SEMI ANNUAL REPORT December 31,1994
The BlackRock
Government
Income Trust
(LOGO)
<PAGE>
Letter to Shareholders
February 15, 1995
Dear Shareholder:
During the second half of 1994, a continued increase in interest rates
created a challenging investment environment for fixed income funds,
including The BlackRock Government Income Trust. Although the beginning
of the third quarter of 1994 provided fixed income investors with a renewed
sense of stability, a lack of monetary restraint by the Federal Reserve in
September along with increasingly strong economic data unleashed bearish
sentiment that pushed the yields of fixed income securities higher. In
November, the Federal Reserve finally intervened and increased the Fed Funds
rate for the sixth time in 1994 by another 0.75% to 5.50% on November 15.
This increase was more aggressive than most had anticipated and the bond
market's initial response was favorable. This sentiment was short lived,
however, as interest rates continued to rise with inflation fears as
economic data indicated strength in the economy.
The performance of The BlackRock Government Income Trust on a relative basis
has been solid, outperforming the broader markets and its peer group. For
the six-month period ended December 31, 1994, The BlackRock Government Income
Trust had a total investment return of 1.7% for Class A shares and 1.4% for
Class B shares compared to the Lipper Adjustable Rate Mortgage Fund Average
of -0.8% for the same period.
<TABLE>
HISTORICAL PERFORMANCE1
As of December 31, 1994
<CAPTION>
Six-month 30-Day NAV
Total Return SEC Yield 12/31/94
<S> <C> <C> <C>
Class A 1.7% 6.25% $9.21
Class B 1.4 6.30 9.21
Class C N/A 5.64 9.21
Lipper Adjustable Rate -0.8 N/A N/A
Mortgage Fund Average2
</TABLE>
1 Source: Prudential Mutual Fund Management, Inc. These figures do not take
into account sales charges. The Fund charges a maximum sales load of 3.00%
for Class A shares. Class B and Class C shares are subject to a contingent
deferred sales charge of 1% over a period of one year.
2 These are the average returns of 76 funds for six months in the adjustable
rate mortgage category, as determined by Lipper Analytical Services, Inc.
-1-
<PAGE>
<TABLE>
AVERAGE ANNUAL TOTAL RETURNS1
As of December 31, 1994
<CAPTION>
One Year Since Inception2
<S> <C> <C>
Class A -1.6% 2.6%
Class B -0.3 1.2
Class C N/A -0.8
</TABLE>
1 Source: Prudential Mutual Fund Management, Inc. These figures take into
account applicable sales charges.
2 Inception of Class A 9/9/91; Class B 9/1/92; Class C 11/1/94.
An investment in the Fund is neither insured nor guaranteed by the U.S.
government. Past performance is no guarantee of future results. Investment
return and principal value will fluctuate so that an investor's shares when
redeemed may be worth more or less than their original cost.
Mortgage Backed Securities and Short Duration Products
Mortgage securities have been affected by increased interest rates through
a dramatic decline in the rate of prepayments. As a result, many formerly
"short" securities have extended to intermediate securities. In contrast to
the first half of 1994 where the performance of short-term securities was
driven primarily by changing fundamentals due to substantial increases in
interest rates and volatility, supply and demand played the dominant role
in performance during the latter half of 1994. In particular, asset-backed
issuance has become extremely heavy and adjustable rate mortgage (ARM)
origination has become a larger percentage of mortgage origination,
negatively affecting their relative performance.
The current steepness of the short-end (Fed Funds to two-year) of the
yield curve suggests the market is anticipating extensive Fed intervention.
Given the tremendous yield advantage of short-term Treasuries (18-months to
three-years), we believe that the short-term market offers value.
Portfolio Strategy
As sub-adviser, BlackRock Financial Management is responsible for making the
day-to-day investment decisions for the portfolio. The Fund seeks to
achieve a net asset value (NAV) volatility similar to a two-year Treasury.
Therefore, if the price of the two-year Treasury declines or rises,
shareholders should expect to see a related move in the Fund's NAV.
In addition, since mortgage backed securities (MBS) are subject to
unpredictable cash flows, their prices are affected by the degree to
which homeowners refinance their mortgages. The yield spreads of MBS
to their Treasury counterparts reflect this uncertainty of cash flows,
and as a result, MBS perform best in stable interest rate environments
where cash flows are more predictable.
-2-
<PAGE>
Emphasis on mortgage pools with higher caps on their interest rate resets
and shorter ARM reset periods benefitted the Fund throughout the period.
Floating rate securities, including selected ARMs and floating rate
asset-backed securities within the portfolio should continue to lend
a degree of NAV stability to the Fund as the coupons of such securities
reset to reflect the rise in interest rates.
Given the dramatic changes in relative value among short-term securities,
the Fund has made some significant changes to the portfolio during the
latter half of the year. Weightings in the asset-backed sector have
increased substantially with the recent spread widening and the relative
richness of other short duration products. In addition, reallocation of
the portfolio in favor of securities which trade in substantial daily
volume such as Treasuries, credit card asset-backs and GNMA ARMs, gives
the Fund the flexibility to take advantage of year-end dislocations in
the market.
Economic Outlook
As inflation indicators continue to point to strength in the economy, we
believe that the Federal Reserve will remain committed to fighting
inflation and increase the Fed Funds rate again during the first quarter
of 1995. Inflationary pressure is expected to diminish following further
Fed tightening and longer term projections are for a stabilization of
interest rates beginning the second quarter of 1995 and rolling into
the latter half of the year.
Because adjustable rate securities reset to current interest rates on a
periodic basis, the rapid increase in short-term interest rates in the
broader markets has left the Fund somewhat lagging behind its benchmark
yield. Over the next several months, however, the Fund is expected to
benefit as the adjustable rate securities within the portfolio reset to
reflect the current interest rate environment.
As always, we appreciate having you as a shareholder in The BlackRock
Government Income Trust.
Sincerely,
Lawrence C. McQuade
President
Scott Amero
Portfolio Manager
-3-
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST Portfolio of Investments
December 31, 1994 (Unaudited)
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--91.5%
Mortgage Pass-Throughs--46.6%
Federal Home Loan Mortgage
Corporation,
$ 1,111 7.375%, Multi-family.......... $ 1,068,907
5,962 9.00%, 15 Year,
9/01/05-11/01/05............ 5,969,725
Federal National Mortgage
Association,
2,405 5.93%, 1 Year CMT, ARM........ 2,384,964
3,700 6.61%, 1 Year CMT, ARM........ 3,679,237
1,929 7.45%, 1 Year CMT, ARM........ 1,926,735
1,373 7.733%, 1 Year CMT, ARM....... 1,371,413
2,581 8.00%......................... 2,529,542
3,640 8.50%......................... 3,606,895
Government National Mortgage
Association,
500 7.00%, 1 year CMT, ARM........ 491,563
3,626@ 7.25%......................... 3,481,060
-----------
Total Mortgage Pass-Throughs
(cost $27,767,413).......... 26,510,041
-----------
Multiple Class Mortgage
Pass-Throughs--8.0%
Federal Home Loan Mortgage
Corporation, Multiclass
Mortgage Participation
Certificates,
1,724 Series 124, Class A,
Floating Rate, REMIC........ 1,714,623
Federal National Mortgage
Association, REMIC Pass-
Through Certificates,
1,050 8.00%, 5/25/05................ 1,045,020
1,655 11.50%, 4/01/09............... 1,787,467
$ 552 Residential Funding Mtg. Sec.
I,
Series 1992-S2, Class A17..... $ 487
-----------
Total Multiple Class Mortgage
Pass-Throughs (cost
$8,066,236)................. 4,547,597
-----------
Asset-Backed Securities--26.8%
1,400 Banc One Credit Card Master
Trust, Series 1994-C, Class
A,.......................... 1,385,244
2,000 Chase Manhattan Credit Card,
Series 1991-1,.............. 2,018,120
2,500 Discover Credit Card Master
Trust,
Series 1994-2, Class A,
Floating Rate 2,497,656
First USA Credit Card Master
2,800 Trust, Series 1994-4 Class
A, Floating Rate............ 2,798,236
1,000 Household Affinity Credit Card
Master
Trust I, Class A, Floating
Rate........................ 996,870
Household Affinity Credit
Card, Series 1994-2 Credit
1,200 Card Participation
Certificate, Class A,
7.00%....................... 1,166,438
First Chicago Master Trust,
1,500 Series 1991-D, 8.40%.......... 1,504,680
1,500 Series 1992-E1, 6.25%......... 1,430,625
Sears Credit Card Master
1,500 Trust,
Series 1994-2, Class A...... 1,470,000
-----------
Total Asset-Backed Securities
(cost $15,414,402).......... 15,267,869
-----------
U.S. Government Securities--10.1%
U. S. Treasury Notes,
4,825 6.88%, 10/31/96............... 4,760,152
1,000 7.25%, 11/30/96............... 992,340
-----------
Total U.S. Government
Securities
(cost $5,797,997)........... 5,752,492
-----------
Total Long-Term Investments
(cost $57,046,048).......... 52,077,999
-----------
</TABLE>
-4- See Notes to Financial Statements.
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
SHORT-TERM INVESTMENT--9.3%
Repurchase Agreement
$ 5,300 Lehman Brothers, Inc.,
5.80%, dated 12/30/94, due
1/3/95 in the amount of
$5,303,416 (cost $5,300,000;
collateralized by $5,775,000
U.S. Treasury Note, 5.50%,
due 3/26/95, value including
accrued
interest-$5,520,232)........ $ 5,300,000
-----------
Total Investments--100.8%
(cost $62,346,048; Note 4).... 57,377,999
Liabilities in excess of
other assets--(0.8%)........ (458,068)
-----------
Net Assets--100%.............. $56,919,931
-----------
-----------
</TABLE>
ARM--Adjustable Rate Mortgage.
CMT--Constant Maturity Treasury.
REMIC--Real Estate Mortgage Investment Conduit.
@ Partial principal amount pledged as collateral for futures transactions.
-5- See Notes to Financial Statements.
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
Statement of Assets and Liabilities
(Unaudited)
<TABLE>
<CAPTION>
Assets December 31, 1994
-----------------
<S> <C>
Investments, at value (cost $62,346,048).............................................. $57,377,999
Cash.................................................................................. 7,826
Receivable for investments sold....................................................... 662,254
Interest receivable................................................................... 603,157
Receivable for Fund shares sold....................................................... 55,529
Deferred organization expenses and other assets....................................... 46,949
-----------------
Total assets...................................................................... 58,753,714
-----------------
Liabilities
Payable for investments purchased..................................................... 982,910
Payable for Fund shares reacquired.................................................... 502,183
Accrued expenses and other liabilities................................................ 298,176
Management fee payable................................................................ 24,683
Dividends payable..................................................................... 18,025
Distribution fee payable.............................................................. 7,524
Due to broker-variation margin........................................................ 282
-----------------
Total liabilities................................................................. 1,833,783
-----------------
Net Assets............................................................................ $56,919,931
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at par............................................... $ 61,805
Paid-in capital in excess of par.................................................... 65,215,658
-----------------
65,277,463
Distributions in excess of net investment income.................................... (22,448)
Accumulated net realized losses on investments...................................... (3,363,324)
Net unrealized depreciation on investments.......................................... (4,971,760)
-----------------
Net assets, December 31, 1994....................................................... $56,919,931
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($54,162,464 / 5,881,028 shares of beneficial interest issued and outstanding).... $9.21
Maximum sales charge (3.0% of offering price)....................................... .28
-----------------
Maximum offering price to public.................................................... $9.49
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($2,757,267 / 299,407 shares of beneficial interest issued and outstanding)....... $9.21
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($199.63 / 21.671 shares of beneficial interest issued and outstanding)........... $9.21
-----------------
-----------------
</TABLE>
See Notes to Financial Statements.
-6-
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
Statement of Operations
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
December 31,
Net Investment Income 1994
------------
<S> <C>
Income
Interest (net of interest expense of
$221,028).......................... $ 2,276,949
------------
Expenses
Management fee....................... 165,379
Distribution fee--Class A............ 47,110
Distribution fee--Class B............ 12,814
Transfer agent....................... 61,000
Custodian............................ 54,000
Reports to shareholders.............. 50,000
Registration......................... 28,000
Audit................................ 18,000
Legal................................ 15,000
Directors............................ 15,000
Amortization of deferred organization
expenses........................... 13,500
Miscellaneous........................ 24,342
------------
Total operating expenses........... 504,145
------------
Net investment income.................. 1,772,804
------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Security transactions................ (938,472)
Financial futures contracts.......... 277,900
Short sale transactions.............. 32,471
------------
(628,101)
------------
Net change in unrealized depreciation on:
Securities........................... 109,810
Financial futures contracts.......... (107,064)
Short sales.......................... (25,203)
------------
(22,457)
------------
Net loss on investments................ (650,558)
------------
Net Increase in Net Assets
Resulting from Operations.............. $ 1,122,246
------------
------------
</TABLE>
THE BLACKROCK GOVERNMENT INCOME TRUST
Statement of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended
December 31,
Increase (Decrease) in Cash 1994
------------
<S> <C>
Cash flows provided by operating
activities:
Interest received.................. $ 3,245,885
Operating expenses paid............ (558,675)
Interest expense paid.............. (242,545)
Purchase of short-term portfolio
investments, net................. (5,369,910)
Purchase of long-term portfolio
investments...................... (99,137,867)
Proceeds from disposition of
long-term portfolio
investments...................... 137,919,297
Variation margin on futures........ 206,753
Other.............................. 299
------------
Net cash provided by operating
activities....................... 36,063,237
------------
Cash flows used for financing
activitiesD:
Proceeds from shares sold.......... 623,529
Payments on shares redeemed........ (18,739,122)
Cash dividends paid................ (719,691)
Reduction in reverse repurchase
agreements....................... (8,300,000)
------------
Net cash used for financing
activities....................... (27,135,284)
------------
Net increase in cash................. 8,927,953
Cash at beginning of period.......... (8,920,127)
------------
Cash at end of period................ $ 7,826
------------
------------
Reconciliation of Net Increase in Net Assets
to Net Cash Provided by Operating Activities
Net increase in net assets resulting
from operations.................... $ 1,122,246
------------
Decrease in investments.............. 29,881,285
Net realized loss.................... 628,101
Increase in unrealized
depreciation......................... 22,457
Decrease in receivable for
investments sold..................... 12,274,965
Decrease in interest receivable...... 725,121
Decrease in variation margin
receivable........................... 40,125
Decrease in deposit with brokers for
investments sold short............. 3,284,063
Decrease in other assets............. 13,799
Decrease in investments sold short... (3,251,008)
Decrease in payable for investments
purchased.......................... (8,588,370)
Decrease in interest payable......... (21,517)
Decrease in accrued expenses and
other liabilities.................. (68,030)
------------
Total adjustments.................. 34,940,991
------------
Net cash provided by operating
activities........................... $ 36,063,237
------------
------------
</TABLE>
- ---------------
D Non-cash financing activity not included herein consists of reinvestment of
dividends and distributions of $979,712.
See Notes to Financial Statements. See Notes to Financial Statements.
-7-
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
Statement of Changes in Net Assets
(Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
December 31, June 30,
Increase (Decrease) in Net Assets 1994 1994
------------ ------------
<S> <C> <C>
Operations:
Net investment income...................................................... $ 1,772,804 $ 4,768,026
Net realized loss on investments and foreign currency transactions......... (628,101)
(2,063,529)
Net change in unrealized appreciation/depreciation on investments and
foreign currencies....................................................... (22,457)
(1,602,332)
------------ ------------
Net increase in net assets resulting from operations....................... 1,122,246 1,102,165
------------ ------------
Net equalization debits...................................................... (8,833)
(61,820)
------------ ------------
Dividends and distributions (Note 1):
Dividends from net investment income:
Class A.................................................................. (1,558,798)
(3,960,210)
Class B.................................................................. (71,240)
(201,804)
------------ ------------
(1,630,038)
(4,162,014)
------------ ------------
Tax return of capital distributions:
Class A.................................................................. --
(703,286)
Class B.................................................................. --
(35,838)
------------ ------------
--
(739,124)
------------ ------------
Fund share transactions (Note 6):
Net proceeds from shares subscribed........................................ 617,888 6,405,954
Net asset value of shares issued in reinvestment of dividends and
distributions............................................................ 979,712 2,827,310
Cost of shares reacquired.................................................. (17,917,962)
(51,193,373)
------------ ------------
Net decrease in net assets from Fund share transactions.................... (16,320,362)
(41,960,109)
------------ ------------
Total decrease............................................................... (16,836,987)
(45,820,902)
Net Assets
Beginning of period.......................................................... 73,756,918 119,577,820
------------ ------------
End of period................................................................ $ 56,919,931 $ 73,756,918
------------ ------------
------------ ------------
</TABLE>
See Notes to Financial Statements.
-8-
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
Notes to Financial Statements
(Unaudited)
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 The following is a summary
Policies of significant accounting poli-
cies 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.
Any securities or other assets 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
December 31, 1994.
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 debt 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.
Short Sales: The Fund may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). When the Fund makes a
short sale, it must
-9-
<PAGE>
borrow the security sold short and deliver it to the broker-dealer through which
it made the short sale as collateral for its obligation to deliver the security
upon conclusion of the sale. The Fund may have to pay a fee to borrow the
particular security and may be obligated to pay over any payments received on
such borrowed securities. A gain, limited to the price at which the Fund sold
the security short, or a loss, unlimited as to dollar amount, will be recognized
upon the termination of a short sale if the market price at termination is less
than or greater than, respectively, the proceeds originally received.
Cash Flow Information: The Fund invests in securities and distributes dividends
from net investment income and from net realized gains which are paid in cash or
are reinvested at the discretion of shareholders. These activities are reported
in the Statement of Changes in Net Assets and additional information on cash
receipts and cash payments is presented in the Statement of Cash Flows.
Accounting practices that do not affect reporting activities on a cash basis
include carrying investments at value and amortizing discounts or premiums on
debt obligations.
Securities Transactions and 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 accrues 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.
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 L.P. (``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 pays BFM,
as compensation for its services pursuant to the subadvisory agreement, a fee at
the annual rate of .25 of 1% of the Fund's average daily net assets.
The Fund has 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 period ended December
-10-
<PAGE>
31, 1994. 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.
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 two month period ended December 31, 1994.
PMFD has advised the Fund that it has received approximately $12,100 in
front-end sales charges resulting from sales of Class A shares during the six
months ended December 31, 1994. 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 six months ended December
31, 1994 it has received approximately $900 in contingent deferred sales charges
imposed upon certain redemptions by investors. PSI, as distributor, has also
advised the Fund that as of December 31, 1994, the amount of distribution
expenses incurred by PSI and not yet reimbursed by the Fund or recovered through
contingent deferred sales charges approximated $48,100. 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'').
On June 16, 1994, BFM entered into a definitive agreement to be acquired by
PNC Bank, NA. The acquisition is expected to close by the end of February 1995.
Following closing, BFM will become a wholly-owned corporate subsidiary of PNC
Asset Management Group, Inc. and Research, the holding company for PNC's asset
management business.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the period ended December 31, 1994, the Fund incurred fees of approximately
$33,000 for the services of PMFS. As of December 31, 1994, approximately $6,000
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 Purchases and sales of invest-
Securities ment securities, other than
short-term investments and dollar rolls, for the
period ended December 31, 1994 aggregated $90,549,497 and $118,872,390,
respectively.
The federal income tax basis of the Fund's investments at December 31, 1994
was substantially the same as the basis for financial statement reporting
purposes and, accordingly, net unrealized depreciation for federal income tax
purposes was $4,968,049 (gross unrealized appreciation--$3,433; gross unrealized
depreciation--$4,971,482).
At December 31, 1994, the Fund had sold U.S. Treasury Note futures contracts
expiring in March 1995. The value at disposition of such contracts was $897,134.
The value of such contracts on December 31, 1994 was $900,845, thereby resulting
in an unrealized loss of $3,711.
For federal income tax purposes, the Fund had a capital loss carryforward at
June 30, 1994 of approximately $2,632,000 of which $588,000 expires in 2001 and
$2,044,000 expires in 2002. Accordingly, no capital gains distributions are
expected to be paid to shareholders until net gains have been realized in excess
of such amount.
Note 5. Borrowings The Fund enters into reverse
repurchase agreements with qualified, third party
broker-dealers as determined by and under the direction of the Board of
Trustees. 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 average daily balance of reverse repurchase agreements outstanding during
the period ended December 31,
-11-
<PAGE>
1994 was approximately $9,114,000 at a weighted average interest rate of
approximately 4.81%.
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 6,180,457 shares issued and outstanding at
December 31, 1994, 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>
Six months ended
December 31, 1994:
Shares sold..................... 46,694 $ 434,273
Shares issued in reinvestment
of dividends.................. 100,774 933,341
Shares reacquired............... (1,792,973) (16,633,023)
---------- ------------
Net decrease in shares
outstanding................... (1,645,505) $(15,265,409)
---------- ------------
---------- ------------
<CAPTION>
Class A Shares Amount
- -------------------------------- ---------- ------------
<S> <C> <C>
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)
---------- ------------
---------- ------------
<CAPTION>
Class B
- --------------------------------
<S> <C> <C>
Six months ended
December 31, 1994:
Shares sold..................... 20,100 $ 183,415
Shares issued in reinvestment
of dividends.................. 5,034 46,371
Shares reacquired............... (139,460) (1,284,939)
---------- ------------
Net decrease in shares
outstanding................... (114,326) $ (1,055,153)
---------- ------------
---------- ------------
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* through
December 31, 1994:
Shares sold..................... 22 $ 200
---------- ------------
---------- ------------
</TABLE>
- ---------------
* Commencement of offering of Class C shares.
-12-
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
Financial Highlights
(Unaudited)
<TABLE>
<CAPTION>
Class A Class
B
------------------------------------------------
- ---------------------------------
September
Six months 9, 1991* Six months
Year
ended Year ended June 30, through ended
ended
December 31, -------------------- June 30, December 31,
June 30,
PER SHARE OPERATING PERFORMANCE: 1994DD 1994DD 1993 1992 1994DD
1994DD
------------ -------- -------- -------- -----------------
------------
<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.............. .30 .45 .64 .57 .27
.37
Net realized and unrealized gains
(losses) on investments and
foreign currency transactions.... (.15) (.35) (.41) .10 (.15)
(.37)
------------ -------- -------- -------- -----------------
------------
Total from investment
operations....................... .15 .10 .23 .67 .12
--
------------ -------- -------- -------- -----------------
------------
Less distributions:
Dividends from net investment
income........................... (.23) (.40) (.63) (.57) (.20)
(.32)
Tax return of capital
distributions.................... -- (.08) -- -- --
(.07)
Distributions in excess of net
realized capital gains........... -- -- -- (.03) --
--
------------ -------- -------- -------- -----------------
------------
Total distributions.............. (.23) (.48) (.63) (.60) (.20)
(.39)
------------ -------- -------- -------- -----------------
------------
Net asset value, end of period..... $ 9.21 $ 9.29 $ 9.67 $ 10.07 $ 9.21
$ 9.29
------------ -------- -------- -------- -----------------
------------
------------ -------- -------- -------- -----------------
------------
TOTAL RETURN#...................... 1.73% 1.02% 2.40% 6.69% 1.38%
(.01)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $ 54,162 $ 69,912 $113,623 $143,856 $ 2,757
$ 3,845
Average net assets (000)........... $ 62,302 $ 91,849 $131,371 $134,585 $ 3,309
$ 5,778
Ratios to average net assets:
Expenses, including distribution
fee............................ 1.49%** 1.17% 1.05% 1.03%** 2.11%**
2.05%
Expenses, excluding distribution
fee............................ 1.34%** 1.05% .95% .93%** 1.34%**
1.05%
Net investment income............ 5.37%** 4.94% 6.71% 6.95%** 4.75%**
4.06%
Portfolio turnover rate............ 132% 209% 228% 137% 132%
209%
<CAPTION>
Class C
------------
September 1, November 1,
1992D 1994@
through through
June 30, December 31,
PER SHARE OPERATING PERFORMANCE: 1993 1994DD
------------- ------------
<S> <C> <C>
Net asset value, beginning of
period........................... $ 9.97 $ 9.26
------------- ------------
Income from investment operations:
Net investment income.............. .47 .09
Net realized and unrealized gains
(losses) on investments and
foreign currency transactions.... (.32) (.08)
------------- ------------
Total from investment
operations....................... .15 .01
------------- ------------
Less distributions:
Dividends from net investment
income........................... (.44) (.06)
Tax return of capital
distributions.................... -- --
Distributions in excess of net
realized capital gains........... -- --
------------- ------------
Total distributions.............. (.44) (.06)
------------- ------------
Net asset value, end of period..... $ 9.68 $ 9.21
------------- ------------
------------- ------------
TOTAL RETURN#...................... 1.39% .21%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).... $ 5,954 $ 200@@
Average net assets (000)........... $ 2,740 $ 191@@
Ratios to average net assets:
Expenses, including distribution
fee............................ 1.95%** 2.09%**
Expenses, excluding distribution
fee............................ .95%** 1.34%**
Net investment income............ 5.11%** 4.73%**
Portfolio turnover rate............ 228% 132%**
</TABLE>
<TABLE>
<CAPTION>
BORROWINGS:
Average amount of
debt per share
Amount of debt Average amount of Average number
of outstanding
outstanding at end debt outstanding shares outstanding
during
Period Ended of period (000) during period (000) during period (000)
period
- --------------------------------------- ------------------ ------------------- -------------------
-----------------
<S> <C> <C> <C>
<C>
December 31, 1994...................... -- $ 9,114 5,929
$1.54
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>
- ---------------
* Commencement of investment operations.
** Annualized.
D Commencement of offering of Class B shares.
DD Calculated based upon weighted average shares outstanding
during the period.
@ Commencement of offering of Class C shares.
@@ Figures are actual and not rounded to nearest thousand.
# 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.
See Notes to Financial Statements.
-13-
<PAGE>
Past performance is not predictive of future performance and an investor's
shares may be worth more or less than their original cost.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in The BlackRock Government Income Trust (Class A
and Class B) with a similar investment in the Lehman Bros. 1-3 Year Government
Index (Lehman Government Index) by portraying the initial account values at the
commencement of operations of each class and subsequent account values at the
end of each fiscal year (June 30), as measured on a quarterly basis, beginning
in 1991 for Class A shares and 1992 for Class B shares. For purposes of the
graphs and, unless otherwise indicated, the accompanying tables, it has been
assumed that (a) the maximum sales charge was deducted from the initial $10,000
investment in Class A shares; (b) the maximum applicable contingent deferred
sales charge was deducted from the value of the investment in Class B shares
assuming full redemption on June 30, 1994; (c) all recurring fees (including
management fees) were deducted; and (d) all dividends and distributions were
reinvested.
The Lehman Government Index is a weighted index comprised of securities
issued or backed by the U.S. Government and its agencies with a remaining
maturity of one to three years. The Lehman Government Index is an unmanaged
index and includes the reinvestment of all dividends, but does not reflect the
payment of transaction costs and advisory fees associated with an investment in
the Fund. The securities which comprise the Lehman Government Index may differ
substantially from the securities in the Fund's portfolio. The Lehman Government
Index is not the only index that may be used to characterize performance of
government security funds and other indices may portray different comparative
performance.
-14-
<PAGE>
<PAGE>
Directors
Edward D. Beach
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Lawrence C. McQuade
Richard A. Redeker
Stanley E. Shirk
Stephen Stoneburn
Nancy H. Teeters
Officers
Lawrence C. McQuade, President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Manager
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Subadviser
BlackRock Financial Management L.P.
345 Park Avenue
New York, NY 10154
Distributors
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
Toll free (800) 225-1852, Collect (908) 417-7555
The accompanying financial statements, as of December 31, 1994,
were not audited and, accordingly, no opinion is expressed on them.
This report is not authorized for distribution to prospective investors
unless preceded or accompanied by a current prospectus.
09247Y208
09247Y307
09247Y109 (LOGO) MF 152E2
