THE BLACKROCK GOVERNMENT INCOME TRUST
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Prospectus dated August 31, 1995
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The BlackRock Government Income Trust (the Fund) is an open-end, diversified
management investment company whose investment objective is to provide low
volatility of net asset value and high monthly income. The Fund seeks to achieve
its objective by investing 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 or instrumentalities. See "How
the Fund Invests--Investment Objective and Policies."
The Fund may also invest in high quality debt securities rated AAA by Standard &
Poor's Ratings Group or Aaa by Moody's Investors Service, including fixed rate
and adjustable rate mortgage-backed securities, asset-backed securities,
corporate debt securities and money market instruments of a comparable
short-term rating. The Fund may engage in various hedging and income enhancement
strategies, including the use of derivatives, short-selling and leverage,
including reverse repurchase agreements and dollar rolls, which entail
additional risks not usually associated with a government fund. See "How the
Fund Invests--Hedging and Income Enhancement Strategies." An investment in the
Fund is neither insured nor guaranteed by the U.S. Government and there can be
no assurance that the Fund's investment objective will be achieved. The Fund's
address is One Seaport Plaza, New York, New York 10292, and its telephone number
is (800) 225-1852.
This Prospectus sets forth concisely the information about the Fund that a
prospective investor should know before investing. Additional information about
the Fund has been filed with the Securities and Exchange Commission in a
Statement of Additional Information, dated August 31, 1995, which information is
incorporated herein by reference (is legally considered a part of this
Prospectus) and is available without charge upon request to the Fund at the
address or telephone number noted above.
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Investors are advised to read this Prospectus and retain it for future
reference.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE>
FUND HIGHLIGHTS
The following summary is intended to highlight certain information contained
in the Prospectus and is qualified in its entirety by the more detailed
information appearing elsewhere herein.
WHAT IS THE BLACKROCK GOVERNMENT INCOME TRUST?
The BlackRock Government Income Trust (the Fund) is a mutual fund. A mutual
fund pools the resources of investors by selling its shares to the public and
investing the proceeds of such sale in a portfolio of securities designed to
achieve its investment objective. Technically, the Fund is an open-end,
diversified management investment company.
WHAT IS THE FUND'S INVESTMENT OBJECTIVE?
The Fund's investment objective is to provide low volatility of net asset
value and high monthly income. There can be no assurance that the Fund's
investment objective will be achieved. See "How the Fund Invests--Investment
Objective and Policies" at page 6.
RISK FACTORS AND SPECIAL CHARACTERISTICS
The Fund seeks to achieve its objective by investing 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 or
instrumentalities. The Fund may also invest in high quality debt securities
rated AAA by Standard & Poor's Ratings Group or Aaa by Moody's Investors
Service, including fixed rate and adjustable rate mortgage-backed securities,
asset-backed securities, corporate debt securities and money market instruments
of comparable short-term ratings. The Fund may also engage in various hedging
and income enhancement strategies, including the use of derivatives,
short-selling and leverage, including reverse repurchase agreements and dollar
rolls, which entail additional risks not usually associated with a government
fund. See "How the Fund Invests-- Hedging and Income Enhancement Strategies" at
page 14.
WHO MANAGES THE FUND?
Prudential Mutual Fund Management, Inc. (PMF or the Manager) is the Manager
of the Fund and is compensated for its services at an annual rate of .50 of 1%
of the Fund's average daily net assets. As of July 31, 1995, PMF served as
manager or administrator to 67 investment companies, including 39 mutual funds,
with aggregate assets of approximately $49 billion. See "How the Fund is
Managed--Manager" at page 19. BlackRock Financial Management, Inc. (BFM or the
Subadviser) furnishes investment advisory services in connection with the
management of the Fund under a Subadvisory Agreement with PMF. See "How the Fund
is Managed--Subadviser" at page 19.
WHO DISTRIBUTES THE FUND'S SHARES?
Prudential Mutual Fund Distributors, Inc. (PMFD) acts as the Distributor of
the Fund's Class A shares. The Fund currently reimburses PMFD for expenses
related to the distribution of Class A shares at the annual rate of up to .15 of
1% of the average daily net assets of the Class A shares.
Prudential Securities Incorporated (Prudential Securities or PSI), a major
securities underwriter and securities and commodities broker, acts as the
Distributor of the Fund's Class B and Class C shares. Prudential Securities may
be reimbursed for its expenses related to the distribution of Class B shares at
an annual rate of up to 1% of the average daily net assets of the Class B
shares, which is currently being charged at the rate of .20 of 1% of the average
daily net assets of the Class B shares. The Fund is currently not accepting
purchase orders for its Class B shares. Prudential Securities is paid an annual
distribution and service fee with respect to the Class C shares which is
currently being charged at the rate of .75 of 1% of the average daily net assets
of the Class C shares. See "How the Fund is Managed--Distributor" at page 20.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A shares is $2,500 and $5,000 for
Class C shares. Thereafter, the minimum investment is $100 for both classes.
There is no minimum investment requirement for certain retirement plans and
employee savings plans or custodial accounts for the benefit of minors. For
purchases made through the Automatic Savings Accumulation Plan, the minimum
initial and subsequent investment is $50. See "Shareholder Guide--How to Buy
Shares of the Fund" at page 28 and "Shareholder Guide--Shareholder Services"
at page 37.
HOW DO I PURCHASE SHARES?
You may purchase shares of the Fund through Prudential Securities, Pruco
Securities Corporation (Prusec) or directly from the Fund, through its transfer
agent, Prudential Mutual Fund Services, Inc. (PMFS or the Transfer Agent) at the
net asset value per share (NAV) next determined after receipt of your purchase
order by the Transfer Agent or Prudential Securities plus a sales charge which
may be imposed either (i) at the time of purchase (Class A shares) or (ii) on a
deferred basis (Class C shares). In addition, Class A shares may be purchased
through a dealer which has entered into a selected dealer agreement with the
Fund's Distributor. See "How the Fund Values its Shares" at page 24 and
"Shareholder Guide--How to Buy Shares of the Fund" at page 28.
WHAT ARE MY PURCHASE ALTERNATIVES?
The Fund offers two classes of shares:
. Class A Shares: Sold with an initial sales charge of up to 3% of the
offering price.
. Class C Shares: Sold without an initial sales charge and, for one year
after purchase, are subject to a 1% contingent deferred
sales charge or CDSC on redemptions. Class C shares are
subject to higher ongoing distribution-related expenses
than Class A shares.
You should understand that over time the deferred sales charge plus the
distribution and service fee of the Class C shares will exceed the
initial sales charge plus the distribution and service fee of the Class A
shares.
See "Shareholder Guide--Alternative Purchase Plan" at page 29.
HOW DO I SELL MY SHARES?
You may redeem your shares at any time at the NAV next determined after
Prudential Securities or the Transfer Agent receives your sell order. However,
the proceeds of redemptions of Class B and Class C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 32.
HOW ARE DIVIDENDS AND DISTRIBUTIONS PAID?
The Fund expects to declare daily and to pay monthly dividends of net
investment income, if any, and make distributions of any net capital gains at
least annually. Dividends and distributions will be automatically reinvested in
additional shares of the Fund at NAV without a sales charge unless you request
that they be paid to you in cash. See "Taxes, Dividends and Distributions" at
page 25.
3
<PAGE>
FUND EXPENSES
<TABLE><CAPTION>
CLASS A SHARES CLASS B SHARES+++ CLASS C SHARES
-------------- ----------------- --------------
<S> <C> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on Purchases
(as a percentage of offering price).... 3% None None
Maximum Sales Load or Deferred Sales
Load Imposed on Reinvested Dividends... None None None
Deferred Sales Load (as a percentage of
original purchase price or redemption
proceeds, whichever is lower).......... None 1% during the 1% during the
first year and first year and
0% thereafter 0% thereafter
Redemption Fees......................... None None None
Exchange Fee............................ None None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
<CAPTION>
CLASS A SHARES CLASS B SHARES+++ CLASS C SHARES
-------------- ----------------- --------------
<S> <C> <C> <C>
Management Fees......................... .50% .50% .50%
12b-1 Fees.............................. .15%++ .20% .75%++
Other Expenses.......................... .66% .66% .66%
-----
Total Fund Operating Expenses........... 1.31% 1.36% 1.91%
----- ----- -----
----- ----- -----
</TABLE>
<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............................................ $ 43 $70 $ 100 $183
Class B+++......................................... $ 64 $73 $ 84 $164
Class C............................................ $ 29 $60 $ 103 $223
You would pay the following expenses on the same
investment, assuming no redemption:
Class A............................................ $ 43 $70 $ 100 $183
Class B+++......................................... $ 14 $43 $ 74 $164
Class C............................................ $ 19 $60 $ 103 $223
</TABLE>
The above example with respect to Class A and Class B shares is based on
data (restated for Class B shares) for the Fund's fiscal year ended June 30,
1995. The above example with respect to Class C shares is based on expenses
expected to have been incurred if Class C shares had been in existence
during the entire fiscal year ended June 30, 1995. The example should not be
considered a representation of past or future expenses. Actual expenses may
be greater or less than those shown.
The purpose of this table is to assist investors in understanding the
various costs and expenses that an investor in the Fund will bear, whether
directly or indirectly. For more complete descriptions of the various costs
and expenses, see "How the Fund is Managed." "Other Expenses" includes an
estimate of operating expenses of the Fund, such as Trustees' and
professional fees, registration fees, reports to shareholders and transfer
agency and custodian fees.
----------------
+ Pursuant to rules of the National Association of Securities Dealers,
Inc., the aggregate initial sales charges, deferred sales charges and
asset-based sales charges on shares of the Fund may not exceed 6.25% of
total gross sales, subject to certain exclusions. This 6.25% limitation is
imposed on each class of the Fund rather than on a per shareholder basis.
Therefore, long-term shareholders of the Fund may pay more in total sales
charges than the economic equivalent of 6.25% of such shareholder's
investment in such shares. See "How the Fund is Managed--Distributor."
++ Although the Class A and Class C Distribution and Service Plans
provide that the Fund may pay a distribution fee of up to .30 of 1% per
annum of the average daily net assets of the Class A shares and 1% per annum
of the average daily net assets of the Class C shares, respectively, the
Distributor has agreed to limit its distribution expenses with respect to
the Class A shares to .15 of 1% of the average daily net assets of the Class
A shares and to limit its distribution fees with respect to the Class C
shares to no more than .75 of 1% of the average daily net assets of the
Class C shares for the fiscal year ending June 30, 1996. Total Fund
Operating Expenses without such limitations would be 1.46% for the Class A
shares and 2.16% for the Class C shares. See "How the Fund is
Managed--Distributor."
+++ The Fund is currently not accepting purchase orders for Class B
shares. Although the Class B Distribution and Service Plan provides that the
Fund may pay a distribution fee of up to 1% per annum of the average daily
net assets of the Class B shares, the Distributor has agreed to limit its
distribution fees with respect to the Class B shares to .20 of 1% of the
average daily net assets of the Class B shares for the fiscal year ending
June 30, 1996. Total Fund Operating Expenses without such limitation would
be 2.16% for the Class B shares.
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
The following financial highlights have been audited by Deloitte & Touche
LLP, independent accountants, whose report thereon was unqualified. This
information should be read in conjunction with the financial statements and
notes thereto, which appear in the Statement of Additional Information. The
following financial highlights contain selected data for a Class A, Class B and
Class C share of beneficial interest outstanding, total return, ratios to
average net assets and other supplemental data for the periods indicated. This
information is based on data contained in the financial statements.
<TABLE><CAPTION>
CLASS A CLASS B CLASS C
------------------------------------------- ------------------------------- -----------
SEPTEMBER 9, SEPTEMBER 1, NOVEMBER 1,
1991(A) YEAR ENDED 1992(C) 1994(E)
YEAR ENDED JUNE 30, THROUGH JUNE 30, THROUGH THROUGH
---------------------------- JUNE 30, ---------------- JUNE 30, JUNE 30,
1995(D)* 1994(D) 1993 1992 1995(D)* 1994(D) 1993 1995(D)*
------- ------- -------- ------------ ------ ------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value,
beginning of period... $ 9.29 $ 9.67 $ 10.07 $ 10.00 $ 9.29 $ 9.68 $ 9.97 $ 9.26
------- ------- -------- ------------ ------ ------- ----- -----
INCOME FROM INVESTMENT
OPERATIONS
Net investment
income................. .51 .45 .64 .57 .48 .37 .47 .23
Net realized and
unrealized gains
(losses) on
investments and
foreign currency
transactions........... .09 (.35) (.41) .10 .09 (.37 ) (.32) .21
------- ------- -------- ------------ ------ ------- ----- -----
Total from
investment
operations............. .60 .10 .23 .67 .57 -- .15 .44
------- ------- -------- ------------ ------ ------- ----- -----
LESS DISTRIBUTIONS
Dividends from net
investment income..... (.52) (.40) (.63) (.57) (.49) (.32 ) (.44) (.33)
Tax return of capital
distributions.......... -- (.08) -- -- -- (.07 ) -- --
Distributions in excess
of net realized
capital gains.......... -- -- -- (.03) -- -- -- --
------- ------- -------- ------------ ------ ------- ----- -----
Total distributions.... (.52) (.48) (.63) (.60) (.49) (.39 ) (.44) (.33)
------- ------- -------- ------------ ------ ------- ----- -----
Net asset value, end
of period.............. $ 9.37 $ 9.29 $ 9.67 $ 10.07 $ 9.37 $ 9.29 $ 9.68 $ 9.37
------- ------- -------- ------------ ------ ------- ----- -----
------- ------- -------- ------------ ------ ------- ----- -----
TOTAL RETURN(G):....... 6.55% 1.02% 2.40% 6.69% 6.16% (.01 )% 1.39% 4.65%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of
period (000)........... $46,450 $69,912 $113,623 $143,856 $2,466 $3,845 $5,954 $ 7,121(f)
Average net assets
(000).................. $56,395 $91,849 $131,371 $134,585 $2,928 $5,778 $2,740 $ 1,335(f)
Ratios to average net
assets(h):
Expenses, including
distribution fees...... 1.31% 1.17% 1.05% 1.03%(b) 1.68% 2.05 % 1.95%(b) 1.91%(b)
Expenses, excluding
distribution fees...... 1.16% 1.05% .95% .93%(b) 1.16% 1.05 % .95%(b) 1.16%(b)
Net investment
income................. 5.49% 4.94% 6.71% 6.95%(b) 5.12% 4.06 % 5.11%(b) 4.89%(b)
Portfolio turnover
rate................... 254% 209% 228% 137% 254% 209 % 228% 254%
</TABLE>
<TABLE><CAPTION>
AVERAGE AMOUNT OF
BORROWINGS: AMOUNT OF DEBT AVERAGE AMOUNT OF AVERAGE NUMBER OF DEBT PER SHARE
OUTSTANDING AT END DEBT OUTSTANDING SHARES OUTSTANDING OUTSTANDING DURING
PERIOD ENDED OF PERIOD (000) DURING PERIOD (000) DURING PERIOD (000) PERIOD
- -------------------------------- ------------------ ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
June 30, 1995................. $ 19,872 $ 9,130 6,389 $1.43
June 30, 1994................. 8,300 18,840 10,234 1.84
June 30, 1993................. 24,386 34,892 13,517 2.58
June 30, 1992................. 20,109 9,939 13,458 .74
</TABLE>
-------------
<TABLE>
<S> <C>
(a) Commencement of investment operations.
(b) Annualized.
(c) Commencement of offering of Class B shares.
(d) Calculated based upon weighted average shares outstanding during the period.
(e) Commencement of offering of Class C shares.
(f) Figures are actual and not rounded to nearest thousand.
(g) Total return does not consider the effect of sales loads. Total return is calculated
assuming a purchase of shares on the first day and a sale on the last day of each
period reported and includes reinvestment of dividends and distributions. Total returns
for periods of less than one full year are not annualized.
(h) Because of the event referred to in "e" and the timing of such, the ratios for Class C
shares are not necessarily comparable to that of Class A or B shares and are not
necessarily indicative of future ratios.
</TABLE>
* Effective February 28, 1995, BlackRock Financial Management, Inc.
succeeded BlackRock Financial Management, L.P. as subadviser of
the Fund.
5
<PAGE>
HOW THE FUND INVESTS
INVESTMENT OBJECTIVE AND POLICIES
THE INVESTMENT OBJECTIVE OF THE FUND IS TO PROVIDE LOW VOLATILITY OF NET
ASSET VALUE AND HIGH MONTHLY INCOME. THE FUND 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, 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 THE FUND'S
SHARES OR OF THE U.S. GOVERNMENT SECURITIES WHICH MAY BE INVESTED IN BY THE FUND
IS GUARANTEED BY THE U.S. GOVERNMENT. There can be no assurance that the Fund
will be able to achieve its investment objective. See "Investment Objective and
Policies" in the Statement of Additional Information.
WITH RESPECT TO THE REMAINING 35% OF ITS ASSETS, THE FUND 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 STANDARD & POOR'S RATINGS GROUP (S&P) OR AAA BY MOODY'S
INVESTORS SERVICE (MOODY'S) AND MONEY MARKET INSTRUMENTS OF A COMPARABLE
SHORT-TERM RATING. UP TO 20% OF THE FUND'S TOTAL ASSETS MAY BE INVESTED IN
SECURITIES WHICH ARE UNRATED BUT DEEMED TO BE OF COMPARABLE CREDIT QUALITY BY
THE FUND'S INVESTMENT ADVISER. UP TO 10% OF THE FUND'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. The Fund may also engage in various hedging strategies,
including utilizing derivatives, to increase investment return and/or protect
against interest rate changes and thus maintain the stability of its net asset
value. See "Hedging and Income Enhancement Strategies" below.
THE FUND'S INVESTMENT OBJECTIVE IS A FUNDAMENTAL POLICY WHICH MAY NOT BE
CHANGED WITHOUT THE APPROVAL OF THE HOLDERS OF A MAJORITY OF THE FUND'S
OUTSTANDING VOTING SECURITIES, AS DEFINED IN THE INVESTMENT COMPANY ACT OF 1940
(THE INVESTMENT COMPANY ACT). FUND POLICIES THAT ARE NON-FUNDAMENTAL MAY BE
CHANGED BY THE TRUSTEES.
The Fund seeks to achieve low volatility of net asset value by investing in
a diversified portfolio of securities which the investment adviser believes
will, in the aggregate, be resistant to significant fluctuations in market
value. Various factors affect the volatility of the Fund's assets, including the
time to the next coupon reset date for adjustable rate securities, payment
characteristics of the security and the dollar-weighted average life of the
investment and, therefore, the Fund will seek to select particular securities
for its portfolio which take into account these factors. The Fund will seek to
achieve a volatility of net asset value that will be similar to that of a
portfolio that invests exclusively in fixed-income securities of comparable
credit quality with maturities of approximately two years. The Fund expects that
under normal circumstances the dollar-weighted average life (or period until the
next reset date) of the Fund's portfolio securities will be approximately five
years.
6
<PAGE>
U.S. GOVERNMENT SECURITIES
UNDER NORMAL CIRCUMSTANCES, THE FUND WILL INVEST AT LEAST 65% OF ITS TOTAL
ASSETS IN FIXED-INCOME U.S. GOVERNMENT SECURITIES, INCLUDING U.S. TREASURY
SECURITIES, SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES OR
INSTRUMENTALITIES AND MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT
AGENCIES AND INSTRUMENTALITIES.
U.S. TREASURY SECURITIES
THE FUND WILL INVEST IN U.S. TREASURY SECURITIES, INCLUDING BILLS, NOTES,
BONDS AND OTHER DEBT SECURITIES ISSUED BY THE U.S. TREASURY. These instruments
are direct obligations of the U.S. Government and, as such, are backed by the
"full faith and credit" of the United States. They differ primarily in their
interest rates, the lengths of their maturities and the dates of their
issuances.
SECURITIES ISSUED OR GUARANTEED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES
THE FUND WILL INVEST IN SECURITIES ISSUED BY AGENCIES OF THE U.S. GOVERNMENT
OR INSTRUMENTALITIES OF THE U.S. GOVERNMENT, INCLUDING, BUT NOT LIMITED TO,
GNMA, FNMA AND FHLMC SECURITIES. Obligations of GNMA, the Farmers Home
Administration and the Export-Import Bank are backed by the "full faith and
credit" of the United States. In the case of securities not backed by the "full
faith and credit" of the United States, the Fund must look principally to the
agency issuing or guaranteeing the obligation for ultimate repayment. Such
securities include obligations issued by FNMA and FHLMC, each of which may
borrow under certain conditions from the U.S. Treasury to meet its obligations,
although the U.S. Treasury is under no obligation to lend to FNMA or FHLMC.
GNMA, FNMA and FHLMC investments may also include collateralized mortgage
obligations. See "Other Investments and Policies" below.
MORTGAGE-RELATED SECURITIES ISSUED BY U.S. GOVERNMENT AGENCIES AND
INSTRUMENTALITIES
THE FUND WILL INVEST IN MORTGAGE-BACKED SECURITIES, INCLUDING THOSE
REPRESENTING AN UNDIVIDED OWNERSHIP INTEREST IN A POOL OF MORTGAGES, E.G., GNMA,
FNMA AND FHLMC CERTIFICATES. The U.S. Government or the issuing agency
guarantees the payment of interest and principal of these securities. However,
the guarantees do not extend to the securities' yield or value, which are likely
to vary inversely with fluctuations in interest rates, nor do the guarantees
extend to the yield or value of the Fund's shares. See "Investment Objective and
Policies--U.S. Government Securities" in the Statement of Additional
Information. These certificates are in most cases "pass-through" instruments,
through which the holder receives a share of all interest and principal payments
from the mortgages underlying the certificate, net of certain fees. See "Other
Investments and Policies--Mortgage-Backed Securities" below.
In addition to GNMA, FNMA or FHLMC certificates, through which the holder
receives a share of all interest and principal payments from the mortgages
underlying the certificate, the Fund may invest in mortgage pass-through
securities, where all interest payments go to one class of holders (Interest
Only Securities or IOs) and all principal payments go to a second class of
holders (Principal Only Securities or POs). These securities are commonly
referred to as mortgage-backed security strips or MBS strips. The yields to
maturity on IOs and POs are sensitive to the rate of principal payments
(including prepayments) on the related underlying mortgage assets, and principal
payments may have a material effect on yield to maturity. If the underlying
mortgage assets experience greater than anticipated prepayments of principal,
the Fund may not fully recoup
7
<PAGE>
its initial investment in IOs. Conversely, if the underlying mortgage assets
experience less than anticipated prepayments of principal, the yield on POs
could be materially adversely affected.
OTHER INVESTMENTS AND POLICIES
UNDER NORMAL CIRCUMSTANCES, THE FUND MAY INVEST UP TO 35% OF ITS TOTAL
ASSETS IN THE FOLLOWING PRIVATELY ISSUED INSTRUMENTS RATED AAA BY S&P OR AAA BY
MOODY'S OR HAVING A COMPARABLE SHORT-TERM RATING: (i) fixed rate and adjustable
rate mortgage-backed securities, including collateralized mortgage obligations,
multi-class pass-through securities and stripped mortgage-backed securities,
(ii) asset-backed securities, (iii) corporate debt securities (if unrated,
deemed to be of comparable credit quality by the Fund's investment adviser) and
(iv) money market instruments, including bank obligations, Eurodollar
certificates of deposit, obligations of savings institutions, fully insured
certificates of deposit and commercial paper (if unrated, issued by a company
having an outstanding debt issue rated AAA by S&P or Aaa by Moody's).
UP TO 20% OF THE FUND'S TOTAL ASSETS MAY BE INVESTED IN SECURITIES WHICH ARE
UNRATED BUT DEEMED BY THE FUND'S INVESTMENT ADVISER TO BE COMPARABLE IN CREDIT
QUALITY TO SECURITIES RATED AAA BY S&P OR AAA BY MOODY'S AND UP TO 10% OF ITS
TOTAL ASSETS MAY BE INVESTED IN FOREIGN SECURITIES OF COMPARABLE CREDIT QUALITY.
THE FUND MAY INVEST UP TO 5% OF ITS TOTAL ASSETS IN MUNICIPAL OBLIGATIONS AND IN
ZERO COUPON SECURITIES, INCLUDING ZERO COUPON U.S. TREASURY SECURITIES. If a
portfolio security held by the Fund is assigned a lower rating or ceases to be
rated or of comparable credit quality to securities rated AAA by S&P or Aaa by
Moody's, the investment adviser will reassess whether the Fund should continue
to hold the security.
MORTGAGE-BACKED SECURITIES
Mortgage-Backed securities are securities that directly or indirectly
represent a participation in, or are secured by and payable from, mortgage loans
secured by real property. The term Mortgage-Backed securities, as used herein,
includes adjustable rate mortgage securities and derivative mortgage products
such as collateralized mortgage obligations, stripped Mortgage-Backed securities
and other products described below.
There are currently three basic types of Mortgage-Backed securities: (i)
those issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities, such as GNMA, FNMA and FHLMC, described under "U.S.
Government Securities" above; (ii) those issued by private issuers that
represent an interest in or are collateralized by Mortgage-Backed securities
issued or guaranteed by the U.S. Government or one of its agencies or
instrumentalities; and (iii) those issued by private issuers that represent an
interest in or are collateralized by whole mortgage loans or Mortgage-Backed
securities without a government guarantee but usually having some form of
private credit enhancement.
ADJUSTABLE RATE MORTGAGE SECURITIES
Adjustable rate mortgage securities (ARMs) are pass-through mortgage
securities collateralized by mortgages with adjustable rather than fixed rates.
ARMs eligible for inclusion in a mortgage pool generally provide for a fixed
initial mortgage interest rate for either the first three, six, twelve,
thirteen, thirty-six or sixty scheduled monthly payments. Thereafter, the
interest rates are subject to periodic adjustment based on changes to a
designated benchmark index.
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ARMs contain maximum and minimum rates beyond which the mortgage interest
rate may not vary over the lifetime of the security. In addition, certain ARMs
provide for additional limitations on the maximum amount by which the mortgage
interest rate may adjust for any single adjustment period. Alternatively,
certain ARMs contain limitations on changes in the required monthly payment. In
the event that a monthly payment is not sufficient to pay the interest accruing
on an ARM, any such excess interest is added to the principal balance of the
mortgage loan, which is repaid through future monthly payments. If the monthly
payment for such an instrument exceeds the sum of the interest accrued at the
applicable mortgage interest rate and the principal payment required at such
point to amortize the outstanding principal balance over the remaining term of
the loan, the excess is utilized to reduce the then outstanding principal
balance of the ARM.
PRIVATE MORTGAGE PASS-THROUGH SECURITIES
Private mortgage pass-through securities are structured similarly to GNMA,
FNMA and FHLMC mortgage pass-through securities and are issued by originators of
and investors in mortgage loans, including depository institutions, mortgage
banks, investment banks and special purpose subsidiaries of the foregoing. These
securities usually are backed by a pool of conventional fixed rate or adjustable
rate mortgage loans. Since private mortgage pass-through securities typically
are not guaranteed by an entity having the credit status of GNMA, FNMA and
FHLMC, such securities generally are structured with one or more types of credit
enhancement. Types of credit enhancements are described under "Asset-Backed
Securities" below.
COLLATERALIZED MORTGAGE OBLIGATIONS AND MULTI-CLASS PASS-THROUGH SECURITIES
Collateralized mortgage obligations or "CMOs" are debt obligations
collateralized by mortgage loans or mortgage pass-through securities. Typically,
CMOs are collateralized by GNMA, FNMA or FHLMC Certificates, but also may be
collateralized by whole loans or private mortgage pass-through securities (such
collateral collectively hereinafter referred to as "Mortgage Assets").
Multi-class pass-through securities are equity interests in a trust composed of
Mortgage Assets. Payments of principal and interest on the Mortgage Assets, and
any reinvestment income thereon, provide the funds to pay debt service on the
CMOs or make scheduled distributions on the multi-class pass-through securities.
CMOs may be issued by agencies or instrumentalities of the U.S. Government, or
by private originators of, or investors in, mortgage loans, including depository
institutions, mortgage banks, investment banks and special purpose subsidiaries
of the foregoing. The issuer of a series of CMOs may elect to be treated as a
Real Estate Mortgage Investment Conduit (REMIC). All future references to CMOs
shall also be deemed to include REMICs.
In a CMO, a series of bonds or certificates is issued in multiple classes.
Each class of CMOs, often referred to as a "tranche," is issued at a specific
fixed or floating coupon rate and has a stated maturity or final distribution
date. Principal prepayments on the Mortgage Assets may cause the CMOs to be
retired substantially earlier than their stated maturities or final distribution
dates. Interest is paid or accrues on all classes of the CMOs on a monthly,
quarterly or semi-annual basis. The principal and interest on the Mortgage
Assets may be allocated among the several classes of a CMO series in a number of
different ways. Generally, the purpose of the allocation of the cash flow of a
CMO to the various classes is to obtain a more predictable cash flow to the
individual tranches than exists with the underlying collateral of the CMO. As a
general rule, the more
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predictable the cash flow is on a CMO tranche, the lower the anticipated yield
will be on that tranche at the time of issuance relative to prevailing market
yields on Mortgage-Backed securities.
The Fund also may invest in, among other things, parallel pay CMOs and
Planned Amortization Class CMOs (PAC Bonds). Parallel pay CMOs are structured to
provide payments of principal on each payment date to more than one class. These
simultaneous payments are taken into account in calculating the stated maturity
date or final distribution date of each class, which, as with other CMO
structures, must be retired by its stated maturity date or final distribution
date but may be retired earlier. PAC Bonds generally require payments of a
specified amount of principal on each payment date. PAC Bonds always are
parallel pay CMOs with the required principal payment on such securities having
the highest priority after interest has been paid to all classes.
In reliance on rules and on interpretations of the Securities and Exchange
Commission (SEC), the Fund's investments in certain qualifying CMOs and REMICs
are not subject to the Investment Company Act's limitation on acquiring
interests in other investment companies. See "Investment Objective and
Policies--Other Investments" in the Statement of Additional Information. CMOs
and REMICs issued by an agency or instrumentality of the U.S. Government are
considered U.S. Government securities for purposes of this Prospectus.
STRIPPED MORTGAGE-BACKED SECURITIES
Stripped Mortgage-Backed securities or MBS strips are derivative multi-class
mortgage securities. In addition to MBS strips issued by agencies or
instrumentalities of the U.S. Government, the Fund may purchase MBS strips
issued by private originators of, or investors in, mortgage loans, including
depository institutions, mortgage banks, investment banks and special purpose
subsidiaries of the foregoing. See "Investment Objective and Policies--U.S.
Government Securities-- Mortgage-Related Securities Issued by U.S. Government
Agencies and Instrumentalities" above.
ASSET-BACKED SECURITIES
The securitization techniques used to develop Mortgage-Backed securities are
also applied to a broad range of other assets. Through the use of trusts and
special purpose corporations, various types of assets, primarily automobile and
credit card receivables and home equity loans, are being securitized in
pass-through structures similar to the mortgage pass-through structures
described above or in a pay-through structure similar to the CMO structure. The
Fund may invest in these and other types of Asset-Backed securities that may be
developed in the future.
New instruments and variations of existing Mortgage-Backed securities and
Asset-Backed securities continue to be developed. The Fund may invest in any
such instruments or variations as may be developed, to the extent consistent
with its investment objective and policies and applicable regulatory
requirements.
TYPES OF CREDIT ENHANCEMENT
Mortgage-Backed securities and Asset-Backed securities are often backed by a
pool of assets representing the obligations of a number of different parties. To
lessen the effect of failures by obligors on underlying assets to make payments,
those securities may contain elements of credit support, which fall into two
categories: (i) liquidity protection and (ii) protection against losses
resulting from ultimate default by an obligor on the underlying assets.
Liquidity protection
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refers to the provision of advances, generally by the entity administering the
pool of assets, to ensure that the receipt of payments on the underlying pool
occurs in a timely fashion. Protection against losses resulting from default
ensures ultimate payment of the obligations on at least a portion of the assets
in the pool. This protection may be provided through guarantees, insurance
policies or letters of credit obtained by the issuer or sponsor from third
parties, through various means of structuring the transaction or through a
combination of such approaches. The degree of credit support provided for each
issue is generally based on historical information respecting the level of
credit risk associated with the underlying assets. Delinquencies or losses in
excess of those anticipated could adversely affect the return on an investment
in a security. The Fund will not pay any additional fees for credit support,
although the existence of credit support may increase the price of a security.
RISK FACTORS RELATING TO INVESTING IN MORTGAGE-BACKED AND ASSET-BACKED
SECURITIES
The yield characteristics of Mortgage-Backed and Asset-Backed securities
differ from traditional debt securities. Among the major differences are that
interest and principal payments are made more frequently, usually monthly, and
that principal may be prepaid at any time because the underlying mortgage loans
or other assets generally may be prepaid at any time. As a result, if the Fund
purchases such a security at a premium, a prepayment rate that is faster than
expected will reduce yield to maturity, while a prepayment rate that is slower
than expected will have the opposite effect of increasing yield to maturity.
Alternatively, if the Fund purchases these securities at a discount, faster than
expected prepayments will increase, while slower than expected prepayments will
reduce, yield to maturity. The Fund may invest a portion of its assets in
derivative Mortgage-Backed securities such as Stripped Mortgage-Backed
securities which are highly sensitive to changes in prepayment and interest
rates. The investment adviser will seek to manage these risks (and potential
benefits) by diversifying its investments in such securities and through hedging
techniques.
Although the extent of prepayments on a pool of mortgage loans depends on
various economic and other factors, as a general rule prepayments on fixed rate
mortgage loans will increase during a period of falling interest rates and
decrease during a period of rising interest rates. Accordingly, amounts
available for reinvestment by the Fund are likely to be greater during a period
of declining interest rates and, as a result, likely to be reinvested at lower
interest rates than during a period of rising interest rates. Asset-Backed
securities, although less likely to experience the same prepayment rates as
Mortgage-Backed securities, may respond to certain of the same factors
influencing prepayments, while at other times different factors will
predominate. Mortgage-Backed securities and Asset-Backed securities may decrease
in value as a result of increases in interest rates and may benefit less than
other fixed income securities from declining interest rates because of the risk
of prepayment.
Asset-Backed securities involve certain risks that are not posed by
Mortgage-Backed securities, resulting mainly from the fact that Asset-Backed
securities do not usually contain the complete benefit of a security interest in
the related collateral. For example, credit card receivables generally are
unsecured and the debtors are entitled to the protection of a number of state
and federal consumer credit laws, some of which may reduce the ability to obtain
full payment. In the case of automobile receivables, due to various legal and
economic factors, proceeds from repossessed collateral may not always be
sufficient to support payments on these securities.
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CORPORATE DEBT SECURITIES
The Fund may purchase corporate debt securities rated AAA by S&P or Aaa by
Moody's or, if unrated, deemed to be of comparable credit quality by the Fund's
investment adviser. These debt securities may have adjustable or fixed rates of
interest and in certain instances may be secured by assets of the issuer.
Adjustable rate corporate debt securities may have features similar to those of
adjustable rate Mortgage-Backed securities, but corporate debt securities,
unlike Mortgage-Backed securities, are not subject to prepayment risk other than
through contractual call provisions which generally impose a penalty for
prepayment. Fixed rate debt securities may also be subject to call provisions.
FOREIGN SECURITIES
The Fund may invest up to 10% of its total assets in foreign securities,
including Mortgage-Backed securities and Asset-Backed securities issued by
foreign entities.
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. See "Investment Objective and Policies--Other
Investments--Foreign Securities" in the Statement of Additional Information.
MUNICIPAL OBLIGATIONS
The Fund may invest up to 5% of its total assets in Municipal Obligations
(consisting of Municipal Bonds, Municipal Notes and Municipal Commercial Paper)
rated in the highest rating category by Moody's or S&P. The Municipal
Obligations in which the Fund may invest include "zero coupon" Municipal
Obligations. Any Municipal Obligation which depends directly or indirectly on
the credit of the U.S. Government shall be considered to have the highest rating
by Moody's and S&P. See "Investment Objective and Policies--Other
Investments--Municipal Obligations" in the Statement of Additional Information.
ZERO COUPON SECURITIES
The Fund may invest up to 5% of its total assets in "zero coupon"
securities, including U.S. Treasury bills, notes and bonds which have been
stripped of their unmatured interest coupons and receipts or which are
certificates representing interests in such stripped debt obligations and
coupons. Such securities are purchased at a discount from their face amount,
giving the purchaser the right to receive their full value at maturity. A zero
coupon security pays no interest to its holder during its life. See "Investment
Objective and Policies--Other Investments--Zero Coupon Treasury Securities" in
the Statement of Additional Information.
ILLIQUID SECURITIES
The Fund may invest up to 15% of its net assets in illiquid securities
including repurchase agreements having maturities of more than seven days,
securities with legal or contractual restrictions on resale (restricted
securities) and securities that are not readily marketable. Restricted
securities issued pursuant to Rule 144A under the Securities Act of 1933, as
amended (the Securities Act) and privately placed commercial paper that have a
readily available market are not considered illiquid for purposes of this
limitation. See "Investment Objective and Policies-- Other Investments--Illiquid
Securities" in the Statement of Additional Information. The Fund intends to
comply with any applicable state blue sky laws restricting the Fund's
investments in illiquid securities. See "Investment Restrictions" in the
Statement of Additional Information. The investment adviser will monitor the
liquidity of such restricted securities under the supervision of the Trustees.
The Fund will also treat POs and IOs as illiquid securities except for POs and
IOs issued
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by U.S. Government agencies and instrumentalities, whose liquidity is monitored
by the investment adviser subject to the supervision of the Trustees.
The staff of the SEC has taken the position that purchased over-the-counter
options and the assets used as "cover" for written over-the-counter options are
illiquid securities unless the Fund and the counterparty have provided for the
Fund at the Fund's option to unwind the over-the-counter option. The exercise of
such an option ordinarily would involve the payment by the Fund of an amount
designed to reflect the counterparty's economic loss from an early termination,
but does allow the Fund to treat the assets used as "cover" as "liquid."
When the Fund enters into interest rate swaps on other than a net basis, the
entire amount of the Fund's obligations, if any, with respect to such interest
rate swaps will be treated as illiquid. To the extent that the Fund enters into
interest rate swaps on a net basis, the net amount of the excess, if any, of the
Fund's obligations over its entitlements with respect to each interest rate swap
will be treated as illiquid.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements, whereby the seller of a
security agrees to repurchase that security from the Fund at a mutually
agreed-upon time and price. The repurchase date is usually within a day or two
of the original purchase, although it may extend over a number of months. The
resale price is in excess of the purchase price, reflecting an agreed-upon rate
of return effective for the period of time the Fund's money is invested in the
security. The Fund's repurchase agreements will at all times be fully
collateralized in an amount at least equal to the purchase price including
accrued interest earned on the underlying repurchase agreement. The instruments
held as collateral are valued daily, and if the value of the instruments
declines, the Fund will require additional collateral. If the seller defaults
and the value of the collateral securing the repurchase agreement declines, the
Fund may incur a loss. In the event of a default or bankruptcy of a seller, the
Fund will promptly seek to liquidate the collateral. To the extent that the
proceeds from any sale of such collateral upon a default in the obligations to
repurchase are less than the repurchase price, the Fund will suffer a loss. See
"Investment Objective and Policies-- Other Investment Strategies--Repurchase
Agreements" in the Statement of Additional Information.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES AND FORWARD COMMITMENTS
From time to time, in the ordinary course of business, the Fund may purchase
securities on a when-issued or delayed delivery basis or may purchase or sell
securities on a forward commitment basis. When such transactions are negotiated,
the price is fixed at the time of the commitment, but delivery and payment can
take place a month or more after the date of the commitment. While the Fund will
only purchase securities on a when-issued, delayed delivery or forward
commitment basis with the intention of acquiring the securities, the Fund may
sell the securities before the settlement date, if it is deemed advisable. At
the time the Fund makes the commitment to purchase securities on a when-issued
or delayed delivery basis, the Fund will record the transaction and thereafter
reflect the value, each day, of such security in determining the net asset value
of the Fund. The securities so purchased are subject to market fluctuations and
no interest accrues to the purchaser during the period between purchase and
settlement. At the time of delivery of the securities, the value may be more or
less than the purchase price. An increase in the percentage of the Fund's assets
committed to the purchase of securities on a when-issued, delayed delivery or
forward commitment basis may increase the volatility of the Fund's net asset
value. At the time the Fund enters into a transaction on a when-issued or
forward commitment basis, a segregated account consisting of cash, U.S.
Government securities or other liquid high-grade debt securities equal to at
least 105% of the value of the when-issued or forward commitment securities will
be established
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and maintained with the custodian. Subject to this requirement, the Fund may
purchase securities on such basis without limit. See "Investment Objective and
Policies--Other Investment Strategies--When-Issued and Delayed Delivery
Securities" in the Statement of Additional Information.
HEDGING AND INCOME ENHANCEMENT STRATEGIES
The Fund may engage in various investment techniques, 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 in an effort to increase
investment return and/or to hedge against changes in interest rates and thus
maintain the stability of its net asset value.
SHORT SALES
The Fund may make short sales of securities. A short sale is a transaction
in which the Fund sells a security it does not own in anticipation that the
market price of that security will decline. The Fund expects to make short sales
both as a form of hedging to offset potential declines in long positions in
similar securities and in order to maintain portfolio flexibility.
When the Fund makes a short sale, it must 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 particular securities and is
often obligated to pay over any payments received on such borrowed securities.
Until the Fund replaces a borrowed security, the Fund will maintain daily a
segregated account, containing cash or U.S. Government securities, at such a
level that (i) the amount deposited in the account plus any cash or U.S.
Government securities deposited with the broker as collateral will equal the
current value of the security sold short and (ii) the amount deposited in the
segregated account plus the amount deposited with the broker as collateral will
not be less than the market value of the security at the time it was sold short.
Depending on arrangements made with the broker-dealer from which it borrowed the
security regarding payment over of any payments received by the Fund on such
security, the Fund may not receive any payments (including interest) on its
collateral deposited with such broker-dealer.
If the price of the security sold short increases between the time of the
short sale and the time the Fund replaces the borrowed security, the Fund will
incur a loss; conversely, if the price declines, the Fund will realize a capital
gain. Although the Fund's gain is limited to the price at which it sold the
security short, its potential loss is theoretically unlimited.
The Fund will not make a short sale if, after giving effect to such sale,
the market value of all securities sold short exceeds 25% of the value of its
net assets or the Fund's aggregate short sales of a particular class of
securities exceeds 25% of the outstanding securities of that class. The Fund may
also make short sales "against the box" without respect to such limitations. In
this type of short sale, at the time of the sale, the Fund owns or has the
immediate and unconditional right to acquire at no additional cost the identical
security.
LENDING OF PORTFOLIO SECURITIES
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions,
provided that such loans are callable at any time by the Fund (subject to
certain notice provisions described in the Statement of Additional Information),
and are at all times secured by cash, U.S. Government securities or other high
grade debt securities, which are maintained in a segregated account pursuant to
applicable regulations and that are at least equal to the market value,
determined daily, of the loaned securities.
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REVERSE REPURCHASE AGREEMENTS AND DOLLAR ROLLS
The Fund may use reverse repurchase agreements and dollar rolls as part of
its investment strategy. Reverse repurchase agreements involve sales by the Fund
of portfolio assets concurrently with an agreement by the Fund to repurchase the
same assets at a later date at a fixed price. During the reverse repurchase
agreement period, the Fund continues to receive principal and interest payments
on these securities.
The Fund may enter into dollar rolls in which the Fund sells securities for
delivery in the current month and simultaneously contracts to repurchase
substantially similar (same type and coupon) securities on a specified future
date from the same party. During the roll period, the Fund forgoes principal and
interest paid on the securities. The Fund is compensated by the difference
between the current sales price and the forward price for the future purchase
(often referred to as the "drop") as well as by the interest earned on the cash
proceeds of the initial sale.
The Fund will establish a segregated account with its custodian in which it
will maintain cash, U.S. Government securities or other liquid high-grade debt
obligations equal in value to its obligations in respect to reverse repurchase
agreements and dollar rolls. Reverse repurchase agreements and dollar rolls
involve the risk that the market value of the securities retained by the Fund
may decline below the price of the securities the Fund has sold but is obligated
to repurchase under the agreement. In the event the buyer of securities under a
reverse repurchase agreement files for bankruptcy or becomes insolvent, the
Fund's use of the proceeds of the agreement may be restricted pending a
determination by the other party, or its trustee or receiver, whether to enforce
the Fund's obligation to repurchase the securities.
Reverse repurchase agreements and dollar rolls are speculative techniques
involving leverage and are considered borrowings by the Fund for purposes of the
percentage limitations applicable to borrowings. Under normal market conditions
the Fund expects to engage in reverse repurchase agreements and dollar rolls
with respect to approximately 15% of the Fund's total assets.
OPTIONS TRANSACTIONS
The Fund may purchase put and call options on U.S. Government securities and
Mortgage-Backed securities. The Fund may purchase a put option in an effort to
protect the value of a security which it owns against a substantial decline in
market value (protective puts), if the Fund's investment adviser believes that a
defensive posture is warranted for a portion of the portfolio.
The Fund 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 Fund may therefore purchase a put option on
securities other than those it wishes to protect even though it does not hold
such other securities in its portfolio. While changes in the value of the put
option should generally offset changes in the value of the securities being
hedged, the correlation between the two values may not be as close in these
transactions as in transactions in which the Fund purchases a put option on an
underlying security it owns.
The Fund may purchase call options on securities it intends to acquire in
order to hedge against an anticipated market appreciation in the price of the
underlying securities at limited risk and with a limited cash outlay. If the
market price does rise as anticipated, the Fund will benefit from that rise but
only to the extent that the rise exceeds the premiums paid. If the anticipated
rise does not occur or if it does not exceed the premium, the Fund will bear the
expense of the option premiums and transaction costs without gaining an
offsetting benefit.
The Fund's ability to purchase put and call options may be limited by the
requirements of the Internal Revenue Code of 1986, as amended (the Internal
Revenue Code) for qualification as a
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regulated investment company. See "Taxes, Dividends and Distributions" in the
Statement of Additional Information.
All options purchased by the Fund will be traded on a U.S. securities
exchange or will be purchased or sold by a primary government securities dealer
recognized by the Federal Reserve Bank of New York (OTC options). While
exchange-traded options are in effect guaranteed by The Options Clearing
Corporation, the Fund relies on the dealer from whom it purchases an OTC option
to perform if the option is exercised. The Fund's investment adviser monitors
the creditworthiness of dealers with whom the Fund enters into OTC option
transactions under the general supervision of the Fund's Trustees. See
"Investment Objective and Policies--Other Investment Strategies-- Option and
Futures Transactions" in the Statement of Additional Information.
TRANSACTIONS IN FUTURES CONTRACTS AND OPTIONS THEREON
The Fund may purchase and sell interest rate futures contracts on U.S.
Government securities and Mortgage-Backed securities (futures contracts) that
are traded on U.S. commodity exchanges. A futures contract on such securities,
other than GNMAs which are cash settled, is an agreement to purchase or sell an
agreed amount of such securities at a set price for delivery on an agreed future
date. The Fund may purchase a futures contract as a hedge against an anticipated
decline in interest rates, and resulting increase in market price, in securities
the Fund intends to acquire. The Fund may sell a futures contract as a hedge
against an anticipated increase in interest rates, and resulting decline in
market price, in securities the Fund owns.
The Fund may also purchase call and put options on futures contracts on U.S.
Government securities and Mortgage-Backed securities that are traded on U.S.
commodity exchanges. An option on a futures contract gives the purchaser the
right, in return for the premium paid, to assume a position in a futures
contract (a long position if the option is a call and a short position if the
option is a put) at a specified exercise price at any time during the option
exercise period. The writer of the option is required upon exercise to assume an
offsetting futures position (a short position if the option is a call and a long
position if the option is a put). Upon the exercise of the option, the
assumption of offsetting futures positions by the writer and holder of the
option will be accompanied by delivery of the accumulated cash balance in the
writer's futures margin account which represents the amount by which the market
price of the futures contract, at exercise, exceeds, in the case of a call, or
is less than, in the case of a put, the exercise price of the option on the
futures contract.
The Fund's ability to enter into transactions in futures contracts and
options thereon may be limited by the Internal Revenue Code's requirements for
qualification as a regulated investment company. The Fund will not purchase an
option if, as a result of such purchase, more than 20% of its total assets would
be invested in premiums for options and options on futures. In addition, the
Fund may not purchase or sell futures contracts or options thereon for
non-hedging purposes if immediately thereafter the sum of the amount of initial
margin deposits on the Fund's futures positions and premiums paid for options
thereon would exceed 5% of the liquidation value of the Fund's total assets,
after taking into account unrealized profits and unrealized losses on any such
contracts the Fund has entered into; provided, however, that in the case of an
option that is in-the-money at the time of purchase, the in-the-money amount may
be excluded in computing such 5% limitation. However, there is no overall
limitation on the percentage of the Fund's assets which may be subject to a
hedge position.
The Fund will purchase and sell futures contracts primarily to hedge its
actual or anticipated holdings of U.S. Government and Mortgage-Backed
securities. There is generally an inverse relationship between interest rates
and bond prices. Generally, when interest rates increase, bond
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prices will decline; when interest rates decline, bond prices will increase. For
example, if the Fund holds cash reserves or short-term debt securities at a time
that interest rates are expected to decline, the Fund might purchase futures
contracts as a hedge against anticipated increases in the price of the U.S.
Government securities that the Fund intends to acquire (an anticipatory hedge).
CHARACTERISTICS AND PURPOSE OF OPTIONS ON FUTURES CONTRACTS ON U.S.
GOVERNMENT SECURITIES AND MORTGAGE-BACKED SECURITIES. The Fund will purchase put
options on futures contracts primarily to hedge its portfolio of U.S. Government
and Mortgage-Backed securities against the risk of rising interest rates, and
the consequent decline in the prices of U.S. Government and Mortgage-Backed
securities it owns. The Fund will purchase call options on futures contracts to
hedge the Fund's portfolio against a possible market advance at a time when the
Fund is not fully invested in U.S. Government and Mortgage-Backed securities
(other than Treasury Bills).
RISK CONSIDERATIONS. Participation in the options or futures markets
involves investment risks and transaction costs to which the Fund would not be
subject absent the use of these strategies. If the adviser's predictions of
movements in the direction of the securities and interest rate markets are
inaccurate, the adverse consequences to the Fund may leave the Fund in a worse
position than if such strategies were not used. Risks inherent in the use of
options, futures contracts and options on futures contracts include (1)
dependence on the 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 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 the Fund to purchase or sell a portfolio security at a time that
otherwise would be favorable for it to do so, or the possible need for the Fund
to sell the security at a disadvantageous time, due to the requirement that the
Fund maintain "cover" or segregate securities in connection with hedging
transactions. See "Investment Objective and Policies" and "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
There is no assurance that a liquid secondary market will exist for futures
contracts and options thereon in which the Fund may invest. In the event a
liquid market does not exist, it may not be possible to close out a futures
position, and in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. In addition,
limitations imposed by an exchange or board of trade on which futures contracts
are traded may compel or prevent the Fund from closing out a contract which may
result in reduced gain or increased loss to the Fund. The absence of a liquid
market in futures contracts might cause the Fund to make or take delivery of the
underlying securities at a time when it may be disadvantageous to do so.
EURODOLLAR INSTRUMENTS
The Fund may also from time to time purchase Eurodollar instruments traded
on the Chicago Mercantile Exchange. Eurodollar instruments are essentially U.S.
dollar denominated futures contracts or options thereon which are linked to the
London Interbank Offered Rate (LIBOR). Eurodollar futures contracts enable
purchasers to obtain a fixed rate for the lending of funds and sellers to obtain
a fixed rate for borrowings. The Fund intends to use Eurodollar futures
contracts and options thereon to hedge against changes in LIBOR, to which many
interest rate swaps are linked. See "Interest Rate Transactions."
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INTEREST RATE TRANSACTIONS
The Fund may enter into interest rate swaps. Interest rate swaps involve the
exchange by the Fund with another party of their respective commitments to pay
or receive interest, e.g., an exchange of floating rate payments for fixed rate
payments. The Fund expects to enter into these transactions primarily to
preserve a return or spread on a particular investment or portion of its
portfolio or to protect against any increase in the price of securities the Fund
anticipates purchasing at a later date. The Fund intends to use these
transactions as a hedge and not as a speculative investment.
See "Investment Objective and Policies--Other Investment
Strategies--Interest Rate Transactions" in the Statement of Additional
Information.
BORROWING
The Fund may borrow from banks and enter into reverse repurchase agreements
or dollar rolls up to 33 1/3% of the value of its total assets (computed at the
time the loan is made) to take advantage of investment opportunities and for
temporary, extraordinary or emergency purposes. See "Reverse Repurchase
Agreements and Dollar Rolls" above. The Fund may pledge up to 33 1/3% of its
total assets to secure these borrowings. If the Fund's asset coverage for
borrowings falls below 300%, the Fund will take prompt action to reduce its
borrowings. If the Fund borrows to invest in securities, any investment gains
made on the securities in excess of interest paid on the borrowing will cause
the net asset value of the Fund's shares to rise faster than would otherwise be
the case. On the other hand, if the investment performance of the additional
securities purchased fails to cover their cost (including any interest paid on
the money borrowed) to the Fund, the net asset value of the Fund's shares will
decrease faster than would otherwise be the case. This is the speculative
characteristic known as "leverage." Under normal market conditions, the Fund
expects to engage in borrowing with respect to approximately 15% of the Fund's
total assets.
PORTFOLIO TURNOVER
The Fund has no fixed policy with respect to portfolio turnover. The Fund
does not expect to trade in securities for short-term gain. The portfolio
turnover rates for the fiscal years ended June 30, 1995 and 1994 were 254% and
209%, respectively, due to market volatility. The investment adviser expects
that, under normal circumstances, the Fund's annual portfolio turnover rate will
not exceed 200%. The portfolio turnover rate is calculated by dividing the
lesser of sales or purchases of portfolio securities by the average monthly
value of the Fund's portfolio securities, excluding securities having a maturity
at the date of purchase of one year or less. While the Fund will pay commissions
in connection with its options and futures transactions, the other securities in
which the Fund invests are generally traded on a "net" basis with dealers acting
as principals for their own account without a stated commission. Nevertheless,
high portfolio turnover may involve correspondingly greater brokerage
commissions and other transaction costs which will be borne directly by the
Fund. See "Portfolio Transactions" in the Statement of Additional Information.
INVESTMENT RESTRICTIONS
The Fund is subject to certain investment restrictions which, like its
investment objective, constitute fundamental policies. Fundamental policies
cannot be changed without the approval of the holders of a majority of the
Fund's outstanding voting securities, as defined in the Investment Company Act.
See "Investment Restrictions" in the Statement of Additional Information.
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HOW THE FUND IS MANAGED
THE TRUSTEES OF THE FUND, IN ADDITION TO OVERSEEING THE ACTIONS OF THE
FUND'S MANAGER, SUBADVISER AND DISTRIBUTOR, AS SET FORTH BELOW, DECIDE UPON
MATTERS OF GENERAL POLICY. THE FUND'S MANAGER CONDUCTS AND SUPERVISES THE DAILY
BUSINESS OPERATIONS OF THE FUND. THE FUND'S SUBADVISER FURNISHES DAILY
INVESTMENT ADVISORY SERVICES.
For the fiscal year ended through June 30, 1995, total expenses as a
percentage of average net assets of the Class A, Class B and Class C shares were
1.31%, 1.68% and 1.91% (annualized), respectively. See "Financial Highlights."
MANAGER
PRUDENTIAL MUTUAL FUND MANAGEMENT, INC. (PMF OR THE MANAGER), ONE SEAPORT
PLAZA, NEW YORK, NEW YORK 10292, IS THE MANAGER OF THE FUND AND IS COMPENSATED
FOR ITS SERVICES AT AN ANNUAL RATE OF .50 OF 1% OF THE FUND'S AVERAGE DAILY NET
ASSETS. It was incorporated in May 1987 under the laws of the State of Delaware.
See "Manager" in the Statement of Additional Information.
For the fiscal year ended June 30, 1995, the Fund paid management fees to
PMF of .50 of 1% of the Fund's average net assets.
As of July 31, 1995, PMF served as the manager of 39 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 28 closed-end investment companies with aggregate assets of
approximately $49 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PMF MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS AFFAIRS. See
"Manager" in the Statement of Additional Information. PMF is a subsidiary of
Prudential Securities Incorporated and a wholly-owned subsidiary of The
Prudential Insurance Company of America (Prudential), a major diversified
insurance and financial services company.
SUBADVISER
UNDER A SUBADVISORY AGREEMENT AMONG THE FUND, PMF AND BLACKROCK FINANCIAL
MANAGEMENT, INC. (BFM OR THE SUBADVISER), BFM FURNISHES INVESTMENT ADVISORY
SERVICES IN CONNECTION WITH THE MANAGEMENT OF THE FUND'S PORTFOLIO AND IS
COMPENSATED BY PMF FOR ITS SERVICES AT THE RATE OF .25 OF 1% OF THE FUND'S
AVERAGE DAILY NET ASSETS. PMF continues to have responsibility for all
investment advisory services pursuant to the Management Agreement and supervises
BFM's performance of such services.
For the fiscal year ended June 30, 1995, the Subadviser received advisory
fees of .25 of 1% of the Fund's average daily net assets from PMF.
The Subadviser is a Delaware corporation and a wholly-owned subsidiary of
PNC Asset Management Group, Inc., which is a wholly-owned subsidiary of PNC
Bank, N.A. (PNC), a commercial bank. PNC is a wholly-owned indirect subsidiary
of PNC Bank Corp., a bank holding company. The Subadviser serves as investment
adviser to fixed-income investors in the U.S. and overseas through funds and
private
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accounts with combined total assets of over $30 billion, of which approximately
$15 billion represent investment company assets.
Scott Amero, an employee of the Subadviser, is responsible for the
day-to-day management of the Fund's portfolio. Mr. Amero has managed the Fund's
portfolio since its inception in September 1991 and has been employed by BFM as
a portfolio manager since 1990. Prior to joining BlackRock in 1990, Mr. Amero
was a vice-president in Fixed Income Research at The First Boston Corporation.
BFM, however, applies a team approach to portfolio management and several
BlackRock professionals, including Robert Kapito and Keith Anderson, are
responsible for the longer term strategies and major transactions for the Fund's
portfolio.
DISTRIBUTOR
PRUDENTIAL MUTUAL FUND DISTRIBUTORS, INC. (PMFD), ONE SEAPORT PLAZA, NEW
YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF
DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS A SHARES OF THE FUND. IT IS
A WHOLLY-OWNED SUBSIDIARY OF PMF.
PRUDENTIAL SECURITIES INCORPORATED (PRUDENTIAL SECURITIES OR PSI), ONE
SEAPORT PLAZA, NEW YORK, NEW YORK 10292, IS A CORPORATION ORGANIZED UNDER THE
LAWS OF THE STATE OF DELAWARE AND SERVES AS THE DISTRIBUTOR OF THE CLASS B AND
CLASS C SHARES OF THE FUND. IT IS AN INDIRECT, WHOLLY-OWNED SUBSIDIARY OF
PRUDENTIAL.
UNDER SEPARATE DISTRIBUTION AND SERVICE PLANS (THE CLASS A PLAN, THE CLASS B
PLAN AND THE CLASS C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER
RULE 12B-1 UNDER THE INVESTMENT COMPANY ACT AND SEPARATE DISTRIBUTION AGREEMENTS
(THE DISTRIBUTION AGREEMENTS), PMFD AND PRUDENTIAL SECURITIES (COLLECTIVELY, THE
DISTRIBUTOR) INCUR THE EXPENSES OF DISTRIBUTING THE FUND'S CLASS A, CLASS B AND
CLASS C SHARES. These expenses include commissions and account servicing fees
paid to, or on account of, financial advisers of Prudential Securities and
representatives of Pruco Securities Corporation (Prusec), an affiliated broker-
dealer, commissions and account servicing fees paid to, or on account of, other
broker-dealers or financial institutions (other than national banks) which have
entered into agreements with the Distributor, interest and/or carrying charges
(Class B only), advertising expenses, the cost of printing and mailing
prospectuses to potential investors and indirect and overhead costs of
Prudential Securities and Prusec associated with the sale of Fund shares,
including lease, utility, communications and sales promotion expenses. The State
of Texas requires that shares of the Fund may be sold in that state only by
dealers or other financial institutions which are registered there as
broker-dealers.
Under the Class C Plan, the Fund is obligated to pay distribution and/or
service fees to the Distributor as compensation for its distribution and service
activities, not as reimbursement for specific expenses incurred, as is the case
under the Class A and Class B Plans. If the Distributor's expenses under the
Class C Plan exceed its distribution and service fees, the Fund will not be
obligated to pay any additional expenses under the Class C Plan. If the
Distributor's expenses under the Class C Plan are less than such distribution
and service fees, it will retain its full fees and realize a profit.
UNDER THE CLASS A PLAN, THE FUND REIMBURSES PMFD FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS A SHARES AT AN ANNUAL RATE
OF UP TO .30 OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS A SHARES. The
Class A Plan provides that (i) up to .25 of 1% of the average
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<PAGE>
daily net assets of the Class A shares may be used to pay for personal service
and the maintenance of shareholder accounts (service fee) and (ii) total
distribution fees (including the service fee of .25 of 1%) may not exceed .30 of
1%. It is expected that, in the case of Class A shares, proceeds from the
distribution fee will be used primarily to pay an account servicing fee to
financial advisers. The Distributor has agreed to limit its distribution
expenses under the Class A Plan to .15 of 1% of the average daily net assets of
the Class A shares for the fiscal year ending June 30, 1996.
UNDER THE CLASS B PLAN, THE FUND MAY REIMBURSE PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED EXPENSES WITH RESPECT TO CLASS B SHARES (ASSET-BASED SALES
CHARGES) AT AN ANNUAL RATE OF UP TO .75 OF 1% OF THE AVERAGE DAILY NET ASSETS OF
THE CLASS B SHARES. Prudential Securities recovers the distribution expenses it
incurs through the receipt of reimbursement payments from the Fund under the
Class B Plan and the receipt of contingent deferred sales charges from certain
redeeming shareholders. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges."
THE CLASS B PLAN ALSO PROVIDES FOR THE PAYMENT OF A SERVICE FEE TO
PRUDENTIAL SECURITIES AT A RATE NOT TO EXCEED .25 OF 1% OF THE AVERAGE DAILY NET
ASSETS OF THE CLASS B SHARES. The service fee is used to pay financial advisers
for personal service and/or the maintenance of shareholder accounts.
Actual distribution expenses (asset-based sales charges) for Class B shares
for any given year may exceed the fees received pursuant to the Class B Plan and
will be carried forward and paid by the Fund in future years so long as the
Class B Plan is in effect. Interest is accrued monthly on such carry forward
amounts at a rate comparable to that paid by Prudential Securities for bank
borrowings. See "Distributor" in the Statement of Additional Information.
THE AGGREGATE DISTRIBUTION FEE FOR CLASS B SHARES (ASSET-BASED SALES CHARGE
PLUS SERVICE FEE) WILL NOT EXCEED THE ANNUAL RATE OF 1% OF THE AVERAGE DAILY NET
ASSETS OF THE CLASS B SHARES UNDER THE CLASS B PLAN. EFFECTIVE NOVEMBER 1, 1994,
THE FUND CEASED TO ACCEPT PURCHASE ORDERS FOR CLASS B SHARES AND PRUDENTIAL
SECURITIES AGREED TO LIMIT ITS DISTRIBUTION-RELATED FEE TO AN ANNUAL RATE OF .20
OF 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS B SHARES; ALL OF THIS FEE IS
A SERVICE FEE.
UNDER THE CLASS C PLAN, THE FUND MAY PAY PRUDENTIAL SECURITIES FOR ITS
DISTRIBUTION-RELATED ACTIVITIES WITH RESPECT TO CLASS C SHARES AT AN ANNUAL RATE
OF UP TO 1% OF THE AVERAGE DAILY NET ASSETS OF THE CLASS C SHARES. The Class C
Plan provides for the payment to Prudential Securities of (i) an asset-based
sales charge of up to .75 of 1% of the average daily net assets of the Class C
shares, and (ii) a service fee of up to .25 of 1% of the average daily net
assets of the Class C shares. The service fee is used to pay for personal
service and/or the maintenance of shareholder accounts. Prudential Securities
has agreed to limit its distribution-related fees payable under the Class C Plan
to .75 of 1% of the average daily net assets of the Class C shares for the
fiscal year ending June 30, 1996. Prudential Securities also receives contingent
deferred sales charges from certain redeeming shareholders. See "Shareholder
Guide--How to Sell Your Shares--Contingent Deferred Sales Charges."
For the fiscal year ended June 30, 1995, Prudential Securities received
$ 15,335 from the Fund under the Class B Plan. It is estimated that Prudential
Securities spent approximately $ 16,600 on behalf of the Fund during such
period. At June 30, 1995, the aggregate amount of
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<PAGE>
distribution expenses incurred by Prudential Securities and not yet reimbursed
by the Fund or recovered through contingent deferred sales charges was
approximately $ 46,400 or 1.9% of the net assets of the Class B shares. These
unreimbursed amounts may be recovered by the Distributor through future payments
under the Class B Plan or contingent deferred sales charges. As of November 1,
1994, the Fund ceased to accept purchase orders for Class B shares.
For the fiscal year ended June 30, 1995, the Fund paid distribution expenses
of .15%, .52% and .75% (annualized) of the average daily net assets of the Class
A, Class B and Class C shares, respectively. The Fund records all payments made
under the Plans as expenses in the calculation of net investment income.
Distribution expenses attributable to the sale of shares of the Fund will be
allocated to each class based upon the ratio of sales of each class to the sales
of all shares of the Fund. The distribution fee and sales charge of one class
will not be used to subsidize the sale of another class.
Each Plan provides that it shall continue in effect from year to year
provided that a majority of the Trustees of the Fund, including a majority of
the Trustees who are not "interested persons" of the Fund (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of the Plan or any agreement related to the Plan (the Rule 12b-1
Trustees), vote annually to continue the Plan. Each Plan may be terminated at
any time by vote of a majority of the Rule 12b-1 Trustees or of a majority of
the outstanding shares of the applicable class of the Fund. In the event of
termination or non-continuation of the Class B Plan, the Trustees may consider
the appropriateness of having the Fund reimburse Prudential Securities for the
outstanding carry forward amounts plus interest thereon.
In addition to distribution and service fees paid by the Fund under the
Class A, Class B and Class C Plans, the Manager (or one of its affiliates) may
make payments out of its own resources to dealers and other persons who
distribute shares of the Fund. Such payments may be calculated by reference to
the net asset value of the shares sold by such persons or otherwise.
The Distributor is subject to the rules of the National Association of
Securities Dealers, Inc. (the NASD) governing maximum sales charges. See
"Distributor" in the Statement of Additional Information.
On October 21, 1993, PSI entered into an omnibus settlement with the SEC,
state securities regulators (with the exception of the Texas Securities
Commissioner who joined the settlement on January 18, 1994) and the NASD to
resolve allegations that from 1980 through 1990 PSI sold certain limited
partnership interests in violation of securities laws to persons for whom such
securities were not suitable and misrepresented the safety, potential returns
and liquidity of these investments. Without admitting or denying the allegations
asserted against it, PSI consented to the entry of an SEC Administrative Order
which stated that PSI's conduct violated the federal securities laws, directed
PSI to cease and desist from violating the federal securities laws, pay civil
penalties, and adopt certain remedial measures to address the violations.
Pursuant to the terms of the SEC settlement, PSI agreed to the imposition of
a $10,000,000 civil penalty, established a settlement fund in the amount of
$330,000,000 and procedures to resolve legitimate claims for compensatory
damages by purchasers of the partnership interests. PSI's settlement with the
state securities regulators included an agreement to pay a penalty of
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<PAGE>
$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 October 1994, a criminal complaint was filed with the United States
Magistrate for the Southern District of New York alleging that PSI committed
fraud in connection with the sale of certain limited partnership interests in
violation of federal securities laws. An agreement was simultaneously filed to
defer prosecution of these charges for a period of three years from the signing
of the agreement, provided that PSI complies with the terms of the agreement.
If, upon completion of the three year period, PSI has complied with the terms of
the agreement, no prosecution will be instituted by the United States for the
offenses charged in the complaint. If on the other hand, during the course of
the three year period, PSI violates the terms of the agreement, the U.S.
Attorney can then elect to pursue these charges. Under the terms of the
agreement, PSI agreed, among other things, to pay an additional $330,000,000
into the fund established by the SEC to pay restitution to investors who
purchased certain PSI limited partnership interests.
For more detailed information concerning the foregoing matters, see
"Distributor" in the Statement of Additional Information, a copy of which may be
obtained at no cost by calling 1-800-225-1852.
The Fund is not affected by PSI's financial condition and is an entirely
separate legal entity from PSI, which has no beneficial ownership therein and
the Fund's assets which are held by State Street Bank and Trust Company, an
independent custodian, are separate and distinct from PSI.
PORTFOLIO TRANSACTIONS
Prudential Securities may act as broker and/or futures commission merchant
for the Fund, provided that the commissions, fees or other remuneration it
receives are fair and reasonable. See "Portfolio Transactions" in the Statement
of Additional Information.
CUSTODIAN AND TRANSFER AND DIVIDEND DISBURSING AGENT
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, 02171, serves as Custodian for the Fund's portfolio securities
and cash and, in that capacity, maintains certain financial and accounting books
and records pursuant to an agreement with the Fund. Its mailing address is P.O.
Box 1713, Boston, Massachusetts 02105.
Prudential Mutual Fund Services, Inc., Raritan Plaza One, Edison, New Jersey
08837, serves as Transfer Agent and Dividend Disbursing Agent and in those
capacities maintains certain books and records for the Fund. PMFS is a
wholly-owned subsidiary of PMF. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
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HOW THE FUND VALUES ITS SHARES
THE FUND'S NET ASSET VALUE PER SHARE OR NAV IS DETERMINED BY SUBTRACTING ITS
LIABILITIES FROM THE VALUE OF ITS ASSETS AND DIVIDING THE REMAINDER BY THE
NUMBER OF OUTSTANDING SHARES. NAV IS CALCULATED SEPARATELY FOR EACH CLASS. THE
TRUSTEES HAVE FIXED THE SPECIFIC TIME OF DAY FOR THE COMPUTATION OF THE FUND'S
NAV TO BE AS OF 4:15 P.M., NEW YORK TIME.
Portfolio securities are valued based on market quotations or, if not
readily available, at fair value as determined in good faith under procedures
established by the Fund's Trustees.
The Fund will compute its NAV once daily on days that the New York Stock
Exchange is open for trading except on days on which no orders to purchase, sell
or redeem shares have been received by the Fund or days on which changes in the
value of the Fund's portfolio securities do not materially affect the NAV. The
New York Stock Exchange is closed on the following holidays: New Year's Day,
Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day. See "Net Asset Value" in the Statement of
Additional Information.
Although the legal rights of each class of shares are substantially
identical, the different expenses borne by each class will result in different
NAVs and dividends. As long as the Fund declares dividends daily, the NAV of the
Class A, Class B and Class C shares will generally be the same. It is expected,
however, that the Fund's dividends will differ by approximately the amount of
the distribution-related expense accrual differential among the classes.
HOW THE FUND CALCULATES PERFORMANCE
FROM TIME TO TIME THE FUND MAY ADVERTISE ITS "YIELD" AND "TOTAL RETURN"
(INCLUDING "AVERAGE ANNUAL" TOTAL RETURN AND "AGGREGATE" TOTAL RETURN) IN
ADVERTISEMENTS AND SALES LITERATURE. YIELD AND TOTAL RETURN ARE CALCULATED
SEPARATELY FOR CLASS A, CLASS B AND CLASS C SHARES. These figures are based on
historical earnings and are not intended to indicate future performance. The
"yield" refers to the income generated by an investment in the Fund over a one-
month or 30-day period. This income is then "annualized" that is, the amount of
income generated by the investment during that 30-day period is assumed to be
generated each 30-day period for twelve periods and is shown as a percentage of
the investment. The income earned on the investment is also assumed to be
reinvested at the end of the 30-day period. The "total return" shows how much an
investment in the Fund would have increased (decreased) over a specified period
of time, (i.e., one, five or ten years or since inception of the Fund) assuming
that all distributions and dividends by the Fund were reinvested on the
reinvestment dates during the period and less all recurring fees. The
"aggregate" total return reflects actual performance over a stated period of
time. "Average annual" total return is a hypothetical rate of return that, if
achieved annually, would have produced the same aggregate total return if
performance had been constant over the entire period. "Average annual" total
return smooths out variations in performance and takes into account any
applicable initial or contingent deferred sales charges. Neither "average
annual" total return nor "aggregate" total return takes into account any federal
or state income
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<PAGE>
taxes which may be payable upon redemption. The Fund also may include
comparative performance information in advertising or marketing the Fund's
shares. Such performance information may include data from Lipper Analytical
Services, Inc., Morningstar Publications, Inc., other industry publications,
business periodicals and market indices. See "Performance Information" in the
Statement of Additional Information. The Fund will include performance data for
each class of shares of the Fund in any advertisement or information including
performance data of the Fund. Additional performance information is contained in
the Fund's annual and semi-annual reports to shareholders which may be obtained
without cost. See "Shareholder Guide--Shareholder Services--Reports to
Shareholders."
TAXES, DIVIDENDS AND DISTRIBUTIONS
TAXATION OF THE FUND
THE FUND HAS ELECTED TO QUALIFY AND INTENDS TO REMAIN QUALIFIED AS A
REGULATED INVESTMENT COMPANY UNDER THE INTERNAL REVENUE CODE. ACCORDINGLY, THE
FUND WILL NOT BE SUBJECT TO FEDERAL INCOME TAXES ON ITS NET INVESTMENT INCOME
AND CAPITAL GAINS, IF ANY, THAT IT DISTRIBUTES TO ITS SHAREHOLDERS. See "Taxes,
Dividends and Distributions" in the Statement of Additional Information.
The Fund may incur foreign income taxes in the event that it does invest in
foreign securities. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
Under the Internal Revenue Code, special rules apply to the treatment of
certain options and futures contracts (Section 1256 contracts). At the end of
each year, such investments held by the Fund will be required to be "marked to
market" for federal income tax purposes; that is, treated as having been sold at
market value. Sixty percent of any gain or loss recognized on these "deemed
sales" and on actual dispositions will be treated as long-term capital gain or
loss, and the remainder will be treated as short-term capital gain or loss. See
"Taxes, Dividends and Distributions" in the Statement of Additional Information.
TAXATION OF SHAREHOLDERS
Any dividends out of net investment income, together with distributions of
net short-term gains (i.e., the excess of net short-term capital gains over net
long-term capital losses) distributed to shareholders, will be taxable as
ordinary income to the shareholder whether or not reinvested. Any net capital
gains (i.e., the excess of net long-term capital gains over net short-term
capital losses) distributed to shareholders will be taxable as long-term capital
gains to the shareholders, whether or not reinvested and regardless of the
length of time a shareholder has owned his or her shares. The maximum long-term
capital gains rate for individuals is currently 28%. The maximum long-term
capital gains rate for corporate shareholders currently is the same as the
maximum tax rate for ordinary income.
The Fund has obtained an opinion of counsel to the effect that the exchange
of Class B or Class C shares for Class A shares does not constitute a taxable
event for federal income tax purposes. However, such opinion is not binding on
the Internal Revenue Service.
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<PAGE>
Shareholders are advised to consult their own tax advisers regarding
specific questions as to federal, state or local taxes.
WITHHOLDING TAXES
Under the Internal Revenue Code, the Fund is required to withhold and remit
to the U.S. Treasury 31% of dividends and capital gain income and redemption
proceeds payable to individuals and certain noncorporate shareholders who fail
to furnish correct tax identification numbers on IRS Form W-9 (or IRS Form W-8
in the case of certain foreign shareholders). For shareholders who are otherwise
subject to backup withholding under federal income tax law, only dividends and
capital gains distributions are subject to withholding. Dividends of net
investment income and short-term capital gains to a foreign shareholder will
generally be subject to U.S. withholding tax at the rate of 30% (or lower treaty
rate).
DIVIDENDS AND DISTRIBUTIONS
THE FUND EXPECTS TO DECLARE DAILY AND PAY MONTHLY DIVIDENDS OF NET
INVESTMENT INCOME AND MAKE DISTRIBUTIONS AT LEAST ANNUALLY OF ANY NET CAPITAL
GAINS. Dividends paid by the Fund with respect to each class of shares, to the
extent any dividends 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 charges, generally resulting in lower dividends
for Class B and Class C shares. Distributions of net capital gains, if any, will
be paid in the same amount for Class A, Class B and Class C shares. See "How the
Fund Values its Shares." For federal income tax purposes, the Fund had a capital
loss carryforward at June 30, 1995 of approximately $3,374,000 of which $588,000
expires in 2001, $2,044,000 expires in 2002, and $742,000 expires in 2003.
Accordingly, no capital gains distributions are expected to be paid to
shareholders until net gains have been realized in excess of such amount. The
Fund has elected to treat approximately $533,700 of net capital losses incurred
in the eight month period ended June 30, 1995, as having occurred in the
following fiscal year.
DIVIDENDS AND DISTRIBUTIONS WILL BE PAID IN ADDITIONAL FUND SHARES, BASED ON
THE NAV ON THE RECORD DATE OR SUCH OTHER DATE AS THE TRUSTEES MAY DETERMINE,
UNLESS THE SHAREHOLDER ELECTS IN WRITING NOT LESS THAN FIVE BUSINESS DAYS PRIOR
TO THE RECORD DATE TO RECEIVE SUCH DIVIDENDS AND DISTRIBUTIONS IN CASH. Such
election should be submitted to Prudential Mutual Fund Services, Inc.,
Attention: Account Maintenance, P.O. Box 15015, New Brunswick, New Jersey
08906-5015. The Fund will notify each shareholder after the close of the Fund's
taxable year of both the dollar amount and the taxable status of that year's
dividends and distributions on a per share basis.
WHEN THE FUND GOES "EX-DIVIDEND," ITS NAV IS REDUCED BY THE AMOUNT OF THE
DIVIDEND OR DISTRIBUTION. IF YOU BUY SHARES JUST PRIOR TO THE EX-DIVIDEND DATE,
THE PRICE YOU PAY WILL INCLUDE THE DIVIDEND OR DISTRIBUTION AND A PORTION OF
YOUR INVESTMENT WILL BE RETURNED TO YOU AS A TAXABLE DISTRIBUTION. YOU SHOULD,
THEREFORE, CONSIDER THE TIMING OF DIVIDENDS WHEN MAKING YOUR PURCHASES.
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<PAGE>
GENERAL INFORMATION
DESCRIPTION OF SHARES
THE FUND, ORGANIZED AS AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF
MASSACHUSETTS, IS A TRUST FUND OF THE TYPE COMMONLY KNOWN AS A "MASSACHUSETTS
BUSINESS TRUST." THE FUND'S ACTIVITIES ARE SUPERVISED BY ITS TRUSTEES. THE FUND
IS AUTHORIZED TO ISSUE AN UNLIMITED NUMBER OF SHARES OF BENEFICIAL INTEREST,
$.01 PAR VALUE DIVIDED INTO THREE CLASSES, DESIGNATED CLASS A, CLASS B AND CLASS
C. Each class of shares represents an interest in the same assets of the Fund
and are identical in all respects except that each class bears different
distribution expenses and has exclusive voting rights with respect to its
distribution plan and each class has a different exchange privilege. See "How
the Fund is Managed--Distributor." The Fund has received an order of the SEC
permitting the issuance and sale of multiple classes of shares. The Trustees are
empowered by the Declaration of Trust to issue additional series of shares and
classes within those series.
The Trustees may increase or decrease the number of authorized shares.
Shares of the Fund, when issued, are fully paid, nonassessable, fully
transferable and redeemable at the option of the holder. Shares are also
redeemable at the option of the Fund under certain circumstances as described
under "Shareholder Guide--How to Sell Your Shares." Each share of beneficial
interest of each class is equal as to earnings, assets and voting privileges;
except as noted above, each class bears the expenses related to the distribution
of its shares. There are no conversion, preemptive or other subscription rights
in connection with the shares. In the event of liquidation, each share of the
Fund is entitled to its portion of all of the Fund's assets after all debt and
expenses of the Fund have been paid. Since Class B and Class C shares generally
bear higher distribution expenses than Class A shares, the liquidation proceeds
to shareholders of those classes are likely to be lower than to Class A
shareholders. The Fund's shares do not have cumulative voting rights for the
election of Trustees.
THE FUND DOES NOT INTEND TO HOLD ANNUAL MEETINGS OF SHAREHOLDERS.
SHAREHOLDERS HAVE CERTAIN RIGHTS, INCLUDING THE RIGHT TO CALL A MEETING UPON A
VOTE OF 10% OF THE FUND'S OUTSTANDING SHARES FOR THE PURPOSE OF VOTING ON THE
REMOVAL OF ONE OR MORE TRUSTEES OR TO TRANSACT ANY OTHER BUSINESS.
Under Massachusetts law, shareholders of a business trust may, under certain
circumstances, be held personally liable as partners for the obligation of the
Fund beyond the amount of their investment in the Fund, which is not the case
with a corporation. The Declaration of Trust of the Fund provides that
shareholders shall not be subject to any personal liability for the acts or
obligations of the Fund and that every written obligation, contract, instrument
or undertaking made by the Fund shall contain a provision to the effect that the
shareholders are not individually bound thereunder.
ADDITIONAL INFORMATION
This Prospectus, including the Statement of Additional Information which has
been incorporated by reference herein, does not contain all the information set
forth in the Registration Statement filed by the Fund with the SEC under the
Securities Act. Copies of the Registration Statement may be obtained at a
reasonable charge from the SEC or may be examined, without charge, at the office
of the SEC in Washington, D.C.
27
<PAGE>
SHAREHOLDER GUIDE
HOW TO BUY SHARES OF THE FUND
YOU MAY PURCHASE SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, PRUSEC,
OR DIRECTLY FROM THE FUND, THROUGH ITS TRANSFER AGENT, PRUDENTIAL MUTUAL FUND
SERVICES, INC. (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES,
P.O. BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. In addition, Class A
shares may be purchased through a dealer which has entered into a selected
dealer agreement with the Fund's Distributor. The minimum initial investment for
Class A shares is $2,500 and $5,000 for Class C shares. The minimum
subsequent investment is $100 for both classes. All minimum investment
requirements are waived for certain retirement and employee savings plans or
custodial accounts for the benefit of minors. For purchases made through the
Automatic Savings Accumulation Plan, the minimum initial and subsequent
investment is $50. See "Shareholder Services."
THE PURCHASE PRICE IS THE NAV PER SHARE NEXT DETERMINED FOLLOWING RECEIPT OF
AN ORDER BY THE TRANSFER AGENT OR PRUDENTIAL SECURITIES PLUS A SALES CHARGE
WHICH, AT YOUR OPTION, MAY BE IMPOSED EITHER (I) AT THE TIME OF PURCHASE (CLASS
A SHARES) OR (II) ON A DEFERRED BASIS (CLASS C SHARES). SEE "ALTERNATIVE
PURCHASE PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES." THE FUND IS
CURRENTLY NOT ACCEPTING PURCHASE ORDERS FOR CLASS B SHARES.
Application forms can be obtained from PMFS, Prudential Securities or
Prusec. If a share certificate is desired, it must be requested in writing for
each transaction. Certificates are issued only for full shares. Shareholders who
hold their shares through Prudential Securities will not receive share
certificates.
The Fund reserves the right to reject any purchase order (including an
exchange into the Fund) or to suspend or modify the continuous offering of its
shares. See "How to Sell Your Shares."
Your dealer is responsible for forwarding payment promptly to the Fund. The
Distributor reserves the right to cancel any purchase order for which payment
has not been received by the fifth business day following the investment.
Transactions in Fund shares may be subject to postage and handling charges
imposed by your dealer.
PURCHASE BY WIRE. For an initial purchase of shares of the Fund by wire, you
must first telephone PMFS to receive an account number at (800) 225-1852
(toll-free). The following information will be requested: your name, address,
tax identification number, class election, dividend distribution election,
amount being wired, and wiring bank. Instructions should then be given by you to
your bank to transfer funds by wire to State Street Bank and Trust Company,
Boston, Massachusetts, Custody and Shareholder Services Division, Attention: The
BlackRock Government Income Trust, specifying on the wire the account number
assigned by PMFS and your name and identifying the sales charge alternative
(Class A or Class C shares).
If you arrange for receipt by State Street of Federal Funds prior to the
calculation of NAV (4:15 P.M., New York time), on a business day, you may
purchase shares of the Fund as of that day. See "Net Asset Value" in the
Statement of Additional Information.
In making a subsequent purchase order by wire, you should wire State Street
directly and should be sure that the wire specifies The BlackRock Government
Income Trust, Class A or Class C shares, your name and individual account
number. It is not necessary to call PMFS to make subsequent purchase orders
utilizing Federal Funds. The minimum initial amount which may be invested by
wire is $2,500 for Class A shares and $5,000 for Class C shares and the minimum
subsequent amount which may be invested by wire is $1,000 for both classes.
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<PAGE>
ALTERNATIVE PURCHASE PLAN
THE FUND OFFERS TWO CLASSES OF SHARES (CLASS A AND CLASS C SHARES) WHICH
ALLOWS YOU TO CHOOSE THE MOST BENEFICIAL SALES CHARGE STRUCTURE FOR YOUR
INDIVIDUAL CIRCUMSTANCES GIVEN THE AMOUNT OF THE PURCHASE, THE LENGTH OF TIME
YOU EXPECT TO HOLD THE SHARES AND OTHER RELEVANT CIRCUMSTANCES (ALTERNATIVE
PURCHASE PLAN). CLASS B SHARES ARE NOT CURRENTLY BEING OFFERED.
<TABLE>
<CAPTION>
ANNUAL 12B-1 FEES
(AS A % OF AVERAGE DAILY
SALES CHARGE NET ASSETS) OTHER INFORMATION
--------------------------- -------------------------- -----------------------------------
<S> <C> <C> <C>
CLASS A Maximum initial sales .30 of 1% (Currently being Initial sales charge waived or
charge of 3% of the public charged at a rate of .15 reduced for certain purchases
offering price of 1%)
CLASS B Maximum contingent deferred 1% (Currently being The Fund is currently not accepting
sales charge or CDSC of 1% charged at a rate of .20 purchase orders for Class B shares
of the lesser of the amount of 1%)
invested or the redemption
proceeds on redemptions
made within one year of
purchase
CLASS C Maximum CDSC of 1% of the 1% (Currently being
lesser of the amount charged at a rate of .75
invested or the redemption of 1%)
proceeds on redemptions
made within one year of
purchase
</TABLE>
The three classes of shares represent an interest in the same portfolio of
investments of the Fund and have the same rights, except that (i) each class
bears the separate expenses of its Rule 12b-1 distribution and service plan and
(ii) each class has exclusive voting rights with respect to its plan.
The three classes also have separate exchange privileges. See "How to
Exchange Your Shares" below. The income attributable to each class and the
dividends payable on the shares of each class will be reduced by the amount of
the distribution fee of each class. Class B and Class C shares bear the expenses
of a higher distribution fee which will generally cause them to have higher
expense ratios and to pay lower dividends than the Class A shares.
Financial advisers and other sales agents who sell shares of the Fund will
receive different compensation for selling Class A and Class C shares and will
generally receive more compensation initially for selling Class A shares than
for selling Class C shares.
IN SELECTING A PURCHASE ALTERNATIVE, YOU SHOULD CONSIDER, AMONG OTHER
THINGS, (1) the length of time you expect to hold your investment, (2) the
amount of any applicable sales charge (whether imposed at the time of purchase
or redemption) and distribution-related fees, as noted above, (3) whether you
qualify for any reduction or waiver of any applicable sales charge, and (4) the
various exchange privileges among the different classes of shares (see "How to
Exchange Your Shares" below).
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<PAGE>
The following illustrations are provided to assist you in determining which
method of purchase best suits your individual circumstances:
If you qualify for a reduced sales charge, you might elect to purchase Class
A shares because a similar sales charge reduction is not available for purchases
of Class C shares and because Class A shares are subject to a lower distribution
and service fee than are Class C shares. However, because the initial sales
charge for Class A shares is deducted at the time of purchase, you would not
have all of your funds invested initially.
If you do not qualify for a reduced initial sales charge and expect to
maintain your investment in the Fund for a long period of time you might also
elect to purchase Class A shares because over time the accumulated continuing
distribution and service fees of Class C shares will exceed the initial sales
charge plus distribution and service fees of Class A shares. Again, however, you
must weigh this consideration against the fact that not all of your funds will
be invested initially. Furthermore, the ongoing distribution and service fees
applicable to Class C shares will be offset to the extent any return is realized
on the additional funds. However, there can be no assurance that any return will
be realized on the additional funds.
On the other hand, you might determine that it is more advantageous to have
all of your funds invested initially, although they are subject to a
distribution and service fee and, for a one-year period, a contingent deferred
sales charge. For example, based on current fees and expenses, you would have to
hold your investment over six years for the Class C distribution and service fee
to exceed the initial sales charge plus distribution and service fees of Class A
shares. In this example, if you intend to maintain your investment in the Fund
for more than six years, you should consider purchasing Class A shares. This
example does not take into account the time value of money which further reduces
the impact of the distribution and service fee on the investment, fluctuations
in net asset value, the effect of the return on the investment over this period
of time or redemptions to which the contingent deferred sales charge is
applicable.
CLASS A SHARES
The offering price of Class A shares for investors choosing the initial
sales charge alternative is the next determined NAV plus a sales charge
(expressed as a percentage of the offering price and of the amount invested)
imposed on a single transaction as shown in the following table:
<TABLE>
<CAPTION>
SALES CHARGE AS SALES CHARGE AS DEALER CONCESSION AS
PERCENTAGE OF PERCENTAGE OF PERCENTAGE OF
AMOUNT OF PURCHASE OFFERING PRICE AMOUNT INVESTED OFFERING PRICE
- --------------------------------------- --------------- --------------- --------------------
<S> <C> <C> <C>
$0 to $49,999 3.00% 3.09% 2.90%
$50,000 to $99,999 2.50 2.56 2.40
$100,000 to $249,999 2.00 2.04 1.90
$250,000 to $499,999 1.50 1.52 1.45
$500,000 to $999,999 1.00 1.01 0.95
$1,000,000 to $2,499,999 0.50 0.50 0.45
Over $2,500,000 0.25 0.20 0.20
</TABLE>
Selling dealers may be deemed to be underwriters, as that term is defined
under federal securities laws.
REDUCTION AND WAIVER OF INITIAL SALES CHARGES. Reduced sales charges are
available through Rights of Accumulation and Letters of Intent. Shares of the
Fund and shares of other
30
<PAGE>
Prudential Mutual Funds (excluding money market funds other than those acquired
pursuant to the exchange privilege) may be aggregated to determine the
applicable reduction. See "Purchase and Redemption of Fund Shares--Reduced
Initial Sales Charges--Class A Shares" in the Statement of Additional
Information.
Benefit Plans. Class A shares may be purchased at NAV, without payment of an
initial sales charge, by pension, profit-sharing or other employee benefit plans
qualified under Section 401 of the Internal Revenue Code and deferred
compensation and annuity plans under Section 457 and 403(b)(7) of the Internal
Revenue Code (Benefit Plans), provided that the plan has existing assets of at
least $1 million invested in shares of Prudential Mutual Funds (excluding money
market funds other than those acquired pursuant to the exchange privilege) or
1,000 eligible employees or participants. In the case of Benefit Plans whose
accounts are held directly with the Transfer Agent or Prudential Securities and
for which the Transfer Agent or Prudential Securities does individual account
recordkeeping (Direct Account Benefit Plans) and Benefit Plans sponsored by PSI
or its subsidiaries (PSI or Subsidiary Prototype Benefit Plans), Class A shares
may be purchased at NAV by participants who are repaying loans made from such
plans to the participant.
PruArray Plans. Class A shares may be purchased at NAV by certain retirement
and deferred compensation plans, qualified or non-qualified under the Internal
Revenue Code, including pension, profit-sharing, stock-bonus or other employee
benefit plans under Section 401 of the Code and deferred compensation and
annuity plans under Sections 457 and 403(b)(7) of the Code that participate in
the Transfer Agent's PruArray Program (a benefit plan recordkeeping service)
(hereafter referred to as a PruArray Plan); provided (i) that the plan has at
least $1 million in existing assets or 1,000 eligible employees or participants
and (ii) that Prudential Mutual Funds constitute at least one-half of the plan's
investment options. The term "existing assets" for this purpose includes stock
issued by a PruArray Plan sponsor and shares of non-money market Prudential
Mutual Funds and shares of certain unaffiliated non-money market mutual funds
that participate in the PruArray Program (Participating Funds). "Existing
assets" also include shares of money market funds acquired by exchange from a
Participating Fund.
Special Rules Applicable to Retirement Plans. After a Benefit Plan or
PruArray Plan qualifies to purchase Class A shares at NAV, all subsequent
purchases will be made at NAV.
Other Waivers. Class A shares may be purchased at NAV, through Prudential
Securities or the Transfer Agent, by the following persons: (a) Trustees and
officers of the Fund and other Prudential Mutual Funds, (b) employees of
Prudential Securities and PMF and their subsidiaries and members of the families
of such persons who maintain an "employee related" account at Prudential
Securities or the Tranfer Agent, (c) employees and special agents of Prudential
and its subsidiaries and all persons who have retired directly from active
service with Prudential or one of its subsidiaries, (d) registered
representatives and employees of dealers who have entered into a selected dealer
agreement with Prudential Securities provided that purchases at NAV are
permitted by such person's employer and (e) investors who have a business
relationship with a financial adviser who joined Prudential Securities from
another investment firm, provided that (i) the purchase is made within 90 days
of the commencement of the financial adviser's employment at Prudential
Securities, (ii) the purchase is made with proceeds of a redemption of shares of
any open-end, non-money market fund sponsored by the financial adviser's
previous employer (other than a fund which imposes a distribution or service fee
of .25 of 1% or less) and (iii) the financial adviser served as the client's
broker on the previous purchases.
31
<PAGE>
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec that you are entitled to the reduction or waiver of the
sales charge. The reduction or waiver will be granted subject to confirmation of
your entitlement. No initial sales charges are imposed upon Class A shares
acquired upon the reinvestment of dividends and distributions. See "Purchase and
Redemption of Fund Shares--Reduced Initial Sales Charges--Class A Shares" in the
Statement of Additional Information.
CLASS C SHARES
The offering price of Class C shares for investors choosing the deferred
sales charge alternative is the NAV next determined following receipt of an
order by the Transfer Agent or Prudential Securities. Although there is no
sales charge imposed at the time of purchase, redemptions of Class C shares may
be subject to a contingent deferred sales charge. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
HOW TO SELL YOUR SHARES
YOU CAN REDEEM YOUR SHARES AT ANY TIME FOR CASH AT THE NAV NEXT DETERMINED
AFTER THE REDEMPTION REQUEST IS RECEIVED IN PROPER FORM BY THE TRANSFER AGENT OR
PRUDENTIAL SECURITIES. SEE "HOW THE FUND VALUES ITS SHARES." In certain cases,
however, redemption proceeds will be reduced by the amount of any applicable
contingent deferred sales charge. See "Contingent Deferred Sales Charges" below.
IF YOU HOLD SHARES OF THE FUND THROUGH PRUDENTIAL SECURITIES, YOU MUST
REDEEM YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD SHARES IN NON-CERTIFICATE FORM, A WRITTEN REQUEST FOR REDEMPTION
SIGNED BY YOU EXACTLY AS THE ACCOUNT IS REGISTERED IS REQUIRED. IF YOU HOLD
CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON THE FACE OF THE
CERTIFICATES, MUST BE RECEIVED BY THE TRANSFER AGENT IN ORDER FOR THE REDEMPTION
REQUEST TO BE PROCESSED. IF REDEMPTION IS REQUESTED BY A CORPORATION,
PARTNERSHIP, TRUST OR FIDUCIARY, WRITTEN EVIDENCE OF AUTHORITY ACCEPTABLE TO THE
TRANSFER AGENT MUST BE SUBMITTED BEFORE SUCH REQUEST WILL BE ACCEPTED. All
correspondence and documents concerning redemptions should be sent to the Fund
in care of its Transfer Agent, Prudential Mutual Fund Services, Inc., Attention:
Redemption Services, P.O. Box 15010, New Brunswick, New Jersey 08906-5010.
If the proceeds of the redemption (a) exceed $50,000, (b) are to be paid to
a person other than the record owner, (c) are to be sent to an address other
than the address on the Transfer Agent's records, or (d) are to be paid to a
corporation, partnership, trust or fiduciary, the signature(s) on the redemption
request and on the certificates, if any, or stock power must be guaranteed by an
"eligible guarantor institution." An "eligible guarantor institution" includes
any bank, broker, dealer or credit union. The Transfer Agent reserves the right
to request additional information from, and make reasonable inquiries of, any
eligible guarantor institution. For clients of Prusec, a signature guarantee may
be obtained from the agency or office manager of most Prudential Insurance and
Financial Services or Preferred Services offices.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN
SEVEN DAYS AFTER RECEIPT BY THE TRANSFER AGENT OF THE CERTIFICATE AND/OR WRITTEN
REQUEST EXCEPT AS INDICATED BELOW. IF YOU HOLD SHARES THROUGH PRUDENTIAL
SECURITIES, PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE CREDITED TO YOUR
PRUDENTIAL SECURITIES ACCOUNT, UNLESS YOU INDICATE OTHERWISE. Such payment may
be postponed or the right of redemption suspended at times (a) when the New York
Stock Exchange is closed for other than customary weekends and
32
<PAGE>
holidays, (b) when trading on such Exchange is restricted, (c) when an emergency
exists as a result of which disposal by the Fund of securities owned by it is
not reasonably practicable or it is not reasonably practicable for the Fund
fairly to determine the value of its net assets, or (d) during any other period
when the SEC, by order, so permits; provided that applicable rules and
regulations of the SEC shall govern as to whether the conditions prescribed in
(b), (c) or (d) exist.
PAYMENT FOR REDEMPTION OF RECENTLY PURCHASED SHARES WILL BE DELAYED UNTIL
THE FUND OR ITS TRANSFER AGENT HAS BEEN ADVISED THAT THE PURCHASE CHECK HAS BEEN
HONORED, UP TO 10 CALENDAR DAYS FROM THE TIME OF RECEIPT OF THE PURCHASE CHECK
BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY WIRE OR
BY CERTIFIED OR OFFICIAL BANK CHECK.
REDEMPTION IN KIND. If the Trustees determine that it would be detrimental
to the best interests of the remaining shareholders of the Fund to make payment
wholly or partly in cash, the Fund may pay the redemption price in whole or in
part by a distribution in kind of securities from the investment portfolio of
the Fund, in lieu of cash, in conformity with applicable rules of the SEC.
Securities will be readily marketable and will be valued in the same manner as
in a regular redemption. See "How the Fund Values its Shares." If your shares
are redeemed in kind, you would incur transaction costs in converting the assets
into cash. The Fund, however, has elected to be governed by Rule 18f-1 under the
Investment Company Act, under which the Fund is obligated to redeem shares
solely in cash up to the lesser of $250,000 or 1% of the net asset value of the
Fund during any 90-day period for any one shareholder.
INVOLUNTARY REDEMPTION. In order to reduce expenses of the Fund, the
Trustees may redeem all of the shares of any shareholder, other than a
shareholder which is an IRA or other tax-deferred retirement plan, whose account
has a net asset value of less than $500 due to a redemption. The Fund will give
such shareholders 60 days' prior written notice in which to purchase sufficient
additional shares to avoid such redemption. No contingent deferred sales charge
will be imposed on any involuntary redemption.
90-DAY REPURCHASE PRIVILEGE. If you redeem your shares and have not
previously exercised the repurchase privilege, you may reinvest any portion or
all of the proceeds of such redemption in shares of the Fund at the NAV next
determined after the order is received, which must be within 90 days after the
date of the redemption. No sales charge will apply to such repurchases. You will
receive pro rata credit for any contingent deferred sales charge paid in
connection with the redemption of Class C shares. You must notify the Fund's
Transfer Agent, either directly or through Prudential Securities or Prusec, at
the time the repurchase privilege is exercised that you are entitled to credit
for the contingent deferred sales charge previously paid. Exercise of the
repurchase privilege will generally not affect federal income tax treatment of
any gain realized upon redemption. If the redemption resulted in a loss, some or
all of the loss, depending on the amount reinvested, will generally not be
allowed for federal income tax purposes.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of Class B or Class C shares made within one year of purchase
will be subject to a contingent deferred sales charge or CDSC of 1%. The CDSC
will be deducted from the redemption proceeds and reduce the amount paid to you.
A CDSC will be applied on the lesser of the original purchase price or the
current value of the shares being redeemed. Increases in the value of your
shares acquired through reinvestment of dividends or distributions are not
subject to a CDSC. The amount of any contingent deferred sales charge will be
paid to and retained by the Distributor. See "How the Fund is
Managed--Distributor."
33
<PAGE>
Solely for purposes of determining the number of years from the time of any
payment for the purchase of shares, all payments during a month will be
aggregated and deemed to have been made on the last day of the month. The CDSC
will be calculated from the first day of the month after the initial purchase,
excluding the time shares were held in a money market fund. See "How to Exchange
Your Shares."
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. In the case
of Class B shares, it will be assumed that the redemption is made first of
shares acquired pursuant to reinvestment of dividends and distributions and then
of shares held beyond the applicable one-year CDSC period. In the case of Class
C shares, it will be assumed that the redemption is made first of amounts
representing shares acquired pursuant to the reinvestment of dividends and
distributions; then of amounts representing the increase in net asset value
above the total amount of payments for the purchase of shares made during the
preceding one-year period and then of amounts representing the cost of shares
held beyond the applicable one-year CDSC period.
CLASS B. For example, assume you purchased 1,000 Class B shares at $10 per
share for a cost of $10,000. Subsequently, you acquired 50 additional shares
through dividend reinvestment. Six months after the purchase, you decided to
redeem 200 shares. Assuming at the time of redemption the net asset value had
appreciated to $10.20 per share, the proceeds of the redemption would be $2,040.
Fifty shares would not be subject to charge because of dividend reinvestment.
With respect to the remaining 150 shares, the charge would be applied to the
original cost of $10 per share and not to the increase in net asset value per
share of $.20. Therefore, $1,500 of the $2,040 redemption proceeds would be
charged at a rate of 1%.
CLASS C. For example, assume you purchased 100 Class C shares at $10 per
share for a cost of $1,000. Subsequently, you acquired 5 additional Class C
shares through dividend reinvestment. Six months after purchase you decided to
redeem $500 of your investment. Assuming at the time of the redemption the NAV
had appreciated to $12 per share, the value of your Class C shares would be
$1,260 (105 shares at $12 per share). The CDSC would not be applied to the value
of the reinvested dividend shares and the amount which represents appreciation
($260). Therefore, $240 of the $500 redemption proceeds ($500 minus $260) would
be charged at a rate of 1%.
For federal income tax purposes, the amount of the CDSC will reduce the gain
or increase the loss, as the case may be, on the amount recognized on the
redemption of shares.
WAIVER OF THE CONTINGENT DEFERRED SALES CHARGES--CLASS B SHARES. The CDSC
will be waived in the case of a redemption following the death or disability of
a shareholder or, in the case of a trust account, following the death or
disability of the grantor. The waiver is available for total or partial
redemptions of shares owned by a person, either individually or in joint tenancy
(with rights of survivorship), or a trust, at the time of death or initial
determination of disability, provided that the shares were purchased prior to
death or disability.
The CDSC will also be waived in the case of a total or partial redemption in
connection with certain distributions made without penalty under the Internal
Revenue Code from a tax-deferred retirement plan, an IRA or a Section 403(b)
custodial account. These distributions include: (i) in the case of a
tax-deferred retirement plan, a lump-sum or other distribution after retirement;
(ii) in the case of an IRA or Section 403(b) custodial account, a lump-sum or
other distribution after attaining age 59 1/2; and (iii) a tax-free return of an
excess contribution or plan distributions following the death or disability of
the shareholder, provided that the shares were purchased prior to death or
disability. The waiver does not apply in the case of a tax-free rollover or
transfer of assets, other
34
<PAGE>
than one following a separation from service (i.e., following voluntary or
involuntary termination of employment or following retirement). Under no
circumstances will the CDSC be waived on redemptions resulting from the
termination of a tax-deferred retirement plan, unless such redemptions otherwise
qualify for a waiver as described above. In the case of Direct Account and PSI
or Subsidiary Prototype Benefit Plans, the CDSC will be waived on redemptions
which represent borrowings from such plans. Shares purchased with amounts used
to repay a loan from such plans on which a CDSC was not previously deducted will
thereafter be subject to a CDSC without regard to the time such amounts were
previously invested. In the case of a 401(k) plan, the CDSC will also be waived
upon the redemption of shares purchased with amounts used to repay loans made
from the account to the participant and from which a CDSC was previously
deducted.
In addition, the CDSC will be waived on redemptions of shares held by
Trustees of the Fund.
You must notify the Transfer Agent either directly or through Prudential
Securities or Prusec, at the time of redemption, that you are entitled to waiver
of the CDSC and provide the Transfer Agent with such supporting documentation as
it may deem appropriate. The waiver will be granted subject to confirmation of
your entitlement. Notwithstanding the above, any CDSC which remains to be paid
on any Class B shares of the Fund outstanding at November 1995 will be waived,
and such remaining Class B shares of the Fund will be automatically exchanged
for Class A shares of the Fund. See "Purchase and Redemption of Fund
Shares--Waiver of the Contingent Deferred Sales Charge--Class B Shares" in the
Statement of Additional Information.
HOW TO EXCHANGE YOUR SHARES
AS A SHAREHOLDER OF THE FUND, YOU 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 AND
CLASS C SHARES OF THE FUND MAY BE EXCHANGED FOR CLASS A AND CLASS C SHARES,
RESPECTIVELY, OF ANOTHER FUND ON THE BASIS OF THE RELATIVE NAV. CLASS C
SHAREHOLDERS MAY ALSO EXCHANGE THEIR SHARES FOR SHARES OF PRUDENTIAL SPECIAL
MONEY MARKET FUND ON THE BASIS OF THE RELATIVE NAV. IN ADDITION, UNTIL NOVEMBER
1995, CLASS B SHARES MAY BE EXCHANGED FOR CLASS A SHARES OF THE FUND OR CLASS A
SHARES OF ANY OTHER PRUDENTIAL MUTUAL FUND WITHOUT REGARD TO THE MINIMUM INITIAL
INVESTMENT REQUIREMENTS FOR CLASS A SHARES. Class A shares acquired as a result
of an exchange from Class B shares will not be subject to any CDSC. No sales
charge will be imposed at the time of the exchange. Any applicable CDSC
payable upon the redemption of Class C shares exchanged will be that imposed
by the fund in which shares were initially purchased and will be calculated
from the first day of the month after the initial purchase, excluding the time
shares were held in a money market fund. Class C shares may not be exchanged
into money market funds other than Prudential Special Money Market Fund.
Exchanges (other than pursuant to the special exchange privilege discussed
below) will be treated as a redemption and purchase for Federal income tax
purposes. See "Shareholder Investment Account-- Exchange Privilege" in the
Statement of Additional Information.
IN ORDER TO EXCHANGE SHARES BY TELEPHONE, YOU MUST AUTHORIZE TELEPHONE
EXCHANGES ON YOUR INITIAL APPLICATION FORM OR BY WRITTEN NOTICE TO THE TRANSFER
AGENT AND HOLD SHARES IN NON-CERTIFICATE FORM. Thereafter, you may call the Fund
at (800) 225-1852 to execute a telephone exchange of shares, on weekdays, except
holidays, between the hours of 8:00 A.M. and 6:00 P.M., New York time. For your
protection and to prevent fraudulent exchanges, your telephone call will be
35
<PAGE>
recorded and you will be asked to provide your personal identification number. A
written confirmation of the exchange transaction will be sent to you. NEITHER
THE FUND NOR ITS AGENTS WILL BE LIABLE FOR ANY LOSS, LIABILITY OR COST WHICH
RESULTS FROM ACTING UPON INSTRUCTIONS REASONABLY BELIEVED TO BE GENUINE UNDER
THE FOREGOING PROCEDURES. All exchanges will be made on the basis of the
relative NAV of the two funds next determined after the request is received in
good order. The Exchange Privilege is available only in states where the
exchange may legally be made.
IF YOU HOLD SHARES THROUGH PRUDENTIAL SECURITIES OR THROUGH A DEALER WHICH
HAS ENTERED INTO A SELECTED DEALER AGREEMENT WITH THE DISTRIBUTOR, YOU MUST
EXCHANGE YOUR SHARES BY CONTACTING YOUR PRUDENTIAL SECURITIES FINANCIAL ADVISER.
IF YOU HOLD CERTIFICATES, THE CERTIFICATES, SIGNED IN THE NAME(S) SHOWN ON
THE FACE OF THE CERTIFICATES, MUST BE RETURNED IN ORDER FOR THE SHARES TO BE
EXCHANGED. SEE "SHAREHOLDER GUIDE--HOW TO SELL YOUR SHARES."
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services, Inc. Attention: Exchange Processing, P.O. Box 15010, New Brunswick,
New Jersey 08906-5010.
IN PERIODS OF SEVERE MARKET OR ECONOMIC CONDITIONS, THE TELEPHONE EXCHANGE
OF SHARES OF THE FUND MAY BE DIFFICULT TO IMPLEMENT AND SHAREHOLDERS SHOULD MAKE
EXCHANGES BY MAIL BY WRITING TO PRUDENTIAL MUTUAL FUND SERVICES, INC. AT THE
ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGE. A special exchange privilege will be available
for Class B and Class C shareholders who purchase prior to November 1995 whether
or not such shareholders qualify to purchase Class A shares at NAV. Commencing
in or about November 1995, for those Class C shareholders who purchase shares in
November 1995 and thereafter, the following special exchange privilege will be
modified to apply only to Class C shareholders who qualify to purchase Class A
shares at NAV. See "Alternative Purchase Plan--Class A Shares--Reduction and
Waiver of Initial Sales Charges" above. Under this exchange privilege, amounts
representing any Class C shares (which are not subject to a CDSC) held in such a
shareholder's account will be automatically exchanged for Class A shares on a
quarterly basis, unless the shareholder elects otherwise. It is currently
anticipated that this exchange will occur quarterly. Eligibility for this
exchange privilege will be calculated on the business day prior to the date of
the exchange. Amounts representing Class C shares which are not subject to a
CDSC include the following: (1)amounts representing Class C shares acquired
pursuant to the automatic reinvestment of dividends and distributions,
(2)amounts representing the increase in the net asset value above the total
amount of payments for the purchase of Class C shares and (3)amounts
representing Class C shares held beyond the applicable CDSC period. Class C
shareholders must notify the Transfer Agent either directly or through
Prudential Securities or Prusec that they are eligible for this special exchange
privilege.
In November 1995, any CDSC which remains to be paid on the Class B shares of
the Fund outstanding at such time will be waived, and such remaining Class B
shares of the Fund will be automatically exchanged for Class A shares of the
Fund. At such time the Exchange Privilege and Special Exchange Privilege with
respect to Class B shares will be terminated.
The Exchange Privilege may be modified or terminated at any time on 60 days'
notice to shareholders.
36
<PAGE>
SHAREHOLDER SERVICES
In addition to the exchange privilege, as a shareholder in the Fund, you can
take advantage of the following additional services and privileges:
. AUTOMATIC REINVESTMENT OF DIVIDENDS AND/OR DISTRIBUTIONS WITHOUT SALES
CHARGE. For your convenience, all dividends and distributions are automatically
reinvested in full and fractional shares of the Fund at NAV without a sales
charge unless you indicate otherwise on your initial application form. You may
direct the Transfer Agent in writing not less than 5 full business days prior to
the record date to have subsequent dividends and/or distributions sent in cash
rather than reinvested.
. AUTOMATIC SAVINGS ACCUMULATION PLAN (ASAP). Under ASAP, you may make
regular purchases of the Fund's shares in amounts as little as $50 via an
automatic debit to a bank account or Prudential Securities account (including a
COMMANDSM Account). For additional information about this service, you may
contact your Prudential Securities financial adviser, Prusec representative or
the Transfer Agent directly.
. 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 is available from Prudential Securities or the
Transfer Agent. If you are considering adopting such a plan, you should consult
with your own legal or tax adviser with respect to the establishment and
maintenance of such a plan.
. SYSTEMATIC WITHDRAWAL PLAN. A systematic withdrawal plan is available for
shareholders which provides for monthly or quarterly checks. Withdrawals of
Class B and Class C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
. REPORTS TO SHAREHOLDERS. The Fund will send you annual and semi-annual
reports. The financial statements appearing in annual reports are audited by
independent accountants. In order to reduce duplicate mailing and printing
expenses, the Fund will provide one annual and semi-annual shareholder report
and annual prospectus per household. You may request additional copies of such
reports or prospectuses by calling (800) 225-1852 or by writing to the Fund at
One Seaport Plaza, New York, New York 10292. In addition, monthly unaudited
financial data is available upon request from the Fund.
. SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at One
Seaport Plaza, New York, New York 10292, or by telephone at (800) 225-1852
(toll-free) or, from outside the U.S.A., at (908) 417-7555 (collect).
For additional information regarding the services and privileges described
above, see "Shareholder Investment Account" in the Statement of Additional
Information.
37
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Mutual Fund Management offers a broad range of mutual funds
designed to meet your individual needs. We welcome you to review the investment
options available through our family of funds. For more information on the
Prudential Mutual Funds, including charges and expenses, contact your Prudential
Securities financial adviser or Prusec representative or telephone the Fund at
(800) 225-1852 for a free prospectus. Read the prospectus carefully before you
invest or send money.
<TABLE>
<S> <C>
TAXABLE BOND FUNDS EQUITY FUNDS
Prudential Adjustable Rate Securities Fund, Inc. Prudential Allocation Fund
Prudential Diversified Bond Fund, Inc. Conservatively Managed Portfolio
Prudential Government Income Fund, Inc. Strategy Portfolio
Prudential Government Securities Trust Prudential Equity Fund, Inc.
Short-Intermediate Term Series Prudential Equity Income Fund
Prudential High Yield Fund, Inc. Prudential Growth Opportunity Fund, Inc.
Prudential Mortgage Income Fund, Inc. Prudential IncomeVertible(R) Fund, Inc.
Prudential Structured Maturity Fund, Inc. Prudential Multi-Sector Fund, Inc.
Income Portfolio Prudential Utility Fund, Inc.
Prudential U.S. Government Fund Nicholas-Applegate Fund, Inc.
The BlackRock Government Income Trust Nicholas-Applegate Growth Equity Fund
TAX-EXEMPT BOND FUNDS MONEY MARKET FUNDS
Prudential California Municipal Fund . Taxable Money Market Funds
California Series Prudential Government Securities Trust
California Income Series Money Market Series
Prudential Municipal Bond Fund U.S. Treasury Money Market Series
High Yield Series Prudential Special Money Market Fund
Insured Series Money Market Series
Intermediate Series Prudential MoneyMart Assets
Prudential Municipal Series Fund . Tax-Free Money Market Funds
Arizona Series Prudential Tax-Free Money Fund
Florida Series Prudential California Municipal Fund
Georgia Series California Money Market Series
Hawaii Income Series Prudential Municipal Series Fund
Maryland Series Connecticut Money Market Series
Massachusetts Series Massachusetts Money Market Series
Michigan Series New Jersey Money Market Series
Minnesota Series New York Money Market Series
New Jersey Series . Command Funds
New York Series Command Money Fund
North Carolina Series Command Government Fund
Ohio Series Command Tax-Free Fund
Pennsylvania Series Prudential . Institutional Money Market Funds
National Municipals Fund, Inc. Prudential Institutional Liquidity
Portfolio, Inc.
GLOBAL FUNDS Institutional Money Market Series
Prudential Europe Growth Fund, Inc.
Prudential Global Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Natural Resources Fund, Inc.
Prudential Intermediate Global Income Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential Short-Term Global Income Fund, Inc.
Global Assets Portfolio
Short-Term Global Income Portfolio
Global Utility Fund, Inc.
</TABLE>
A-1
<PAGE>
No dealer, sales representative or any other person has been authorized to give
any information or to make any representations, other than those contained in
this Prospectus, in connection with the offer contained herein, and, if given or
made, such other information or representations must not be relied upon as
having been authorized by the Fund or the Distributor. This Prospectus does not
constitute an offer by the Fund or by the Distributor to sell or a solicitation
of any offer to buy any of the securities offered hereby in any jurisdiction to
any person to whom it is unlawful to make such offer in such jurisdiction.
- -------------------------------------------
TABLE OF CONTENTS
FUND HIGHLIGHTS..................... 2
Risk Factors and Special
Characteristics..................... 2
FUND EXPENSES....................... 4
FINANCIAL HIGHLIGHTS................ 5
HOW THE FUND INVESTS................ 6
Investment Objective and
Policies............................ 6
Other Investments and Policies.... 8
Hedging and Income Enhancement
Strategies...................... 14
Investment Restrictions........... 18
HOW THE FUND IS MANAGED............. 19
Manager........................... 19
Subadviser........................ 19
Distributor....................... 20
Portfolio Transactions............ 23
Custodian and Transfer and
Dividend Disbursing Agent........... 23
HOW THE FUND VALUES ITS SHARES...... 24
HOW THE FUND CALCULATES
PERFORMANCE......................... 24
TAXES, DIVIDENDS AND
DISTRIBUTIONS....................... 25
GENERAL INFORMATION................. 27
Description of Shares............. 27
Additional Information............ 27
SHAREHOLDER GUIDE................... 28
How to Buy Shares of the Fund..... 28
Alternative Purchase Plan......... 29
How to Sell Your Shares........... 32
How to Exchange Your Shares....... 35
Shareholder Services.............. 37
THE PRUDENTIAL MUTUAL FUND FAMILY... A-1
- -------------------------------------------
MF 152A 444 5604
CUSIP Nos.: Class A: 09247Y208
Class B: 09247Y307
Class C: 09247Y109
THE BLACKROCK
GOVERNMENT
INCOME TRUST
PROSPECTUS
AUGUST 31, 1995
PRUDENTIAL MUTUAL FUNDS
BUILDING YOUR FUTURE
ON OUR STRENGTH SM [Logo]
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
Statement of Additional Information
dated August 31, 1995
The BlackRock Government Income Trust (the Fund) is an open-end,
diversified management investment company whose investment objective is to
provide low volatility of net asset value and high monthly income. The Fund
seeks to achieve its objective by investing 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 or
instrumentalities. The Fund may also invest in high quality debt securities
rated AAA by Standard & Poor's Ratings Group or Aaa by Moody's Investors
Service, including fixed rate and adjustable rate mortgage-backed securities,
asset-backed securities, corporate debt securities and money market
instruments of a comparable short-term rating. The Fund may engage in short
selling and use leverage, including reverse repurchase agreements and dollar
rolls, which entail additional risks not usually associated with a government
fund. An investment in this Fund is neither insured nor guaranteed by the U.S.
Government and there can be no assurance that the Fund's investment objective
will be achieved. See "Investment Objective and Policies."
The Fund's address is One Seaport Plaza, New York, New York 10292, and
its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Fund's Prospectus dated August 31, 1995, a copy
of which may be obtained from the Fund upon request.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Cross-reference
to page in
Page Prospectus
---- ----------------
<S> <C> <C>
Investment Objective and Policies........................................... B-2 6
Investment Restrictions..................................................... B-10 18
Trustees and Officers....................................................... B-11 19
Manager..................................................................... B-14 19
Subadviser.................................................................. B-15 19
Distributor................................................................. B-15 20
Portfolio Transactions...................................................... B-17 23
Purchase and Redemption of Fund Shares...................................... B-18 28
Shareholder Investment Account.............................................. B-21 37
Net Asset Value............................................................. B-24 24
Taxes, Dividends and Distributions.......................................... B-24 25
Performance Information..................................................... B-26 24
Custodian, Transfer and Dividend Disbursing Agent and Independent
Accountants............................................................... B-27 23
Financial Statements........................................................ B-28 --
Independent Auditors' Report................................................ B-39 --
- -------------------------------------------------------------------------------------------------------
MF152B
</TABLE>
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide low volatility of net
asset value and high monthly income. There can be no assurance that the
Fund's investment objective will be achieved.
U.S. Government Securities
The Fund will invest at least 65% of its total assets in fixed-income
securities issued by the U.S. Government, its agencies or instrumentalities.
Such securities include:
(1) U.S. Treasury bills (maturities of one year or less), U.S.
Treasury notes (maturities of one to ten years) and U.S. Treasury bonds
(generally maturities of greater than ten years), all of which are
direct obligations of the U.S. Government and, as such, are backed by the
"full faith and credit" of the United States.
(2) Securities issued by agencies and instrumentalities of the
U.S. Government which are backed by the full faith and credit of the
United States. Among the agencies and instrumentalities issuing such
obligations are the Federal Housing Administration, the Government
National Mortgage Association (GNMA), the Department of Housing and Urban
Development, the Export-Import Bank, the Farmers Home Administration, the
General Services Administration, the Maritime Administration and the
Small Business Administration. The maturities of such obligations range
from three months to 30 years.
(3) Securities issued by agencies and instrumentalities which are
not backed by the full faith and credit of the United States, but whose
issuing agency or instrumentality may borrow under certain conditions, to
meet its obligations, from the U.S. Treasury. Among the agencies and
instrumentalities issuing such obligations are the Tennessee Valley
Authority, the Federal National Mortgage Association (FNMA), the Federal
Home Loan Mortgage Corporation (FHLMC), the U.S. Postal Service and the
Federal Home Loan Bank.
(4) Securities issued by agencies and instrumentalities which are
not backed by the full faith and credit of the United States, but which
are backed by the credit of the issuing agency or instrumentality. Among
the agencies and instrumentalities issuing such obligations is the Federal
Farm Credit System.
Neither the value nor the yield of the Fund's shares or of the U.S.
Government securities which may be invested in by the Fund are guaranteed by
the U.S. Government. Such values and yield will fluctuate with changes in
prevailing interest rates and other factors. Generally, as prevailing interest
rates rise, the value of any U.S. Government securities held by the Fund will
fall. Such securities with longer maturities generally tend to produce higher
yields and are subject to greater market fluctuation as a result of changes in
interest rates than debt securities with shorter maturities. The Fund is not
limited as to the maturities of the U.S. Government securities in which it may
invest. See "How the Fund Invests--Investment Objective and Policies" in the
Prospectus.
Mortgage-Backed Securities
As discussed in the Prospectus, the mortgage-backed securities purchased
by the Fund 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), authorized 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 insured
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. Legislative changes may be proposed
from time to time in relation to the Department of Housing and Urban
Development which, if adopted, could alter the viability of investing in
GNMAs. As of the date of this Statement of Additional Information, no such
legislation has been enacted. The Fund's investment adviser may re-evaluate
the Fund's investment objective and policies if any such legislative proposals
were adopted.
B-2
<PAGE>
FNMA Certificates. FNMA is a federally chartered and privately owned
corporation organized and existing under the Federal National Mortgage
Association Charter Act. FNMA was originally established in 1938 as a U.S.
Government agency to provide supplemental liquidity to the mortgage market
and was transformed into a shareholder owned and privately managed corporation
by legislation enacted in 1968. 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, thereby expanding the total
amount of funds available for housing.
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 of 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
graduated payment mortgage loans; and (iii) adjustable rate mortgage loans.
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). FHLMC was established primarily for the purpose of increasing
the availability of mortgage credit for the financing of needed housing. The
principal activity of FHLMC currently 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 a 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 of 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. A 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.
Other Investments
Zero Coupon Treasury Securities
The Fund may purchase ``zero coupon'' Treasury securities. These are
U.S. Treasury bills, notes and bonds which have been stripped of their
unmatured interest coupons and receipts or which are certificates representing
interests in such stripped debt obligations and coupons. Such securities are
purchased at a discount from their face amount giving the purchaser the right
to receive their full value at maturity. A zero coupon security pays no
interest to its holder during its life. Its value to an investor consists of
the difference between its face value at the time of maturity and the price
for which it was acquired, which is generally an amount significantly less
than its face value (sometimes referred to as a "deep discount" price).
The interest rate on such securities is automatically compounded and paid
out at maturity. While such compounding at a constant rate eliminates the risk
of receiving lower yields upon reinvestment of interest if prevailing interest
rates decline, the owner of a zero coupon security will be unable to participate
in higher yields upon reinvestment of interest received if prevailing interest
rates rise. For this reason, zero coupon securities are subject to substantially
greater market price fluctuations during periods of changing prevailing interest
rates than are comparable debt securities which make current distributions of
interest. Current federal tax law generally requires that a holder (such as the
Fund) of a zero coupon security accrue a portion of the discount at which the
security was purchased as income each year even though the Fund receives no
interest payments in cash on the security during the year.
B-3
<PAGE>
Currently the only U.S. Treasury security issued without coupons is the
Treasury bill. However, a number of banks and brokerage firms have separated
(stripped) the principal portions from the coupon portions of the U.S. Treasury
bonds and notes and sold them separately in the form of receipts or certificates
representing undivided interests in these instruments. These instruments are
generally held by a bank in a custodial or trust account.
Municipal Obligations
The municipal obligations in which the Fund may invest include municipal
bonds, municipal notes and municipal commercial paper rated in the highest
rating category by Moody's Investors Service (Moody's) or Standard & Poor's
Ratings Group (S&P) and ``zero coupon'' municipal obligations. Any municipal
obligation which depends directly or indirectly on the credit of the U.S.
Government shall be considered to have the highest rating by Moody's and S&P.
Municipal bonds and municipal notes are debt obligations of a state, its
cities, municipalities and municipal agencies which generally have maturities,
at the time of their issuance, of either one year or more (bonds) or from six
months to three years (notes). Municipal commercial paper consists of short-term
obligations of municipalities which may be issued at a discount and is sometimes
referred to as short-term discount notes.
The two principal classifications of municipal bonds, notes and commercial
paper are ``general obligation'' and ``revenue'' bonds, notes or commercial
paper. General obligation bonds, notes or commercial paper are secured by the
issuer's pledge of its faith, credit and taxing power for the payment of
principal and interest. Issuers of general obligation bonds, notes or commercial
paper include a state, its counties, cities, towns and other governmental units.
Revenue bonds, notes or commercial paper are payable from the revenues derived
from a particular facility or class of facilities or, in some cases, from
specific revenue sources. Revenue bonds, notes or commercial paper are issued
for a wide variety of purposes, including the financing of electric, gas, water
and sewer systems and other public utilities; industrial development and
pollution control facilities; single and multifamily housing units; public
buildings and facilities; air and marine ports; transportation facilities such
as toll roads, bridges and tunnels; and health and educational facilities such
as hospitals and dormitories. They rely primarily on user fees to pay debt
service, although the principal revenue source is often supplemented by
additional security features which are intended to enhance the creditworthiness
of the issuer's obligations. In some cases, particularly revenue bonds issued to
finance housing and public buildings, a direct or implied "moral obligation"
of a governmental unit may be pledged to the payment of debt service. In other
cases, a special tax or other charge may augment user fees.
Included within the revenue bonds category are participations in lease
obligations or installment purchase contracts (hereinafter collectively called
"lease obligations") of municipalities. State and local governments issue
lease obligations to acquire equipment and facilities.
Lease obligations may have risks not normally associated with general
obligation or other revenue bonds. Leases and installment purchase or
conditional sale contracts (which may provide for title to the leased asset to
pass eventually to the issuer) have developed as a means for governmental
issuers to acquire property and equipment without the necessity of complying
with the constitutional and statutory requirements generally applicable for the
issuance of debt. Certain lease obligations contain "non-appropriation"
clauses that provide that the governmental issuer has no obligation to make
future payments under the lease or contract unless money is appropriated for
such purpose by the appropriate legislative body on an annual or other periodic
basis. Consequently, continued lease payments on those lease obligations
containing ``non-appropriation'' clauses are dependent on future legislative
actions. If such legislative actions do not occur, the holders of the lease
obligation may experience difficulty in exercising their rights, including
disposition of the property.
Foreign Securities
The Fund 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 under current market conditions the Fund does not
expect to invest in foreign securities.
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. With respect to certain countries, there is
the possibility of expropriation of assets, confiscatory taxation, political or
social instability or diplomatic developments which could adversely affect
investments in those countries.
There may be less publicly available information about a foreign company
than about a U.S. company, and foreign companies may not be subject to
accounting, auditing and financial reporting standards and requirements
comparable to or as uniform as those of U.S. companies. Foreign securities
markets (other than Japan), while growing in volume, have, for the most part,
substantially less volume than U.S. markets, and securities of many foreign
companies are less liquid and their prices more volatile than securities of
comparable U.S. companies. Transaction costs on foreign securities markets are
generally higher than in the United States and settlement procedures are often
not as regularized as in the United States. There is generally less government
supervision and regulation of
B-4
<PAGE>
exchanges, brokers and issuers than there is in the United States. The Fund may
have greater difficulty taking appropriate legal action with respect to foreign
investments in foreign courts than with respect to domestic issuers in U.S.
courts.
Dividend and interest income from foreign securities will generally be
subject to withholding taxes by the country in which the issuer is located and
the Fund will not be able to pass through to its shareholders foreign tax
credits or deductions with respect to these taxes.
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 Fund may invest
in the securities of such issuers without the limitations imposed by the
Investment Company Act of 1940 (the Investment Company Act) on investments by
the Fund in other investment companies. In addition, in reliance on an earlier
SEC interpretation, the Fund's investments in certain other qualifying CMOs,
which cannot or do not rely on the rule, are also not subject to the limitation
of the Investment Company Act on acquiring interests in 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. To the extent that the Fund
selects CMOs or REMICs that cannot rely on the Rule or do not meet the above
requirements, the Fund may not invest more than 10% of its assets in all such
entities and may not acquire more than 3% of the voting securities of any
single such entity.
Illiquid Securities
The Fund may invest up to 15% of its net assets 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 (either within or outside of the United States) 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 and corporate bonds and notes. Institutional investors depend on an
efficient institutional market in which the unregistered security can be readily
resold or on an issuer's ability to honor a demand for repayment. The fact that
there are contractual or legal restrictions on resale to the general public or
to certain institutions may not be indicative of the liquidity of such
investments.
Rule 144A of the Securities Act allows for a broader institutional trading
market for securities otherwise subject to restriction on resale to the general
public. Rule 144A establishes a ``safe harbor'' from the registration
requirements of the Securities Act for resales of certain securities to
qualified institutional buyers. The investment adviser anticipates that the
market for certain restricted securities such as institutional commercial paper
will expand further as a result of this new 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 and 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 trades (e.g., the time
needed to dispose of the security, the method of soliciting offers and the
mechanics of the transfer). In addition, in order for commercial paper that is
issued in reliance on Section 4(2) of the Securities Act to be considered
liquid, (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
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to principal or interest. With respect to municipal lease obligations, the
investment adviser also considers: (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. Repurchase agreements subject to demand
are deemed to have a maturity equal to the notice period.
Other Investment Strategies
Option and Futures Transactions
Options on Treasury Bonds and Notes. Because trading interest in options
written on Treasury bonds and notes tends to center mostly on the most recently
auctioned issues, the exchanges on which such securities trade will not continue
indefinitely to introduce options with new expirations to replace expiring
options on particular issues. Instead, the expirations introduced at the
commencement of options trading on a particular issue will be allowed to run
their course, with the possible addition of a limited number of new expirations
as the original ones expire. Options trading on each issue of bonds or notes
will thus be phased out as new options are listed on more recent issues, and
options representing a full range of expirations will not ordinarily be
available for every issue on which options are traded.
Purchasing Call and Put Options. The Fund may purchase listed and OTC call
and put options in amounts equalling up to 10% of its total assets. The Fund may
purchase put options on securities which it holds (or has the right to acquire)
in its portfolio only to protect itself against a decline in the value of the
security. If the value of the underlying security were to fall below the
exercise price of the put purchased in an amount greater than the premium paid
for the option, the Fund would incur no additional loss. In addition, the Fund
may sell a put option which it has previously purchased prior to the sale of the
securities underlying such option. Such a sale would result in a net gain or
loss depending on whether the amount received on the sale is more or less than
the premium and other transaction costs paid on the put option which is sold.
Any such gain or loss could be offset in whole or in part by a change in the
market value of the underlying security. If a put option purchased by the Fund
expired without being sold or exercised, the premium would be lost.
Risks of Options Transactions. In the event of the bankruptcy of a broker
through which the Fund engages in options transactions, the Fund could
experience delays and/or losses in liquidating open positions purchased or sold
through the broker and/or incur a loss of all or part of its margin deposits
with the broker. Similarly, in the event of the bankruptcy of the writer of an
OTC option purchased by the Fund, the Fund could experience a loss of all or
part of the value of the option. Transactions are entered into by the Fund 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.
Interest Rate Futures Contracts. As a purchaser of an interest rate futures
contract (futures contract), the Fund 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 Fund incurs an obligation to deliver the specified amount of the
underlying obligation at a specified time in return for an agreed upon price.
The Fund 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 U.S. Government or other debt
securities falls, the Fund may sell a futures contract. If declining interest
rates are anticipated, the Fund may purchase a futures contract to protect
against a potential increase in the price of U.S. Government or other debt
securities the Fund intends to purchase. Subsequently, appropriate U.S.
Government or other debt securities may be purchased by the Fund in an orderly
fashion; as securities are purchased, corresponding futures positions would be
terminated by offsetting sales of contracts. 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
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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 Fund will be
able to enter into a closing transaction.
When the Fund enters into a futures contract it is initially required to
deposit with its 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.
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 the futures
contract which will be returned to the Fund upon the proper termination of the
futures contract. The margin deposits made are marked to market daily and the
Fund may be required to make subsequent deposits into the segregated account,
maintained at its 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. Currently, interest
rate futures contracts can be purchased on debt securities such as U.S. Treasury
Bills and Bonds, Eurodollar instruments, U.S. Treasury Notes with maturities
between 6 1/2 and 10 years, GNMA Certificates and Bank Certificates of Deposit.
Options on Futures Contracts. The Fund may purchase 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 offsetting futures
positions by the writer and holder of the option will be accompanied by the
delivery of the accumulated balance in the writer's futures margin account,
which represents the amount by which the market price of the futures contract at
the time of 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 Fund will purchase optionson 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 Fund
may sell a futures contract to protect against the decline in the value of U.S.
Government securities and other debt securities held by the Fund. However, it is
possible that the futures market may advance and the value of securities held in
the Fund's portfolio may decline. If this were to occur, the Fund would lose
money on the futures contracts and also experience a decline in value in its
portfolio securities. However, while this could occur for a very brief period or
to a very small degree, over time the market prices of the securities of a
diversified portfolio will tend to move in the same direction as the prices of
futures contracts.
If the Fund purchases a futures contract to hedge against the increase in
value of U.S. Government securities it intends to buy, and the value of such
securities decreases, then the Fund may determine not to invest in the
securities as planned and will realize a loss on the futures contract that is
not offset by a reduction in the price of the securities.
In order to assure that the Fund is entering into transactions in futures
contracts for hedging purposes as such is defined by the Commodity Futures
Trading Commission, either: (1) a substantial majority (i.e., approximately 75%)
of all anticipatory hedge transactions (transactions in which the Fund does not
own at the time of the transaction, but expects to acquire, the securities
underlying the relevant futures contract) involving the purchase of futures
contracts will be completed by the purchase of securities which are the subject
of the hedge, or (2) the underlying value of all long positions in futures
contracts will not exceed the total value of (a) all short-term debt obligations
held by the Fund; (b) cash held by the Fund; (c) cash proceeds due to the Fund
on investments within thirty days; (d) the margin deposited on the contracts;
and (e) any unrealized appreciation in the value of the contracts.
If the Fund maintains a short position in a futures contract, it will cover
this position by holding, in a segregated account maintained at its Custodian,
cash, U.S. Government securities or other liquid high grade debt obligations
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 Fund to purchase the same contract at a
price no higher than the price at which the short position was established.
In addition, if the Fund holds a long position in a futures contract, it
will hold cash, U.S. Government securities or other liquid high grade debt
obligations equal to the purchase price of the contract (less the amount of
initial or variation margin on deposit) in a
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segregated account maintained for the Fund by its Custodian. Alternatively, the
Fund 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 Fund.
Exchanges limit the amount by which the price of a futures contract may
move on any day. If the price moves equal the daily limit on successive days,
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 Fund would
continue to be required to make daily cash payments of variation margin on open
futures positions. In such situations, if the Fund has insufficient cash, it may
be disadvantageous to do so. In addition, the Fund may be required to take or
make delivery of the instruments underlying interest rate futures contracts it
holds at a time when it is disadvantageous to do so. The inability to close out
options and futures positions could also have an adverse impact on the Fund's
ability to effectively hedge its portfolio.
In the event of the bankruptcy of a broker through which the Fund engages
in transactions in futures or options thereon, the Fund could experience delays
and/or losses in liquidating open positions purchased or sold through the broker
and/or incur a loss of all or part of its margin deposits with the broker.
Transactions are entered into by the Fund only with brokers or financial
institutions deemed creditworthy by the investment adviser.
While the futures contracts and options transactions to be engaged in by
the Fund for the purpose of hedging the Fund's portfolio securities are not
speculative in nature, there are risks inherent in the use of such instruments.
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 Fund's
portfolio securities. Another such risk is that prices of interest rate futures
contracts may not move in tandem with the changes in prevailing interest rates
against which the Fund seeks a hedge. A correlation may also be distorted by the
fact that the futures market is dominated by short-term traders seeking to
profit from the difference between a contract or security price objective and
their cost of borrowed funds. Such distortions are generally minor and would
diminish as the contract approached maturity.
There may exist an imperfect correlation between the price movements of
futures contracts purchased by the Fund and the movements in the prices of the
securities 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 market
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 U.S. Government 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.
There is no assurance that a liquid secondary market will exist for futures
contracts and related options in which the Fund may invest. In the event a
liquid market does not exist, it may not be possible to close out a futures
position, and in the event of adverse price movements, the Fund would continue
to be required to make daily cash payments of variation margin. In addition,
limitations imposed by an exchange or board of trade on which futures contracts
are traded may compel or prevent the Fund from closing out a contract which may
result in reduced gain or increased loss to the Fund. The absence of a liquid
market in futures contracts might cause the Fund to make or take delivery of the
underlying securities at a time when it may be disadvantageous to do so.
Compared to the purchase or sale of futures contracts, the purchase of call
or put options on futures contracts involves less potential risk to the Fund
because the maximum amount at risk is the premium paid for the options (plus
transaction costs). However, there may be circumstances when the purchase of a
call or put option on a futures contract would result in a loss to the Fund
notwithstanding that the purchase or sale of a futures contract would not result
in a loss, as in the instance where there is no movement in the prices of the
futures contracts or underlying U.S. Government securities.
Repurchase Agreements
When cash may be available for only a few days, it may be invested by the
Fund in repurchase agreements until such time as it may otherwise be invested or
used for payments of obligations of the Fund. These agreements, which may be
viewed as a type of secured lending by the Fund, typically involve the
acquisition by the Fund of debt securities from a selling financial institution
such as a bank or broker-dealer. The agreement provides that the Fund will sell
back to the institution, and that the institution will repurchase, the
underlying security (collateral) at a specified price and at a fixed time in the
future, usually not more than seven days from the date of purchase. The
collateral will be maintained in a segregated account and will be marked to
market daily to determine that the value of the collateral,as specified in the
agreement, does not decrease below the purchase price plus accrued interest. If
such decrease occurs, additional collateral will be requested and, when
received, added to the account to maintain full collateralization. The Fund will
accrue
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interest from the institution until the time when the repurchase is to occur.
Although such date is deemed by the Fund to be the maturity date of a repurchase
agreement, the maturities of securities subject to repurchase agreements are not
subject to any limits.
While repurchase agreements involve certain risks not associated with
direct investment in debt securities, the Fund follows procedures designed to
minimize such risks. These procedures include effecting repurchase transactions
only with large, well-capitalized and well-established financial institutions
whose financial condition will be continually monitored by the investment
adviser subject to procedures established by the Trustees. In addition, as
described above, the value of the collateral underlying the repurchase agreement
will be at least equal to the repurchase price, including any accrued interest
earned on the repurchase agreement. In the event of a default or bankruptcy by a
selling financial institution, the Fund will seek to liquidate such collateral.
However, the exercising of the Fund's right to liquidate such collateral could
involve certain costs or delays and, to the extent that proceeds from any sale
upon a default of the obligation to repurchase were less than the repurchase
price, the Fund could suffer a loss. It is the current policy of the Fund not to
invest in repurchase agreements that do not mature within seven days if any such
investment, together with any other illiquid assets held by the Fund, amounts to
more than 15% of its net assets.
When-Issued and Delayed Delivery Securities
From time to time, in the ordinary course of business, the Fund may
purchase securities on a when-issued or delayed delivery basis--i.e., delivery
and payment can take place a month or more after the date of the transactions.
The securities so purchased are subject to market fluctuation and no interest
accrues to the purchaser during this period. While the Fund will only purchase
securities on a when-issued, delayed delivery or forward commitment basis with
the intention of acquiring the securities, the Fund may sell the securities
before the settlement date, if it is deemed advisable. At the time the Fund
makes the commitment to purchase securities on a when-issued or delayed delivery
basis, the Fund will record the transaction and thereafter reflect the value,
each day, of such security in determining the net asset value of the Fund. At
the time of delivery of the securities, the value may be more or less than the
purchase price. The Fund will also establish a segregated account with the
Fund's custodian bank in which it will continuously maintain cash, U.S.
Government securities or other liquid high grade debt portfolio securities equal
in value to commitments for such when-issued or delayed delivery securities;
subject to this requirement, the Fund may purchase securities on such basis
without limit. An increase in the percentage of the Fund's assets committed to
the purchase of securities on a when-issued or delayed delivery basis may
increase the volatility of the Fund's net asset value. The investment adviser
does not believe that the Fund's net asset value or income will be adversely
affected by the Fund's purchase of securities on such basis.
Securities Lending
Consistent with applicable regulatory requirements, the Fund may lend its
portfolio securities to brokers, dealers and other financial institutions,
provided that such loans are callable at any time by the Fund, 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 Fund 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 Fund on two business days' notice. If the borrower fails to deliver the
loaned securities within two days after receipt of notice, the Fund 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 Fund's 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 Fund. Any
gain or loss in the market price during the loan period would inure to the Fund.
The creditworthiness of firms to which the Fund 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 Trustees of the
Fund.
When voting or consent rights which accompany loaned securities pass to the
borrower, the Fund will follow the policy of calling the loaned securities, to
be delivered within one day after notice, to permit the exercise of such rights
if the matters involved would have a material effect on the Fund's investment in
such loaned securities. The Fund will pay reasonable finders', administrative
and custodial fees in connection with a loan of its securities.
Interest Rate Transactions
The Fund may enter into interest rate swaps, on either an asset-based or
liability-based basis, depending on whether it is hedging its assets or its
liabilities, and will usually enter into interest rate swaps on a net basis,
i.e., the two payment streamsare netted out, with the Fund receivingor 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
adviser and the Fund 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 Fund's
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obligations over its entitlements with respect to each interest rate swap will
be accrued on a daily basis and an amount of cash or liquid high-grade debt
securities having an aggregate net asset value at least equal to the accrued
excess will be maintained in a segregated account by a custodian that satisfies
the requirements of the Investment Company Act. To the extent that the Fund
enters into interest rate swaps on other than a net basis, the amount maintained
in a segregated account will be the full amount of the Fund's obligations, if
any, with respect to such interest rate swaps, accrued on a daily basis. The
Fund will not enter into any interest rate swaps unless the unsecured senior
debt or the claims-paying ability of the other party thereto is rated in the
highest rating category of at least one nationally recognized rating
organization at the time of entering into such transaction. If there is a
default by the other party to such a transaction, the Fund will have contractual
remedies pursuant to the agreement related to the transaction. The swap market
has grown substantially in recent years with a large number of banks and
investment banking firms acting both as principals and as agents utilizing
standardized swap documentation. As a result, the swap market has become
relatively liquid.
The use of interest rate swaps is a highly speculative activity which
involves investment techniques and risks different from those associated with
ordinary portfolio securities transactions. If incorrect in its forecast of
market values, interest rates and other applicable factors, the investment
performance of the Fund would diminish compared to what it would have been if
this investment technique was never used.
The Fund may only enter into interest rate swaps to hedge its portfolio.
Interest rate swaps do not involve the delivery of securities or other
underlying assets or principal. Accordingly, the risk of loss with respect to
interest rates swaps is limited to the net amount of interest payments that the
Fund is contractually obligated to make. If the other party to an interest rate
swap defaults, the Fund's risk of loss consists of the net amount of interest
payments that the Fund is contractually entitled to receive. Since interest rate
swaps are individually negotiated, the Fund expects to achieve an acceptable
degree of correlation between its rights to receive interest on its portfolio
securities and its rights and obligations to receive and pay interest pursuant
to interest rate swaps.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies. Fundamental policies
are those which cannot be changed without the approval of the holders of a
majority of the outstanding voting securities of the Fund. A "majority of the
outstanding voting securities,'' when used in this Statement of Additional
Information, means the lesser of (i) 67% of the voting shares represented at a
meeting at which more than 50% of the outstanding voting shares are present in
person or represented by proxy or (ii) more than 50% of the outstanding voting
shares.
The Fund may not:
1. Purchase securities on margin (but the Fund may obtain such short-term
credits as may be necessary for the clearance of transactions); provided that
the deposit or payment by the Fund of initial or variation margin in connection
with options or futures contracts is not considered the purchase of a security
on margin.
2. Make short sales of securities, or maintain a short position if, when
added together, more than 25% of the value of the Fund's 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.
3. Issue senior securities, borrow money or pledge its assets, except that
the Fund may borrow from banks or through reverse repurchase agreements or
dollar rolls up to 33 1/3% of the value of its total assets (calculated when the
loan is made) for temporary, extraordinary or emergency purposes and to take
advantage of investment opportunities and may pledge up to 33 1/3% of the value
of its total assets to secure such borrowings. For purposes of this restriction,
the purchase or sale of securities on a ``when-issued'' or delayed delivery
basis, the purchase and sale of futures contracts, the entry into reverse
repurchase agreements and dollar roll transactions and collateral arrangements
with respect thereto are not deemed to be a pledge of assets and neither such
arrangements nor the purchase or sale of futures contracts or the purchase and
sale of related options, nor obligations of the Fund to Trustees pursuant to
deferred compensation arrangements are deemed to be the issuance of a senior
security.
4. Purchase any security (other than obligations of the U.S. Government,
its agencies and instrumentalities) if as a result: (i) with respect to 75% of
its total assets, more than 5% of the Fund's total assets (determined at the
time of investment) would then be invested in securities of a single issuer or
(ii) 25% or more of the Fund's total assets (determined at the time of
investment) would be invested in one or more issuers having their principal
business activities in the same industry.
5. Purchase securities, other than mortgage-backed securities, asset-backed
securities or obligations of the U.S. Government, its agencies or
instrumentalities, of any issuer having a record, together with predecessors, of
less than three years of continuous operations if, immediately after such
purchase, more than 5% of the Fund's total assets would be invested in such
securities.
6. Buy or sell real estate or interests in real estate, except that the
Fund 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
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estate and publicly traded securities of real estate investment trusts. The Fund
may not purchase interests in real estate limited partnerships which are not
readily marketable.
7. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.
8. Make investments for the purpose of exercising control or management.
9. Invest in securities of other registered investment companies, except by
purchases in the open market involving only customary brokerage commissions and
as a result of which not more than 10% of its total assets (determined at the
time of investment) would be invested in such securities, or except as part of a
merger, consolidation or other acquisition.
10. Invest in interests in oil, gas or other mineral exploration or
development programs, except that the Fund may invest in the securities of
companies which invest in or sponsor such programs.
11. Make loans, except through (i) repurchase agreements and (ii) loans of
portfolio securities limited to 30% of the value of the Fund's total assets.
12. Purchase more than 10% of all outstanding voting securities of any one
issuer.
13. Buy or sell commodities or commodity contracts, except that the Fund
may purchase and sell financial futures contracts and options thereon.
Whenever any fundamental investment policy or investment restriction states
a maximum percentage of the Fund's assets, it is intended that if the percentage
limitation is met at the time the investment is made, a later change in
percentage resulting from changing total or net asset values will not be
considered a violation of such policy.
However, in the event that the Fund's asset coverage for borrowings falls
below 300%, the Fund will take prompt action to reduce its borrowings as
required by applicable laws.
In order to comply with certain "blue sky" restrictions, the Fund will
not, as a matter of operating policy, (i) invest in securities of any issuer if,
to the knowledge of the Fund, any officer or Trustee of the Fund or the Fund's
Manager or Subadviser owns more than 1/2 of 1% of the outstanding securities of
such issuer, and such officers and Trustees who own more than 1/2 of 1% own in
the aggregate more than 5% of the outstanding securities of such issuer, (ii)
invest in securities of issuers which are restricted as to disposition, if more
than 10% of its total assets would be invested in such securities (this
restriction shall not apply to mortgage-backed securities, asset-backed
securities or obligations issued or guaranteed by the U.S. Government, its
agencies or instrumentalities) and (iii) invest more than 5% of its total assets
in securities of unseasoned issuers, including their predecessors, which have
been in operation for less than three years, and in equity securities of issuers
which are not readily marketable.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
Position Principal Occupations
Name, Address and Age with Fund During Past Five Years
- --------------------- ------------- ----------------------
<S> <C> <C>
Edward D. Beach (70) Trustee President and Director of BMC Fund, Inc., a closed-end
c/o Prudential Mutual investment company; prior thereto, Vice Chairman of
Fund Broyhill Furniture Industries, Inc.; Certified Public
Management, Inc. Accountant; Secretary and Treasurer of Broyhill Family
One Seaport Plaza Foundation, Inc.; Member of the Board of Trustees of
New York, NY Mars Hill College; President and Director of First
Financial Fund, Inc. and The High Yield Income Fund,
Inc.; Director of The Global Government Plus Fund,
Inc. and The Global Total Return Fund, Inc.
Delayne D. Gold (55) Trustee Marketing and Management Consultant.
c/o Prudential Mutual
Fund
Management, Inc.
One Seaport Plaza
New York, NY
</TABLE>
B-11
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupations
Name, Address and Age with Fund During Past Five Years
- --------------------- ------------- ----------------------
<S> <C> <C>
Stanley E. Shirk (78) Trustee Certified Public Accountant and a former Senior Partner
c/o Prudential Mutual of the accounting firm of KPMG Peat Marwick L.L.P.;
Fund former Management and Accounting Consultant for the
Management, Inc. Association of Bank Holding Companies, Washington,
One Seaport Plaza D.C. and the Bank Administration Institute, Chicago,
New York, NY IL; Director of The High Yield Income Fund, Inc.
Stephen Stoneburn (52) Trustee Senior Vice President and Managing Director, Cowles
c/o Prudential Mutual Business Media (since January 1993); prior thereto,
Fund Senior Vice President (January 1991-December 1992) and
Management, Inc. Publishing Vice President (May 1989-December 1990) of
One Seaport Plaza Gralla Publications, a division of United Newspapers,
New York, NY U.K.; formerly, Senior Vice President of Fairchild
Publications, Inc.
Nancy H. Teeters (65) Trustee Economist; formerly, Vice President and Chief Economist
c/o Prudential Mutual (March 1986-June 1990) of International Business
Fund Machines Corporation; Member of the Board of Governors
Management, Inc. of the Horace H. Rackham School of Graduate Studies of
One Seaport Plaza the University of Michigan; Director, Inland Steel
New York, NY Corporation (since July 1991), First Financial Fund,
Inc. and The Global Total Return Fund, Inc.
Richard A. Redeker President President, Chief Executive Officer and Director (since
(52) October 1993), PMF; Executive Vice President, Director
One Seaport Plaza and Member of Operating Committee (since October
New York, NY 1993), Prudential Securities; Director (since October
1993) of Prudential Securities Group, Inc. (PSG);
Executive Vice President, The Prudential Investment
Corporation (since July 1994); Director (since January
1994) of Prudential Mutual Fund Distributors, Inc.
(PMFD) and Prudential Mutual Fund Services, Inc.
(PMFS); formerly Senior Executive Vice President and
Director of Kemper Financial Services, Inc. (September
1978-September 1993); President and Director of The
Global Government Plus Fund, Inc., The Global Total
Return Fund, Inc. and The High Yield Income Fund, Inc.
Robert F. Gunia (48) Vice Chief Administrative Officer (since July 1990), Director
One Seaport Plaza President (since January 1989), Executive Vice President,
New York, NY Treasurer and Chief Financial Officer (since June
1987) of PMF; Senior Vice President (since March 1987)
of Prudential Securities; Executive Vice President,
Treasurer and Comptroller (since March 1991) of PMFD;
Director (since June 1987) of PMFS; Vice President and
Director of The Asia Pacific Fund, Inc. (since May
1989).
Eugene S. Stark (37) Treasurer and First Vice President (since January 1990) of PMF.
One Seaport Plaza Principal
New York, NY Financial and
Accounting
Officer
Stephen M. Ungerman Assistant First Vice President (since February 1993) of PMF; prior
(42) Treasurer thereto, Senior Tax Manager of Price Waterhouse LLP
One Seaport Plaza (1981-January 1993).
New York, NY
</TABLE>
B-12
<PAGE>
<TABLE>
<CAPTION>
Position Principal Occupations
Name, Address and Age with Fund During Past Five Years
- --------------------- ------------- ----------------------
<S> <C> <C>
S. Jane Rose (49) Secretary Senior Vice President (since January 1991), Senior
One Seaport Plaza Counsel (since June 1987) and First Vice President
New York, NY (June 1987-December 1990) of PMF; Senior Vice
President and Senior Counsel of Prudential Securities
(since July 1992); formerly, Vice President and
Associate General Counsel of Prudential Securities.
Ellyn C. Acker (34) Assistant Vice President and Associate General Counsel of
One Seaport Plaza Secretary Prudential Securities and PMF (since March 1995);
New York, NY prior thereto, associated with the law firm of
Fulbright & Jaworski L.L.P.
</TABLE>
Trustees of the Fund are also directors, trustees and officers of some or
all of the other investment companies distributed by Prudential Securities or
PMFD.
The officers conduct and supervise the daily business operations of the
Fund, while the Trustees, in addition to their functions set forth under
"Manager" and "Distributor," review such actions and decide on general policy.
The Fund pays each of its Trustees who is not an affiliated person of the
Manager or the Fund's investment adviser annual compensation of $6,000, in
addition to certain out-of-pocket expenses.
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, Messrs. Beach
and Shirk are scheduled to retire on December 31, 1999 and 1997, respectively.
Trustees may receive their Trustees' fees pursuant to a deferred fee
agreement with the Fund. Under the terms of the agreement, the Fund accrues
daily the amount of Trustees' fees which accrue interest at a rate equivalent to
the prevailing rate applicable to 90-day U.S. Treasury Bills at the beginning of
each calendar quarter or pursuant to an SEC exemptive order, at the daily rate
of return of the Fund. Payment of the interest so accrued is also deferred and
accruals become payable at the option of the Trustee. The Fund's obligation to
make payments of deferred Trustees' fees, together with interest thereon, is a
general obligation of the Fund.
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended June 30, 1995 to the Trustees who are not affiliated
with the Manager and the aggregate compensation paid to such Trustees for
service on the Fund's Board and the Board of any other investment companies
managed by Prudential Mutual Fund Management, Inc. (Fund Complex) for the
calendar year ended December 31, 1994.
<TABLE>
<CAPTION>
Compensation Table
------------------
------------------
Total
Pension or Compensation
Retirement from Fund
Aggregate Benefits Accrued Estimated Annual and Fund
Compensation as Part of Fund Benefits Upon Complex Paid
Name and Position From Fund Expenses Retirement to Trustees
- ------------------------------------------ ------------ ----------------- ----------------- -------------
<S> <C> <C> <C> <C>
Edward D. Beach, Trustee $6,000 None N/A $159,000(20)*(39)**
Delayne Dedrick Gold, Trustee $6,000 None N/A $185,000(24)*(43)**
Stanley E. Shirk, Trustee $6,000 None N/A $79,000(8)*(10)**
Stephen Stoneburn, Trustee $6,000 None N/A $48,000(7)*(7)**
Nancy H. Teeters, Trustee $6,000 None N/A $95,000(12)*(30)**
*Indicates number of funds in Fund Complex (including the Fund) to which aggregate compensation relates.
**Indicates number of portfolios in Fund Complex (including the Fund) to which aggregate compensation relates.
</TABLE>
As of August 4, 1995, the Trustees and officers of the Fund, as a group,
owned beneficially less than 1% of the shares of beneficial interest of the
Fund.
As of August 4, 1995, Lawrence H. Sparagen TTEE, Schenectady Hdwr &
Electric 401K FBO David Green, Box 258 Young Road, Middle Grove, New York was
the beneficial owner of 83 Class C shares (approximately 11% of the outstanding
Class C shares), Prudential Securities, Inc. FA Chia-Lin Fu Sun, 9060 North
Whitehall, Fresno, California was the beneficial owner of 536 Class C shares
(approximately 67% of the outstanding Class C shares), and Prudential Securities
C/F Linda Shepard, Linda Shepard Insurance Agency, SEP DTD 01/19/94, 72 North
Main Street, Fredericktown, Ohio was the beneficial owner of 138 Class C shares
(approximately 18% of the outstanding Class C shares).
B-13
<PAGE>
As of August 4, 1995, Prudential Securities was record holder of 3,954,463
Class A shares (or 81% of the outstanding Class A shares), 37,050 Class B shares
(or 14% of the outstanding Class B shares) and 757 Class C shares (or 97% of the
outstanding Class C shares). In the event of any meetings of shareholders,
Prudential Securities will forward, or cause the forwarding of, proxy material
to the beneficial owner for which it is the record holder.
MANAGER
Prudential Mutual Fund Management, Inc. (PMF or the Manager), the Manager
of the Fund, is a subsidiary of Prudential Securities and The Prudential
Insurance Company of America (Prudential). PMF has three wholly-owned
subsidiaries: Prudential Mutual Fund Distributors, Inc., Prudential Mutual Fund
Services, Inc. (PMFS or the Transfer Agent) and Prudential Mutual Fund
Investment Management, Inc. PMFS serves as the transfer agent for the Prudential
Mutual Funds and, in addition, provides customer service, record keeping and
management and administration services to qualified plans.
Prudential 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, 1994. 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 nearly 100,000 persons
worldwide, and maintains a sales force of approximately 19,000 agents, 3,400
insurance brokers and 6,000 financial advisors. It insures or provides other
financial services to more than 50 million people worldwide. 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.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PMF, subject to the supervision of the Fund's Trustees and in
conformity with the stated policies of the Fund, manages both the investment
operations of the Fund and the composition of the Fund's portfolio, including
the purchase, retention, disposition and lending of securities. In connection
therewith, PMF is obligated to keep certain books and records of the Fund. PMF
also administers the Fund's business affairs and, in connection therewith,
furnishes the Fund with office facilities, together with those ordinary clerical
and bookkeeping services which are not being furnished by State Street Bank and
Trust Company, the Fund's Custodian, and Prudential Mutual Fund Services, Inc.
(PMFS or the Transfer Agent), the Fund's Transfer and Dividend Disbursing Agent.
The management services of PMF for the Fund are not exclusive under the terms of
the Management Agreement and PMF is free to, and does, render management
services to others.
For its services, PMF receives, pursuant to the Management Agreement, a fee
at an annual rate of .50 of 1% of the Fund's average daily net assets. The fee
is computed daily and payable monthly. In the event the expenses of the Fund
(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 statutes or
regulations of any jurisdiction in which shares of the Fund are then qualified
for offer and sale, the Manager will reduce its fee by the amount of such
excess, or, if such reduction exceeds the compensation payable to the Manager,
the Manager will pay to the Fund the amount of such reduction which exceeds the
amount of such compensation. Any such reductions or payments will be made
monthly and are subject to readjustment during the year. Currently, the most
restrictive of such annual limitations is believed to be 2 1/2% of the Fund's
average daily net assets up to $30 million, 2% of the next $70 million and
1 1/2% of such assets in excess of $100 million.
In connection with its management of the business affairs of the Fund, PMF
bears the following expenses:
(a) the salaries and expenses of all of its and the Fund's personnel except
the fees and expenses of Trustees who are not affiliated persons of PMF or the
Fund's investment adviser;
(b) all expenses incurred by PMF or by the Fund in connection with managing
the ordinary course of the Fund's business, other than those assumed by the Fund
as described below; and
(c) the costs and expenses payable to BlackRock Financial Management, Inc.
(BFM) pursuant to the subadvisory agreement among the Fund, PMF and BFM (the
Subadvisory Agreement).
Under the terms of the Management Agreement, the Fund is responsible for
the payment of the following expenses: (a) the fees payable to the Manager, (b)
the fees and expenses of Trustees who are not affiliated persons of the Manager
or the Fund's investment adviser, (c) the fees and certain expenses of the
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 Fund and of pricing the Fund's shares, (d)
the charges and expenses of legal counsel and independent accountants for the
Fund, (e) brokerage commissions and any issue or transfer taxes chargeable to
the Fund in connection with its securities transactions, (f) all taxes and
business fees payable by the Fund to governmental agencies, (g) the fees of any
trade associations of which the Fund may be a member, (h) the cost of share
certificates representing shares of the Fund, (i) the cost of fidelity and
liability insurance, (j) the fees and expenses involved in registering and
maintaining registration of the Fund and of its shares with the Securities and
Exchange Commission, registering the Fund as a broker or
B-14
<PAGE>
dealer and qualifying its shares under state securities laws, including the
preparation and printing of the Fund'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, proxy statements and prospectuses to
shareholders in the amount necessary for distribution to the shareholders, (l)
litigation and indemnification expenses and other extraordinary expenses not
incurred in the ordinary course of the Fund's business and (m) distribution
fees.
The Management Agreement provides that PMF will not be liable for any error
of judgment or for any loss suffered by the Fund in connection with the matters
to which the Management Agreement relates, except a loss resulting from willful
misfeasance, bad faith, gross negligence or reckless disregard of duty. The
Management Agreement provides that it will terminate automatically if assigned,
and that it may be terminated without penalty by either party upon not more than
60 days' nor less than 30 days' written notice. The Management Agreement will
continue in effect for a period of more than two years from the date of
execution only so long as such continuance is specifically approved at least
annually in conformity with the Investment Company Act. The Management Agreement
was last approved by the Trustees of the Fund, including a majority of the
Trustees who are not parties to the contract or interested persons of any such
party as defined in the Investment Company Act, on April 12, 1995 and by the
shareholders of the Fund on February 23, 1995. For the fiscal years ended June
30, 1995, 1994 and 1993, PMF earned management fees of $296,623, $488,157 and
$668,227, respectively, of which it paid $148,312, $244,079 and $334,114,
respectively, to the Subadviser.
The Manager is a subsidiary of The Prudential which, as of December 31,
1994, is one of the largest financial institutions in the world and the largest
insurance company in North America. Prudential has been engaged in the insurance
business since 1875. In July 1994, Institutional Investor ranked The Prudential
the second largest institutional money manager of the 300 largest money
management organizations in the United States as of December 31, 1993.
SUBADVISER
PMF and the Fund have entered into a Subadvisory Agreement with BlackRock
Financial Management, Inc. (BFM or the Subadviser), a Delaware corporation and a
wholly-owned subsidiary of PNC Asset Management Group, Inc. and a wholly-owned
indirect subsidiary of PNC Bank, N.A., a bank holding company organized under
the laws of the Commonwealth of Pennsylvania. BFM specializes in fixed-income,
mortgage-backed and asset-backed investing. Its proprietary analytic models
utilize resources and data generally not available to individual investors. See
"How the Fund is Managed--Subadviser" in the Prospectus.
The Subadvisory Agreement provides that BFM furnish investment advisory
services in connection with the management of the Fund. In connection therewith,
BFM is obligated to keep certain books and records of the Fund. PMF continues to
have responsibility for all investment advisory services pursuant to the
Management Agreement and supervises BFM's performance of such services. Pursuant
to the Subadvisory Agreement, PMF compensates BFM for its services thereunder at
the rate of .25 of 1% of the Fund's average daily net assets.
The Subadvisory Agreement was last approved by the Trustees, including a
majority of the Trustees who are not parties to the contract or interested
persons of any such parties, as defined in the Investment Company Act, on April
12, 1995 and by the shareholders of the Fund on February 23, 1995.
The Subadvisory Agreement provides that it will terminate in the eventof
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PMF or BFM upon not more than 60 days', nor less than 30
days', written notice. The Subadvisory Agreement provides that it will continue
in effect for a period of more than two years from its execution only so long as
such continuance is specifically approved at least annually in accordance with
the requirements of the Investment Company Act.
DISTRIBUTOR
Prudential Mutual Fund Distributors, Inc. (PMFD), One Seaport Plaza, New
York, New York 10292, acts as the distributor of the Class A shares of the Fund.
Prudential Securities Incorporated (Prudential Securities or PSI), One Seaport
Plaza, New York, New York 10292 acts as the distributor of the Class B and Class
C shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan, the
Class B Plan and the Class C Plan, collectively, the Plans) adopted bythe Fund
under Rule 12b-1 under the Investment Company Act and separate distribution
agreements (the Distribution Agreements), PMFD and Prudential Securities
(collectively, the Distributor) incur the expenses of distributing the Fund's
Class A, Class B and Class C shares, respectively. See "How the Fund is
Managed--Distributor" in the Prospectus.
Prior to August 31, 1992, the Fund offered only one class of shares (the
Class A shares). On January 8, 1992, the Trustees, including a majority of the
Trustees who are not interested persons of the Fund and who have no direct or
indirect financial interest in the operation of the Class A or Class B Plan or
in any agreement related to either Plan (the Rule 12b-1 Trustees), at a meeting
called for the purpose of voting on each such Plan approved an amended and
restated plan of distribution of the Class A shares of the Fund (the Class A
Plan) and
B-15
<PAGE>
adopted a new plan of distribution for the Class B shares of the Fund. On April
14, 1993, the Trustees, including a majority of the Rule 12b-1 Trustees, at a
meeting called for the purpose of voting on each such Plan, approved
modifications of the Fund's Class A and Class B Plans and Distribution
Agreements to conform them with recent amendments to the NASD maximum sales
charge rule described below. As modified, the Class A Plan provides that (i) up
to .25 of 1% of the average daily net assets of the Class A shares may be used
to pay for personal service and the maintenance of shareholder accounts (service
fee) and (ii) total distribution fees (including the service fee of .25 of 1%)
may not exceed .30 of 1%. As modified, the Class B Plan provides that (i) up to
.25 of 1% of the average daily net assets of the Class B shares may be paid as a
service fee and (ii) up to .75 of 1% (not including the service fee) may be used
as reimbursement for distribution-related expenses with respect to the Class B
shares (asset-based sales charge). The Class A Plan was approved by the
shareholders of the Fund on February 27, 1992. The Class B Plan was approved by
the sole shareholder of Class B shares on August 27, 1992. On October 7, 1994,
the Trustees, including a majority of the Rule 12b-1 Trustees, at a meeting
called for the purpose of voting on the Class C Plan, adopted a plan of
distribution for the Class C shares. The Class C Plan was approved by the sole
shareholder of the Class C shares on November 1, 1994. The Class C Plan provides
that the Distributor may be paid a distribution and service fee of up to 1% of
the average daily net assets of the Class C shares as compensation for its
distribution activities in connection with such shares. Unlike the Class A and
Class B Plan, the Class C Plan is a compensation, rather than a reimbursement,
type plan. See "How the Fund is Managed--Distributor" in the Prospectus. Each
Plan was last approved by the Trustees, including a majority of the Rule 12b-1
Trustees, on April 12, 1995.
Class A Plan. For the fiscal year ended June 30, 1995, PMFD incurred
distribution expenses in the amount of $84,590, all of which was recovered
through the distribution fee paid by the Fund to PMFD under the Class A Plan.
This amount was expended on commission credits to Prudential Securities and
Pruco Securities Corporation (Prusec), an affiliated broker-dealer, for payments
of commissions and account servicing fees to financial advisers.
In addition, for the fiscal year ended June 30, 1995, PMFD received
approximately $17,300 in initial sales charges with respect to the sale of
Class A shares.
Class B Plan. For the fiscal year ended June 30, 1995, the Distributor
received $15,335 from the Fund under the Class B Plan and spent approximately
$16,600 in distributing the Class B shares of the Fund. It is estimated that
of this amount approximately 71.7% ($11,900) was spent on printing and mailing
prospectuses to other than current shareholders; 2.4% ($400) was spent in
commissions paid to or on account of representatives of Prusec; 1.8% ($300) in
interest and/or carrying charges; and 24.1% ($4,000) for payments of
commission and account servicing fees to financial advisers.
The Distributor also receives the proceeds of contingent deferred sales
charges paid by holders of Class B shares upon certain redemptions of Class B
shares. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred
Sales Charges" in the Prospectus. The amount of distribution expenses
reimbursable by the Class B shares of the Fund is reduced by the amount of such
contingent deferred sales charges. For the fiscal year ended June 30, 1995, the
Distributor received approximately $2,100 in contingent deferred sales charges
with respect to the Class B shares. As of November 1, 1994, the Fund no longer
accepts purchase orders for Class B shares.
Class C Plan. For the period November 1, 1994 (inception of Class C shares)
through June 30, 1995, Prudential Securities received $6 under the Class C
Plan and spent approximately $100 in distributing Class C shares. It is
estimated that the latter amount was spent on (i) payments of commissions and
account servicing fees to financial advisers (48% or $48) and (ii) printing
and mailing of prospectuses (52% or $52). Prudential Securities receives the
proceeds of contingent deferred sales charges paid by investors upon certain
redemptions of Class C shares. See "Shareholder Guide--How to Sell Your
Shares--Contingent Deferred Sales Charges" in the Prospectus. Prior to
November 1, 1994, no distribution expenses were incurred under the Class C
Plan. For the period ended June 30, 1995, the Distributor did not receive any
contingent deferred sales charges with respect to Class C shares.
The Class A, Class B and Class C Plans continue in effect from year to
year, provided that each such continuance is approved at least annually by a
vote of the Trustees, including a majority vote of the Rule 12b-1 Trustees, cast
in person at a meeting called for the purpose of voting on such continuance. The
Plans may each be terminated at any time, without penalty, by the vote of a
majority of the Rule 12b-1 Trustees or by the vote of the holders of a majority
of the outstanding shares of the Fund on not more than 30 days' written notice
to any other party to the Plans. The Plans may be amended to increase materially
the amounts to be spent for the services described therein without approval by
the shareholders of the applicable class, and all material amendments are
required to be approved by the Trustees in the manner described above. Each Plan
will automatically terminate in the event of its assignment. The Fund will not
be contractually obligated to pay expenses incurred under any Plan after it is
terminated or not continued.
Pursuant to each Plan, the Trustees will review at least quarterly a
written report of the distribution expenses incurred on behalf of each class of
shares of the Fund by PMFD and Prudential Securities, respectively. The report
includes an itemization of the distribution expenses and the purposes of such
expenditures. In addition, as long as the Plans remain in effect, the selection
and nomination of Rule 12b-1 Trustees shall be committed to the Rule 12b-1
Trustees.
B-16
<PAGE>
Pursuant to each Distribution Agreement, the Fund has agreed to indemnify
PMFD and Prudential Securities to the extent permitted by applicable law against
certain liabilities under the Securities Act of 1933, as amended. Each
Distribution Agreement with respect to the Class A, Class B and Class C shares
was last approved by the Trustees, including a majority of the Rule 12b-1
Trustees, on April 12, 1995.
NASD Maximum Sales Charge Rule. Pursuant to rules of the NASD, the
Distributor is required to limit aggregate initial sales charges, deferred sales
charges and asset-based sales charges to 6.25% of total gross sales of each
class of shares. Interest charges on unreimbursed distribution expenses equal to
the prime rate plus one percent per annum may be added to the 6.25% limitation.
Sales from the reinvestment of dividends and distributions are not required to
be included in the calculation of the 6.25% limitation. The annual asset-based
sales charge on shares of the Fund may not exceed .75 of 1%. The 6.25%
limitation applies to the Fund rather than on a per shareholder basis. If
aggregate sales charges were to exceed 6.25% of the total gross sales of any
class, all sales charges on shares of that class would be suspended.
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. (PSG) 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.
PORTFOLIO TRANSACTIONS
The Manager is responsible for decisions to buy and sell securities,
futures contracts and options on such securities and futures contracts, for the
Fund, the selection of brokers and dealers to effect the transactions and the
negotiation of brokerage commissions, if any. For purposes of this section, the
term "Manager" includes the Subadviser. The Fund does not normally incur any
brokerage commission expense on such transactions. The instruments purchased by
the Fund are generally traded on a ``net'' basis, with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security usually includes a profit to the dealer. In underwritten
offerings, securities are purchased at a fixed price which includes an amount of
compensation to the underwriter, generally referred to as the underwriter's
concession or discount. On occasion, certain money market instruments may be
purchased directly from an issuer, in which case no commissions or discounts are
paid. Portfolio securities may not be purchased from any
B-17
<PAGE>
underwriting or selling syndicate of which Prudential Securities (or an
affiliate thereof), during the existence of the syndicate, is a principal
underwriter (as defined in the Investment Company Act), except in accordance
with rules of the Securities and Exchange Commission. This limitation, in the
opinion of the Fund, will not significantly affect the Fund's ability to pursue
its present investment objective. However, in the future, in other
circumstances, the Fund may be at a disadvantage because of this limitation in
comparison to other funds with similar objectives but not subject to such
limitations. The Fund will not deal with Prudential Securities or its affiliates
on a principal basis.
In placing orders for portfolio securities of the Fund, the Manager is
required to give primary consideration to obtaining the most favorable price and
efficient execution. This means that the Manager will seek to execute each
transaction at a price and commission, if any, which provide the most favorable
total cost or proceeds reasonably attainable under the circumstances. While the
Manager generally seeks reasonably competitive spreads or commissions, the Fund
will not necessarily be paying the lowest spread or commission available. Within
the framework of this policy, the Manager may consider research and investment
services provided by brokers or dealers who effect or are parties to portfolio
transactions of the Fund, the Manager or the Manager's other clients. Such
research and investment services are those which brokerage houses customarily
provide to institutional investors and include statistical and economic data and
research reports on particular companies and industries. Such services are used
by the Manager in connection with all of its investment activities, and some of
such services obtained in connection with the execution of transactions for
the Fund may be used in managing other investment accounts. Conversely, brokers,
dealers or futures commission merchants furnishing such services may be selected
for the execution of transactions for such other accounts, whose aggregate
assets are far larger than the Fund's, and the services furnished by such
brokers may be used by the Manager in providing investment management for the
Fund. While such services are useful and important in supplementing its own
research and facilities, the Manager believes that the value of such services is
not determinable and does not significantly reduce expenses. The Fund does not
reduce the advisory fee it pays to the Manager by any amount that may be
attributed to the value of such services. The Fund will not pay for research in
principal transactions.
Subject to the above considerations, Prudential Securities may act as a
securities broker or futures commission merchant for the Fund. In order for
Prudential Securities (or any affiliate) to effect any portfolio transactions
for the Fund, the commissions, fees or other remuneration received by Prudential
Securities (or any affiliate) must be reasonable and fair compared to the
commissions, fees or other remuneration paid to other brokers or futures
commission merchants in connection with comparable transactions involving
similar securities or futures being purchased or sold during a comparable period
of time. This standard would allow Prudential Securities (or any affiliate) to
receive no more than the remuneration which would be expected to be received by
an unaffiliated broker or futures commission merchant in a commensurate
arm's-length transaction. Furthermore, the Trustees of the Fund, including a
majority of the noninterested Trustees, have adopted procedures which are
reasonably designed to provide that any commissions, fees or other remuneration
paid to Prudential Securities (or any affiliate) are consistent with the
foregoing standard. In accordance with Section 11(a) under the Securities
Exchange Act of 1934, Prudential Securities may not retain compensation for
effecting transactions on a national securities exchange for the Fund unless the
Fund has expressly authorized the retention of such compensation. Prudential
Securities must furnish to the Fund at least annually a statement setting forth
the total amount of all compensation retained by Prudential Securities from
transactions effected for the Fund during the applicable period. Brokerage and
futures transactions with Prudential Securities (or any affiliate) are also
subject to such fiduciary standards as may be imposed on Prudential Securities
(or any affiliate) by applicable law.
For the fiscal years ended June 30, 1995, 1994 and 1993, the Fund paid
brokerage commissions of $4,215, $9,750 and $19,525, respectively, none of which
was paid to Prudential Securities.
PURCHASE AND REDEMPTION OF FUND SHARES
Shares of the Fund may be purchased at a price equal to the next determined
net asset value per share, plus a sales charge which, at the election of the
investor, may be imposed either (i) at the time of purchase (Class A shares) or
(ii) on a deferred basis (Class C shares). The Fund is currently not accepting
purchase orders for Class B shares. See "Shareholder Guide--Alternative
Purchase Plan" in the Prospectus.
Each class of shares represents an interest in the same portfolio of
investments of the Fund and have the same rights, except that each class bears
the separate expenses of its Rule 12b-1 distribution plan and has exclusive
voting rights with respect to such plan. See "Distributor." Each class also
has separate exchange privileges. See "Shareholder Investment Account--Exchange
Privilege."
B-18
<PAGE>
Specimen Price Make-up
Under the current distribution arrangements between the Fund and the
Distributor, Class A shares are sold at a maximum sales charge of 3% and Class
B* and Class C* shares are sold at net asset value. Using the Fund's net asset
value at June 30, 1995, the maximum offering price of the Fund's shares is set
forth below.
<TABLE>
<S> <C>
Class A
Net asset value and redemption price per Class A share.............................. $9.37
-----
Maximum sales charge (3% of offering price)......................................... .29
-----
Offering price to public............................................................ $9.66
-----
-----
Class B
Net asset value, offering price and redemption price per Class B share*............. $9.37
-----
-----
Class C
Net asset value, offering price and redemption price per Class C share*............. $9.37
-----
-----
---------------
* Class B and Class C shares are subject to a contingent deferred sales charge on certain
redemptions. See "Shareholder Guide--How to Sell Your Shares--Contingent Deferred Sales
Charges" in the Prospectus.
</TABLE>
Reduced Initial Sales Charges--Class A Shares
Combined Purchase and Cumulative Purchase Privilege. If an investor or
eligible group of related investors purchases Class A shares of the Fund
concurrently with ClassA shares of other Prudential MutualFunds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See the table of breakpoints under "Shareholder
Guide--Alternative Purchase Plan" in the Prospectus.
An eligible group of related Fund investors includes any combination of the
following:
(a) an individual;
(b) the individual's spouse, their children and their parents;
(c) the individual's and spouse's Individual Retirement Account (IRA);
(d) any company controlled by the individual (a person, entity or group
that holds 25% or more of the outstanding voting securities of a
company will be deemed to control the company, and a partnership will
be deemed to be controlled by each of its general partners);
(e) a trust created by the individual, the beneficiaries of which are the
individual, his or her spouse, parents or children;
(f) a Uniform Gifts to Minors Act/Uniform Transfers to Minors Act account
created by the individual or the individual's spouse; and
(g) one or more employee benefit plans of a company controlled by an
individual.
In addition, an eligible group of related Fund investors may include an
employer (or group of related employers) and one or more qualified retirement
plans of such employer or employers (an employer controlling, controlled by or
under common control with another employer is deemed related to that employer).
The Distributor must be notified at the time of purchase that the investor
is entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. The Combined Purchase and
Cumulative Purchase Privilege does not apply to individual participants in any
retirement or group plans.
Rights of Accumulation. Reduced sales charges are also available through
Rights of Accumulation, under which an investor or an eligible group of related
investors, as described above under "Combined Purchase and Cumulative Purchase
Privilege," may aggregate the value of their existing holdings of the shares of
the Fund and shares of other Prudential Mutual Funds (excluding money market
funds other than those acquired pursuant to the exchange privilege) to determine
the reduced sales charge. However, the value of shares held directly with the
Transfer Agent and through Prudential Securities will not be aggregated to
determine the reduced sales charge. All shares must be held either directly with
the Transfer Agent or through Prudential Securities. The value of existing
holdings for purposes of determining the reduced sales charge is calculated
using the maximum offering price (net asset value plus maximum sales charge) as
of the previous business day. See "How the Fund Values its Shares" in the
Prospectus. The Distributor must be notified at the time of purchase that the
investor is entitled to a reduced sales charge. The reduced sales charges will
be granted subject to confirmation of the investor's holdings. Rights of
accumulation are not available to individual participants in any retirement or
group plans.
B-19
<PAGE>
Letter of Intent. Reduced sales charges are available to investors (or an
eligible group of related investors), including retirement and group plans, who
enter into a written Letter of Intent providing for the purchase, within a
thirteen-month period, of shares of the Fund and shares of other Prudential
Mutual Funds. All shares of the Fund and shares of other Prudential Mutual Funds
(excluding money market funds other than those acquired pursuant to the exchange
privilege) which were previously purchased and are still owned are also included
in determining the applicable reduction. However, the value of shares held
directly with the Transfer Agent and through Prudential Securities will not be
aggregated to determine the reduced sales charge. All shares must be held either
directly with the Transfer Agent or through Prudential Securities. The
Distributor must be notified at the time of purchase that the investor is
entitled to a reduced sales charge. The reduced sales charge will be granted
subject to confirmation of the investor's holdings. Letters of Intent are not
available to individual participants in any retirement or group plans.
A Letter of Intent permits a purchaser to establish a total investment goal
to be achieved by any number of investments over a thirteen-month period. Each
investment made during the period will receive the reduced sales charge
applicable to the amount represented by the goal, as if it were a single
investment. Class A shares totaling 5% of the dollar amount of the Letter of
Intent will be held by the Transfer Agent in escrow in the name of the
purchaser, except in the case of retirement and group plans where the employer
or plan sponsor will be responsible for paying any applicable sales charges. The
effective date of a Letter of Intent may be back-dated up to 90 days, in order
that any investments made during this 90-day period, valued at the purchaser's
cost, can be applied to the fulfillment of the Letter of Intent goal, except in
the case of retirement and group plans.
The Letter of Intent does not obligate the investor to purchase, nor the
Fund to sell, the indicated amount. In the event the Letter of Intent goal is
not achieved within the thirteen-month period, the purchaser (or the employer or
plan sponsor in the case of any retirement or group plan) is required to pay the
difference between the sales charge otherwise applicable to the purchases made
during this period and sales charges actually paid. Such payment may be made
directly to the Distributor or, if not paid, the Distributor will liquidate
sufficient escrowed shares to obtain such difference. Investors electing to
purchase Class A shares of the Fund pursuant to a Letter of Intent should
carefully read such Letter of Intent.
Waiver of the Contingent Deferred Sales Charge--Class B Shares
The contingent deferred sales charge is waived under circumstances
described in the Prospectus. See "Shareholder Guide--How to Sell Your
Shares--Waiver of the Contingent Deferred Sales Charges--Class B Shares" in the
Prospectus. In connection with these waivers, the Transfer Agent will require
you to submit the supporting documentation set forth below.
<TABLE>
<S> <C>
Category of Waiver Required Documentation
Death A copy of the shareholder's death certificate
or, in the case of a trust, a copy of the
grantor's death certificate, plus a copy of
the trust agreement identifying the grantor.
Disability--An individual will be A copy of the Social Security Administration
considered disabled if he or she is award letter or a letter from a physician on
unable to engage in any substantial the physician's letterhead stating that the
gainful activity by reason of any shareholder (or, in the case of a trust, the
medically determinable physical or grantor) is permanently disabled. The letter
mental impairment which can be must also indicate the date of disability.
expected to result in death or to be
of long-continued and indefinite
duration.
Distribution from an IRA or 403(b) A copy of the distribution form from the
Custodial Account custodial firm indicating (i) the date of
birth of the shareholder and (ii) that the
shareholder is over age 59 1/2 and is taking
a normal distribution--signed by the
shareholder.
Distribution from Retirement Plan A letter signed by the plan
administrator/trustee indicating the reason
for the distribution.
Excess Contributions A letter from the shareholder (for an IRA) or
the plan administrator/trustee on company
letterhead indicating the amount of the
excess and whether or not taxes have been
paid.
</TABLE>
The Transfer Agent reserves the right to request such additional
documents as it may deem appropriate.
B-20
<PAGE>
SHAREHOLDER INVESTMENT ACCOUNT
Upon the initial purchase of shares of the Fund, a Shareholder Investment
Account is established for each investor under which the shares are held for the
investor 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. The Fund makes available to its
shareholders the following privileges and plans.
Automatic Reinvestment of Dividends and/or Distributions
For the convenience of investors, all dividends and distributions are
automatically reinvested in full and fractional shares of the Fund at net asset
value per share on the payment date, unless the Trustees determine otherwise. An
investor may direct the Transfer Agent in writing not less than five full
business days prior to the payment date to have subsequent dividends and/or
distributions sent in cash rather than reinvested. In the case of recently
purchased shares for which registration instructions have not been received 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 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. Such shareholder will
receive credit for any contingent deferred sales charge paid in connection with
the amount of proceeds being reinvested.
Exchange Privilege
The Fund makes available to its shareholders the privilege of exchanging
their shares of the Fund for shares of certain other Prudential Mutual Funds,
including one or more specified money market funds, subject in each case to the
minimum investment requirements of such funds. Shares of such other Prudential
Mutual Funds may also be exchanged for shares of the Fund. All exchanges are
made on the basis of relative net asset value next determined after receipt of
an order in proper form. An exchange will be treated as a redemption and
purchase for tax purposes. Shares may be exchanged for shares of another fund
only if shares of such fund may legally be sold under applicable state laws. For
retirement and group plans having a limited menu of Prudential Mutual Funds, the
Exchange Privilege is available for those funds eligible for investment in the
particular program.
It is contemplated that the exchange privilege may be applicable to new
mutual funds whose shares may be distributed by the Distributor.
Class A. Shareholders of the Fund may exchange their Class A shares for
Class A shares of certain other Prudential Mutual Funds and Prudential
Government Securities Trust (Intermediate Term Series) and shares of the money
market funds specified below. No fee or sales load will be imposed upon the
exchange. Shareholders of money market funds who acquire such shares upon
exchange of Class A shares may use the exchange privilege only to acquire Class
A shares of the Prudential Mutual Funds participating in the exchange
privilege.
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets
Prudential Tax-Free Money Fund
Class B. Until November 1995, Class B shares of the Fund may be exchanged
for shares of Prudential Special Money Market Fund, Money Market Series,
without imposition of any contingent deferred sales charge. Upon subsequent
redemption from such money market fund, such shares will be subject to the Class
B contingent deferred sales charge calculated without regard to the time such
shares were held in the money market fund. In order to minimize the period of
time in which shares are subject to a contingent deferred sales charge, shares
exchanged out of the money market fund will be exchanged on the basis of their
remaining holding periods, with the longest remaining holding periods being
transferred first. Additional details about the Exchange Privilege and
prospectuses for each of the Prudential Mutual Funds are available from the
Fund's Transfer Agent, Prudential Securities or Prusec. Notwithstanding the
above, any contingent deferred sales charge which remains to be paid on any
Class B shares of the Fund outstanding at November 1995 will be waived, and such
remaining Class B shares of the Fund will be automatically exchanged for Class
A shares of the Fund. At such time the Exchange Privilege with respect to Class
B shares will be terminated. The Exchange Privilege may be modified, terminated
or
B-21
<PAGE>
suspended on sixty days notice, and any fund, including the Fund, or the
Distributor, has the right to reject any exchange application relating to such
fund's shares.
Class C. Shareholders of the Fund may exchange their Class C shares for
Class C shares of certain other Prudential Mutual Funds and shares of Prudential
Special Money Market Fund, a money market fund. No CDSC will be payable upon
such exchange, but a CDSC may be payable upon the redemption of Class C shares
acquired as a result of the exchange. The applicable sales charge will be that
imposed by the fund in which shares were initially purchased and the purchase
date will be deemed to be the date of the initial purchase, rather than the date
of the exchange.
Class C shares of the Fund may also be exchanged for shares of Prudential
Special Money Market Fund without imposition of any CDSC at the time of
exchange. Upon subsequent redemption from such money market fund or after
re-exchange into the Fund, such shares will be subject to the CDSC calculated
without regard to the time such shares were held in the money market fund. In
order to minimize the period of time in which shares are subject to a CDSC,
shares exchanged out of the money market fund will be exchanged on the basis of
their remaining holding periods, with the longest remaining holding periods
being transferred first. In measuring the time period shares are held in a money
market fund and "tolled" for purposes of calculating the CDSC holding period,
exchanges are deemed to have been made on the last day of the month. Thus, if
shares are exchanged into the Fund from a money market fund during the month
(and are held in the Fund at the end of the month), the entire month will be
included in the CDSC holding period. Conversely, if shares are exchanged into a
money market fund prior to the last day of the month (and are held in the money
market fund on the last day of the month), the entire month will be excluded
from the CDSC holding period.
At any time after acquiring shares of other funds participating in the
Class C exchange privilege, a shareholder may again exchange those shares (and
any reinvested dividends and distributions) for Class C shares of the Fund,
without subjecting such shares to any CDSC. Shares of any fund participating in
the Class C Exchange Privilege that were acquired through reinvestment of
dividends or distributions may be exchanged for Class C shares of other funds
without being subject to any CDSC.
Additional details about the Exchange Privilege and prospectuses for each
of the Prudential Mutual Funds are available from the Fund's Transfer Agent,
Prudential Securities or Prusec. The Exchange Privilege may be modified,
terminated or suspended on 60 days' notice, and any fund, including the Fund, or
the Distributor, has the right to reject any exchange application relating to
such fund's shares.
Dollar Cost Averaging
Dollar cost averaging is a method of accumulating shares by investing a
fixed amount of dollars in shares at set intervals. An investor buys more shares
when the price is low and fewer shares when the price is high. The 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 1993-1994 academic year.
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 of less than their original
cost.
B-22
<PAGE>
Automatic Savings Accumulation Plan (ASAP)
Under ASAP, an investor may arrange to have a fixed amount automatically
invested in shares of the Fund monthly by authorizing his or her bank account or
Prudential Securities account (including a Command Account) to be debited to
invest specified dollar amounts in shares of the Fund. The investor's bank must
be a member of the Automatic Clearing House System. Share certificates are not
issued to ASAP participants.
Futher 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 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. Withdrawals of Class B or
Class C shares may be subject to a CDSC. See ``Shareholder Guide--How to Sell
Your Shares--Contingent Deferred Sales Charges'' in the Prospectus.
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 at net asset
value on shares held under this plan. See "Shareholder Investment
Account--Automatic Reinvestment of Dividends and/or 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. In addition, withdrawals made concurrently with purchases of
additional shares areinadvisable because of the salescharges applicable to (i)
the purchase of Class A shares and (ii) the withdrawal of Class B and Class C
shares. Each shareholder should consult his or her own tax adviser with regard
to the tax consequences of the 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.
B-23
<PAGE>
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.
NET ASSET VALUE
The Fund computes its net asset value at 4:15 P.M., New York time, on each
day the New York Stock Exchange is open for trading except days on which no
orders to purchase, sell or redeem Fund shares have been received or on days on
which changes in the value of the Fund's portfolio investments 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 Fund's shares shall be determined at a
time between such closing and 4:15 P.M., New York time.
Under the Investment Company Act, the Trustees are responsible for
determining in good faith the fair value of securities of the Fund. In
accordance with procedures adopted by the Trustees, the value of each portfolio
security for which quotations are available will be based on the valuation
provided by an independent broker/dealer or 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
at fair value as determined in good faith under procedures established by the
Trustees. Short-term debt securities which mature in more than 60 days are
valued at current market quotations. Short-term debt securities which mature in
60 days or less are valued at amortized cost if their term to maturity from the
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 from the date of purchase
exceeded 60 days, unless the Trustees determine that such valuation does not
represent fair value.
TAXES, DIVIDENDS AND DISTRIBUTIONS
The Fund has elected to qualify and intends to remain qualified as a
regulated investment company under Subchapter M of the Internal Revenue Code of
1986, as amended (the Internal Revenue Code). This relieves the Fund (but not
its shareholders) from paying federal income tax on income realized during the
taxable year which is distributed to shareholders, provided that it distributes
at least 90% of its net investment income and short-term capital gains, and
permits net capital gains of the Fund (i.e., the excess of net long-term capital
gains over net short-term capital losses) to be treated as long-term capital
gains of the shareholders, regardless of how long shareholders have held their
shares in the Fund.
Qualification as a regulated investment company requires, among other
things, that (a) at least 90% of the Fund's annual gross income (without
reduction for losses from the sale or other disposition of securities) be
derived from interest, dividends, payments with respect to securities loans and
gains from the sale or other disposition of securities, options thereon, futures
contracts, options thereon, forward contracts and foreign currencies; (b) the
Fund derive less than 30% of its gross income from gains (without reduction for
losses) from the sale or other disposition of securities, options thereon,
futures contracts, options thereon and forward contracts held for less than
three months; and (c) the Fund diversify its holdings so that, at the end of
each quarter of the taxable year, (i) at least 50% of the market value of the
Fund's assets is represented by cash, U.S. Government obligations and other
securities limited in respect of any one issuer to an amount not greater than 5%
of the Fund's 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 obligations).
Gains or losses on sales of securities by the Fund generally will be
treated as long-term capital gains or losses if the securities have been held by
it for more than one year, except in certain cases where the Fund acquires a put
or makes a short-sale against-the-box. Other gains or losses on the sale of
securities will be short-term capital gains or losses.
Gains and losses on the sale, lapse or other termination of options on
securities will generally be treated as gains and losses from the sale of
securities (assuming they do not qualify as "Section 1256 contracts"). Certain
of the Fund's transactions may be subject to wash sale and short sale provisions
of the Internal Revenue Code. In addition, debt securities acquired by the Fund
may be subject to original issue discount and market discount rules.
B-24
<PAGE>
For federal income tax purposes, the Fund had a capital loss carryforward
at June 30, 1995 of approximately $3,374,000 of which $588,000 expires in 2001,
$2,044,000 expires in 2002, and $742,000 expires in 2003. Accordingly, no
capital gains distributions are expected to be paid to shareholders until net
gains have been realized in excess of such amount.
The Fund has elected to treat approximately $533,700 of net capital losses
incurred in the eight month period ended June 30, 1995, as having occurred in
the following fiscal year.
"Regulated futures 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 the 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 long-term capital gain or loss and the remainder
will be treated as short-term capital gains or loss. In addition, positions
which are part of a "straddle" are to be subject to rules which apply certain
wash sale and short sale provisions of the Internal Revenue Code. The Fund may
be required to defer the recognition of losses on positions it holds to the
extent of any unrecognized gain on offsetting positions held by the Fund. The
Fund's ability to enter into futures contracts, options thereon and options on
securities may be affected by the 30% limitation on gains derived from
securities held less than three months, discussed above.
Distributions of net investment income and net short-term capital gains
will be taxable to the shareholder at ordinary income rates regardless of
whether the shareholder receives such distributions in additional shares or
cash. Distributions of net capital gains, if any, are taxable as long-term
capital gains regardless of how long the investor has held his or her Fund
shares. However, if a shareholder holds shares in the Fund for not more than six
months, then any loss recognized on the sale of such shares will be treated as
long-term capital loss to the extent of any distribution on the shares which was
treated as long-term capital gain. Shareholders will be notified annually by the
Fund as to the federal tax status of distributions made by the Fund.
The Fund is subject to a nondeductible 4% excise tax if it does not
distribute 98% of its ordinary income on a calendar year basis and 98% of its
capital gains on an October 31 year-end basis. The Fund intends to distribute
its income and capital gains in the manner necessary to avoid imposition of the
4% excise tax. Dividends and distributions generally are taxable to shareholders
in the year in which they are received or accrued; however, 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 Fund 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.
Any loss realized on a sale, redemption or exchange of shares of the Fund
by a shareholder will be disallowed to the extent the shares are replaced within
a 61-day period (beginning 30 days before the disposition of shares). Shares
purchased pursuant to the reinvestment of a dividend will constitute a
replacement of shares.
Income received by the Fund from sources within foreign countries may be
subject to withholding and other taxes imposed by such countries. Income tax
treaties between certain countries and the United States may reduce or eliminate
such taxes. It is impossible to determine in advance the effective rate of
foreign tax to which the Fund will be subject, since the amount of the Fund's
assets to be invested in various countries is not known.
A shareholder who acquires shares of the Fund and sells or otherwise
disposes of such shares within 90 days of acquisition may not be allowed to
include certain sales charges incurred in acquiring such shares for purposes of
calculating gain or loss realized upon a sale or exchange of shares of the
Fund.
The Fund declares dividends daily based on actual net investment income
determined in accordance with generally accepted accounting principles. A
portion of such dividend may also include projected net investment income. Such
dividends will be payable monthly in additional shares of the Fund unless
otherwise requested by the shareholder. The Fund's net capital gains, if any,
will be distributed at least annually. In determining the amount of capital
gains to be distributed, any capital loss carry forwards from prior years will
be offset against capital gains. Dividends and distributions will be paid in
additional Fund shares based on net asset value on the payment date or such
other date as the Trustees may determine, unless the shareholder elects in
writing not less than five full business days prior to the payment date to
receive such distributions in cash. In the event that a shareholder's shares are
redeemed on a date other than the monthly dividend payment date, the proceeds of
such redemption will equal the net asset value of the shares redeemed plus the
amount of all dividends declared through the date of redemption.
Distributions of taxable net investment income and net realized capital
gains will be taxable as described above, whether made in shares or in cash.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for federal income tax purposes in each share so received
equal to the net asset value of a share of the Fund on the distribution date.
Any dividends or distributions paid shortly after a purchase by an investor
may have the effect of reducing the per share net asset value of the investor's
shares by the per share amount of the dividends or distributions. Furthermore,
such dividends or distributions, although in effect a return of capital, are
subject to federal income taxes. Therefore, prior to purchasing shares of the
Fund, the investor
B-25
<PAGE>
should carefully consider the impact of dividends or capital gains distributions
which are expected to be or have been announced. Distributions may be subject to
additional state and local taxes. See "Taxes, Dividends and Distributions" in
the Prospectus.
The per share dividends on Class B and Class C shares will be lower than
the per share dividends on Class A shares as a result of the higher distribution
fee applicable with respect to the Class B and Class C shares.
PERFORMANCE INFORMATION
The Fund may from time to time advertise its yield as calculated over a
30-day period. Yield is calculated separately for Class A, Class B and Class C
shares. This yield will be computed by dividing the Fund's net investment income
per share earned during this 30-day period by the maximum offering price per
share on the last day of this period. The yield for the 30-day period ended June
30, 1995 for the Class A shares was 7.50%, for the Class B shares was 7.68% and
for the Class C shares was 6.97%. 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 maximum offering price per share on the last day of the
period.
Yield fluctuates and an annualized yield quotation is not a representation
by the Fund as to what an investment in the Fund will actually yield for any
given period.
Average Annual Total Return. The Fund may also advertise its average annual
total return. Average annual total return is determined separately for Class A,
Class B and Class C shares. See "How the Fund 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 $1000.
T = average annual total return.
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
$1000 payment made at the beginning of the 1, 5 or 10
year periods.
Average annual return takes into account any applicable initial or
contingent deferred sales charges but does not take into account any federal or
state income taxes that may be payable upon redemption.
The average annual total return for Class A shares for the period September
9, 1991 (commencement of offering of the Class A shares) through June 30, 1995
and for the one year ended June 30, 1995 was 3.52% and 3.36%, respectively. The
average annual total return with respect to the Class B shares of the Fund for
the period September 1, 1992 (commencement of offering of the Class B shares)
through June 30, 1995 and for the one year period ended June 30, 1995 was 2.64%
and 5.16%, respectively. The average annual total return for Class C shares
for the period November 1, 1994 (commencement of offering of the Class C shares)
through June 30, 1995 was 3.65%.
Aggregate Total Return. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A, Class B and
Class C shares. See "How the Fund Calculates Performance" in the
Prospectus.
Aggregate total return represents the cumulative change in the value of an
investment in the Fund and is computed by the following formula:
ERV - P
P
Where: P = a hypothetical initial payment of $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 payment made at the beginning of the 1, 5 or 10 year
periods.
B-26
<PAGE>
Aggregate total return does not take into account any federal or state
income taxes that may be payable upon redemption or any applicable initial or
contingent deferred sales charges.
The aggregate total return for Class A shares for the period September 9,
1991 (commencement of offering of the Class A shares) through June 30, 1995 and
for the one year period ended June 30, 1995 was 17.60% and 6.55%, respectively.
The aggregate total return for Class B shares for the period September 1, 1992
(commencement of offering of the Class B shares) through June 30, 1995 and for
the one year period ended June 30, 1995 was 7.63% and 6.16%%, respectively. The
aggregate total return for Class C shares for the period November 1, 1994
(commencement of offering of Class C shares) through June 30, 1995 was 4.65%.
From time to time, the performance of the Fund may be measured against
various indices. Set forth below is a chart which compares the performance of
different types of investments over the long-term.1
(CHART)
- ------------------
1Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1993
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). Common stock returns are based on the Standard & Poor's 500 Stock
Index, a market-weighted, unmanaged index of 500 common stocks in a variety of
industry sectors. It is a commonly used indicator of broad stock price
movements. This chart is for illustrative purposes only, and is not intended to
represent the performance of any particular investment or fund.
CUSTODIAN, TRANSFER AND DIVIDEND DISBURSING
AGENT AND INDEPENDENT ACCOUNTANTS
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, serves as Custodian for the Fund's portfolio securities and cash,
and in that capacity maintains certain financial and accounting books and
records pursuant to an agreement with the Fund.
Prudential Mutual Fund Services, Inc. (PMFS), Raritan Plaza One, Edison,
New Jersey 08837, serves as the Transfer and Dividend Disbursing Agent of the
Fund. It is a wholly-owned subsidiary of PMF. PMFS provides customary transfer
agency services to the Fund, including the handling of shareholder
communications, the processing of shareholder transactions, the maintenance of
shareholder account records, 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. For the
fiscal year ended June 30, 1995, such fees amounted to approximately $75,000.
PMFS is also reimbursed for its out-of-pocket expenses, including but not
limited to postage, stationery, printing, allocable communications and other
costs.
Deloitte & Touche LLP, Two World Financial Center, New York, New York
10281, serves as the Fund's independent accountants and in that capacity audits
the Fund's annual financial statements.
B-27
<PAGE>
Portfolio of Investments as of THE BLACKROCK GOVERNMENT
June 30, 1995 INCOME TRUST
- -----------------------------------------------------------------
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- -----------------------------------------------------------------
LONG-TERM INVESTMENTS--134.6%
- -----------------------------------------------------------------
Mortgage Pass-Throughs--94.4%
Federal Home Loan Mortgage
Corporation,
$ 1,215 7.50%, 6/01/00 $ 1,231,686
5,075 9.00%, 9/01/05 - 11/01/05, 15 Year 5,277,146
1,027 7.375%, 3/01/06, Multi-family 1,029,602
991 6.128%, 2/01/18, 1 year CMT, ARM 980,945
2,402 6.912%, 9/01/23, 1 year CMT, ARM 2,514,224
2,358 6.207%, 10/01/24, 1 year CMT, ARM 2,442,346
Federal National Mortgage
Association,
2,279 8.00%, 3/01/08 2,350,057
3,438 8.50%, 6/01/08 - 1/01/16 3,600,791
1,293 7.857%, 12/01/20, 3 year CMT, ARM 1,322,645
1,638 7.447%, 12/01/22, 1 Year CMT, ARM 1,689,487
2,400 6.627%, 11/01/24, 1 year CMT, ARM 2,433,750
996 5.693%, 2/01/25, 6 month CD, ARM 1,001,670
Government National Mortgage
Association,
3,295(d) 7.25%, 1/15/05 - 4/15/06 3,351,343
2,212 6.50%, 2/20/21, 1 year CMT, ARM 2,238,320
2,968(b) 7.00%, 7/20/24 - 4/20/25, 1 year
CMT, ARM 3,020,399
4,796(c) 7.50%, 1/20/25 - 3/20/25, 1 year
CMT, ARM 4,917,230
1,686 8.50%, 4/20/25, 1 year CMT, ARM 1,753,063
2,980 7.50%, 4/20/25, 1 year CMT, ARM 3,056,861
1,957 6.50%, 5/20/25, 1 Year CMT, ARM 1,980,070
------------
Total Mortgage Pass-Throughs
(cost $46,216,306) 46,191,635
- -----------------------------------------------------------------
Multiple Class Mortgage Pass-Throughs--22.1%
1,480 Collateralized Mortgage Obligation,
Trust 59, Class G, 9.00%, 7/01/17 1,491,454
1,633 Federal Home Loan Mortgage
Corporation, Multiclass Mortgage
Participation Certificates,
Series 124, Class A, Floating Rate
REMIC, 8.50%, 3/15/97 1,659,954
Federal National Mortgage
Association, REMIC Pass-Through
Certificates,
$ 1,559 11.50%, 4/01/09 $ 1,726,352
783 Trust 1991-49, Class D, 8.00%,
5/25/05 786,017
1,061 Trust 1990-60, Class J, 9.00%,
6/25/17 1,067,932
513 Residential Funding Mtg. Sec. I,
I/0,
Series 1992-S2, Class A17, 7.96%,
1/25/22 452
1,350 Resolution Trust Corporation,
Multiclass Mortgage Participation
Certificates, Series 1992-9, Class
A, 8.00%, 7/25/29 1,359,887
Small Business Administration,
1,359 7.25%, 8/25/16, ARM 1,377,879
1,326 7.375%, 9/25/16, ARM 1,349,757
------------
Total Multiple Class Mortgage
Pass-Throughs (cost $14,124,472) 10,819,684
- -----------------------------------------------------------------
U.S. Government Securities--14.5%
U.S. Treasury Notes,
6,200(c) 6.00%, 6/30/96 6,215,500
870(c) 6.625%, 3/31/97 881,284
------------
Total U.S. Government Securities
(cost $7,022,319) 7,096,784
- -----------------------------------------------------------------
Asset-Backed Securities--3.6%
700 First Chicago Master Trust,
Series 1991-D, 8.40% 713,125
1,000 National Credit Card Trust,
Series 1989-4, 9.45% 1,028,120
------------
Total Asset-Backed Securities
(cost $1,744,091) 1,741,245
Total Long-Term Investments
(cost $69,107,188) 65,849,348
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-28
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
Portfolio of Investments as of June 30, 1995
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- -----------------------------------------------------------------
SHORT-TERM INVESTMENTS--4.7%
- -----------------------------------------------------------------
Repurchase Agreement--3.1%
$ 1,520 Lehman Brothers, Inc., 6.15%, dated
6/30/95, due 7/3/95 in the amount
of $1,520,779 (cost $1,520,000;
collateralized by $1,450,000 U.S.
Treasury Note, 7.75%, due 11/30/99,
value including accrued interest--
$1,560,168) $ 1,520,000
- -----------------------------------------------------------------
Discount Note--1.5%
730 Federal National Mortgage
Association, 5.90%, 7/07/95 (cost
$729,282) 729,282
- -----------------------------------------------------------------
Call Options Purchased--0.1%
Contracts(a)
- ---------
13 U.S. Treasury Bond Future, Dec. '95,
expiring 11/19/95 @ 114.00
(cost $43,141) 34,125
------------
Total Short-Term Investments
(cost $2,292,423) 2,283,407
- -----------------------------------------------------------------
Total Investments--139.3%
(cost $71,399,611; Note 4) 68,132,755
Liabilities in excess of
other assets (Note 5)--(39.3%) (19,210,450)
------------
Net Assets--100% $ 48,922,305
------------
------------
</TABLE>
- ---------------
ARM--Adjustable Rate Mortgage.
CMT--Constant Maturity Treasury.
I/O--Interest Only.
REMIC--Real Estate Mortgage Investment Conduit.
(a) One contract equals $1,000 face value.
(b) Portion of principal amount pledged as collateral for
reverse repurchase agreements.
(c) Entire principal amount pledged as collateral for
reverse repurchase agreements.
(d) Entire principal amount pledged as collateral for
futures transactions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-29
<PAGE>
Statement of Assets and Liabilities THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets June 30, 1995
<S> <C>
Investments, at value (cost $71,399,611)...................................................................... $68,132,755
Cash.......................................................................................................... 67,673
Receivable for investments sold............................................................................... 6,407,604
Interest receivable........................................................................................... 928,409
Receivable for Fund shares sold............................................................................... 14,829
Deferred organization expenses and other assets............................................................... 34,934
-----------
Total assets............................................................................................... 75,586,204
-----------
Liabilities
Reverse repurchase agreements................................................................................. 19,872,000
Payable for investments purchased............................................................................. 6,219,169
Payable for Fund shares reacquired............................................................................ 209,654
Dividends payable............................................................................................. 77,059
Due to broker-variation margin................................................................................ 25,807
Interest payable.............................................................................................. 20,378
Management fee payable........................................................................................ 20,350
Distribution fee payable...................................................................................... 6,210
Accrued expenses and other liabilities........................................................................ 213,272
-----------
Total liabilities.......................................................................................... 26,663,899
-----------
Net Assets.................................................................................................... $48,922,305
-----------
-----------
Net assets were comprised of:
Shares of beneficial interest, at par...................................................................... $ 52,215
Paid-in capital in excess of par........................................................................... 56,285,356
-----------
56,337,571
Distributions in excess of net investment income........................................................... (159,383)
Accumulated net realized loss on investments............................................................... (3,988,929)
Net unrealized depreciation on investments................................................................. (3,266,954)
-----------
Net assets, June 30, 1995..................................................................................... $48,922,305
-----------
-----------
Class A:
Net asset value and redemption price per share
($46,449,586 3 4,957,567 shares of beneficial interest issued and outstanding).......................... $9.37
Maximum sales charge (3.0% of offering price).............................................................. .29
-----
Maximum offering price to public........................................................................... $9.66
-----
-----
Class B:
Net asset value, offering price and redemption price per share
($2,465,598 3 263,153 shares of beneficial interest issued and outstanding)............................. $9.37
-----
-----
Class C:
Net asset value, offering price and redemption price per share
($7,121 3 760 shares of beneficial interest issued and outstanding)..................................... $9.37
-----
-----
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-30
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
Statement of Operations
- -----------------------------------------------------------------
- -----------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended
June 30,
Net Investment Income 1995
-----------
<S> <C>
Income
Interest (net of interest expense of
$522,011)................................. $ 4,029,913
-----------
Expenses
Management fee............................... 296,623
Distribution fee--Class A.................... 84,590
Distribution fee--Class B.................... 15,335
Distribution fee--Class C.................... 6
Custodian's fees and expenses................ 107,000
Transfer agent's fees and expenses........... 85,000
Registration fees............................ 44,000
Audit fee.................................... 33,000
Reports to shareholders...................... 33,000
Legal fees................................... 30,000
Trustees' fees............................... 30,000
Amortization of deferred organization
expense................................... 27,000
Miscellaneous................................ 580
-----------
Total expenses............................ 786,134
-----------
Net investment income........................... 3,243,779
-----------
Realized and Unrealized Gain
(Loss) on Investments
Net realized gain (loss) on:
Security transactions........................ (693,346)
Financial futures contracts.................. (601,248)
Short sale transactions...................... 40,888
-----------
(1,253,706)
-----------
Net change in unrealized appreciation
(depreciation) on:
Securities................................... 1,811,003
Financial futures contracts.................. (103,451)
Short sales.................................. (25,203)
-----------
1,682,349
-----------
Net gain on investments......................... 428,643
-----------
Net Increase in Net Assets
Resulting from Operations....................... $ 3,672,422
-----------
-----------
</TABLE>
THE BLACKROCK GOVERNMENT INCOME TRUST
Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended
June 30,
Increase (Decrease) in Cash 1995
------------
<S> <C>
Cash flows provided by operating activities:
Interest received............................ $ 4,795,026
Operating expenses paid...................... (917,715)
Interest expense paid........................ (523,150)
Purchase of short-term portfolio investments,
net....................................... (2,292,423)
Purchase of long-term portfolio
investments............................... (173,235,978)
Proceeds from disposition of long-term
portfolio investments..................... 199,806,156
Variation margin on futures.................. (639,049)
Other........................................ (1,186)
------------
Net cash provided by operating activities.... 26,991,681
------------
Cash flows used for financing activities:
Proceeds from shares sold.................... 1,340,405
Payments on shares redeemed.................. (29,547,716)
Cash dividends paid(a)....................... (1,368,570)
Net proceeds from issuance of reverse
repurchase agreements..................... 11,572,000
------------
Net cash used for financing activities....... (18,003,881)
------------
Net increase in cash............................ 8,987,800
Cash at beginning of year....................... (8,920,127)
------------
Cash at end of year............................. $ 67,673
------------
------------
Reconciliation of Net Increase in Net Assets
to Net Cash Provided by Operating Activities
Net increase in net assets resulting from
operations................................... $ 3,672,422
------------
Decrease in investments......................... 20,205,730
Net realized loss............................... 1,253,706
Decrease in unrealized depreciation............. (1,682,349)
Decrease in receivable for investments sold..... 6,529,615
Decrease in interest receivable................. 399,869
Decrease in deposit with brokers for investments
sold short................................... 3,284,063
Decrease in other assets........................ 25,814
Decrease in investments sold short.............. (3,251,008)
Decrease in payable for investments purchased... (3,352,111)
Decrease in interest payable.................... (1,139)
Decrease in accrued expenses and other
liabilities..................................... (158,581)
Increase in due to broker variation margin...... 65,650
------------
Total adjustments............................ 23,319,259
------------
Net cash provided by operating activities....... $ 26,991,681
------------
------------
</TABLE>
- ---------------
(a) Non-cash financing activity not included herein consists of reinvestment of
dividends and distributions of $1,891,073.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-31
<PAGE>
Statement of Changes in Net Assets THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------
Increase (Decrease) in Net Assets 1995 1994
------------ ------------
<S> <C> <C>
Operations:
Net investment income.................................................................... $ 3,243,779 $ 4,768,026
Net realized loss on investments and foreign currency transactions....................... (1,253,706) (2,063,529)
Net change in unrealized appreciation/depreciation on investments........................ 1,682,349 (1,602,332)
------------ ------------
Net increase in net assets resulting from operations..................................... 3,672,422 1,102,165
------------ ------------
Net equalization debits..................................................................... (13,333) (61,820)
------------ ------------
Dividends and distributions (Note 1):
Dividends from net investment income:
Class A............................................................................... (3,086,267) (3,960,210)
Class B............................................................................... (147,139) (201,804)
Class C............................................................................... (42) --
------------ ------------
(3,233,448) (4,162,014)
------------ ------------
Tax return of capital distributions:
Class A............................................................................... (15,142) (703,286)
Class B............................................................................... (722) (35,838)
Class C............................................................................... -- --
------------ ------------
(15,864) (739,124)
------------ ------------
Fund share transactions (Note 6):
Net proceeds from shares subscribed...................................................... 1,294,788 6,405,954
Net asset value of shares issued in reinvestment of dividends and distributions.......... 1,891,073 2,827,310
Cost of shares reacquired................................................................ (28,430,251) (51,193,373)
------------ ------------
Net decrease in net assets from Fund share transactions.................................. (25,244,390) (41,960,109)
------------ ------------
Total decrease.............................................................................. (24,834,613) (45,820,902)
Net Assets
Beginning of year........................................................................... 73,756,918 119,577,820
------------ ------------
End of year................................................................................. $ 48,922,305 $ 73,756,918
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-32
<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
Mutual Fund Management, Inc. (``PMF''). 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 determine 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. No such securities were held by the Fund at June 30,
1995.
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. This amount is
known as the ``initial margin''. Subsequent payments, known as ``variation
margin'', are made or received by the Fund each day, depending on the daily
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 or foreign currency exchange rates with respect to
securities or currencies 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
- --------------------------------------------------------------------------------
B-33
<PAGE>
Notes to Financial Statements THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
option. If an option expires unexercised, the Fund realizes a gain or loss to
the extent of the premium received or paid. If an option is exercised, the
premium received or paid is an adjustment to the proceeds from the sale or the
cost of the purchase in determining whether the Fund has realized a gain or
loss. The difference between the premium and the amount received or paid on
effecting a closing purchase or sale transaction is also treated as a realized
gain or loss. Gain or loss on purchased options is included in net realized gain
(loss) on investment transactions. Gain or loss on written options is presented
separately as net realized gain (loss) on written option transactions.
The Fund, as a writer of an option, has no control over whether the underlying
securities may be sold (called) or purchased (put). As a result, the Fund bears
the market risk of an unfavorable change in the price of the security or
currency underlying the written option. The Fund, as purchaser of an option,
bears the risk of the potential inability of the counterparites to meet the
terms of their contracts.
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 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 interest method.
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.
Equalization: The Fund follows the accounting practice known as equalization by
which a portion of the proceeds from sales and costs of reacquisitions of Fund
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. As a result, undistributed net investment
income per share is unaffected by sales or reacquisitions of the Fund's shares.
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.
Reclassification of Capital Accounts: The effect of applying Statement of
Position 93-2: Determination, Disclosure, and Financial Statement Presentation
of Income, Capital Gain, and Return of Capital Distributions by Investment
Companies during the year was to decrease distributions in excess of net
investment income by $15,864 and decrease paid-in capital by $15,864 due to the
reclassification of distributions in excess of net investment income (tax return
of capital distributions). Net investment income, net realized gains and net
assets were not affected by this change.
Deferred Organization Expenses: A total of $135,000 was incurred in connection
with the organization of the Fund. These costs have been deferred and are being
amortized ratably over a period of sixty months from the date the Fund commenced
investment operations.
- --------------------------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with 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 BlackRock Financial Management, Inc. (``BFM''). BFM furnishes
investment advisory services in connection with the management of the Fund. PMF
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 PMF is computed daily and payable monthly at an annual
rate of .50 of 1% of the Fund's average daily net assets. PMF
- --------------------------------------------------------------------------------
B-34
<PAGE>
Notes to Financial Statements THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
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.
On February 28, 1995, BFM was acquired by PNC Bank, N.A. Following the
acquisition, BFM became a wholly-owned corporate subsidiary of PNC Asset
Management Group, Inc., the holding company for PNC's asset management business.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acts as the distributor of the Class A shares of the
Fund, and Prudential Securities Incorporated (``PSI''), which acts as
distributor of the Class B and Class C shares of the Fund (collectively the
``Distributors''). The Fund began offering Class C shares on November 1, 1994.
The Fund reimburses PMF and PSI for distributing and servicing the Fund's Class
A and Class B shares, pursuant to plans of distribution (the ``Class A and B
Plans''). The Fund compensates PSI for distributing and servicing the Fund's
Class C shares pursuant to a plan of distribution (the ``Class C Plan'')
regardless of expenses actually incurred. The distribution fees are accrued
daily and payable monthly.
Pursuant to the Class A Plan, the Fund reimburses PMFD for its
distribution-related expenses with respect to Class A shares at an annual rate
of up to .30 of 1% of the average daily net assets of the Class A shares. Such
expenses under the Class A Plan were .15 of 1% of the average daily net assets
of the Class A shares for the year ended June 30, 1995. PMFD pays various
broker-dealers, including PSI and Pruco Securities Corporation (`Prusec''),
affiliated broker-dealers, for account servicing fees and other expenses
incurred by such broker-dealers.
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to 1% of the average daily net assets of Class B shares. Prior to November
1, 1994, the Class B Plan distribution expenses were 1% of the average daily net
assets. Effective November 1, 1994 such expenses under the Class B Plan were
reduced to .20 of 1% of the average daily net assets of the Class B shares since
the Fund is not currently accepting purchase orders for Class B shares.
Pursuant to the Class C Plan, the Fund compensates PSI for its
distribution-related expenses with respect to Class C shares at an annual rate
of up to 1% of the average daily net assets of Class C shares. Such expenses
under the Class C Plan were .75 of 1% of the average daily net assets of Class C
shares for the year ended June 30, 1995.
PMFD has advised the Fund that it has received approximately $17,300 in
front-end sales charges resulting from sales of Class A shares during the year
ended June 30, 1995. From these fees, PMFD paid such sales charges to dealers
(PSI and Prusec) which in turn paid commissions to salespersons and incurred
other distribution costs.
With respect to the Class B Plan, at any given time, the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payments made by the Fund pursuant to
the Class B Plan. PSI advised the Fund that for the year ended June 30, 1995, it
has received approximately $2,100 in contingent deferred sales charges imposed
upon certain redemptions by investors. PSI, as distributor, has also advised the
Fund that as of June 30, 1995, the amount of distribution expenses incurred by
PSI and not yet reimbursed by the Fund or recovered through contingent deferred
sales charges approximated $46,400. This amount may be recovered through future
payments under the Class B Plan or contingent deferred sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI and PMF are (indirect)
wholly-owned subsidiaries of The Prudential Insurance Company of America
("Prudential").
- --------------------------------------------------------------------------------
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 June 30, 1995,
the Fund incurred fees of approximately $75,000 for the services of PMFS. As of
June 30, 1995, approximately $6,100 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, 1995 aggregated $169,337,176 and $182,228,730,
respectively.
The federal income tax basis of the Fund's investments at June 30, 1995 was
substantially the same as the basis for financial statement reporting purposes
and, accordingly, net unrealized depreciation for federal income tax purposes
was $3,266,856 (gross unrealized appreciation--$372,368; gross unrealized
depreciation--$3,639,224).
- --------------------------------------------------------------------------------
B-35
<PAGE>
Notes to Financial Statements THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
During the year ended June 30, 1995 the Fund entered into financial futures
contracts. Details of open contracts at June 30, 1995 are as follows:
<TABLE>
<CAPTION>
Value at Value at Unrealized
Number of Expiration Trade June 30, Appreciation
Contracts Type Date Date 1995 (Depreciation)
- --------- ----------- ----------- ----------- ---------- --------------
<C> <S> <C> <C> <C> <C>
Long
position:
30 yr. Sept.
2 T-Bond 1995 $224,203 $ 227,062 $ 2,859
Short
positions:
2 yr. Sept.
16 T-Note 1995 3,312,404 3,318,250 (5,846)
5 yr. Sept.
48 T-Note 1995 5,144,712 5,152,500 (7,788)
30 yr. Dec.
7 T-Bond 1995 802,333 791,656 10,677
------
$ (98)
------
------
</TABLE>
For federal income tax purposes, the Fund had a capital loss carryforward at
June 30, 1995 of approximately $3,374,000 of which $588,000 expires in 2001,
$2,044,000 expires in 2002, and $742,000 expires in 2003. Accordingly, no
capital gains distributions are expected to be paid to shareholders until net
gains have been realized in excess of such amount.
The Fund has elected to treat approximately $533,700 of net capital losses
incurred in the eight-month period ended June 30, 1995, as having occurred in
the following fiscal year.
- --------------------------------------------------------------------------------
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. At the time the Fund enters into a reverse
repurchase agreement, it establishes and maintains a segregated account with the
lender containing liquid high grade securities having a value not less than the
repurchase price, including accrued interest, of the reverse repurchase
agreement.
The Fund had outstanding reverse repurchase agreements at June 30, 1995 as
follows:
<TABLE>
<CAPTION>
Date Amount
Entered Maturity Interest Due at
Into Date Par Rate Maturity
- -------- --------- ------------ -------- -----------
<S> <C> <C> <C> <C>
6/22/95 7/25/95 $ 6,100,000 6.05% $ 6,133,830
6/26/95 7/5/95 12,500,000 6.13% 12,519,141
6/28/95 7/5/95 1,272,000 6.13% 1,273,515
------------
$ 19,872,000
------------
------------
</TABLE>
The average daily balance of reverse repurchase agreements outstanding during
the year ended June 30, 1995 was approximately $9,129,900 at a weighted average
interest rate of approximately 5.36%.
- --------------------------------------------------------------------------------
Note 6. Capital
The Fund has issued Class A, B and C shares. Class A shares are sold with a
front-end sales charge of up to 3.0%. Class B shares were sold and Class C
shares are currently sold with a contingent deferred sales charge of 1% during
the first year.
The Fund has authorized an unlimited number of shares of beneficial interest at
$.01 par value per share divided into three classes, designated Class A, Class B
and Class C shares. Of the 5,221,480 shares issued and outstanding at June 30,
1995, PMF owned 10,000 Class A shares and 10 Class B shares.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------- ---------- ------------
<S> <C> <C>
Year ended June 30, 1995:
Shares sold.......................... 119,099 $ 1,102,305
Shares issued in reinvestment of
dividends
and distributions.................. 193,271 1,796,033
Shares reacquired.................... (2,881,336) (26,749,291)
---------- ------------
Net decrease in shares outstanding... (2,568,966) $(23,850,953)
---------- ------------
---------- ------------
Year ended June 30, 1994:
Shares sold.......................... 496,009 $ 4,718,497
Shares issued in reinvestment
of dividends and distributions..... 280,842 2,665,273
Shares reacquired.................... (5,001,428) (47,467,365)
---------- ------------
Net decrease in shares
outstanding........................ (4,224,577) $(40,083,595)
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
B-36
<PAGE>
Notes to Financial Statements THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- ------------------------------------- ---------- ------------
Year ended June 30, 1995:
<S> <C> <C>
Shares sold.......................... 20,175 $ 185,396
Shares issued in reinvestment of
dividends
and distributions.................. 10,322 95,011
Shares reacquired.................... (181,077) (1,680,960)
---------- ------------
Net decrease in shares
outstanding........................ (150,580) $ (1,400,553)
---------- ------------
---------- ------------
Year ended June 30, 1994:
Shares sold.......................... 177,366 $ 1,687,457
Shares issued in reinvestment
of dividends and distributions..... 17,092 162,037
Shares reacquired.................... (395,711) (3,726,008)
---------- ------------
Net decrease in shares
outstanding........................ (201,253) $ (1,876,514)
---------- ------------
---------- ------------
<CAPTION>
Class C
- -------------------------------------
<S> <C> <C>
November 1, 1994(a) through
June 30, 1995:
Shares sold.......................... 757 $ 7,087
Shares issued in reinvestment
of dividends and distributions..... 3 29
Shares reacquired.................... -- --
---------- ------------
Net increase in shares
outstanding........................ 760 $ 7,116
---------- ------------
---------- ------------
</TABLE>
- ---------------
(a) Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
B-37
<PAGE>
Financial Highlights THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
---------------------------------------------- -------------------
September
9, 1991(a)
Year ended June 30, through Year ended June 30,
-------------------------------- June 30, -------------------
PER SHARE OPERATING PERFORMANCE: 1995(d) 1994(d) 1993 1992 1995(d) 1994(d)
------- ------- -------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period.......... $ 9.29 $ 9.67 $ 10.07 $ 10.00 $ 9.29 $ 9.68
------- ------- -------- --------- ------- -------
Income from investment operations
Net investment income......................... .51 .45 .64 .57 .48 .37
Net realized and unrealized gains (losses) on
investments and foreign currency
transactions................................ .09 (.35) (.41) .10 .09 (.37)
------- ------- -------- --------- ------- -------
Total from investment operations.......... .60 .10 .23 .67 .57 --
------- ------- -------- --------- ------- -------
Less distributions
Dividends from net investment income.......... (.52) (.40) (.63) (.57 ) (.49) (.32)
Tax return of capital distributions........... -- (.08) -- -- -- (.07)
Distributions in excess of net realized
capital gains............................... -- -- -- (.03 ) -- --
------- ------- -------- --------- ------- -------
Total distributions....................... (.52) (.48) (.63) (.60 ) (.49) (.39)
------- ------- -------- --------- ------- -------
Net asset value, end of period................ $ 9.37 $ 9.29 $ 9.67 $ 10.07 $ 9.37 $ 9.29
------- ------- -------- --------- ------- -------
------- ------- -------- --------- ------- -------
TOTAL RETURN(g)............................... 6.55% 1.02% 2.40% 6.69 % 6.16% (.01)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $46,450 $69,912 $113,623 $143,856 $ 2,466 $ 3,845
Average net assets (000)...................... $56,395 $91,849 $131,371 $134,585 $ 2,928 $ 5,778
Ratios to average net assets:(h)
Expenses, including distribution fee........ 1.31% 1.17% 1.05% 1.03 %(b) 1.68% 2.05%
Expenses, excluding distribution fee........ 1.16% 1.05% .95% .93 %(b) 1.16% 1.05%
Net investment income....................... 5.49% 4.94% 6.71% 6.95 %(b) 5.12% 4.06%
Portfolio turnover rate....................... 254% 209% 228% 137 % 254% 209%
<CAPTION>
Class B Class C
-------------- ------------
September 1, November 1,
1992(c) 1994(e)
through through
June 30, June 30,
PER SHARE OPERATING PERFORMANCE: 1993 1995(d)
------------ ------------
<S> <C> <C>
Net asset value, beginning of period.......... $ 9.97 $ 9.26
----- -----
Income from investment operations
Net investment income......................... .47 .23
Net realized and unrealized gains (losses) on
investments and foreign currency
transactions................................ (.32) .21
----- -----
Total from investment operations.......... .15 .44
----- -----
Less distributions
Dividends from net investment income.......... (.44) (.33)
Tax return of capital distributions........... -- --
Distributions in excess of net realized
capital gains............................... -- --
----- -----
Total distributions....................... (.44) (.33)
----- -----
Net asset value, end of period................ $ 9.68 $ 9.37
----- -----
----- -----
TOTAL RETURN(g)............................... 1.39% 4.65%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $5,954 $7,121(f)
Average net assets (000)...................... $2,740 $1,335(f)
Ratios to average net assets:(h)
Expenses, including distribution fee........ 1.95%(b) 1.91%(b)
Expenses, excluding distribution fee........ .95%(b) 1.16%(b)
Net investment income....................... 5.11%(b) 4.89%(b)
Portfolio turnover rate....................... 228% 254%
</TABLE>
<TABLE>
<CAPTION>
BORROWINGS:
Amount of debt Average amount of
outstanding at end debt outstanding
Period Ended of period (000) during period (000)
- ------------ ------------------ -------------------
<S> <C> <C>
June 30, 1995........................................................ $ 19,872 $ 9,130
June 30, 1994........................................................ 8,300 18,840
June 30, 1993........................................................ 24,386 34,892
June 30, 1992........................................................ 20,109 9,939
<CAPTION>
- ---------------
<CAPTION>
BORROWINGS:
Average amount of
debt per share
Average number of outstanding
shares outstanding during
Period Ended during period (000) period
- ------------ ------------------- -----------------
<S> <C> <C>
June 30, 1995........................................................ 6,389 $1.43
June 30, 1994........................................................ 10,234 1.84
June 30, 1993........................................................ 13,517 2.58
June 30, 1992........................................................ 13,458 .74
- ---------------
</TABLE>
(a) Commencement of investment operations.
(b) Annualized.
(c) Commencement of offering of Class B shares.
(d) Calculated based upon weighted average shares outstanding during the
period.
(e) Commencement of offering of Class C shares.
(f) Figures are actual and not rounded to nearest thousand.
(g) 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.
(h) Because of the event referred to in "e" and the timing of such, the
ratios for Class C shares are not necessarily comparable to that of Class
A or B shares and are not necessarily indicative of future ratios.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-38
<PAGE>
Report of Independent Accountants THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
The Shareholders and
Board of Trustees of
The BlackRock Government Income Trust:
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of The BlackRock Government Income Trust as of
June 30, 1995, the related statements of operations and of cash flows for the
year then ended and of changes in net assets for each of the two years in the
period then ended and the financial highlights for each of the three years in
the period then ended and for the period September 9, 1991 (commencement of
investment operations) to June 30, 1992. These financial statements and
financial highlights are the responsibility of the Fund's management. Our
responsibility is to express an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at June 30,
1995, by correspondence with the custodian and brokers; where replies were not
received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of The BlackRock
Government Income Trust as of June 30, 1995, the results of its operations, its
cash flows, the changes in its net assets and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
New York, New York
August 21, 1995
- --------------------------------------------------------------------------------
B-39
