The
BlackRock
Government
Income Trust
SEMI
ANNUAL
REPORT
Dec. 31, 1996
(LOGO)
<PAGE>
The BlackRock Government Income Trust
Performance At A Glance.
Strong performances by adjustable rate mortgages and asset backed securities
helped The BlackRock Government Income Trust produce attractive returns for
the six-month period ended December 31, 1996. Class A shares posted a total
return, excluding sales loads, of 3.49%, which compared favorably with the
3.26% average returned by similar adjustable rate mortgage funds tracked by
Lipper Analytical Services.
<TABLE>
<CAPTION>
Historical Investment Results1 As of 12/31/96
One Five Since
Year Years Inception2
<S> <C> <C> <C>
Class A 5.0% 21.7% 27.8%
Class C 4.3 N/A 12.6
Lipper Adjustable Rate
Mortgage Fund Avg.3 5.4 19.0 25.0
</TABLE>
<TABLE>
Average Annual Total Returns1 As of 12/31/96
One Five Since
Year Years Inception2
<S> <C> <C> <C>
Class A 1.8% 3.4% 4.1%
Class C 3.3 N/A 5.6
</TABLE>
<TABLE>
<CAPTION>
Total Dividends 30-Day
Paid for Six Mos. SEC Yield
<S> <C> <C> <C>
Dividends
& Yields
As of 12/31/96 Class A $0.24 4.31%
Class C $0.23 3.78
</TABLE>
An investment in the Fund is neither insured not guaranteed by the U.S.
government. Past performance is not indicative of future results. Investment
return and principal value will fluctuate so that an investor's shares when
redeemed may be worth more or less than their original cost.
1Source: Prudential Mutual Fund Management, Inc. Historical investment results
do not take into account sales charges. Average annual returns do take into
account applicable sales charges. The Fund charges a maximum sales load of 3%
for Class A shares. Class C shares are subject to a contingent deferred sales
charge of 1% over a period of one year.
2Inception of Class A 9/9/91 and Class C 11/1/94.
3These are the average returns of 46 funds for one year and 23 funds for five
years as determined by Lipper Analytical Services.
How Investments Compared.
(As of 12/31/96)
(CHART)
Source: Lipper Analytical Services. Financial markets change, so a mutual
fund's past performance should never be used to predict future results. The
risks to each of the investments listed above are different -- we provide 12-
month total returns for several Lipper mutual fund categories to show you that
reaching for higher yields means tolerating more risk. The greater the risk,
the larger the potential reward or loss. In addition, we've included historical
20-year average annual returns. These returns assume the reinvestment of
dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received higher
historical total returns from stocks than from most other investments. Smaller
capitalization stocks offer greater potential for long-term growth but may be
more volatile than larger capitalization stocks.
General Bond Funds provide more income than stock funds, which can help smooth
out their total returns year by year. But their prices still fluctuate
(sometimes significantly) and their returns have been historically lower than
those of stock funds.
General Municipal Debt Funds invest in bonds issued by state governments, state
agencies and/or municipalities. This investment provides income that is usually
exempt from federal and state income taxes.
Money Market Funds attempt to preserve a constant share value; they don't
fluctuate much in price but, historically, their returns have been generally
among the lowest of the major investment categories.
<PAGE>
Scott Amero, Fund Manager
(PHOTO)
Portfolio
Manager's Report
The BlackRock Government Income Trust is an open-end bond fund whose investment
objective is to limit the degree of fluctuation of its net asset value (NAV)
resulting from movements in interest rates and provide high monthly income.
The Trust pursues its investment objective by investing primarily in a
portfolio of adjustable rate mortgage-backed securities (ARMs), U.S. government
securities and asset backed securities (ABS). The Fund is part of the
Prudential family of mutual funds and is managed by its investment sub-adviser,
BlackRock Financial Management, Inc. There can be no assurance that the Fund
will achieve its investment objective.
A New Look.
We've given your shareholder report a new look. The format and design changes
were made to enhance the presentation of Fund performance data. We hope you
like it.
Strategy Session.
A Strong Finish.
Within the short duration sector, both adjustable rate mortgages (ARMs) and
asset backed securities (ABS) continued their strong year-to-date performance
during the third and fourth quarters. ARM performance was boosted by slower
and more stable prepayment rates in response to higher mortgage rates.
However, the ARM market has become less favorable as a flatter yield curve may
provide ARM borrowers an opportunity to refinance into fixed-rate alternatives.
Therefore, we believe that the ARM sector may experience faster prepayments
over the next few months.
Despite record new issuance in 1996, the ABS market continued to perform well
as demand for these assets far outpaced supply. Looking to 1997, a recessionary
economy could pose a threat to the ABS market due to the existing high levels
of consumer delinquencies and defaults.
After a torrid second quarter, the pace of economic growth slowed over the
past six months. Largely softer economic data and continued moderation in the
broad inflation measures during the third quarter allowed the Federal Reserve
to leave short-term interest rates unchanged at their August and September
policy meetings.
The Treasury market started the fourth quarter on a positive note due to the
combination of the Federal Reserve's inaction with respect to interest rates
and the weaker September non-farm payroll number. In addition to the favorable
economic news, a stronger dollar, large foreign buying of U.S. Treasurys and
balanced budget hopes following the November elections also supported the
market early in the fourth quarter.
However, Alan Greenspan's mention of "irrational exuberance" in the financial
markets on December 4th rattled the Treasury market, leading to a month-long
rise in rates. A resilient housing market and strong consumer confidence
contributed to the market decline in late December. Treasury yields reflected
the market's uncertainty regarding the economy's strength. For example, the
yield of the 2-year Treasury note rose to a six-month high of 6.44% shortly
after the release of the strong June employ-ment report; as economic data
moderated, the yield of the 2-year fell to a low of 5.58% on November 29.
Stronger data through year-end drove the yield to 5.87% on December 31 for a
net decline of 25 basis points for the quarter.
<PAGE>
What Went Well.
In pursuing its investment objective, the Trust's assets are actively managed
and reflect the adviser's relative value analysis of individual securities and
sectors. From June 30 through December 31, 1996, the Trust significantly
reduced its Treasury allocation. Proceeds were used to purchase securities
with a comparable duration (price sensitivity to changes in interest rates)
which offer more yield than Treasuries. Over the past six months, the Trust
increased its exposure to the ABS sector, focusing on securities backed by
auto loans, which offered attractive yield spreads to comparable duration
Treasuries. During the third quarter, the Trust reduced its ARM positions in
response to strong demand for short mortgage product. However, the Trust again
became a buyer of ARMs over the past few months, emphasizing COFI based ARMs,
which appeared to offer excellent relative value after their performance
dramatically lagged other ARMs and Treasuries during the second half of 1996.
Five Largest
Issues.
8.9% FHLMC
9.00%, 9/1/05-11/1/05
8.9% FHLB
Zero Coupon, 1/2/97
7.7% FNMA
8.50%, 6/1/08-1/1/16
7.4% GNMA II
7.25%, 12/15/26
5.6% GNMA II
6.50%, 2/20/21
Expressed as a percentage of total net assets as of 12/31/96.
We Added To Asset Backed Holdings In 1996.
Expressed as a percentage of total investments.
As Of 12/31/96 As Of 12/31/95
(PIE CHART) (PIE CHART)
Looking Ahead.
BlackRock anticipates low inflation, moderate economic growth and continued
strong international participation in the U.S. fixed income market to provide
strong support for domestic bonds in 1997. While December economic releases
indicated a break in the recent pattern of moderation, it is premature to
suggest the trend is toward stronger economic growth. Certainly, fourth
quarter 1996 growth increased from third quarter levels; however, the full
year growth of approximately 2.5% does not appear inflationary. Reduced
leverage and financing costs for U.S. corporations and soaring global
competition and production are further restraining inflation. Finally,
consumers appear to remain heavily indebted and the aging of the overall
population continues to restrain spending patterns. Sluggish retail Christmas
sales support this observation.
- -------------------------------------------------------------------------------
1
<PAGE>
Portfolio of Investments as of
December 31, 1996
(Unaudited) THE BLACKROCK GOVERNMENT INCOME TRUST
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
LONG-TERM INVESTMENTS--121.8%
- -------------------------------------------------------------
Asset-Backed Securities--39.2%
$ 846 AFC Mortgage Loan Trust, Series
1996-1, Class 2A, 5.735%(d),
7/25/27 $ 846,471
334 Banc One Auto Grantor Trust, Series
1996-B, Class A, 6.55%, 2/15/03 335,904
Chase Manhattan Grantor Trust,
Auto Loan Pass-Through
Certificates,
791 Series 1995-A, Class A,
6.00%, 9/17/01 790,615
915 Series 1996-96B, Class A,
6.61%, 9/16/02 920,529
525 Series 1996-C, Class A3,
5.95%, 11/15/00 523,195
450 Chevy Chase Auto Receivables Trust,
Series 1996-2, Class A, 5.90%,
7/15/03 448,453
1,055 Daimler-Benz Vehicle Trust,
Series 1996-A, Class A,
5.85%, 7/20/03 1,051,681
1,300 Discover Card Master Trust,
Series 1994-2, Class A,
5.955%(d), 10/16/04 1,310,959
563 EQCC Home Equity Loan Trust,
Series 1994-1, 5.80%, 3/15/09 550,232
1,500 First Chicago Master Trust,
Series 1992-E 1, Class A
6.25%, 8/15/99 1,500,000
Ford Credit Auto Lease Trust,
700 Series 1996-1, Class A2,
5.80%, 5/15/99 697,594
942 Series 1995-B, Class A,
5.90%, 10/15/00 941,036
Merrill Lynch Credit Corporation,
Mortgage Loan,
1,352 Series 1996-A, Class A,
5.805%(d), 5/15/21 1,357,137
931 Series 1996-B, Class A,
5.775%(d), 7/15/21 933,516
Salomon Brothers,
Mortgage Trust Certificate,
$ 500 Series 1996-6B, Class A1,
5.725%(d), 6/30/26 $ 498,594
500 Series 1996-6G, Class A1,
5.625%(d), 9/30/27 498,594
-----------
Total Asset-Backed Securities
(cost $13,190,938) 13,204,510
-----------
- ------------------------------------------------------------
Mortgage Pass-Throughs--53.8%
Federal Home Loan Mortgage
Corporation,
2,901(b) 9.00%, 9/01/05 - 11/01/05, 15 Year 3,004,762
680 7.375%, 3/01/06, Multi-family 686,068
1,622(a) 6.069%, 8/01/20, COFI ARM 1,606,209
1,479 6.072%, 11/01/20, COFI ARM 1,464,287
Federal National Mortgage
Association,
1,655(b) 8.00%, 3/01/08 1,701,815
2,489(b) 8.50%, 6/01/08 - 1/01/16 2,601,475
772 8.50%, 12/01/10 807,174
Government National Mortgage
Association, II
1,826 6.50%, 2/20/21, 1 year CMT, ARM 1,866,217
812(c) 6.875%, 10/20/21, 1 year CMT, ARM 827,662
1,001(a) 7.00%, 1/20/25, 1 year CMT, ARM 1,022,077
2,468 7.25%, 12/15/26 2,495,043
-----------
Total Mortgage Pass-Throughs
(cost $18,157,833) 18,082,789
-----------
- ------------------------------------------------------------
Multiple Class Mortgage Pass-Throughs--15.1%
Federal Home Loan Mortgage Corporation,
Muliticlass Mortgage Participation
Certificates, (REMIC),
380 Series 124, Class A, 8.50%, 3/15/97 380,043
1,432 Series 1632, Class F, 6.04%(d),
4/15/23 1,431,564
Federal National Mortgage
Association,
REMIC Pass-Through Certificates,
990 Series 1996-T6, Class C,
6.20% 2/26/01 977,918
</TABLE>
- --------------------------------------------------------------------------------
2 See Notes to Financial Statements.
<PAGE>
Portfolio of Investments as of
December 31, 1996
(Unaudited) THE BLACKROCK GOVERNMENT INCOME TRUST
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
Multiple Class Mortgage Pass-Throughs (cont'd.)
Federal National Mortgage
Association,
REMIC Pass-Through Certificates,
$ 1,150 Series I, Class-2, 11.50%, 4/01/09 $ 1,293,407
1,000 Series 1994-39, Class PB,
5.75% 6/25/12 994,687
326 Residential Funding Mtg. Sec. I,
I/O, Series 1992-S2, Class A17,
7.958%, 1/25/22 287
2 Small Business Administration,
6.50%, 8/25/16, ARM 1,661
-----------
Total Multiple Class Mortgage
Pass-Throughs
(cost $8,345,241) 5,079,567
-----------
- ------------------------------------------------------------
U.S Government & Agency Securities--13.7%
850 Tennessee Valley Authority, Power
Bond,
Series 1996, 5.98%, 4/01/36 858,500
U.S. Treasury Notes,
1,925(b) 6.00%, 9/30/98 1,929,813
700 5.875%, 10/31/98 700,000
1,100(b) 6.50%, 8/31/01 1,112,375
-----------
Total U.S. Government &
Agency Securities
(cost $4,598,522) 4,600,688
-----------
Total Long-Term Investments
(cost $44,292,534) 40,967,554
-----------
SHORT-TERM INVESTMENT--8.9%
- ------------------------------------------------------------
Discount Note--8.9%
$ 2,995 Federal Home Loan Bank,
1/02/97, Zero Coupon
(cost $2,994,459) $ 2,994,459
-----------
- ------------------------------------------------------------
Total Investments--130.7%
(cost $47,286,993; Note 4) 43,962,013
Liabilities in excess of other
assets--(30.7%) (10,337,085)
-----------
Net Assets--100% $33,624,928
-----------
-----------
</TABLE>
- ---------------
ARM--Adjustable Rate Mortgage
CMT--Constant Maturity Treasury
COFI--Cost Of Funds Index
I/O--Interest Only
REMIC--Real Estate Mortgage Investment Conduit
(a) Portion of principal amount pledged as collateral for reverse repurchase
agreements.
(b) Entire principal amount pledged as collateral for reverse repurchase
agreements.
(c) Portion of principal amount pledged as collateral for futures transactions.
(d) Rate shown reflects current rate of variable rate instruments.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3 -----
<PAGE>
Statement of Assets and
Liabilities (Unaudited) THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets December 31, 1996
-----------------
<S> <C>
Investments, at value (cost $47,286,993)................................................................ $43,962,013
Cash.................................................................................................... 559,635
Interest receivable..................................................................................... 393,100
Due from broker-variation margin........................................................................ 8,909
Receivable for Fund shares sold......................................................................... 175
-----------------
Total assets......................................................................................... 44,923,832
-----------------
Liabilities
Reverse repurchase agreements........................................................................... 10,504,562
Payable for investments purchased....................................................................... 500,979
Payable for Fund shares reacquired...................................................................... 67,262
Interest payable........................................................................................ 54,882
Management fee payable.................................................................................. 14,479
Distribution fee payable................................................................................ 4,404
Dividends payable....................................................................................... 4,260
Accrued expenses and other liabilities.................................................................. 148,076
-----------------
Total liabilities.................................................................................... 11,298,904
-----------------
Net Assets.............................................................................................. $33,624,928
-----------------
-----------------
Net assets were comprised of:
Shares of beneficial interest, at par................................................................ $ 35,990
Paid-in capital in excess of par..................................................................... 41,029,224
-----------------
41,065,214
Distributions in excess of net investment income..................................................... (159,020)
Accumulated net realized loss on investments......................................................... (3,977,271)
Net unrealized depreciation on investments and financial futures contracts........................... (3,303,995)
-----------------
Net assets, December 31, 1996........................................................................... $33,624,928
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($33,507,962 / 3,586,513 shares of beneficial interest issued and outstanding).................... $9.34
Maximum sales charge (3.0% of offering price)........................................................ .29
Maximum offering price to public..................................................................... $9.63
Class C:
Net asset value, offering price and redemption price per share
($116,966 / 12,516 shares of beneficial interest issued and outstanding).......................... $9.34
</TABLE>
- --------------------------------------------------------------------------------
4 See Notes to Financial Statements.
<PAGE>
THE BLACKROCK GOVERNMENT INCOME TRUST
Statement of Operations (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
December 31,
Net Investment Income 1996
<S> <C>
Income
Interest................................... $1,561,631
------------
Expenses
Management fee............................. 89,291
Distribution fee--Class A.................. 26,591
Distribution fee--Class C.................. 473
Custodian's fees and expenses.............. 35,000
Transfer agent's fees and expenses......... 25,000
Reports to shareholders.................... 25,000
Registration fees.......................... 23,000
Audit fee and expenses..................... 18,000
Trustees' fees............................. 16,000
Legal fees and expenses.................... 8,000
Amortization of deferred organization
expense................................. 5,000
Miscellaneous.............................. 4,724
------------
Total operating expenses............... 276,079
Interest expense........................... 360,351
------------
Total expenses......................... 636,430
------------
Net investment income......................... 925,201
------------
Realized and Unrealized Gain
(Loss) on Investments
Net realized gain (loss) on:
Investment transactions.................... (75,005)
Financial futures contracts................ (110,946)
Short sale transactions.................... 1,376
------------
(184,575)
------------
Net change in unrealized depreciation on:
Investments................................ 363,297
Financial futures contracts................ 73,176
------------
436,473
------------
Net gain on investments....................... 251,898
------------
Net Increase in Net Assets
Resulting from Operations..................... $1,177,099
------------
------------
</TABLE>
THE BLACKROCK GOVERNMENT INCOME TRUST
Statement of Cash Flows (Unaudited)
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
December 31,
Increase (Decrease) in Cash 1996
<S> <C>
Cash flows provided by operating activities:
Interest received.......................... $ 1,905,025
Operating expenses paid.................... 651,727
Interest expense paid...................... 314,212
Sale of short-term portfolio investments,
net..................................... (2,282,666)
Purchase of long-term portfolio
investments............................. 52,023,734
Sale of long-term portfolio investments.... (48,658,831)
Variation margin on futures................ (115,540)
Other...................................... 8,162
------------
Net cash provided by operating
activities.............................. 3,845,823
------------
Cash flows used for financing activities:
Proceeds from shares sold.................. 974,905
Payments on shares redeemed................ (5,341,948)
Cash dividends paid(a)..................... (417,311)
Net proceeds from issuance of reverse
repurchase agreements................... 1,497,062
------------
Net cash used for financing activities..... (3,287,292)
------------
Net increase in cash.......................... 558,531
Cash at beginning of period................... 1,104
------------
Cash at end of period......................... $ 559,635
------------
------------
Reconciliation of Net Increase in Net Assets
to Net Cash Provided by Operating Activities
Net increase in net assets resulting from
operations................................. $ 1,177,099
------------
Decrease in investments....................... 2,650,319
Net realized loss............................. 184,575
Decrease in unrealized depreciation........... (436,473)
Decrease in receivable for investments sold... 1,111,601
Decrease in interest receivable............... 159,356
Decrease in other assets...................... 4,253
Decrease in payable for investments
purchased.................................. (1,005,172)
Increase in interest payable.................. 46,140
Decrease in accrued expenses and other
liabilities................................... (20,296)
Decrease in due to broker-variation margin.... (25,579)
------------
Total adjustments.......................... 2,668,724
------------
Net cash provided by operating activities..... $ 3,845,823
------------
------------
</TABLE>
- ---------------
(a) Non-cash financing activity not included herein consists of reinvestment of
dividends and distributions of $575,183.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5 -----
<PAGE>
Statement of Changes in
Net Assets (Unaudited) THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
December 31, June 30,
Increase (Decrease) in Net Assets 1996 1996
------------ ------------
<S> <C> <C>
Operations:
Net investment income.................................................................... $ 925,201 $ 2,449,186
Net realized gain (loss) on investment transactions...................................... (184,575) 196,234
Net change in unrealized depreciation on investments..................................... 436,473 (473,514)
------------ ------------
Net increase in net assets resulting from operations..................................... 1,177,099 2,171,906
------------ ------------
Net equalization debits..................................................................... -- (5,142)
------------ ------------
Dividends and distributions (Note 1):
Dividends from net investment income:
Class A............................................................................... (922,297) (2,374,095)
Class B............................................................................... -- (51,187)
Class C............................................................................... (2,904) (1,632)
------------ ------------
(925,201) (2,426,914)
------------ ------------
Distributions in excess of net investment income:
Class A............................................................................... (16,736) --
Class C............................................................................... (30) --
------------ ------------
(16,766) --
------------ ------------
Tax return of capital distributions:
Class A............................................................................... -- (116,602)
Class B............................................................................... -- (2,514)
Class C............................................................................... -- (80)
------------ ------------
-- (119,196)
------------ ------------
Fund share transactions (Note 6):
Net proceeds from shares subscribed...................................................... 968,490 795,510
Net asset value of shares issued in reinvestment of dividends and distributions.......... 575,183 1,488,750
Cost of shares reacquired................................................................ (5,268,725) (13,712,371)
------------ ------------
Net decrease in net assets from Fund share transactions.................................. (3,725,052) (11,428,111)
------------ ------------
Total decrease.............................................................................. (3,489,920) (11,807,457)
Net Assets
Beginning of period......................................................................... 37,114,848 48,922,305
------------ ------------
End of period............................................................................... $ 33,624,928 $ 37,114,848
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
6 See Notes to Financial Statements.
<PAGE>
Notes to Financial Statements (Unaudited) THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
The BlackRock Government Income Trust (the ``Fund''), is registered under the
Investment Company Act of 1940 as a diversified, open-end management investment
company. The Fund was organized as an unincorporated business trust in
Massachusetts on June 13, 1991 and had no operations until the issuance of
10,000 shares of beneficial interest for $100,000 on July 18, 1991 to Prudential
Mutual Fund Management LLC (``PMF''). Investment operations commenced on
September 9, 1991. The Fund's primary objectives are to provide low volatility
of net asset value and high monthly income, primarily through investment in U.S.
Government securities and obligations issued or guaranteed by the U.S.
Government, its agencies or instrumentalities. The ability of issuers of debt
securities, other than those issued or guaranteed by the U.S. Government, to
meet their obligations may be affected by economic developments in a specific
industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: The Fund values mortgage-backed, asset-backed and other
debt securities on the basis of current market quotations provided by dealers or
pricing services approved by the Board of Trustees. In determining the value of
a particular security, pricing services may use certain information with respect
to transactions in such securities, quotations from dealers, market transactions
in comparable securities, various relationships observed in the market between
securities, and calculated yield measures based on valuation technology commonly
employed in the market for such securities. Exchange-traded options are valued
at their last sales price as of the close of options trading on the applicable
exchanges. In the absence of a last sale, options are valued at the average of
the quoted bid and asked prices as of the close of business. Futures contracts
are valued at the last sale price as of the close of the commodities exchange on
which they trade unless the Fund's Board of Trustees determine that such price
does not reflect its fair value, in which case it will be valued at its fair
value as determined by the Fund's Board of Trustees.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
Securities for which such current market quotations are not readily available
are valued at fair value as determined in good faith under procedures
established by and under the general supervision and responsibility of the
Fund's Board of Trustees. No such securities were held by the Fund at December
31, 1996.
In connection with transactions in repurchase agreements, the Fund's custodian
takes possession of the underlying collateral securities, the value of which at
least equals the principal amount of the repurchase transaction, including
accrued interest. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily basis
to ensure the adequacy of the collateral. If the seller defaults and the value
of the collateral declines or if bankruptcy proceedings are commenced with
respect to the seller of the security, realization of the collateral by the Fund
may be delayed or limited.
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the ``initial margin''. Subsequent payments, known as ``variation
margin'', are made or received by the Fund each day, depending on the daily
fluctuations in the value of the underlying security. Such variation margin is
recorded for financial statement purposes on a daily basis as unrealized gain or
loss. When the contract expires or is closed, the gain or loss is realized and
is presented in the statement of operations as net realized gain (loss) on
financial futures contracts.
The Fund invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Fund may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates or foreign currency exchange rates with respect to
securities or currencies which the Fund currently owns or intends to purchase.
When the Fund purchases an option, it pays a premium and an amount equal to that
premium is recorded as an investment. When the Fund writes an option, it
receives a premium and an amount equal to that premium is recorded as a
liability. The investment or liability is adjusted daily to reflect the current
market value of the option. If an option expires unexercised, the Fund realizes
a gain or loss to
- --------------------------------------------------------------------------------
7 -----
<PAGE>
Notes to Financial Statements (Unaudited) THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
the extent of the premium received or paid. If an option is exercised, the
premium received or paid is an adjustment to the proceeds from the sale or the
cost of the purchase in determining whether the Fund has realized a gain or
loss. The difference between the premium and the amount received or paid on
effecting a closing purchase or sale transaction is also treated as a realized
gain or loss. Gain or loss on purchased options is included in net realized gain
(loss) on investment transactions. Gain or loss on written options is presented
separately as net realized gain (loss) on written option transactions.
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 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.
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 PMF. Pursuant to this agreement, PMF
has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PMF has entered into a subadvisory
agreement with BlackRock Financial Management, Inc. (``BFM''). BFM furnishes
investment advisory services in connection with the management of the Fund. PMF
pays for the costs of the subadviser's services, the compensation of officers of
the Fund, occupancy and certain clerical and bookkeeping costs of the Fund. The
Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly at an annual
rate of .50 of 1% of the Fund's average daily net assets. PMF 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.
Effective January 2, 1996, Prudential Securities Incorporated (``PSI'') became
the distributor of the Class A shares of the Fund and is serving the Fund under
the same terms and conditions as under the previous arrangement. PSI is also
distributor of the Class B, Class C and Class Z shares of the Fund. The Fund
compensated 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.
- --------------------------------------------------------------------------------
8
<PAGE>
Notes to Financial Statements (Unaudited) THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
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 period ended December 31, 1996.
PSI has advised the Fund that it has received approximately $2,000 in front-end
sales charges resulting from sales of Class A shares during the period ended
December 31, 1996. 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 period ended
December 31, 1996, it received approximately $25 in contingent deferred sales
charges imposed upon certain redemptions by investors.
PSI and PMF 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 December 31,
1996. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the period ended December 31,
1996, the Fund incurred fees of approximately $23,000 for the services of PMFS.
As of December 31, 1996, approximately $4,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments
for the period ended December 31, 1996 aggregated $51,018,562 and $50,332,693,
respectively.
The federal income tax basis of the Fund's investments at December 31, 1996 was
substantially the same as the basis for financial statement reporting purposes
and, accordingly, net unrealized depreciation for federal income tax purposes
was $3,324,980 (gross unrealized appreciation--$143,057; gross unrealized
depreciation--$3,468,037).
During the period ended December 31, 1996 the Fund entered into financial
futures contracts. Details of open futures contracts at December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
Value at Value at
Number of Expiration Trade December 31, Unrealized
Contracts Type Date Date 1996 Appreciation
- --------- ------------------ ----------- ----------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Short positions:
11 5 yr. T-Note Mar. 1997 $ 1,186,404 $ 1,172,531 $ 13,873
3 30 yr. T-Bond Mar. 1997 344,987 337,875 7,112
-------
$ 20,985
-------
-------
</TABLE>
For federal income tax purposes, the Fund had a capital loss carryforward at
June 30, 1996 of approximately $3,822,000 of which $588,000 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.
- ------------------------------------------------------------
Note 5. Borrowings
The Fund enters into reverse repurchase agreements with qualified, third party
broker-dealers as determined by and under the direction of the Board of
Trustees. Reverse repurchase agreements are a technique involving leverage and
are considered a borrowing of the Fund thereby causing the Fund's total assets
to exceed its net assets. In a reverse repurchase agreement, the Fund sells
securities and agrees to repurchase them at a mutually agreed date and price.
During this time, the Fund continues to receive the principal and interest
payments from that security. At the end of the term, the Fund receives the same
securities that were sold for the same initial dollar amount plus interest on
the cash proceeds of the initial sale. Interest on the value of reverse
repurchase agreements issued and outstanding is based upon competitive market
rates at the time of issuance. At the time the Fund enters into a reverse
repurchase agreement, it establishes and maintains a segregated account with the
lender containing liquid securities having a value not less than the repurchase
price, including accrued interest, of the reverse repurchase agreement.
- --------------------------------------------------------------------------------
9 -----
<PAGE>
Notes to Financial Statements (Unaudited) THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
The Fund had outstanding reverse repurchase agreements at December 31, 1996 as
follows:
<TABLE>
<CAPTION>
Date Amount
Entered Maturity Interest Due at
Into Date Par Rate Maturity
- --------- --------- ------------ -------- ----------
<S> <C> <C> <C> <C>
11/21/96 01/23/97 $ 4,932,000 5.47% $4,979,212
11/21/96 01/23/97 1,574,000 5.47 1,589,067
11/21/96 01/23/97 900,000 5.41 908,521
12/18/96 01/02/97 1,958,687 5.55 1,963,217
12/31/96 01/07/97 1,139,875 6.00 1,141,205
------------
$ 10,504,562
------------
------------
</TABLE>
The average daily balance of reverse repurchase agreements outstanding during
the period ended December 31, 1996 was approximately $13,203,000 at a weighted
average interest rate of approximately 5.44%.
- ------------------------------------------------------------
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. Of the
3,599,029 shares issued and outstanding at December 31, 1996, PMF owned 10,000
Class A shares.
Transactions in shares of beneficial interest were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------- ---------- ------------
<S> <C> <C>
Six months ended December 31, 1996:
Shares sold.......................... 96,983 $ 906,019
Shares issued in reinvestment
of dividends and distributions..... 61,403 572,595
Shares reacquired.................... (563,837) (5,253,702)
---------- ------------
Net decrease in shares outstanding... (405,451) $ (3,775,088)
---------- ------------
---------- ------------
<CAPTION>
Class A Shares Amount
- ------------------------------------- ---------- ------------
<S> <C> <C>
Year ended June 30, 1996:
Shares sold.......................... 75,957 $ 711,331
Shares issued in reinvestment
of dividends and distributions..... 155,658 1,455,287
Shares reacquired.................... (1,435,603) (13,420,680)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (1,203,988) (11,254,062)
Shares issued upon conversion from
Class B............................ 237,999 2,230,509
---------- ------------
Net decrease in shares outstanding... (965,989) $ (9,023,553)
---------- ------------
---------- ------------
<CAPTION>
Class B
- -------------------------------------
Period ended November 28, 1995:(a)
Shares sold.......................... 139 $ 1,297
Shares issued in reinvestment
of dividends and distributions..... 3,471 32,417
Shares reacquired.................... (28,748) (266,771)
---------- ------------
Net decrease in shares outstanding
before conversion.................. (25,138) (233,057)
Shares reacquired upon conversion
into Class A....................... (238,015) (2,230,509)
---------- ------------
Net decrease in shares outstanding... (263,153) $ (2,463,566)
---------- ------------
---------- ------------
<CAPTION>
Class C
- -------------------------------------
Six months ended December 31, 1996:
Shares sold.......................... 6,745 $ 62,471
Shares issued in reinvestment
of dividends and distributions..... 278 2,588
Shares reacquired.................... (1,603) (15,023)
---------- ------------
Net increase in shares outstanding... 5,420 $ 50,036
---------- ------------
---------- ------------
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) Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
10
<PAGE>
Financial Highlights (Unaudited) THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
------------------------------------------------------------------------------
September 9,
Six Months 1991(a)
Ended Year Ended June 30, through
December 31, -------------------------------------------- June 30,
1996(c) 1996 1995(c) 1994(c) 1993 1992
------------ ------- ------- ------- -------- ------------
<S> <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
------ ------- ------- ------- -------- ------------
Income from investment operations
Net investment income......................... .24 .51 .51 .45 .64 .57
Net realized and unrealized gains (losses) on
investments and foreign currency
transactions............................... .07 (.06) .09 (.35) (.41) .10
------ ------- ------- ------- -------- ------------
Total from investment operations........... .31 .45 .60 .10 .23 .67
------ ------- ------- ------- -------- ------------
Less distributions
Dividends from net investment income.......... (.25) (.51) (.52) (.40) (.63) (.57)
Tax return of capital distributions........... -- (.03) -- (.08) -- --
Distributions in excess of net realized
capital gains.............................. -- -- -- -- -- (.03)
------ ------- ------- ------- -------- ------------
Total distributions........................ (.25) (.54) (.52) (.48) (.63) (.60)
------ ------- ------- ------- -------- ------------
Net asset value, end of period................ $ 9.34 $ 9.28 $ 9.37 $ 9.29 $ 9.67 $ 10.07
------ ------- ------- ------- -------- ------------
------ ------- ------- ------- -------- ------------
TOTAL RETURN(d):.............................. 3.49% 4.98% 6.55% 1.02% 2.40% 6.69%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 33,508 $37,049 $46,450 $69,912 $113,623 $143,856
Average net assets (000)...................... $ 35,300 $42,598 $56,395 $91,849 $131,371 $134,585
Ratios to average net assets:
Total expenses............................. 3.56%(b) 3.74% 2.19% 1.89% 1.94% 1.34%(b)
Operating expenses, including distribution
fee..................................... 1.54%(b) 1.47% 1.31% 1.17% 1.05% 1.03%(b)
Operating expenses, excluding distribution
fee..................................... 1.39%(b) 1.32% 1.16% 1.05% .95% .93%(b)
Net investment income...................... 5.18%(b) 5.51% 5.49% 4.94% 6.71% 6.95%(b)
For Class A, B and C shares:
Portfolio turnover rate.................... 110% 173% 254% 209% 228% 137%
</TABLE>
<TABLE>
<CAPTION>
BORROWINGS:
Amount of debt Average amount of
outstanding at end debt outstanding
Period Ended of period (000) during period (000)
- --------------------------------------------------------------------- ------------------ -------------------
<S> <C> <C>
December 31, 1996.................................................... $ 10,505 $13,203
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
June 30, 1992........................................................ 20,109 9,939
<CAPTION>
BORROWINGS:
Average amount of
debt per share
Average number of outstanding
shares outstanding during
Period Ended during period (000) period
- --------------------------------------------------------------------- ------------------- -----------------
<S> <C> <C>
December 31, 1996.................................................... 3,786 $3.49
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
June 30, 1992........................................................ 13,458 .74
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Annualized.
(c) Calculated based upon weighted average shares outstanding during the period.
(d) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total return for periods of less than one full year are not
annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 11 -----
<PAGE>
Financial Highlights (Unaudited) THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Class C
------------------------------------------------------ ------------
July 1, September 1,
1995 Year ended June 30, 1992(a) Six Months
Through Through Ended
November 27, ------------------- June 30, December 31,
1995(f) 1995(c) 1994(c) 1993 1996(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 .22
Net realized and unrealized gains (losses) on
investments and foreign currency
transactions............................... .02 .09 (.37) (.32) .07
------ ------- ------- ----- -----
Total from investment operations........... .24 .57 -- .15 .29
------ ------- ------- ----- -----
Less distributions
Dividends from net investment income.......... (.22) (.49) (.32) (.44) (.23)
Tax return of capital distributions........... (.01) -- (.07) -- --
Distributions in excess of net realized
capital gains.............................. -- -- -- -- --
------ ------- ------- ----- -----
Total distributions........................ (.23) (.49) (.39) (.44) (.23)
------ ------- ------- ----- -----
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% 3.14%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............... $ 0 $2,466 $3,845 $5,954 $ 117
Average net assets (000)...................... $ 1,820 $2,928 $5,778 $2,740 $ 125
Ratios to average net assets:
Total expenses............................. 3.87%(b) 2.56% 2.76% 2.89%(b) 4.16%(b)
Operating expenses, including distribution
fee..................................... 1.52%(b) 1.68% 2.05% 1.95%(b) 2.14%(b)
Operating expenses, excluding distribution
fee..................................... 1.32%(b) 1.16% 1.05% .95%(b) 1.39%(b)
Net investment income...................... 5.46%(b) 5.12% 4.06% 5.11%(b) 4.58%(b)
<CAPTION>
November 1,
1994(a)
Year Ended Through
June 30, 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) --
Distributions in excess of net realized
capital gains.............................. -- --
----------- -----
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.
- --------------------------------------------------------------------------------
12 See Notes to Financial Statements.
<PAGE>
Important Information THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
As of the Fund's fiscal period end (December 31, 1996) total dividends and
distributions to shareholders exceeded taxable income by $16,766 (approximately
$.005 per share). Since a final determination as to whether an overdistribution
of taxable income, commonly referred to as a return of capital, cannot be
performed until after the Fund's fiscal year end (June 30, 1997), we wish to
caution investors as to this possibility at this time.
- --------------------------------------------------------------------------------
13 -----
<PAGE>
Supplemental Proxy Information THE BLACKROCK GOVERNMENT INCOME TRUST
- --------------------------------------------------------------------------------
The Annual Meeting of Shareholders of the The BlackRock Government Income
Trust (the ``Fund'') was held on Wednesday, October 30, 1996 at the offices of
Prudential Securities Incorporated, One Seaport Plaza, New York, New York. The
meeting was held for the following purposes:
(1) To elect Directors as follows: Eugene C. Dorsey, Douglas McCorkindale,
Thomas T. Mooney, Richard A. Redeker.
(2) To approve the proposed elimination of the Fund's fundamental investment
restriction relating to investment in securities of unseasoned issuers.
(3) To ratify the selection of Deloitte & Touche LLP as independent public
accountants for the fiscal year ending June 30, 1997.
The results of the proxy solicitation on the above matters were as follows:
<TABLE>
<CAPTION>
Director/Matter Votes for Votes against Abstentions
---------------- ------------- -----------
<S> <C> <C> <C>
(1) Eugene C. Dorsey 1,871,016 -- 76,359
Douglas McCorkindale 1,871,016 -- 76,359
Thomas T. Mooney 1,869,902 -- 78,473
Richard A. Redeker 1,870,379 -- 76,995
(2) Investment restriction--unseasoned issuers 1,509,194 166,137 157,946
(3) Deloitte & Touche LLP 1,827,606 28,633 90,934
</TABLE>
- --------------------------------------------------------------------------------
14
<PAGE>
[This page left intentionally blank.]
<PAGE>
[This page left intentionally blank.]
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Trustees
Eugene C. Dorsey
Douglas H. McCorkindale
Thomas T. Mooney
Richard A. Redeker
Officers
Richard A. Redeker, President
Robert F. Gunia, Vice President
Eugene S. Stark, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Manager
Prudential Mutual Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Subadviser
BlackRock Financial Management, Inc.
345 Park Avenue
New York, NY 10154
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.
The accompanying financial statements as of December 31, 1996 were not audited
and, accordingly, no opinion is expressed on them.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
<PAGE>
(LOGO)
Prudential Mutual Funds BULK RATE
Gateway Center Three U.S. POSTAGE
100 Mulberry Street PAID
Newark, NJ 07102-4077 Permit 6807
(800) 225-1852 New York, NY
09247Y208 MF152E2
09247Y307 Cat#4445612
09247Y109
