<PAGE>
As filed with the Securities and Exchange Commission on August 28, 1997
Securities Act Registration No. 33-41224
Investment Company Act Registration No. 811-6334
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / /
PRE-EFFECTIVE AMENDMENT NO. / /
POST-EFFECTIVE AMENDMENT NO. 8 /X/
AND/OR
REGISTRATION STATEMENT UNDER THE
INVESTMENT COMPANY ACT OF 1940 / /
AMENDMENT NO. 10 /X/
(Check appropriate box or boxes)
------------------------
THE BLACKROCK GOVERNMENT INCOME TRUST
(exact name of registrant as specified in charter)
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102
(Address of Principal Executive Offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (201) 367-7530
S. JANE ROSE, ESQ.
GATEWAY CENTER THREE
100 MULBERRY STREET
NEWARK, NEW JERSEY 07102-4077
(NAME AND ADDRESS OF AGENT FOR SERVICE OF PROCESS)
APPROXIMATE DATE OF PROPOSED PUBLIC OFFERING:
As soon as practicable after the effective
date of the Registration Statement.
It is proposed that this filing will become effective
(check appropriate box):
/ / immediately upon filing pursuant to paragraph (b)
/X/ on August 29, 1997 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a)(1)
/ / on (date) pursuant to paragraph (a)(1)
/ / 75 days after filing pursuant to paragraph (a)(2)
/ / on (date) pursuant to paragraph (a)(2) of Rule 485.
If appropriate, check the following box:
/ / This post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE* REGISTRATION FEE
<S> <C> <C> <C> <C>
Shares of beneficial interest par
value $.01 per share............... 891,392 $9.66 N/A $0
</TABLE>
* The calculation of the maximum aggregate offering price was made pursuant to
Rule 24e-2 and was based upon an offering price of $9.66 per share equal to
the offering price of the Class A Shares of the Registrant as of the close of
business on August 15, 1997 pursuant to Rule 457(d). The total number of
shares redeemed during the fiscal year ended June 30, 1997 amounted to
1,129,308 shares. Of this number, no shares have been used for reduction
pursuant to paragraph (a) of rule 24e-2 in all previous filings of
post-effective amendments during the current year and 127,252 shares were used
for reduction pursuant to paragraph (c) of Rule 24f-2 in all previous filings
during the current year. 891,392 ($8,302,557) of the redeemed shares are being
used for the reductions in the post-effective amendment being filed herein.
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, Registrant has
previously registered an indefinite number of shares of beneficial interest, par
value $.01 per share. The Registrant filed a notice under such Rule for its
fiscal year ended June 30, 1997 on or about August 26, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
(AS REQUIRED BY RULE 495)
<TABLE>
<CAPTION>
N-1A ITEM NO. LOCATION
- ---------------------------------------------------- ----------------------------------------
<S> <C> <C> <C>
PART A
Item 1. Cover Page.............................. Cover Page
Item 2. Synopsis................................ Fund Expenses; Fund Highlights
Item 3. Condensed Financial Information......... Fund Expenses; Financial Highlights; How
the Fund Calculates Performance
Item 4. General Description of Registrant....... Cover Page; Fund Highlights; How the
Fund Invests; General Information
Item 5. Management of Fund...................... Financial Highlights; How the Fund is
Managed; General Information;
Shareholder Guide
Item 5A. Management's Discussion of Fund
Performance............................. Financial Highlights
Item 6. Capital Stock and Other Securities...... Taxes, Dividends and Distributions;
General Information; Shareholder Guide
Item 7. Purchase of Securities Being Offered.... Shareholder Guide; How the Fund Values
its Shares; How the Fund is Managed
Item 8. Redemption or Repurchase................ Shareholder Guide; How the Fund Values
Its Shares; General Information
Item 9. Pending Legal Proceedings............... Not Applicable
PART B
Item 10. Cover Page.............................. Cover Page
Item 11. Table of Contents....................... Table of Contents
Item 12. General Information and History......... Not Applicable
Item 13. Investment Objectives and Policies...... Investment Objective and Policies;
Investment Restrictions
Item 14. Management of the Fund.................. Trustees and Officers; Manager;
Distributor
Item 15. Control Persons and Principal Holders of
Securities.............................. Trustees and Officers
Item 16. Investment Advisory and Other
Services................................ Manager; Distributor; Custodian,
Transfer and Dividend Disbursing Agent
and Independent Accountants
Item 17. Brokerage Allocation and Other
Practices............................... Portfolio Transactions
Item 18. Capital Stock and Other Securities...... Not Applicable
Item 19. Purchase, Redemption and Pricing of
Securities Being Offered................ Purchase and Redemption of Fund Shares;
Shareholder Investment Account
Item 20. Tax Status.............................. Taxes, Dividends and Distributions
Item 21. Underwriters............................ Distributor
Item 22. Calculation of Performance Data......... Performance Information
Item 23. Financial Statements.................... Financial Statements
PART C
Information required to be included in Part C is set forth under the appropriate Item,
so numbered, in Part C to this Post-Effective Amendment to the Registration Statement.
</TABLE>
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
PROSPECTUS DATED AUGUST 29, 1997
- --------------------------------------------------------------------------------
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, Inc., 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 return enhancement
strategies, including short-selling and leverage and use derivatives and reverse
repurchase agreements and dollar rolls, which entail additional risks not
usually associated with a government fund. See "How the Fund Invests--Hedging
and Return 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 Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey, 07102-4077, 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 29, 1997, 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.
- --------------------------------------------------------------------------------
INVESTORS ARE ADVISED TO READ THIS PROSPECTUS AND RETAIN IT FOR FUTURE
REFERENCE.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<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.
WHAT ARE THE FUND'S 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, Inc., 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's net asset value per share and the volatility of its portfolio
securities will vary. See "How the Fund Invests--Other Investments and
Policies" at page 8. The Fund may also engage in various hedging and return
enhancement strategies, including short-selling and leverage, and use
derivatives and reverse repurchase agreements and dollar rolls, which entail
additional risks not usually associated with a government fund. See "How the
Fund Invests--Hedging and Return Enhancement Strategies" at page 13. As with
an investment in any mutual fund, an investment in this Fund can decrease in
value and you can lose money.
WHO MANAGES THE FUND?
Prudential Investments Fund Management LLC (PIFM 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, 1997, PIFM
served as manager or administrator to 62 investment companies, including 40
mutual funds, with aggregate assets of approximately $56.7 billion. See "How
the Fund is Managed--Manager" at page 18. 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 PIFM. See "How the Fund is Managed--Subadviser" at page 18.
WHO DISTRIBUTES THE FUND'S 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 A and Class C shares and is currently
reimbursed 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 and is paid a distribution and service fee with respect to the
Class C shares which is currently being charged at the annual 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 19.
2
<PAGE>
WHAT IS THE MINIMUM INVESTMENT?
The minimum initial investment for Class A shares is $2,500 and is $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 24 and "Shareholder
Guide--Shareholder Services" at page 32.
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 LLC. (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, shares
of the Fund 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 21 and "Shareholder Guide--How to Buy Shares of
the Fund" at page 24.
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 25.
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 C shares may be subject to a
CDSC. See "Shareholder Guide--How to Sell Your Shares" at page 29.
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 22.
3
<PAGE>
FUND EXPENSES
<TABLE>
<CAPTION>
CLASS A CLASS C
SHARES SHARES
------------- -------------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES+
Maximum Sales Load Imposed on Purchases (as a percentage of
offering price)............................................. 3% None
Maximum Sales Load or Deferred Sales Load Imposed on
Reinvested Dividends........................................ None None
Deferred Sales Load (as a percentage of original purchase
price or redemption proceeds, whichever is lower)........... None 1% during the
first year
and
0% thereafter
Redemption Fees............................................... None None
Exchange Fee.................................................. None None
</TABLE>
<TABLE>
<CAPTION>
ANNUAL FUND OPERATING EXPENSES
(AS A PERCENTAGE OF AVERAGE NET ASSETS) CLASS A SHARES CLASS C SHARES
----------------- -----------------
<S> <C> <C>
Management Fees............................................... .50% .50%
12b-1 Fees.................................................... .15%++ .75%++
Other Expenses................................................ .91% .91%
--- ---
Total Fund Operating Expenses+++.............................. 1.56% 2.16%
--- ---
--- ---
</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.................................................. $ 45 $ 78 $ 112 $ 210
Class C.................................................. $ 32 $ 68 $ 116 $ 249
You would pay the following expenses on the same investment,
assuming no redemption:
Class A.................................................. $ 45 $ 78 $ 112 $ 210
Class C.................................................. $ 22 $ 68 $ 116 $ 249
</TABLE>
The above example with respect to Class A and Class C shares is based on
data for the Fund's fiscal year ended June 30, 1997. 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 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, 1998. Total Fund Operating Expenses
without such limitations would be 1.71% for the Class A shares and
2.41% for the Class C shares. See "How the Fund is
Managed--Distributor."
+++ Total Fund Operating Expenses do not include interest expenses which
vary from year to year based on the level of borrowings the Fund
incurs. Total fund expenses including interest expense for the fiscal
year ended June 30, 1997 were 3.45% and 4.05% for Class A shares and
Class C shares, respectively.
4
<PAGE>
FINANCIAL HIGHLIGHTS
(FOR A SHARE OUTSTANDING THROUGHOUT EACH OF THE INDICATED PERIODS)
The following financial highlights for the year ended June 30, 1997 have
been audited by Price Waterhouse LLP, independent accountants, and for
periods prior thereto by Deloitte & Touche LLP, independent auditors, whose
reports thereon were 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 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. Further performance information
is contained in the annual report, which may be obtained without charge. See
"Shareholder Guide--Shareholder Services-- Reports to Shareholders."
<TABLE>
<CAPTION>
CLASS A CLASS C
----------------------------------------------------------------- ----------------------------
SEPTEMBER 9, NOVEMBER 1,
1991(a) YEAR ENDED JUNE 1994(d)
YEAR ENDED JUNE 30, THROUGH 30, THROUGH
-------------------------------------------------- JUNE 30, --------------- JUNE 30,
1997(c) 1996 1995(c) 1994(c) 1993 1992 1997(c) 1996 1995(c)
-------- ------- -------- -------- -------- ------------- ------- ----- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING
PERFORMANCE:
Net asset value, beginning of
period...................... $ 9.28 $ 9.37 $ 9.29 $ 9.67 $ 10.07 $ 10.00 $9.28 $9.37 $ 9.26
-------- ------- -------- -------- -------- ------------- ------- ----- -----------
INCOME FROM INVESTMENT
OPERATIONS
Net investment income......... .49 .51 .51 .45 .64 .57 .43 .45 .23
Net realized and unrealized
gains (losses) on
investments and foreign
currency transactions....... .08 (.06) .09 (.35) (.41) .10 .08 (.06) .21
-------- ------- -------- -------- -------- ------------- ------- ----- -----------
Total from investment
operations.............. .57 .45 .60 .10 .23 .67 .51 .39 .44
-------- ------- -------- -------- -------- ------------- ------- ----- -----------
LESS DISTRIBUTIONS
Dividends from net investment
income...................... (.49) (.51) (.52) (.40) (.63) (.57) (.44) (.46) (.33)
Tax return of capital
distributions............... (.01) (.03) -- (.08) -- -- (.01) (.02) --
Distributions in excess of net
realized capital gains...... -- -- -- -- -- (.03) -- -- --
-------- ------- -------- -------- -------- ------------- ------- ----- -----------
Total distributions........... (.50) (.54) (.52) (.48) (.63) (.60) (.45) (.48) (.33)
-------- ------- -------- -------- -------- ------------- ------- ----- -----------
Net asset value, end of
period.................... $ 9.35 $ 9.28 $ 9.37 $ 9.29 $ 9.67 $ 10.07 $9.34 $9.28 $ 9.37
-------- ------- -------- -------- -------- ------------- ------- ----- -----------
-------- ------- -------- -------- -------- ------------- ------- ----- -----------
TOTAL RETURN(f):.............. 6.22% 4.98% 6.55% 1.02% 2.40% 6.69% 5.55% 4.31% 4.65%
--------
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)....................... $29,116 $37,049 $46,450 $69,912 $113,623 $143,856 $16 $66 $7,121(e)
--------
Average net assets (000)...... $33,235 $42,598 $56,395 $91,849 $131,371 $134,585 $94 $33 $1,335(e)
--------
Ratios to average net assets:
Total expenses.............. 3.45% 3.74% 2.19% 1.89% 1.94% 1.34%(b) 4.05% 4.10% 2.24%(b)
Operating Expenses,
including distribution
fees...................... 1.56% 1.47% 1.31% 1.17% 1.05% 1.03%(b) 2.16% 2.07% 1.91%(b)
Operating Expenses,
excluding distribution
fees...................... 1.41% 1.32% 1.16% 1.05% .95% .93%(b) 1.41% 1.32% 1.16%(b)
Net investment income....... 5.23% 5.51% 5.49% 4.94% 6.71% 6.95%(b) 4.63% 4.91% 4.89%(b)
Portfolio turnover rate....... 225% 173% 254% 209% 228% 137% 225% 173% 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, 1997........................ $ 7,625 $10,695 $ 3,571 $2.99
June 30, 1996........................ 9,008 15,626 4,550 3.43
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) Calculated based upon weighted average shares outstanding during the period.
(d) Commencement of offering of Class C shares.
(e) Figures are actual and not rounded to nearest thousand.
(f) 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.
</TABLE>
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, INC. (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 Return Enhancement Strategies" below.
As with an investment in any mutual fund, an investment in this Fund can
decrease in value and you can lose money.
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's net asset value per share may increase or decrease for many
reasons. These include increases and decreases in the market prices of the
Fund's portfolio securities, the success or failure (and the associated costs)
of investment strategies employed by the investment adviser in seeking to
achieve the Fund's investment objective, and the payment (whether in cash or
shares) of dividends and distributions.
Market prices of portfolio securities change in response to changes in market
interest rates generally, with the prices of securities having a longer maturity
or duration being more volatile than those having a shorter maturity or
duration; changes in differentials in yields among various kinds of U.S.
Government securities; and changes in the creditworthiness or perceived
creditworthiness of the issuer. Market price volatility also arises from certain
terms of specific securities, such as the length of time to the next coupon
reset date, the payment characteristics and the dollar-weighted average life.
Certain types of securities (especially mortgage- and asset-backed instruments)
may have less predictable cashflows and may have longer or shorter effective
maturities, and thus greater price volatility, than anticipated at the time they
were purchased. See "Other Investments and Policies--Risk Factors Relating to
Investing in Mortgage-Backed and Asset-Backed Securities" below.
6
<PAGE>
Investment strategies employed by the investment adviser result from its
continuous evaluation of the appropriate composition of the portfolio as a
whole. The investment adviser's efforts to change or modify the portfolio
composition are made in response to (i) cash inflows and outflows resulting from
purchases and redemptions, (ii) current market conditions and (iii) the
investment adviser's view of future market developments. The investment adviser
may employ certain strategies, such as options, futures and derivative
instruments, which may magnify or minimize the volatility of the Fund's net
asset value per share depending in large measure on the success of the
investment adviser in correlating the investment strategies with actual market
developments. Specific risks associated with these instruments are discussed
under "Hedging and Return Enhancement Strategies" below.
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. 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. There can be no assurance, however, that the Fund will
achieve its investment objective or that the strategies used by the investment
adviser will not magnify rather than limit volatility or decreases in value.
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".
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
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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".
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 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 "Investment
Objective and Policies--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.
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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.
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".
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 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
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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 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.
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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. Moreover, slower than expected prepayments may
effectively change a security which was considered short- or intermediate-term
at the time of purchase into a long-term security. Long-term securities
generally lead to increased volatility of net asset value because they tend to
fluctuate more widely in response to changes in interest rates than short- or
intermediate-term securities. 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.
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.
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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 hold 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.
Investing in Rule 144A securities could, however, have the effect of increasing
the level of Fund illiquidity to the extent that qualified institutional buyers
become, for a limited time, uninterested in purchasing these securities. 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 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. See "Investment Objective and Policies--Other
Investments--Illiquid Securities" in the Statement of Additional Information.
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 resale price. 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
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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 or other
liquid assets having a value equal to or greater than the Fund's purchase
commitments will be established 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 RETURN 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. The Fund, and thus investors, may
lose money through any unsuccessful use of these strategies. The Fund's ability
to use these strategies may be limited by market conditions, regulatory limits
and tax considerations and there can be no assurance that any of these
strategies will succeed.
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 other liquid assets, at such a level that
(i) the amount deposited in the account plus any cash or other liquid assets
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
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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 or other liquid assets or an irrevocable
letter of credit in favor of the Fund. The cash or other liquid assets will be
maintained in a segregated account pursuant to applicable regulations and will
at least equal the market value, determined daily, of the loaned securities.
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 or other liquid assets equal in value to its obligations in
respect of reverse repurchase agreements and dollar rolls. Reverse repurchase
agreements and dollar rolls involve the risk that the market value of the
securities retained by the Fund may decline below the price of the securities
the Fund has sold but is obligated to repurchase under the agreement. In the
event the buyer of securities under a 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. See "Borrowing." 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.
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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 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 and close out 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
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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 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. The Fund, and thus investors, may lose money
through any unsuccessful 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.
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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."
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 of 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
rate for the fiscal year ended June 30, 1997 was 225% 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 June 30, 1997, total expenses as a percentage of
average net assets of the Class A and Class C shares were 3.45% and 4.05%,
respectively. See "Fund Expenses" and "Financial Highlights."
MANAGER
PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC (PIFM OR THE MANAGER), GATEWAY
CENTER THREE, 100 MULBERRY STREET, NEWARK, NEW JERSEY 07102-4077, 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. PIFM is organized in New York as a
limited liability company. It is the successor to Prudential Mutual Fund
Management, Inc., which transferred its assets to PIFM in September 1996. See
"Manager" in the Statement of Additional Information.
For the fiscal year ended June 30, 1997, the Fund paid management fees to PMF
of .50 of 1% of the Fund's average net assets.
As of July 31, 1997, PIFM served as the manager of 40 open-end investment
companies, constituting all of the Prudential Mutual Funds, and as manager or
administrator to 22 closed-end investment companies with aggregate assets of
approximately $56.7 billion.
UNDER THE MANAGEMENT AGREEMENT WITH THE FUND, PIFM MANAGES THE INVESTMENT
OPERATIONS OF THE FUND AND ALSO ADMINISTERS THE FUND'S BUSINESS AFFAIRS. See
"Manager" in the Statement of Additional Information. PIFM is 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, PIFM 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 PIFM FOR ITS SERVICES AT THE RATE OF .25 OF 1% OF THE FUND'S
AVERAGE DAILY NET ASSETS. PIFM 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, 1997, the Subadviser received advisory fees
of .25 of 1% of the Fund's average daily net assets from PIFM.
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
accounts with combined total assets of over $50 billion, of which approximately
$17 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
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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 SECURITIES INCORPORATED (PRUDENTIAL SECURITIES, PSI OR THE
DISTRIBUTOR), 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 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 AND THE CLASS
C PLAN, COLLECTIVELY, THE PLANS) ADOPTED BY THE FUND UNDER RULE 12B-1 UNDER THE
INVESTMENT COMPANY ACT AND A DISTRIBUTION AGREEMENT (THE DISTRIBUTION
AGREEMENT), PRUDENTIAL SECURITIES INCURS THE EXPENSES OF DISTRIBUTING THE FUND'S
CLASS A 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, 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.
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 Plan. 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 PRUDENTIAL SECURITIES 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 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, 1998.
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, 1998. 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, 1997, the Fund paid distribution expenses
of .15% and .75% of the average daily net assets of the Class A and Class C
shares, respectively. The Fund records all payments made under the Plans as
expenses in the calculation of net investment income.
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Distribution expenses attributable to the sale of Class A or Class C shares of
the Fund will be allocated to each such class based upon the ratio of sales of
each such class to the sales of Class A or Class C shares of the Fund other than
expenses allocated to a particular class. 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 addition to distribution and service fees paid by the Fund under the Class
A and Class C Plans, the Manager (or one of its affiliates) may make payments
out of its own resources to dealers (including Prudential Securities) 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 has agreed to provide
additional funds, if necessary, for the purpose of the settlement fund. 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 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 (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.
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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 LLC (PMFS), 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 PIFM. Its mailing address is P.O. Box 15005, New
Brunswick, New Jersey 08906-5005.
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. For valuation purposes, quotations of
foreign securities in a foreign currency are converted to U.S. dollar
equivalents. See "Net Asset Value" in the Statement of Additional Information.
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.
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
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, AVERAGE ANNUAL TOTAL
RETURN AND AGGREGATE TOTAL RETURN IN ADVERTISEMENTS AND SALES LITERATURE. YIELD
AND TOTAL RETURN ARE CALCULATED SEPARATELY FOR CLASS A 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
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<PAGE>
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 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. Further performance information will be
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 NET
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 most capital assets held by individuals is currently 20%.
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 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.
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes.
22
<PAGE>
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 on the accounts of those shareholders who fail to furnish their tax
identification numbers on IRS Form W-9 (or IRS Form W-8 in the case of certain
foreign shareholders) with the required certifications regarding the
shareholder's status under the federal income tax law. 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).
Shareholders are advised to consult their own tax advisers regarding specific
questions as to federal, state or local taxes. See "Taxes, Dividends and
Distributions" in the Statement of Additional Information.
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 C
shares. Distributions of net capital gains, if any, will be paid in the same
amount for Class A 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, 1997 of approximately $3,793,000 of which $559,000 expires in 2001,
$2,044,000 expires in 2002, $742,000 expires in 2003, and $448,000 expires in
2004. Accordingly, no capital gains distributions are expected to be paid to
shareholders until net gains have been realized in excess of such amount.
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 LLC, 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.
IF YOU BUY SHARES ON OR BEFORE THE RECORD DATE (THE DATE THAT MEASURES WHO
RECEIVES THE DIVIDEND), YOU WILL RECEIVE A PORTION OF THE MONEY YOU INVESTED AS
A TAXABLE DIVIDEND. THEREFORE, YOU SHOULD CONSIDER THE TIMING OF DIVIDENDS WHEN
BUYING SHARES OF THE FUND.
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 PER SHARE, DIVIDED INTO THREE CLASSES, DESIGNATED CLASS A, CLASS
B AND CLASS C. ON NOVEMBER 28, 1995, ALL OUTSTANDING CLASS B SHARES WERE
CONVERTED TO CLASS A SHARES. THE FUND CURRENTLY OFFERS ONLY CLASS A AND CLASS C
SHARES. 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
23
<PAGE>
privilege. See "How the Fund is Managed--Distributor." 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 C shares generally bear higher distribution expenses
than Class A shares, the liquidation proceeds to shareholders of Class C shares
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.
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 LLC (PMFS OR THE TRANSFER AGENT), ATTENTION: INVESTMENT SERVICES, P.O.
BOX 15020, NEW BRUNSWICK, NEW JERSEY 08906-5020. The minimum initial investment
for Class A shares is $2,500 and is $5,000 for Class C shares, except that the
minimum initial investment for Class C shares may be waived from time to time.
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 IN PROPER FORM 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). PAYMENT
MAY BE MADE BY WIRE, CHECK OR THROUGH YOUR BROKERAGE ACCOUNT. SEE "ALTERNATIVE
PURCHASE PLAN" BELOW. SEE ALSO "HOW THE FUND VALUES ITS SHARES."
24
<PAGE>
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 third 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 class in which you are
eligible to invest (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 and 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 $1,000 for both classes.
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).
<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
charge of 3% of the charged at a rate of .15 or reduced for certain
public offering price of 1%) purchases
CLASS C Maximum CDSC of 1% of 1% (Currently being
the lesser of the amount charged at a rate of .75
invested or the of 1%)
redemption proceeds on
redemptions made within
one year of purchase
</TABLE>
25
<PAGE>
Both 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 is
subject to different sales charges and distribution and/or service fees and (ii)
each class has exclusive voting rights on any matter submitted to shareholders
that relates solely to its distribution arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of the other class.
The two 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 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).
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.
26
<PAGE>
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>
The Distributor may reallow the entire sales charge to dealers. Selling
dealers may be deemed to be underwriters, as that term is defined under federal
securities laws.
In connection with the sale of Class A shares at NAV (without payment of an
initial sales charge), the Manager, the Distributor or one of their affiliates
will pay dealers, financial advisers, and other persons which distribute shares
a finders' fee from its own resources based on a percentage of the net asset
value of shares sold by such persons.
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 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 Sections 457 and 403(b)(7) of the Internal
Revenue Code (collectively, Benefit Plans), provided that the Benefit 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 250 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.
PRUDENTIAL RETIREMENT PROGRAMS. Class A shares may be purchased at NAV by
certain savings, retirement and deferred compensation plans, qualified or
non-qualified under the Internal Revenue Code for which Prudential serves as the
plan administrator or recordkeeper, provided that (i) the plan has at least $1
million in existing assets or 250 eligible employees and (ii) the Fund is an
available investment option. These plans include pension, profit-sharing,
stock-bonus or other employee benefit plans under Section 401 of the Internal
Revenue Code, deferred compensation and annuity plans under Sections 457 or
403(b)(7) of the Internal Revenue Code and plans that participate in the
Transfer Agent's PruArray and SmartPath Programs (benefit plan recordkeeping
services) (hereafter referred to as a PruArray or SmartPath Plan). All plans of
a company for which Prudential serves as plan administrator or recordkeeper are
aggregated in meeting the $1 million threshold. The term "existing
27
<PAGE>
assets" as used herein includes stock issued by a plan sponsor, shares of
Prudential Mutual Funds and shares of certain unaffiliated mutual funds that
participate in the PruArray or SmartPath Program (Participating Funds).
"Existing assets" also include monies invested in The Guaranteed Interest
Account (GIA), a group annuity insurance product issued by Prudential, and units
of The Stable Value Fund (SVF), an unaffiliated bank collective fund. Class A
shares may also be purchased at NAV by plans that have monies invested in GIA
and SVF, provided (i) the purchase is made with the proceeds of a redemption
from either GIA or SVF and (ii) Class A shares are an investment option of the
plan.
PRUARRAY ASSOCIATION BENEFIT PLANS. Class A shares are also offered at net
asset value to Benefit Plans or nonqualified plans sponsored by employers which
are members of a common trade, professional or membership association
(Association) that participate in the PruArray Program provided that the
Association enters into a written agreement with Prudential. Such Benefit Plans
or non-qualified plans may purchase Class A shares at net asset value without
regard to the assets or number of participants in the individual employer's
qualified Plan(s) or non-qualified plans so long as the employers in the
Association (i) have retirement plan assets in the aggregate of at least $1
million or 250 participants in the aggregate and (ii) maintain their accounts
with the Fund's transfer agent.
PRUARRAY SAVINGS PROGRAM. Class A shares are also offered at net asset value
to employees of companies that enter into a written agreement with Prudential
Retirement Services to participate in the PruArray Savings Program. Under this
Program, a limited number of Prudential Mutual Funds are available for purchase
at net asset value by Individual Retirement Accounts and Savings Accumulation
Plans of the company's employees. The Program is available only to (i) employees
who open an IRA or Savings Accumulation Plan account with the Transfer Agent and
(ii) spouses of employees who open an IRA account with the Transfer Agent. The
program is offered to companies that have at least 250 eligible employees.
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. In addition, Class A shares may be purchased at NAV, through
Prudential Securities or the Transfer Agent, by the following persons: (a)
officers of the Prudential Mutual Funds (including the Fund), (b) employees of
Prudential Securities and PIFM and their subsidiaries and members of the
families of such persons who maintain an "employee related" account at
Prudential Securities or the Transfer Agent, (c) employees of subadvisers of the
Prudential Mutual Funds provided that such purchases at NAV are permitted by
such person's employer, (d) Prudential, employees and special agents of
Prudential and its subsidiaries and all persons who have retired directly from
active service with Prudential or one of its subsidiaries, (e) 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, (f) 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 180 days
of the commencement of the financial adviser's employment at Prudential
Securities, or within one year in the case of Benefit Plans, (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 purchase and
(g) investors in Individual Retirement Accounts, provided the purchase is made
with the proceeds of a tax-free, rollover of assets from a Benefit Plan for
which Prudential Investments serves as the recordkeeper or administrator.
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.
28
<PAGE>
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." In connection with the sale of Class C shares, the
Distributor will pay dealers, financial advisers and other persons which
distribute Class C shares a sales commission of up to 1% of the purchase price
of such shares at the time of the sale.
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 THROUGH PRUDENTIAL SECURITIES. PLEASE CONTACT 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 LLC, 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. In the case of redemptions
from a PruArray or SmartPath Plan, if the proceeds of the redemption are
invested in another investment option of the plan, in the name of the record
holder and at the same address as reflected in the Transfer Agent's records, a
signature guarantee is not required.
PAYMENT FOR SHARES PRESENTED FOR REDEMPTION WILL BE MADE BY CHECK WITHIN SEVEN
DAYS AFTER RECEIPT BY THE TRANSFER AGENT 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 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
29
<PAGE>
CHECK BY THE TRANSFER AGENT. SUCH DELAY MAY BE AVOIDED BY PURCHASING SHARES BY
WIRE OR BY CERTIFIED OR CASHIER'S CHECK.
REDEMPTION IN KIND. If the 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 such 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. Any contingent deferred sales charge or CDSC paid in connection with
such redemption will be credited (in shares) to your account. (If less than a
full repurchase is made, the credit will be on a PRO RATA basis.) You must
notify the Fund's Transfer Agent, either directly or through Prudential
Securities, at the time the repurchase privilege is exercised to adjust your
account for the CDSC you previously paid. Thereafter, any redemptions will be
subject to the CDSC applicable at the time of the redemption. See "Contingent
Deferred Sales Charges" below. Exercise of the repurchase privilege will
generally not affect the federal tax treatment of any gain or loss realized upon
redemption. However, if the redemption was made within a 30 day period of the
repurchase and if the redemption resulted in a loss, some or all of the loss,
depending on the amount reinvested, may not be allowed for federal income tax
purposes. See "Taxes, Dividends and Distributions" in the Statement of
Additional Information.
CONTINGENT DEFERRED SALES CHARGES
Redemptions of 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."
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," below.
In determining whether a CDSC is applicable to a redemption, the calculation
will be made in a manner that results in the lowest possible rate. It will be
assumed that the redemption is made first of amounts representing shares
acquired pursuant to the reinvestment of dividends and distributions; then of
amounts representing the increase in 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.
30
<PAGE>
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 C SHARES
PRUARRAY OR SMARTPATH PLANS.The CDSC will be waived on redemptions from
qualified and non-qualified retirement and deferred compensation plans that
participate in the Transfer Agent's PruArray and SmartPath Programs.
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, INC. ON THE BASIS OF THE RELATIVE NAV. 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, Inc. 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
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 "HOW TO SELL YOUR SHARES."
You may also exchange shares by mail by writing to Prudential Mutual Fund
Services LLC, Attention: Exchange Processing, P.O. Box 15010, New Brunswick, New
Jersey 08906-5010.
31
<PAGE>
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 LLC. AT THE
ADDRESS NOTED ABOVE.
SPECIAL EXCHANGE PRIVILEGES. The following special exchange privilege applies
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
for shareholders who qualify to purchase Class A shares at NAV, unless the
shareholder elects otherwise. 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.
The Fund reserves the right to reject any exchange order including exchanges
(and market timing transactions) which are of size and/or frequency engaged in
by one or more accounts acting in concert or otherwise, that have or may have an
adverse effect on the ability of the Subadviser to manage the portfolio. The
determination that such exchanges or activity may have an adverse effect and the
determination to reject any exchange order shall be in the discretion of the
Manager and the Subadviser.
The Exchange Privilege is not a right and may be suspended, modified or
terminated on 60 days' notice to shareholders.
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. If you hold shares through Prudential Securities, you
should contact your financial adviser.
- 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
COMMAND(SM) 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 C shares may be subject to a CDSC. See "How to Sell Your
Shares--Contingent Deferred Sales Charges."
32
<PAGE>
- 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
Gateway Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077. In
addition, monthly unaudited financial data is available upon request from the
Fund.
- SHAREHOLDER INQUIRIES. Inquiries should be addressed to the Fund at Gateway
Center Three, 100 Mulberry Street, Newark, New Jersey 07102-4077, 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.
33
<PAGE>
THE PRUDENTIAL MUTUAL FUND FAMILY
Prudential Investments 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.
TAXABLE BOND FUNDS
-------------------------
Prudential Diversified Bond Fund, Inc.
Prudential Government Income Fund, Inc.
Prudential Government Securities Trust
Short-Intermediate Term Series
Prudential High Yield Fund, Inc.
Prudential Mortgage Income Fund, Inc.
Prudential Structured Maturity Fund, Inc.
Income Portfolio
The BlackRock Government Income Trust
TAX-EXEMPT BOND FUNDS
----------------------------
Prudential California Municipal Fund
California Series
California Income Series
Prudential Municipal Bond Fund
High Yield Series
Insured Series
Intermediate Series
Prudential Municipal Series Fund
Florida Series
Maryland Series
Massachusetts Series
Michigan Series
New Jersey Series
New York Series
North Carolina Series
Ohio Series
Pennsylvania Series
Prudential National Municipals Fund, Inc.
GLOBAL FUNDS
-------------------
Prudential Europe Growth Fund, Inc.
Prudential Global Genesis Fund, Inc.
Prudential Global Limited Maturity Fund, Inc.
Limited Maturity Portfolio
Prudential Intermediate Global Income Fund, Inc.
Prudential International Bond Fund, Inc.
Prudential Natural Resources Fund, Inc.
Prudential Pacific Growth Fund, Inc.
Prudential World Fund, Inc.
Global Series
International Stock Series
The Global Total Return Fund, Inc.
Global Utility Fund, Inc.
EQUITY FUNDS
-------------------
Prudential Balanced Fund, Inc.
Prudential Distressed Securities Fund, Inc.
Prudential Dryden Fund
Prudential Active Balanced Fund
Prudential Stock Index Fund
Prudential Emerging Growth Fund, Inc.
Prudential Equity Fund, Inc.
Prudential Equity Income Fund
Prudential Jennison Series Fund, Inc.
Prudential Jennison Growth Fund
Prudential Jennison Growth & Income Fund
Prudential Multi-Sector Fund, Inc.
Prudential Small Company Value Fund, Inc.
Prudential Utility Fund, Inc.
Nicholas-Applegate Fund, Inc.
Nicholas-Applegate Growth Equity Fund
MONEY MARKET FUNDS
--------------------------
- -TAXABLE MONEY MARKET FUNDS
Prudential Government Securities Trust
Money Market Series
U.S. Treasury Money Market Series
Prudential Special Money Market Fund, Inc.
Money Market Series
Prudential MoneyMart Assets, Inc.
- -TAX-FREE MONEY MARKET FUNDS
Prudential Tax-Free Money Fund, Inc.
Prudential California Municipal Fund
California Money Market Series
Prudential Municipal Series Fund
Connecticut Money Market Series
Massachusetts Money Market Series
New Jersey Money Market Series
New York Money Market Series
- -COMMAND FUNDS
Command Money Fund
Command Government Fund
Command Tax-Free Fund
- -INSTITUTIONAL MONEY MARKET FUNDS
Prudential Institutional Liquidity Portfolio, Inc.
Institutional Money Market Series
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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FUND HIGHLIGHTS....................................................... 2
What are the Fund's 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 Return Enhancement Strategies........................... 13
Investment Restrictions............................................. 17
HOW THE FUND IS MANAGED............................................... 18
Manager............................................................. 18
Subadviser.......................................................... 18
Distributor......................................................... 19
Portfolio Transactions.............................................. 21
Custodian and Transfer and
Dividend Disbursing Agent......................................... 21
HOW THE FUND VALUES ITS SHARES........................................ 21
HOW THE FUND CALCULATES PERFORMANCE................................... 21
TAXES, DIVIDENDS AND DISTRIBUTIONS.................................... 22
GENERAL INFORMATION................................................... 23
Description of Shares............................................... 23
Additional Information.............................................. 24
SHAREHOLDER GUIDE..................................................... 24
How to Buy Shares of the Fund....................................... 24
Alternative Purchase Plan........................................... 25
How to Sell Your Shares............................................. 29
How to Exchange Your Shares......................................... 31
Shareholder Services................................................ 32
THE PRUDENTIAL MUTUAL FUND FAMILY..................................... A-1
</TABLE>
------------------------------------------------
MF152A 4445604
CUSIP NOS: Class A: 09247Y208
Class C: 09247Y109
THE BLACKROCK GOVERNMENT INCOME TRUST
PROSPECTUS
August 29, 1997
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
STATEMENT OF ADDITIONAL INFORMATION
DATED AUGUST 29, 1997
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, Inc., 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 return enhancement
strategies, including short selling and leverage and use derivatives and 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 Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102-4077, and its telephone number is (800) 225-1852.
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Fund's Prospectus dated August 29, 1997, 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-11 17
Trustees and Officers.............................................................................. B-12 18
Manager............................................................................................ B-15 18
Subadviser......................................................................................... B-16 18
Distributor........................................................................................ B-16 19
Portfolio Transactions............................................................................. B-18 21
Purchase and Redemption of Fund Shares............................................................. B-19 24
Shareholder Investment Account..................................................................... B-21 32
Net Asset Value.................................................................................... B-24 21
Taxes, Dividends and Distributions................................................................. B-25 22
Performance Information............................................................................ B-26 21
Custodian, Transfer and Dividend Disbursing Agent and Independent Accountants...................... B-28 21
Financial Statements............................................................................... B-29 --
Report of Independent Accountants.................................................................. B-40 --
Independent Auditors' Report....................................................................... B-42
Appendix--General Investment Information........................................................... I-1 --
Appendix--Information Relating to Prudential....................................................... II-1 --
</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 from the U.S. Treasury under certain
conditions, to meet its obligations. 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
B-2
<PAGE>
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.
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
B-3
<PAGE>
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.
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, Inc. (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 are
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.
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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 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 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, as amended (the Investment Company Act) on investments by
the Fund in other investment companies. In addition, in reliance on an 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 hold 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
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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 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); and (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.
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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 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 options on futures contracts for identical purposes
to those set forth above for the purchase of a futures contract (purchase of a
call option or sale of a put option) and the sale of a futures contract
(purchase of a put option or sale of a call option), or to close out a long or
short position in futures contracts. If, for example, the investment adviser
wished to protect against an increase in interest rates and the resulting
negative impact on the value of a portion of its U.S. Government securities
portfolio, it might purchase a put option on an interest rate futures contract,
the underlying security of which correlates with the portion of the portfolio
the investment adviser seeks to hedge.
RISKS OF TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS. The 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
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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 or other liquid assets equal in value (when added to any initial or
variation margin on deposit) to the market value of the securities underlying
the futures 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 or other liquid assets equal to the purchase price of the
contract (less the amount of initial or variation margin on deposit) in a
segregated account maintained for the 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
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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 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 resale price. 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 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 or other liquid assets having a value
equal to or greater than the Fund's purchase commitments. 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
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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 may include a secured letter
of credit) 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 streams are netted out, with the Fund receiving or paying,
as the case may be, only the net amount of the two payments. Inasmuch as these
hedging transactions are entered into for good faith hedging purposes, the
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
obligations over its entitlements with respect to each interest rate swap will
be accrued and an amount of cash or other liquid assets 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 NRSRO 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.
B-10
<PAGE>
SEGREGATED ACCOUNTS
When the Fund is required to segregate assets in connection with certain
hedging transactions, it will maintain cash or liquid assets in a segregated
account with the Fund's custodian. "Liquid assets" means cash, U.S. Government
securities, equity securities or other liquid, unencumbered assets,
marked-to-market daily.
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. 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 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.
6. Act as underwriter except to the extent that, in connection with the
disposition of portfolio securities, it may be deemed to be an underwriter under
certain federal securities laws.
7. Make investments for the purpose of exercising control or management.
8. 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.
9. 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.
10. 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.
B-11
<PAGE>
11. Purchase more than 10% of all outstanding voting securities of any one
issuer.
12. 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.
TRUSTEES AND OFFICERS
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(1) THE TRUST DURING PAST FIVE YEARS
- ----------------------------------- ------------- ------------------------------------------------------------------------
<S> <C> <C>
Eugene C. Dorsey (70) Trustee Retired President, Chief Executive Officer and Trustee of the Gannett
Foundation (now Freedom Forum); former Publisher of four Gannett
newspapers and Vice President of Gannett Company, Chairman of
Independent Sector, Washington, D.C. (largest national coalition of
philanthropic organizations), Chairman of the American Council for the
Arts; Director of the advisory board of Chase Manhattan Bank of
Rochester and The High Yield Income Fund, Inc.
Douglas H. McCorkindale (57) Trustee Vice Chairman (since March 1994) of Gannett Co. Inc. (publishing and
media); Director of Gannett Co. Inc., Frontier Corporation and
Continental Airlines, Inc.
Thomas T. Mooney (55) Trustee President of the Greater Rochester Metro Chamber of Commerce; former
Rochester City Manager, Trustee of Center for Governmental Research,
Inc., Director of Blue Cross of Rochester, Monroe County Water
Authority, Rochester Jobs, Inc., Executive Service Corps of Rochester,
Monroe County Industrial Development Corporation, Northeast-Midwest
Institute, The Business Council of New York State, First Financial
Fund, Inc., The High Yield Plus Fund, Inc. and The High Yield Income
Fund, Inc.
*Richard A. Redeker (53) President Employee of Prudential Investments; formerly President, Chief Executive
751 Broad Street and Trustee Officer and Director (October 1993-September 1996) of Prudential
Newark, New Jersey 07102 Mutual Fund Management, Inc. (PMF), Executive Vice President, Director
and Member of Operating Committee (October 1993-September 1996) of
Prudential Securities Incorporated (Prudential Securities), Director
(October 1993-September 1996) of Prudential Securities Group, Inc.,
Executive Vice President (July 1994-September 1996) of The Prudential
Investment Corporation, Executive Vice President (January
1994-September 1996) of Prudential Mutual Fund Distributors, Inc.
(PMFD) and Prudential Mutual Fund Services, Inc. and Senior Executive
Vice President and Director (September 1976-September 1993) of Kemper
Financial Services, Inc.; President and Director of The High Yield
Income Fund, Inc.
</TABLE>
B-12
<PAGE>
<TABLE>
<CAPTION>
POSITION WITH PRINCIPAL OCCUPATIONS
NAME AND AGE(1) THE TRUST DURING PAST FIVE YEARS
- ----------------------------------- ------------- ------------------------------------------------------------------------
<S> <C> <C>
Thomas A. Early (42) Vice Vice President and General Counsel (since March 1997) of Prudential
President Mutual Funds & Annuities, Executive Vice President, Secretary and
General Counsel (since December 1996) of Prudential Investment Fund
Management LLC (PIFM); formerly Vice President and General Counsel
(March 1994-March 1997) of Prudential Retirement Services and
Associate General Counsel and Chief Financial Services Officer
(1988-1994) of Frank Russell Company.
S. Jane Rose (51) Secretary Senior Vice President (since December 1996) of PIFM, Senior Vice
President and Senior Counsel (since July 1992) of Prudential
Securities; formerly Senior Vice President (January 1991-September
1996) and Senior Counsel (June 1987-September 1996) of PMF.
Grace C. Torres (38) Treasurer First Vice President (since December 1996) of PIFM, First Vice President
and Principal (since March 1994) of Prudential Securities; formerly First Vice
Financial and President (March 1994-Septmber 1996) of PMF and Vice President (July
Accounting 1989-March 1994) of Bankers Trust.
Officer
Deborah A. Garfield (32) Assistant Assistant General Counsel (since March 1997) of PIFM; formerly
Secretary associated with the law firm of Gordon Altman Butowsky Weitzen Shalov
& Wein.
Stephen M. Ungerman (44) Assistant Tax Director (since March 1996) of Prudential Investments and the
Treasurer Private Asset Group of The Prudential Insurance Company of America;
formerly First Vice President (February 1993-September 1996) of
Prudential Mutual Fund Management, Inc. and Senior Tax Manager
(1981-January 1993) Price Waterhouse.
</TABLE>
- ------------------------
(1)Unless otherwise noted, the addresses of the persons listed in the table
above is 100 Mulberry Street, Gateway Center Three, Newark, New Jersey
07102-4077.
* "Interested" Trustee, as defined in the Investment Company Act, by reason of
his or her affiliation with Prudential, Prudential Securities or PIFM.
Trustees of the Fund are also directors, trustees and officers of some or
all of the other investment companies distributed by Prudential Securities.
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.
Pursuant to the terms of the Management Agreement with the Fund, the Manager
pays all compensation of officers and employees of the Fund as well as the fees
and expenses of all Trustees of the Fund who are affiliated persons of the
Manager. 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 $4,000, in
addition to certain out-of-pocket expenses. The amount of annual compensation
paid to each Trustee may change as a result of the introduction of additional
funds on the boards of which the Trustee will be asked to serve.
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.
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.
B-13
<PAGE>
The following table sets forth the aggregate compensation paid by the Fund
for the fiscal year ended June 30, 1997 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 Investments Fund Management LLC (Fund Complex) for the
calendar year ended December 31, 1996. In October 1996, shareholders elected a
new Board of Trustees. Below are listed the Trustees who have served the Fund
during its most recent fiscal year, as well as the new Trustees who took office
after the shareholder meeting in October.
COMPENSATION TABLE
<TABLE>
<CAPTION>
TOTAL
PENSION OR COMPENSATION
AGGREGATE RETIREMENT FROM TRUST AND
COMPENSATION BENEFITS ACCRUED ESTIMATED ANNUAL FUND
FROM AS PART OF TRUST BENEFITS UPON COMPLEX PAID TO
NAME OF TRUSTEE TRUST*** EXPENSES RETIREMENT TRUSTEES
- ------------------------------------------------------- ------------ ----------------- ------------------- -----------------
<S> <C> <C> <C> <C>
Edward D. Beach,
Former Trustee....................................... $ 3,000 None N/A $ 166,000 (21/39)**
Eugene C. Dorsey*...................................... $ 2,000 None N/A $ 98,583 (12/36)**
Douglas H. McCorkindale*............................... $ 2,000 None N/A $ 71,208 (10/13)**
Thomas T. Mooney*...................................... $ 2,000 None N/A $ 135,375 (18/36)**
Richard A. Redeker+.................................... $ -- None N/A --
Stanley E. Shirk,
Former Trustee....................................... $ 3,000 None N/A $ 71,000 (9/18)**
Stephen Stoneburn,*
Former Trustee....................................... $ 3,000 None N/A $ 30,375 (4/6)**
Nancy H. Teeters,
Former Trustee....................................... $ 3,000 None N/A $ 103,583 (11/28)**
</TABLE>
- ------------------------
*Total compensation from all the funds in the Fund Complex for the calendar
year ended December 31, 1996 includes amounts deferred at the election of
Trustees under the funds' deferred compensation plan. Including accrued
interest, total compensation amounted to approximately $111,535, $71,034 and
$139,869 for Mr. Dorsey, Mr. McCorkindale and Mr. Mooney, respectively.
**Indicates number of funds/portfolios in the the Fund Complex (including the
Trust) to which aggregate compensation relates.
***Effective January 1997, the annual compensation paid to each Trustee was
reduced from $6,000 to $4,000 in addition to certain out-of-pocket expenses.
+ Richard A. Redeker, who is an interested Trustee, does not receive
compensation from the Fund or any fund in the Fund Complex.
As of August 8, 1997, 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 8, 1997, the only beneficial owners, directly or indirectly, of
more than 5% of either class of shares of the Fund were: Prudential Bank and
Trust Co., C/F The IRA of Anne C. Landolfi, 508 23rd Street, Ocean City, New
Jersey who owned approximately 109 Class C shares (or approximately 6% of the
outstanding Class C shares); Sidney H. Willuweit, Lila Willuweit, JT TEN, 14812
Berry Valley Road, Yelm, Washington who owned approximately 813 Class C shares
(or approximately 46% of the outstanding Class C shares); Donovan D. Allen,
Ingrid F. Allen JT TEN, 11512 Chesapeake Drive, Reno, Nevada who owned
approximately 214 Class C shares (or approximately 12% of the outstanding Class
C shares); and Chia-Lin Fu Sun and Wei S Fu, Ten Com, 1564 E. Utah Avenue,
Fresno, California who owned approximately 591 Class C shares (or approximately
34% of the outstanding Class C shares.
As of August 8, 1997, Prudential Securities was record holder of 2,242,121
Class A shares (or approximately 74% of the outstanding Class A shares) and 591
Class C shares (or approximately 34% 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.
B-14
<PAGE>
MANAGER
The manager of the Fund is Prudential Investments Fund Management LLC
(formerly Prudential Mutual Fund Management LLC), as successor to Prudential
Mutual Fund Management, Inc. (PIFM or the Manager), Gateway Center Three, 100
Mulberry Street, Newark, New Jersey 07102-4077. PIFM serves as manager to all of
the other investment companies that, together with the Fund, comprise the
Prudential Mutual Funds. See "How the Fund is Managed--Manager" in the
Prospectus. As of July 31, 1997, PIFM managed and/or administered open-end and
closed-end management investment companies with assets of approximately $56.7
billion. According to the Investment Company Institute, as of December 31, 1996,
the Prudential Mutual Funds were the 15th largest family of mutual funds in the
United States.
PIFM is a subsidiary of Prudential Securities and The Prudential Insurance
Company of America (Prudential). Prudential Mutual Fund Services LLC (PMFS or
the Transfer Agent), a wholly-owned subsidiary of PIFM, serves as the transfer
agent for the Prudential Mutual Funds and, in addition, provides customer
service, recordkeeping and management and administration services to qualified
plans.
Pursuant to the Management Agreement with the Fund (the Management
Agreement), PIFM, 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 loan of securities. In connection
therewith, PIFM is obligated to keep certain books and records of the Fund. PIFM
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 PMFS, the Fund's Transfer and Dividend
Disbursing Agent. The management services of PIFM for the Fund are not exclusive
under the terms of the Management Agreement and PIFM is free to, and does,
render management services to others.
For its services, PIFM 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. No such reductions were
required during the fiscal year ended June 30, 1997. No jurisdiction currently
limits the Fund's expenses.
In connection with its management of the business affairs of the Fund, PIFM
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 PIFM or the
Fund's investment adviser;
(b) all expenses incurred by PIFM 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 or the Subadviser) pursuant to the subadvisory agreement among the Fund,
PIFM 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 and the states, 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.
B-15
<PAGE>
The Management Agreement provides that PIFM 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 May 28, 1997 and by the
shareholders of the Fund on February 23, 1995. For the fiscal years ended June
30, 1997, 1996 and 1995, PIFM earned management fees of $166,647, $217,733 and
$296,623, respectively, of which it paid $83,324, $108,867 and $148,312,
respectively, to the Subadviser.
SUBADVISER
PIFM 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 will 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. PIFM 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, PIFM 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 May
28, 1997 and by the shareholders of the Fund on February 23, 1995.
The Subadvisory Agreement provides that it will terminate in the event of
its assignment (as defined in the Investment Company Act) or upon the
termination of the Management Agreement. The Subadvisory Agreement may be
terminated by the Fund, PIFM 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 Securities Incorporated (Prudential Securities, PSI or the
Distributor), One Seaport Plaza, New York, New York 10292 acts as the
distributor of the Class A and Class C shares of the Fund.
Pursuant to separate Distribution and Service Plans (the Class A Plan and
the Class C Plan, collectively, the Plans) adopted by the Fund under Rule 12b-1
under the Investment Company Act and a distribution agreement (the Distribution
Agreement), Prudential Securities (the Distributor) incurs the expenses of
distributing the Fund's Class A and Class C shares. 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 Plan or in any
agreement related to the Class A 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). 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 the Class A Plan,
approved modifications of the Fund's Class A Plan and Distribution Agreement 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%. The Class A Plan was approved by the shareholders of the Fund
on February 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 thereon,
adopted a plan of distribution for the Class C shares (the Class C Plan). The
Class C Plan was approved by the sole shareholder of the Class C
B-16
<PAGE>
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. 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 May 28, 1997.
CLASS A PLAN. For the fiscal year ended June 30, 1997, Prudential Securities
incurred distribution expenses in the amount of $49,853, all of which was
recovered through the distribution fee paid by the Fund to Prudential Securities
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, 1997, Prudential Securities
received approximately $3,900 in initial sales charges with respect to the sale
of Class A shares.
CLASS C PLAN. For the fiscal year ended June 30, 1997, Prudential Securities
received $707 from the Fund under the Class C Plan. It is estimated that the
Distributor spent approximately $790 in distributing the Fund's Class C shares,
on behalf of the Fund during the year ended June 30, 1997. It is estimated that
of this amount approximately $82 (10.4%) was spent on printing and mailing of
prospectuses to other than current shareholders; $438 (55.4%) on compensation to
Prusec, an affiliated broker-dealer, for commissions to its representatives and
other expenses, including an allocation of overhead and other branch office
distribution- related expenses incurred by it for distribution of Fund shares;
and $270 (34.2%) on the aggregate of (i) payments of commissions to financial
advisers ($138 or 17.5%) and (ii) an allocation on account of overhead and other
branch office distribution-related expenses ($132 or 16.7%). The term "overhead
and other branch office distribution-related expenses" represents (a) the
expenses of operating the Prudential Securities' branch offices in connection
with the sale of Fund shares, including lease costs, the salaries and employee
benefits of operations and sales support personnel, utility costs,
communications costs and the costs of stationery and supplies, (b) the costs of
client sales seminars, (c) expenses of mutual fund sales coordinators to promote
the sale of Fund shares and (d) other incidental expenses relating to branch
promotion of Fund sales.
The Class A 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 Prudential Securities. 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.
Pursuant to the Distribution Agreement, the Fund has agreed to indemnify
Prudential Securities to the extent permitted by applicable law against certain
liabilities under the federal securities laws. The Distribution Agreement was
last approved by the Board of Trustees, including a majority of the Rule 12b-1
Trustees on May 28, 1997.
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
B-17
<PAGE>
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 serves as an independent "ombudsman" whom PSI employees
can call anonymously with complaints about ethics and compliance. Prudential
Securities reports any allegations or instances of criminal conduct and material
improprieties to the new director. The new director submits compliance reports
which identify all such allegations or instances of criminal conduct and
material improprieties every three months and will continue to do so for a
three-year period.
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.
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 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
B-18
<PAGE>
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 year ended June 30, 1997, the Fund paid brokerage commissions
of $2,216, none of which was paid to Prudential Securities. For the fiscal year
ended June 30, 1996, the Fund did not pay any brokerage commissions and for the
fiscal year ended 1995, the Fund paid brokerage commissions of $4,215, 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). See "Shareholder Guide--Alternative
Purchase Plan" in the Prospectus.
Each class of shares represents an interest in the same assets of the Fund
and is identical in all respects except that (i) each class is subject to
different sales charges and distribution and/or service fees, (ii) each class
has exclusive voting rights with respect to any matter submitted to shareholders
that relates solely to its distribution arrangement and has separate voting
rights on any matter submitted to shareholders in which the interests of one
class differ from the interests of the other class and (iii) each class has a
different exchange privilege. See "Distributor" and "Shareholder Investment
Account--Exchange Privilege."
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
C* shares are sold at net asset value. Using the Fund's net asset value at June
30, 1997, 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............................. $ 9.35
---------
Maximum sales charge (3% of offering price)........................................ .29
---------
Offering price to public........................................................... $ 9.64
---------
---------
CLASS C
Net asset value, offering price and redemption price per Class C share*............ $ 9.34
---------
</TABLE>
- ------------------------
* 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.
B-19
<PAGE>
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 Class A shares of other Prudential Mutual Funds, the purchases
may be combined to take advantage of the reduced sales charges applicable to
larger purchases. See 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 retirement or group
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.
LETTERS OF INTENT. Reduced sales charges are also available to investors (or
an eligible group of related investors), including retirement and groups 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 (Investment Letter of Intent). Retirement and group plans may also
qualify to purchase Class A shares at net asset value by entering into a Letter
of Intent whereby they agree to enroll, within a thirteen-month period, a
specified number of eligible employees or participants (Participant Letter of
Intent).
For purposes of the Investment Letter of Intent, all shares of the Fund and
shares of other Prudential Mutual Funds (excluding money market funds other than
those acquired pursuant to the exchange privilege) which were previously
purchased and are still owned are also included in determining the applicable
reduction. However, the value of shares held directly with the Transfer Agent
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.
A Letter of Intent permits a purchaser, in the case of an Investment Letter
of Intent, to establish a total investment goal to be achieved by any number of
investments over a thirteen-month period and, in the case of a Participant
Letter of Intent, to establish a minimum eligible employee or participant
enrollment goal over a thirteen-month period. Each investment made during the
period,
B-20
<PAGE>
in the case of an Investment Letter of Intent, will receive the reduced sales
charge applicable to the amount represented by the goal as if it were a single
investment. In the case of a Participant Letter of Intent, each investment made
during the period will be made at net asset value. Escrowed Class A shares
totalling 5% of the dollar amount of the Letter of Intent will be held by the
Transfer Agent 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 charge. The effective date of an Investment Letter
of Intent (except in the case of retirement and group plans) may be back-dated
up to 90 days, in order that any investment made during this 90-day period,
valued at the purchaser's cost, can be applied to the fulfillment of the Letter
of Intent goal.
The Investment Letter of Intent does not obligate the investor to purchase,
nor the Fund to sell, the indicated amount. Similarly, the Participant Letter of
Intent does not obligate the retirement or group plan to enroll the indicated
number of eligible employees or participants. 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.
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, in the
case of an Investment Letter of Intent, be granted subject to confirmation of
the investor's holdings or, in the case of a Participant Letter of Intent,
subject to confirmation of the number of eligible employees or participants in
the retirement or group plan. Letters of Intent are not available to any
individual participants in any retirement or group plans.
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 (Short-Intermediate Term Series) and shares of the
money market funds specified below. No fee or sales load will be imposed upon
the exchange. Shareholders of money market funds who 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.
B-21
<PAGE>
The following money market funds participate in the Class A exchange
privilege:
Prudential California Municipal Fund
(California Money Market Series)
Prudential Government Securities Trust
(Money Market Series)
(U.S. Treasury Money Market Series)
Prudential Municipal Series Fund
(Connecticut Money Market Series)
(Massachusetts Money Market Series)
(New Jersey Money Market Series)
(New York Money Market Series)
Prudential MoneyMart Assets, Inc. (Class A shares)
Prudential Tax-Free Money Fund, Inc.
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, Inc. 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, Inc. 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)
B-22
<PAGE>
The following chart shows how much you would need in monthly investments to
achieve specified lump sums to finance your investment goals.(2)
<TABLE>
<CAPTION>
PERIOD OF
MONTHLY
INVESTMENTS: $100,000 $150,000 $200,000 $250,000
- ------------------ ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
25 Years $ 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."
</TABLE>
- ------------------------
(1) Source information concerning the costs of education at public and private
universities is available from The College Board Annual Survey of Colleges,
1993. Average costs for private institutions include tuition, fees, room and
board for the 1993-1994 academic year.
(2) The chart assumes an effective rate of return of 8% (assuming monthly
compounding). This example is for illustrative purposes only and is not
intended to reflect the performance of an investment in shares of the Fund.
The investment return and principal value of an investment will fluctuate so
that an investor's shares when redeemed may be worth more or less than their
original cost.
AUTOMATIC 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 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 "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 are inadvisable because of the sales charges applicable to (i)
the purchase of Class A shares and (ii) the withdrawal of 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.
B-23
<PAGE>
TAX-DEFERRED RETIREMENT PLANS
Various tax-deferred retirement plans, including a 401(k) Plan,
self-directed individual retirement accounts and "tax sheltered accounts" under
Section 403(b)(7) of the Internal Revenue Code are available through the
Distributor. These plans are for use by both self-employed individuals and
corporate employers. These plans permit either self-direction of accounts by
participants, or a pooled account arrangement. Information regarding the
establishment of these plans, the administration, custodial fees and other
details are available from Prudential Securities or the Transfer Agent.
Investors who are considering the adoption of such a plan should consult
with their own legal counsel or tax adviser with respect to the establishment
and maintenance of any such plan.
INDIVIDUAL RETIREMENT ACCOUNTS
An individual retirement account (IRA) permits the deferral of federal
income tax on income earned in the account until the earnings are withdrawn. The
following chart represents a comparison of the earnings in a personal savings
account with those in an IRA, assuming a $2,000 annual contribution, an 8% rate
of return and a 39.6% federal income tax bracket and shows how much more
retirement income can accumulate within an IRA as opposed to a taxable
individual savings account.
TAX-DEFERRED COMPOUNDING(1)
<TABLE>
<CAPTION>
CONTRIBUTIONS PERSONAL
MADE OVER: SAVINGS IRA
- ----------- ---------- ----------
<S> <C> <C>
10 years $ 26,165 $ 31,291
15 years 44,675 58,649
20 years 68,109 98,846
25 years 97,780 157,909
30 years 135,346 244,692
</TABLE>
- ------------------------
(1)The chart is for illustrative purposes only and does not represent the
performance of the Fund or any specific investment. It shows taxable versus
tax-deferred compounding for the periods and on the terms indicated. Earnings
in 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. The New York Stock
Exchange is closed on the following holidays: New Year's Day, Martin Luther
King, Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day.
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.
B-24
<PAGE>
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 which is distributed
to shareholders, 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 or options thereon, or
foreign currencies, or other income (including but not limited to gains from
options, futures or forward contracts) derived with respect to its business of
investing in such securities or 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; (c) the Fund
diversify its holdings so that, at the end of each quarter of the taxable year,
(i) at least 50% of the 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 value 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) and (d) the Fund distribute to its
shareholders at least 90% of its net investment income, including net short-term
capital gains other than net capital gains, in each year. Effective for taxable
years beginning after August 5, 1997, the Taxpayer Relief Act of 1997 repealed
the 30% limitation on gains derived from securities held less than three months
(the short-short rule) described in clause (b) of this paragraph. Accordingly,
effective as of the Fund's taxable year beginning July 1, 1998, the Fund will no
longer be required to comply with the short-short rule.
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 18 months, except in certain cases where the Fund acquires a put or
writes a call thereon or otherwise holds an offsetting position with respect to
the securities. 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. Certain of the Fund's transactions may be subject to wash sale,
short sale and constructive 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.
For federal income tax purposes, the Fund had a capital loss carryforward at
June 30, 1997 of approximately $3,793,000, of which $559,000 expires in 2001,
$2,044,000 expires in 2002, $742,000 expires in 2003 and $448,000 expires in
2004. The Fund will elect to treat net realized capital losses of approximately
$3,410,400 incurred in the eight month period ended June 30, 1997 as having been
incurred in the following year. Accordingly, no capital gains distributions are
expected to be paid to shareholders until net gains have been realized in excess
of such amount.
"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" will be subject to certain wash sale, short sale
and constructive 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.
Distributions of net investment income and net short-term gains (i.e., the
excess of net short-term capital gains over net long-term capital losses) 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
B-25
<PAGE>
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 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 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 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 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,
1997 for the Class A shares was 8.0% and for the Class C shares was 7.4%. Yield
is calculated according to the following formula:
<TABLE>
<S> <C> <C>
a - b
YIELD = 2 [( cd + 1)(6)-1]
</TABLE>
<TABLE>
<C> <C> <S>
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.
</TABLE>
B-26
<PAGE>
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. Yields for the Fund will vary based on a number of factors
including changes in net asset value, market conditions, the level of interest
rates and the level of Fund income and expenses.
AVERAGE ANNUAL TOTAL RETURN. The Fund may also advertise its average annual
total return. Average annual total return is determined separately for Class A
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)(4) = ERV
<TABLE>
<C> <C> <S>
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.
</TABLE>
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 returns for Class A shares for the period September
9, 1991 (commencement of offering of the Class A shares) through June 30, 1997
and for the five and one year periods ended June 30, 1997 were 4.2%, 3.6% and
3.0%, respectively. The average annual total returns for Class C shares for the
period November 1, 1994 (commencement of offering of the Class C shares) through
June 30, 1997 and for the one year period ended June 30, 1997 were 5.5% and
4.6%, respectively.
AGGREGATE TOTAL RETURN. The Fund may also advertise its aggregate total
return. Aggregate total return is determined separately for Class A 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
<TABLE>
<C> <C> <S>
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.
</TABLE>
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 returns for Class A shares for the period September 9,
1991 (commencement of offering of the Class A shares) through June 30, 1997 and
for the five and one year periods ended June 30, 1997 were 31.2%, 22.9% and
6.2%, respectively. The aggregate total returns for Class C shares for the
period November 1, 1994 (commencement of offering of Class C shares) through
June 30, 1997 and for the one year period ended June 30, 1997 were 15.2% and
5.6%, respectively.
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)
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PERFORMANCE
<S> <C>
Comparison of
Different
Types of Investments
Over the Long Term
(1/1926 - 6/30/97)
Common Shares 11.1%
Long-Term Bonds 5.1%
Inflation 3.1%
</TABLE>
- ------------------------
(1) Source: Ibbotson Associates, "Stocks, Bonds, Bills and Inflation--1997
Yearbook" (annually updates the work of Roger G. Ibbotson and Rex A.
Sinquefield). All rights reserved. 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. Investors cannot invest directly in an index.
Past performance is not a guarantee of future results.
B-27
<PAGE>
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 LLC (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 PIFM. PMFS provides customary transfer agency
services to the Fund, including the handling of shareholder communications, the
processing of shareholder transactions, the maintenance of shareholder account
records, 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,
1997, such fees amounted to approximately $43,500. PMFS is also reimbursed for
its out-of-pocket expenses, including but not limited to postage, stationery,
printing, allocable communications and other costs.
Price Waterhouse LLP, 1177 Avenue of the Americas, New York, New York,
serves as the Fund's independent accountants and in that capacity audits the
Fund's annual financial statements.
B-28
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF
JUNE 30, 1997
- -------------------------------------------------------------------------
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--131.7%
- ------------------------------------------------------------
ASSET-BACKED SECURITIES--38.8%
$ 766 AFC Mortgage Loan Trust,
Series 1997-1, Class A,
5.9075%(c), 3/25/27 $ 765,621
1,000 Chase Credit Card Master Trust,
Series 1996-4, Class A,
5.8175%(c), 7/15/06 998,750
800 Chase Manhattan Auto Owner Trust,
Series 1996-C, Class A3, 5.95%,
11/15/00 796,750
753(b) Chase Manhattan Grantor Trust,
Series 1996-B, Class A, 6.61%,
9/15/02 756,841
Chevy Chase Auto Receivable Trust,
378 Series 1996-2, Class A, 5.90%,
7/15/03 375,232
900 Series 1997-2, Class A, 6.35%,
1/15/04 899,297
500 Discover Card Master Trust,
Series 1996-4, Class A,
6.0625%(c), 10/16/13 505,234
490 EQCC Home Equity Loan Trust,
Series 1994-1, Class A, 5.80%,
3/15/09 476,759
First USA Credit Card Master Trust,
500 Series 1994-6, Class A, 6.0375%(c),
10/15/03 503,985
500 Series 1997-4, Class A, 5.8975%(c),
2/17/10 500,078
700 Ford Credit Auto Lease Trust,
Series 1996-1, Class A2, 5.80%,
5/15/99 699,125
921 GMAC Grantor Trust,
Series 1997-A, Class A, 6.50%,
4/15/02 923,014
874 Merrill Lynch Credit Corporation,
Mortgage Loan,
Series 1996-B, Class A,
6.0875%(c), 7/15/21 877,369
<CAPTION>
THE BLACKROCK GOVERNMENT INCOME TRUST
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
$ 900 Olympic Automobile Receivables
Trust,
Series 1997-A, Class A2, 6.125%,
8/15/00 $ 901,407
500 Peoples Bank Credit Card Master
Trust,
Series 1996-1, Class A,
5.8375%(c), 11/15/04 500,547
Salomon Brothers,
Mortgage Trust Certificate,
417 Series 1996-6B, Class A1, 6.10% (c),
6/30/26 416,306
408 Series 1996-6G, Class A1, 6.00% (c),
9/30/27 407,189
-----------
Total asset-backed securities
(cost $11,302,951) 11,303,504
-----------
- ------------------------------------------------------------
MORTGAGE PASS-THROUGHS--53.1%
Federal Home Loan Mortgage Corporation,
2,419(a) 9.00%, 9/01/05 - 11/01/05, 15 Year 2,492,059
519 7.375%, 3/01/06, Multi-family 521,271
743 Federal Housing Administration,
GMAC Commercial Mortgage,
7.465%, 7/25/19 750,929
Federal National Mortgage
Association,
1,414(a) 8.00%, 3/01/08 1,446,392
704 8.50%, 12/01/10 732,475
2,289 8.50%, 6/01/08 - 1/01/16 2,375,130
894 7.179%, 9/01/28, ARM 917,357
Government National Mortgage
Association, II
1,500 5.50%, 12/20/99, 1 year CMT, ARM,
TBA 1,482,975
2,230(a) 7.25%, 4/15/06 2,257,127
1,540 7.125%, 9/20/23, 1 year CMT, ARM 1,577,854
888(a) 7.50%, 1/20/25, 1 year CMT, ARM 914,290
-----------
Total mortgage pass-throughs
(cost $15,596,599) 15,467,859
-----------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-29
<PAGE>
PORTFOLIO OF INVESTMENTS AS OF
JUNE 30, 1997
- -------------------------------------------------------------------------
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
Multiple Class Mortgage Pass-Throughs--25.9%
Residential Asset Security Trust,
Incorporated,
Mortgage Certificate,
$ 416 Series 1996-A8, Class A1, 8.00%,
12/25/26 $ 422,354
374 Series 1997-A1, Class A1, 7.00%,
3/25/27 375,983
Federal Home Loan Mortgage Corporation,
906 Series 1561, Class ZB, 6.00%,
8/15/06 893,220
969 Series 19, Class F, 6.57%, 6/01/28,
ARM 977,866
Federal National Mortgage
Association,
950 Trust 1996-T6, Class C, 6.20%,
2/26/01 936,409
864 Trust 1993-192, Class 192-Z, 5.75%,
8/25/06 849,246
500 Trust 1994-12, Class 12-PE, 5.75%,
4/25/07 490,480
1,029 Trust I, Class-2, 11.50%, 4/01/09 1,158,182
1,439 Trust 1997-15, Class 15-FA, 6.02%,
4/25/27, ARM 1,437,989
-----------
Total multiple class mortgage
pass-throughs
(cost $7,476,182) 7,541,729
-----------
<CAPTION>
THE BLACKROCK GOVERNMENT INCOME TRUST
PRINCIPAL
AMOUNT
(000) DESCRIPTION VALUE (NOTE 1)
<C> <S> <C>
- ------------------------------------------------------------
U.S GOVERNMENT SECURITIES--13.9%
$ 4,040(a) United States Treasury Note,
6.375%, 5/15/00
(cost $4,063,101) $ 4,055,150
-----------
Total long-term investments
(cost $38,438,833) 38,368,242
-----------
SHORT-TERM INVESTMENTS--1.8%
- ------------------------------------------------------------
REPURCHASE AGREEMENT--1.8%
540 State Street Bank & Trust Company,
5.60%, due 7/1/97 in the amount
of $540,084 (cost $540,000 value
of collateral including accrued
interest is $558,892) 540,000
-----------
- ------------------------------------------------------------
TOTAL INVESTMENTS--133.5%
(cost $38,978,833; Note 4) 38,908,242
Liabilities in excess of other
assets--(33.5%) (9,776,144)
-----------
Net Assets--100% $29,132,098
-----------
-----------
</TABLE>
- ---------------
ARM--Adjustable Rate Mortgage
CMT--Constant Maturity Treasury
TBA-- Securities purchased on a delayed delivery basis with an approximate
principal amount and maturity date. The actual principal amount and the
maturity date will be determined upon settlement.
(a) All or a portion of principal amount pledged as collateral for reverse
repurchase agreements.
(b) All or a portion of principal amount pledged as collateral for futures
transactions.
(c) Rate shown reflects current rate of variable rate instruments.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-30
<PAGE>
STATEMENT OF ASSETS AND LIABILITIES THE BLACKROCK GOVERNMENT INCOME TRUST
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS JUNE 30, 1997
-------------
<S> <C>
Investments, at value (cost $38,978,833).................................................................... $38,908,242
Cash........................................................................................................ 1,652
Receivable for investments sold............................................................................. 1,394,221
Interest receivable......................................................................................... 329,074
Receivable for Fund shares sold............................................................................. 20,527
Due from broker-variation margin............................................................................ 6,628
-------------
Total assets............................................................................................. 40,660,344
-------------
LIABILITIES
Reverse repurchase agreements............................................................................... 7,624,875
Payable for investments purchased........................................................................... 3,683,488
Payable for Fund shares reacquired.......................................................................... 66,819
Dividends payable........................................................................................... 34,924
Management fee payable...................................................................................... 12,077
Interest payable............................................................................................ 9,343
Distribution fee payable.................................................................................... 3,632
Accrued expenses............................................................................................ 93,088
-------------
Total liabilities........................................................................................ 11,528,246
-------------
NET ASSETS.................................................................................................. $29,132,098
-------------
-------------
Net assets were comprised of:
Shares of beneficial interest, at par.................................................................... $ 31,168
Paid-in capital in excess of par......................................................................... 36,414,996
-------------
36,446,164
Distributions in excess of net investment income......................................................... (34,924)
Accumulated net realized loss on investments............................................................. (7,213,585)
Net unrealized depreciation on investments............................................................... (65,557)
-------------
Net assets, June 30, 1997................................................................................... $29,132,098
-------------
-------------
Class A:
Net asset value and redemption price per share
($29,115,935 / 3,114,609 shares of beneficial interest issued and outstanding)........................ $9.35
Maximum sales charge (3.0% of offering price)............................................................ .29
Maximum offering price to public......................................................................... $9.64
-------------
-------------
Class C:
Net asset value, offering price and redemption price per share
($16,163 / 1,730 shares of beneficial interest issued and outstanding)................................ $9.34
-------------
-------------
</TABLE>
- -------------------------------------------------------------------------------
See Notes to Financial Statements.
B-31
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
STATEMENT OF OPERATIONS
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year
Ended
June 30,
NET INVESTMENT INCOME 1997
--------
<S> <C>
Income
Interest and discount earned................. $2,840,963
----------
Expenses
Management fee............................... 166,647
Distribution fee--Class A.................... 49,853
Distribution fee--Class C.................... 707
Custodian's fees and expenses................ 73,000
Transfer agent's fees and expenses........... 52,000
Reports to shareholders...................... 46,000
Registration fees............................ 38,000
Legal fees and expenses...................... 30,000
Audit fee.................................... 27,000
Trustees' fees and expenses.................. 22,000
Miscellaneous................................ 10,897
Amortization of deferred organization
expense................................... 4,961
----------
Total operating expenses................. 521,065
Interest expense............................. 577,603
----------
Total expenses........................... 1,098,668
----------
Net investment income........................... 1,742,295
----------
REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized loss on:
Investment transactions...................... (3,334,709)
Financial futures contracts.................. (77,713)
Short sale transactions...................... (8,468)
----------
(3,420,890)
----------
Net change in unrealized depreciation on:
Investments.................................. 3,617,686
Financial futures contracts.................. 57,225
----------
3,674,911
----------
Net gain on investments......................... 254,021
----------
NET INCREASE IN NET ASSETS
RESULTING FROM OPERATIONS....................... $1,996,316
----------
----------
</TABLE>
THE BLACKROCK GOVERNMENT INCOME TRUST
STATEMENT OF CASH FLOWS
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year
Ended
June 30,
INCREASE (DECREASE) IN CASH 1997
--------
<S> <C>
Cash flows provided by operating activities:
Interest received.......................... $ 3,082,273
Operating expenses paid.................... (599,523)
Interest expense paid...................... (577,002)
Purchase of long-term portfolio
investments............................. (98,818,537)
Sale of long-term portfolio investments.... 108,255,166
Sale of short-term portfolio investments,
net..................................... 171,793
Variation margin on futures................ (43,756)
Deferred organization and other assets..... (708)
------------
Net cash provided by operating
activities.............................. 11,469,706
------------
Cash flows used for financing activities:
Net proceeds from shares subscribed........ 1,187,699
Payments on shares reacquired.............. (10,525,565)
Cash dividends paid(a)..................... (748,664)
Net payments for reduction of reverse
repurchase agreements................... (1,382,628)
------------
Net cash used for financing activities..... (11,469,158)
------------
Net increase in cash.......................... 548
Cash at beginning of year..................... 1,104
------------
Cash at end of year........................... $ 1,652
------------
------------
RECONCILIATION OF NET INCREASE IN NET ASSETS
TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net increase in net assets resulting from
operations................................. $ 1,996,316
------------
Decrease in investments....................... 7,706,214
Net realized loss on investment
transactions............................... 3,420,890
Decrease in unrealized depreciation........... (3,674,911)
Increase in receivable for investments sold... (282,620)
Decrease in interest receivable............... 223,382
Increase in due from broker-variation
margin..................................... (6,628)
Decrease in other assets...................... 4,253
Increase in payable for investments
purchased.................................. 2,177,337
Increase in interest payable.................. 601
Decrease in accrued expenses and other
liabilities................................... (78,458)
Decrease in variation margin payable.......... (16,670)
------------
Total adjustments.......................... 9,473,390
------------
Net cash provided by operating activities..... $ 11,469,706
------------
------------
</TABLE>
- ---------------
(a) Non-cash financing activity not included herein consists of reinvestment of
dividends and distributions of $1,031,449.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-32
<PAGE>
STATEMENT OF CHANGES IN NET ASSETS THE BLACKROCK GOVERNMENT INCOME TRUST
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------
INCREASE (DECREASE) 1997 1996
IN NET ASSETS ---- ----
<S> <C> <C>
Operations:
Net investment income..................................................................... $ 1,742,295 $ 2,449,186
Net realized gain (loss) on investment transactions....................................... (3,420,890) 196,234
Net change in unrealized appreciation (depreciation) on investments....................... 3,674,911 (473,514)
----------- ------------
Net increase in net assets resulting from operations...................................... 1,996,316 2,171,906
----------- ------------
Net equalization debits...................................................................... -- (5,142)
----------- ------------
Dividends and distributions (Note 1):
Dividends from net investment income:
Class A................................................................................ (1,718,151) (2,374,095)
Class B................................................................................ -- (51,187)
Class C................................................................................ (4,281) (1,632)
----------- ------------
(1,722,432) (2,426,914)
----------- ------------
Tax return of capital distributions:
Class A................................................................................ (37,724) (116,602)
Class B................................................................................ -- (2,514)
Class C................................................................................ (94) (80)
----------- ------------
(37,818) (119,196)
----------- ------------
Fund share transactions (net of share conversions) (Note 6):
Net proceeds from shares subscribed....................................................... 1,201,635 795,510
Net asset value of shares issued in reinvestment of dividends and distributions........... 1,031,449 1,488,750
Cost of shares reacquired................................................................. (10,451,900) (13,712,371)
----------- ------------
Net decrease in net assets from Fund share transactions................................... (8,218,816) (11,428,111)
----------- ------------
Total decrease............................................................................... (7,982,750) (11,807,457)
NET ASSETS
Beginning of year............................................................................ 37,114,848 48,922,305
----------- ------------
End of year.................................................................................. $29,132,098 $ 37,114,848
----------- ------------
----------- ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-33
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE BLACKROCK GOVERNMENT INCOME TRUST
- -------------------------------------------------------------------------------
The BlackRock Government Income Trust (the 'Fund'), is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund was organized as an unincorporated business trust in
Massachusetts on June 13, 1991 and had no operations until the issuance of
10,000 shares of beneficial interest for $100,000 on July 18, 1991 to Prudential
Investments Fund Management LLC ('PIFM'). Investment operations commenced on
September 9, 1991. The Fund's primary objectives are to provide low volatility
of net asset value and high monthly income, primarily through investment in U.S.
Government securities and obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The ability of issuers of debt
securities, other than those issued or guaranteed by the U.S. Government, to
meet their obligations may be affected by economic developments in a specific
industry or region.
- ------------------------------------------------------------
NOTE 1. ACCOUNTING POLICIES
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: The Fund values mortgage-backed, asset-backed and other
debt securities on the basis of current market quotations provided by dealers or
pricing services approved by the Board of Trustees. In determining the value of
a particular security, pricing services may use certain information with respect
to transactions in such securities, quotations from dealers, market transactions
in comparable securities, various relationships observed in the market between
securities, and calculated yield measures based on valuation technology commonly
employed in the market for such securities. Exchange-traded options are valued
at their last sales price as of the close of options trading on the applicable
exchanges. In the absence of a last sale, options are valued at the average of
the quoted bid and asked prices as of the close of business. Futures contracts
are valued at the last sale price as of the close of the commodities exchange on
which they trade unless the Fund's Board of Trustees determines that such price
does not reflect its fair value, in which case it will be valued at its fair
value as determined by the Fund's Board of Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
Securities for which such current market quotations are not readily available
are valued at fair value as determined in good faith under procedures
established by and under the general supervision and responsibility of the
Fund's Board of Trustees.
In connection with transactions in repurchase agreements, the Fund's custodian
takes possession of the underlying collateral securities, the value of which at
least equals the principal amount of the repurchase transaction, including
accrued interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily basis
to ensure the adequacy of the collateral. If the seller defaults and the value
of the collateral declines or if bankruptcy proceedings are commenced with
respect to the seller of the security, realization of the collateral by the Fund
may be delayed or limited.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount, known as 'initial
margin'. Subsequent payments, known as 'variation margin', are made or received
by the Fund each day, depending on the daily fluctuations in the value of the
underlying security. Such variation margin is recorded for financial statement
purposes on a daily basis as unrealized gain or loss. When the contract expires
or is closed, the gain or loss is realized and is presented in the statement of
operations as net realized gain (loss) on financial futures contracts.
The Fund invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Fund may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates with respect to securities which the Fund currently
owns or intends to purchase. When the Fund purchases an option, it pays a
premium and an amount equal to that premium is recorded as an investment. When
the Fund writes an option, it receives a premium and an amount equal to that
premium is recorded as a liability. The investment or liability is adjusted
daily to reflect the current market value of the option. If an option expires
unexercised, the Fund realizes a gain or loss to the extent of the premium
received or paid. If an option is exercised, the premium received or paid is an
adjustment to the proceeds from the sale or the cost of the purchase in
determining whether the Fund
- --------------------------------------------------------------------------------
B-34
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE BLACKROCK GOVERNMENT INCOME TRUST
- -------------------------------------------------------------------------------
has realized a gain or loss. The difference between the premium and the amount
received or paid on effecting a closing purchase or sale transaction is also
treated as a realized gain or loss. Gain or loss on purchased options is
included in net realized gain (loss) on investment transactions. Gain or loss on
written options is presented separately as net realized gain (loss) on written
option transactions.
Short Sales: The Fund may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). When the Fund makes a
short sale, it may borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Fund may
have to pay a fee to borrow the particular security and may be obligated to pay
over any payments received on such borrowed securities. A gain, limited to the
price at which the Fund sold the security short, or a loss, unlimited in
magnitude, will be recognized upon the termination of a short sale if the market
price at termination is less than or greater than, respectively, the proceeds
originally received.
Cash Flow Information: The Fund invests in securities and distributes dividends
from net investment income and from net realized gains which are paid in cash or
are reinvested at the discretion of shareholders. These activities are reported
in the Statement of Changes in Net Assets and additional information on cash
receipts and cash payments is presented in the Statement of Cash Flows.
Accounting practices that do not affect reporting activities on a cash basis
include carrying investments at value and amortizing discounts or premiums on
debt obligations.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized and unrealized gains and losses on sales of
portfolio securities are calculated on the identified cost basis. Interest
income is recorded on the accrual basis and the Fund accretes discount or
amortizes premium on securities purchased using the effective interest method.
Expenses are recorded on the accrual basis which may require the use of certain
estimates by management.
Net investment income (other than distribution fees), and realized and
unrealized gains or losses are allocated daily to each class of shares based
upon the relative proportion of net assets of each class at the beginning of the
day.
Taxes: It is the Fund's intention to continue to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute sufficient amounts of its taxable income to shareholders. Therefore,
no federal income tax provision is required.
Dividends and Distributions: The Fund declares daily and pays dividends monthly
first from net investment income then from realized short-term capital gains, if
any, and other sources, if necessary. Net long-term capital gains, if any, are
distributed at least annually. Dividends and distributions are recorded on the
ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Equalization: Effective July 1, 1996, the Fund discontinued the accounting
practice of equalization. Equalization is a practice whereby a portion of the
proceeds from sales and costs of repurchases of capital shares, equivalent on a
per share basis to the amount of distributable net investment income on the date
of the transaction, is credited or charged to undistributed net investment
income. A portion ($87,466) of undistributed net investment income at June 30,
1996, resulting from equalization was transferred to paid-in capital in excess
of par. Such reclassification has no effect on net assets, results of
operations, or net asset value per share.
Deferred Organization Expenses: A total of $135,000 was incurred in connection
with the organization of the Fund. Such amount was deferred and amortized over a
period of sixty months ended September, 1996.
- -------------------------------------------------------------------------------
NOTE 2. AGREEMENTS
The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM
has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PIFM has entered into a subadvisory
agreement with BlackRock Financial Management, Inc. ('BFM'). BFM furnishes
investment advisory services in connection with the management of the Fund. PIFM
pays for the costs of the subadviser's services, the compensation of officers of
the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly at an annual
rate of .50 of 1% of the Fund's average daily net assets. PIFM pays BFM, as
compensation for its services pursuant to the subadvisory agreement, a fee at
the annual rate of .25 of 1% of the Fund's average daily net assets.
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI') which acts as the distributor of the Class A and Class C
- --------------------------------------------------------------------------------
B-35
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE BLACKROCK GOVERNMENT INCOME TRUST
- -------------------------------------------------------------------------------
shares of the Fund. The Fund compensates PSI for distributing and servicing the
Fund's Class A and Class C shares, pursuant to plans of distribution (the 'Class
A and C Plans'), regardless of expenses actually incurred by them. The
distribution fees are accrued daily and payable monthly.
Pursuant to the Class A and C Plans, the Fund compensates PSI for
distribution-related activities at an annual rate of up to .30 of 1% and 1% of
the average daily net assets of the Class A and C shares, respectively. Such
expenses under the Class A and Class C Plans were .15% and .75%, respectively,
of the average daily net assets of Class A and Class C shares for the year ended
June 30, 1997.
PSI has advised the Fund that it has received approximately $3,900 in front-end
sales charges resulting from sales of Class A shares during the year ended June
30, 1997. From these fees, PSI paid such sales charges to dealers which in turn
paid commissions to salespersons and incurred other distribution costs.
With respect to the Class C Plan, PSI advised the Fund that for the year ended
June 30, 1997, it received approximately $600 in contingent deferred sales
charges imposed upon certain redemptions by Class C shareholders.
PSI and PIFM are indirect wholly-owned subsidiaries of The Prudential Insurance
Company of America ('Prudential').
The Fund, along with other affiliated registered investment companies (the
'Funds'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purposes of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of June 30, 1997.
The Funds pay a commitment fee at an annual rate of .055 of 1% on the unused
portion of the credit facility. The commitment fee is accrued and paid quarterly
on a pro-rata basis by the Funds.
- ------------------------------------------------------------
NOTE 3. OTHER TRANSACTIONS WITH AFFILIATES
Prudential Mutual Fund Services LLC ('PMFS'), a wholly-owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the year ended June 30, 1997, the
Fund incurred fees of approximately $43,500 for the services of PMFS. As of June
30, 1997, approximately $3,300 of such fees were due to PMFS. Transfer agent
fees and expenses in the Statement of Operations include certain out-of-pocket
expenses paid to non-affiliates.
NOTE 4. PORTFOLIO SECURITIES
Purchases and sales of investment securities, other than short-term investments
for the year ended June 30, 1997 aggregated $100,995,874 and $95,795,068,
respectively.
The federal income tax basis of the Fund's investments at June 30, 1997 was
$38,984,115 and, accordingly, net unrealized depreciation for federal income tax
purposes was $75,873 (gross unrealized appreciation--$84,905; gross unrealized
depreciation--$160,778).
During the year ended June 30, 1997 the Fund entered into financial futures
contracts. Details of open futures contracts at June 30, 1997 are as follows:
<TABLE>
<CAPTION>
VALUE AT VALUE AT UNREALIZED
NUMBER OF EXPIRATION TRADE JUNE 30, APPRECIATION
CONTRACTS TYPE DATE DATE 1997 (DEPRECIATION)
- --------- ---------------- ----------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Short position:
31 5 yr. T-Note Sept. 1997 $3,282,423 $3,282,609 $ (186)
Long position:
2 30 yr. T-Bond Sept. 1997 216,905 222,125 5,220
-----
$5,034
-----
-----
</TABLE>
For federal income tax purposes, the Fund had a capital loss carryforward at
June 30, 1997 of approximately $3,793,000 of which $559,000 expires in 2001,
$2,044,000 expires in 2002, $742,000 expires in 2003, and $448,000 expires in
2004. The Fund will elect to treat net realized capital losses of approximately
$3,410,400 incurred in the eight months period ended June 30, 1997 as having
been incurred in the following fiscal year. Accordingly, no capital gains
distributions are expected to be paid to shareholders until net gains have been
realized in excess of such amount.
- ------------------------------------------------------------
NOTE 5. BORROWINGS
The Fund enters into reverse repurchase agreements with qualified, third party
broker-dealers as determined by and under the direction of the Board of
Trustees. Reverse repurchase agreements are a technique involving leverage and
are considered a borrowing of the Fund thereby causing the Fund's total assets
to exceed its net assets. In a reverse repurchase agreement, the Fund sells
securities and agrees to repurchase them at a mutually agreed date and price.
During this time, the Fund continues to receive the principal and interest
payments from that security. At the end of the term, the Fund receives the same
securities that were sold for the same initial dollar amount plus interest on
the cash proceeds of the initial sale. Interest on the value of reverse
repurchase agreements issued and outstanding is based upon competitive market
rates at the time of issuance.
- --------------------------------------------------------------------------------
B-36
<PAGE>
NOTES TO FINANCIAL STATEMENTS THE BLACKROCK GOVERNMENT INCOME TRUST
- -------------------------------------------------------------------------------
The Fund had outstanding reverse repurchase agreements at June 30, 1997 as
follows:
<TABLE>
<CAPTION>
AMOUNT
DATE MATURITY PRINCIPAL INTEREST DUE AT
SOLD DATE AMOUNT RATE MATURITY
- --------- --------- ----------- -------- ----------
<S> <C> <C> <C> <C>
06/13/97 07/24/97 $ 862,000 5.63% $ 867,527
06/23/97 07/24/97 2,819,000 5.61 2,832,618
06/25/97 07/01/97 3,943,875 5.38 3,947,408
-----------
$ 7,624,875
-----------
-----------
</TABLE>
The average daily balance of reverse repurchase agreements outstanding during
the year ended June 30, 1997 was approximately $10,695,000 at a weighted average
interest rate of approximately 5.40%. The maximum amount of reverse repurchase
agreements outstanding at any month-end during the year was $15,482,969 as of
October 31, 1996.
- ------------------------------------------------------------
NOTE 6. CAPITAL
The Fund currently offers only Class A and Class C shares. Class A shares are
sold with a front-end sales charge of up to 3%. Class C shares are sold with a
contingent deferred sales charge of 1% during the first year. Class B shares,
which were discontinued from being offered on November 1, 1994, automatically
converted to Class A shares upon being held longer than one year from the date
of purchase. On November 28, 1995, the remaining Class B shares converted to
Class A shares.
The Fund has authorized an unlimited number of shares of beneficial interest at
$.01 par value per share divided into three classes, of which two classes,
designated Class A and Class C shares, are currently being offered.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
- ------------------------------------- ---------- ------------
<S> <C> <C>
Year ended June 30, 1997:
Shares sold.......................... 121,896 $ 1,138,130
Shares issued in reinvestment
of dividends and distributions..... 110,261 1,027,696
Shares reacquired.................... (1,109,126) (10,334,549)
---------- ------------
Net decrease in shares outstanding... (876,969) $ (8,168,723)
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Class A SHARES AMOUNT
- ------------------------------------- ---------- ------------
<S> <C> <C>
Year ended June 30, 1996:
Shares sold.......................... 75,957 $ 711,331
Shares issued in reinvestment
of dividends and distributions..... 155,658 1,455,287
Shares reacquired.................... (1,435,603) (13,420,680)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (1,203,988) (11,254,062)
Shares issued upon conversion from
Class B............................ 237,999 2,230,509
---------- ------------
Net decrease in shares outstanding... (965,989) $ (9,023,553)
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Class B
- -------------------------------------
<S> <C> <C>
Period ended November 28, 1995(a):
Shares sold.......................... 139 $ 1,297
Shares issued in reinvestment
of dividends and distributions..... 3,471 32,417
Shares reacquired.................... (28,748) (266,771)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (25,138) (233,057)
Shares reacquired upon conversion
into Class A....................... (238,015) (2,230,509)
---------- ------------
Net decrease in shares outstanding... (263,153) $ (2,463,566)
---------- ------------
---------- ------------
</TABLE>
<TABLE>
<CAPTION>
Class C
- -------------------------------------
<S> <C> <C>
Year ended June 30, 1997:
Shares sold.......................... 6,842 $ 63,505
Shares issued in reinvestment
of dividends and distributions..... 403 3,753
Shares reacquired.................... (12,611) (117,351)
---------- ------------
Net decrease in shares outstanding... (5,366) $ (50,093)
---------- ------------
---------- ------------
Year ended June 30, 1996:
Shares sold.......................... 8,898 $ 82,882
Shares issued in reinvestment
of dividends and distributions..... 103 1,046
Shares reacquired.................... (2,665) (24,920)
---------- ------------
Net increase in shares outstanding... 6,336 $ 59,008
---------- ------------
---------- ------------
</TABLE>
- ---------------
(a) On November 28, 1995, all outstanding Class B shares were converted to Class
A shares.
- --------------------------------------------------------------------------------
B-37
<PAGE>
FINANCIAL HIGHLIGHTS THE BLACKROCK GOVERNMENT INCOME TRUST
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED JUNE 30,
--------------------------------------------------------
CLASS A
--------------------------------------------------------
1997(a) 1996 1995(a) 1994(a) 1993
------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............ $ 9.28 $ 9.37 $ 9.29 $ 9.67 $ 10.07
------- ------- ------- ------- --------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......................... .49 .51 .51 .45 .64
Net realized and unrealized gains (losses) on
investments and foreign currency
transactions............................... .08 (.06) .09 (.35) (.41)
------- ------- ------- ------- --------
Total from investment operations........... .57 .45 .60 .10 .23
------- ------- ------- ------- --------
LESS DISTRIBUTIONS
Dividends from net investment income.......... (.49) (.51) (.52) (.40) (.63)
Tax return of capital distributions........... (.01) (.03) -- (.08) --
------- ------- ------- ------- --------
Total distributions........................ (.50) (.54) (.52) (.48) (.63)
------- ------- ------- ------- --------
Net asset value, end of year.................. $ 9.35 $ 9.28 $ 9.37 $ 9.29 $ 9.67
------- ------- ------- ------- --------
------- ------- ------- ------- --------
TOTAL RETURN(b):.............................. 6.22% 4.98% 6.55% 1.02% 2.40%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of year (000)................. $29,116 $37,049 $46,450 $69,912 $113,623
Average net assets (000)...................... $33,235 $42,598 $56,395 $91,849 $131,371
Ratios to average net assets:
Total expenses............................. 3.45% 3.74% 2.19% 1.89% 1.94%
Operating expenses, including distribution
fee..................................... 1.56% 1.47% 1.31% 1.17% 1.05%
Operating expenses, excluding distribution
fee..................................... 1.41% 1.32% 1.16% 1.05% .95%
Net investment income...................... 5.23% 5.51% 5.49% 4.94% 6.71%
FOR CLASS A, B AND C SHARES:
Portfolio turnover rate.................... 225% 173% 254% 209% 228%
</TABLE>
<TABLE>
<CAPTION>
BORROWINGS (FOR ALL CLASSES):
AMOUNT OF DEBT AVERAGE AMOUNT OF
OUTSTANDING AT END DEBT OUTSTANDING
YEAR ENDED OF YEAR (000) DURING YEAR (000)
- --------------------------------------------------------------------- ------------------ -------------------
<S> <C> <C>
June 30, 1997........................................................ $ 7,625 $10,695
June 30, 1996........................................................ 9,008 15,626
June 30, 1995........................................................ 19,872 9,130
June 30, 1994........................................................ 8,300 18,840
June 30, 1993........................................................ 24,386 34,892
</TABLE>
<TABLE>
<CAPTION>
BORROWINGS (FOR ALL CLASSES):
AVERAGE AMOUNT OF
DEBT PER SHARE
AVERAGE NUMBER OF OUTSTANDING
SHARES OUTSTANDING DURING
YEAR ENDED DURING YEAR (000) YEAR
- --------------------------------------------------------------------- ------------------- -----------------
<S> <C> <C>
June 30, 1997........................................................ 3,571 $2.99
June 30, 1996........................................................ 4,550 3.43
June 30, 1995........................................................ 6,389 1.43
June 30, 1994........................................................ 10,234 1.84
June 30, 1993........................................................ 13,517 2.58
</TABLE>
- ---------------
(a) Calculated based upon weighted average shares outstanding during the year.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each year reported and includes reinvestment of dividends and
distributions.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-38
<PAGE>
FINANCIAL HIGHLIGHTS THE BLACKROCK GOVERNMENT INCOME TRUST
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CLASS B CLASS C
------------------------------------------------------- ---------
JULY 1, SEPTEMBER 1, YEAR
1995 1992(a) ENDED
THROUGH YEAR ENDED JUNE 30, THROUGH JUNE 30,
NOVEMBER 27, --------------------- JUNE 30, ---------
1995(f) 1995(c) 1994(c) 1993 1997(c)
------------ -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 9.37 $ 9.29 $ 9.68 $ 9.97 $ 9.28
------ -------- -------- ----- ---------
INCOME FROM INVESTMENT OPERATIONS
Net investment income......................... .22 .48 .37 .47 .43
Net realized and unrealized gains (losses) on
investments and foreign currency
transactions............................... .02 .09 (.37) (.32) .08
------ -------- -------- ----- ---------
Total from investment operations........... .24 .57 -- .15 .51
------ -------- -------- ----- ---------
LESS DISTRIBUTIONS
Dividends from net investment income.......... (.22) (.49) (.32) (.44) (.44)
Tax return of capital distributions........... (.01) -- (.07) -- (.01)
------ -------- -------- ----- ---------
Total distributions........................ (.23) (.49) (.39) (.44) (.45)
------ -------- -------- ----- ---------
Net asset value, end of period................ $ 9.38 $ 9.37 $ 9.29 $ 9.68 $ 9.34
------ -------- -------- ----- ---------
------ -------- -------- ----- ---------
TOTAL RETURN(e):.............................. 2.63% 6.16% (.01)% 1.39% 5.55%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 0 $2,466 $3,845 $5,954 $ 16
Average net assets (000)...................... $ 1,820 $2,928 $5,778 $2,740 $ 94
Ratios to average net assets:
Total expenses............................. 3.87%(b) 2.56% 2.76% 2.89%(b) 4.05%
Operating expenses, including distribution
fee..................................... 1.52%(b) 1.68% 2.05% 1.95%(b) 2.16%
Operating expenses, excluding distribution
fee..................................... 1.32%(b) 1.16% 1.05% .95%(b) 1.41%
Net investment income...................... 5.46%(b) 5.12% 4.06% 5.11%(b) 4.63%
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 1,
1994(a)
THROUGH
JUNE 30,
1996 1995(c)
----------- ------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.......... $ 9.37 $ 9.26
----------- -----
INCOME FROM INVESTMENT OPERATIONS
Net investment income......................... .45 .23
Net realized and unrealized gains (losses) on
investments and foreign currency
transactions............................... (.06) .21
----------- -----
Total from investment operations........... .39 .44
----------- -----
LESS DISTRIBUTIONS
Dividends from net investment income.......... (.46) (.33)
Tax return of capital distributions........... (.02) --
----------- -----
Total distributions........................ (.48) (.33)
----------- -----
Net asset value, end of period................ $ 9.28 $ 9.37
----------- -----
----------- -----
TOTAL RETURN(e):.............................. 4.31% 4.65%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 66 $7,121(d)
Average net assets (000)...................... $ 33 $1,335(d)
Ratios to average net assets:
Total expenses............................. 4.10% 2.24%(b)
Operating expenses, including distribution
fee..................................... 2.07% 1.91%(b)
Operating expenses, excluding distribution
fee..................................... 1.32% 1.16%(b)
Net investment income...................... 4.91% 4.89%(b)
</TABLE>
- ---------------
(a) Commencement of offering of shares.
(b) Annualized.
(c) Calculated based upon weighted average shares outstanding during the period.
(d) Amounts are actual and not rounded to nearest thousand.
(e) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total return for periods of less than one full year are not
annualized.
(f) Last day of investment operations of Class B shares. On November 28, 1995,
all outstanding Class B shares were converted to Class A shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
B-39
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS THE BLACKROCK GOVERNMENT INCOME TRUST
- -------------------------------------------------------------------------------
To the Shareholders and Board of Trustees of
The BlackRock Government Income Trust:
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations, of cash
flows and of changes in net assets and the financial highlights present fairly,
in all material respects, the financial position of The BlackRock Government
Income Trust (the 'Fund') at June 30, 1997, and the results of its operations,
the changes in its net assets and the financial highlights for the year then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these financial statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit, which included
confirmation of securities at June 30, 1997 by correspondence with the
custodian and brokers, provides a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
August 21, 1997
- --------------------------------------------------------------------------------
B-40
<PAGE>
CHANGE OF INDEPENDENT ACCOUNTANTS THE BLACKROCK GOVERNMENT INCOME TRUST
- -------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
independent accountants. For the years ended June 30, 1996, 1995, 1994, 1993 and
the period ended June 30, 1992, Deloitte & Touche LLP expressed an unqualified
opinion on the Fund's financial statements. There were no disagreements between
Fund management and Deloitte & Touche LLP prior to their termination. The Board
of Trustees approved the termination of Deloitte & Touche LLP and the
appointment of Price Waterhouse LLP as the Fund's independent accountants.
- --------------------------------------------------------------------------------
B-41
<PAGE>
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
The Shareholders and Board of Trustees of
The Blackrock Government Income Trust:
We have audited the accompanying statements of changes in net assets of The
BlackRock Government Income Trust for the year ended June 30, 1996, and the
financial highlights contained in the prospectus for each of the periods
presented in the four years ended June 30, 1996. 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. 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 changes in net assets and the financial
highlights of each of the respective portfolios of The BlackRock Government
Income Trust for the respective stated periods in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
New York, New York
August 15, 1996
B-42
<PAGE>
APPENDIX I--GENERAL INVESTMENT INFORMATION
The following terms are used in mutual fund investing.
ASSET ALLOCATION
Asset allocation is a technique for reducing risk, providing balance. Asset
allocation among different types of securities within an overall portfolio helps
to reduce risk and to potentially provide stable returns, while enabling
investors to work towards their financial goal(s). Asset allocation is also a
strategy to gain exposure to better performing asset classes while maintaining
investment in other asset classes.
DIVERSIFICATION
Diversification is a time-honored technique for reducing risk, providing
"balance" to an overall portfolio and potentially achieving more stable returns.
Owning a portfolio of securities mitigates the individual risks (and returns) of
any one security. Additionally, diversification among types of securities
reduces the risks (and general returns) of any one type of security.
DURATION
Debt securities have varying levels of sensitivity to interest rates. As
interest rates fluctuate, the value of a bond (or a bond portfolio) will
increase or decrease. Longer-term bonds are generally more sensitive to changes
in interest rates. When interest rates fall, bond prices generally rise.
Conversely, when interest rates rise, bond prices generally fall.
Duration is an approximation of the price sensitivity of a bond (or a bond
portfolio) to interest rate changes. It measures the weighted average maturity
of a bond's (or a bond portfolio's) cash flows, I.E., principal and interest
rate payments. Duration is expressed as a measure of time in years--the longer
the duration of a bond (or a bond portfolio), the greater the impact of interest
rate changes on the bond's (or the bond portfolio's) price. Duration differs
from effective maturity in that duration takes into account call provisions,
coupon rates and other factors. Duration measures interest rate risk only and
not other risks such as credit risk and, in the case of non-U.S. dollar
denominated securities, currency risk. Effective maturity measures the final
maturity dates of a bond (or a bond portfolio).
MARKET TIMING
Market timing--buying securities when prices are low and selling them when
prices are relatively higher may not work for many investors because it is
impossible to predict with certainty how the price of a security will fluctuate.
However, owning a security for a long period of time may help investors offset
short-term price volatility and realize positive returns.
POWER OF COMPOUNDING
Over time, the compounding of returns can significantly impact investment
returns. Compounding is the effect of continuous investment on long-term
investment results, by which the proceeds of capital appreciation (and income
distributions, if elected) are reinvested to contribute to the overall growth of
assets. The long-term investment results of compounding may be greater than that
of an equivalent initial investment in which the proceeds of capital
appreciation and income distributions are taken in cash.
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APPENDIX II--INFORMATION RELATING TO PRUDENTIAL
Set forth below is information relating to The Prudential Insurance Company
of America (Prudential) and its subsidiaries as well as information relating to
the Prudential Mutual Funds. See "Management of the Fund--Manager" in the
Prospectus. The data will be used in sales materials relating to the Prudential
Mutual Funds. Unless otherwise indicated, the information is as of December 31,
1996 and is subject to change thereafter. All information relies on data
provided by The Prudential Investment Corporation (PIC) or from other sources
believed by the Manager to be reliable. Such information has not been verified
by the Fund.
INFORMATION ABOUT PRUDENTIAL
The Manager and PIC(1)are subsidiaries of Prudential, which is one of the
largest diversified financial services institutions in the world and, based on
total assets, the largest insurance company in North America as of December 31,
1996. Principal products and services include life and health insurance, other
healthcare products, property and casualty insurance, securities brokerage,
asset management, investment advisory services and real estate brokerage.
Prudential (together with its subsidiaries) employs almost 81,000 persons
worldwide, and maintains a sales force of approximately 11,500 agents and nearly
6,400 financial advisors. Prudential is a major issuer of annuities, including
variable annuities. Prudential seeks to develop innovative products and services
to meet consumer needs in each of its business areas. Prudential uses the rock
of Gibraltar as its symbol. The Prudential rock is a recognized brand name
throughout the world.
INSURANCE. Prudential has been engaged in the insurance business since 1875.
It insures or provides financial services to nearly 50 million people worldwide.
Long one of the largest issuers of individual life insurance, the Prudential has
22 million life insurance policies in force today with a face value of $1
trillion. Prudential has the largest capital base ($12.1 billion) of any life
insurance company in the United States. The Prudential provides auto insurance
for approximately 1.6 million cars and insures approximately 1.2 million homes.
MONEY MANAGEMENT. Prudential is one of the largest pension fund managers in
the country, providing pension services to 1 in 3 Fortune 500 firms. It manages
$36 billion of individual retirement plan assets, such as 401(k) plans. As of
December 31, 1996, Prudential had more than $332 billion in assets under
management. Prudential Investments, a business group of Prudential (of which
Prudential Mutual Funds is a key part) manages over $190 billion in assets of
institutions and individuals. In PENSIONS & INVESTMENTS, May 12, 1997,
Prudential was ranked third in terms of total assets under management.
REAL ESTATE. The Prudential Real Estate Affiliates, the fourth largest real
estate brokerage network in the United States, has more than 37,000 brokers and
agents across the United States.(2)
HEALTHCARE. Over two decades ago, the Prudential introduced the first
federally-funded, for-profit HMO in the country. Today, approximately 4.6
million Americans receive healthcare from a Prudential managed care membership.
FINANCIAL SERVICES. The Prudential Bank, a wholly-owned subsidiary of
Prudential, has over $1 billion in assets and serves nearly 1.5 million
customers across 50 states.
INFORMATION ABOUT THE PRUDENTIAL MUTUAL FUNDS
As of June 30, 1997 Prudential Investments Fund Management was the fifteenth
largest mutual fund company in the country with over 2.5 million shareholders
invested in more than 50 mutual fund portfolios and variable annuities with more
than 3.7 million shareholder accounts.
The Prudential Mutual Funds have over 30 portfolio managers who manage over
$55 billion in mutual fund and variable annuity assets. Some of Prudential's
portfolio managers have over 20 years of experience managing investment
portfolios.
- ------------------------
(1) Prudential Investments, a business group of PIC, serves as the Subadviser
to substantially all of the Prudential Mutual Funds. Wellington Management
Company serves as the subadviser to Global Utility Fund, Inc.,
Nicholas-Applegate Capital Management as the subadviser to
Nicholas-Applegate Fund, Inc., Jennison Associates Capital Corp., as the
subadviser to Prudential Jennison Series Fund, Inc. and Prudential Active
Balanced Fund, a portfolio of Prudential Dryden Fund, Mercator Asset
Management LP as the subadviser to International Stock Series, a portfolio
of Prudential World Fund, Inc. and BlackRock Financial Management, Inc. as
subadviser to the BlackRock Government Income Trust. There are multiple
subadvisers for The Target Portfolio Trust.
(2) As of December 31, 1996.
II-1
<PAGE>
From time to time, there may be media coverage of portfolio managers and
other investment professionals associated with the Manager and the Subadviser in
national and regional publications, on television and in other media.
Additionally, individual mutual fund portfolios are frequently cited in surveys
conducted by national and regional publications and media organizations such as
THE WALL STREET JOURNAL, THE NEW YORK TIMES, BARRON'S and USA TODAY.
EQUITY FUNDS. FORBES magazine listed Prudential Equity Fund among twenty
mutual funds on its Honor Roll in its mutual fund issue of August 28, 1995.
Honorees are chosen annually among mutual funds (excluding sector funds) which
are open to new investors and have had the same management for at least five
years. FORBES considers, among other criteria, the total return of a mutual fund
in both bull and bear markets as well as a fund's risk profile. Prudential
Equity Fund is managed with a "value" investment style by PIC. In 1995,
Prudential Securities introduced Prudential Jennison Fund, a growth-style equity
fund managed by Jennison Associates Capital Corp., a premier institutional
equity manager and a subsidiary of Prudential.
HIGH YIELD FUNDS. Investing in high yield bonds is a complex and research
intensive pursuit. A separate team of high yield bond analysts monitor the 167
issues held in the Prudential High Yield Fund (currently the largest fund of its
kind in the country) along with 100 or so other high yield bonds, which may be
considered for purchase.(3) Non-investment grade bonds, also known as junk bonds
or high yield bonds, are subject to a greater risk of loss of principal and
interest including default risk than higher-rated bonds. Prudential high yield
portfolio managers and analysts meet face-to-face with almost every bond issuer
in the High Yield Fund's portfolio annually, and have additional telephone
contact throughout the year.
Prudential's portfolio managers are supported by a large and sophisticated
research organization. Fourteen investment grade bond analysts monitor the
financial viability of approximately 1,750 different bond issuers in the
investment grade corporate and municipal bond markets--from IBM to small
municipalities, such as Rockaway Township, New Jersey. These analysts consider
among other things sinking fund provisions and interest coverage ratios.
Prudential's portfolio managers and analysts receive research services from
almost 200 brokers and market service vendors. They also receive nearly 100
trade publications and newspapers--from PULP AND PAPER FORECASTER to WOMEN'S
WEAR DAILY--to keep them informed of the industries they follow.
Prudential Mutual Funds' traders scan over 100 computer monitors to collect
detailed information on which to trade. From natural gas prices in the Rocky
Mountains to the results of local municipal elections, a Prudential portfolio
manager or trader is able to monitor it if it's important to a Prudential mutual
fund.
Prudential Mutual Funds trade approximately $31 billion in U.S. and foreign
government securities a year. PIC seeks information from government policy
makers. In 1995, Prudential's portfolio managers met with several senior U.S.
and foreign government officials, on issues ranging from economic conditions in
foreign countries to the viability of index-linked securities in the United
States.
Prudential Mutual Funds' portfolio managers and analysts met with over 1,200
companies in 1995, often with the Chief Executive Officer (CEO) or Chief
Financial Officer (CFO). They also attended over 250 industry conferences.
Prudential Mutual Fund global equity managers conducted many of their visits
overseas, often holding private meetings with a company in a foreign language
(our global equity managers speak 7 different languages, including Mandarin
Chinese).
TRADING DATA.(4) On an average day, Prudential Mutual Funds' U.S. and
foreign equity trading desks traded $77 million in securities representing over
3.8 million shares with nearly 200 different firms. Prudential Mutual Funds'
bond trading desks traded $157 million in government and corporate bonds on an
average day. That represents more in daily trading than most bond funds tracked
by Lipper even have in assets.(5) Prudential Mutual Funds' money market desk
traded $3.2 billion in money market securities on an average day, or over $800
billion a year. They made a trade every 3 minutes of every trading day. In 1994,
the Prudential Mutual Funds effected more than 40,000 trades in money market
securities and held on average $20 billion of money market securities.(6)
- ------------------------
(3) As of December 31, 1995. The number of bonds and the size of the Fund are
subject to change.
(4) Trading data represents average daily transactions for portfolios of the
Prudential Mutual Funds for which PIC serves as the subadviser, portfolios
of the Prudential Series Fund and institutional and non-US accounts managed
by Prudential Mutual Fund Investment Management, a division of PIC, for the
year ended December 31, 1995.
(5) Based on 669 funds in Lipper Analytical Services categories of Short U.S.
Treasury, Short U.S. Government, Intermediate U.S. Treasury, Intermediate
U.S. Government, Short Investment Grade Debt, Intermediate Investment Grade
Debt, General U.S. Treasury, General U.S. Government and Mortgage funds.
(6) As of December 31, 1994.
II-2
<PAGE>
Based on complex-wide data, on an average day, over 7,250 shareholders
telephoned Prudential Mutual Fund Services, Inc., the Transfer Agent of the
Prudential Mutual Funds, on the Prudential Mutual Funds' toll-free number. On an
annual basis, that represents approximately 1.8 million telephone calls
answered.
INFORMATION ABOUT PRUDENTIAL SECURITIES
Prudential Securities is the fifth largest retail brokerage firm in the
United States with approximately 5,600 financial advisors. It offers to its
clients a wide range of products, including Prudential Mutual Funds and
annuities. As of December 31, 1995, assets held by Prudential Securities for its
clients approximated $168 billion. During 1994, over 28,000 new customer
accounts were opened each month at PSI.(7)
Prudential Securities has a two-year Financial Advisor training program plus
advanced education programs, including Prudential Securities "university," which
provides advanced education in a wide array of investment areas. Prudential
Securities is the only Wall Street firm to have its own in-house Certified
Financial Planner (CFP) program. In the December 1995 issue of Registered Rep,
an industry publication, Prudential Securities Financial Advisor training
programs received a grade of A- (compared to an industry average of B+).
In 1995, Prudential Securities' equity research team ranked 8th in
INSTITUTIONAL INVESTOR magazine's 1995 "All America Research Team" survey. Five
Prudential Securities analysts were ranked as first-team finishers.(8)
In addition to training, Prudential Securities provides its financial
advisors with access to firm economists and market analysts. It has also
developed proprietary tools for use by financial advisors, including the
Financial ArchitectSM, a state-of-the-art asset allocation software program
which helps Financial Advisors to evaluate a client's objectives and overall
financial plan, and a comprehensive mutual fund information and analysis system
that compares different mutual funds.
For more complete information about any of the Prudential Mutual Funds,
including charges and expenses, call your Prudential Securities financial
adviser or Pruco/Prudential representative for a free prospectus. Read it
carefully before you invest or send money.
- ------------------------
(7) As of December 31, 1994.
(8) On an annual basis, INSTITUTIONAL INVESTOR magazine surveys more than 700
institutional money managers, chief investment officers and research
directors, asking them to evaluate analysts in 76 industry sectors. Scores
were produced by taking the number of votes awarded to an individual
analyst and weighting them based on the size of the voting institution. In
total, the magazine sent its survey to more than 2,000 institutions and a
group of European and Asian Institutions.
II-3
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(a) FINANCIAL STATEMENTS:
(1)Financial statements included in the Prospectus constituting Part A of
this Registration Statement:
Financial Highlights.
(2) Financial statements included in the Statement of Additional
Information constituting Part B of this Registration Statement:
Portfolio of Investments at June 30, 1997.
Statement of Assets and Liabilities at June 30, 1997.
Statement of Operations for the fiscal year ended June 30, 1997.
Statement of Changes in Net Assets for the years ended June 30, 1997
and June 30, 1996.
Notes to Financial Statements.
Financial Highlights.
Report of Independent Accountants.
Independent Auditors' Report.
(b) EXHIBITS:
<TABLE>
<C> <S>
1. (a) Declaration of Trust dated June 13, 1991.*
(b) Certificate of Amendment to Declaration of Trust dated July 15, 1991.*
(c) Certificate of Amendment to Declaration of Trust dated August 18, 1992.*
(d) Amended and Restated Certificate of Designation dated October 31, 1994
incorporated by reference to Exhibit 1(d) to Post-Effective Amendment No. 6 to the
Registration Statement on Form N-1A (File No. 33-41224) filed via EDGAR on August
31, 1995.
2. By-Laws.*
4. Specimen certificate for shares of beneficial interest, $.01 par value.*
5. (a) Management Agreement between the Registrant and Prudential Mutual Fund
Management Inc. incorporated by reference to Exhibit 5(a) to Post-Effective
Amendment No. 6 to the Registration Statement on Form N-1A (File No. 33-41224) filed
via EDGAR on August 31, 1995.
(b) Subadvisory Agreement among the Registrant, Prudential Mutual Fund Management,
Inc. and BlackRock Financial Management, Inc. incorporated by reference to Exhibit
5(b) to Post-Effective Amendment No. 6 to the Registration Statement on Form N-1A
(File No. 33-41224) filed via EDGAR on August 31, 1995.
6. (a) Amendment to Distribution Agreement incorporated by reference to Exhibit 6(b) to
Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A (File No.
33-41224) filed via EDGAR on August 29, 1996.
(b) Distribution Agreement between the Registrant and Prudential Securities
Incorporated dated April 10, 1996 incorporated by reference to Exhibit 6(c) to
Post-Effective Amendment No. 7 to the Registration Statement on Form N-1A (File No.
33-41224) filed via EDGAR on August 29, 1996.
8. (a) Custodian Contract between the Registrant and State Street Bank and Trust
Company.*
(b) Amendment to Custodian Contract between the Registrant and State Street Bank and
Trust Company.*
9. Transfer Agency and Service Agreement between the Registrant and Prudential Mutual
Fund Services, Inc.*
10. Opinion of Counsel.*
</TABLE>
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<TABLE>
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11. (a) Consent of Independent Accountants.*
(b) Consent of Deloitte & Touche LLP.*
13. Not Applicable.
15. (a) Restated Distribution and Service Plan pursuant to Rule 12b-1 (Class A Shares)
between the Registrant and Prudential Mutual Fund Distributors, Inc.*
(b) Restated Distribution and Service Plan pursuant to Rule 12b-1 (Class B Shares)
between the Registrant and Prudential Securities Incorporated.*
(c) Distribution and Service Plan pursuant to Rule 12b-1 (Class C Shares) between
the Registrant and Prudential Securities Incorporated.*
16. Schedule of Computation of Performance Quotations for Class A and Class C shares.*
27. Financial Data Schedules filed as Exhibit 27 for electronic purposes.*
</TABLE>
---------------------
* Filed herewith.
ITEM 25. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 26. NUMBER OF HOLDERS OF SECURITIES.
As of August 8, 1997, there were 2,444, and 7 record holders of shares of
beneficial interest, $.01 par value per share, of the Class A and Class C
shares, respectively, of the Registrant.
ITEM 27. INDEMNIFICATION.
Article V., Section 5.1 of the Registrant's Declaration of Trust provides
that neither shareholders nor Trustees, officers, employees or agents shall be
subject to personal liability to any other person, except (with respect to
Trustees, officers, employees or agents) liability arising from bad faith,
willful misfeasance, gross negligence or reckless disregard of his or her
duties. Section 5.1 also provides that the Registrant will indemnify and hold
harmless each shareholder against all claims and all expenses reasonably related
thereto.
As permitted by Section 17(h) and (i) of the Investment Company Act of 1940,
as amended (the 1940 Act) and pursuant to Article XI of the Fund's By-laws
(Exhibit 2 to the Registration Statement), officers, directors, employees and
agents of the Registrant will not be liable to the Registrant, any shareholder,
officer, Trustee, employee, agent or other person for any action or failure to
act, except for bad faith, willful misfeasance, gross negligence or reckless
disregard of duties, and those individuals may be indemnified against
liabilities in connection with the Registrant, subject to the same exceptions.
As permitted by Section 17(i) of the 1940 Act, pursuant to Section 10 of each
the Distribution Agreement (Exhibits 6(b), 6(c) and 6(d) to the Registration
Statement), the Distributor of the Registrant may be indemnified against
liabilities which it may incur, except liabilities arising from bad faith, gross
negligence, willful misfeasance or reckless disregard of duties.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the Securities Act) may be permitted to Trustees, officers
and controlling persons of the Registrant pursuant to the foregoing provisions
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the 1940 Act and is, therefore, unenforceable. In the event that
a claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer, or
controlling person of the Registrant in connection with the successful defense
of any action, suit or proceeding) is asserted against the Registrant by such
Trustees, officer or controlling person in connection with the shares being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the 1940 Act and will be governed by the final
adjudication of such issue.
The Registrant has purchased an insurance policy insuring its officers and
trustees against liabilities, and certain costs of defending claims against such
officers and trustees, to the extent such officers and trustees are not found to
have committed conduct constituting willful misfeasance, bad faith, gross
negligence or reckless disregard in the performance of their duties. The
insurance policy also insures the Registrant against the cost of indemnification
payments to officers and trustees under certain circumstances.
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Section 9 of the Management Agreement (Exhibit 5(a) to the Registration
Statement) and Section 4 of the Subadvisory Agreement (Exhibit 5(b) to the
Registration Statement) limit the liability of Prudential Investments Fund
Management LLC (PIFM) and BlackRock Financial Management, Inc., respectively, to
liabilities arising from willful misfeasance, bad faith or gross negligence in
the performance of their respective duties or from reckless disregard by them of
their respective obligations and duties under the agreements.
The Registrant hereby undertakes that it will apply the indemnification
provisions of its By-Laws and the Distribution Agreements in a manner consistent
with Release No. 11330 of the Securities and Exchange Commission under the 1940
Act so long as the interpretation of Section 17(h) and 17(i) of such Act remain
in effect and are consistently applied.
ITEM 28. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
(i) PRUDENTIAL INVESTMENTS FUND MANAGEMENT LLC
See "How the Fund is Managed--Manager" in the Prospectus constituting Part A
of this Registration Statement and "Manager" in the Statement of Additional
Information constituting Part B of this Registration Statement.
The business and other connections of the officers of PIFM are listed in
Schedules A and D of Form ADV of PMF as currently on file with the Securities
and Exchange Commission, the text of which is hereby incorporated by reference
(File No. 801-31104).
The business and other connections of PIFM's directors and principal
executive officers are set forth below. Except as otherwise indicated, the
address of each person is Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102.
<TABLE>
<CAPTION>
NAME AND ADDRESS POSITION WITH PIFM PRINCIPAL OCCUPATIONS
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<S> <C> <C>
Brian Storms Officer-in-Charge, President, Prudential Mutual Funds & Annuities (PMF&A); Officer-in-
President, Chief Executive Charge, President, Chief Executive Officer and Chief Operating
Officer and Chief Operating Officer, PIFM
Officer
Robert F. Gunia Executive Vice President Comptroller, Prudential Investments; Executive Vice President and
and Treasurer Treasurer, PIFM; Senior Vice President, Prudential Securities
Incorporated.
Thomas A. Early Executive Vice President, Vice President and General Counsel, PMF&A; Executive Vice President,
Secretary and General Secretary and General Counsel, PIFM
Counsel
Neil A. McGuinness Executive Vice President Executive Vice President and Director of Marketing, PMF&A; Executive
Vice President, PIFM
Robert J. Sullivan Executive Vice President Executive Vice President, PMF&A; Executive Vice President, PIFM
</TABLE>
(ii) BLACKROCK FINANCIAL MANAGEMENT, INC.
See "How the Fund is Managed--Subadviser" in the Prospectus constituting
Part A of this Registration Statement and "Subadviser" in the Statement of
Additional Information constituting Part B of this Registration Statement.
BlackRock Financial Management, Inc. (BFM), the Subadviser, is a Delaware
Corporation and is a registered investment adviser engaged in the investment
advisory business. Information as to BFM's officers and directors is included in
its Form ADV as currently on file with the Securities and Exchange Commission
(File No. 80-32183) and is incorporated herein by reference thereto.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) PRUDENTIAL SECURITIES INCORPORATED
Prudential Securities Incorporated is distributor for The Target Portfolio
Trust, The BlackRock Government Income Trust, Command Government Fund, Command
Money Fund, Command Tax-Free Fund, The Global Total Return Fund, Inc., Global
Utility Fund, Inc., Nicholas-Applegate Fund, Inc. (Nicholas-Applegate Growth
Equity Fund), Prudential Allocation Fund, Prudential California Municipal Fund,
Prudential Distressed Securities Fund, Inc., Prudential Diversified Bond Fund,
Inc., Prudential Dryden Fund, Prudential Emerging Growth Fund, Inc., Prudential
Equity Fund, Inc., Prudential Equity Income Fund, Prudential Europe Growth Fund,
Inc., Prudential Global Genesis Fund, Inc., Prudential Global Limited Maturity
Fund, Inc., Prudential Government Income Fund, Inc., Prudential Government
Securities Trust, Prudential High Yield Fund, Inc., Prudential Institutional
Liquidity Portfolio, Inc., Prudential Intermediate Global Income Fund, Inc.,
Prudential International Bond Fund, Inc., Prudential Jennison Series Fund, Inc.,
Prudential MoneyMart Assets, Inc.,
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Prudential Mortgage Income Fund, Inc., Prudential Multi-Sector Fund, Inc.,
Prudential Municipal Bond Fund, Prudential Municipal Series Fund, Prudential
National Municipals Fund, Inc., Prudential Natural Resources Fund, Inc.,
Prudential Pacific Growth Fund, Inc., Prudential Small Company Value Fund, Inc.,
Prudential Special Money Market Fund, Inc., Prudential Structured Maturity Fund,
Inc., Prudential Tax-Free Money Fund, Inc., Prudential Utility Fund, Inc.,
Prudential World Fund, Inc. Prudential Securities is also a depositor for the
following unit investment trusts:
The Corporate Investment Trust Fund
Prudential Equity Trust Shares
National Equity Trust
Prudential Unit Trusts
Government Securities Equity Trust
National Municipal Trust
(b) INFORMATION CONCERNING THE DIRECTORS AND OFFICERS OF PRUDENTIAL SECURITIES
INCORPORATED IS SET FORTH BELOW:
<TABLE>
<CAPTION>
POSITIONS AND POSITIONS AND
OFFICES WITH OFFICES WITH
NAME(1) UNDERWRITER REGISTRANT
- ----------------------- ------------------------------------------------------------------------ -------------
<S> <C> <C>
Alan D. Hogan.......... Executive Vice President and Director None
George A. Murray....... Executive Vice President and Director None
Leland B. Paton........ Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Martin Pfinsgraff...... Executive Vice President, Chief Financial Officer and Director None
Vincent T. Pica, II.... Executive Vice President and Director None
One New York Plaza
New York, NY 10292
Hardwick Simmons....... Chief Executive Officer, President and Director None
Lee B. Spencer, Jr..... Executive Vice President, General Counsel, Secretary and Director None
Brian Storms........... Director None
751 Broad Street
Newark, NJ 07102
</TABLE>
- --------------
(1) The address of each person named is One Seaport Plaza, New York, New York
10292 unless otherwise indicated.
(c) REGISTRANT HAS NO PRINCIPAL UNDERWRITER WHO IS NOT AN AFFILIATED PERSON
OF THE REGISTRANT.
ITEM 30. LOCATION OF ACCOUNTS AND RECORDS
All accounts, books and other documents required to be maintained by Section
31(a) of the 1940 Act and the Rules thereunder are maintained at the offices of
State Street Bank and Trust Company, One Heritage Drive, North Quincy,
Massachusetts, BlackRock Financial Management, Inc., 345 Park Avenue, New York,
New York, the Registrant, Gateway Center Three, 100 Mulberry Street, Newark, New
Jersey 07102, and Prudential Mutual Fund Services LLC, Raritan Plaza One,
Edison, New Jersey. Documents required by Rules 31a-1(b)(5), (6), (7), (9), (10)
and (11) and 31a-1(f) will be kept at BlackRock Financial Management, Inc., 345
Park Avenue, New York, New York, documents required by Rules 31a-1(b)(4) and
(11) and 31a-1(d) at One Seaport Plaza and the remaining accounts, books and
other documents required by such other pertinent provisions of Section 31(a) and
the rules promulgated thereunder will be kept by State Street Bank and Trust
Company and Prudential Mutual Fund Services LLC.
C-4
<PAGE>
ITEM 31. MANAGEMENT SERVICES
Other than as set forth under the captions "How the Fund is
Managed--Manager" and "How the Fund is Managed--Distributor" in the Prospectus
and the captions "Manager" and "Distributor" in the Statement of Additional
Information, constituting Parts A and B, respectively, of this Registration
Statement, Registrant is not a party to any management-related service contract.
ITEM 32. UNDERTAKINGS
The Registrant makes the following undertaking:
To furnish each person to whom a prospectus is delivered with a copy of
the Fund's latest annual report upon request and without charge.
C-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant certifies that it meets all of
the requirements for effectiveness of this Post-Effective Amendment to the
Registration Statement under Rule 485 (b) under the Securities Act of 1933 and
has duly caused this Post-Effective Amendment to the Registration Statement to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Newark, and State of New Jersey, on the 25th day of August, 1997.
THE BLACKROCK GOVERNMENT INCOME TRUST
/s/ Richard A. Redeker
-----------------------------------------------------------------------
(RICHARD A. REDEKER, PRESIDENT)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ------------------------------- ----------------
<S> <C> <C>
/s/ Eugene C. Dorsey Trustee August 25, 1997
- ------------------------------------
EUGENE C. DORSEY
/s/ Douglas H. McCorkindale Trustee August 25, 1997
- ------------------------------------
DOUGLAS H. MCCORKINDALE
/s/ Richard A. Redeker President and Trustee August 25, 1997
- ------------------------------------
RICHARD A. REDEKER
/s/ Thomas T. Mooney Trustee August 25, 1997
- ------------------------------------
THOMAS T. MOONEY
/s/ Grace C. Torres Treasurer and Principal August 25, 1997
- ------------------------------------ Financial and Accounting
GRACE C. TORRES Officer
</TABLE>
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
1 (a) Declaration of Trust dated June 13, 1991.*
(b) Certificate of Amendment to Declaration of Trust dated July 15, 1991.*
(c) Certificate of Amendment to Declaration of Trust dated August 18, 1992.*
(d) Amended and Restated Certificate of Designation dated October 31, 1994 incorporated by reference to
Exhibit 1(d) to Post-Effective Amendment No. 6 to the Registration Statement on Form N-1A (File No.
33-41224) filed via EDGAR on August 31, 1995.
2 By-Laws.*
4 Specimen certificate for shares of beneficial interest, $.01 par value.*
5 (a) Management Agreement between the Registrant and Prudential Mutual Fund Management Inc. incorporated
by reference to Exhibit 5(a) to Post-Effective Amendment No. 6 to the Registration Statement on Form
N-1A (File No. 33-41224) filed via EDGAR on August 31, 1995.
(b) Subadvisory Agreement among the Registrant, Prudential Mutual Fund Management, Inc. and BlackRock
Financial Management, Inc. incorporated by reference to Exhibit 5(b) to Post-Effective Amendment No.
6 to the Registration Statement on Form N-1A (File No. 33-41224) filed via EDGAR on August 31, 1995.
6 (a) Amendment to Distribution Agreement incorporated by reference to Exhibit 6(b) to Post-Effective
Amendment No. 7 to the Registration Statement on Form N-1A (File No. 33-41224) filed via EDGAR on
August 29, 1996.
(b) Distribution Agreement between the Registrant and Prudential Securities Incorporated dated April
10, 1996 incorporated by reference to Exhibit 6(c) to Post-Effective Amendment No. 7 to the
Registration Statement on Form N-1A (File No. 33-41224) filed via EDGAR on August 29, 1996.
8 (a) Custodian Contract between the Registrant and State Street Bank and Trust Company.*
(b) Amendment to Custodian Contract between the Registrant and State Street Bank and Trust Company.*
9 Transfer Agency and Service Agreement between the Registrant and Prudential Mutual Fund Services, Inc.*
10 Opinion of Counsel.*
11 (a) Consent of Independent Accountants.*
(b) Consent of Deloitte & Touche LLP.*
13 Not Applicable.
15 (a) Restated Distribution and Service Plan pursuant to Rule 12b-1 (Class A Shares) between the
Registrant and Prudential Mutual Fund Distributors, Inc.*
(b) Restated Distribution and Service Plan pursuant to Rule 12b-1 (Class B Shares) between the
Registrant and Prudential Securities Incorporated.*
(c) Distribution and Service Plan pursuant to Rule 12b-1 (Class C Shares) between the Registrant and
Prudential Securities Incorporated.*
16 Schedule of Computation of Performance Quotations for Class A and Class C shares.*
27 Financial Data Schedules filed as Exhibit 27 for electronic purposes.*
</TABLE>
<PAGE>
Exhibit 99.B1(a)
BFM GOVERNMENT SECURITIES TRUST
DECLARATION OF TRUST
Dated: June 13, 1991
<PAGE>
TABLE OF CONTENTS
PAGE
ARTICLE I -- NAME AND DEFINITIONS
SECTION 1.1. Name 1
SECTION 1.2. Definitions 1
ARTICLE II -- TRUSTEES
SECTION 2.1. Number of Trustees 3
SECTION 2.2. Election and Term 3
SECTION 2.3. Resignation and Removal 4
SECTION 2.4. Vacancies 4
SECTION 2.5. Delegation of Power to
Other Trustees 4
ARTICLE III -- POWERS OF TRUSTEES
SECTION 3.1. General 5
SECTION 3.2. Investments 5
SECTION 3.3. Legal Title 6
SECTION 3.4. Issuance and Repurchase of
Securities 6
SECTION 3.5. Borrowing Money; Lending
Trust Assets 6
SECTION 3.6. Delegation; Committees 6
SECTION 3.7. Collection and Payment 7
SECTION 3.8. Expenses 7
SECTION 3.9. Manner of Acting; By-Laws 7
SECTION 3.10. Miscellaneous Powers 7
SECTION 3.11. Principal Transactions 8
ARTICLE IV -- INVESTMENT ADVISER, ADMINISTRATOR, DISTRIBUTOR,
CUSTODIAN AND TRANSFER AGENT
SECTION 4.1. Investment Adviser 9
SECTION 4.2. Administrator 9
SECTION 4.3. Distributor 9
SECTION 4.4. Custodian 9
SECTION 4.5. Transfer Agent 10
SECTION 4.6. Parties to Contract 10
ARTICLE V -- LIMITATIONS OF LIABILITY OF
SHAREHOLDERS, TRUSTEES AND OTHERS
SECTION 5.1. No Personal Liability of
Shareholders, Trustees, etc. 10
-i-
<PAGE>
SECTION 5.2. Non-Liability of Trustees, etc. 11
SECTION 5.3. Indemnification 11
SECTION 5.4. No Bond Required of Trustees 11
SECTION 5.5. No Duty of Investigation;
Notice in Trust
Instruments, Insurance 11
SECTION 5.6. Reliance on Experts, etc. 12
ARTICLE VI -- SHARES OF BENEFICIAL INTEREST
SECTION 6.1. Beneficial Interest 12
SECTION 6.2. Rights of Shareholders 12
SECTION 6.3. Trust Only 13
SECTION 6.4. Issuance of Shares 13
SECTION 6.5. Register of Shares 13
SECTION 6.6. Transfer of Shares 13
SECTION 6.7. Notices 14
SECTION 6.8. Voting Powers 14
SECTION 6.9. Series Designation 14
ARTICLE VII -- REDEMPTIONS
SECTION 7.1. Redemptions 17
SECTION 7.2. Redemption of Shares;
Disclosure of Holding 17
SECTION 7.3. Redemptions of Accounts of
Less Than $500 17
SECTION 7.4. Payment for Redeemed Shares
in Kind 18
SECTION 7.5. Other Redemptions 18
ARTICLE VIII -- DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
SECTION 8.1. Net Asset Value 18
SECTION 8.2. Distributions to Shareholders 18
SECTION 8.3. Determination of Net Income 19
SECTION 8.4. Power to Modify Foregoing
Procedures 19
ARTICLE IX -- DURATION; TERMINATION OF TRUST;
AMENDMENT; MERGERS, ETC.
SECTION 9.1. Duration 20
SECTION 9.2. Termination of Trust 20
SECTION 9.3. Amendment Procedure 21
SECTION 9.4. Merger, Consolidation and
Sale of Assets 21
SECTION 9.5. Incorporation 22
ARTICLE X -- REPORTS TO SHAREHOLDERS 22
-ii-
<PAGE>
ARTICLE XI -- MISCELLANEOUS
SECTION 11.1. Filing 22
SECTION 11.2. Resident Agent 23
SECTION 11.3. Governing Law 23
SECTION 11.4. Counterparts 23
SECTION 11.5. Reliance by Third Parties 23
SECTION 11.6. Provisions in Conflict with
Law or Regulations 23
SIGNATURE PAGE 24
-iii-
<PAGE>
DECLARATION OF TRUST
OF
BFM GOVERNMENT SECURITIES TRUST
Dated June 13, 1991
THE DECLARATION OF TRUST of BFM Government Securities Trust is made the
13th day of June, 1991 by the party signatory hereto, as trustee (such
person, so long as she shall continue in office in accordance with the terms
of this Declaration of Trust, and all other persons who at the time in
question have been duly elected or appointed as trustees in accordance with
the provisions of this Declaration of Trust and are then in office, being
hereinafter called the "Trustees").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Trustees desire to form a trust fund under the laws of
Massachusetts for the investment and reinvestment of funds contributed
thereto; and
WHEREAS, it is proposed that the beneficial interest in the trust assets
be divided into transferable shares of beneficial interest;
NOW, THEREFORE, the Trustees hereby declare that they will hold in trust
all money and property contributed to the trust fund to manage and dispose of
the same for the beneficial interest issued hereunder and subject to the
provisions hereof, to wit:
ARTICLE I
NAME AND DEFINITIONS
SECTION 1.1. NAME. The name of the trust created hereby is the BFM
Government Securities Trust.
SECTION 1.2. DEFINITIONS. Wherever they are used herein, the following
terms have the following respective meanings:
(a) "Administrator" means the party, other than the Trust, to the
contract described in Section 4.2 hereof.
(b) "By-Laws" means the By-Laws referred to in Section 3.9 hereof, as
from time to time amended.
(c) The terms "Commission," "Affiliated Person" and "Interested Person"
have the meanings given them in the 1940 Act, as defined herein, except as
otherwise defined by the Trustees in conjunction with the establishment of
any series of Shares.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
<PAGE>
(e) "Custodian" means any Person other than the Trust who has custody
of any Trust Property as required by Section 17(f) of the 1940 Act, but does
not include a system for the central handling of securities described in said
Section 17(f).
(f) "Declaration" means this Declaration of Trust as amended from time
to time. Reference in this Declaration of Trust to "Declaration," "hereof,"
"herein" and "hereunder" shall be deemed to refer to this Declaration rather
than to the article or section in which such words appear.
(g) "Distributor" means the party, other than the Trust, to the
contract described in Section 4.3 hereof.
(h) "Fundamental Policies" means the investment objective and
investment restrictions set forth in the Prospectus and designated as
fundamental policies therein.
(i) "Investment Adviser" means the party, other than the Trust, to the
contract described in Section 4.1 hereof.
(j) "Majority Shareholder Vote" means the vote of the holders of a
majority of Shares which shall consist of: (i) a majority of Shares
represented in person or by proxy and entitled to vote at a meeting of
Shareholders at which a quorum, as determined in accordance with the By-Laws,
is present; (ii) a majority of Shares issued and outstanding and entitled to
vote when action is taken by written consent of Shareholders; or (iii) a
"majority of the outstanding voting securities," as that phrase is defined in
the 1940 Act, when action is taken by Shareholders with respect to approval of
an investment advisory or management contract or an underwriting or
distribution agreement or continuance thereof.
(k) "1940 Act" means the Investment Company Act of 1940 and the rules
and regulations thereunder, as amended from time to time.
(l) "Person" means and includes individuals, corporations,
partnerships, trusts, associations, joint ventures and other entities,
whether or not legal entities, and governments and agencies and political
subdivisions thereof.
(m) "Prospectus" means the prospectus (including the statement of
additional information to the extent incorporated by reference therein)
constituting part of the Registration Statement of the Trust under the
Securities Act of 1933, as amended, as such prospectus may be amended or
supplemented and filed with the Commission from time to time.
(n) "Shareholder" means a record owner of outstanding Shares.
(o) "Shares" shall mean the equal proportionate transferable units of
interest into which the beneficial interest in any series of the Trust shall
be divided from time to time and includes fractions of Shares as well as
whole Shares. As provided in Article VI hereof, a series of the Trust may
-2-
<PAGE>
be divided into separate classes of Shares; all references to Shares shall be
deemed to be Shares of any or all series or of a single class of a series or
all classes of a series as the context may require.
(p) "Transfer Agent" means the party, other than the Trust, to the
contract described in Section 4.5 hereof.
(q) "Trust" means the BFM Government Securities Trust.
(r) "Trust Property" means any and all property, real or personal,
tangible or intangible, which is owned or held by or for the account of the
Trust or the Trustees.
(s) "Trustees" mean the person or persons who have signed the
Declaration, so long as he or they shall continue in office in accordance
with the terms hereof, and all other persons who may from time to time be
duly elected, qualified and serving as Trustees in accordance with the
provisions hereof, and reference herein to a Trustee or the Trustees shall
refer to such person or persons in their capacity as trustees hereunder.
ARTICLE II
TRUSTEES
SECTION 2.1. NUMBER OF TRUSTEES. The number of Trustees shall
initially be one and thereafter shall be such number as shall be fixed from
time to time by a written instrument signed by a majority of the Trustees;
provided, however, that at all times after the Prospectus of the Trust first
becomes effective, the number of Trustees shall in no event be less than
three (3) nor more than fifteen (15).
SECTION 2.2. ELECTION AND TERM. The Trustees shall be elected by a
Majority Shareholder Vote at the first meeting of Shareholders following the
public offering of Shares of the Trust. The Trustees shall have the power to
set and alter the terms of office of the Trustees, and they may at any time
lengthen or lessen their own terms or make their terms of unlimited duration,
subject to the resignation and removal provisions of Section 2.3 hereof.
Except in the event of resignation or removals pursuant to Section 2.3
hereof, each Trustee shall hold office until such time as less than a
majority of the Trustees holding office have been elected by Shareholders.
In such event the Trustees then in office will call a Shareholders' meeting
for the election of Trustees. Subject to Section 16(c) of the 1940 Act, no
Trustee shall continue to hold office after the holders of record of not less
than two-thirds of the outstanding Shares of the Trust have declared that
such Trustee be removed from office either by declaration in writing filed
with the Custodian or by votes cast in person or by proxy at a meeting called
for the purpose. The Trustees shall promptly call a meeting of the
Shareholders for the purpose of voting upon the question of removal of any
Trustee or Trustees when requested in writing to do so by the record holders
of not less than 10 percent of the outstanding Shares. Except for the
foregoing circumstances, the Trustees shall continue to hold office and may
appoint successor Trustees.
-3-
<PAGE>
SECTION 2.3. RESIGNATION AND REMOVAL. Any Trustee may resign his trust
(without need for prior or subsequent accounting) by an instrument in writing
signed by him and delivered to the other Trustees and such resignation shall
be effective upon such delivery, or at a later date according to the terms of
the instrument. Any of the Trustees may be removed (provided that the
aggregate number of Trustees after such removal shall not be less than the
number required by Section 2.1 hereof) with cause, by the action of
two-thirds of the remaining Trustees. Upon the resignation or removal of a
Trustee, or his otherwise ceasing to be a Trustee, he shall execute and
deliver such documents as the remaining Trustees shall require for the
purpose of conveying to the Trust or the remaining Trustees any Trust
Property or property of any series of the Trust held in the name of the
resigning or removed Trustee. Upon the incapacity or death of any Trustee,
his legal representative shall execute and deliver on his behalf such
documents as the remaining Trustees shall require as provided in the
preceding sentence.
SECTION 2.4. VACANCIES. The term of office of a Trustee shall
terminate and a vacancy shall occur in the event of the death, resignation,
removal, bankruptcy, adjudicated incompetence or other incapacity to perform
the duties of the office of a Trustee. No such vacancy shall operate to
annul the Declaration or to revoke any existing agency created pursuant to
the terms of the Declaration. In the case of an existing vacancy, including
a vacancy existing by reason of an increase in the number of Trustees,
subject to the provisions of Section 16(a) of the 1940 Act, the remaining
Trustees or, prior to the public offering of Shares of the Trust, if only one
Trustee shall then remain in office, the remaining Trustee, shall fill such
vacancy by the appointment of such other person as they or he, in their or
his discretion, shall see fit, made by a written instrument signed by a
majority of the remaining Trustees or by the remaining Trustee, as the case
may be. Any such appointment shall not become effective, however, until the
person named in the written instrument of appointment shall have accepted in
writing such appointment and agreed in writing to be bound by the terms of
the Declaration. An appointment of a Trustee may be made in anticipation of
a vacancy to occur at a later date by reason of retirement, resignation or
increase in the number of Trustees, provided that such appointment shall not
become effective prior to such retirement, resignation or increase in the
number of Trustees. Whenever a vacancy in the number of Trustees shall
occur, until such vacancy is filled as provided in this Section 2.4, the
Trustees in office, regardless of their number, shall have all the powers
granted to the Trustees and shall discharge all the duties imposed upon the
Trustees by the Declaration. A written instrument certifying the existence
of such vacancy signed by a majority of the Trustees shall be conclusive
evidence of the existence of such vacancy.
SECTION 2.5. DELEGATION OF POWER TO OTHER TRUSTEES. Any Trustee may, by
power of attorney, delegate his power for a period not exceeding six (6)
months at any one time to any other Trustee or Trustees; provided that in no
case shall less than two (2) Trustees personally exercise the powers granted
to the Trustees under the Declaration except as herein otherwise expressly
provided.
-4-
<PAGE>
ARTICLE III
POWERS OF TRUSTEES
SECTION 3.1. GENERAL. The Trustees shall have exclusive and absolute
control over the property and business of the Trust and of any series of the
Trust to the same extent as if the Trustees were the sole owners of such
property and business in their own right, but with such powers of delegation
as may be permitted by the Declaration. The Trustees shall have power to
conduct the business of the Trust and carry on its operations in any and all
of its branches and maintain offices both within and without The Commonwealth
of Massachusetts, in any and all states of the United States of America, in
the District of Columbia, and in any and all commonwealths, territories,
dependencies, colonies, possessions, agencies or instrumentalities of the
United States of America and of foreign governments, and to do all such other
things and execute all such instruments as they deem necessary, proper or
desirable in order to promote the interests of the Trust although such things
are not herein specifically mentioned. Any determination as to what is in
the interests of the Trust made by the Trustees in good faith shall be
conclusive. In construing the provisions of the Declaration, the presumption
shall be in favor of a grant of power to the Trustees.
The enumeration of any specific power herein shall not be construed as
limiting the aforesaid powers. Such powers of the Trustees may be exercised
without order of or resort to any court.
SECTION 3.2. INVESTMENTS. The Trustees shall have the power to:
(a) conduct, operate and carry on the business of an investment
company;
(b) subscribe for, invest in, reinvest in, purchase or otherwise
acquire, hold, pledge, sell, assign, transfer, exchange, distribute,
lend or otherwise deal in or dispose of negotiable or non-negotiable
instruments, obligations, evidences of indebtedness, certificates of
deposit or indebtedness, commercial paper, repurchase agreements,
reverse repurchase agreements, options, futures and other securities of
any kind, including, without limitation, those issues, guaranteed or
sponsored by any and all Persons including, without limitation, states,
territories and possessions of the United States, the District of Columbia
and any of the political subdivisions, agencies or instrumentalities
thereof, and by the United States Government or its agencies or
instrumentalities, or international instrumentalities, or by any bank or
savings institution, or by any corporation or organization organized
under the laws of the United States or of any state, territory or
possession thereof, and of corporations or organizations organized under
foreign laws, or in "when issued" contracts for any such securities, or
retain assets of the Trust or any series thereof in cash and from time to
time change the investments of the assets of the Trust or any series
thereof; and to exercise any and all rights, powers and
-5-
<PAGE>
privileges of ownership or interest in respect of any and all such
investments of every kind and description, including, without limitation,
the right to consent and otherwise act with respect thereto, with power to
designate one or more persons, firms, associations or corporations to
exercise any of said rights, powers and privileges in respect of any of said
instruments; and the Trustees shall be deemed to have the foregoing powers
with respect to any additional securities in which the Trust or any series
of the Trust may invest should the Fundamental Policies be amended.
The Trustees shall not be limited to investing in obligations maturing before
the possible termination of the Trust, nor shall the Trustees be limited by any
law limiting the investments which may be made by fiduciaries.
SECTION 3.3. LEGAL TITLE. Legal title to all of the Trust Property shall
be vested in the Trustees as joint tenants except that the Trustees shall have
power to cause legal title to any Trust Property to be held by or in the name of
one or more of the Trustees, or in the name of the Trust or any series
of the Trust or in the name of any other Person as nominee, on
such terms as the Trustees may determine, provided that the interest of the
Trust therein is appropriately protected. The right, title and interest of the
Trustees in the Trust Property shall vest automatically in each Person who may
hereafter become a Trustee. Upon the resignation, removal or death of a Trustee
he shall automatically cease to have any right, title or interest in any of the
Trust Property, and the right, title and interest of such Trustee in all such
property shall vest automatically in the remaining Trustees. Such vesting and
cessation of title shall be effective without the requirement that conveyancing
documents be executed and delivered.
SECTION 3.4. ISSUANCE AND REPURCHASE OF SECURITIES. The Trustees shall
have the power to issue, sell, repurchase, redeem, retire, cancel, acquire,
hold, resell, reissue, dispose of, transfer and otherwise deal in Shares and,
subject to the provisions set forth in Articles VII, VIII and IX and Section 6.9
hereof, to apply to any such repurchase, redemption, retirement, cancellation or
acquisition of Shares any funds or property of the particular series of the
Trust with respect to which such Shares are issued, whether capital or surplus
or otherwise, to the full extent now or hereafter permitted by laws of The
Commonwealth of Massachusetts governing business corporations.
SECTION 3.5. BORROWING MONEY; LENDING TRUST ASSETS. The Trustees shall
have power to borrow money or otherwise obtain credit and to secure the same by
mortgaging, pledging or otherwise subjecting as security the assets of the
Trust, to endorse, guarantee or undertake the performance of any obligation,
contract or engagement of any other Person and to lend Trust assets.
SECTION 3.6. DELEGATION; COMMITTEES. The Trustees shall have power,
consistent with their continuing exclusive authority over the management of the
Trust and the Trust Property, to delegate from time to time to such of their
number or to officers, employees or agents of the Trust the doing of
-6-
<PAGE>
such things and the execution of such instruments either in the name of the
Trust or any series of the Trust or the names of the Trustees or otherwise as
the Trustees may deem expedient.
SECTION 3.7. COLLECTION AND PAYMENT. The Trustees shall have power to
collect all property due to the Trust, to pay all claims, including taxes,
against the Trust Property; to prosecute, defend, compromise or abandon any
claims relating to the Trust Property; to foreclose any security interest
securing any obligations, by virtue of which any property is owed to the Trust;
and to enter into releases, agreements and other instruments.
SECTION 3.8. EXPENSES. The Trustees shall have the power to incur and pay
any expenses which in the opinion of the Trustees are necessary or incidental to
carry out any of the purposes of the Declaration and to pay reasonable
compensation from the funds of the Trust to themselves as Trustees. The
Trustees shall fix the compensation of all officers, employees and Trustees.
SECTION 3.9. MANNER OF ACTING; BY-LAWS. Except as otherwise provided
herein or in the By-Laws or by any provision of law, any action to be taken
by the Trustees may be taken by a majority of the Trustees present at a
meeting of Trustees (a quorum being present), including any meeting held by
means of a conference telephone circuit or similiar communications equipment
by means of which all persons participating in the meeting can hear each
other, or by written consent of all the Trustees. The Trustees may adopt
By-Laws not inconsistent with this Declaration to provide for the conduct of
the business of the Trust and may amend or repeal such By-Laws to the extent
such power is not reserved to the Shareholders.
SECTION 3.10. MISCELLANEOUS POWERS. Subject to Section 6.9 hereof, the
Trustees shall have the power to: (a) employ or contract with such Persons as
the Trustees may deem desirable for the transaction of the business of the Trust
or any series thereof; (b) enter into joint ventures, partnerships and any
other combinations or associations; (c) remove Trustees or fill vacancies in or
add to their number, elect and remove such officers and appoint and terminate
such agents or employees as they consider appropriate, and appoint from their
own number or otherwise, and terminate, any one or more committees which may
exercise some or all of the power and authority of the Trustees as the Trustees
may determine; (d) purchase, and pay for out of Trust Property or the property
of the appropriate series of the Trust, insurance policies insuring the
Shareholders, Trustees, officers, employees, agents, investment advisers,
distributors, selected dealers or independent contractors of the Trust against
all claims arising by reason of holding any such position or by reason of any
action taken or omitted to be taken by any such Person in such capacity, whether
or not constituting negligence, or whether or not the Trust would have the power
to indemnify such Person against such liability; (e) establish pension,
profit-sharing, Share purchase and other retirement, incentive and benefit
plans for any Trustees, officers, employees and agents of the Trust; (f) to the
extent permitted by law, indemnify any person with whom the Trust or any series
thereof has dealings, including the Investment Adviser, Administrator,
Distributor,
-7-
<PAGE>
Custodian, Transfer Agent and selected dealers, to such extent as the
Trustees shall determine; (g) guarantee indebtedness or contractual
obligations of others; (h) determine and change the fiscal year of the Trust
or any series thereof and the method by which its accounts shall be kept; (i)
adopt a seal for the Trust, but the absence of such seal shall not impair the
validity of any instrument executed on behalf of the Trust; (j) aid by
further investment any corporation, company, trust, association or firm, any
obligation of or interest in which is included in the Trust Property or in
the affairs of which the Trustees have any direct or indirect interest; to do
all acts and things designed to protect, preserve, improve or enhance the
value of such obligation or interest; to guarantee or become surety on any or
all of the contracts, stocks, bonds, notes, debentures and other obligations
of any such corporation, company, trust, association or firm; (k) enter into
a plan of distribution and any related agreements whereby the Trust may
finance directly or indirectly any activity which is primarily intended to
result in sale of Shares; and (1) in general, carry on any other business in
connection with or incidental to any of the foregoing powers, to do
everything necessary, suitable or proper for the accomplishment of any
purpose or the attainment of any object or the furtherance of any power
hereinbefore set forth, either alone or in association with others, and to do
every other act or thing incidental or appurtenant to or growing out of or
connected with the aforesaid business or purposes, objects or powers.
The foregoing clauses shall be construed both as objects and powers, and
the foregoing enumeration of specific powers shall not be held to limit or
restrict in any manner the general powers of the Trustees.
The Trustees shall not be limited to investing in obligations maturing
before the possible termination of the Trust, nor shall the Trustees be limited
by any law limiting the investments which may be made by fiduciaries.
SECTION 3.11. PRINCIPAL TRANSACTIONS. Except in transactions permitted by
the 1940 Act or any order of exemption issued by the Commission, or effected to
implement the provisions of any agreement to which the Trust is a party, the
Trustees shall not, on behalf of the Trust, buy any securities (other than
Shares) from or sell any securities (other than Shares) to, or lend any assets
of the Trust or any series thereof to, any Trustee or officer of the Trust or
any firm of which any such Trustee or officer is a member acting as principal,
or have any such dealings with the Investment Adviser, Administrator, Custodian,
Distributor or Transfer Agent or with any Affiliated Person of such Person; but
the Trust or a series thereof may employ any such Person, or firm or company in
which such Person is an Interested Person, as broker, legal counsel, registrar,
transfer agent, dividend disbursing agent or custodian upon customary terms.
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ARTICLE IV
INVESTMENT ADVISER, ADMINISTRATOR, DISTRIBUTOR,
CUSTODIAN AND TRANSFER AGENT
SECTION 4.1. INVESTMENT ADVISER. Subject to approval by a Majority
Shareholder Vote, the Trustees may in their discretion from time to time enter
into an investment advisory or management contract or contracts whereby the
other party to such contract shall undertake to furnish the Trust or any series
thereof such management, investment advisory, administration, accounting, legal,
statistical and research facilities and services, promotional activities and
such other facilities and services, if any, as the Trustees shall from time to
time consider desirable, all upon such terms and conditions as the Trustees may
in their discretion determine. Notwithstanding any provisions of the
Declaration, the Trustees may authorize the Investment Adviser (subject to such
general or specific instructions as the Trustees may from time to time adopt) to
effect purchases, sales, loans or exchanges of portfolio securities of the Trust
or any series thereof on behalf of the Trustees or may authorize any officer,
employee or Trustee to effect such purchases, sales, loans or exchanges pursuant
to recommendations of the Investment Adviser, all without further action by the
Trustees. Any such purchases, sales, loans and exchanges shall be deemed to
have been authorized by all of the Trustees. The Trustees may, in their sole
discretion, call a meeting of Shareholders in order to submit to a vote of
Shareholders at such meeting the approval of continuance of any such investment
advisory or management contract.
SECTION 4.2. ADMINISTRATOR. The Trustees may in their discretion from
time to time enter into an administrative services contract or contracts whereby
the other party or parties to such contract or contracts shall undertake to
furnish administrative services. The contract or contracts shall have such
terms and conditions as the Trustees may in their discretion determine are not
inconsistent with the Declaration. Such services may be provided by one or more
Persons.
SECTION 4.3. DISTRIBUTOR. The Trustees may in their discretion from time
to time enter into a contract providing for the sale of Shares of the Trust
or applicable series thereof at not less than the net asset value per Share
(as described in Article VIII hereof) and pursuant to which the Trust or
series thereof may either agree to sell the Shares to the other party to the
contract or appoint such other party its sales agent for such Shares. In
either case, the contract shall be on such terms and conditions as the
Trustees may in their discretion determine is not inconsistent with the
provisions of this Article IV, including, without limitation, the provision
for the repurchase or sale of shares of the Trust by such other party as
principal or as agent of the Trust.
SECTION 4.4. CUSTODIAN. The Trustees shall employ at all times a custodian
or custodians, meeting the qualifications for custodians of portfolio securities
under the 1940 Act, as custodian with respect to the Trust and may from time to
time enter into a custodian contract or contracts whereby
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the other party or parties to such contract or contracts shall undertake to
furnish custodial services. The contract or contracts shall have such terms and
conditions as the Trustees may in their discretion determine are not
inconsistent with the Declaration. Such services may be provided by one or more
Persons.
SECTION 4.5. TRANSFER AGENT. The Trustees may in their discretion from
time to time enter into a transfer agency and shareholder service contract
whereby the other party to such contract shall undertake to furnish transfer
agency and shareholder services to the Trust. The contract shall have such
terms and conditions as the Trustees may in their discretion determine that are
not inconsistent with the Declaration. Such services may be provided by one or
more Persons.
SECTION 4.6. PARTIES TO CONTRACT. Any contract of the character described
in Section 4.1, 4.2, 4.3, 4.4, or 4.5 of this Article IV and any other contract
may be entered into with any Person, although one or more of the Trustees or
officers of the Trust may be an officer, director, trustee, shareholder or
member of such other party to the contract, and no such contract shall be
invalidated or rendered voidable by reason of the existence of any such
relationship; nor shall any Person holding such relationship be liable merely by
reason of such relationship for any loss or expense to the Trust under or by
reason of said contract or accountable for any profit realized directly or
indirectly therefrom, provided that the contract when entered into was not
inconsistent with the provisions of this Article IV. The same Person may be the
other party to any contracts entered into pursuant to Sections 4.1, 4.2, 4.3,
4.4 and 4.5 above or otherwise, and any individual may be financially interested
or otherwise affiliated with Persons who are parties to any or all of the
contracts referred to in this Section 4.6.
ARTICLE V
LIMITATION OF LIABILITY OF SHAREHOLDERS,
TRUSTEES AND OTHERS
SECTION 5.1. NO PERSONAL LIABILITY OF SHAREHOLDERS, TRUSTEES, ETC. No
Shareholder shall be subject to any personal liability whatsoever to any Person
in connection with Trust Property, or the acts, obligations or affairs of the
Trust. No Trustee, officer, employee or agent of the Trust shall be subject to
any personal liability whatsoever to any Person, other than the Trust or its
Shareholders, in connection with Trust Property or the affairs of the Trust,
save only that arising from bad faith, willful misfeasance, gross negligence or
reckless disregard of his duty to such Person; and all such Persons shall look
solely to the Trust Property or the property of one or more specific series of
the Trust, for satisfaction of claims of any nature arising in connection with
the affairs of the Trust. If any Shareholder, Trustee, officer, employee or
agent, as such, of the Trust is made a party to any suit or proceeding to
enforce any such liability, he shall not, on account thereof, be held to any
personal liability. The Trust shall indemnify and hold each Shareholder
harmless from and
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against all claims by reason of his being or having been a Shareholder, and
shall reimburse the Shareholder for all legal and other expenses reasonably
incurred by him in connection with any such claim or liability, provided that
any such expenses shall be paid solely out of the Trust Property or the
property of one or more series thereof. Indemnification and reimbursement
required by the preceding sentence shall be made only out of assets of the
one or more series whose shares were held by said Shareholder at the time the
act or event occurred which gave rise to the claim against or liability of
said Shareholder. The rights accruing to a Shareholder under this Section
5.1 shall not exclude any other right to which the Shareholder may be
lawfully entitled, nor shall anything herein contained restrict the right of
the Trust to indemnify or reimburse a Shareholder in any appropriate
situation even though not specifically provided herein.
SECTION 5.2. NON-LIABILITY OF TRUSTEES, ETC. No Trustee, officer,
employee or agent of the Trust shall be liable to the Trust, its Shareholders or
to any Shareholder, Trustee, officer, employee or agent thereof for any action
or failure to act (including without limitation the failure to compel in any way
any former or acting Trustee to redress any breach of trust) except for his own
bad faith, willful misfeasance, gross negligence or reckless disregard of his
duties.
SECTION 5.3. INDEMNIFICATION.
(a) The Trustees shall provide for indemnification by the Trust or by one
or more series thereof if the claim arises from conduct with respect to only
such series of every person who is, or has been, a Trustee or officer of the
Trust against all liability and against all expenses reasonably incurred or paid
by him in connection with any claim, action, suit or proceeding in which he
becomes involved as a party or otherwise by virtue of his being or having been a
Trustee or officer and against amounts paid or incurred by him in the settlement
thereof, in such manner as the Trustees may provide from time to time in the
By-Laws.
(b) The words "claim," "action," "suit" or "proceeding" shall apply to all
claims, actions, suits or proceedings (civil, criminal or other, including
appeals), actual or threatened; and the words "liability" and "expenses" shall
include, without limitation, attorneys' fees, costs, judgments, amounts paid in
settlement, fines, penalties and other liabilities.
SECTION 5.4. NO BOND REQUIRED OF TRUSTEES. No Trustee shall be obligated
to give any bond or other security for performance of any of his duties
hereunder.
SECTION 5.5. NO DUTY OF INVESTIGATION; NOTICE IN TRUST INSTRUMENTS;
INSURANCE. No purchaser, lender, transfer agent or other Person dealing with
the Trustees or any officer, employee or agent of the Trust or any series
thereof shall be bound to make any inquiry concerning the validity of any
transaction purporting to be made by the Trustees or by said officer,
employee or agent or be liable for the application of money or property paid,
loaned or delivered to or on the order of the Trustees or of said
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officer, employee or agent. Every obligation, contract, instrument,
certificate, Share, other security of the Trust or any series thereof or
undertaking, and every other act or thing whatsoever executed in connection
with the Trust or any series thereof, shall be conclusively presumed to have
been executed or done by the executors thereof only in their capacity as
Trustees under the Declaration or in their capacity as officers, employees or
agents of the Trust or any series thereof. Every written obligation,
contract, instrument, certificate, Share, other security of the Trust or a
series thereof or undertaking made or issued by the Trustees shall recite
that the same is executed or made by them not individually, but as Trustees
under the Declaration, and that the obligations of any such instrument are
not binding upon any of the Trustees or Shareholders, individually, but bind
only the Trust Property or a series thereof, and may contain any further
recital which they or he may deem appropriate, but the omission of such
recital shall not operate to bind the Trustees or Shareholders individually.
The Trustees shall at all times maintain insurance for the protection of the
Trust Property and any property of a series thereof, its Shareholders,
Trustees, officers, employees and agents in such amount as the Trustees shall
deem adequate to cover possible tort liability, and such other insurance as
the Trustees in their sole judgment shall deem advisable.
SECTION 5.6. RELIANCE ON EXPERTS, ETC. Each Trustee and officer or
employee of the Trust or any series thereof shall, in the performance of his
duties, be fully and completely justified and protected with regard to any act
or any failure to act resulting from reliance in good faith upon the books of
account or other records of the Trust or any series thereof, upon an opinion of
counsel or upon reports made to the Trust or any series thereof by any of its
officers or employees or by the Investment Adviser, Administrator, Distributor,
Custodian, Transfer Agent, selected dealers, accountants, appraisers or other
experts or consultants selected with reasonable care by the Trustees, officers
or employees of the Trust or any series thereof, regardless of whether such
counsel or expert may also be a Trustee.
ARTICLE VI
SHARES OF BENEFICIAL INTEREST
SECTION 6.1. BENEFICIAL INTEREST. The interest of the beneficiaries
hereunder shall be divided into transferable shares of beneficial interest with
$.01 par value. The number of shares of beneficial interest authorized
hereunder is unlimited. All Shares issued hereunder including, without
limitation, Shares issued in connection with a dividend in Shares or a split in
Shares, shall be fully paid and nonassessable.
SECTION 6.2. RIGHTS OF SHAREHOLDERS. The ownership of the Trust Property
and the right to conduct any business hereinbefore described are vested
exclusively in the Trustees, and the Shareholders shall have no interest therein
other than the beneficial interest conferred by their Shares, and they shall
have no right to call for any partition or division of any property, profits,
rights or interests of the Trust nor can they be called
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upon to assure any losses of the Trust or suffer an assessment of any kind by
virtue of their ownership of Shares. The Shares shall be personal property
giving only the rights specifically set forth in the Declaration. The Shares
shall not entitle the holder to preference, preemptive, appraisal, conversion or
exchange rights, except as the Trustees may determine.
SECTION 6.3. TRUST ONLY. It is the intention of the Trustees to create
only the relationship of Trustee and beneficiary between the Trustees and each
Shareholder from time to time. It is not the intention of the Trustees to
create a general partnership, limited partnership, joint stock association,
corporation, bailment or any form of legal relationship other than a trust.
Nothing in the Declaration shall be construed to make the Shareholders, either
by themselves or with the Trustees, partners or members of a joint stock
association.
SECTION 6.4. ISSUANCE OF SHARES. The Trustees, in their discretion may,
from time to time without vote of the Shareholders, issue Shares, in addition to
the then issued and outstanding Shares and Shares held in the treasury, to such
party or parties and for such amount and type of consideration, including cash
or property, at such time or times (including, without limitation, each business
day) and on such terms as the Trustees may deem best, and may in such manner
acquire other assets (including the acquisition of assets subject to, and in
connection with, the assumption of liabilities) and businesses. In connection
with any issuance of Shares, the Trustees may issue fractional Shares.
Reductions in the number of outstanding Shares may be made pursuant to the
provisions of Section 8.3 Contributions to the Trust may be accepted for, and
Shares shall be redeemed as, whole Shares and/or fractions of a Share as
described in the Prospectus.
SECTION 6.5. REGISTER OF SHARES. A register shall be kept at the
principal office of the Trust or at an office of the Transfer Agent which shall
contain the names and addresses of the Shareholders and the number of Shares
held by each of them and a record of all transfers thereof. Such register may
be in written form or any other form capable of being converted into written
form within a reasonable time for visual inspection. Such register shall be
conclusive as to who are the holders of the Shares and who shall be entitled to
receive dividends or distributions or otherwise to exercise or enjoy the rights
of Shareholders. No Shareholder shall be entitled to receive payment of any
dividend or distribution, nor to have notice given to him as herein or in the
By-Laws provided, until he has given his address to the Transfer Agent or such
other officer or agent of the Trustees as shall keep the said register for entry
thereon. It is not contemplated that certificates will be issued for the
Shares; however, the Trustees, in their discretion, may authorize the issuance
of Share certificates and promulgate appropriate rules and regulations as to
their use.
SECTION 6.6. TRANSFER OF SHARES. Shares shall be transferable on the
records of the Trust only by the record holder thereof or by his agent thereunto
duly authorized in writing, upon delivery to the Trustees or the Transfer Agent
of a duly executed instrument of transfer, together with such evidence of the
genuineness of each such execution and authorization and of
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other matters as may reasonably be required. Upon this delivery the transfer
shall be recorded on the register of the Trust. Until this record is made, the
Shareholder of record shall be deemed to be the holder of the Shares for all
purposes hereunder and neither the Trustees nor any Transfer Agent or registrar
nor any officer, employee or agent of the Trust shall be affected by any notice
of the proposed transfer.
Any person becoming entitled to any Shares in consequence of the death,
bankruptcy or incompetence of any Shareholder, or otherwise by operation of law,
shall be recorded on the register of Shares as the holder of such Shares upon
production of the proper evidence thereof to the Trustees or the Transfer Agent,
but until such record is made, the Shareholder of record shall be deemed to be
the holder of such Shares for all purposes hereunder and neither the Trustees
nor any Transfer Agent or registrar nor any officer or agent of the Trust shall
be affected by any notice of such death, bankruptcy or incompetence, or other
operation of law, except as may otherwise be provided by the laws of The
Commonwealth of Massachusetts.
SECTION 6.7. NOTICES. Any and all notices to which any Shareholder may be
entitled and any and all communications shall be deemed duly served or given if
mailed, postage prepaid, addressed to any Shareholder of record at his last
known address as recorded on the register of the Trust.
SECTION 6.8. VOTING POWERS. The Shareholders shall have power to vote (i)
for the election of Trustees as provided in Section 2.2; (ii) with respect to
any advisory or management contract of a series as provided in Section 4.1;
(iii) with respect to the amendment of this Declaration as provided in Section
9.3; (iv) with respect to such additional matters relating to the Trust as may
be required or authorized by the 1940 Act, the laws of the Commonwealth of
Massachusetts or other applicable law or by this Declaration or the By-Laws
of the Trust; and (v) with respect to such additional matters relating to the
Trust as may be properly submitted for Shareholder approval. If the Shares of a
series shall be divided into classes as provided in Section 6.9 hereof, the
Shares of each class shall have identical voting rights except that the
Trustees, in their discretion, may provide a class of a series with exclusive
voting rights with respect to matters related to expenses being borne solely by
such class.
SECTION 6.9. SERIES DESIGNATION. The Trustee, in their discretion from
time to time, may authorize the division of Shares into two or more series, each
series relating to a separate portfolio of investments. The different series
shall be established and designated, and the variations in the relative rights
and preferences as between the different series shall be fixed and determined,
by the Trustee; provided that all Shares shall be identical except that there
may be variations between different series as to purchase price, determination
of net asset value, the price, terms and manner of redemption, special and
relative rights as to dividends and on liquidation, conversion rights, and
conditions under which the several series shall have separate voting rights.
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The Trustees, in their discretion without a vote of the Shareholders, may
divide the Shares of any series into classes. In such event, each class of a
series shall represent interests in the Trust Property of a series and have
identical voting, dividend, liquidation and other rights and the same terms
and conditions except that expenses related directly to the distribution of
the Shares of a class of a series may be borne solely by such class (as shall
be determined by the Trustees) and, as provided in Section 6.8, a class of a
series may have exclusive voting rights with respect to matters relating to
the expenses being borne solely by such class. The bearing of such expenses
solely by a class of Shares shall be appropriately reflected (in the manner
determined by the Trustees) in the net asset value, dividend and liquidation
rights of the Shares of such class. The division of the Shares of a series
into classes and the terms and conditions pursuant to which the Shares of the
classes of a series will be issued must be made in compliance with the 1940
Act. No division of Shares of a series into classes shall result in the
creation of a class of Shares having a preference as to dividends or
distributions or a preference in the event of any liquidation, termination or
winding up of the Trust.
If the Trustees shall divide the Shares of the Trust into two or more
series, the following provisions shall be applicable:
(a) The number of Shares of each series and of each class of a series that
may be issued shall be unlimited. The Trustees may classify or reclassify any
unissued Shares or any Shares previously issued and reacquired of any series
into one or more series that may be established and designated from time to
time. The Trustees may hold as treasury shares (of the same or some other
series), reissue for such consideration and on such terms as they may determine,
or cancel any Shares of any series reacquired by the Trust at their discretion
from time to time.
(b) The power of the Trustees to invest and reinvest the Trust Property of
each series that may be established shall be governed by Section 3.2 of this
Declaration.
(c) All consideration received by the Trust for the issue or sale of
Shares of a particular series, together with all assets in which such
consideration is invested or reinvested, all income, earnings, profits, and
proceeds thereof, including any proceeds derived from the sale, exchange or
liquidation of assets, and any funds or payments derived from any
reinvestment of such proceeds in whatever form the same may be, shall
irrevocably belong to that series for all purposes, subject only to the
rights of creditors and shall be so recorded upon the books of account of the
Trust. In the event that there are any assets, income, earnings, profits,
and proceeds thereof, funds, or payments which are not readily identifiable
as belonging to any particular series, the Trustees shall allocate them among
any one or more of the series established and designated from time to time in
such manner and on such basis as they, in their sole discretion, deem fair
and equitable. Each such allocation by the Trustees shall be conclusive and
binding upon the shareholders of all series for all purposes.
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(d) The assets belonging to each particular series shall be charged
with the liabilities of the Trust in respect of that series only, and all
expenses, costs, charges and reserves attributable to that series, and shall
not be charged with the liabilities, expenses, costs, charges and reserves
attributable to other series, and any general liabilities, expenses, costs,
charges or reserves of the Trust which are not readily identifiable as
belonging to any particular series shall be allocated and charged by the
Trustees to and among any one or more of the series established and
designated from time to time in such manner and on such basis as the Trustees
in their sole discretion deem fair and equitable. Each allocation of
liabilities, expenses, costs, charges and reserves by the Trustees shall be
conclusive and binding upon the holders of all series for all purposes. The
Trustees shall have full discretion, to the extent not inconsistent with the
1940 Act, to determine which items are capital; and each such determination
and allocation shall be conclusive and binding upon the Shareholders.
(e) The power of the Trustees to pay dividends and make distributions
with respect to any one or more series shall be governed by Section 8.2 of this
Declaration. Dividends and distributions on Shares of a particular series may
be paid with such frequency as the Trustees may determine to the holders of
Shares of that series, from such of the income and capital gains, accrued or
realized, from the assets belonging to that series, as Trustees may determine,
after providing for actual and accrued liabilities belonging to that series.
All dividends and distributions on Shares of a particular series shall be
distributed pro rata to the shareholders of that series in proportion to the
number of Shares of that series held by such holders at the date and time of
record established for the payment of such dividends or distributions, except
that such dividends and distributions shall appropriately reflect expenses
related directly or indirectly to the distribution of Shares of a class of such
series.
The establishment and designation of any series or class within such series
of Shares shall be effective upon the execution by a majority of the then
Trustees (or by an officer of the Trust pursuant to a vote of a majority of the
Trustees) of an instrument setting forth the establishment and designation such
series or class within such series. Such instrument shall also set forth any
rights and preferences of such series or class within such series which are in
addition to the rights and preferences of Shares set forth in this Declaration.
At any time that there are no Shares outstanding of any particular series or
class within such series previously established and designated, the Trustees may
by an instrument executed by a majority of their number (or by an officer of the
Trust pursuant to a vote of a majority of the Trustees) abolish that series or
class within such series and the establishment and designation thereof. Each
instrument referred to in this paragraph shall have the status of an amendment
to this Declaration.
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ARTICLE VII
REDEMPTIONS
SECTION 7.1. REDEMPTIONS. All outstanding Shares may be redeemed at the
option of the holders thereof, upon and subject to the terms and conditions
provided in this Article VII. The Trust shall, upon application of any
Shareholder or pursuant to authorization from any Shareholder, redeem or
repurchase from the Shareholder outstanding Shares for an amount per share
determined by the Trustees in accordance with any applicable laws and
regulations; provided that (a) the amount per share shall not exceed the cash
equivalent of the proportionate interest of each share in the assets of the
Trust or any series thereof at the time of the redemption or repurchase and (b)
if so authorized by the Trustees, the Trust may, at any time and from time to
time, charge fees for effecting such redemption or repurchase, at rates the
Trustees may establish, as and to the extent permitted under the 1940 Act, and
may, at any time and from time to time, pursuant to the Act, suspend the right
of redemption. The procedures for effecting any suspending redemption shall be
as set forth in the Prospectus from time to time. Payment will be made in the
manner described in the Prospectus.
SECTION 7.2. REDEMPTION OF SHARES; DISCLOSURE OF HOLDING. If the Trustees
shall, at any time and in good faith, be of the opinion that direct or indirect
ownership of Shares or other securities of the Trust or any series thereof has
or may become concentrated in any Person to an extent which would disqualify the
Trust as a regulated investment company under the Internal Revenue Code, then
the Trustees shall have the power by lot or other means deemed equitable by them
(i) to call for redemption by any such Person a number, or principal amount, of
Shares or other securities of the Trust or series thereof sufficient, in the
opinion of the Trustees, to maintain or bring the direct or indirect ownership
of Shares or other securities of the Trust or series thereof into conformity
with the requirements for such qualification and (ii) to refuse to transfer or
issue Shares or other securities of the Trust or any series thereof to any
Person whose acquisition of the Shares or other securities of the Trust in
question would in the opinion of the Trustees result in such disqualification.
The redemption shall be effected at a redemption price determined in accordance
with Section 7.1 hereof.
The holders of Shares or other securities of the Trust or any series
thereof shall upon demand disclose to the Trustees in writing such information
with respect to direct and indirect ownership of Shares or other securities of
the Trust or series thereof as the Trustees deem necessary to comply with the
provisions of the Internal Revenue Code, or to comply with the requirements of
any other authority.
SECTION 7.3. REDEMPTIONS OF ACCOUNTS OF LESS THAN $500. The Trustees shall
have the power at any time to redeem Shares of any Shareholder at a redemption
price determined in accordance with Section 7.1 if at such time the aggregate
net asset value of the Shares in the Shareholder's account is less than $500. A
Shareholder will be notified that the value of his
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account is less than $500 and allowed at least sixty (60) days to make an
additional investment before redemption is processed.
SECTION 7.4. PAYMENT FOR REDEEMED SHARES IN KIND. Subject to any
applicable provisions of the 1940 Act, payment for any Shares redeemed pursuant
to Section 7.1 or 7.2 hereof may, at the option of the Trustees or such officer
or officers of the Trust as they may authorize for the purpose, be made in cash
or in kind, or partially in cash and partially in kind, and, in case of full or
partial payment in kind, the Trustees or such authorized officer or officers
shall have absolute discretion to determine the securities or other assets of
the Trust and the amount thereof to be distributed in kind. For such purpose,
the value of any securities or other non-cash assets delivered in payment for
Shares redeemed shall be determined in the same manner as the value of such
securities or other non-cash assets are determined in accordance with Section
8.1 hereof for purposes of determining the net asset value per Share applicable
to such Shares, as of the same time that the net asset value per Share
applicable to such Shares is determined.
SECTION 7.5. OTHER REDEMPTIONS. The Trust or series thereof may also
reduce the number of outstanding Shares pursuant to the provisions of Section
8.3 hereof.
ARTICLE VIII
DETERMINATION OF NET ASSET VALUE,
NET INCOME AND DISTRIBUTIONS
SECTION 8.1. NET ASSET VALUE. The net asset value of each outstanding
Share of each series of the Trust shall be determined on such days and at such
time or times as the Trustees may determine in accordance with the 1940 Act,
with respect to each series. The method of determination of net asset value of
Shares of each class of a series shall be determined by the Trustees and shall
be as set forth in the Prospectus with respect to the applicable series with
any expenses being borne solely by a class of Shares being reflected in the net
asset value of Shares of each class. The power and duty to make the daily
calculations for any series may be delegated by the Trustees to the investment
adviser, the Custodian, the administrator, the manager, the transfer agent or
such other person as the Trustees may determine. The Trustees may suspend the
daily determination of net asset value to the extent permitted by the 1940 Act.
SECTION 8.2. DISTRIBUTIONS TO SHAREHOLDERS. The Trustees shall from time
to time distribute ratably among the Shareholders of any series such proportion
of the net profits, surplus (including paid-in-surplus), capital, or assets with
respect to such series held by the Trustees as they deem proper with any
expenses being borne solely by a class of Shares of any series being reflected
in the net profits or other assets being distributed to such class. Such
distribution may be made in cash or property (including without limitation any
type of obligations of the Trust or any assets thereof), and the Trustees may
distribute ratably among the Shareholders of any
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<PAGE>
series additional Shares of such series issuable hereunder in such manner, at
such times, and on such terms as the Trustees may deem proper. Such
distributions may be among the Shareholders of record at the time of declaring a
distribution or among the Shareholders of record at such later date as the
Trustees shall determine. The Trustees may always retain from the net profits
such amount as they may deem necessary to pay the debts or expenses of the Trust
or to meet obligations of the Trust, or as they deem desirable to use in the
conduct of its affairs or to retain for future requirements or extensions of the
business. The Trustees may adopt and offer to Shareholders of any series such
dividend reinvestment plans, cash dividend payout plans, or related plans as the
Trustees shall deem appropriate for such series.
Inasmuch as the computation of net income and gains for federal income tax
purposes may vary from the computation thereof on the books, the above
provisions shall be interpreted to give the Trustees the power in their
discretion to distribute for any fiscal year as ordinary dividends and as
capital gains distributions, respectively, additional amounts sufficient to
enable the Trust to avoid or reduce liability for taxes.
SECTION 8.3. DETERMINATION OF NET INCOME. The Trustees shall have the
power to determine the net income of the Trust or any series thereof one or more
times on each business day and at each determination to declare the net income
as dividends in additional Shares. The determination of net income and the
resultant declaration of dividends shall be as set forth in the Prospectus. It
is expected that the Trust or any series thereof will have a positive net income
at the time of each determination. If for any reason the net income is a
negative amount, the Trustees shall have authority to reduce the number of
outstanding Shares. The reduction will be effected by having each Shareholder
proportionately contribute to the capital the necessary Shares that represent
the amount of the excess upon such determination. Each Shareholder will be
deemed to have agreed to such contribution in these circumstances by his
investment in the Trust or any series thereof. The Trustees shall have full
discretion to determine whether any cash or property received shall be treated
as income or as principal and whether any item of expenses shall be charged to
the income or the principal account, and their determination made in good faith
shall be conclusive upon the Shareholders. In the case of stock dividends
received, the Trustees shall have full discretion to determine, in the light of
the particular circumstances, how much, if any, of the value thereof shall be
treated as income, with the balance, if any, to be treated as principal.
SECTION 8.4. POWER TO MODIFY FOREGOING PROCEDURES. Notwithstanding any of
the foregoing provisions of this Article VIII, the Trustees may prescribe, in
their absolute discretion, such other bases and times for determining the per
Share net asset value of the Shares or net income, or the declaration and
payment of dividends and distributions, as they may deem necessary or desirable
to enable the Trust or any series thereof to comply with any provision of the
1940 Act, or any rule or regulation thereunder, including any rule or regulation
adopted pursuant to Section 22 of the 1940 Act by the Commission or any
securities association registered under the
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<PAGE>
Securities Exchange Act of 1934, all as in effect now or hereafter amended or
modified.
ARTICLE IX
DURATION; TERMINATION OF
TRUST; AMENDMENT; MERGERS, ETC.
SECTION 9.1. DURATION. The Trust or any series thereof shall continue
without limitation of time but subject to the provisions of this Article IX.
SECTION 9.2. TERMINATION OF TRUST. (a) The Trust or any series thereof
may be terminated by (i) by the affirmative vote of the holders of not less than
two-thirds of the Shares of each series of the Trust at any meeting of
Shareholders, or (ii) by an instrument in writing, without a meeting, signed by
a majority of the Trustees and consented to by the holders of not less than
two-thirds of such Shares, or (iii) by the Trustees by written notice to the
Shareholders. Upon the termination of the Trust or any series:
(i) The Trust or such series shall carry on no business except for the
purpose of winding up its affairs.
(ii) The Trustees shall proceed to wind up the affairs of the Trust or
such series and all of the powers of the Trustees under this Declaration
shall continue until the affairs of the Trust or such series shall have
been wound up, including the power to fulfill or discharge the contracts of
the Trust or such series, collect its assets, sell, convey, assign,
exchange, transfer or otherwise dispose of all or any part of the remaining
Trust Property to one or more persons at public or private sale for
consideration which may consist in whole or in part of cash, securities or
other property of any kind, discharge or pay its liabilities, and to do all
other acts appropriate to liquidate its business; provided that any sale,
conveyance, assignment, exchange, transfer or other disposition of all or
substantially all the Trust Property or property of the series shall
require approval of the principal terms of the transaction and the nature
and amount of the consideration by vote or consent of the holders of a
majority of the Shares entitled to vote.
(iii) After paying or adequately providing for the payment of all
liabilities, and upon receipt of such releases, indemnities and refunding
agreements as they deem necessary for their protection, the Trustees may
distribute the remaining Trust Property or property of any series, in cash
or in kind or partly each, among the Shareholders of such series and each
class of such series according to their respective rights taking into
account their respective net asset values and the proper allocations by any
series or any claims of Shares of a series.
(b) After termination of the Trust or a series and distribution to the
Shareholders as herein provided, a majority of the Trustees (or an officer of
the Trust pursuant to a vote of majority of the Trustees) shall execute and
lodge among the records of the Trust an instrument in writing setting
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<PAGE>
forth the fact of such termination, and such instrument shall be filed with
the Secretary of the Commonwealth of Massachusetts, as well as with any other
governmental office where such filing may from time to time be required by
the laws of Massachusetts. Upon termination of the Trust, the Trustees shall
thereupon be discharged from all further liabilities and duties hereunder, and
the rights and interests of all Shareholders shall thereupon cease. Upon
termination of any series, the Trustees shall thereupon be discharged from
all further liabilities and duties with respect to such series, and the
rights and interests of all Shareholders of such series shall thereupon cease.
SECTION 9.3. AMENDMENT PROCEDURE. (a) This Declaration may be amended
by a Majority Shareholder Vote, at a meeting of Shareholders, or by written
consent without a meeting. The Trustees may also amend this Declaration
without the vote or consent of Shareholders to change the name of the Trust
or a series, to supply any omission, to cure, correct or supplement any
ambiguous, defective or inconsistent provision hereof, or if they deem it
necessary to conform this Declaration to the requirements of applicable
federal laws or regulations or the requirements of the regulated investment
company provisions of the Internal Revenue Code, but the Trustees shall not
be liable for failing so to do.
(b) No amendment may be made under this Section 9.3 which would change
any rights with respect to any Shares of the Trust or a series by reducing
the amount payable thereon upon liquidation of the Trust or a series or by
diminishing or eliminating any voting rights pertaining thereto, except with
the vote or consent of the holders of two-thirds of the Shares outstanding
and entitled to vote. Nothing contained in this Declaration shall permit the
amendment of this Declaration to impair the exemption from personal liability
of the Shareholders, Trustees, officers, employees and agents of the Trust or
a series or to permit assessments upon Shareholders.
(c) A certificate signed by a majority of the Trustees or by the
Secretary or any Assistant Secretary of the Trust, setting forth an amendment
and reciting that it was duly adopted by the Shareholders or by the Trustees
as aforesaid or a copy of the Declaration, as amended, and executed by a
majority of the Trustees or certified by the Secretary or any Assistant
Secretary of the Trust, shall be conclusive evidence of such amendment when
lodged among the records of the Trust. Such amendment shall be effective
when lodged among the records of the Trust unless some later effective date
is specified.
Notwithstanding any other provision hereof, until such time as a
Registration Statement under the Securities Act of 1933, as amended, covering
the first public offering of securities of the Trust or a series thereof
shall have become effective, this Declaration may be terminated or amended in
any respect by the affirmative vote of a majority of the Trustees or by an
instrument signed by a majority of the Trustees.
SECTION 9.4. MERGER, CONSOLIDATION AND SALE OF ASSETS. The Trust or
any series thereof may merge or consolidate with any other corporation,
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<PAGE>
association, trust or other organization or may sell, lease or exchange all
or substantially all of the Trust Property or property of a series, including
its good will, upon such terms and conditions and for such consideration when
and as authorized, at any meeting of Shareholders called for the purpose, by
the affirmative vote of the holders of not less than two-thirds of the
Shares; provided, however, that, if the merger, consolidation, sale, lease or
exchange is recommended by the Trustees, a Majority Shareholder Vote shall be
sufficient authorization.
SECTION 9.5. INCORPORATION. With approval of a Majority Shareholder
Vote, the Trustees may cause to be organized or assist in organizing a
corporation or corporations under the laws of any jurisdiction or any other
trust, partnership, association or other organization to take over all of the
Trust Property or property of a series or to carry on any business in which
the Trust or any series shall directly or indirectly have any interest, and
to sell, convey and transfer the Trust Property or the property of a series
to any corporation, trust, association or organization in exchange for the
shares or securities thereof or otherwise, and to lend money to, subscribe
for the Shares or securities of, and enter into any contracts with any
corporation, trust, partnership, association or organization in which the
Trust or any series holds or is about to acquire shares or any other
interest. The Trustees may also cause a merger or consolidation between the
Trust or any series or any successor thereto and any corporation, trust,
partnership, association or other organization if and to the extent permitted
by law, as provided under the law then in effect. Nothing contained herein
shall be construed as requiring approval of Shareholders for the Trustees to
organize or assist in organizing one or more corporations, trusts,
partnerships, associations or other organizations and selling, conveying or
transferring a portion of the Trust Property to such organization or entities.
ARTICLE X
REPORTS TO SHAREHOLDERS
The Trustees shall at least semi-annually submit to the Shareholders a
written financial report of the transactions of the Trust or a series
thereof, including financial statements which shall at least annually be
certified by independent public accountants.
ARTICLE XI
MISCELLANEOUS
SECTION 11.1. FILING. This Declaration and any amendment hereto shall
be filed in the office of the Secretary of The Commonwealth of Massachusetts
and in such other places as may be required under the laws of Massachusetts
and may also be filed or recorded in such other places as the Trustees deem
appropriate. Each amendment so filed shall be accompanied by a certificate
signed and acknowledged by a Trustee or by the Secretary or any Assistant
Secretary of the Trust stating that such action was duly taken in a manner
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<PAGE>
provided herein. A restated Declaration, integrating into a single
instrument all of the provisions of the Declaration which are then in effect
and operative, may be executed from time to time by a majority of the
Trustees and shall, upon filing with the Secretary of The Commonwealth of
Massachusetts, be conclusive evidence of all amendments contained therein and
may thereafter be referred to in lieu of the original Declaration and the
various amendments thereto.
SECTION 11.2. RESIDENT AGENT. The Trust may appoint and maintain a
resident agent in The Commonwealth of Massachusetts.
SECTION 11.3. GOVERNING LAW. This Declaration is executed by the
Trustees with reference to the laws of The Commonwealth of Massachusetts, and
the rights of all parties and the validity and construction of every
provision hereof shall be subject to and construed according to the laws of
the Commonwealth, notwithstanding any Massachusetts law governing choice of
law which may require the construction of this Declaration in accordance with
the laws of another state or jurisdiction.
SECTION 11.4. COUNTERPARTS. The Declaration may be simultaneously
executed in several counterparts, each of which shall be deemed to be an
original, and such counterparts, together, shall constitute one and the same
instrument, which shall be sufficiently evidenced by any such original
counterpart.
SECTION 11.5. RELIANCE BY THIRD PARTIES. Any certificate executed by
an individual who, according to the records of the Trust, appears to be a
Trustee hereunder, or Secretary or Assistant Secretary of the Trust,
certifying to: (a) the number or identity of Trustees or Shareholders, (b)
the due authorization of the execution of any instrument or writing, (c) the
form of any vote passed at a meeting of Trustees or Shareholders, (d) the
fact that the number of Trustees or Shareholders present at any meeting or
executing any written instrument satisfies the requirements of this
Declaration, (e) the form of any By-Laws adopted by or the identity of any
officers elected by the Trustees or (f) the existence of any fact or facts
which in any manner relate to the affairs of the Trust, shall be conclusive
evidence as to the matters so certified in favor of any Person dealing with
the Trustees and their successors.
SECTION 11.6. PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS. (a) The
provisions of the Declaration are severable, and if the Trustees shall
determine, with the advice of counsel, that any of such provisions is in
conflict with the 1940 Act, the regulated investment company provisions of
the Internal Revenue Code or with other applicable laws and regulations, the
conflicting provisions shall be deemed never to have constituted a part of the
Declaration; provided, however, that such determination shall not affect any
of the remaining provisions of the Declaration or render invalid or improper
any action taken or omitted prior to such determination.
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<PAGE>
(b) If any provision of the Declaration shall be held invalid or
unenforceable in any jurisdiction, such invalidity or unenforceability shall
affect only the provision in the jurisdiction and shall not in any manner
affect the provision in any other jurisdiction or any other provision of the
Declaration in any jurisdiction.
IN WITNESS WHEREOF, the undersigned has executed this instrument this
13th day of June, 1991.
/s/ Bettina Weis
----------------------------------------
Bettina Weis, as Trustee
and Not Individually
Gardner, Carton & Douglas
321 North Clark Street
Suite 3400
Chicago, Illinois 60610
2522W
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<PAGE>
THE STATE OF ILLINOIS
COUNTY OF COOK, SS CHICAGO
June 13, 1991
Then personally appeared the above-named Bettina Weis who acknowledged
the foregoing instrument to be her free act and deed.
Before me,
/s/ Joyce Johnson
----------------------------------------
Notary Public
[STAMP]
My Commission expires:
2522W
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<PAGE>
THE PRINCIPAL OFFICE OF BFM GOVERNMENT SECURITIES TRUST
ONE SEAPORT PLAZA
NEW YORK, N.Y. 10292
RESIDENT AGENT
RICHARD FORD
C/O C.T. CORPORATION SYSTEM
TWO OLIVER ST
BOSTON, MA 02109
<PAGE>
DECLARATION OF TRUST #32618
BFM GOVERNMENT SECURITIES TRUST
365286
$200.00
[STAMP]
/s/ [Illegible]
<PAGE>
Exhibit 99.B1(b)
BFM Government Securities Trust
Certificate of Amendment of
Declaration of Trust
The undersigned, being the duly elected and acting Secretary of BFM
Government Securities Trust, a trust with transferable shares under
Massachusetts law (the "TRUST"), established under a Declaration of Trust dated
June 13, 1991, (the "DECLARATION"), DO HEREBY CERTIFY that the Trustees of the
Trust, acting pursuant to Section 9.3 of the Declaration, by unanimous written
consent, have amended Section 1.1 of the Declaration to read as follows:
"SECTION 1.1. NAME. The name of the trust created hereby is The
Blackstone Government Income Trust."
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of the Trust,
this 15th day of July, 1991.
/s/ Ronald Amblard
--------------------------
Name: Ronald Amblard
Title: Secretary
[TRUST SEAL]
<PAGE>
STATE OF NEW YORK )
):ss.
COUNTY OF NEW YORK )
Then personally appeared the above named Ronald Amblard, Secretary, who
acknowledged the foregoing instrument to be his free act and deed, this 15th
day of July, 1991.
Before me
-------------------------
Notary Public
My Commission Expires ___
[NOTARIAL SEAL]
bfm-mnss.nc
<PAGE>
AMENDMENT TO DECLARATION (NAME CHANGE)
(NEW NAME) BLACKSTONE GOVERNMENT INCOME TRUST
(OLD NAME) BFM GOVERNMENT SECURITIES TRUST
[STAMP]
<PAGE>
Exhibit 99.B1(c)
THE BLACKSTONE GOVERNMENT INCOME TRUST
CERTIFICATE OF AMENDMENT OF
DECLARATION OF TRUST
The undersigned, being the duly elected and acting Assistant Secretary of
THE BLACKSTONE GOVERNMENT INCOME TRUST, a trust with transferable shares under
Massachusetts law (the "TRUST"), established under a Declaration of Trust dated
June 13, 1991 as amended July 15, 1991, (as so amended, the "DECLARATION"), DOES
HEREBY CERTIFY that the Trustees of the Trust, acting pursuant to Section 9.3 of
the Declaration, by vote duly adopted at a meeting of the Trustees, duly called
and held, at which a quorum was present and acting, have amended Section 1.1 of
the Declaration to read as follows:
"SECTION 1.1. NAME. The name of the trust created hereby is The
BlackRock Government Income Trust."
This amendment of the Declaration is to become effective on September 1,
1992.
IN WITNESS WHEREOF, I have hereunto set my hand and the seal of the Trust,
this 18 day of August, 1992.
/s/ Domenick Pugliese
------------------------------
Name: Domenick Pugliese
Title: Assistant Secretary
[TRUST SEAL]
5-162W
<PAGE>
A C K N O W L E D G M E N T
- - - - - - - - - - - - - -
STATE OF NEW YORK )
ss. August 18, 1992
COUNTY OF NEW YORK )
Then personally appeared before me the above named Domenick Pugliese and
acknowledged the foregoing instrument to be his free act and deed.
/s/ Robert S. Moskow
------------------------------
Notary Public
[STAMP]
<PAGE>
AMENDMENT TO DECLARATION (NAME CHANGE)
(NEW NAME) BLACKROCK GOVERNMENT INCOME TRUST, THE
(OLD NAME) BLACKSTONE GOVERNMENT INCOME TRUST, THE
FEE PAID
$100.00
AUG 24 1992
CASHIERS
SECRETARY'S OFFICE
/s/ [Illegible]
[STAMP]
<PAGE>
Exhibit 99.B2
BY-LAWS OF
THE BLACKSTONE GOVERNMENT INCOME TRUST
as amended on July 31, 1991
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I - DEFINITIONS 1
ARTICLE II - OFFICES 1
Section 1. Principal Office 1
Section 2. Other Offices 1
ARTICLE III - SHAREHOLDERS 2
Section 1. Meetings 2
Section 2. Notice of Meetings 2
Section 3. Record of Date for Meetings
and Other Purposes 2
Section 4. Proxies 3
Section 5. Inspection of Records 4
Section 6. Action without Meeting 4
ARTICLE IV - TRUSTEES 5
Section 1. Meetings of the Trustees 5
Section 2. Quorum and Manner of Acting 6
ARTICLE V - COMMITTEES 7
Section 1. Executive and Other Committees 7
Section 2. Meetings, Quorum and Manner of Acting 7
ARTICLE VI - OFFICERS 8
Section 1. General Provisions 8
Section 2. Term of Office and Qualifications 8
Section 3. Removal 9
Section 4. Powers and Duties of the President 9
Section 5. Powers and Duties of Vice President 10
Section 6. Powers and Duties of the Treasurer 10
Section 7. Powers and Duties of the Secretary 11
Section 8. Powers and Duties of Assistant
Treasurers 11
Section 9. Powers and Duties of Assistant
Secretaries 11
Section 10. Compensation of Officers and
Trustees and Members of
Advisory Board 12
ARTICLE VII - FISCAL YEAR 12
ARTICLE VIII - SEAL 12
ARTICLE IX - WAIVERS OF NOTICE 13
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<PAGE>
TABLE OF CONTENTS (continued)
Page
----
ARTICLE X - CUSTODY OF SECURITIES 13
Section 1. Employment of a Custodian 13
Section 2. Action upon Termination of
Custodian Agreement 13
Section 3. Provisions of Custodian Contract 14
Section 4. Central Certificate System 15
ARTICLE XI - INDEMNIFICATION 16
ARTICLE XII - AMENDMENTS 20
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<PAGE>
BY-LAWS
OF
THE BLACKSTONE GOVERNMENT INCOME TRUST
ARTICLE I.
DEFINITIONS
The terms "Administrator," "Commission," "Custodian," "Declaration,"
"Distributor," "Investment Adviser," "1940 Act," "Shareholder," "Shares,"
"Transfer," "Transfer Agent," "Trust," "Trust Property," "Trustees," and
"Majority Shareholder Vote," have the respective meanings given them in the
Declaration of Trust of The Blackstone Government Income Trust dated June 13,
1991, as amended from time to time.
ARTICLE II.
OFFICES
Section 1. Principal Office. Until changed by the Trustees, the principal
office of the Trust in The Commonwealth of Massachusetts shall be in the City of
Boston, County of Suffolk.
Section 2. Other Offices. The Trust may have offices in such other places
without as well as within the Commonwealth as the Trustee may from time to time
determine.
<PAGE>
ARTICLE III.
SHAREHOLDERS
Section 1. Meetings. Meetings of the Shareholders shall be held to the
extent provided in the Declaration at such place within or without The
Commonwealth of Massachusetts as the Trustees shall designate. The holders of a
majority of outstanding Shares of the Trust or series of the Trust present in
person or by proxy and entitled to vote shall constitute a quorum with respect
to Shares of the Trust or such series at any meeting of the Shareholders.
Section 2. Notice of Meetings. Notice of all meetings of the Shareholders,
stating the time, place and purposes of the meeting, shall be given by the
Trustees by mail to each Shareholder at his or her address as recorded on the
register of the Trust mailed at least (10) days and not more than sixty (60)
days before the meeting. Only the business stated in the notice of the meeting
shall be considered at such meeting. Any adjourned meeting may be held as
adjourned without further notice. No notice need be given to any Shareholder who
shall have failed to inform the Trust of his or her current address or if a
written waiver of notice, executed before or after the meeting by the
Shareholder or his or her attorney thereunto authorized, is filed with the
records of the meeting.
Section 3. Record Date for Meetings and Other Purposes. For the purpose of
determining the Shareholders who are entitled to notice of and to vote at any
meeting, or to
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<PAGE>
participate in any distribution, or for the purpose of any other action, the
Trustees may from time to time close the transfer books for such period, not
exceeding thirty (30) days, as the Trustees may determine; or without closing
the transfer books the Trustees may fix a date not more than sixty (60) days
prior to the date of any meeting of Shareholders or distribution or other action
as a record date for the determinations of the persons to be treated as
Shareholders of record for such purposes, except for dividend payments which
shall be governed by the Declaration.
Section 4. Proxies. At any meeting of Shareholders, any holder of Shares
entitled to vote thereat may vote by proxy, provided that no proxy shall be
voted at any meeting unless it shall have been placed on file with the
Secretary, or with such other officer or agent of the Trust as the Secretary may
direct, for verification prior to the time at which such vote shall be taken.
Proxies may be solicited in the name of one or more Trustees or one or more of
the officers of the Trust. Only Shareholders of record shall be entitled to
vote. Each whole Share shall be entitled to one vote as to any matter on which
it is entitled by the Declaration to vote, and each fractional Share shall be
entitled to a proportionate fractional vote. When any Share is held jointly by
several persons, any one of them may vote at any meeting in person or by proxy
in respect of such Share, but if more than one of them shall be present at such
meeting in person or by proxy, and
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<PAGE>
such joint owners or their proxies so present disagree as to any vote to be
cast, such vote shall not be received in respect of such Share. A proxy
purporting to be executed by or on behalf of a Shareholder shall be deemed valid
unless challenged at or prior to its exercise, and the burden of proving
invalidity shall rest on the challenger. If the holder of any such Share is a
minor or a person of unsound mind, and subject to guardianship or the legal
control of any other person as regards the charge or management of such Share,
he or she may vote by his or her guardian or such other person appointed or
having such control, and such vote may be given in person or by proxy.
Section 5. Inspection of Records. The records of the Trust shall be open to
inspection by Shareholders to the same extent as is permitted shareholders of a
Massachusetts business corporation.
Section 6. Action without Meeting. Any action which may be taken by
Shareholders may be taken without a meeting if a majority of Shareholders of the
Trust or the applicable series of the Trust entitled to vote on the matter (or
such larger proportion thereof as shall be required by law, the Declaration or
these By-Laws for approval of such matter) consent to the action in writing and
the written consents are filed with the records of the meetings of Shareholders.
Such consents shall be treated for all purposes as a vote taken at a meeting of
Shareholders.
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<PAGE>
ARTICLE IV.
TRUSTEES
Section 1. Meetings of the Trustees. The Trustees may in their discretion
provide for regular or stated meetings of the Trustees. Notice of regular or
stated meetings need not be given. Meetings of the Trustees other than regular
or stated meetings shall be held whenever called by the President, or by any one
of the Trustees, at the time being in office. Notice of the time and place of
each meeting other than regular or stated meetings shall be given by the
Secretary or an Assistant Secretary or by the officer or Trustee calling the
meeting and shall be mailed to each Trustee at least two days before the
meeting, or shall be telegraphed, cabled, or wired to each Trustee at his or her
business address, or personally delivered to him or her at least one day before
the meeting. Such notice may, however, be waived by any Trustee. Notice of a
meeting need not be given to any Trustee if a written waiver of notice, executed
by him or her before or after the meeting, is filed with the records of the
meeting, or to any Trustee who attends the meeting without protesting prior
thereto or at its commencement the lack of notice to him or her. A notice or
waiver of notice need not specify the purpose of any meeting. The Trustees may
meet by means of a telephone conference circuit or similar communications
equipment by means of which all persons participating in the meeting are
connected, which meeting shall be deemed to have been held at a place designated
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<PAGE>
by the Trustees at the meeting. Participation in a telephone conference meeting
shall constitute presence in person at such meeting. Any action required or
permitted to be taken at any meeting of the Trustees may be taken by the
Trustees without a meeting if all the Trustees consent to the action in writing
and the written consents are filed with the records of the Trustees' meetings.
Such consents shall be treated for all purposes as a vote taken at a meeting of
the Trustees. Notwithstanding the foregoing, all actions of the Trustees shall
be taken in compliance with the provisions of the Investment Company Act of
1940, as amended.
Section 2. Quorum and Manner of Acting. One-third of the Trustees then in
office shall constitute a quorum for the transaction of business, provided that
a quorum shall in no case be less than two Trustees. If at any meeting of the
Trustees there shall be less than a quorum present, a majority of those present
may adjourn the meeting from time to time until a quorum shall be obtained.
Notice of an adjourned meeting need not be given. The act of the majority of
the Trustees present at any meeting at which there is a quorum shall be the act
of the Trustees, except as may be otherwise specifically provided by statute or
by the Declaration of Trust or by these By-Laws.
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<PAGE>
ARTICLE V.
COMMITTEES
Section 1. Executive and Other Committees. The Trustees by vote of a
majority of all the Trustees may elect from their own number an Executive
Committee to consist of not less than three (3) Trustees to hold office at the
pleasure of the Trustees, which shall have the power to conduct the current and
ordinary business of the Trust while the Trustees are not in session, including
the purchase and sale of securities and the designation of securities to be
delivered upon redemption of Shares of the Trust, and such other powers of the
Trustees as the Trustees may, from time to time, delegate to them except those
powers which by law, the Declaration or these By-Laws they are prohibited from
delegating. The Trustees may also elect from their own number or otherwise other
Committees from time to time, the number composing such Committees, the powers
conferred upon the same (subject to the same limitations as with respect to the
Executive Committee) and the term of membership on such Committees to be
determined by the Trustees. The Trustees may designate a chairman of any such
Committee. In the absence of such designation the Committee may elect its own
Chairman.
Section 2. Meetings, Quorum and Manner of Acting. The Trustees may (1)
provide for stated meetings of any Committee, (2) specify the manner of calling
and notice required for special meetings of any Committee, (3) specify the
number of
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<PAGE>
members of a Committee required to constitute a quorum and the number of members
of a Committee required to exercise specified powers delegated to such
Committee, (4) authorize the making of decisions to exercise specified powers by
written assent of the requisite number of members of a Committee without a
meeting, and (5) authorize the members of a Committee to meet by means of a
telephone conference circuit.
The Executive Committee shall keep regular minutes of its meetings and
records of decisions taken without a meeting and cause them to be recorded in a
book designated for that purpose and kept in the Office of the Trust.
ARTICLE VI. OFFICERS
Section 1. General Provisions. The officers of the Trust shall be a
President, a Treasurer and a Secretary, who shall be elected by the Trustees.
The Trustees may elect or appoint such other officers or agents as the business
of the Trust may require, including one or more Vice Presidents, one or more
Assistant Secretaries, and one or more Assistant Treasurers. The Trustees may
delegate to any officer or committee the power to appoint any subordinate
officers or agents.
Section 2. Term of Office and Qualifications. Except as otherwise provided
by law, the Declaration or these By-Laws, the President, the Treasurer and the
Secretary shall each hold office until his or her successor shall have been duly
elected
-8-
<PAGE>
and qualified, and all other officers shall hold office at the pleasure of the
Trustees. The Secretary and Treasury may be the same person. A Vice President
and the Treasurer or a Vice President and the Secretary may be the same person,
but the offices of Vice President, Secretary and Treasurer shall not be held by
the same person. The President shall hold no other office. Except as above
provided, any two offices may be held by the same person. Any officer may be but
none need be a Trustee or Shareholder.
Section 3. Removal. The Trustees, at any regular or special meeting of the
Trustees, may remove any officer without cause, by a vote of a majority of the
Trustees then in office. Any officer or agent appointed by an officer or
committee may be removed with or without cause by such appointing officer or
committee.
Section 4. Powers and Duties of the President. The President shall be the
principal executive officer of the Trust. He or she may call meetings of the
Trustees and of any Committee thereof when he or she deems it necessary and
shall preside at all meetings of the Shareholders. Subject to the control of the
Trustees and to the control of any Committees of the Trustees, within their
respective spheres, as provided by the Trustees, the President shall at all
times exercise a general supervision and direction over the affairs of the
Trust. The President shall have the power to employ attorneys and counsel for
the Trust and to employ such subordinate officers,
-9-
<PAGE>
agents, clerks and employees as he or she may find necessary to transact the
business of the Trust. He or she shall also have the power to grant, issue,
execute or sign such powers of attorney, proxies or other documents as may be
deemed advisable or necessary in furtherance of the interests of the Trust. The
President shall have such other powers and duties as from time to time may be
conferred upon or assigned to him or her by the Trustees.
Section 5. Powers and Duties of Vice President. In the absence or
disability of the President, the Vice President or, if there be more than one
Vice President, any Vice President designated by the Trustees shall perform all
the duties and may exercise any of the powers of the President, subject to the
control of the Trustees. Each Vice President shall perform such other duties as
may be assigned to him or her from time to time by the Trustees and the
President.
Section 6. Powers and Duties of the Treasurer. The Treasurer shall be the
principal financial and accounting officer of the Trust. The Treasurer shall
deliver all funds of the Trust which may come into his or her hands to such
Custodian as the Trustees may employ pursuant to Article X of these By-Laws. He
or she shall render a statement of condition of the finances of the Trust to the
Trustees as often as they shall require the same and he or she shall in general
perform all the duties incident to the office of Treasurer and such other duties
as from time to time may be assigned to him or her by the
-10-
<PAGE>
Trustees. The Treasurer shall give a bond for the faithful discharge of his or
her duties, if required so to do by the Trustees, in such sum and with such
surety or sureties as the Trustees shall require.
Section 7. Powers and Duties of the Secretary. The Secretary shall keep the
minutes of all meetings of the Trustees and of the Shareholders in proper books
provided for that purpose; he or she shall have custody of the seal of the
Trust; he or she shall have charge of the Share transfer books, lists and
records unless the same are in the charge of the Transfer Agent. The Secretary
shall attend to the giving and serving of all notices by the Trust in accordance
with the provisions of these By-Laws and as required by law; and subject to
these By-Laws, he or she shall in general perform all duties incident to the
office of Secretary and such other duties as from time to time may be assigned
to him or her by the Trustees.
Section 8. Powers and Duties of Assistant Treasurers. In the absence or
disability of the Treasurer, any Assistant Treasurer designated by the Trustees
shall perform all the duties, and may exercise any of the powers, of the
Treasurer. Each Assistant Treasurer shall give a bond for the faithful discharge
of his or her duties, if required so to do by the Trustees, in such sum and with
such surety or sureties as the Trustees shall require.
Section 9. Powers and Duties of Assistant Secretaries. In the absence or
disability of the Secretary, any Assistant
-11-
<PAGE>
Secretary designated by the Trustees shall perform all the duties, and may
exercise any of the powers, of the Secretary. Each Assistant Secretary shall
perform such other duties as from time to time may be assigned to him by the
Trustees.
Section 10. Compensation of Officers and Trustees and Members of the
Advisory Board. Subject to any applicable provisions of the Declaration, the
compensation of the officers and Trustees and members of the Advisory Board
shall be fixed from time to time by the Trustees or, in the case of officers, by
any Committee or officer upon whom such power may be conferred by the Trustees.
No officer shall be prevented from receiving such compensation as such officer
by reason of the fact that he or she is also a Trustee.
ARTICLE VII.
FISCAL YEAR
The fiscal year of the Trust shall begin on the first day of July in each
year and shall end on the last day of June in each year, provided, however, that
the Trustees may from time to time change the fiscal year.
ARTICLE VIII.
SEAL
The Trustees may adopt a seal which shall be in such form and shall have
such inscription thereon as the Trustees may from time to time prescribe.
-12-
<PAGE>
ARTICLE IX.
WAIVERS OF NOTICE
Whenever any notice whatever is required to be given by law, the
Declaration or these By-Laws, a waiver thereof in writing, signed by the person
or persons entitled to said notice, whether before or after the time stated
therein, shall be deemed equivalent thereto. A notice shall be deemed to have
been telegraphed, cabled or wired for the purposes of these By-Laws when it has
been delivered to a representative of any telegraph, cable or wire company with
instructions that it be telegraphed, cabled or wired.
ARTICLE X.
CUSTODY OF SECURITIES
Section 1. Employment of a Custodian. The Trust shall place and at all
times maintain in the custody of a Custodian (including any sub-custodian for
the Custodian) all funds, securities and similar investments included in the
Trust Property. The Custodian (and any sub-custodian) shall be a bank having not
less than $20,000,000 aggregate capital, surplus and undivided profits and shall
be appointed from time to time by the Trustees, who shall fix its remuneration.
Section 2. Action upon Termination of Custodian Agreement. Upon
termination of a Custodian Agreement or inability of the Custodian to
continue to serve, the Trustees shall promptly appoint a successor custodian,
but in the event
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<PAGE>
that no successor custodian can be found who has the required qualifications and
is willing to serve, the Trustees shall call as promptly as possible a special
meeting of the Shareholders to determine whether the Trust shall function
without a custodian or shall be liquidated. If so directed by a Majority
Shareholder Vote, the Custodian shall deliver and pay over all Trust Property
held by it as specified in such vote.
Section 3. Provisions of Custodian Contract. The following provisions shall
apply to the employment of a Custodian and to any contract entered into with the
Custodian so employed: The Trustees shall cause to be delivered to the Custodian
all securities included in the Trust Property or to which the Trust may become
entitled, and shall order the same to be delivered by the Custodian only in
completion of a sale, exchange, transfer, pledge, loan of portfolio securities
to another person, or other disposition thereof, all as the Trustees may
generally or from time to time require or approve or to a successor Custodian;
and the Trustees shall cause all funds included in the Trust Property or to
which it may become entitled to be paid to the Custodian, and shall order the
same disbursed only for investment against delivery of the securities acquired
(including securities acquired under a repurchase agreement), or the return of
cash held as collateral for loans of portfolio securities, or in payment of
expenses, including management compensation, and liabilities of the Trust,
including distributions to Shareholders, or to a
-14-
<PAGE>
successor Custodian. Notwithstanding anything to the contrary in these By-Laws,
upon receipt of proper instructions, which may be standing instructions, the
Custodian may deliver funds in the following cases. In connection with
repurchase agreements, the Custodian shall transmit prior to receipt on behalf
of the Fund of any securities or other property, funds from the Fund's custodian
account to a special custodian approved by the Trustees of the Fund, which funds
shall be used to pay for securities to be purchased by the Fund subject to the
Fund's obligation to sell and the seller's obligation to repurchase such
securities. In such case, the securities shall be held in the custody of the
special custodian. In connection with the Trust's purchase or sale of financial
futures contracts, the Custodian shall transmit, prior to receipt on behalf of
the Fund of any securities or other property, funds from the Trust's custodian
account in order to furnish to and maintain funds with brokers as margin to
guarantee the performance of the Trust's futures obligations in accordance with
the applicable requirements of commodities exchanges and brokers.
Section 4. Central Certificate System. Subject to applicable rules,
regulations and orders adopted by the Commission, the Trustees may direct the
Custodian to deposit all or any part of the securities owned by the Trust in a
system for the central handling of securities established by a national
securities exchange or a national securities association registered with the
Commission under the Securities Exchange Act of
-15-
<PAGE>
1934, or such other person as may be permitted by the Commission, or otherwise
in accordance with the 1940 Act, pursuant to which system all securities of any
particular class or series of any issuer deposited within the system are treated
as fungible and may be transferred or pledged by bookkeeping entry without
physical delivery of such securities, provided that all such deposits shall be
subject to withdrawal only upon the order of the Trust.
ARTICLE XI.
INDEMNIFICATION
A representative of the Trust shall be indemnified by the Trust with
respect to each proceeding against such representative, except a proceeding
brought by or on behalf of the Trust, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such representative in connection with such proceeding, provided
that such representative acted in good faith and in a manner he or she
reasonably believed to be in or not opposed to the best interests of the Trust
and, with respect to any criminal proceeding, had no reasonable cause to believe
his or her conduct was unlawful. The termination of any proceeding by judgment,
order, settlement, conviction or upon a plea of nolo contendere or its
equivalent, shall not, of itself, create a presumption that the person did not
act in good faith in a manner which he or she reasonably believed to be in or
not
-16-
<PAGE>
opposed to the best interests of the Trust and, with respect to any criminal
proceeding, had reasonable cause to believe that his or her conduct was
unlawful.
A representative of the Trust shall be indemnified by the Trust, with
respect to each proceeding brought by or on behalf of the Trust to obtain
judgment or decree in its favor, against expenses (including attorneys' fees)
actually and reasonably incurred by him or her in connection with the defense or
settlement of such proceeding, if he or she acted in good faith and in a manner
he or she reasonably believed to be in or not opposed to the best interests of
the Trust; except that no indemnification shall be made in respect of any claim,
issue, or matter as to which such representative has been adjudged to be liable
for negligence or misconduct in the performance of his or her duty to the Trust,
unless and only to the extent that the court in which the proceeding was
brought, or a court of equity in the county in which the Trust has its principal
office, determines upon application that, despite the adjudication of liability
but in view of all circumstances of the case, such representative is fairly and
reasonably entitled to indemnity for the expenses which the court considers
proper.
To the extent that the representative of the Trust has been successful on
the merits or otherwise in defense of any proceeding referred to in the
preceding two paragraphs, or in defense of any claim, issue or matter therein,
the Trust shall indemnify him or her against all expenses (including attorneys'
-17-
<PAGE>
fees) actually and reasonably incurred by him or her in connection therewith.
Except as provided in the preceding paragraph any indemnification under the
first two paragraphs of this Article XI (unless ordered by a court) shall be
made by the Trust only as authorized in the specific case upon a determination
that indemnification of the representative of the Trust is proper in the
circumstances because he or she has met the applicable standard of conduct set
forth in such paragraphs. The determination shall be made (1) by the Trustees by
a majority vote of a quorum consisting of Trustees who were not parties to the
proceeding, or (2) if a quorum is not obtainable or if a quorum of disinterested
Trustees so directs, by independent legal counsel in a written opinion, or (3)
by a Majority Shareholder Vote.
Expenses (including attorneys' fees) incurred in defending a proceeding may
be paid by the Trust in advance of the final disposition thereof if (1)
authorized by the Trustees in the specific case, and (2) the Trust receives an
undertaking by or on behalf of the representative of the Trust to repay the
advance if it is not ultimately determined that he or she is entitled to be
indemnified by the Trust as authorized in this Article XI.
The indemnification provided by this Article XI shall not be deemed
exclusive of any other rights to which a representative of the Trust or other
person may be entitled under any
-18-
<PAGE>
agreement, vote of Shareholders or disinterested Trustees or otherwise, both as
to action in his or her official capacity and as to action in another capacity
while holding the office, and shall continue as to a person who has ceased to be
a Trustee, officer, employee or agent and inure to the benefit of his or her
heirs and personal representatives.
The Trust may purchase and maintain insurance on behalf of any person who
is or was a Trustee, officer, employee or agent of the Trust, or is or was
serving at the request of the Trust as a trustee, director, officer, employee or
agent of another trust, corporation, partnership, joint venture or other
enterprise, against any liability asserted against him or her and incurred by
him or her in any such capacity or arising out of his or her status as such,
regardless of whether the Trust would have the power to indemnify him or her
against the liability under the provisions of this Article XI.
Nothing contained in this Article XI shall be construed to indemnify any
representative of the Trust against any liability to the Trust or to its
Shareholders to which he or she would otherwise be subject by reason of
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his or her office.
As used in this Article XI, "representative of the Trust" means an
individual (1) who is a present or former Trustee, officer, agent or employee of
the Trust or who serves or has served another trust, corporation, partnership,
joint venture
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<PAGE>
or other enterprise in one of such capacities at the request of the Trust, and
(2) who by reason of his or her position is, has been or is threatened to be
made a party to a proceeding; and "proceeding" includes any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administration
or investigative.
ARTICLE XII.
AMENDMENTS
These By-Laws, or any of them, may be altered, amended or repealed, or new
By-Laws may be adopted by (a) a Majority Shareholder Vote or (b) by the
Trustees, provided, however, that no By-Law may be amended, adopted or repealed
by the Trustees if such amendment, adoption or repeal requires, pursuant to law,
the Declaration or these By-Laws, a vote of the Shareholders.
End of By-Laws
2518W
-20-
<PAGE>
Exhibit 99.B4
<TABLE>
<CAPTION>
<S><C>
RECEIPT FOR SHARES
NUMBER SHARES OF BENEFICIAL INTEREST
- ---------------- -----------------------------
AN UNINCORPORATED BUSINESS TRUST UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS
ACCOUNT NO. ALPHA CODE -----------------------------
CUSIP
-----------------------------
SEE REVERSE SIDE
FOR CERTAIN DEFINITIONS
THIS IS TO EVIDENCE that
Is the owner of
FULLY-PAID AND NON-ASSESSABLE SHARES OF BENEFICIAL INTEREST, PAR VALUE OF $.01 EACH OF THE
- --------------------------- ---------------------------
hereafter called the "Trust", transferable on the books of the Trust by the owner in person or by duly authorized attorney upon
surrender of this Certificate properly endorsed.
This Certificate and the shares represented hereby are issued and shall be held subject to the provisions of the
Declaration of Trust and By-Laws of the Trust and all amendments thereof, copies of which are on file with the Secretary of the
Commonwealth of Massachusetts and at the office of the Trust, to all of which the holder, by acceptance hereof assents.
This Certificate is not valid unless countersigned by the Transfer Agent.
IN WITNESS WHEREOF, the Trust has caused this Certificate to be signed in its name by its proper officers and to be
sealed with the Seal of the Trust.
Dated:
[SEAL]
Secretary President
COUNTERSIGNED:
PRUDENTIAL MUTUAL FUND SERVICES, INC.
(NEW JERSEY)
BY TRANSFER AGENT
AUTHORIZED OFFICER
</TABLE>
<PAGE>
The following abbreviations, when used in the inscription on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S><C>
TEN COM --as tenants in common UNIF GIFT MIN ACT--............Custodian............
TEN ENT --as tenants by the entireties (Cust) (Minor)
JT TEN --as joint tenants with right under Uniform Gifts to Minors Act
of survivorship and not as
tenants in common ........................
(State)
Additional abbreviations may also be used though not in the above list.
</TABLE>
For value received,........hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------.........................................
...............................................................................
Please print or typewrite name and address
including postal zip code of assignee
...............................................................................
...............................................................................
.........................................................................Shares
of Beneficial Interest represented by the within Certificate, and do hereby
irrevocably constitute and appoint.............................................
...............................................................................
Attorney to transfer the said shares on the books of the within-named Trust
with full power of substitution in the premises.
Dated
---------------------------
...............................................
- -------------------------------------------------------------------------------
THIS SPACE MUST NOT BE COVERED IN ANY WAY
NOTICE: The signature to this assignment must correspond with the name as
written upon the face of the Certificate, in every particular, without
alteration or enlargement, or any change whatever.
<PAGE>
Exhibit 99.B8(a)
CUSTODIAN CONTRACT
Between
EACH OF THE PARTIES INDICATED ON APPENDIX A
and
STATE STREET BANK AND TRUST COMPANY
<PAGE>
TABLE OF CONTENTS
Page
----
1. Employment of Custodian and Property to be
Held By It .................................................. 1
2. Duties of the Custodian with Respect to Property of
the Fund Held by the Custodian in the United States ......... 2
2.1 Holding Securities ............................... 2
2.2 Delivery of Securities ........................... 3
2.3 Registration of Securities ....................... 8
2.4 Bank Accounts .................................... 8
2.5 Availability of Federal Funds .................... 9
2.6 Collection of Income ............................. 10
2.7 Payment of Fund Monies ........................... 10
2.8 Liability for Payment in Advance of
Receipt of Securities Purchased .................. 13
2.9 Appointment of Agents ............................ 14
2.10 Deposit of Securities in Securities System ...... 14
2.10A Fund Assets Held in the Custodian's Direct
Paper System ..................................... 17
2.11 Segregated Account ............................... 19
2.12 Ownership Certificates for Tax Purposes .......... 20
2.13 Proxies .......................................... 20
2.14 Communications Relating to Fund
Portfolio Securities ............................. 20
2.15 Reports to Fund by Independent Public
Accountants ...................................... 21
3. Duties of the Custodian with Respect to Property of
the Fund Held Outside of the United States .................. 22
3.1 Appointment of Foreign Sub-Custodians ............ 22
3.2 Assets to be Held ................................ 22
3.3 Foreign Securities Depositories .................. 23
3.4 Segregation of Securities ........................ 23
3.5 Agreements with Foreign Banking Institutions ..... 24
3.6 Access of Independent Accountants of the Fund .... 24
3.7 Reports by Custodian ............................. 25
3.8 Transactions in Foreign Custody Account .......... 25
3.9 Liability of Foreign Sub-Custodians .............. 26
3.10 Liability of Custodian ........................... 27
3.11 Reimbursement for Advances ....................... 28
3.12 Monitoring Responsibilities ...................... 28
3.13 Branches of U.S. Banks ........................... 29
4. Payments for Repurchases or Redemptions and Sales
of Shares of the Fund ....................................... 29
5. Proper Instructions ......................................... 30
6. Actions Permitted Without Express Authority ................. 32
7. Evidence of Authority ....................................... 32
<PAGE>
8. Duties of Custodian with Respect to the Books of
Account and Calculations of Net Asset Value and
Net Income .................................................. 33
9. Records ..................................................... 33
10. Opinion of Fund's Independent Accountant ................... 34
11. Compensation of Custodian ................................... 34
12. Responsibility of Custodian ................................. 34
13. Effective Period, Termination and Amendment ................ 37
14. Successor Custodian ......................................... 38
15. Interpretive and Additional Provisions ...................... 40
16. Massachusetts Law to Apply .................................. 40
17. Prior Contracts ............................................. 40
18. The Parties ................................................ 40
19. Limitation of Liability ..................................... 41
<PAGE>
CUSTODIAN CONTRACT
This Contract between State Street Bank and Trust Company, a Massachusetts
trust company, having its principal place of business at 225 Franklin Street,
Boston, Massachusetts, 02110, hereinafter called the "Custodian", and each Fund
listed on Appendix A which evidences its agreement to be bound hereby by
executing a copy of this Contract (each such Fund individually hereinafter
referred to as the "Fund").
WITNESSETH: That in consideration of the mutual covenants and agreements
hereinafter contained, the parties hereto agree as follows:
1. Employment of Custodian and Property to be Held by It
The Fund hereby employs the Custodian as the custodian of its assets,
including securities it desires to be held in places within the United States
("domestic securities") and securities it desires to be held outside the United
States ("foreign securities") pursuant to the provisions of the Articles of
Incorporation/Declaration of Trust. The Fund agrees to deliver to the Custodian
all securities and cash owned by it, and all payments of income, payments of
principal or capital distributions received by it with respect to all securities
owned by the Fund from time to time, and the cash consideration received by it
for such new or treasury shares of capital stock, ("Shares") of the Fund as may
be issued or sold from time to time. The Custodian shall not be responsible for
any property of the Fund held or received by the Fund and not delivered to the
Custodian.
<PAGE>
Upon receipt of "Proper Instructions" (within the meaning of Article 5),
the Custodian shall from time to time employ one or more sub-custodians located
in the United States, but only in accordance with an applicable vote by the
Board of Directors/Trustees of the Fund, and provided that the Custodian shall
have the same responsibility or liability to the Fund on account of any actions
or omissions of any sub-custodian so employed as any such sub-custodian has to
the Custodian, provided that the Custodian agreement with any such domestic
sub-custodian shall impose on such sub-custodian responsibilities and
liabilities similar in nature and scope to those imposed by this Agreement with
respect to the functions to be performed by such sub-custodian. The Custodian
may employ as sub-custodians for the Fund's securities and other assets the
foreign banking institutions and foreign securities depositories designated in
Schedule "A" hereto but only in accordance with the provisions of Article 3.
2. Duties of the Custodian with Respect to Property of the Fund Held By the
Custodian in the United States
2.1 Holding Securities. The Custodian shall hold and physically segregate for
the account of the Fund all non-cash property, to be held by it in the
United States, including all domestic securities owned by the Fund, other
than (a) securities which are maintained pursuant to Section 2.10 in a
clearing agency which acts as a securities depository or in a book-entry
system authorized by the U.S. Department of the Treasury,
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<PAGE>
collectively referred to herein as "Securities System" and (b) commercial
paper of an issuer for which State Street Bank and Trust Company acts as
issuing and paying agent ("Direct Paper") which is deposited and/or
maintained in the Direct Paper System of the Custodian pursuant to Section
2.10A.
2.2 Delivery of Securities. The Custodian shall release and deliver domestic
securities owned by the Fund held by the Custodian or in a Securities
System account of the Custodian or in the Custodian's Direct Paper
book-entry system account ("Direct Paper System") only upon receipt of
Proper Instructions, which may be continuing instructions when deemed
appropriate by the parties, and only in the following cases:
1) Upon sale of such securities for the account of the Fund and
receipt of payment therefor;
2) Upon the receipt of payment in connection with any repurchase
agreement related to such securities entered into by the Fund;
3) In the case of a sale effected through a Securities System, in
accordance with the provisions of Section 2.10 hereof;
4) To the depository agent in connection with tender or other
similar offers for portfolio securities of the Fund;
5) To the issuer thereof or its agent when such securities are
called, redeemed, retired or
-3-
<PAGE>
otherwise become payable; provided that, in any such case, the
cash or other consideration is to be delivered to the
Custodian;
6) To the issuer thereof, or its agent, for transfer into the
name of the Fund or into the name of any nominee or nominees
of the Custodian or into the name or nominee name of any agent
appointed pursuant to Section 2.9 or into the name or nominee
name of any sub-custodian appointed pursuant to Article 1; or
for exchange for a different number of bonds, certificates or
other evidence representing the same aggregate face amount or
number of units; provided that, in any such case, the new
securities are to be delivered to the Custodian;
7) Upon the sale of such securities for the account of the Fund,
to the broker or its clearing agent, against a receipt, for
examination in accordance with "street delivery" custom;
provided that in any such case, the Custodian shall have no
responsibility or liability for any loss arising from the
delivery of such securities prior to receiving payment for
such securities except as may arise from the
-4-
<PAGE>
Custodian's own negligence or willful misconduct;
8) For exchange or conversion pursuant to any plan of merger,
consolidation, recapitalization, reorganization or
readjustment of the securities of the issuer of such
securities, or pursuant to provisions for conversion contained
in such securities, or pursuant to any deposit agreement;
provided that, in any such case, the new securities and cash,
if any, are to be delivered to the Custodian;
9) In the case of warrants, rights or similar securities, the
surrender thereof in the exercise of such warrants, rights or
similar securities or the surrender of interim receipts or
temporary securities for definitive securities; provided that,
in any such case, the new securities and cash, if any, are to
be delivered to the Custodian;
10) For delivery in connection with any loans of securities made
by the Fund, but only against receipt of adequate collateral
as agreed upon from time to time by the Custodian and the
Fund, which may be in the form of cash or obligations issued
by the United States government, its agencies or
-5-
<PAGE>
instrumentalities, except that in connection with any loans
for which collateral is to be credited to the Custodian's
account in the book-entry system authorized by the U.S.
Department of the Treasury, the Custodian will not be held
liable or responsible for the delivery of securities owned by
the Fund prior to the receipt of such collateral;
11) For delivery as security in connection with any borrowings by
the Fund requiring a pledge of assets by the Fund, but only
against receipt of amounts borrowed;
12) For delivery in accordance with the provisions of any
agreement among the Fund, the Custodian and a broker-dealer
registered under the Securities Exchange Act of 1934 (the
"Exchange Act") and a member of The National Association of
Securities Dealers, Inc. ("NASD"), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange, or of any similar
organization or organizations, regarding escrow or other
arrangements in connection with transactions by the Fund;
13) For delivery in accordance with the provisions of any
agreement among the Fund,
-6-
<PAGE>
the Custodian, and a Futures Commission Merchant registered
under the Commodity Exchange Act, relating to compliance with
the rules of the Commodity Futures Trading Commission and/or
any Contract Market or any similar organization or
organizations, regarding account deposits in connection with
transactions by the Fund;
14) Upon receipt of instructions from the transfer agent
("Transfer Agent") for the Fund, for delivery to such Transfer
Agent or to the holders of shares in connection with
distributions in kind, as may be described from time to time
in the Fund's currently effective prospectus and statement of
additional information ("prospectus"), in satisfaction of
requests by holders of Shares for repurchase or redemption;
and
15) For any other proper business purpose, but only upon receipt
of, in addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors/Trustees or of the
Executive Committee signed by an officer of the Fund and
certified by the Secretary or an Assistant Secretary,
specifying the securities to be delivered, setting forth the
purpose for which such
-7-
<PAGE>
delivery is to be made, declaring such purpose to be a proper
business purpose, and naming the person or persons to whom
delivery of such securities shall be made.
2.3 Registration of Securities. Domestic securities held by the
Custodian (other than bearer securities) shall be registered
in the name of the Fund or in the name of any nominee of the
Fund or of any nominee of the Custodian which nominee shall be
assigned exclusively to the Fund, unless the Fund has
authorized in writing the appointment of a nominee to be used
in common with other registered investment companies having
the same investment adviser as the Fund, or in the name or
nominee name of any agent appointed pursuant to Section 2.9 or
in the name or nominee name of any sub-custodian appointed
pursuant to Article 1. All securities accepted by the
Custodian on behalf of the Fund under the terms of this
Contract shall be in "street name" or other good delivery
form. If, however, the Fund directs the Custodian to maintain
securities in "street name", the Custodian shall utilize its
best efforts to timely collect income due the Fund on such
securities and to notify the Fund on a best efforts basis of
relevant corporate actions including, without limitation,
pendency of calls, maturities, tender or exchange offers.
2.4 Bank Accounts. The Custodian shall open and maintain a
separate bank account or accounts in the United States in
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the name of the Fund, subject only to draft or order by the
Custodian acting pursuant to the terms of this Contract, and
shall hold in such account or accounts, subject to the
provisions hereof, all cash received by it from or for the
account of the Fund, other than cash maintained by the Fund in
a bank account established and used in accordance with Rule
l7f-3 under the Investment Company Act of 1940. Funds held by
the Custodian for the Fund may be deposited by it to its
credit as Custodian in the Banking Department of the Custodian
or in such other bank or trust companies as it may in its
discretion deem necessary or desirable; provided, however,
that every such bank or trust company shall be qualified to
act as a custodian under the Investment Company Act of 1940
and that each such bank or trust company and the funds to be
deposited with each such bank or trust company shall be
approved by vote of a majority of the Board of
Directors/Trustees of the Fund. Such funds shall be deposited
by the Custodian in its capacity as Custodian and shall be
withdrawable by the Custodian only in that capacity.
2.5 Availability of Federal Funds. Upon mutual agreement between
the Fund and the Custodian, the Custodian shall, upon the
receipt of Proper Instructions, make federal funds available
to the Fund as of specified times agreed upon from time to
time by the Fund and the Custodian in the amount of checks
received in payment for Shares of the Fund which are deposited
into the Fund's account.
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<PAGE>
2.6 Collection of Income. Subject to the provisions of Section
2.3, the Custodian shall collect on a timely basis all income
and other payments with respect to registered securities held
hereunder to which the Fund shall be entitled either by law or
pursuant to custom in the securities business, and shall
collect on a timely basis all income and other payments with
respect to bearer securities if, on the date of payment by the
issuer, such securities are held by the Custodian or its agent
thereof and shall credit such income, as collected, to the
Fund's custodian account. Without limiting the generality of
the foregoing, the Custodian shall detach and present for
payment all coupons and other income items requiring
presentation as and when they become due and shall collect
interest when due on securities held hereunder. Income due the
Fund on securities loaned pursuant to the provisions of
Section 2.2 (10) shall be the responsibility of the Fund. The
Custodian will have no duty or responsibility in connection
therewith, other than to provide the Fund with such
information or data as may be necessary to assist the Fund in
arranging for the timely delivery to the Custodian of the
income to which the Fund is properly entitled.
2.7 Payment of Fund Monies. Upon receipt of Proper Instructions,
which may be continuing instructions when deemed appropriate
by the parties, the Custodian shall pay out monies of the Fund
in the following cases only:
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1) Upon the purchase of securities held domestically, options,
futures contracts or options on futures contracts for the
account of the Fund but only (a) against the delivery of such
securities, or evidence of title to such options, futures
contracts or options on futures contracts, to the Custodian
(or any bank, banking firm or trust company doing business in
the United States or abroad which is qualified under the
Investment Company Act of 1940, as amended, to act as a
custodian and has been designated by the Custodian as its
agent for this purpose) registered in the name of the Fund or
in the name of a nominee of the Custodian referred to in
Section 2.3 hereof or in proper form for transfer; (b) in the
case of a purchase effected through a Securities System, in
accordance with the conditions set forth in Section 2.10
hereof; (c) in the case of a purchase involving the Direct
Paper System, in accordance with the conditions set forth in
Section 2.10A; (d) In the case of repurchase agreements
entered into between the Fund and the Custodian, or another
bank, or a broker-dealer which is a member of NASD, (i)
against delivery of the securities either in certificate form
or
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through an entry crediting the Custodian's account at the
Federal Reserve Bank with such securities or (ii) against
delivery of the receipt evidencing purchase by the Fund of
securities owned by the Custodian along with written evidence
of the agreement by the Custodian to repurchase such
securities from the Fund or (e) for transfer to a time deposit
account of the Fund in any bank, whether domestic or foreign;
such transfer may be effected prior to receipt of a
confirmation from a broker and/or the applicable bank pursuant
to Proper Instructions from the Fund as defined in Article 5;
2) In connection with conversion, exchange or surrender of
securities owned by the Fund as set forth in Section 2.2
hereof;
3) For the redemption or repurchase of Shares issued by the Fund
as set forth in Article 4 hereof;
4) For the payment of any expense or liability incurred by the
Fund, including but not limited to the following payments for
the account of the Fund: interest, taxes, management,
accounting, transfer agent and legal fees, and operating
expenses of the
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Fund whether or not such expenses are to be in whole or part
capitalized or treated as deferred expenses;
5) For the payment of any dividends declared pursuant to the
governing documents of the Fund;
6) For payment of the amount of dividends received in respect of
securities sold short;
7) For any other proper purpose, but only upon receipt of, in
addition to Proper Instructions, a certified copy of a
resolution of the Board of Directors/Trustees or of the
Executive Committee of the Fund signed by an officer of the
Fund and certified by its Secretary or an Assistant Secretary,
specifying the amount of such payment, setting forth the
purpose for which such payment is to be made, declaring such
purpose to be a proper purpose, and naming the person or
persons to whom such payment is to be made.
2.8 Liability for Payment in Advance of Receipt of Securities Purchased.
Except as specifically stated otherwise in this Contract, in any and every
case where payment for purchase of securities for the account of the Fund
is made by the Custodian in advance of receipt of the securities purchased
in the absence of specific written
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instructions from the Fund to so pay in advance, the Custodian shall be
absolutely liable to the Fund for such securities to the same extent as if
the securities had been received by the Custodian.
2.9 Appointment of Agents. The Custodian may at any time or times in its
discretion appoint (and may at any time remove) any other bank or trust
company which is itself qualified under the Investment Company Act of
1940, as amended, to act as a custodian, as its agent to carry out such of
the provisions of this Article 2 as the Custodian may from time to time
direct; provided, however, that the appointment of any agent shall not
relieve the Custodian of its responsibilities or liabilities hereunder.
2.10 Deposit of Securities in Securities Systems. The Custodian may deposit
and/or maintain domestic securities owned by the Fund in a clearing agency
registered with the Securities and Exchange Commission under Section 17A
of the Securities Exchange Act of 1934, which acts as a securities
depository, or in the book-entry system authorized by the U.S. Department
of the Treasury and certain federal agencies, collectively referred to
herein as "Securities System" in accordance with applicable Federal
Reserve Board and Securities and Exchange Commission rules and
regulations, if any, and subject to the following provisions:
1) The Custodian may keep domestic securities of the Fund in a
Securities System provided that
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<PAGE>
such securities are represented in an account ("Account") of
the Custodian in the Securities System which shall not include
any assets of the Custodian other than assets held as a
fiduciary, custodian or otherwise for customers;
2) The records of the Custodian with respect to domestic
securities of the Fund which are maintained in a Securities
System shall identify by book-entry those securities belonging
to the Fund;
3) The Custodian shall pay for domestic securities purchased for
the account of the Fund upon (i) receipt of advice from the
Securities System that such securities have been transferred
to the Account, and (ii) the making of an entry on the records
of the Custodian to reflect such payment and transfer for the
account of the Fund. The Custodian shall transfer domestic
securities sold for the account of the Fund upon (i) receipt
of advice from the Securities System that payment for such
securities has been transferred to the Account, and (ii) the
making of an entry on the records of the Custodian to reflect
such transfer and payment for the account of the Fund. Copies
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of all advices from the Securities System of transfers of
domestic securities for the account of the Fund shall identify
the Fund, be maintained for the Fund by the Custodian and be
provided to the Fund at its request. Upon request, the
Custodian shall furnish the Fund confirmation of each transfer
to or from the account of the Fund in the form of a written
advice or notice and shall furnish promptly to the Fund copies
of daily transaction sheets reflecting each day's transactions
in the Securities System for the account of the Fund.
4) The Custodian shall provide the Fund with any report obtained
by the Custodian on the Securities System's accounting system,
internal accounting control and procedures for safeguarding
securities deposited in the Securities System;
5) The Custodian shall have received the initial or annual
certificate, as the case may be, required by Article 13
hereof;
6) Anything to the contrary in this Contract notwithstanding, the
Custodian shall be liable to the Fund for any loss or damage
to the Fund resulting from use of the Securities System by
reason of any negligence,
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<PAGE>
misfeasance or misconduct of the Custodian or any of its
agents or of any of its or their employees or from failure of
the Custodian or any such agent to enforce effectively such
rights as it may have against the Securities System; at the
election of the Fund, it shall be entitled to be subrogated to
the rights of the Custodian with respect to any claim against
the Securities System or any other person which the Custodian
may have as a consequence of any such loss or damage if and to
the extent that the Fund has not been made whole for any such
loss or damage.
2.10A Fund Assets Held in the Custodian's Direct Paper System
The Custodian may deposit and/or maintain securities owned by the Fund in
the Direct Paper System or the Custodian subject to the following
provisions:
1) No transaction relating to securities in the Direct Paper
System will be effected in the absence of Proper Instructions;
2) The Custodian may keep securities of the Fund in the Direct
Paper System only if such securities are represented in an
account ("Account") of the Custodian in the Direct Paper
System which shall not include any assets of the Custodian
other than assets held as a fiduciary, custodian or otherwise
for customers;
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<PAGE>
3) The records of the Custodian with respect to securities of the
Fund which are maintained in the Direct Paper System shall
identify by book-entry those securities belonging to the Fund;
4) The Custodian shall pay for securities purchased for the
account of the Fund upon the making of an entry on the records
of the Custodian to reflect such payment and transfer of
securities to the account of the Fund. The Custodian shall
transfer securities sold for the account of the Fund upon the
making of an entry on the records of the Custodian to reflect
such transfer and receipt of payment for the account of the
Fund;
5) The Custodian shall furnish the Fund confirmation of each
transfer to or from the account of the Fund, in the form of a
written advice or notice, of Direct Paper on the next business
day following such transfer and shall furnish to the Fund
copies of daily transaction sheets reflecting each day's
transaction in the Direct Paper System for the account of the
Fund;
6) The Custodian shall provide the Fund with any report on its
system of internal accounting
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<PAGE>
control as the Fund may reasonably request from time to time;
2.11 Segregated Accounts. The Custodian shall upon receipt of
Proper Instructions establish and maintain a segregated
account or accounts for and on behalf of the Fund, into which
account or accounts may be transferred cash and/or securities,
including securities maintained in an account by the Custodian
pursuant to Section 2.10 hereof, (i) in accordance with the
provisions of any agreement among the Fund, the Custodian and
a broker-dealer registered under the Exchange Act and a member
of the NASD (or any futures commission merchant registered
under the Commodity Exchange Act), relating to compliance with
the rules of The Options Clearing Corporation and of any
registered national securities exchange (or the Commodity
Futures Trading Commission or any registered contract market),
or of any similar organization or organizations, regarding
escrow or other arrangements in connection with transactions
by the Fund, (ii) for purposes of segregating cash, government
securities or liquid, high-grade debt obligations in
connection with options purchased, sold or written by the Fund
or commodity futures contracts or options thereon purchased or
sold by the Fund, (iii) for the purposes of compliance by the
Fund with the procedures required by Investment Company Act
Release No. 10666, or any subsequent release or releases of
the Securities and Exchange Commission
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<PAGE>
relating to the maintenance of segregated accounts by
registered investment companies and (iv) for other proper
corporate purposes, but only, in the case of clause (iv),
upon receipt of, in addition to Proper Instructions, a
certified copy of a resolution of the Board of
Directors/Trustees or of the Executive Committee signed by an
officer of the Fund and certified by the Secretary or an
Assistant Secretary, setting forth the purpose or purposes of
such segregated account and declaring such purposes to be
proper corporate purposes.
2.12 Ownership Certificates for Tax Purposes. The Custodian shall
execute ownership and other certificates and affidavits for
all federal and state tax purposes in connection with receipt
of income or other payments with respect to domestic
securities of the Fund held by it and in connection with
transfers of such securities.
2.13 Proxies. The Custodian shall, with respect to the domestic
securities held hereunder, cause to be promptly executed by
the registered holder of such securities, if the securities
are registered otherwise than in the name of the Fund or a
nominee of the Fund, all proxies, without indication of the
manner in which such proxies are to be voted, and shall
promptly deliver to the Fund such proxies, all proxy
soliciting materials and all notices relating to such
securities.
2.14 Communications Relating to Fund Portfolio Securities. Subject
to the provisions of Section 2.3, the Custodian
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<PAGE>
shall transmit promptly to the Fund all written information
(including, without limitation, pendency of calls and
maturities of securities held domestically and expirations of
rights in connection therewith and notices of exercise of call
and put options written by the Fund and the maturity of
futures contracts purchased or sold by the Fund) received by
the Custodian from issuers of the securities being held for
the Fund. With respect to tender or exchange offers, the
Custodian shall transmit promptly to the Fund all written
information received by the Custodian from issuers of the
securities whose tender or exchange is sought and from the
party (or his agents) making the tender or exchange offer. If
the Fund desires to take action with respect to any tender
offer, exchange offer or any other similar transaction, the
Fund shall notify the Custodian at least three business days
prior to the date on which the Custodian is to take such
action.
2.15 Reports to Fund by Independent Public Accountants. The
Custodian shall provide the Fund, at such times as the Fund
may reasonably require, with reports by independent public
accountants on the accounting system, internal accounting
control and procedures for safeguarding securities, futures
contracts and options on futures contracts, including
securities deposited and/or maintained in a Securities System,
relating to the services provided by the Custodian under this
Contract; such reports shall be of sufficient scope and in
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sufficient detail, as may reasonably be required by the Fund to provide
reasonable assurance that any material inadequacies would be disclosed by
such examination, and, if there are no such inadequacies, the reports
shall so state.
3. Duties of the Custodian with Respect to Property of the Fund Held Outside
of the United States
3.1 Appointment of Foreign Sub-Custodians
The Fund hereby authorizes and instructs the Custodian to employ as
sub-custodians for the Fund's securities and other assets maintained
outside the United States the foreign banking institutions and foreign
securities depositories designated on Schedule A hereto ("foreign
sub-custodians"). Upon receipt of "Proper Instructions", as defined in
Section 5 of this Contract, together with a certified resolution of the
Fund's Board of Directors/Trustees, the Custodian and the Fund may agree
to amend Schedule A hereto from time to time to designate additional
foreign banking institutions and foreign securities depositories to act as
sub-custodian. Upon receipt of Proper Instructions, the Fund may instruct
the Custodian to cease the employment of any one or more such
sub-custodians for maintaining custody of the Fund's assets.
3.2 Assets to be Held. The Custodian shall limit the securities and other
assets maintained in the custody of the foreign sub-custodians to: (a)
"foreign securities",
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as defined in paragraph (c)(1) of Rule 17f-5 under the Investment Company
Act of 1940, and (b) cash and cash equivalents in such amounts as the
Custodian or the Fund may determine to be reasonably necessary to effect
the Fund's foreign securities transactions.
3.3 Foreign Securities Depositories. Except as may otherwise be agreed upon in
writing by the Custodian and the Fund, assets of the Fund shall be
maintained in foreign securities depositories only through arrangements
implemented by the foreign banking institutions serving as sub-custodians
pursuant to the terms hereof. Where possible, such arrangements shall
include entry into agreements containing the provisions set forth in
Section 3.5 hereof.
3.4 Segregation of Securities
The Custodian shall identify on its books as belonging to the Fund, the
foreign securities of the Fund held by each foreign sub-custodian. Each
agreement pursuant to which the Custodian employs a foreign banking
institution shall require that such institution establish a custody
account for the Custodian on behalf of the Fund and physically segregate
in that account, securities and other assets of the Fund, and, in the
event that such institution deposits the Fund's securities in a foreign
securities depository, that it shall identify on its books as belonging to
the Custodian, as agent for the Fund, the securities so deposited.
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3.5 Agreements with Foreign Banking Institutions. Each agreement with a
foreign banking institution shall be substantially in the form set forth
in Exhibit 1 hereto and shall provide that: (a) the Fund's assets will
not be subject to any right, charge, security interest, lien or claim of
any kind in favor of the foreign banking institution or its creditors or
agent, except a claim of payment for their safe custody or administration;
(b) beneficial ownership of the Fund's assets will be freely transferable
without the payment of money or value other than for custody or
administration; (c) adequate records will be maintained identifying the
assets as belonging to the Fund; (d) officers of or auditors employed by,
or other representatives of the Custodian, including to the extent
permitted under applicable law the independent public accountants for the
Fund, will be given access to the books and records of the foreign banking
institution relating to its actions under its agreement with the
Custodian; and (e) assets of the Fund held by the foreign sub-custodian
will be subject only to the instructions of the Custodian or its agents.
3.6 Access of Independent Accountants of the Fund. Upon request of the Fund,
the Custodian will use its best efforts to arrange for the independent
accountants of the Fund to be afforded access to the books and records of
any foreign banking institution employed as a foreign sub-custodian
insofar as such books and records relate to
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the performance of such foreign banking institution under its agreement
with the Custodian.
3.7 Reports by Custodian. The Custodian will supply to the Fund from time to
time, as mutually agreed upon, statements in respect of the securities and
other assets of the Fund held by foreign sub-custodians, including but not
limited to an identification of entities having possession of the Fund's
securities and other assets and advices or notifications of any transfers
of securities to or from each custodial account maintained by a foreign
banking institution for the Custodian on behalf of the Fund indicating, as
to securities acquired for the Fund, the identity of the entity having
physical possession of such securities.
3.8 Transactions in Foreign Custody Account
(a) Except as otherwise provided in paragraph (b) of this Section 3.8, the
provision of Sections 2.2 and 2.7 of this Contract shall apply, in their
entirety to the foreign securities of the Fund held outside the United
States by foreign sub-custodians.
(b) Notwithstanding any provision of this Contract to the contrary,
settlement and payment for securities received for the account of the Fund
and delivery of securities maintained for the account of the Fund may be
effected in accordance with the customary established securities trading
or securities processing practices and procedures in the jurisdiction or
market in which the transaction
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occurs, including, without limitation, delivering securities to the
purchaser thereof or to a dealer therefor (or an agent for such purchaser
or dealer) against a receipt with the expectation of receiving later
payment for such securities from such purchaser or dealer. (c) Securities
maintained in the custody of a foreign sub-custodian may be maintained in
the name of such entity's nominee to the same extent as set forth in
Section 2.3 of this Contract, and the Fund agrees to hold any such nominee
harmless from any liability as a holder of record of such securities.
3.9 Liability of Foreign Sub-Custodians. Each agreement pursuant to which the
Custodian employs a foreign banking institution as a foreign sub-custodian
shall require the institution to exercise reasonable care in the
performance of its duties and to indemnify, and hold harmless, the
Custodian and each Fund from and against any loss, damage, cost, expense,
liability or claim arising out of or in connection with the institution's
performance of such obligations. At the election of the Fund, it shall he
entitled to be subrogated to the rights of the Custodian with respect to
any claims against a foreign banking institution as a consequence of any
such loss, damage, cost, expense, liability or claim if and to the extent
that the Fund has not been made whole for any such loss, damage, cost,
expense, liability or claim.
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3.10 Liability of Custodian. The Custodian shall be liable for the acts or
omissions of a foreign banking institution to the same extent as set forth
with respect to sub-custodians generally to this Contract and, regardless
of whether assets are maintained in the custody of a foreign banking
institution, a foreign securities depository or a branch of a U.S. bank as
contemplated by paragraph 3.13 hereof, the Custodian shall not be liable
for any loss, damage, cost, expense, liability or claim resulting from
nationalization, expropriation, currency restrictions, or acts of war or
terrorism or any loss where the sub-custodian has otherwise exercised
reasonable care. Notwithstanding the foregoing provisions of this
paragraph 3.10, in delegating custody duties to State Street London Ltd.,
the Custodian shall not be relieved of any responsibility to the Fund for
any loss due to such delegation, except such loss as may result from (a)
political risk (including, but not limited to, exchange control
restrictions, confiscation, expropriation, nationalization, insurrection,
civil strife or armed hostilities) or (b) other losses (excluding a
bankruptcy or insolvency of State Street London Ltd. not caused by
political risk) due to Acts of God, nuclear incident or other losses under
circumstances where the Custodian and State Street London Ltd. have
exercised reasonable care.
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3.11 Reimbursement for Advances. If the Fund requires the Custodian to advance
cash or securities for any purpose including the purchase or sale of
foreign exchange or of contracts for foreign exchange, or in the event
that the Custodian or its nominee shall incur or be assessed any taxes,
charges, expenses, assessments, claims or liabilities in connection with
the performance of this Contract, except such as may arise from its or its
nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund
shall be security therefor and should the Fund fail to repay the Custodian
promptly, the Custodian shall be entitled to utilize available cash and to
dispose of the Fund assets to the extent necessary to obtain
reimbursement.
3.12 Monitoring Responsibilities. The Custodian shall furnish annually to the
Fund, during the month of June, information concerning the foreign
sub-custodians employed by the Custodian. Such information shall be
similar in kind and scope to that furnished to the Fund in connection with
the initial approval of this Contract. In addition, the Custodian will
promptly inform the Fund in the event that the Custodian learns of a
material adverse change in the financial condition of a foreign
sub-custodian or any material loss of the assets of the Fund or in the
case of any foreign sub-custodian not the subject of an exemptive order
from the Securities
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and Exchange Commission is notified by such foreign sub-custodian that
there appears to be a substantial likelihood that its shareholders' equity
will decline below $200 million (U.S. dollars or the equivalent thereof)
or that its shareholders' equity has declined below $200 million in each
case computed in accordance with generally accepted U.S. accounting
principles).
3.13 Branches of U.S. Banks
(a) Except as otherwise set forth in this Contract, the provisions of
Article 3 shall not apply where the custody of the Fund assets are
maintained in a foreign branch of a banking institution which is a "bank"
as defined by Section 2(a)(5) of the Investment Company Act of 1940
meeting the qualification set forth in Section 26(a) of said Act. The
appointment of any such branch as a sub-custodian shall be governed by
paragraph 1 of this Contract.
(b) Cash held for the Fund in the United Kingdom shall be maintained in an
interest bearing account established for the Fund with the Custodian's
London branch, which account shall be subject to the direction of the
Custodian, State Street London Ltd. or both.
4. Payments for Repurchases or Redemptions and Sales or Shares of the Fund
From such funds as may be available for the purpose but subject to the
limitations of the Articles of Incorporation/Declaration of Trust and any
applicable votes of the Board of
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Directors/Trustees of the Fund pursuant thereto, the Custodian shall, upon
receipt of instructions from the Transfer Agent, make funds available for
payment to holders of Shares who have delivered to the Transfer Agent a request
for redemption or repurchase of their Shares. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian is authorized upon receipt of
instructions from the Transfer Agent to wire funds to or through a commercial
bank designated by the redeeming shareholders. In connection with the redemption
or repurchase of Shares of the Fund, the Custodian shall honor checks drawn on
the Custodian by a holder of Shares, which checks have been furnished by the
Fund to the holder of Shares, when presented to the Custodian in accordance with
such procedures and controls as are mutually agreed upon from time to time
between the Fund and the Custodian.
The Custodian shall receive from the distributor for the Fund's Shares or
from the Transfer Agent of the Fund and deposit into the Fund's account such
payments as are received for Shares of the Fund issued or sold from time to time
by the Fund. The Custodian will provide timely notification to the Fund and the
Transfer Agent of any receipt by it of payments for Shares of the Fund.
5. Proper Instructions
Proper Instructions as used herein means a writing signed or initialled by
one or more person or persons as the officers of the Fund shall have from time
to time authorized. Each such writing shall set forth the specific transaction
or type of
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transaction involved, including a specific statement of the purpose for which
such action is requested. Oral instructions will be considered Proper
Instructions if the Custodian reasonably believes them to have been given by a
person authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in writing.
It is understood and agreed that the Board of Directors/Directors/Trustees has
authorized (i) Prudential Mutual Fund Management, Inc., as Manager of the Fund,
and (ii) The Prudential Investment Corporation (or Prudential-Bache Securities
Inc.), as Subadviser to the Fund, to deliver proper instructions with respect to
all matters for which proper instructions are required by this Article 5. The
Custodian may rely upon the certificate of an officer of the Manager or
Subadviser, as the case may be, with respect to the person or persons authorized
on behalf of the Manager and Subadviser, respectively, to sign, initial or give
proper instructions for the purpose of this Article 5. Proper Instructions may
include communications effected directly between electro-mechanical or
electronic devices provided that the Fund and the Custodian are satisfied that
such procedures afford adequate safeguards for the Fund's assets. For purposes
of this Section, Proper Instructions shall include instructions received by the
Custodian pursuant to any three-party agreement which requires a segregated
asset account in accordance with Section 2.11.
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6. Actions Permitted without Express Authority
The Custodian may in its discretion, without express authority from the
Fund:
1) make payments to itself or others for minor expenses of handling
securities or other similar items relating to its duties under this Contract,
provided that all such payments shall be accounted for to the Fund;
2) surrender securities in temporary form for securities in definitive
form;
3) endorse for collection, in the name of the Fund, checks, drafts and
other negotiable instruments; and
4) in general, attend to all non-discretionary details in connection with
the sale, exchange, substitution, purchase, transfer and other dealings with the
securities and property of the Fund except as otherwise directed by the Board of
Directors/Trustees of the Fund.
7. Evidence of Authority
The Custodian shall be protected in acting upon any instructions, notice,
request, consent, certificate or other instrument or paper believed by it to be
genuine and to have been properly executed by or on behalf of the Fund. The
Custodian may receive and accept a certified copy of a vote of the Board of
Directors/Trustees of the Fund as conclusive evidence (a) of the authority of
any person to act in accordance with such vote or (b) of any determination or of
any action by the Board of Directors/Trustees pursuant to the Articles of
Incorporation/
-32-
<PAGE>
Declaration of Trust as described in such vote, and such vote may be considered
as in full force and effect until receipt by the Custodian of written notice to
the contrary.
8. Duties of Custodian with Respect to the Books of Account and Calculation
of Net Asset Value and Net Income
The Custodian shall cooperate with and supply necessary information to the
entity or entities appointed by the Board of Directors/Trustees of the Fund to
keep the books of account of the Fund and/or compute the net asset value per
share of the outstanding shares of the Fund or, if directed in writing to do so
by the Fund, shall itself keep such books of account and/or compute such net
asset value per share. If so directed, the Custodian shall also calculate daily
the net income of the Fund as described in the Fund's currently effective
prospectus and shall advise the Fund and the Transfer Agent daily of the total
amounts of such net income and, if instructed in writing by an officer of the
Fund to do so, shall advise the Transfer Agent periodically of the division of
such net income among its various components. The calculations of the net asset
value per share and the daily income of the Fund shall be made at the time or
times described from time to time in the Fund's currently effective prospectus.
9. Records
The Custodian shall create and maintain all records relating to its
activities and obligations under this Contract in such manner as will meet the
obligations of the Fund under the Investment Company Act of 1940, with
particular attention to
-33-
<PAGE>
Section 31 thereof and Rules 31a-1 and 31a-2 thereunder. All such records shall
be the property of the Fund and shall at all times during the regular business
hours of the Custodian be open for inspection by duly authorized officers,
employees or agents of the Fund and employees and agents of the Securities and
Exchange Commission. The Custodian shall, at the Fund's request, supply the Fund
with a tabulation of securities owned by the Fund and held by the Custodian and
shall, when requested to do so by the Fund and for such compensation as shall be
agreed upon between the Fund and the Custodian, include certificate numbers in
such tabulations.
10. Opinion of Fund's Independent Accountant
The Custodian shall take all reasonable action, as the Fund may from time
to time request, to obtain from year to year favorable opinions from the Fund's
independent accountants with respect to its activities hereunder in connection
with the preparation of the Fund's Form N-1A, Form N-2 (in the case of a closed
end Fund) and Form N-SAR or other periodic reports to the Securities and
Exchange Commission and with respect to any other requirements of such
Commission.
11. Compensation of Custodian
The Custodian shall be entitled to reasonable compensation for its
services and expenses as Custodian, as agreed upon from time to time between the
Fund and the Custodian.
12. Responsibility of Custodian
So long as and to the extent that it is in the exercise of reasonable
care, the Custodian shall not be responsible for
-34-
<PAGE>
the title, validity or genuineness of any property or evidence of title thereto
received by it or delivered by it pursuant to this Contract and shall be held
harmless in acting upon any notice, request, consent, certificate or other
instrument reasonably believed by it to be genuine and to be signed by the
proper party or parties, including any futures commission merchant acting
pursuant to the terms of a three-party futures or options agreement. The
Custodian shall be held to the exercise of reasonable care in carrying out the
provisions of this Contract, but shall be kept indemnified by and shall be
without liability to the Fund for any action taken or omitted by it in good
faith without negligence. It shall be entitled to rely on and may act upon
advice of counsel (who may be counsel for the Fund) on all matters, and shall be
without liability for any action reasonably taken or omitted pursuant to such
advice. Notwithstanding the foregoing, the responsibility of the Custodian with
respect to redemptions effected by check shall be in accordance with a separate
Agreement entered into between the Custodian and the Fund.
The Custodian shall be liable for the acts or omissions of a foreign
banking institution appointed pursuant to the provisions of Article 3 to the
same extent as set forth in Article 1 hereof with respect to sub-custodians
located in the United States and, regardless of whether assets are maintained in
the custody of a foreign banking institution, a foreign securities depository or
a branch of a U.S bank as contemplated by paragraph 3.11 hereof, the Custodian
shall not be liable for
-35-
<PAGE>
any loss, damage, cost, expense, liability or claim resulting from, or caused
by, the direction of or authorization by the Fund to maintain custody or any
securities or cash of the Fund in a foreign country including, but not limited
to, losses resulting from nationalization, expropriation, currency restrictions,
or acts of war or terrorism.
If the Fund requires the Custodian to take any action with respect to
securities, which action involves the payment of money or which action may, in
the opinion of the Custodian, result in the Custodian or its nominee assigned to
the Fund being liable for the payment of money or incurring liability of some
other form, the Fund, as a prerequisite to requiring the Custodian to take such
action, shall provide indemnity to the Custodian in an amount and form
satisfactory to it.
If the Fund requires the Custodian to advance cash or securities for any
purpose or in the event that the Custodian or its nominee shall incur or be
assessed any taxes, charges, expenses, assessments, claims or liabilities in
connection with the performance of this Contract, except such as may arise from
its or its nominee's own negligent action, negligent failure to act or willful
misconduct, any property at any time held for the account of the Fund shall be
security therefor and should the Fund fail to repay the Custodian promptly, the
Custodian shall be entitled to utilize available cash and to dispose of the Fund
assets to the extent necessary to obtain reimbursement provided, however that,
prior to disposing of Fund assets hereunder, the Custodian shall give the Fund
notice of its intention to dispose
-36-
<PAGE>
of assets identifying such assets and the Fund shall have one business day from
receipt of such notice to notify the Custodian if the Fund wishes the Custodian
to dispose of Fund assets of equal value other than those identified in such
notice.
13. Effective Period, Termination and Amendment
This Contract shall become effective as of its execution, shall continue
in full force and effect until terminated as hereinafter provided, may be
amended at any time by mutual agreement of the parties hereto and may be
terminated by either party by an instrument in writing delivered or mailed,
postage prepaid to the other party, such termination to take effect not sooner
than sixty (60) days after the date of such delivery or mailing; provided,
however that the Custodian shall not act under Section 2.10 hereof in the
absence of receipt of an initial certificate of the Secretary or an Assistant
Secretary that the Board of Directors/Trustees of the Fund has approved the
initial use of a particular Securities System and the receipt of an annual
certificate of the Secretary or an Assistant Secretary that the Board of
Directors/Trustees has reviewed the use by the Fund of such Securities System,
as required in each case by Rule 17f-4 under the Investment Company Act of 1940,
as amended and that the Custodian shall not act under Section 2.10A hereof in
the absence of receipt of an initial certificate of the Secretary or an
Assistant Secretary that the Board of Directors/Trustees has approved the
initial use of the Direct Paper System and the receipt of an annual certificate
of the Secretary or an Assistant Secretary that the Board of Directors/Trustees
has reviewed the
-37-
<PAGE>
use by the Fund of the Direct Paper System; provided further, however, that the
Fund shall not amend or terminate this Contract in contravention of any
applicable federal or state regulations, or any provision of the Articles of
Incorporation/Declaration of Trust, and further provided, that the Fund may at
any time by action of its Board of Directors/Trustees (i) substitute another
bank or trust company for the Custodian by giving notice as described above to
the Custodian, or (ii) immediately terminate this Contract in the event of the
appointment of a conservator or receiver for the Custodian by the Comptroller of
the Currency or upon the happening of a like event at the direction of an
appropriate regulatory agency or court of competent jurisdiction.
Upon termination of the Contract, the Fund shall pay to the Custodian such
compensation as may be due as of the date of such termination and shall likewise
reimburse the Custodian for its costs, expenses and disbursements.
14. Successor Custodian
If a successor custodian shall be appointed by the Board of
Directors/Trustees of the Fund, the Custodian shall, upon termination, deliver
to such successor custodian at the office of the Custodian, duly endorsed and in
the form for transfer, all securities then held by it hereunder and shall
transfer to an account of the successor custodian all of the Fund's securities
held in a Securities System.
If no such successor custodian shall be appointed, the Custodian shall, in
like manner, upon receipt of a certified copy of a vote of the Board of
Directors/Trustees of the Fund, deliver
-38-
<PAGE>
at the office of the Custodian and transfer such securities, funds and other
properties in accordance with such vote.
In the event that no written order designating a successor custodian or
certified copy of a vote of the Board of Directors/Trustees shall have been
delivered to the Custodian on or before the date when such termination shall
become effective, then the Custodian shall have the right to deliver to a bank
or trust company, which is a "bank" as defined in the Investment Company Act of
1940, doing business in Boston, Massachusetts, of its own selection, having an
aggregate capital, surplus, and undivided profits, as shown by its last
published report, of not less than $25,000,000, all securities, funds and other
properties held by the Custodian and all instruments held by the Custodian
relative thereto and all other property held by it under this Contract and to
transfer to an account of such successor custodian all of the Fund's securities
held in any Securities System. Thereafter, such bank or trust company shall be
the successor of the Custodian under this Contract.
In the event that securities, funds and other properties remain in the
possession of the Custodian after the date of termination hereof owing to
failure of the Fund to procure the certified copy of the vote referred to or of
the Board of Directors/Trustees to appoint a successor custodian, the Custodian
shall be entitled to fair compensation for its services during such period as
the Custodian retains possession of such securities, funds and other properties
and the provisions of this Contract relating to the duties and obligations of
the Custodian shall remain in full force and effect.
-39-
<PAGE>
15. Interpretive and Additional Provisions
In connection with the operation of this Contract, the Custodian and the
Fund may from time to time agree on such provisions interpretive of or in
addition to the provisions of this Contract as may in their joint opinion be
consistent with the general tenor of this Contract. Any such interpretive or
additional provisions shall be in a writing signed by both parties and shall be
annexed hereto, provided that no such interpretive or additional provisions
shall contravene any applicable federal or state regulations or any provision of
the Articles of Incorporation/Declaration of Trust of the Fund. No interpretive
or additional provisions made as provided in the preceding sentence shall be
deemed to be an amendment of this Contract.
16. Massachusetts Law to Apply
This Contract shall be construed and the provisions thereof interpreted
under and in accordance with laws of the Commonwealth of Massachusetts.
17. Prior Contracts
This Contract supersedes and terminates, as of the date hereof, all prior
contracts between the Fund and the Custodian relating to the custody of the
Fund's assets.
18. The Parties
All references herein to the "Fund" are to each of the Funds listed on
Appendix A individually, as if this Contract were between such individual Fund
and the Custodian. With respect to any Fund listed on Appendix A which is
organized as a
-40-
<PAGE>
Massachusetts Business Trust, references to Board of Directors and Articles of
Incorporation shall be deemed a reference to Board of Directors/Trustees and
Articles of Incorporation/Declaration of Trust respectively and reference to
shares of capital stock shall be deemed a reference to shares of beneficial
interest.
19. Limitation of Liability
Each Fund listed on Appendix A that is referenced as a Massachusetts
Business Trust is the designation of the Directors/Trustees under a Articles of
Incorporation/Declaration of Trust, dated (see Appendix A) and all persons
dealing with the Fund must look solely to the property of the Fund for the
enforcement of any claims against the Fund as neither the Directors/Trustees,
officers, agents or shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
IN WITNESS WHEREOF, each of the parties has caused this Instrument to be
executed in its name and behalf by its duly authorized representative and its
seal to be hereunder affixed as of the dates set forth on Appendix A.
ATTEST STATE STREET BANK AND TRUST COMPANY
/s/ [ILLEGIBLE] By /s/ R. O'Connell
- ---------------------------- -------------------------------
Assistant Secretary Vice President
ATTEST EACH OF THE FUNDS LISTED ON APPENDIX A
/s/ S. Jane Rose By /s/ Robert F. Gunia
- ---------------------------- -------------------------------
Secretary Vice President
-41-
<PAGE>
Appendix A
Fund Name Execution Date of
- --------- Date Declaration of Trust
---- --------------------
(if applicable)
Command Government Fund July 1, 1990 August 19, 1981
Command Money Fund July 1, 1990 June 5, 1981
Command Tax-Free Money Fund July 1, 1990 June 5, 1981
The Blackstone Government Income Trust August 30, 1991 June 13, 1991
The Global Yield Fund, Inc. September 5, 1990
Prudential California Municipal Fund August 1, 1990 May 18, 1984
Prudential Equity Fund August 1, 1990
Prudential Global Fund, Inc. June 7, 1990
Prudential GNMA Fund August 1, 1990
Prudential Government Plus Fund July 31, 1990
Prudential Government Securities Trust July 26, 1990 September 22, 1981
Prudential Growth Opportunity Fund July 26, 1990
Prudential High Yield Fund July 26, 1990
Prudential IncomeVertible(R) Plus Fund June 6, 1990
Prudential MoneyMart Assets July 25, 1990
Prudential Multi-Sector Fund, Inc. June 1, 1990
Prudential Municipal Series Fund August 1, 1990 May 18, 1984
Prudential National Municipals Fund July 26, 1990
Prudential Option Growth Fund July 31, 1990
d/b/a/ Prudential Total Return Fund
Prudential Growth Fund, Inc. July 25, 1990
formerly Prudential Research Fund
Prudential Short-Term Global Income Fund October 25, 1990
Prudential Special Money Market Fund January 12, 1990
Prudential Strategic Income Fund September 4, 1990
Prudential Structured Maturity Fund July 25, 1989
Prudential Tax-Free Money Fund July 26, 1990
Prudential U.S. Government Fund June 7, 1990 September 22, 1986
Prudential Utility Fund June 6, 1990
<PAGE>
The Blackstone Government Income Trust
Schedule A
The following foreign banking institution and foreign securities
depository have been approved by the Trustees of The Blackstone Government Trust
for use as sub-custodians for the Fund's securities and other assets:
Securities Depository
Country Bank Clearing Agency
- --------- ------------ ---------------------
Canada Canada Trust The Canadian
Company Depository for
Securities Limited
Certified:
/s/ [ILLEGIBLE]
- ----------------------------
Fund's Authorized Officer
Date: November 14, 1991
<PAGE>
[LOGO]State Street
STATE STREET BANK AND TRUST COMPANY
Custodian Fee Schedule
THE BLACKSTONE GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
I. Administration
Custody, Portfolio and Fund Accounting Service - Maintain custody of fund
assets. Settle portfolio purchases and sales. Report buy and sell fails.
Determine and collect portfolio income. Make cash disbursements and report cash
transactions. Maintain investment ledgers, provide selected portfolio
transactions, position and income reports. Maintain general ledger and capital
stock accounts. Prepare daily trial balance. Calculate net asset value daily.
Provide selected general ledger reports.
The administration fee shown below is an annual charge, billed and payable
monthly, based on average monthly net assets.
ANNUAL FEES
Fund Net Assets Annual Full Service Fees
--------------- ------------------------
First $25 Million 1/10 of 1%
Next $75 Million 1/30 of 1%
Next $400 Million 1/70 of 1%
Next $500 Million 1/75 of 1%
Excess 1/90 of 1%
Minimum Monthly
Charges $2,500
Monthly Charge for
APP Processing $1,263
1839H/1
<PAGE>
[LOGO]State Street
II. Portfolio Trades - For each line item processed
State Street Bank Repos $ 7.00
New York Physical Settlements $25.00
All other trades $16.00
Maturity Collections $ 8.00
III. Options
Option charge for each option written or
closing contract, per issue, per broker $25.00
Option expiration charge, per Issue, per broker $15.00
Option exercised charge, per issue, per broker $15.00
IV. Lending of Securities
Deliver loaned securities versus cash
collateral $20.00
Deliver loaned securities versus securities
collateral $30.00
Receive/deliver additional cash collateral $ 6.00
Substitutions of securities collateral $30.00
Deliver cash collateral versus receipt of
loaned securities $15.00
Deliver securities collateral versus receipt
of loaned securities $25.00
Loan Administration -- mark-to-market per
day, per loan $ 5.00
V. Futures (Marketing)
Transactions -- no security movement $10.00
VI. Holdings Charge
For each issue maintained -- monthly charge $ 5.00
VII. Principal Reduction Payments
Paydown on Government Securities, per paydown $ 8.00
1839H/2
<PAGE>
[LOGO]State Street
VIII. Special Services
Fees for activities of a non-recurring nature such as fund
consolidations or reorganizations, extraordinary security shipments
and the preparation of special reports will be subject to
negotiation.
IX. Automated Pricing
Services and fees are based upon the attached schedule.
X. SEC Yield Calculation
Services and fees are based upon the attached schedule.
XI. Out-of-Pocket Expenses
A billing for the recovery of applicable out-of-pocket expenses will
be made as of the end of each month. Out-of-pocket expenses include,
but are not limited to the following:
Telephone
Wire Charges ($5.25 per wire in and $5.00 out)
Postage and Insurance
Courier Service
Duplicating
Legal Fees
Supplies Related to Fund Records
Rush Transfer -- $8.00 Each
Transfer Fees
Sub-custodian Charges
Price Waterhouse Audit Letter
Federal Reserve Fee for Return Check items over $2,500 - $4.25
GNMA Transfer - $15 each
THE BLACKSTONE GOVERNMENT STATE STREET BANK & TRUST N.A.
INCOME TRUST
BY: /s/ [ILLEGIBLE] BY: /s/ [ILLEGIBLE]
----------------------- -----------------------
TITLE: [ILLEGIBLE] TITLE: [ILLEGIBLE]
DATE: [ILLEGIBLE] DATE: [ILLEGIBLE]
1839H/3
<PAGE>
[LOGO]State Street
STATE STREET BANK AND TRUST COMPANY
Fee Information for Automated Pricing
- --------------------------------------------------------------------------------
Monthly charges for the State Street Bank Automated pricing System are
determined by:
1. Mix of security positions.
2. The number of positions that are priced during the month.
Monthly Base Fee $375.00
Monthly Quote Charge
o Municipal Bonds via Muller Data $ 16.00
o Municipal Bonds via Kenny Information
Systems $ 16.00
o Government, Corporate and Convertible
Bonds via Merrill Lynch $ 11.00
o Corporate and Government Bonds via
Muller Data $ 11.00
o Options, Futures and Private Placements $ 6.00
o Foreign Equities and Bonds via Extel Ltd. $ 6.00
o Listed Equities, OTC Equities, and Bonds $ 6.00
o Corporate, Municipal, Convertible and
Government Bonds, Adjustable Rate Preferred
Stocks via IDSI $ 6.00
For billing purposes, the monthly quote charge will be based on the average
number of positions in each portfolio. The monthly base fee will apply to each
portfolio which is priced on a daily basis.
1839H/4
<PAGE>
[LOGO]State Street
STATE STREET BANK AND TRUST COMPANY
THE BLACKSTONE GOVERNMENT INCOME TRUST
Advertised Yield Service
Fee Schedule
- --------------------------------------------------------------------------------
GENERAL: Provide performance results of the fund in accordance with the
provisions of our Yield Calculation Service Agreement.
ANNUAL MAINTENANCE FEE:
For each portfolio maintained, monthly charge is based on the number of
holdings* as follows:
Holding per portfolio Monthly Charge
--------------------- --------------
0 to 50 $250
50 to 100 $300
over 100 $350
*For mortgage backed assets, the charge is per composite holding.
1839H/5
<PAGE>
Exhibit 99.B8(b)
AMENDMENT TO CUSTODIAN CONTRACT
BETWEEN BLACKSTONE GOVERNMENT INCOME TRUST
AND STATE STREET BANK AND TRUST COMPANY
Reference is made to the CUSTODIAN CONTRACT BETWEEN BLACKSTONE
GOVERNMENT INCOME TRUST (AS ONE OF THE PARTIES INDICATED ON APPENDIX A
THEREOF) AND STATE STREET BANK AND TRUST COMPANY dated August 30, 1991 with
respect to Blackstone Government Income Trust. Paragraph 5 of said Agreement
shall be restated in its entirety and shall provide as follows:
Proper instructions as used herein means a writing signed or
initialled by one or more person or persons as the officers of the Fund
shall have from time to time authorized. Each such writing shall set
forth the specific transaction or type of transaction involved,
including a specific statement of the purpose for which such action is
requested. Oral instructions will be considered Proper Instructions if
the Custodian reasonably believes them to have been given by a person
authorized to give such instructions with respect to the transaction
involved. The Fund shall cause all oral instructions to be confirmed in
writing. It is understood and agreed that the Board of
Directors/Directors/Trustees has authorized (i) Prudential Mutual Fund
Management, Inc., as Manager of the Fund, and (ii) Blackstone Financial
Management L.P., as Subadviser to the Fund, to deliver proper
instructions with respect to all matters for which proper instructions
are required by this Article 5. The Custodian may rely upon the
certificate of an officer of the Manager or Subadviser, as the case may
be, with respect to the person or persons authorized on behalf of the
Manager and Subadviser, respectively, to sign, initial or give proper
instructions for the purpose of this Article 5. Proper Instructions may
include communications effected directly between electro-mechanical or
electronic devices provided that the Fund and the Custodian are
satisfied that such procedures afford adequate safeguards for the Fund's
assets. For purposes of this Section, Proper Instructions shall include
instructions received by the Custodian pursuant to any three-party
agreement which requires a segregated asset account in accordance with
Section 2.11.
<PAGE>
IN WITNESS WHEREOF, each of the parties has caused this instrument to be
executed in its name and behalf by its duly authorized representative.
ATTEST STATE STREET BANK & TRUST
COMPANY
/s/ Claire Rodowicz By /s/ Al Neal
- ---------------------------------- --------------------------------------
VICE PRESIDENT
ATTEST BLACKSTONE GOVERNMENT INCOME
TRUST
/s/ Domenick Pugliese By /s/ Lawrence C. McQuade
- ---------------------------------- --------------------------------------
Assistant Secretary
<PAGE>
Exhibit 99.B9
TRANSFER AGENCY AND SERVICE AGREEMENT
between
THE BLACKSTONE GOVERNMENT INCOME TRUST
(a Massachusetts business trust)
and
PRUDENTIAL MUTUAL FUND SERVICES, INC.
<PAGE>
TABLE OF CONTENTS
Article 1 Terms of Appointment; Duties of the Agent 1
Article 2 Fees and Expenses 5
Article 3 Representations and Warranties of the Agent 5
Article 4 Representations of Warranties of the Fund 6
Article 5 Duty of Care and Indemnification 7
Article 6 Documents and Covenants of the Fund and the Agent 10
Article 7 Termination of Agreement 12
Article 8 Assignment 12
Article 9 Affiliations 13
Article 10 Amendment 14
Article 11 Applicable Law 14
Article 12 Miscellaneous 14
Article 13 Merger of Agreement 16
<PAGE>
TRANSFER AGENCY AND SERVICE AGREEMENT
AGREEMENT made as of this 30th day of August, 1991 by and between
THE BLACKSTONE GOVERNMENT INCOME TRUST, a Massachusetts business trust, having
its principal office and place of business at One Seaport Plaza, New York, New
York 10292 (the Fund), and PRUDENTIAL MUTUAL FUND SERVICES, INC., a New Jersey
corporation, having its principal office and place of business at Raritan Plaza
One, Edison, New Jersey 08837 (the Agent or PMFS).
WHEREAS, the Fund desires to appoint PMFS as its transfer agent,
dividend disbursing agent and shareholder servicing agent in connection with
certain other activities, and PMFS desires to accept such appointment;
NOW THEREFORE, in consideration of the mutual covenants herein
contained, the parties hereto agree as follows:
Article 1 Terms of Appointment; Duties of PMFS
1.01 Subject to the terms and conditions set forth in this
Agreement, the Fund hereby employs and appoints PMFS to act as, and PMFS agrees
to act as, the transfer agent for the authorized and issued shares of beneficial
interest of each series of the Fund, $.01 par value (Shares), dividend
disbursing agent and shareholder servicing agent in connection with any
accumulation, open-account or similar plans provided to the shareholders of the
Fund or any series thereof (Shareholders) and set out in the currently effective
prospectus and statement of additional
<PAGE>
information (prospectus) of the Fund, including without limitation any periodic
investment plan or periodic withdrawal program.
1.02 PMFS agrees that it will perform the following
services:
(a) In accordance with procedures established from time to time by
agreement between the Fund and PMFS, PMFS shall:
(i) Receive for acceptance, orders for the purchase of Shares, and
promptly deliver payment and appropriate documentation therefor to the Custodian
of the Fund authorized pursuant to the Articles of Incorporation of the Fund
(the Custodian);
(ii) Pursuant to purchase orders, issue the appropriate number of
Shares and hold such Shares in the appropriate Shareholder account;
(iii) Receive for acceptance redemption requests and redemption
directions and deliver the appropriate documentation therefor to the Custodian;
(iv) At the appropriate time as and when it receives monies paid to it
by the Custodian with respect to any redemption, pay over or cause to be paid
over in the appropriate manner such monies as instructed by the redeeming
Shareholders;
(v) Effect transfers of Shares by the registered owners thereof upon
receipt of appropriate instructions;
(vi) Prepare and transmit payments for dividends and distributions
declared by the Fund;
(vii) Calculate any sales charges payable by a Shareholder on
purchases and/or redemptions of Shares of the Fund as such
2
<PAGE>
charges may be reflected in the prospectus;
(viii) Maintain records of account for and advise the Fund and its
Shareholders as to the foregoing; and
(ix) Record the issuance of Shares of the Fund and maintain pursuant
to Rule l7Ad-l0(e) under the Securities Exchange Act of 1934 (1934 Act) a record
of the total number of Shares of the Fund which are authorized, based upon data
provided to it by the Fund, and issued and outstanding. When recording the
issuance of Shares, PMFS shall have no obligation to take cognizance of any Blue
Sky laws relating to the issue or sale of such Shares, which functions shall be
the sole responsibility of the Fund.
(b) In addition to and not in lieu of the services set forth in the
above paragraph (a), PMFS shall: (i) perform all of the customary services of a
transfer agent, dividend disbursing agent and, as relevant, shareholder
servicing agent in connection with accumulation, open-account or similar plans
(including without limitation any periodic investment plan or periodic
withdrawal program), including but not limited to, maintaining all Shareholder
accounts, preparing Shareholder meeting lists, mailing proxies, receiving and
tabulating proxies, mailing Shareholder reports and prospectuses to current
Shareholders, withholding taxes on non-resident alien accounts, preparing and
filing appropriate forms required with respect to dividends and distributions by
federal tax authorities for all Shareholders, preparing and mailing confirmation
forms and statements of account to Shareholders for all purchases and
redemptions of Shares and other confirmable
3
<PAGE>
transactions in Shareholder accounts, preparing and mailing activity statements
for Shareholders and providing Shareholder account information and (ii) provide
a system which will enable the Fund to monitor the total number of Shares sold
in each State or other jurisdiction.
(c) In addition, the Fund shall (i) identify to PMFS in writing those
transactions and assets to be treated as exempt from Blue Sky reporting for each
State and (ii) verify the establishment of transactions for each State on the
system prior to activation and thereafter monitor the daily activity for each
State. The responsibility of PMFS for the Fund's registration status under the
Blue Sky or securities laws of any State or other jurisdiction is solely limited
to the initial establishment of transactions subject to Blue Sky compliance by
the Fund and the reporting of such transactions to the Fund as provided above
and as agreed from time to time by the Fund and PMFS.
PMFS may also provide such additional services and functions not
specifically described herein as may be mutually agreed between PMFS and the
Fund and set forth in Schedule B hereto.
Procedures applicable to certain of these services may be established
from time to time by agreement between the Fund and PMFS.
Article 2 Fees and Expenses
2.01 For performance by PMFS pursuant to this Agreement, the Fund
agrees to pay PMFS an annual maintenance fee for each
4
<PAGE>
Shareholder account and certain transactional fees as set out in the fee
schedule attached hereto as Schedule A. Such fees and out-of-pocket expenses and
advances identified under Section 2.02 below may be changed from time to time
subject to mutual written agreement between the Fund and PMFS.
2.02 In addition to the fees paid under Section 2.01 above, the
Fund agrees to reimburse PMFS for out-of-pocket expenses or advances incurred by
PMFS for the items set out in Schedule A attached hereto. In addition, any other
expenses incurred by PMFS at the request or with the consent of the Fund will be
reimbursed by the Fund.
2.03 The Fund agrees to pay all fees and reimbursable expenses
within a reasonable period of tine following the mailing of the respective
billing notice. Postage for mailing of dividends, proxies, Fund reports and
other mailings to all Shareholder accounts shall be advanced to PMFS by the Fund
upon request prior to the mailing date of such materials.
Article 3 Representations and Warranties of PMFS
PMFS represents and warrants to the Fund that:
3.01 It is a corporation duly organized and existing and in good
standing under the laws of New Jersey and it is duly qualified to carry on its
business in New Jersey.
3.02 It is and will remain registered with the U.S. Securities
and Exchange Commission (SEC) as a Transfer Agent
5
<PAGE>
pursuant to the requirements of Section 17A of the 1934 Act.
3.03 It is empowered under applicable laws and by its charter and
By-Laws to enter into and perform this Agreement.
3.04 All requisite corporate proceedings have been taken to
authorize it to enter into and perform this Agreement.
3.05 It has and will continue to have access to the necessary
facilities, equipment and personnel to perform its duties and obligations under
this Agreement.
Article 4 Representations and Warranties of the Fund
The Fund represents and warrants to PMFS that:
4.01 It is a business trust duly organized and existing and in
good standing under the laws of Massachusetts.
4.02 It is empowered under applicable laws and by its Declaration
of Trust and By-Laws to enter into and perform this Agreement.
4.03 All proceedings required by said Declaration of Trust and
By-Laws have been taken to authorize it to enter into and perform this
Agreement.
4.04 It is an investment company registered with the SEC under
the Investment Company Act of 1940, as amended (the 1940 Act).
4.05 A registration statement under the Securities Act of 1933
(the 1933 Act) is currently effective and will remain effective, and appropriate
state securities law filings have been made and will continue to be made, with
respect to all Shares of
6
<PAGE>
the Fund being offered for sale.
Article 5 Duty of Care and Indemnification
5.01 PMFS shall not be responsible for, and the Fund shall
indemnify and hold PMFS harmless from and against, any and all losses, damages,
costs, charges, counsel fees, payments, expenses and liability arising out of or
attributable to:
(a) All actions of PMFS or its agents or subcontractors required to be
taken pursuant to this Agreement, provided that such actions are taken in good
faith and without negligence or willful misconduct.
(b) The Fund's refusal or failure to comply with the terms of this
Agreement, or which arise out of the Fund's lack of good faith, negligence or
willful misconduct or which arise out of the breach of any representation or
warranty of the Fund hereunder.
(c) The reliance on or use by PMFS or its agents or subcontractors of
information, records and documents which (i) are received by PMFS or its agents
or subcontractors and furnished to it by or on behalf of the Fund, and (ii) have
been prepared and/or maintained by the Fund or any other person or firm on
behalf of the Fund.
(d) The reliance on, or the carrying out by PMFS or its agents or
subcontractors of, any instructions or requests of the Fund.
(e) The offer or sale of Shares in violation of any requirement under
the federal securities laws or regulations or the
7
<PAGE>
securities or Blue Sky laws of any State or other jurisdiction that such Shares
be registered in such State or other jurisdiction or in violation of any stop
order or other determination or ruling by any federal agency or any State or
other jurisdiction with respect to the offer or sale of such Shares in such
State or other jurisdiction.
5.02 PMFS shall indemnify and hold the Fund harmless from and against
any and all losses, damages, costs, charges, counsel fees, payments, expenses
and liability arising out of or attributable to any action or failure or
omission to act by PMFS as a result of PMFS' lack of good faith, negligence or
willful misconduct.
5.03 At any time PMFS may apply to any officer of the Fund for
instructions, and may consult with legal counsel, with respect to any matter
arising in connection with the services to be performed by PMFS under this
Agreement, and PMFS and its agents or subcontractors shall not be liable and
shall be indemnified by the Fund for any action taken or omitted by it in
reliance upon such instructions or upon the opinion of such counsel. PMFS, its
agents and subcontractors shall be protected and indemnified in acting upon any
paper or document furnished by or on behalf of the Fund, reasonably believed to
be genuine and to have been signed by the proper person or persons, or upon any
instruction, information, data, records or documents provided to PMFS or its
agents or subcontractors by machine readable input, telex, CRT data entry or
other similar means authorized by the Fund, and shall not be held
8
<PAGE>
to have notice of any change of authority of any person, until receipt of
written notice thereof from the Fund. PMFS, its agents and subcontractors shall
also be protected and indemnified in recognizing stock certificates which are
reasonably believed to bear the proper manual or facsimile signature of the
officers of the Fund, and the proper countersignature of any former transfer
agent or registrar, or of a co-transfer agent or co-registrar.
5.04 In the event either party is unable to perform its obligations
under the terms of this Agreement because of acts of God, strikes, equipment or
transmission failure or damage reasonably beyond its control, or other causes
reasonably beyond its control, such party shall not be liable for damages to the
other for any damages resulting from such failure to perform or otherwise from
such causes.
5.05 Neither party to this Agreement shall be liable to the other
party for consequential damages under any provision of this Agreement or for any
act or failure to act hereunder.
5.06 In order that the indemnification provisions contained in this
Article 5 shall apply, upon the assertion of a claim for which either party may
be required to indemnify the other, the party seeking indemnification shall
promptly notify the other party of such assertion, and shall keep the other
party advised with respect to all developments concerning such claim. The party
who may be required to indemnify shall have the option to participate with the
party seeking indemnification in the defense of such claim. The party seeking
indemnification shall in no case confess
9
<PAGE>
any claim or make any compromise in any case in which the other party may be
required to indemnify it except with the other party's prior written consent.
Article 6 Documents and Covenants of the Fund and PMFS
6.01 The Fund shall promptly furnish to PMFS the following:
(a) A certified copy of the resolution of the Board of Trustees of the
Fund authorizing the appointment of PMFS and the execution and delivery of this
Agreement;
(b) A certified copy of the Declaration of Trust and By-Laws of the
Fund and all amendments thereto;
(c) The current registration statements and any amendments and
supplements thereto filed with the SEC pursuant to the requirements of the 1933
Act and the 1940 Act;
(d) A specimen of the certificate for Shares of the Fund in the form
approved by the Board of Trustees, with a certificate of the Secretary of the
Fund as to such approval;
(e) All account application forms or other documents relating to
Shareholder accounts and/or relating to any plan program or service offered or
to be offered by the Fund; and
(f) Such other certificates, documents or opinions as the Agent deems
to be appropriate or necessary for the proper performance of its duties.
6.02 PMFS hereby agrees to establish and maintain facilities and
procedures reasonably acceptable to the Fund for safekeeping of stock
certificates, check forms and facsimile
10
<PAGE>
signature imprinting devices, if any; and for the preparation or use, and for
keeping account of, such certificates, forms and devices.
6.03 PMFS shall prepare and keep records relating to the services to
be performed hereunder, in the form and manner as it may deem advisable. To the
extent required by Section 31 of the 1940 Act, and the Rules and Regulations
thereunder, PMFS agrees that all such records prepared or maintained by PMFS
relating to the services to be performed by PMFS hereunder are the property of
the Fund and will be preserved, maintained and made available in accordance with
such Section 31 of the 1940 Act, and the Rules and Regulations thereunder, and
will be surrendered promptly to the Fund on and in accordance with its request.
6.04 PMFS and the Fund agree that all books, records, information and
data pertaining to the business of the other party which are exchanged or
received pursuant to the negotiation or the carrying out of this Agreement shall
remain confidential and shall not be voluntarily disclosed to any other person
except as may be required by law or with the prior consent of PMFS and the Fund.
6.05 In case of any requests or demands for the inspection of the
Shareholder records of the Fund, PMFS will endeavor to notify the Fund and to
secure instructions from an authorized officer of the Fund as to such
inspection. PMFS reserves the right, however, to exhibit the Shareholder records
to any person whenever it is advised by its counsel that it may be held liable
for the failure to exhibit the Shareholder records to such person.
11
<PAGE>
Article 7 Termination of Agreement
7.01 This Agreement may be terminated by either party upon one hundred
twenty (120) days written notice to the other.
7.02 Should the Fund exercise its right to terminate, all
out-of-pocket expenses associated with the movement of records and other
materials will be borne by the Fund. Additionally, PMFS reserves the right to
charge for any other reasonable fees and expenses associated with such
termination.
Article 8 Assignment
8.01 Except as provided in Section 8.03 below, neither this
Agreement nor any rights or obligations hereunder may be assigned by either
party without the written consent of the other party.
8.02 This Agreement shall inure to the benefit of and be binding
upon the parties and their respective permitted successors and assigns.
8.03 PMFS may, in its sole discretion and without further consent
by the Fund, subcontract, in whole or in part, for the performance of its
obligations and duties hereunder with any person or entity including but not
limited to: (i) Prudential Securities Incorporated (Prudential Securities), a
registered broker-dealer, (ii) The Prudential Insurance Company of America
(Prudential), (iii) Pruco Securities Corporation, a registered broker-dealer,
(iv) any Prudential Securities or Prudential
12
<PAGE>
subsidiary or affiliate duly registered as a broker-dealer and/or a transfer
agent pursuant to the 1934 Act or (vi) any other Prudential Securities or
Prudential affiliate or subsidiary; provided, however, that PMFS shall be as
fully responsible to the Fund for the acts and omissions of any agent or
subcontractor as it is for its own acts and omissions.
Article 9 Affiliations
9.01 PMFS may now or hereafter, without the consent of or notice
to the Fund, function as Transfer Agent and/or Shareholder Servicing Agent for
any other investment company registered with the SEC under the 1940 Act,
including without limitation any investment company whose adviser,
administrator, sponsor or principal underwriter is or may become affiliated with
Prudential-Bache and/or Prudential or any of its or their direct or indirect
subsidiaries or affiliates.
9.02 It is understood and agreed that the trustees, officers,
employees, agents and Shareholders of the Fund, and the trustees, officers,
employees, agents and shareholders of the Fund's investment adviser and/or
distributor, are or may be interested in the Agent as directors, officers,
employees, agents, shareholders or otherwise, and that the directors, officers,
employees, agents or shareholders of the Agent may be interested in the Fund as
Trustees, officers, employees, agents, Shareholders or otherwise, or in the
investment adviser and/or distributor as officers, directors, employees, agents,
shareholders or otherwise.
13
<PAGE>
Article 10 Amendment
10.01 This Agreement may be amended or modified by a written
agreement executed by both parties and authorized or approved by a resolution of
the Board of Trustees of the Fund.
Article 11 Applicable Law
11.01 This Agreement shall be construed and the provisions
thereof interpreted under and in accordance with the laws of the State of New
Jersey.
Article 12 Miscellaneous
12.01 In the event of an alleged loss or destruction of any Share
certificate, no new certificate shall be issued in lieu thereof, unless there
shall first be furnished to PMFS an affidavit of loss or non-receipt by the
holder of Shares with respect to which a certificate has been lost or destroyed,
supported by an appropriate bond satisfactory to PMFS and the Fund issued by a
surety company satisfactory to PMFS, except that PMFS may accept an affidavit of
loss and indemnity agreement executed by the registered holder (or legal
representative) without surety in such form as PMFS deems appropriate
indemnifying PMFS and the Fund for the issuance of a replacement certificate, in
cases where the alleged loss is in the amount of $1000 or less.
12.02 In the event that any check or other order for
payment of money on the account of any Shareholder or new investor
14
<PAGE>
is returned unpaid for any reason, PMFS will (a) give prompt notification to the
Fund's distributor (Distributor) of such non-payment; and (b) take such other
action, including imposition of a reasonable processing or handling fee, as PMFS
may, in its sole discretion, deem appropriate or as the Fund and the Distributor
may instruct PMFS.
12.03 Any notice or other instrument authorized or required by
this Agreement to be given in writing to the Fund or to PMFS shall be
sufficiently given if addressed to that party and received by it at its office
set forth below or at such other place as it may from time to time designate in
writing.
To the Fund:
The Blackstone Government Income Trust
One Seaport Plaza
New York, NY 10292
Attention: President
To PMFS:
Prudential Mutual Fund Services, Inc.
Raritan Plaza One
Edison, NJ 08837
Attention: President
Article 13 Merger of Agreement
13.01 This Agreement constitutes the entire agreement between the
parties hereto and supersedes any prior agreement with respect to the subject
matter hereof whether oral or written.
Article 14 Liabilities of the Fund.
The name "The Blackstone Government Income Trust" is the
15
<PAGE>
designation of the Trustees under a Declaration of Trust dated June 13, 1991, as
amended on July 17, 1991, and all persons dealing with the Fund must look solely
to the property of the Fund for the enforcement of any claims against the Fund
as neither the Trustees, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in their names and on their behalf under their seals by and through
their duly authorized officers, as of the day and year first above written.
THE BLACKSTONE GOVERNMENT INCOME TRUST
BY: /s/ Lawrence C. McQuade
---------------------------
Lawrence C. McQuade
ATTEST: President
/s/ [Illegible]
- -----------------------------
PRUDENTIAL MUTUAL FUND SERVICES, INC.
BY: /s/ Fred A. Fiandaca
---------------------------
Fred A. Fiandaca
ATTEST: Chairman
/s/ [Illegible]
- -----------------------------
<PAGE>
Schedule A
Prudential Mutual Fund Services, Inc.
Fee Schedule
Fee Information for Services as
Transfer Agent, Dividend Disbursing Agent
and Shareholder Servicing Agent
THE BLACKSTONE GOVERNMENT INCOME TRUST
General - Fees are based on an annual per shareholder account charge for
account maintenance plus out-of-pocket expenses. The effective period of
this fee schedule is August 30, 1991 through December 31, 1991 and shall
continue thereafter from year to year, unless otherwise amended.
Annual Maintenance Charges - The annual maintenance charge includes the
processing of all transactions and correspondence. The fee is billable on a
monthly basis at the rate of 1/12 of the annual fee. A charge is made for
an account in the month that an account opens or closes.
Basic Annual Per Account Fee $13.00
New Account Set-up Fee for Manually $ 2.00
Established Accounts
Monthly Inactive Account Fee $ .20
Out-of-Pocket Expenses - Out-of-pocket expenses include but are not
limited to: postage, stationery and printing, allocable communication
costs, microfilm, microfiche, and expenses incurred at the specific
direction of the Fund.
Payment - An invoice will be presented to the Fund on a monthly basis
assessing the Fund the appropriate fee and out-of-pocket expenses.
THE BLACKSTONE GOVERNMENT INCOME TRUST PRUDENTIAL MUTUAL FUND SERVICES, INC.
NAME: /s/ Lawrence C. McQuade NAME: /s/ Fred A. Fiandaca
------------------- ---------------------------
Lawrence C. McQuade Fred A. Fiandaca
TITLE: President TITLE: Chairman
DATE: ________________________ DATE: ________________________
17
<PAGE>
Exhibit 99.B10
SULLIVAN & WORCESTER LLP
ONE POST OFFICE SQUARE
BOSTON, MASSACHUSETTS 02102
(617) 338-2800
FAX NO. 617-338-2880
Boston
August 22, 1997
Prudential Investments Fund
Management LLC
Gateway Center Three
100 Mulberry Street, 9th floor
Newark, New Jersey 07102-4077
Re: The BlackRock Government Income Trust
Post-Effective Amendments to Registration Statement
Ladies and Gentlemen:
You have requested our opinion as to certain matters of Massachusetts law
relating to the organization and shares of The BlackRock Government Income Trust
(originally named "BFM Government Securities Trust"), a Massachusetts trust with
transferable shares (the "TRUST"), established pursuant to a Declaration of
Trust dated June 13, 1991, and filed on that date (the "ORIGINAL DECLARATION"),
as amended by amendments filed July 17, 1991 and August 24, 1992, and
supplemented by an Amended and Restated Certificate of Designation filed
November 1, 1994 (the Original Declaration, as so amended and supplemented, the
"DECLARATION"), in connection with the Trust's filing with the Securities and
Exchange Commission (the "SEC") of Post-Effective Amendment No. 8 to its
Registration Statement on Form N-1A under the Securities Act of 1933, as amended
(the "SECURITIES ACT"), Registration No. 33-41224, and Post-Effective Amendment
No. 10 to its Registration Statement under the Investment Company Act of 1940,
as amended, Registration No. 811-6334 (collectively, the "AMENDMENT").
We have acted as Massachusetts counsel to the Trust in connection
<PAGE>
with the execution and delivery of the Original Declaration and the amendments
and supplements thereto, and we have reviewed the actions taken by the Trustees
of the Trust to organize the Trust and to authorize the issuance and sale of the
shares of beneficial interest, one cent ($.01) per share par value, authorized
by the Declaration (the "SHARES"). In this connection we have examined the
Original Declaration and the amendments and supplements thereto, the By-laws of
the Trust, the prospectus (the "PROSPECTUS") and Statement of Additional
Information (the "SAI") included in the Amendment, substantially in the form in
which they are about to be filed with the SEC, certificates of officers of the
Trust and of public officials as to matters of fact, and such other documents
and instruments, certified or otherwise identified to our satisfaction, and such
questions of law and fact, as we have considered necessary or appropriate for
purposes of rendering the opinions expressed herein. We have assumed the
genuineness of the signatures on, and the authenticity of, all documents
furnished to us as originals, and the conformity to the originals of documents
submitted to us as copies, which facts we have not independently verified.
Based upon and subject to the foregoing, we hereby advise you that, in our
opinion, under the laws of Massachusetts:
1. The Trust has been duly organized and is validly existing as a trust
with transferable shares of the type commonly called a Massachusetts
business trust.
2. The Trust is authorized to issue an unlimited number of Shares; the
Shares to be registered pursuant to the Amendment have been duly and
validly authorized by all requisite action of the Trustees of the
Trust, and no action of the shareholders of the Trust is required in
such connection.
3. The Shares to be so registered, when duly sold, issued and paid for as
contemplated by the Prospectus and the SAI, will be validly and
legally issued, fully paid and nonassess-
<PAGE>
able by the Trust.
With respect to the opinion stated in paragraph 3 above, we wish to point
out that the shareholders of a Massachusetts business trust may under some
circumstances be subject to assessment at the instance of creditors to pay the
obligations of such trust in the event that its assets are insufficient for the
purpose.
This letter expresses our opinions as to the provisions of the Declaration
and the laws of Massachusetts applying to business trusts generally, but does
not extend to the Massachusetts Securities Act, or to federal securities or
other laws.
We hereby consent to the reference to us in the Prospectus, and to the
filing of this letter with the SEC as an exhibit to the Registration Statement.
In giving such consent, we do not thereby concede that we come within the
category of persons whose consent is required under Section 7 of the Securities
Act.
Very truly yours,
/s/ Sullivan & Worcester LLP
SULLIVAN & WORCESTER LLP
<PAGE>
Exhibit 99.B11(a)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional
Information constituting part of this Post-Effective Amendment No. 8
to the registration statement on Form N-1A (the "Registration
Statement") of our report dated August 21, 1997, relating to the
financial statements and financial highlights of The BlackRock
Government Income Trust, which appears in such Statement of Additional
Information, and to the incorporation by reference of our report into
the Prospectus which constitutes part of this Registration Statement.
We also consent to the reference to us under the heading "Custodian,
Transfer and Dividend Disbursing Agent and Independent Accountants" in
such Statement of Additional Information and to the reference to us
under the heading "Financial Highlights" in such Prospectus.
/s/ Price Waterhouse LLP
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York 10036
August 25, 1997
<PAGE>
Exhibit 99.B11(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in Post-Effective Amendment No. 8 to Registration
Statement No. 33-41224 of The BlackRock Government Income Trust of our report
dated August 15, 1996, and the reference to us under the heading "Change of
Independent Accountants", both appearing in the Statement of Additional
Information, which is included in such Registration Statement, and to the
reference to us under the heading "Financial Highlights" in the Prospectus
which is also included in such Registration Statement.
/s/ Deloitte & Touche LLP
New York, New York
August 25, 1997
<PAGE>
Exhibit 99.B15(a)
THE BLACKROCK GOVERNMENT INCOME TRUST
Distribution and Service Plan
(Class A Shares)
Introduction
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-l under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by The BlackRock Government Income Trust, (the
Trust) and by Prudential Mutual Fund Distributors, Inc., the Trust's distributor
(the Distributor).
The Trust has entered into a distribution agreement (the Distribution
Agreement) pursuant to which the Trust employ the Distributor to distribute
Class A shares issued by the Trust (Class A shares). Under the Distribution
Agreement, the Distributor will be entitled to receive payments from investors
of front-end sales charges with respect to the sale of Class A shares. Under the
Plan, the Trust intends to reimburse the Distributor for costs incurred by the
Distributor in distributing Class A shares of the Trust and to pay the
Distributor a service fee for the maintenance of Class A shareholder accounts.
A majority of the Trustees of the Trust, including a majority of those
Trustees who are not "interested persons" of the Trust (as defined in the
Investment Company Act) and who have no direct or indirect financial interest in
the operation of this Plan or any
<PAGE>
agreements related to it (the Rule l2b-l Trustees), have determined by votes
cast in person at a meeting called for the purpose of voting on this Plan that
there is a reasonable likelihood that adoption of this Plan will benefit the
Trust and its shareholders. Expenditures under this Plan by the Trust for
Distribution Activities (defined below) are primarily intended to result in the
sale of Class A shares of the Trust within the meaning of paragraph (a) (2) of
Rule l2b-l promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Trust, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
The material aspects of the Plan are as follows:
1. Distribution Activities
The Trust shall engage the Distributor to distribute Class A shares of the
Trust and to service shareholder accounts using all of the facilities of the
distribution networks of Prudential Securities Incorporated (Prudential
Securities) and Pruco Securities Corporation (Prusec), including sales
personnel and branch office and central support systems, and also using such
other qualified broker-dealers and financial institutions as the
2
<PAGE>
Distributor may select. Services provided and activities undertaken to
distribute Class A shares of the Trust are referred to herein as "Distribution
Activities."
2. Payment of Service Fee
The Trust shall reimburse the Distributor for costs incurred by it in
providing personal service and/or maintaining shareholder accounts at a rate not
to exceed .25 of 1% per annum of the average daily net assets of the Class A
shares (service fee). The Trust shall calculate and accrue daily amounts
reimbursable by the Class A shares of the Trust hereunder and shall pay such
amounts monthly or at such other intervals as the Trustees may determine. Costs
of the Distributor subject to reimbursement hereunder include account servicing
fees and indirect and overhead costs associated with providing personal service
and/or maintaining shareholder accounts.
3. Pavment for Distribution Activities
The Trust shall reimburse the Distributor for costs incurred by it in
performing Distribution Activities at a rate which, together with the service
fee (described in Section 2 hereof), shall not exceed .30% per annum of the
average daily net assets of the Class A shares of the Trust. The Trust shall
calculate and accrue daily amounts reimbursable by the Class A shares of the
Trust hereunder and shall pay such amounts monthly or at such other intervals as
the Trustees may determine.
Amounts paid to the Distributor by the Class A shares of the Trust will
not be used to pay the distribution expenses incurred with respect to the Class
B shares of the Trust except that
3
<PAGE>
distribution expenses attributable to the Trust as a whole will be allocated to
the Class A shares according to the ratio of the sales of Class A shares to the
total sales of the Trust's shares over the Trust's fiscal year or such other
allocation method approved by the Trustees. The allocation of distribution
expenses among Classes will be subject to the review of the Trustees. Payments
hereunder will be applied to distribution expenses in the order in which they
are incurred, unless otherwise determined by the Trustees.
Costs of the Distributor subject to reimbursement hereunder are costs of
performing Distribution Activities and may include, among others:
(a) amounts paid to Prudential Securities in reimbursement of costs
incurred by Prudential Securities in performing services under a
selected dealer agreement between Prudential Securities and the
Distributor for sale of Class A shares of the Trust, including sales
commissions and trailer commissions paid to, or on account of,
account executives and indirect and overhead costs associated with
Distribution Activities, including central office and branch
expenses;
(b) amounts paid to Prusec in reimbursement of costs incurred by Prusec
in performing services under a selected dealer agreement between
Prusec and the Distributor for sale of Class A shares of the Trust,
including sales commissions and trailer commissions paid to, or on
account of, agents and indirect and overhead costs associated with
Distribution Activities;
(c) advertising for the Trust in various forms through any available
medium, including the cost of printing and mailing Trust
prospectuses, statements of additional information and periodic
financial reports and sales literature to persons other than current
shareholders of the Trust; and
4
<PAGE>
(d) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and financial institutions (other than
Prudential Securities and Prusec) which have entered into selected
dealer agreements with the Distributor with respect to shares of the
Trust.
4. Quarterly Reports; Additional Information
An appropriate officer of the Trust will provide to the Trustees of the
Trust for review, at least quarterly, a written report specifying in reasonable
detail the amounts expended for Distribution Activities (including payment of
the service fee) and the purposes for which such expenditures were made in
compliance with the requirements of Rule 12b-l. The Distributor will provide to
the Trustees of the Trust such additional information as the Trustees shall from
time to time reasonably request, including information about Distribution
Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Trustees of the Trust of the commissions
and account servicing fees to be paid by the Distributor to account executives
of the Distributor and to broker-dealers and financial institutions which have
selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Trust.
5
<PAGE>
If approved by a vote of a majority of the outstanding voting securities
of the Class A shares of the Trust, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Trustees of the Trust and a majority of the Rule 12b-l Trustees
by votes cast in person at a meeting called for the purpose of voting on the
continuation of the Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority of the
Rule 12b-l Trustees, or by vote of a majority of the outstanding voting
securities (as defined in the Investment Company Act) of the Class A shares of
the Trust.
7. Amendments
The Plan may not be amended to change the distribution expenses to be paid
as provided for in Section 3 hereof so as to increase materially the amounts
payable under this Plan unless such amendment shall be approved by the vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class A shares of the Trust. All material amendments of the
Plan, including the addition or deletion of categories of expenditures which are
reimbursable hereunder, shall be approved by a majority of the Trustees of the
Trust and a majority of the Rule 12b-l Trustees by votes cast in person at a
meeting called for the purpose of voting on the Plan.
6
<PAGE>
8. Non-interested Trustees
While the Plan is in effect, the selection and nomination of the Trustees
who are not "interested persons" of the Trust (non-interested Trustees) shall be
committed to the discretion of the non-interested Trustees.
9. Records
The Trust shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
10. Liabilities of the Fund
The name The BlackRock Government Income Trust is the designation of the
Trustees under a Declaration of Trust, dated June 13, 1991 and all persons
dealing with the Fund must look solely to the property of the Fund for the
enforcement of any claims against the Fund as neither the Trustees, officers,
agents or shareholders assume any personal liability for obligations entered
into on behalf of the Funds.
Dated as of August 30, 1991 and amended and restated as of July 1, 1993.
7
<PAGE>
Exhibit 99.B15(b)
THE BLACKROCK GOVERNMENT INCOME TRUST
Distribution and Service Plan
(Class B Shares)
Introduction
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-l under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by The BlackRock Government Income Trust, (the
Trust) and by Prudential Securities Incorporated (Prudential Securities), the
Trust's distributor (the Distributor).
The Trust has entered into a distribution agreement (the Distribution
Agreement) pursuant to which the Trust will continue to employ the Distributor
to distribute Class B shares issued by the Trust (Class B shares). Under the
Distribution Agreement, the Distributor will be entitled to receive payments
from investors of contingent deferred sales charges imposed with respect to
certain repurchases and redemptions of Class B shares. Under the Plan, the Trust
wishes to reimburse the Distributor for costs incurred by the Distributor in
distributing Class B shares of the Trust and to pay the Distributor a service
fee for the maintenance of Class B shareholder accounts. A majority of the
Trustees of the Trust including a majority who are not "interested persons" of
the Trust (as defined in the Investment Company Act) and who have no direct or
indirect financial interest in the operation of this Plan or any
<PAGE>
agreements related to it (the Rule 12b-l Trustees), have determined by votes
cast in person at a meeting called for the purpose of voting on this Plan that
there is a reasonable likelihood that adoption of this Plan will benefit the
Trust and its shareholders. Expenditures under this Plan by the Trust for
Distribution Activities (defined below) are primarily intended to result in the
sale of Class B shares of the Trust within the meaning of paragraph (a) (2) of
Rule 12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Trust, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
The Plan
The material aspects of the Plan are as follows:
1. Distribution Activities
The Trust shall engage the Distributor to distribute Class B shares of the
Trust and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network including sales personnel and branch
office and central support systems, and also using such other qualified
broker-dealers and financial institutions as the Distributor may select,
including Pruco Securities Corporation (Prusec) . Services provided and
2
<PAGE>
activities undertaken to distribute Class B shares of the Trust are referred
to herein as "Distribution Activities."
2. Payment of Service Fee
The Trust shall reimburse the Distributor for costs incurred by it in
providing personal service and/or maintaining shareholder accounts at a rate not
to exceed .25 of 1% per annum of the average daily net assets of the Class B
shares (service fee). The Trust shall calculate and accrue daily amounts
reimbursable by the Class B shares of the Trust hereunder and shall pay such
amounts monthly or at such other intervals as the Trustees may determine. Costs
of the Distributor subject to reimbursement hereunder include account servicing
fees and indirect and overhead costs associated with providing personal service
and/or maintaining shareholder accounts.
3. Payment for Distribution Activities
The Trust shall reimburse the Distributor at a rate which, together with
the service fee (described in Section 2 hereof), shall not exceed 1% per annum
of the average daily net assets of the Class B shares of the Trust for costs
incurred by it in performing Distribution Activities. The Trust shall calculate
and accrue daily amounts reimbursable by the Class B shares of the Trust
hereunder and shall pay such amounts monthly or at such other intervals as the
Trustees may determine. Proceeds from contingent deferred sales charges will be
applied to reduce the costs incurred in performing Distribution Activities. The
Trust shall carry forward amounts reimbursable that are not paid because they
exceed .75 of 1% per annum of the average daily net assets of the Class B
3
<PAGE>
shares of the Trust (Carry Forward Amounts) and shall pay such amounts within
the .75 of 1% per annum payment rate limitation so long as this Plan, including
any amendments hereto, is in effect, subject to the limitations of Article III,
Section 26 of the NASD Rules of Fair Practice. Although the Trust is not liable
for unreimbursed distribution expenses, in the event of termination or
discontinuation of the Plan, the Trustees may consider the appropriateness of
having the Class B shares of the Trust reimburse the Distributor for the then
outstanding Carry Forward Amounts plus interest thereon to the extent permitted
by applicable law or regulation from the effective date of the Plan.
Amounts paid to the Distributor by the Class B shares of the Trust will
not be used to pay the distribution expenses incurred with respect to the Class
A shares of the Trust except that distribution expenses attributable to the
Trust as a whole will be allocated to the Class B shares according to the ratio
of the sale of Class B shares to the total sales of the Trust's shares over the
Trust's fiscal year or such other allocation method approved by the Trustees.
The allocation of distribution expenses among Classes will be subject to the
review of the Trustees. Payments hereunder will be applied to distribution
expenses in the order in which they are incurred, unless otherwise determined by
the Trustees.
Costs of the Distributor subject to reimbursement hereunder are all costs
of performing Distribution Activities and include, among others:
4
<PAGE>
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of distribution activities including central office and
branch expenses;
(c) amounts paid to Prusec in reimbursement of all costs incurred by
Prusec in performing services under a selected dealer agreement
between Prusec and the Distributor for sale of Class B shares of the
Trust, including sales commissions and trailer commissions paid to,
or on account of, agents and indirect and overhead costs associated
with distribution activities;
(d) advertising for the Trust in various forms through any available
medium, including the cost of printing and mailing Trust
prospectuses, statements of additional information and periodic
financial reports and sales literature to persons other than current
shareholders of the Trust;
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other
than Prusec) which have entered into selected dealer agreements with
the Distributor with respect to shares of the Trust;
(f) to the extent permitted by law, interest on unreimbursed Carry
Forward Amounts as defined in Section 3 at a rate equal to that paid
by Prudential Securities for bank borrowings as such rate may vary
from day to day, not to exceed that permitted under Article III,
Section 26, of the NASD Rules of Fair Practice; and
(g) unreimbursed distribution expenses incurred with respect to the sale
of Class B shares which have been exchanged into the Trust.
5
<PAGE>
4. Quarterly Reports; Additional Information
An appropriate officer of the Trust will provide to the Trustees of the
Trust for review, at least quarterly, a written report specifying in reasonable
detail the amounts expended for Distribution Activities (including payment of
the service fee) and the purposes for which such expenditures were made in
compliance with the requirements of Rule 12b-l. The Distributor will provide to
the Trustees of the Trust such additional information as they shall from time to
time reasonably request, including information about Distribution Activities
undertaken or to be undertaken by the Distributor.
The Distributor will inform the Trustees of the Trust of the commissions
and account servicing fees to be paid by the Distributor to account executives
of the Distributor and to broker-dealers and other financial institutions which
have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Trust.
If approved by a vote of a majority of the outstanding voting securities
of the Class B shares of the Trust, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the
6
<PAGE>
Trustees of the Trust and a majority of the Rule 12b-l Trustees by votes cast in
person at a meeting called for the purpose of voting on the continuation of the
Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority of the Rule
12b-l Trustees, or by vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class B shares of the Trust.
7. Amendments
The Plan may not be amended to change the distribution expenses to be paid
as provided for in Section 3 hereof so as to increase materially the amounts
payable under this Plan unless such amendment shall be approved by the vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class B shares of the Trust. All material amendments of the
Plan, including the addition or deletion of categories of expenditures which are
reimbursable hereunder, shall be approved by a majority of the Trustees of the
Trust and a majority of the Rule 12b-l Trustees by votes cast in person at a
meeting called for the purpose of voting on the Plan.
8. Non-interested Trustees
While the Plan is in effect, the selection and nomination of the Trustees
who are not "interested persons" of the Trust (non-interested Trustees) shall be
committed to the discretion of the non-interested Trustees.
7
<PAGE>
9. Records
The Trust shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
10. Liabilities of the Fund
The name The BlackRock Government Income Trust is the designation of the
Trustees under a Declaration of Trust, dated June 13, 1991 and all persons
dealing with the Fund must look solely to the property of the Fund for the
enforcement of any claims against the Fund as neither the Trustees, officers,
agents or shareholders assume any personal liability for obligations entered
into on behalf of the Funds.
Dated as of September 1, 1992 and
amended and restated as of July 1, 1993
8
<PAGE>
Exhibit 99.B15(c)
THE BLACKROCK GOVERNMENT INCOME TRUST
Distribution and Service Plan
(Class C Shares)
INTRODUCTION
The Distribution and Service Plan (the Plan) set forth below which is
designed to conform to the requirements of Rule 12b-1 under the Investment
Company Act of 1940 (the Investment Company Act) and Article III, Section 26 of
the Rules of Fair Practice of the National Association of Securities Dealers,
Inc. (NASD) has been adopted by The BlackRock Government Income Trust (the Fund)
and by Prudential Securities Incorporated (Prudential Securities), the Fund's
distributor (the Distributor).
The Fund has entered into a distribution agreement pursuant to which the
Fund will employ the Distributor to distribute Class C shares issued by the Fund
(Class C shares). Under the Plan, the Fund wishes to pay to the Distributor, as
compensation for its services, a distribution and service fee with respect to
Class C shares.
A majority of the Trustees of the Fund, including a majority 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 this Plan
or any agreements related to it (the Rule 12b-1 Trustees), have determined by
votes cast in person at a meeting called for the purpose of voting on this Plan
that there is a reasonable likelihood that adoption of this Plan will benefit
the Fund and its shareholders. Expenditures under this Plan by the Fund for
Distribution Activities (defined below) are primarily intended to result in the
sale of Class C shares of the Fund within the meaning of paragraph (a) (2) of
Rule 12b-1 promulgated under the Investment Company Act.
The purpose of the Plan is to create incentives to the Distributor and/or
other qualified broker-dealers and their account executives to provide
distribution assistance to their customers who are investors in the Fund, to
defray the costs and expenses associated with the preparation, printing and
distribution of prospectuses and sales literature and other promotional and
distribution activities and to provide for the servicing and maintenance of
shareholder accounts.
THE PLAN
The material aspects of the Plan are as follows:
1. Distribution Activities
The Fund shall engage the Distributor to distribute Class C shares of the
Fund and to service shareholder accounts using all of the facilities of the
Prudential Securities distribution network
<PAGE>
including sales personnel and branch office and central support systems, and
also using such other qualified broker-dealers and financial institutions as the
Distributor may select, including Pruco Securities Corporation (Prusec).
Services provided and activities undertaken to distribute Class C shares of the
Fund are referred to herein as "Distribution Activities."
2. Payment of Service Fee
The Fund shall pay to the Distributor as compensation for providing
personal service and/or maintaining shareholder accounts a service fee of .25 of
1% per annum of the average daily net assets of the Class C shares (service
fee). The Fund shall calculate and accrue daily amounts payable by the Class C
shares of the Fund hereunder and shall pay such amounts monthly or at such other
intervals as the Trustees may determine.
3. Payment for Distribution Activities
The Fund shall pay to the Distributor as compensation for its services a
distribution fee of .75 of 1% per annum of the average daily net assets of the
Class C shares for the performance of Distribution Activities. The Fund shall
calculate and accrue daily amounts payable by the Class C shares of the Fund
hereunder and shall pay such amounts monthly or at such other intervals as the
Trustees may determine. Amounts payable under the Plan shall be subject to the
limitations of Article III, Section 26 of the NASD Rules of Fair Practice.
Amounts paid to the Distributor by the Class C shares of the Fund will not
be used to pay the distribution expenses incurred with respect to any other
class of shares of the Fund except that distribution expenses attributable to
the Fund as a whole will be allocated to the Class C shares according to the
ratio of the sale of Class C shares to the total sales of the Fund's shares over
the Fund's fiscal year or such other allocation method approved by the Trustees.
The allocation of distribution expenses among classes will be subject to the
review of the Trustees.
The Distributor shall spend such amounts as it deems appropriate on
Distribution Activities which include, among others:
(a) sales commissions (including trailer commissions) paid to, or on
account of, account executives of the Distributor;
(b) indirect and overhead costs of the Distributor associated with
performance of Distribution Activities including central office and branch
expenses;
(c) amounts paid to Prusec for performing services under a selected dealer
agreement between Prusec and the Distributor for sale of Class C shares of the
Fund, including sales commissions and
2
<PAGE>
trailer commissions paid to, or on account of, agents and indirect and
overhead costs associated with Distribution Activities;
(d) advertising for the Fund in various forms through any available
medium, including the cost of printing and mailing Fund prospectuses, statements
of additional information and periodic financial reports and sales literature
to persons other than current shareholders of the Fund; and
(e) sales commissions (including trailer commissions) paid to, or on
account of, broker-dealers and other financial institutions (other than Prusec)
which have entered into selected dealer agreements with the Distributor with
respect to Class C shares of the Fund.
4. Quarterly Reports; Additional Information
An appropriate officer of the Fund will provide to the Trustees of the
Fund for review, at least quarterly, a written report specifying in reasonable
detail the amounts expended for Distribution Activities (including payment of
the service fee) and the purposes for which such expenditures were made in
compliance with the requirements of the Rule 12b-1. The Distributor will
provide to the Trustees of the Fund such additional information as they shall
from time to time reasonably request, including information about Distribution
Activities undertaken or to be undertaken by the Distributor.
The Distributor will inform the Trustees of the Fund of the commissions
and account servicing fees to be paid by the Distributor to account executives
of the Distributor and to broker-dealers and other financial institutions which
have selected dealer agreements with the Distributor.
5. Effectiveness; Continuation
The Plan shall not take effect until it has been approved by a vote of a
majority of the outstanding voting securities (as defined in the Investment
Company Act) of the Class C shares of the Fund.
If approved by a vote of a majority of the outstanding voting securities
of the Class C shares of the Fund, the Plan shall, unless earlier terminated in
accordance with its terms, continue in full force and effect thereafter for so
long as such continuance is specifically approved at least annually by a
majority of the Trustees of the Fund and a majority of the Rule 12b-1 Trustees
by votes cast in person at a meeting called for the purpose of voting on the
continuation of the Plan.
6. Termination
This Plan may be terminated at any time by vote of a majority of the Rule
12b-1 Trustees, or by vote of a majority of the
3
<PAGE>
outstanding voting securities (as defined in the Investment Company Act) of the
Class C shares of the Fund.
7. Amendments
The Plan may not be amended to change the combined service and
distribution fees to be paid as provided for in Sections 2 and 3 hereof so as to
increase materially the amounts payable under this Plan unless such amendment
shall be approved by the vote of a majority of the outstanding voting securities
(as defined in the Investment Company Act) of the Class C shares of the Fund.
All material amendments of the Plan shall be approved by a majority of the
Trustees of the Fund and a majority of the Rule 12b-1 Trustees by votes cast in
person at a meeting called for the purpose of voting on the Plan.
8. Rule 12b-1 Trustees
While the Plan is in effect, the selection and nomination of the Rule
12b-1 Trustees shall be committed to the discretion of the Rule 12b-1 Trustees.
9. Records
The Fund shall preserve copies of the Plan and any related agreements and
all reports made pursuant to Section 4 hereof, for a period of not less than six
years from the date of effectiveness of the Plan, such agreements or reports,
and for at least the first two years in an easily accessible place.
10. Enforcement of Claims
The name "The BlackRock Government Income Trust Trust" is the designation
of the Trustees under a Declaration of Trust dated _________________________ and
all persons dealing with the Fund must look solely to the property of the Fund
for the enforcement of any claims against the Fund, and neither the Trustees,
officers, agents nor shareholders assume any personal liability for obligations
entered into on behalf of the Fund.
Dated: October 7, 1994
4
<PAGE>
Exhibit 99.B16
THE BLACKROCK GOVERNMENT INCOME TRUST
CLASS "A"
EXHIBIT
AVERAGE ANNUAL TOTAL RETURN CALCULATION
AS OF JUNE 30, 1997
n
ERV = P*(1+T)^
P = Hypothetical initial payment of $1,000.
T = Average annual total return.
n = Number of years.
ERV = Ending redeemable value.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------
From Inception One Year Five Year
--------------------------- --------------------------- ---------------------------
Annualized Unannualized Annualized Unannualized Annualized Unannualized
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
P= $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00
n= 5.81 5.81 1.00 1.00 5.00 5.00
ERV= $ 1,270.07 $ 4,843.90 $ 1,030.40 $ 1,060.20 $ 1,193.44 $ 3,313.57
T= 4.2% 31.2% 3.0% 6.2% 3.6% 22.9%
</TABLE>
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
CLASS "C"
EXHIBIT
AVERAGE ANNUAL TOTAL RETURN CALCULATION
AS OF JUNE 30, 1997
n
ERV = P*(1+T)^
P = Hypothetical initial payment of $1,000.
T = Average annual total return.
n = Number of years.
ERV = Ending redeemable value.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
From Inception One Year
--------------------------- ---------------------------
Annualized Unannualized Annualized Unannualized
------------ ------------ ------------ ------------
P= $ 1,000.00 $ 1,000.00 $ 1,000.00 $ 1,000.00
n= 2.92 2.92 1.00 1.00
ERV= $ 1,169.22 $ 1,511.62 $ 1,046.00 $ 1,056.00
T= 5.5% 15.2% 4.6% 5.6%
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000876173
<NAME> THE BLACKROCK GOVERNMENT INCOME TRUST
<SERIES>
<NUMBER> 001
<NAME> BLACKROCK GOVERNMENT INCOME TRUST (CLASS A)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Jun-30-1997
<INVESTMENTS-AT-COST> 38,978,833
<INVESTMENTS-AT-VALUE> 38,908,242
<RECEIVABLES> 1,743,822
<ASSETS-OTHER> 8,280
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 40,660,344
<PAYABLE-FOR-SECURITIES> 3,683,488
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,844,758
<TOTAL-LIABILITIES> 11,528,246
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 36,446,164
<SHARES-COMMON-STOCK> 3,116,339
<SHARES-COMMON-PRIOR> 3,599,029
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (34,924)
<ACCUMULATED-NET-GAINS> (7,213,585)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (65,557)
<NET-ASSETS> 29,132,098
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,840,963
<OTHER-INCOME> 0
<EXPENSES-NET> 1,098,668
<NET-INVESTMENT-INCOME> 1,742,295
<REALIZED-GAINS-CURRENT> (3,420,890)
<APPREC-INCREASE-CURRENT> 3,674,911
<NET-CHANGE-FROM-OPS> 1,996,316
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,722,432)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (37,818)
<NUMBER-OF-SHARES-SOLD> 1,201,635
<NUMBER-OF-SHARES-REDEEMED> 1,031,449
<SHARES-REINVESTED> (10,451,900)
<NET-CHANGE-IN-ASSETS> (7,982,750)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,792,695)
<OVERDISTRIB-NII-PRIOR> (142,253)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 166,647
<INTEREST-EXPENSE> 577,603
<GROSS-EXPENSE> 1,098,668
<AVERAGE-NET-ASSETS> 33,235,000
<PER-SHARE-NAV-BEGIN> 9.28
<PER-SHARE-NII> 0.57
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.50)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.35
<EXPENSE-RATIO> 3.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<CIK> 0000876173
<NAME> THE BLACKROCK GOVERNMENT INCOME TRUST
<SERIES>
<NUMBER> 001
<NAME> BLACKROCK GOVERNMENT INCOME TRUST (CLASS C)
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> Dec-31-1996
<PERIOD-END> Jun-30-1997
<INVESTMENTS-AT-COST> 38,978,833
<INVESTMENTS-AT-VALUE> 38,908,242
<RECEIVABLES> 1,743,822
<ASSETS-OTHER> 8,280
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 40,660,344
<PAYABLE-FOR-SECURITIES> 3,683,488
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 7,844,758
<TOTAL-LIABILITIES> 11,528,246
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 36,446,164
<SHARES-COMMON-STOCK> 3,116,339
<SHARES-COMMON-PRIOR> 3,599,029
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> (34,924)
<ACCUMULATED-NET-GAINS> (7,213,585)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> (65,557)
<NET-ASSETS> 29,132,098
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 2,840,963
<OTHER-INCOME> 0
<EXPENSES-NET> 1,098,668
<NET-INVESTMENT-INCOME> 1,742,295
<REALIZED-GAINS-CURRENT> (3,420,890)
<APPREC-INCREASE-CURRENT> 3,674,911
<NET-CHANGE-FROM-OPS> 1,996,316
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (1,722,432)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> (37,818)
<NUMBER-OF-SHARES-SOLD> 1,201,635
<NUMBER-OF-SHARES-REDEEMED> 1,031,449
<SHARES-REINVESTED> (10,451,900)
<NET-CHANGE-IN-ASSETS> (7,982,750)
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (3,792,695)
<OVERDISTRIB-NII-PRIOR> (142,253)
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 166,647
<INTEREST-EXPENSE> 577,603
<GROSS-EXPENSE> 1,098,668
<AVERAGE-NET-ASSETS> 33,235,000
<PER-SHARE-NAV-BEGIN> 9.28
<PER-SHARE-NII> 0.57
<PER-SHARE-GAIN-APPREC> 0.00
<PER-SHARE-DIVIDEND> (0.50)
<PER-SHARE-DISTRIBUTIONS> 0.00
<RETURNS-OF-CAPITAL> 0.00
<PER-SHARE-NAV-END> 9.35
<EXPENSE-RATIO> 3.45
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0.00
</TABLE>
