<PAGE>
As filed with the Securities and Exchange Commission on July 28, 1999
Registration No. 33-51937
===========================================================================
SECURITIES AND EXCHANGE COMMISION
WASHINGTON, D.C. 20549
_____________________
POST-EFFECTIVE AMENDMENT NO. 5 TO
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT
OF 1933 OF SECURITIES OF UNIT INVESTMENT
TRUSTS REGISTERED ON FORM N-8B-2
______________________
A. Exact Name of Trust:
GOVERNMENT SECURITIES EQUITY TRUST SERIES 7
B. Name of depositor:
PRUDENTIAL SECURITIES INCORPORATED
C. Complete address of depositor's principal executive office:
One Seaport Plaza
199 Water Street
New York, New York 10292
D. Name and complete address of agent for service:
Copy to:
LEE B. SPENCER, JR., ESQ. KENNETH W. ORCE, ESQ.
PRUDENTIAL SECURITIES INCORPORATED CAHILL GORDON & REINDEL
One Seaport Plaza 80 Pine Street
199 Water Street New York, New York 10005
New York, New York 10292
It is proposed that this filing will become effective (check appropriate
box).
__
/__/ immediately upon filing on (date) pursuant to paragraph (b);
__
/X_/ on July 31, 1999 pursuant to paragraph (b);
__
/__/ 60 days after filing pursuant to paragraph (a);
__
/__/ on (date) pursuant to paragraph (a) of Rule 485.
<PAGE>
CUSIP: 383741709
Government Securities Equity Trust Series 7
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The objectives of the Trust are to attempt to obtain safety of capital through
investment in stripped United States Treasury issued notes or bonds paying no
current interest and to attempt to provide for capital appreciation through
investment in Class A shares of the Templeton Developing Markets Trust (the
'fund'), an open-end, diversified, registered management investment company. The
investment goal of the fund is long-term capital appreciation. The fund tries to
achieve its goal by investing, under normal market conditions, at least 65% of
its total assets in equity securities of developing or emerging market issuers.
Units of the Trust may be suited for purchase by Individual Retirement Accounts,
Keogh Plans and other tax-deferred retirement plans.
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Sponsor:
Prudential Securities (LOGO)
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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Please Read and Retain Prospectus dated
This Prospectus For Future Reference July 31, 1999
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[THIS PAGE INTENTIONALLY LEFT BLANK]
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This Prospectus does not contain all the information with respect to the
investment company set forth in its registration statement and exhibits relating
thereto which have been filed with the Securities and Exchange Commission,
Washington, D.C. under the Securities Act of 1933 and the Investment Company Act
of 1940, and to which reference is hereby made.
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The Trust
Government Securities Equity Trust Series 7 consists of one underlying unit
investment trust (the 'Trust' or 'GSET' as the context requires) composed of
stripped United States Treasury issued notes or bonds bearing no current
interest (the 'Treasury Obligations') and Class A shares ('fund shares') of the
Templeton Developing Markets Trust (the 'fund'), an open-end, diversified,
registered management investment company, or contracts and funds for the
purchase thereof (the Treasury Obligations and the fund shares, collectively,
the 'Securities'). The Trust contains Treasury Obligations maturing in
approximately 8 years.
The objectives of the Trust are to attempt to obtain safety of capital
through investment in stripped United States Treasury issued notes or bonds
paying no current interest and to attempt to provide for capital appreciation
through investment in shares of the fund. The investment goal of the fund is
long-term capital appreciation. The fund tries to achieve its investment goal by
investing, under normal market conditions, at least 65% of its total assets in
equity securities of developing or emerging market issuers. Investment in such
securities involves certain considerations which are not normally involved in
investment in securities of U.S. companies, and an investment in the fund may be
considered speculative. The fund may borrow money for investment purposes, which
may involve greater risk and additional costs to the fund. In addition, the fund
may invest up to 10% of its assets in restricted securities and other illiquid
investments, which may involve greater risk and increased fund expenses. There
is, of course, no assurance that the Trust's objectives will be achieved.
The Trust is structured to contain a sufficient amount of Treasury
Obligations to insure that an investor will receive, at the maturity of such
Trust, $20.00 per Unit. However, an investor holding his Units to Trust maturity
may suffer a loss to the extent the investor's purchase cost of a Unit exceeds
$20.00 since the capital protection is limited to the aggregate maturity value
per Unit of Treasury Obligations. An investor who sells his Units prior to Trust
maturity may suffer a loss to the extent that the price he receives upon the
sale of his Units is less than the purchase price of his Units. The price paid
for a Unit may differ from that set forth herein due to changes in the value of
the Securities in the portfolio subsequent to the date of the Summary of
Essential Information. There is no assurance that a purchaser of Units on the
date of the Prospectus or subsequent to such date will receive, upon
termination, the purchase price per Unit. The fund has not been structured to
generate dividends and therefore dividend distributions by the Trust are likely
to be insignificant. The maximization of dividend income is not an objective of
the Trust. The Trust is 'concentrated' in fund shares, so investors should be
aware that the potential for capital appreciation is directly related to the
investment performance of the fund itself.
The Sponsor may, from time to time, deposit additional Treasury Obligations
and fund shares in the Trust while maintaining the proportionate relationship
between the maturity amount of the Treasury Obligations and the number of fund
shares immediately prior to such deposit. Any additional Treasury Obligations
added to the Trust will be United States Treasury notes or bonds substantially
identical to those then held in the Trust.
The Fund
The investment goal of the fund is long-term capital appreciation. This goal
is fundamental, which means that it may not be changed without fund shareholder
approval.
What is the fund's Investment Strategy?
The fund tries to achieve its investment goal by investing, under normal
market conditions, at least 65% of its total assets in equity securities of
developing or emerging market issuers. The fund normally will invest in at least
three developing or emerging market countries.
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For purposes of the fund's investments, developing or emerging market
countries include those considered such by the World Bank, the International
Finance Corporation, the United Nations or the countries' authorities. In
addition, developing or emerging market equity securities means those issued by:
- companies with their principal securities trading market within a
developing or emerging market country, as defined above; or
- companies that derive 50% or more of their total revenue from either goods
or services produced or sales made in developing or emerging market
countries; or
- companies organized under the laws of, and with a principal office in, a
developing or emerging market country.
The fund buys the following types of securities, among others:
Equity securities. Equity securities generally entitle the holder to
participate in a company's general operating results. These include common
stocks and preferred stocks. The fund's primary investments are in common stock.
Depending upon market conditions, the fund generally invests a portion of
its total assets in rated and unrated debt securities such as bonds, notes and
debentures. Debt securities represent an obligation of the issuer to repay a
loan of money to it, and generally provide for the payment of interest.
The Templeton investment philosophy is 'bottom up,' value-oriented, and
long-term. In choosing equity investments, the fund's manager will focus on the
market price of a company's securities relative to its evaluation of a company's
long-term earnings, asset value and cash flow potential. A company's historical
value measures, including price/earnings ratios, profit margins and liquidation
value, will also be considered.
Temporary Investments. The manager may take a temporary defensive position
when it believes the securities trading markets or the economies of countries
where the fund invests are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist. Under these circumstances,
the fund may be unable to pursue its investment goal because it may not invest
or may invest substantially less in developing market companies' equity
securities.
Investment Risks
Investors should be aware of the risks which an investment in Units of the
Trust may entail. During the life of the Trust, the value of the portfolio
Securities and hence the Units may fluctuate and therefore the Public Offering
Price and Redemption Price per Unit may be more or less than the price paid by
the investor.
The value of the Treasury Obligations will fluctuate inversely with changes
in interest rates and the value of fund shares will vary as the value of the
underlying portfolio securities of the fund increases or decreases. The Treasury
Obligations are subject to substantially greater price fluctuations during
periods of changing interest rates than securities of comparable quality which
make periodic interest payments. See 'The Trust--Stripped U.S. Treasury
Obligations.'
While stocks have historically outperformed other asset classes over the
long term, they tend to go up and down more dramatically over the shorter term.
These price movements may result from factors affecting individual companies,
industries or the securities market as a whole. Value stock prices are
considered 'cheap' relative to the company's perceived value. They may not
increase in value, as anticipated by the manager, if other investors fail to
recognize the company's value and bid up the price or in markets favoring
faster-growing companies.
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods.
Foreign Securities. Securities of companies and governments located outside
the U.S. may involve risks that can increase the potential for losses in the
fund. Investments in depositary receipts also involve some or all of the
following risks.
Country. General securities market movements in any country where the fund
has investments are likely to affect the value of the securities the fund owns
that trade in that country. These movements will affect the fund's share price
and fund performance.
The political, economic and social structures of some countries in which the
fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the imposition
of
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exchange controls, currency devaluation, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks.
Developing or Emerging Markets. The fund's investments in developing or
emerging markets are subject to all of the risks of foreign investing generally,
and have additional heightened risks due to a lack of established legal,
political, business, and social frameworks to support securities markets. Some
of the additional significant risks include:
- Political and social uncertainty (for example, regional conflicts and risk
of war)
- Currency exchange rate volatility
- Pervasiveness of corruption and crime
- Delays in settling portfolio transactions
- Risk of loss arising out of the system of share registration and custody
- Markets that are comparatively smaller and less liquid than developed
markets. While sort-term volatility in these markets can be disconcerting,
declines of more than 50% are not unusual
- Less government supervision and regulation of business and industry
practices, stock exchanges, brokers and listed companies than in the
United States
- Currency and capital controls
All of these factors make developing market equity securities' prices
generally more volatile than equity securities of companies in developed
markets.
Company. Foreign companies are not subject to the same disclosure,
accounting, auditing, and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies. Foreign stock exchanges, trading systems, brokers, and companies
generally have less government supervision and regulation than in the U.S. The
fund may have greater difficulty voting proxies, exercising shareholder rights,
pursuing legal remedies and obtaining judgments with respect to foreign
investments in foreign courts than with respect to U.S. companies in U.S.
courts.
Currency. Many of the fund's investments are denominated in foreign
currencies. Changes in foreign currency exchange rates will affect the value of
what the fund owns and the fund's share price. Generally, when the U.S. dollar
rises in value against a foreign currency, an investment in that country loses
value because that currency is worth fewer U.S. dollars. Devaluation of a
currency by a country's government or banking authority also will have a
significant impact on the value of any securities denominated in that currency.
Currency markets generally are not as regulated as securities markets.
Euro. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries.
Because this change to a single currency is new and untested, it is not
possible to predict the impact of the euro on the business or financial
condition of European issuers which the fund may hold in its portfolio, and
their impact on fund performance. To the extent the fund holds non-U.S. dollar
(euro or other) denominated securities, it will still be exposed to currency
risk due to fluctuations in those currencies versus the U.S. dollar.
Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other agency of the
U.S. government. Mutual fund shares involve investment risks, including the
possible loss of principal.
Illiquid Securities. The fund may invest up to 10% of its total assets in
restricted securities and securities with a limited trading market. Such a
market can result from political or economic conditions affecting previously
established securities markets, particularly in emerging market countries.
Interest Rate. When interest rates rise, debt security prices fall. The
opposite is also true; debt security prices go up when interest rates fall.
Generally, interest rates rise during times of inflation or a growing economy,
and fall during an economic slowdown or recession. Securities with longer
maturities usually are more sensitive to interest rate changes than securities
with shorter maturities.
A-iii
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Credit. There is the possibility that an issuer will be unable to make
interest payments and repay principal. Changes in an issuer's financial strength
or in a security's credit rating may affect a security's value and, thus, impact
fund performance.
Year 2000. When evaluating current and potential portfolio positions, Year
2000 is one of the factors the fund's manager considers.
The manager will rely upon public filings and other statements made by
companies about their Year 2000 readiness. Issuers in countries outside the
U.S., particularly in emerging markets, may be more susceptible to Year 2000
risks and may not be required to make the same level of disclosure about Year
2000 readiness as is required in the U.S. The manager, of course, cannot audit
each company and its major suppliers to verify their Year 2000 readiness.
If a company in which the fund is invested is adversely affected by Year
2000 problems, it is likely that the price of its securities also will be
adversely affected. A decrease in the value of one or more of the fund's
portfolio holdings will have a similar impact on the fund's performance.
Although the Trust is structured to return to an initial Unit Holder his
purchase cost of a Unit through the distribution of the Treasury Obligations'
maturity value on the mandatory termination date of the Trust, an investor will
have included the accrual of original issue discount on such Treasury
Obligations in income for federal income tax purposes and will have paid federal
income tax on such accrual. An investor holding his Units to Trust maturity may
suffer a loss to the extent the investor's purchase cost of a Unit exceeds
$20.00 since the capital protection is limited to the aggregate maturity value
per Unit of Treasury Obligations. Similarly, an investor who sells his Units
prior to Trust maturity may suffer a loss to the extent that the price he
receives upon the sale of his Units is less than the purchase price of his
Units.
Distributions
Distributions, if any, of dividends, 12b-1 fee amounts received by the Trust
from the Sponsor in respect of fund shares (net of Trust expenses),
distributions of any net capital gains received in respect of fund shares and
proceeds of the sale of fund shares not used to redeem Units will be made
quarterly on or shortly after the Quarterly Distribution Date to Unit Holders of
record on the Quarterly Record Date immediately preceding such Quarterly
Distribution Date. No distribution will be made if the amount available for
distribution is less than $2.50 per 100 Units (see 'Rights of Unit
Holders--Distributions'). Alternatively, Unit Holders may have their
distributions reinvested (see 'Reinvestment of Trust Distributions'). Accrual of
original issue discount on the Treasury Obligations will not be distributed on a
current basis, although Unit Holders will be subject to income tax at ordinary
income rates as if a current distribution of such amounts had been made (see
'Tax Status of the Trust'). Upon termination of the Trust, the Trustee will
distribute, upon surrender of Units for cancellation, to each Unit Holder, his
pro rata share of such Trust's net assets including the proceeds of fund shares
sold unless a Unit Holder elects to receive fund shares pursuant to an 'in kind'
distribution of the number of fund shares attributable to his Units, in the
manner set forth under 'Amendment and Termination of the Indenture--Termination'
herein. Upon termination, a Unit Holder may invest the proceeds from the
Treasury Obligations in fund shares at such shares' net asset value.
Public Offering Price
The Public Offering Price of the Units is computed by adding to the
aggregate bid side evaluation of the Treasury Obligations the aggregate net
asset value of fund shares in the Trust, dividing such sum by the number of
Units outstanding and then adding a sales charge of 5.25% of the Public Offering
Price (5.541% of the net amount invested). Any money in the Income and Principal
Accounts other than money required to redeem tendered Units will be added to the
Public Offering Price. The sales charge is reduced on a graduated scale for
sales involving at least 1,667 Units (see 'Public Offering of Units--Volume
Discount'). The minimum purchase is 100 Units except the minimum purchase is 25
Units in the case of Individual Retirement Accounts, Keogh Plans and other
tax-deferred retirement plans.
Secondary Market
The Sponsor, although not obligated to do so, presently intends to maintain
a secondary market to repurchase the Units based on the aggregate bid side
evaluation of the Treasury Obligations and the net asset value of the fund
shares (excluding any sales charge on fund shares). If such market is not
maintained, a Unit Holder will be able to dispose of his Units through
redemption at prices based on the aggregate bid side evaluation of the Treasury
Obligations and the net asset value of the fund shares (see 'Rights of Unit
Holders--Redemption' herein). Market conditions may cause such
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prices to be greater or less than the amount paid for Units and may result in a
loss to a Unit Holder upon the disposition of a Unit.
Special Risk Considerations
An investment in Units of the Trust should be made with an understanding of
the risks entailed in an investment in (i) the stripped United States Treasury
issued notes or bonds bearing no current interest (see 'The Trust--Stripped U.S.
Treasury Obligations' on page B-2) and (ii) a mutual fund which invests in the
type of securities in which the fund invests (see 'The Trust--Fund Risk Factors'
in Part B of this Prospectus). The Trust's objectives are to attempt to obtain
safety of capital through investment in the stripped United States Treasury
issued notes or bonds paying no current interest and to attempt to provide for
capital appreciation through an investment in fund shares. The Trust is
'concentrated' in fund shares so investors should be aware that the potential
for capital appreciation is directly related to the investment performance of
the fund itself. Additionally, changes in the price of the Treasury Obligations
and changes in the net asset value of the fund shares will affect the price of
the Trust's Units.
Portfolio Summary
$11,200,000 face amount of Treasury Obligations maturing on November 15,
2007 and 277,200 fund shares were held in the Trust on July 1, 1999. The
Treasury Obligations and the fund shares represented 63.2% and 36.8%,
respectively, of the total of the aggregate bid side evaluation of Treasury
Obligations in the Trust and the aggregate value of fund shares on July 1, 1999.
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SUMMARY OF ESSENTIAL INFORMATION
GOVERNMENT SECURITIES EQUITY TRUST SERIES 7
As of July 1, 1999
<TABLE>
<S> <C>
AGGREGATE MATURITY VALUE OF TREASURY OBLIGATIONS DEPOSITED................................. $11,200,000.00
AGGREGATE NUMBER OF FUND SHARES DEPOSITED.................................................. 277,200
NUMBER OF UNITS............................................................................ 560,000
FRACTIONAL UNDIVIDED INTEREST IN THE TRUST REPRESENTED BY EACH UNIT........................ 1/560,000th
PUBLIC OFFERING PRICE
Aggregate bid side evaluation of Treasury Obligations in the Trust....................... $ 6,802,544.00
Aggregate value of fund shares(2)........................................................ 3,958,416.00
Cash value............................................................................... (26,629.34)
Total.................................................................................... 10,734,330.66
Divided by 560,000 Units................................................................. 19.168
Plus sales charge of 5.25% of Public Offering (5.54% of net amount invested)(4).......... 1.062
Public Offering Price per Unit(3)........................................................ 20.230
REDEMPTION AND SPONSOR'S REPURCHASE PRICE PER UNIT
(based on bid side evaluation of underlying Treasury Obligations and net asset value of
the fund shares, $1.062 less than Public Offering Price per Unit)........................ $ 19.168
QUARTERLY RECORD DATES: February 1, May 1, August 1 and November 1.
QUARTERLY DISTRIBUTION DATES: February 15, May 15, August 15 and November 15.
TRUSTEE'S ANNUAL FEE(5) (including estimated expenses and Evaluator's fee): $1.93 per 100
Units outstanding.
EVALUATOR'S FEE FOR EACH EVALUATION OF TREASURY OBLIGATIONS: $5.00
EVALUATION TIME: 4:00 P.M. New York Time (i.e., the close of regular trading on the New
York Stock Exchange)
MANDATORY TERMINATION DATE: November 15, 2007
MINIMUM VALUE OF TRUST: The Trust may be terminated if the value of Trust assets at any
time is less than $13,800,000.
DATE OF DEPOSIT: April 20, 1994(1)
</TABLE>
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(1) The Date of Deposit. The Date of Deposit is the date on which the Trust
Indenture and Agreement was signed and the initial deposit of Securities with
the Trustee was made.
(2) Calculated by multiplying aggregate number of fund shares by the current
net asset value per share (excluding any sales load on the fund shares).
(3) This Public Offering Price is computed as of the July 1, 1999 and may
vary from the Public Offering Price on the date of this Prospectus or any
subsequent date.
(4) Certain transactions are entitled to a reduced sales charge. (See
'Public Offering of Units--Volume Discount.')
(5) Based on Trust size of 1,000,000 or fewer Units.
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For an explanation of the management fees paid by the fund, (as of December
31, 1998, 1.25% of fund average net assets) see page B-11.
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<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
THE UNIT HOLDERS, SPONSOR AND TRUSTEE
GOVERNMENT SECURITIES EQUITY TRUST SERIES 7
We have audited the statement of financial condition and schedule of
portfolio securities of the Government Securities Equity Trust Series 7 as
of March 31, 1999, and the related statements of operations and changes in
net assets for the three years in the period then ended. These financial
statements are the responsibility of the Trustee (see Footnote (a)(1)). Our
responsibility is to express an opinion on these financial statements 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 are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of the securities owned as of March 31,
1999 as shown in the statement of financial condition and schedule of
portfolio securities by correspondence with The Chase Manhattan Bank, the
Trustee. An audit also includes assessing the accounting principles used
and the significant estimates made by the Trustee, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Government
Securities Equity Trust Series 7 as of March 31, 1999, and the results of
its operations and the changes in its net assets for the three years in the
period then ended in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
July 15, 1999
New York, New York
</AUDIT-REPORT>
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<TABLE>
STATEMENT OF FINANCIAL CONDITION
GOVERNMENT SECURITIES EQUITY TRUST SERIES 7
March 31, 1999
TRUST PROPERTY
<S> <C>
Investments in securities at market value (amortized cost $10,813,771
including accreted interest of $1,951,296) (Note (a) and Schedule of
Portfolio Securities Notes (4) and (5)) $11,192,240
Other Receivable 12,513
Total 11,204,753
LIABILITIES AND NET ASSETS
Less Liabilities:
Advance from Trustee 18,524
Accrued Trust fees and expenses 5,072
Total liabilities 23,596
Net Assets:
Balance applicable to 620,000 Units of fractional
undivided interest issued and outstanding (Note (c)):
Capital plus net unrealized market appreciation
of $378,469 $11,192,240
Excess distribution of principal and net
investment income (Note (b)) (11,083)
Net assets $11,181,157
Net asset value per Unit ($11,181,157 divided by 620,000 Units) $ 18.0341
See notes to financial statements
</TABLE>
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<TABLE>
STATEMENTS OF OPERATIONS
GOVERNMENT SECURITIES EQUITY TRUST SERIES 7
<CAPTION>
For the years ended March 31,
1999 1998 1997
<S> <C> <C> <C>
Investment Income:
Interest $510,764 $ 620,120 $ 740,139
Dividends 43,758 89,681 111,969
Other Income 11,853 14,405 22,282
Total income 566,375 724,206 874,390
Less Expenses:
Trust fees and expenses 16,970 18,638 20,985
Total expenses 16,970 18,638 20,985
Investment income - net 549,405 705,568 853,405
Net (loss) gain on investments:
Realized gain on securities sold or redeemed 107,328 455,434 462,747
Long-term capital gain distributions received - 351,308 177,705
Net unrealized market (depreciation) appre-
ciation (763,271) (564,592) 431,488
Net (loss) gain on investments (655,943) 242,150 1,071,940
Net (decrease) increase in net assets resulting
from operations $(106,538) $ 947,718 $1,925,345
See notes to financial statements
</TABLE>
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<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
GOVERNMENT SECURITIES EQUITY TRUST SERIES 7
<CAPTION>
For the years ended March 31,
1999 1998 1997
<S> <C> <C> <C>
Operations:
Investment income - net $ 549,405 $ 705,568 $ 853,405
Realized gain on securities sold or
redeemed 107,328 455,434 462,747
Long-term capital gain distributions
received - 351,308 177,705
Net unrealized market (depreciation)
appreciation (763,271) (564,592) 431,488
Net (decrease) increase in net
assets resulting from operations (106,538) 947,718 1,925,345
Less Distributions to Unit Holders:
Principal - (355,907) (255,995)
Investment income - net (61,304) (83,081) (276,533)
Total distributions (61,304) (438,988) (532,528)
Capital Share Transactions:
Creation of 40,000 additional Units - - 664,592
Redemption of 180,000 Units, 220,000
Units and 420,000 Units, respectively (3,205,493) (4,087,417) (7,055,363)
Income on redemption 93 (3,183) (3,837)
Total capital share transactions (3,205,400) (4,090,600) (6,394,608)
Net decrease in net assets (3,373,242) (3,581,870) (5,001,791)
Net assets:
Beginning of year 14,554,399 18,136,269 23,138,060
End of year (including excess distribution
of principal and net investment income
of $11,083, and undistributed principal
and net investment income of $38,631
and $62,787, respectively) $11,181,157 $14,554,399 $18,136,269
See notes to financial statements
</TABLE>
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NOTES TO FINANCIAL STATEMENTS
GOVERNMENT SECURITIES EQUITY TRUST SERIES 7
March 31, 1999
(a) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Trust is registered under the Investment Company Act of 1940 as a
Unit Investment Trust. The following is a summary of the significant
accounting policies of the Trust:
(1) Basis of Presentation
The Trustee has custody of and responsibility for all accounting
and financial books, records, financial statements and related data
of the Trust and is responsible for establishing and maintaining a
system of internal controls directly related to, and designed to
provide reasonable assurance as to the integrity and reliability
of, financial reporting of the Trust. The Trustee is also
responsible for all estimates and accruals reflected in the Trust's
financial statements. The Evaluator determines the price for each
underlying Security included in the Trust's Schedule of Portfolio
Securities on the basis set forth in Part B of this Prospectus,
"Public Offering of Units - Public Offering Price". Under the
Securities Act of 1933 ("the Act"), as amended, the Sponsor is
deemed to be an issuer of the Trust Units. As such, the Sponsor
has the responsibility of an issuer under the Act with respect to
financial statements of the Trust included in the Registration
Statement under the Act and amendments thereto.
(2) Investments
Investments are stated at market value as determined by the
Evaluator based on the bid side evaluations of the Zero Coupon
Treasury Obligations, and by calculations based on the net asset
value per share of the Fund, on the last day of trading during the
period. The value on the date of initial deposit (April 20, 1994)
represents the cost of investments to the Trust based on the
offering side evaluations and the net asset value per share, of the
Treasury Obligations and Fund Shares, respectively, as of the close
of business on the date of initial deposit. The cost of
investments purchased subsequent to the date of initial deposit is
based on the offering side evaluations and the net asset value per
share, respectively, at the date of purchase. The difference
between the initial cost and face amount of the Treasury
Obligations at the date of purchase is being amortized over the
period to its maturity date using the interest method.
(3) Income Taxes
As a Unit Investment Trust, the Trust is organized as a Grantor
Trust and is not an association taxable as a corporation for
Federal income tax purposes; accordingly, no provision is required
for such taxes.
A-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
GOVERNMENT SECURITIES EQUITY TRUST SERIES 7
March 31, 1999
(4) Expenses
The Trust pays an annual Trustee's fee, estimated expenses,
Evaluator's fees, and may incur additional charges as explained
under "Expenses and Charges - Fees" and "- Other Charges" in this
Prospectus.
(b) DISTRIBUTIONS
Distributions from the income and principal accounts, if any, received
by the Trust are made to Unit Holders on a quarterly basis and
distributions of any net capital gains received in respect of Fund
Shares will be made at least annually to Unit Holders of record. Income
from the amortization of original issue discount on the Zero Coupon
Treasury Obligations will not be distributed on a current basis. Upon
termination of the Trust, the Trustee will distribute, upon surrender of
Units for cancellation, to each Unit Holder his pro rata share of the
Trust's assets, less expenses, in the manner set forth under "Amendment
0and Termination of the Trust - Termination" herein.
(c) COST TO INVESTORS
The cost to investors represents the aggregate initial public offering
price as of the respective dates of deposit exclusive of accrued
interest.
<TABLE>
A reconciliation of the cost of Units to investors to the net amount
applicable to investors as of March 31, 1999 follows:
<S> <C>
Cost to investors $26,550,721
Less: Gross underwriting commissions (sales charge) 1,324,383
Net cost to investors 25,226,338
Cost of securities sold (18,184,572)
Net unrealized market appreciation 378,469
Accumulated interest accretion 3,772,005
Net amount applicable to investors $11,192,240
</TABLE>
A-6
<PAGE>
NOTES TO FINANCIAL STATEMENTS
GOVERNMENT SECURITIES EQUITY TRUST SERIES 7
March 31, 1999
(d) OTHER INFORMATION
<TABLE>
Selected data for a Unit of the Trust during each year:
<CAPTION>
For the years ended March 31,
1999 1998 1997
<S> <C> <C> <C>
Principal distributions during year $ - $ .4044 $ .2116
Net investment income distributions
during year $ .0872 $ .0944 $ .2134
Net asset value at end of year $18.0341 $18.1930 $17.7807
Trust Units outstanding at end of
year 620,000 800,000 1,020,000
</TABLE>
A-7
<PAGE>
<TABLE>
SCHEDULE OF PORTFOLIO SECURITIES
GOVERNMENT SECURITIES EQUITY TRUST SERIES 7
March 31, 1999
<CAPTION>
Port-
folio Name of Issuer/Title of Face Amount/ Market
No. Portfolio Security <F1> Number of Shares Value <F4><F5>
<C> <S>
1. Stripped United States Treasury
Obligations maturing on November 15, 2007 <F2> $12,400,000 $ 7,754,960
2. Shares of the Templeton Developing Markets
Trust ($11.20 per Fund Share) <F3> 306,900 3,437,280
$11,192,240
See notes to schedule of portfolio securities
</TABLE>
A-8
<PAGE>
NOTES TO SCHEDULE OF PORTFOLIO SECURITIES
GOVERNMENT SECURITIES EQUITY TRUST SERIES 7
March 31, 1999
<F1> None of the Securities is redeemable by operation of optional call
provisions.
<F2> The Zero Coupon Treasury Obligations have been purchased at a
discount from their par value because there is no stated interest
income thereon (such Securities are often referred to as zero
coupon securities). Over the life of the Treasury Obligations such
discount accrues and upon maturity thereof the holders will receive
100% of the Treasury Obligation maturity amount thereof.
<F3> The Fund's manager is Templeton Asset Management Ltd. - Hong Kong
branch.
<F4> The market value of the Treasury Obligations as of March 31, 1999
was determined by the Evaluator on the basis of bid side
evaluations for the Securities at such date. The market value of
the Fund Shares was calculated by multiplying the aggregate number
of shares by the current net asset value per share as of the same
date.
<F5> At March 31, 1999 the net unrealized market appreciation of
Securities was comprised of the following:
Gross unrealized market appreciation $1,188,558
Gross unrealized market depreciation (810,089)
Net unrealized market appreciation $ 378,469
The amortized cost of the Securities for Federal income tax purposes
was $10,813,771 at March 31, 1999.
A-9
<PAGE>
GOVERNMENT SECURITIES EQUITY TRUST
SERIES 7
THE TRUST
The Government Securities Equity Trust Series 7 (the 'Trust' or 'GSET' as
the context requires) was created under the laws of the State of New York,
pursuant to a Trust Indenture and Agreement and a related Reference Trust
Agreement dated the Date of Deposit (collectively, the 'Indenture')* among
Prudential Securities Incorporated (the 'Sponsor'), United States Trust Company
of New York (the 'predecessor-trustee') and Kenny Information Systems, Inc. (the
'Evaluator'). The Chase Manhattan Bank is the Trustee (the 'Trustee') of the
Trust. The Sponsor, Prudential Securities Incorporated, is a wholly-owned,
indirect subsidiary of The Prudential Insurance Company of America.
The objectives of the Trust are to attempt to obtain safety of capital
through investment in stripped United States Treasury issued notes or bonds
paying no current interest (the 'Treasury Obligations') and to attempt to
provide for capital appreciation through investment in Class A shares ('fund
shares') of Templeton Developing Markets Trust (the 'fund'), an open-end,
diversified, registered management investment company (the Treasury Obligations
and fund shares hereinafter, collectively, referred to as 'Securities'). The
fund's investment goal is long-term capital appreciation. The fund tries to
achieve its investment goal by investing, under normal market conditions, at
least 65% of its total assets in equity securities of developing or emerging
market issuers. There is of course no guarantee that the Trust's objectives will
be achieved.
Trust Formation
The Sponsor deposited with the Trustee the underlying Securities or
confirmations of contracts for the purchase of such Securities at prices equal
to the evaluation of the Treasury Obligations on the offering side of the market
on the date of deposit as determined by the Evaluator and the net asset value of
the fund shares (see 'Schedule of Portfolio Securities'). The Trust was created
simultaneously with the deposit of the Securities with the Trustee and the
execution of the Indenture. The Trustee then immediately delivered to the
Sponsor certificates of beneficial interest (the 'Certificates') representing
the units (the 'Units') comprising the entire ownership of the Trust. Through
this Prospectus, the Sponsor is offering the Units for sale to the public. The
holders of Units (the 'Unit Holder' or 'Unit Holders' as the context requires)
will have the right to have their Units redeemed at a price based on the
aggregate bid side evaluation of the Treasury Obligations as determined by the
Evaluator and the net asset value of the fund shares (the 'Redemption Price'),
if the Units cannot be sold in the secondary market which the Sponsor, although
not obligated to, presently intends to maintain. The Trust has a mandatory
termination date set forth under 'Summary of Essential Information,' but may be
terminated prior thereto upon the occurrence of certain events (see 'Amendment
and Termination of the Indenture--Termination'), including a reduction in the
value of the Trust below the value set forth under 'Summary of Essential
Information.'
On a recent date, each Unit represented the fractional undivided interest in
the Securities and net income of the Trust set forth under 'Summary of Essential
Information.' The Trust Portfolio has been structured so that a Unit Holder will
receive, at the Mandatory Termination Date of the Trust, an amount per Unit at
least equal to $20.00 even if the value of the fund shares were to decline to
zero. Of course, whether or not a Unit Holder makes a profit or suffers a loss
depends on whether his purchase price was less than or exceeded $20.00 per Unit.
A Unit Holder selling his Units prior to the Mandatory Termination Date may
suffer a loss to the extent the sale price of his Units is less than the
purchase price. Because certain of the Securities from time to time may be sold
under circumstances described herein and because additional Securities may be
deposited into the Trust from time to time, the Trust is not expected to retain
its present size and composition. If any Units are redeemed by the Trustee, the
number of Securities in the Trust will be reduced by an amount allocable to
redeemed Units and the fractional undivided interest in such Trust represented
by each unredeemed Unit will be increased. Units will remain outstanding until
redeemed upon tender to the Trustee by any Unit Holder (which may include the
Sponsor) or until the termination of the Trust pursuant to the Indenture.
Neither the Sponsor nor any affiliate of the Sponsor will be liable in any
way for any default, failure or defect in any Securities.
- ------------
* Reference is hereby made to said Indenture and any statements contained herein
are qualified in their entirety by the provisions of said Indenture.
B-1
<PAGE>
Securities Selection
In selecting Treasury Obligations for deposit in the Trust, the following
factors, among others, were considered by the Sponsor: (i) the prices and yields
of such securities and (ii) the maturities of such securities. In selecting the
fund shares for deposit in the Trust, the following factors, among others, were
considered by the Sponsor: (i) the historical performance of the fund and (ii)
the nature of the underlying fund portfolio.
The Trust consists of such of the Securities listed under 'Schedule of
Portfolio Securities' herein as may continue to be held from time to time in the
Trust, newly deposited Securities meeting requirements for creation of
additional Units and undistributed cash receipts from the fund and proceeds
realized from the disposition of Securities.
Stripped U.S. Treasury Obligations
The Treasury Obligations in the portfolio consist of United States Treasury
Obligations which have been stripped by the United States Treasury of their
unmatured interest coupons or such stripped coupons or receipts or certificates
evidencing such obligations or coupons. The obligor with respect to the Treasury
Obligations is the United States Government. Such Treasury Obligations may
include certificates that represent rights to receive the payments that comprise
a U.S. Government bond.
U.S. Treasury bonds evidence the right to receive a fixed payment at a
future date from the U.S. Government, and are backed by the full faith and
credit of the U.S. Government. The Treasury Obligations can be purchased at a
deep discount because the buyer receives only the right to receive one fixed
payment at a specific date in the future and does not receive any periodic
interest payments. The effect of owning deep discount obligations which do not
make current interest payments is that a fixed yield is earned not only on the
original investment but also, in effect, on all discount earned during the life
of the discount obligation. This implicit reinvestment of earnings at the same
rate eliminates the risk of being unable to reinvest the income on such
obligations at a rate as high as the implicit yield on the discount obligation,
but at the same time eliminates the holder's ability to reinvest at higher rates
in the future. For this reason, the Treasury Obligations are subject to
substantially greater price fluctuations during periods of changing market
interest rates than are securities of comparable quality which pay interest on a
current basis. Investors should be aware that income in respect of the accrual
of original issue discount on the Treasury Obligations, although not distributed
on a current basis, will be subject to income tax on a current basis at ordinary
income tax rates (see 'Tax Status of the Trust').
The following disclosure concerning the fund and its affiliates has been
provided by Franklin Templeton Distributors, Inc. While the Sponsor has not
independently verified this information, it has no reason to believe that such
information is not correct in all material respects. No representation is made
herein as to the accuracy or adequacy of such information.
Templeton Developing Markets Trust
The portfolio of the Trust also contains Class A shares (the 'fund shares')
of the Templeton Developing Markets Trust (the 'fund'). On December 31, 1998,
the net assets of the fund were approximately $2,172,954,000. The fund has
retained an investment manager, Templeton Asset Management Ltd. - Hong Kong
Branch ('Asset Management Hong Kong').
The investment goal of the fund is long-term capital appreciation. This goal
is fundamental, which means that it may not be changed without shareholder
approval. The fund tries to achieve its investment goal by investing primarily
in the equity securities of developing or emerging market issuers.
Additionally, the fund may invest in debt securities, which represent an
obligation of the issuer to repay a loan of money to it, and generally, provide
for the payment of interest. The fund may invest up to 35% of its total assets
in debt securities which are rated C or better by Moody's or S&P or unrated debt
which it determines to be of comparable quality. At present, the fund does not
intend to invest more than 5% of its total assets in non-investment grade
securities. The fund may also invest in American, European and Global Depositary
Receipts, which are certificates typically issued by a bank or trust company
that give their holders the right to receive securities issued by a foreign or
domestic corporation.
With respect to 75% of its total assets, the fund may invest up to 5% of its
total assets in securities issued by any one company or foreign government;
however, it may invest any amount of its assets in U.S. government securities.
The fund may invest in any industry although it will not invest more than 25% of
its total assets in any one industry. Additionally,
B-2
<PAGE>
the fund may invest up to 15% of its total assets in foreign securities that are
not listed on a recognized U.S. or foreign securities exchange, including up to
10% of its total assets in restricted securities, securities that are not
readily marketable, repurchase agreements with more than seven days to maturity,
and over-the-counter options bought by the fund.
The fund may be suitable for the patient investor interested in long-term
capital appreciation. The investor should be willing to accept the risks
associated with investments in international securities. The fund is designed
primarily for capital appreciation. Providing current income is not an objective
of the fund. Any income produced is expected to be minimal. An investor should
not consider a purchase of fund shares as equivalent to a complete investment
program.
The Chase Manhattan Bank, is the custodian of the fund's assets. Franklin
Templeton Investor Services, Inc. serves as the fund's dividend disbursing and
transfer agent. Franklin Templeton Services, Inc. performs certain
administrative functions for the fund. The fund's prospectus is available upon
request.
B-3
<PAGE>
FINANCIAL HIGHLIGHTS
(for a share outstanding throughout the periods indicated)
Shown below for the periods indicated are per share income and capital
changes for a fund share outstanding throughout the periods indicated ('per
share information').
<TABLE>
<CAPTION>
Year ended
December 31,
-------------------------------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net asset value, beginning of period..... $ 12.94 $ 15.40 $ 13.01 $ 13.42 $ 15.27 $ 8.86
---------- ---------- ---------- ---------- ---------- ----------
Income from investment operations:
Net investment income................... .17 .16 .16 .21 .14 0.04
Net realized and unrealized gain
(loss).................................. (2.57) (1.62) 2.75 (.18) (1.44) 6.55
---------- ---------- ---------- ---------- ---------- ----------
Total from investment operations...... (2.40) (1.46) 2.91 .03 (1.30) 6.59
---------- ---------- ---------- ---------- ---------- ----------
Distributions:
Dividends from net investment income.... (.19) (.16) (.17) (.20) (.12) (0.05)
Amount in excess of net investment
income................................ -- -- (.01) --
Distributions from net realized gains... (.05) (.53) (.34) (.24) (.43) (0.13)
Amount in excess of net realized
gains................................... -- (.31) -- -- -- --
Distributions from other sources........ -- -- -- -- -- --
---------- ---------- ---------- ---------- ---------- ----------
Total distributions................... (.24) (1.00) (.52) (.44) (.55) (0.18)
---------- ---------- ---------- ---------- ---------- ----------
Change in net asset value for period..... -- -- 2.39 (.41) (1.85) 6.41
---------- ---------- ---------- ---------- ---------- ----------
Net asset value, end of period........... $ 10.30 $ 12.94 $ 15.40 $ 13.01 $ 13.42 $ 15.27
---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ----------
Total Return*............................ (18.72)% (9.41)% 22.51% .36% (8.64)% 74.50%
Ratios/supplemental data
Net assets, end of period (000).......... $2,172,954 $3,444,029 $3,308,753 $2,147,664 $2,009,154 $1,396,392
Ratio of expenses to average net
assets.................................. 2.11% 1.96% 2.03% 2.10% 2.11% 2.20%
Ratio of expenses, including payments to
affiliate, to average net assets........ 2.11% 1.96% 2.03% 2.10% 2.11% 2.20%
Ratio of net investment income to average
net assets.............................. 1.40% 0.99% 1.16% 1.66% 1.08% 0.57%
Portfolio turnover rate.................. 37.51% 30.06% 12.47% 9.76% 18.57% 16.01%
<CAPTION>
October 17,
1991
(commencement
of operations)
to December 31,
1992 1991
-------- -----------------
<S> <C> <C>
Net asset value, beginning of period..... $ 10.02 $ 10.00
-------- -------
Income from investment operations:
Net investment income................... 0.08 0.01
Net realized and unrealized gain
(loss).................................. (1.06) 0.03
-------- -------
Total from investment operations...... (0.98) 0.04
-------- -------
Distributions:
Dividends from net investment income.... (0.07) (0.01)
Amount in excess of net investment
income................................
Distributions from net realized gains... (0.11) --
Amount in excess of net realized
gains................................... -- --
Distributions from other sources........ -- (0.01)
--------
Total distributions................... (0.18) (0.02)
-------- -------
Change in net asset value for period..... (1.16) 0.02
-------- -------
Net asset value, end of period........... $ 8.86 $ 10.02
-------- -------
-------- -------
Total Return*............................ (9.75)% 0.40%**
Ratios/supplemental data
Net assets, end of period (000).......... $180,189 $23,744
Ratio of expenses to average net
assets.................................. 2.52% 3.78%**
Ratio of expenses, including payments to
affiliate, to average net assets........ 2.25% 2.25%**
Ratio of net investment income to average
net assets.............................. 1.30% 0.86%**
Portfolio turnover rate.................. 21.98% --
</TABLE>
- ---------------
* Total return does not reflect sales commissions. Not annualized for
periods less than one year.
** Annualized.
Goal and Strategies
General. The fund may invest up to 100% of its total assets in developing
or emerging markets, including up to 5% of its total assets in Russian
securities. With respect to 75% of its total assets, the fund may invest up to
5% of its total assets in securities issued by any one company or foreign
government. The fund may invest any amount of its assets in U.S. government
securities. The fund may invest in any industry although it will not concentrate
(invest more than 25% of its total assets) in any one industry. For hedging
purposes only, the fund may buy and sell financial futures contracts, stock
index futures contracts, foreign currency futures contracts and options on any
of those instruments. The fund will generally have a portion of its assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, the fund may enter into repurchase agreements with
certain banks and broker-dealers.
Equity Securities. The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include convertible securities, warrants or rights.
Convertible securities typically are debt securities or preferred stocks which
are convertible into common stock after certain time periods or under certain
circumstances. Warrants or rights give the holder the right to purchase a common
stock at a given time for a specified price.
B-4
<PAGE>
Depositary Receipts. Depositary receipts are certificates that give their
holders the right to receive securities (a) of a foreign issuer deposited in a
U.S. bank or trust company (American Depositary Receipts, 'ADRs'); or (b) of a
foreign or U.S. issuer deposited in a foreign bank or trust company (Global
Depositary Receipts, 'GDRs' or European Depositary Receipts, 'EDRs').
Debt Securities. A debt security typically has a fixed payment schedule
which obligates the issuer to pay interest to the lender and to return the
lender's money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bonds, notes,
debentures and commercial paper differ in the length of the issuer's payment
schedule, with bonds carrying the longest repayment schedule and commercial
paper the shortest.
The market value of debt securities generally varies in response to changes
in interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value.
The fund may buy both rated and unrated debt securities. Independent rating
organizations rate debt securities based upon their assessment of the financial
soundness of the issuer. Generally, a lower rating indicates higher risk. The
fund may invest up to 35% of its total assets in debt securities which are rated
C or better by Moody's Investors Services, Inc. (Moody's) or Standard & Poor's
Corporation (S&P) or unrated debt which it determines to be of comparable
quality. At present, the fund does not intend to invest more than 5% of its
total assets in non-investment grade securities (rated lower than BBB by S&P or
Baa by Moody's).
The fund may, from time to time purchase defaulted debt securities if, in
the opinion of the manager, the issuer may resume interest payments in the near
future. As a fundamental policy, the fund will not invest more than 10% of its
total assets (at the time of purchase) in defaulted debt securities, which may
be illiquid.
Borrowing. The fund may borrow up to one-third of the value of its total
assets from banks to increase its holdings of portfolio securities. Under the
1940 Act, the fund is required to maintain continuous asset coverage of 300%
with respect to such borrowings and to sell (within three days) sufficient
portfolio holdings to restore such coverage if it should decline to less than
300% due to market fluctuations or otherwise, even if such liquidations of the
fund's holdings may be disadvantageous from an investment standpoint. Leveraging
by means of borrowing may exaggerate the effect of any increase or decrease in
the value of portfolio securities on the fund's net asset value, and money
borrowed will be subject to interest and other costs (which may include
commitment fees and/or the cost of maintaining minimum average balances) which
may or may not exceed the income received from the securities purchased with
borrowed funds.
Loans of portfolio securities. To generate additional income, the fund may
lend to qualified securities dealers or other institutional investors portfolio
securities with an aggregate market value of up to one-third of its total
assets. Such loans must be secured by collateral (consisting of any combination
of cash, U.S. Government securities or irrevocable letters of credit) in an
amount at least equal (on a daily marked-to-market basis) to the current market
value of the securities loaned. The fund retains all or a portion of the
interest received on investment of the cash collateral or receives a fee from
the borrower. The fund may terminate the loans at any time and obtain the return
of the securities loaned within five business days. The fund will continue to
receive any interest or dividends paid on the loaned securities and will
continue to retain any voting rights with respect to the securities. However, as
with other extensions of credit, there are risks of delay in recovery or even
loss or rights in collateral should the borrower fail.
Options on securities or indices. Although the fund has the authority to
write covered call and put options and purchase call and put options on
securities or stock indices that are traded on U.S. and foreign exchanges and in
the over-the-counter markets, it presently has no intention of entering into
such transactions.
An option on a security is a contract that gives the purchaser of the
option, in return for the premium paid, the right to buy a specified security
(in the case of a call option) or to sell a specified security (in the case of a
put option) from or to the writer of the option at a designated price during the
term of the option. An option on a securities index gives the purchaser of the
option, in return for the premium paid, the right to receive from the seller
cash equal to the difference between the closing price of the index and the
exercise price of the option.
The fund will limit the sale of options on its securities to 15% or less of
its total net assets. The fund may only buy options if the total premiums it
paid for such options is 5% or less of its total assets.
B-5
<PAGE>
The fund may write a call or put option to generate income only if the
option is 'covered.' A call option on a security written by the fund is
'covered' if the fund owns the underlying security covered by the call or has an
absolute and immediate right to acquire that security without additional cash
consideration (or for additional cash consideration held in a segregated account
by its custodian) upon conversion or exchange of other securities held in its
portfolio. A call option on a security is also 'covered' if the fund holds a
call on the same security and in the same principal amount as the call written
where the exercise price of the call held (1) is equal to or less than the
exercise price of the call written or (2) is greater than the exercise price of
the call written if the difference is maintained by the fund in cash or high
grade U.S. government securities in a segregated account with its custodian. A
put option on a security written by the fund is 'covered' if the fund maintains
cash or fixed income securities with a value equal to the exercise price in a
segregated account with its custodian, or else holds a put on the same security
and in the same principal amount as the put written where the exercise price of
the put held is equal to or greater than the exercise price of the put written.
The fund will cover call options on stock indices that it writes by owning
securities whose price changes, in the opinion of the manager, are expected to
be similar to those of the index, or in such other manner as may be in
accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. Nevertheless, where the fund covers a call
option on a stock index through ownership of securities, such securities may not
match the composition of the index. In that event, the fund will not be fully
covered and could be subject to risk of loss in the event of adverse changes in
the value of the index. The fund will cover put options on stock indices that it
writes by segregating assets equal to the option's exercise price, or in such
other manner as may be in accordance with the rules of the exchange on which the
option is traded and applicable laws and regulations.
The fund will receive a premium from writing a put or call option, which
increases the fund's gross income in the event the option expires unexercised or
is closed out at a profit. If the value of a security or an index on which the
fund has written a call option falls or remains the same, the fund will realize
a profit in the form of the premium received (less transaction costs) that could
offset all or a portion of any decline in the value of the portfolio securities
being hedged. If the value of the underlying security or index rises, however,
the fund will realize a loss in its call option position, which will reduce the
benefit of any unrealized appreciation in the fund's investments. By writing a
put option, the fund assumes the risk of a decline in the underlying security or
index. To the extent that the price changes of the portfolio securities being
hedged correlate with changes in the value of the underlying security or index,
writing covered put options on indices or securities will increase the fund's
losses in the event of a market decline, although such losses will be offset in
part by the premium received for writing the option.
The fund may also purchase put options to hedge its investments against a
decline in value. By purchasing a put option, the fund will seek to offset a
decline in the value of the portfolio securities being hedged through
appreciation of the put option. If the value of the fund's investments does not
decline as anticipated, or if the value of the option does not increase, the
fund's loss will be limited to the premium paid for the option plus related
transaction costs. The success of this strategy will depend, in part, on the
correlation between the changes in value of the underlying security or index and
the changes in value of the fund's security holdings being hedged.
The fund may purchase call options on individual securities to hedge against
an increase in the price of securities that the fund anticipates purchasing in
the future. Similarly, the fund may purchase call options on a securities index
to attempt to reduce the risk of missing a broad market advance, or an advance
in an industry or market segment, at a time when the fund holds uninvested cash
or short-term debt securities awaiting investment. When purchasing call options,
the fund will bear the risk of losing all or a portion of the premium paid if
the value of the underlying security or index does not rise.
There can be no assurance that a liquid market will exist when the fund
seeks to close out an option position. Trading could be interrupted, for
example, because of supply and demand imbalances arising from a lack of either
buyers or sellers, or the options exchange could suspend trading after the price
has risen or fallen more than the maximum specified by the exchange. Although
the fund may be able to offset to some extent any adverse effects of being
unable to liquidate an option position, the fund may experience losses in some
cases as a result of such inability.
Forward currency hedging transactions. To help protect its portfolio against
adverse changes in foreign currency exchange rates, the fund may (1) buy and
sell foreign currency at the prevailing rate in the foreign currency exchange
market; (2) enter into forward foreign currency contracts which are agreements
to buy or sell a specific currency at a set price on a future date (generally
within one year). The fund may only commit up to 20% of its total assets to
these
B-6
<PAGE>
contracts; and (3) buy and sell put and call options on foreign currencies. The
fund may also conduct its foreign currency exchange transactions on a spot (ie.,
cash) basis at the spot rate prevailing in the foreign currency exchange market.
The fund may enter into forward foreign currency exchange contracts
('forward contracts') to attempt to minimize the risk to the fund from adverse
changes in the relationship between the U.S. dollar and foreign currencies. A
forward contract is an obligation to purchase or sell a specific currency for an
agreed price at a future date which is individually negotiated and privately
traded by currency traders and their customers. The fund may enter into a
forward contract, for example, when it enters into a contract for the purchase
or sale of a security denominated in a foreign currency in order to 'lock in'
the U.S. dollar price of the security. In addition, for example, when the fund
believes that a foreign currency may suffer or enjoy a substantial movement
against another currency, it may enter into a forward contract to sell an amount
of the former foreign currency approximating the value of some or all of the
fund's portfolio securities denominated in such foreign currency. This second
investment practice is generally referred to as 'cross-hedging.' Because in
connection with the fund's forward foreign currency transactions an amount of
the fund's assets equal to the amount of the purchase will be held aside or
segregated to be used to pay for the commitment, the fund will always have cash,
cash equivalents or high quality debt securities available sufficient to cover
any commitments under these contracts or to limit any potential risk. In
addition, when the fund sells a forward contract, it will cover its obligation
under the contract by segregating cash, cash equivalents or high quality debt
securities, or by owning securities denominated in the corresponding currency
and with a market value equal to or greater than the fund's obligation. Assets
used as cover for forward contracts will be marked to market on a daily basis.
While these contracts are not presently regulated by the Commodity Futures
Trading Commission, it may in the future assert authority to regulate forward
contracts. In such event, the fund's ability to utilize forward contracts in the
manner set forth above may be restricted. Forward contracts may limit potential
gain from a positive change in the relationship between the U.S. dollar and
foreign currencies. Unanticipated changes in currency prices may result in
poorer overall performance for the fund than if it had not engaged in such
contracts.
The fund may purchase and write put and call options on foreign currencies
for the purpose of protecting against declines in the dollar value of foreign
portfolio securities and against increases in the dollar cost of foreign
securities to be acquired. As is the case with other kinds of options, however,
the writing of an option on foreign currency will constitute only a partial
hedge, up to the amount of the premium received, and the fund could be required
to purchase or sell foreign currencies at disadvantageous exchange rates,
thereby incurring losses. The purchase of an option on foreign currency may
constitute an effective hedge against fluctuation in exchange rates, although,
in the event of rate movements adverse to the fund's position, the fund may
forfeit the entire amount of the premium plus related transaction costs. Options
on foreign currencies to be written or purchased by the fund will be traded on
U.S. and foreign exchanges or over-the-counter.
The fund may enter into exchange-traded contracts for the purchase or sale
for future delivery of foreign currencies ('foreign currency futures'). This
investment technique will be used only to hedge against anticipated future
changes in exchange rates which otherwise might adversely affect the value of
the fund's portfolio securities or adversely affect the prices of securities
that the fund intends to purchase at a later date. The successful use of foreign
currency futures will usually depend on the manager's ability to forecast
currency exchange rate movements correctly. Should exchange rates move in an
unexpected manner, the fund may not achieve the anticipated benefits of foreign
currency futures or may realize losses.
Closed-End Investment Companies. To encourage indirect foreign investment in
their capital markets, some countries, including South Korea, Chile and India,
have permitted the creation of closed-end investment companies. The fund may
invest up to 10% of its total assets in securities of these companies. Shares of
certain closed-end investment companies may at times be acquired only at market
prices representing premiums to their net asset values. If the fund acquires
shares of closed-end investment companies, shareholders would bear both their
proportionate share of expenses of the fund (including management and advisory
fees) and, indirectly, the expenses of such closed-end investment companies.
Structured Investments. Included among the issuers of debt securities in
which the fund may invest are entities organized and operated solely for the
purpose of restructuring the investment characteristics of various securities.
These entities are typically organized by investment banking firms which receive
fees in connection with establishing each entity and arranging for the placement
of its securities. This type of restructuring involves the deposit with or
purchase by an entity, such as a corporation or trust, of specified instruments
and the issuance by that entity of one or more classes of securities
('structured investments') backed by, or representing interests in, the
underlying instruments. The cash flows
B-7
<PAGE>
on the underlying instruments may be apportioned among the newly issued
structured investments to create securities with different investment
characteristics such as varying maturities, payment priorities or interest rate
provisions; the extent of the payments made with respect to structured
investments is dependent on the extent of the cash flows on the underlying
instruments. Because structured investments of the type in which the fund
anticipates investing typically involve no credit enhancement, their credit risk
will generally be equivalent to that of the underlying instruments.
The fund is permitted to invest in a class of structured investments that is
either subordinated or unsubordinated to the right of payment of another class.
Subordinated structured investments typically have higher yields and present
greater risks than unsubordinated structured investments. Although the fund's
purchase of subordinated structured investments would have a similar economic
effect to that of borrowing against the underlying securities, the purchase will
not be deemed to be leveraged for purposes of the limitations placed on the
extent of the fund's assets that may be used for borrowing activities.
Certain issuers of structured investments may be deemed to be 'investment
companies' as defined in the 1940 Act. As a result, a fund's investment in these
structured investments may be limited by the restrictions contained in the 1940
Act. Structured investments are typically sold in private placement
transactions, and there currently is no active trading market for structured
investments. To the extent such investments are illiquid, they will be subject
to the fund's restrictions on investments in illiquid securities.
Futures Contracts. Although the fund has the authority to buy and sell
financial futures contracts, it presently has no intention of entering into such
transactions. Although some financial futures contracts call for making or
taking delivery of the underlying securities, in most cases these obligations
are closed out before the settlement date. The closing of a contractual
obligation is accomplished by purchasing or selling an identical offsetting
futures contract. Other financial futures contracts by their terms call for cash
settlements.
The fund may also buy and sell index futures contracts with respect to any
stock index traded on a recognized stock exchange or board of trade. An index
futures contract is a contract to buy or sell units of an index at a specified
future date at a price agreed upon when the contract is made. The stock index
futures contract specifies that no delivery of the actual stocks making up the
index will take place. Instead, settlement in cash must occur upon the
termination of the contract, with the settlement being the difference between
the contract price and the actual level of the stock index at the expiration of
the contract.
The fund may not commit more than 5% of its total assets to initial margin
deposits on futures contracts and related options. In addition, the value of the
securities on which the futures contracts are based will not exceed 25% of the
fund's total assets.
At the time the fund purchases a futures contract, an amount of cash, U.S.
government securities, or other highly liquid debt securities equal to the
market value of the futures contract will be deposited in a segregated account
with the fund's custodian. When writing a futures contract, the fund will
maintain with its custodian liquid assets that, when added to the amounts
deposited with a futures commission merchant or broker as margin, are equal to
the market value of the instruments underlying the contract. Alternatively, the
fund may 'cover' its position by owning the instruments underlying the contract
(or, in the case of an index futures contract, a portfolio with a volatility
substantially similar to that of the index on which the futures contract is
based), or holding a call option permitting the fund to purchase the same
futures contract at a price no higher than the price of the contract written by
the fund (or at a higher price if the difference is maintained in liquid assets
with the fund's custodian).
Repurchase agreements. The fund will generally have a portion of its assets
in cash or cash equivalents for a variety of reasons including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, the fund may enter into repurchase agreements with
certain banks and broker-dealers. Repurchase agreements are contracts under
which the buyer of a security simultaneously commits to resell the security to
the seller at an agreed-upon price and date. Under a repurchase agreement, the
seller is required to maintain the value of the securities subject to the
repurchase agreement at not less than their repurchase price. The manager will
monitor the value of such securities daily to determine that the value equals or
exceeds the repurchase price. Repurchase agreements may involve risks in the
event of default or insolvency of the seller, including possible delays or
restrictions upon the fund's ability to dispose of the underlying securities.
The fund will enter into repurchase agreements only with parties who meet
creditworthiness standards approved by the board of trustees, i.e., banks or
broker-dealers which have been determined by the manager to present no serious
risk of becoming involved in bankruptcy proceedings within the time frame
contemplated by the repurchase transaction.
B-8
<PAGE>
Temporary Investments. When the manager believes that the securities trading
markets or the economy are experiencing excessive volatility or a prolonged
general decline, or other adverse conditions exist, for example, it may invest
the fund's portfolio in a temporary defensive manner.
Under such circumstances, the fund may invest up to 100% of its assets in
money market securities denominated in the currency of any nation. These may
include:
- short-term (maturities of less than 12 months) and medium-term (maturities
up to 5 years) securities issued or guaranteed by the U.S. or a foreign
government, their agencies or instrumentalities;
- finance company and corporate commercial paper, and other short-term
corporate obligations, rated A by S&P or Prime-1 by Moody's or, if
unrated, determined to be of comparable quality;
- bank obligations (including CDs, time deposits and bankers' acceptances);
and
- repurchase agreements with banks and broker-dealers.
Investment restrictions. The fund has adopted the following investment
restrictions as fundamental policies. This means the approval by (i) more than
50% of the fund's outstanding shares or (ii) 67% or more of the fund's shares
present at a shareholder meeting if more than 50% of the fund's outstanding
shares are represented at the meeting in person or by proxy, whichever is less.
In accordance with these Restrictions, the fund will not:
1. Invest in real estate or mortgages on real estate (although the fund
may invest in marketable securities secured by real estate or interests
therein or issued by companies or investment trusts which invest in real
estate or interests therein); invest in interests (other than debentures or
equity stock interests) in oil, gas or other mineral exploration or
development programs; purchase or sell commodity contracts (except futures
contracts as described above); or invest in other open-end investment
companies except as permitted by the 1940 Act. As a non-fundamental policy,
the fund will not invest more than 10% of its assets in real estate
investment trusts. In addition, the fund has undertaken that (1) the fund
will invest in other open-end investment companies only (a) for short-term
investment of cash balances in money market funds, or (b) for investment in
securities in the portfolios of such other open-end investment companies,
direct investment in which is unavailable to the fund; and (2) the fund will
not pay an investment management fee with respect to any portion of its
portfolio comprising shares of other open-end investment companies.
2. Purchase or retain securities of any company in which trustees or
officers of the fund or of the manager, individually owning more than 1/2 of
1% of the securities of such company, in the aggregate own more than 5% of
the securities of such company.
3. Purchase any security (other than obligations of the U.S.
Government, its agencies and instrumentalities) if, as a result, as to 75%
of the fund's total assets (i) more than 5% of the fund's total assets would
be invested in securities of any single issuer, or (ii) the fund would then
own more than 10% of the voting securities of any single issuer. As a
non-fundamental policy, the fund will not invest in any company for the
purpose of exercising control or management.
4. Act as an underwriter; issue senior securities except as set forth
in investment restriction 6 below; or purchase on margin or sell short (but
the fund may make margin payments in connection with options on securities
or securities indices, foreign currencies, futures contracts and related
options, and forward contracts and related options).
5. Loan money, apart from the purchase of a portion of an issue of
publicly distributed bonds, debentures, notes and other evidences of
indebtedness, although the fund may enter into repurchase agreements and
lend its portfolio securities.
6. Borrow money, except that the fund may borrow money from banks in an
amount not exceeding 33 1/3% of the value of the fund's total assets
(including the amount borrowed), or pledge, mortgage or hypothecate its
assets for any purpose, except to secure borrowings and then only to an
extent not greater than 15% of the fund's total assets. Arrangements with
respect to margin for futures contracts, forward contracts and related
options are not deemed to be a pledge of assets.
B-9
<PAGE>
7. Invest more than 5% of the value of the fund's total assets in
securities of issuers, including their predecessors, which have been in
continuous operation less than three years.
8. Invest more than 5% of the fund's total assets in warrants, whether
or not listed on the New York Stock Exchange or the American Stock Exchange,
including no more than 2% of its total assets which may be invested in
warrants that are not listed on those exchanges. Warrants acquired by the
fund in units or attached to securities are not included in this
restriction.
9. Invest more than 25% of the fund's total assets in a single
industry.
10. Participate on a joint or a joint and several basis in any trading
account in securities except as permitted by the 1940 Act.
11. Invest more than 15% of the fund's total assets in securities of
foreign issuers that are not listed on a recognized United States or foreign
securities exchange, including no more than 10% of its total assets in
restricted securities, securities that are not readily marketable,
repurchase agreements having more than seven days to maturity, and
over-the-counter options purchased by the fund. Assets used as cover for
over-the-counter options written by the fund are considered not readily
marketable.
The fund may also be subject to investment limitations imposed by
foreign jurisdictions in which the fund sells its shares.
If a bankruptcy or other extraordinary event occurs concerning a
particular security the fund owns, the fund may receive stock, real estate,
or other investments that the fund would not, or could not, buy. If this
happens, the fund intends to sell the investment as soon as practicable
while maximizing the return to its shareholders.
If a percentage restriction is met at the time of investment, a later
increase or decrease in the percentage due to a change in the value or
liquidity of portfolio securities or the amount of assets will not be
considered a violation of any of the foregoing restrictions.
If the fund receives from an issuer of securities held by the fund
subscription rights to purchase securities of that issuer, and if the fund
exercises such subscription rights at a time when the fund's portfolio
holdings of securities of that issuer would otherwise exceed the limits set
forth in investment restrictions 3 or 9 above, it will not constitute a
violation if, prior to receipt of securities upon exercise of such rights,
and after announcement of such rights, the fund has sold at least as many
securities of the same class and value as it would receive on exercise of
such rights. The fund may borrow up to 5% of the value of its total assets
to meet redemptions and for other temporary purposes.
Net Asset Value of the Fund Shares
The net asset value per share is determined by dividing the net asset value
of the fund by the number of shares outstanding. The fund calculates the NAV per
share of each class each business day at the close of trading on the New York
Stock Exchange (normally 1:00 p.m. pacific time). The fund does not calculate
the NAV on days the New York Stock Exchange (NYSE) is closed for trading, which
include New Year's Day, Martin Luther King Jr. Day, Presidents' Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and
Christmas Day.
When determining its NAV, the fund values cash and receivables at their
realizable amounts, and records interest as accrued and dividends on the
ex-dividend date. If market quotations are readily available for portfolio
securities listed on a securities exchange or on the NASDAQ National Market
System, the fund values those securities at the last quoted sale price of the
day or, if there is no reported sale, within the range of the most recent quoted
bid and ask prices. The fund values over-the-counter portfolio securities within
the range of the most recent quoted bid and ask prices. If portfolio securities
trade both in the over-the-counter market and on a stock exchange, the fund
values them according to the broadest and most representative market as
determined by the manager. The fund values portfolio securities underlying
actively traded call options at their market price as determined above. The
current market value of any option the fund holds is its last sale price on the
relevant exchange before the fund values its assets. If there are no sales that
day or if the last sale price is outside the bid and ask prices, the fund values
options within the range of the current closing bid and ask prices if the fund
believes the valuation fairly reflects the contract's market value.
Trading in securities on European and Far Eastern securities exchanges and
over-the-counter markets is normally completed well before the close of business
of the NYSE on each day that the NYSE is open. Trading in European or Far
Eastern securities generally, or in a particular country or countries, may not
take place on every NYSE business day.
B-10
<PAGE>
Furthermore, trading takes place in various foreign markets on days that are not
business days for the NYSE and on which the fund's NAV is not calculated. Thus,
the calculation of the fund's NAV does not take place contemporaneously with the
determination of the prices of many of the portfolio securities used in the
calculation and, if events materially affecting the values of these foreign
securities occur, the securities will be valued at fair value as determined by
management and approved in good faith by the board.
Generally, trading in corporate bonds, U.S. government securities and money
market instruments is substantially completed each day at various times before
the close of the NYSE. The value of these securities used in computing the NAV
is determined as of such times. Occasionally, events affecting the values of
these securities may occur between the times at which they are determined and
the close of the NYSE that will not be reflected in the computation of the NAV.
If events materially affecting the values of these securities occur during this
period, the securities will be valued at their fair value as determined in good
faith by the board.
Other securities for which market quotations are readily available are
valued at the current market price, which may be obtained from a pricing
service, based on a variety of factors including recent trades, institutional
size trading in similar types of securities (considering yield, risk and
maturity) and/or developments related to specific issues. Securities and other
assets for which market prices are not readily available are valued at fair
value as determined following procedures approved by the board. With the
approval of the board, the fund may use a pricing service, bank or securities
dealer to perform any of the above described functions.
The Fund's Management
The Board. The fund's board of trustees oversees the management of the fund
and elects is officers. The officers are responsible for administering the
fund's day-to-day operations. The fund's board also monitors the fund to ensure
no material conflicts exist among share classes. While none is expected, the
board will act appropriately to resolve any material conflict that may arise.
Investment Manager. Asset Management Hong Kong manages the fund's assets and
makes its investment decisions. Asset Management Hong Kong also performs similar
services for other funds. It is wholly owned by Franklin Resources, Inc.
('Resources'), a publicly owned company engaged in the financial services
industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr.
are the principal shareholders of Resources. Together, Asset Management Hong
Kong and its affiliates manage over $227 billion in assets. The Templeton
organization has been investing globally since 1940. Asset Management Hong Kong
and its affiliates have offices in Argentina, Australia, Bahamas, Brazil, the
British Virgin Islands, Canada, China, Cyprus, France, Germany, Hong Kong,
India, Italy, Japan, Korea, Luxembourg, Mauritius, the Netherlands, Poland,
Russia, Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, Turkey,
United Kingdom and the U.S.
Portfolio Management. The fund's lead portfolio manager is Dr. J. Mark
Mobius, Managing Director of Templeton Asset Management Ltd. Dr. Mobius has been
a manager of the fund since 1991. He joined the Franklin Templeton Group in
1987.
The following individuals have secondary portfolio management
responsibilities. Tom Wu, Director of Templeton Asset Management Ltd. and H.
Allan Lam, Portfolio Manager of Templeton Asset Management Ltd. Mr. Wu has been
a manager of the fund since 1991. He joined the Franklin Templeton Group in
1987. Mr. Lam has been a manager of the fund since 1991. He joined the Franklin
Templeton Group in 1987.
Management Fees. During the fiscal year ended December 31, 1998, management
fees totaling 1.25% of the average daily net assets of the fund were paid to
Asset Management Hong Kong. Total expenses, including fees paid to Asset
Management Hong Kong, were 2.11% for Class A fund shares.
Portfolio Transactions. Asset Management Hong Kong tries to obtain the best
execution on all transactions. If Asset Management Hong Kong believes more than
one broker or dealer can provide the best execution, it may consider research
and related services and the sale of fund shares, as well as shares of other
funds in the Franklin Templeton Group of Funds, when selecting a broker or
dealer.
Administrative Services. Franklin Templeton Services, Inc. ('FT Services')
provides certain administrative services and facilities for the fund. During the
fiscal year ended December 31, 1998, administration fees totaling 0.09% of the
average daily net assets of the fund were paid to FT Services. These fees are
included in the amount of total expenses shown above.
B-11
<PAGE>
The Fund's Plan of Distribution
The fund, pursuant to Rule 12b-1 under the 1940 Act, has adopted a
Distribution Plan (the 'Plan') with respect to the fund shares. Under the plan,
the fund shall pay or may reimburse Distributors or others for the expenses of
activities that are primarily intended to sell fund shares. These expenses may
include, among others, distribution or service fees paid to securities dealers
or others who have executed a servicing agreement with the fund, Distributors or
its affiliates; a prorated portion of Distributors' overhead expenses; and the
expenses of printing prospectuses and reports used for sales purposes, and
preparing and distributing sales literature and advertisements.
The distribution and service (12b-1) fees charged to each class of shares of
the fund are based only on the fees attributable to that particular class.
Payment by the fund under the Class A plan may not exceed 0.35% per year of
Class A's average daily net assets, payable quarterly. Expenses not reimbursed
in any quarter may be reimbursed in future quarters or years. This includes
expenses not reimbursed because they exceeded the applicable limit under the
plan. The terms and provisions of the plan relating to required reports, term,
and approval are consistent with Rule 12b-1.
In no event shall the aggregate asset-backed sales charges, which include
payments made under each plan, plus any other payments deemed to be made
pursuant to a plan, exceed the amount permitted to be paid under the rules of
the National Association of Securities Dealers, Inc.
The plan has been approved in accordance with the provisions of Rule 12b-1.
The plan is renewable annually by a vote of the board, including a majority vote
of the board members who are not interested persons of the fund and who have no
direct or indirect financial interest in the operation of the plan, cast in
person at a meeting called for that purpose. It is also required that the
selection and nomination of such board members be done by the noninterested
members of the fund's board. The plan and any related agreement may be
terminated at any time, without penalty, by vote of a majority of the
noninterested board members on not more than 60 days' written notice, by
Distributors on not more than 60 days' written notice, by any act that
constitutes an assignment of the management agreement with the manager or by
vote of a majority of the outstanding shares of Class A. Distributors or any
dealer or other firm also may terminate their respective distribution or service
agreement at any time upon written notice.
The plan and any related agreements may not be amended to increase
materially the amount to be spent for distribution expenses without approval by
a majority of the outstanding shares of Class A, and all material amendments to
the plan or any related agreements shall be approved by a vote of the
noninterested board members, cast in person at a meeting called for the purpose
of voting on any such amendment. Distributors are required to report in writing
to the board at least quarterly on the amounts and purpose of any payment made
under the plan and any related agreements, as well as to furnish the board with
such other information as may reasonably be requested in order to enable the
board to make an informed determination of whether the plan should be continued.
For the fiscal year ended December 31, 1998, Distributors' eligible
expenditures for advertising, printing, and payments to underwriters and
broker-dealers pursuant to the plans and the amounts the fund paid Distributors
under the plans were:
<TABLE>
<CAPTION>
Distributors' Eligible Amount Paid
Expenses ($) by the Fund ($)
---------------------- ---------------
<S> <C> <C>
Class A 10,947,307 9,279,496
</TABLE>
Pursuant to an exemptive order issued by the Securities and Exchange Commission
the Sponsor has agreed to pay to the Trust the 12b-1 fees it receives from
Templeton Distributor with respect to the fund shares held by the Trust. Fund
shares held directly by an investor (other than the Trust) including fund shares
purchased pursuant to 'Reinvestment of Trust Distributions' will, however, be
subject to 12b-1 fees (see 'Reinvestment of Trust Distributions').
Risk of Investment in Units
The Securities and Exchange Commission has issued an exemptive order
pursuant to which fund shares will be deposited by the Sponsor in the Trust. In
the application for such order, the Sponsor has agreed to take certain steps to
ensure that the Trust's investment in fund shares is equitable to all parties
and particularly that the interests of the Unit Holders are protected.
Accordingly, any sales charges which would otherwise be applicable will be
waived on fund shares sold to the Trust, since the Sponsor is receiving the
sales charge on all Units sold. In addition, the Indenture requires the
B-12
<PAGE>
Trustee to vote all fund shares held in the Trust in the same manner and ratio
on all proposals as the vote of owners of fund shares not held by the Trust.
The fund's shares may appreciate or depreciate in value (or pay dividends)
depending on the full range of economic and market influences affecting the
securities in which the fund is invested and the success of the fund's
management in anticipating or taking advantage of such opportunities as may
occur. In addition, in the event of the inability of the manager to act and/or
claims or actions against the fund by regulatory agencies or other persons or
entities, the value of the fund shares may decline, thereby causing a decline in
the value of Units. Termination of the fund prior to the Termination Date of the
Trust may result in the termination of the Trust sooner than anticipated. Prior
to a purchase of Units, investors should determine that the aforementioned risks
and the other risks described elsewhere in this prospectus are consistent with
their investment objectives.
Fund Risk Factors
Foreign Securities. Investors should consider carefully the substantial
risks involved in securities of companies and governments of foreign nations,
which are in addition to the usual risks inherent in domestic investments. There
may be less publicly available information about foreign companies comparable to
the reports and ratings published about companies in the U.S. Foreign companies
are not generally subject to uniform accounting or financial reporting
standards, and auditing practices and requirements may not be comparable to
those applicable to U.S. companies. The fund, therefore, may encounter
difficulty in obtaining market quotations for purposes of valuing its portfolio
and calculating its net asset value. Foreign markets have substantially less
volume than the NYSE and securities of some foreign companies are less liquid
and more volatile than securities of comparable U.S. companies. Commission rates
in foreign countries, which are generally fixed rather than subject to
negotiation as in the U.S., are likely to be higher. In many foreign countries
there is less government supervision and regulation of stock exchanges, brokers
and listed companies than in the U.S.
Developing or emerging markets. Investments in companies domiciled in
developing countries may be subject to potentially higher risks than investments
in developed countries. These risks include (i) less social, political and
economic stability; (ii) the small current size of the markets for such
securities and the currently low or nonexistent volume of trading, which result
in a lack of liquidity and in greater price volatility; (iii) certain national
policies that may restrict the fund's investment opportunities, including
restrictions on investment in issuers or industries deemed sensitive to national
interests; (iv) foreign taxation; (v) the absence of developed legal structures
governing private or foreign investment or allowing for judicial redress for
injury to private property; (vi) the absence, until recently in many developing
countries, of a capital market structure or market-oriented economy; and (vii)
the possibility that recent favorable economic developments in some developing
countries may be slowed or reversed by unanticipated political or social events
in such countries.
In addition, many countries in which the fund may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some developing countries may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.
Investments in developing countries may involve risks of nationalization,
expropriation and confiscatory taxation. For example, the Communist governments
of a number of Eastern European countries expropriated large amounts of private
property in the past, in many cases without adequate compensation, and there can
be no assurance that such expropriation will not occur in the future. In the
event of such expropriation, the fund could lose a substantial portion of any
investments it has made in the affected countries. Further, no accounting
standards exist in certain developing countries. Finally, even though the
currencies of some developing countries, such as certain Eastern European
countries, may be convertible into U.S. dollars, the conversion rates may be
artificial to the actual market values and may be adverse to fund shareholders.
Russian securities. Investing in Russian companies involves a high degree of
risk and special considerations not typically associated with investing in the
U.S. securities markets, and should be considered highly speculative. Such risks
include, together with Russia's continuing political and economic instability
and the slow-paced development of its market economy, the following: (a) delays
in settling portfolio transactions and risk of loss arising out of Russia's
system
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of share registration and custody; (b) the risk that it may be impossible or
more difficult than in other countries to obtain and/or enforce a judgment; (c)
pervasiveness of corruption, insider trading, and crime in the Russian economic
system; (d) currency exchange rate volatility and the lack of available currency
hedging instruments; (e) higher rates of inflation (including the risk of social
unrest associated with periods of hyper-inflation); (f) controls on foreign
investment and local practices disfavoring foreign investors and limitations on
repatriation of invested capital, profits and dividends, and on the fund's
ability to exchange local currencies for U.S. dollars; (g) the risk that the
government of Russia or other executive or legislative bodies may decide not to
continue to support the economic reform programs implemented since the
dissolution of the Soviet Union and could follow radically different political
and/or economic policies to the detriment of investors, including
non-market-oriented policies such as the support of certain industries at the
expense of other sectors or investors, a return to the centrally planned economy
that existed prior to the dissolution of the Soviet Union, or the
nationalization of privatized enterprises; (h) the risks of investing in
securities with substantially less liquidity and in issuers having significantly
smaller market capitalizations, when compared to securities and issuers in more
developed markets; (i) the difficulties associated in obtaining accurate market
valuations of many Russian securities, based partly on the limited amount of
publicly available information; (j) the financial condition of Russian
companies, including large amounts of inter-company debt which may create a
payments crisis on a national scale; (k) dependency on exports and the
corresponding importance of international trade; (l) the risk that the Russian
tax system will not be reformed to prevent inconsistent, retroactive and/or
exorbitant taxation or, in the alternative, the risk that a reformed tax system
may result in the inconsistent and unpredictable enforcement of the new tax
laws; (m) possible difficulty in identifying a purchaser of securities held by
the fund due to the underdeveloped nature of the securities markets; (n) the
possibility that pending legislation could restrict the levels of foreign
investment in certain industries, thereby limiting the number of investment
opportunities in Russia; (o) the risk that pending legislation would confer to
Russian courts the exclusive jurisdiction to resolve disputes between foreign
investors and the Russian government, instead of bringing such disputes before
an internationally-accepted third-country arbitrator; and (p) the difficulty in
obtaining information about the financial condition of Russian issuers, in light
of the different disclosure and accounting standards applicable to Russian
companies.
There is little long-term historical data on Russian securities markets
because they are relatively new and a substantial proportion of securities
transactions in Russia are privately negotiated outside of stock exchanges.
Because of the recent formation of the securities markets as well as the
underdeveloped state of the banking and telecommunications systems, settlement,
clearing and registration of securities transactions are subject to significant
risks. Ownership of shares (except where shares are held through depositories
that meet the requirements of the 1940 Act) is defined according to entries in
the company's share register and normally evidenced by extracts from the
register or by formal share certificates. However, there is no central
registration system for shareholders and these services are carried out by the
companies themselves or by registrars located throughout Russia. These
registrars are not necessarily subject to effective state supervision nor are
they licensed with any governmental entity and it is possible for the fund to
lose its registration through fraud, negligence or even mere oversight. While
the fund will endeavor to ensure that its interest continues to be appropriately
recorded either itself or through a custodian or other agent inspecting the
share register and by obtaining extracts of share registers through regular
confirmations, these extracts have no legal enforceability and it is possible
that subsequent illegal amendment or other fraudulent act may deprive the fund
of its ownership rights or improperly dilute its interests. In addition, while
applicable Russian regulations impose liability on registrars for losses
resulting from their errors, it may be difficult for the fund to enforce any
rights it may have against the registrar or issuer of the securities in the
event of loss of share registration. Furthermore, although a Russian public
enterprise with more than 500 shareholders is required by law to contract out
the maintenance of its shareholder register to an independent entity that meets
certain criteria, in practice this regulation has not always been strictly
enforced. Because of this lack of independence, management of a company may be
able to exert considerable influence over who can purchase and sell the
company's shares by illegally instructing the registrar to refuse to record
transactions in the share register. In addition, so-called 'financial-industrial
groups' have emerged in recent years that seek to deter outside investors from
interfering in the management of companies they control. These practices may
prevent the fund from investing in the securities of certain Russian companies
deemed suitable by the manager. Further, this also could cause a delay in the
sale of Russian company securities by the fund if a potential purchaser is
deemed unsuitable, which may expose the fund to potential loss on the
investment.
Currency. The fund's management endeavors to buy and sell foreign currencies
on as favorable a basis as practicable. Some price spread on currency exchange
(to cover service charges) may be incurred, particularly when the fund changes
investments from one country to another or when proceeds of the sale of shares
in U.S. dollars are used for the purchase
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of securities in foreign countries. Also, some countries may adopt policies
which would prevent the fund from transferring cash out of the country or
withhold portions of interest and dividends at the source. There is the
possibility of cessation of trading on national exchanges, expropriation,
nationalization or confiscatory taxation, withholding and other foreign tax on
income or other amounts, foreign exchange controls (which may include suspension
of the ability to transfer currency from a given country), default in foreign
government securities, political or social instability, or diplomatic
developments that could affect investments in securities of issuers in those
nations.
The fund may be affected either unfavorably or favorably by fluctuations in
the relative rates of exchange between the currencies of different nations, by
exchange control regulations and by indigenous economic and political
developments. Some countries in which the fund may invest may also have fixed or
managed currencies that are not free-floating against the U.S. dollar. Further,
certain currencies may not be internationally traded.
Certain currencies have experienced a steady devaluation relative to the
U.S. dollar. Any devaluations in the currencies in which the fund's portfolio
securities are denominated may have a detrimental impact on the fund. Through
the fund's flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places the fund's investments.
The exercise of this flexible policy may include decisions to purchase
securities with substantial risk characteristics and other decisions such as
changing the emphasis on investments from one nation to another and from one
type of security to another. Some of these decisions may later prove profitable
and others may not. No assurance can be given that profits, if any, will exceed
losses.
Euro. On January 1, 1999, the European Monetary Union (EMU) introduced a new
single currency, the euro, which will replace the national currency for
participating member countries. The transition and the elimination of currency
risk among EMU countries may change the economic environment and behavior of
investors, particularly in European markets. While the implementation of the
euro could have a negative effect on the fund, the fund's manager and its
affiliated services providers are taking steps they believe are reasonably
designed to address the euro issue.
Interest rate. To the extent the fund invests in debt securities, changes in
interest rates in any country where the fund is invested will affect the value
of the fund's portfolio and, consequently, its share price. Rising interest
rates, which often occur during times of inflation or a growing economy, are
likely to cause the face value of a debt security to decrease, having a negative
effect on the value of the fund's shares. Of course, interest rates have
increased and decreased, sometimes very dramatically, in the past. These changes
are likely to occur again in the future at unpredictable times.
Low-Rated Securities. Bonds which are rated C by Moody's are the lowest
rated class of bonds, and issues so rated can be regarded as having extremely
poor prospects of ever attaining any real investment standing. Bonds rated C by
S&P are obligations on which no interest is being paid.
Although they may offer higher yields than do higher rated securities, low
rated and unrated debt securities generally involve greater volatility of price
and risk of principal and income, including the possibility of default by, or
bankruptcy of, the issuers of the securities. In addition, the markets in which
low rated and unrated debt securities are traded are more limited than those in
which higher rated securities are traded. The existence of limited markets for
particular securities may diminish the fund's ability to sell the securities at
fair value either to meet redemption requests or to respond to a specific
economic event such as a deterioration in the creditworthiness of the issuer.
Reduced secondary market liquidity for certain low rated or unrated debt
securities may also make it more difficult for the fund to obtain accurate
market quotations for the purposes of valuing the fund's portfolio. Market
quotations are generally available on many low rated or unrated securities only
from a limited number of dealers and may not necessarily represent firm bids of
such dealers or prices for actual sales.
Adverse publicity and investor perceptions, whether or not based on
fundamental analysis, may decrease the values and liquidity of low rated debt
securities, especially in a thinly traded market. Analysis of the
creditworthiness of issuers of low rated debt securities may be more complex
than for issuers of higher rated securities, and the ability of the fund to
achieve its investment goal may, to the extent of investment in low rated debt
securities, be more dependent upon such creditworthiness analysis than would be
the case if the fund were investing in higher rated securities.
Low rated debt securities may be more susceptible to real or perceived
adverse economic and competitive industry conditions than investment grade
securities. The prices of low rated debt securities have been found to be less
sensitive to interest rate changes than higher rated investments, but more
sensitive to adverse economic downturns or individual corporate developments. A
projection of an economic downturn or of a period of rising interest rates, for
example, could
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<PAGE>
cause a decline in low rated debt securities prices because the advent of a
recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, the fund may incur additional expenses to seek
recovery.
The purchase of defaulted debt securities involves significant additional
risks, such as the possibility of complete loss of the investment in the event
the issuer does not restructure or reorganize to enable it to resume paying
interest and principal to holders.
Derivative Securities. The fund's ability to reduce or eliminate its futures
and related options positions will depend upon the liquidity of the secondary
markets for such futures and options. The fund intends to purchase or sell
futures and related options only on exchanges or boards of trade where there
appears to be an active secondary market, but there is no assurance that a
liquid secondary market will exist for any particular contract or at any
particular time. Use of stock index futures and related options for hedging may
involve risks because of imperfect correlations between movements in the prices
of the futures or related options and movements in the prices of the securities
being hedged. Successful use of futures and related options by the fund for
hedging purposes also depends upon the manager's ability to predict correctly
movements in the direction of the market, as to which no assurance can be given.
The net asset value of the fund's shares, like the value of the Treasury
Obligations, will fluctuate over the life of the Trust and may be more or less
than the price paid therefor by the Trust. An investment in Units of the Trust
should be made with an understanding of the risks inherent in ownership of fund
shares. However, the Sponsor believes that, upon termination of the Trust on the
mandatory termination date, even if the fund shares are worthless, the Treasury
Obligations will provide sufficient cash at maturity to equal $20.00 per Unit.
Part of such cash will, however, represent the accrual of taxable original issue
discount on the Treasury Obligations.
A UNIT HOLDER PURCHASING A UNIT ON THE DATE OF THIS PROSPECTUS OR THEREAFTER
MAY RECEIVE TOTAL DISTRIBUTIONS, INCLUDING DISTRIBUTIONS MADE UPON TERMINATION
OF THE TRUST, THAT ARE LESS THAN THE AMOUNT PAID FOR A UNIT.
Sales of Securities in the Portfolio under certain permitted circumstances
may result in an accelerated termination of the Trust. It is also possible that,
in the absence of a secondary market for the Units or otherwise, redemptions of
Units may occur in sufficient numbers to reduce the portfolio to a size
resulting in such termination. In addition, the Trust may be terminated if the
net aggregate value of the Trust is less than 40% of the aggregate maturity
values of the Treasury Obligations calculated immediately after the most recent
deposit of Treasury Obligations in the Trust (see 'Amendment and
Termination--Termination'). Early termination of the Trust may have important
consequences to the Unit Holder; for example, to the extent that Units were
purchased with a view to an investment of longer duration, the overall
investment program of the investor may require readjustment; or the overall
return on investment may be less than anticipated, and may result in a loss to a
Unit Holder.
In the event of the early termination of the Trust, the Trustee will cause
the fund shares to be sold and the proceeds thereof distributed to the Unit
Holders in proportion to their respective interests therein, unless a Unit
Holder elects to receive fund shares 'in kind' (see 'Amendment and Termination
of the Indenture--Termination'). Proceeds from the sale of the Treasury
Obligations will be paid in cash.
The Trustee will have no power to vary the investments of the Trust, i.e.,
the Trustee will have no managerial power to take advantage of market variations
to improve a Unit Holder's investment but may dispose of Securities only under
limited circumstances (see 'Sponsor--Responsibility').
To the best of the Sponsor's knowledge there was no litigation pending as of
the Date of Deposit in respect of any Security which might reasonably be
expected to have a material adverse effect on the Trust. At any time after the
Date of Deposit, litigation may be instituted on a variety of grounds with
respect to the Securities. The Sponsor is unable to predict whether any such
litigation may be instituted, or if instituted, whether such litigation might
have a material adverse effect on the Trust.
The Units
On the Date of Deposit, each Unit represented a fractional undivided
interest in the Securities and the net income of the Trust set forth under
'Summary of Essential Information.' Thereafter, if any Units are redeemed by the
Trustee, the amount of Securities in the Trust will be reduced by amounts
allocable to redeemed Units, and the fractional undivided interest represented
by each Unit in the balance will be increased, although the actual interest in
the Trust represented by
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each Unit will remain unchanged. Units will remain outstanding until redeemed
upon tender to the Trustee by any Unit Holder (which may include the Sponsor) or
until the termination of the Trust itself (see 'Rights of Unit
Holders--Redemption' and 'Amendment and Termination of the
Indenture--Termination').
TAX STATUS OF THE TRUST
In the opinion of Messrs. Cahill Gordon & Reindel, counsel for the Sponsor,
under existing law:
The Trust is not an association taxable as a corporation for United
States federal income tax purposes and income of the Trust will be treated
as income of the Unit Holders in the manner set forth below. Each Unit
Holder will be considered the owner of a pro rata portion of each asset of
the Trust under the grantor trust rules of Sections 671-678 of the Internal
Revenue Code of 1986, as amended (the 'Code').
Each Unit Holder will be required to include in his gross income, as
determined for federal income tax purposes, original issue discount with
respect to his pro rata portion of the Treasury Obligations held by the
Trust at the same time and in the same manner as though the Unit Holder were
the direct owner of such pro rata portion. Each Unit Holder will be
considered to have received the distributions paid on his pro rata portion
of the fund shares held in the Trust (including such portion of such
distributions used to pay fees and expenses of the Trust) when such
distributions are received or deemed to be received by the Trust. An
individual Unit Holder who itemizes deductions will be entitled to an
itemized deduction for his pro rata share of fees and expenses paid by the
Trust as though such fees and expenses were paid directly by the Unit
Holder, but only to the extent that this amount together with the Unit
Holder's other miscellaneous deductions exceeds 2% of his adjusted gross
income. A corporate Unit Holder will not be subject to this 2% floor.
Each Unit Holder will have a taxable event when a Security is disposed
of (whether by sale, exchange, redemption, or payment at maturity) or when
the Unit Holder redeems or sells his Units. The total tax cost of each Unit
to a Unit Holder must be allocated among the assets held in the Trust in
proportion to the relative fair market values thereof on the date the Unit
Holder purchases his Units.
The tax basis of a Unit Holder with respect to his interest in a Treasury
Obligation will be increased by the amount of original issue discount thereon
properly included in the Unit Holder's gross income as determined for federal
income tax purposes.
The amount of gain recognized by a Unit Holder on a disposition of fund
shares or Treasury Obligations by the Trust will be equal to the difference
between such Unit Holder's pro rata portion of the gross proceeds realized by
the Trust on the disposition and the Unit Holder's tax basis in his pro rata
portion of the fund shares or Treasury Obligations disposed of, determined as
described in the preceding paragraphs. Any such gain recognized on a sale or
exchange and any such loss will be capital gain or loss, except that gain or
loss recognized by a financial institution with respect to a Treasury Obligation
or by a dealer with respect to fund shares or Treasury Obligations will be
ordinary income or loss. Any capital gain or loss arising from the disposition
of a Unit Holder's pro rata interest in a Security will be long-term capital
gain or loss if the Unit Holder has held his Units and the Trust has held the
Security for more than one year. A capital loss due to sale or redemption of a
Unit Holder's interest with respect to fund shares held in the Trust will be
treated as a long-term capital loss to the extent of any long-term capital gains
derived by the Unit Holder from such interest if the Unit Holder has held such
interest for six months or less. The holding period for this purpose will be
determined by applying the rules of Sections 246(c)(3) and (4) of the Code.
Capital gain of individuals, estates and trusts from Securities held for more
than 1 year is generally subject to a maximum nominal tax rate of 20%. Net
capital gain may result in a disallowance of itemized deductions and/or affect a
personal exemption phase-out.
If the Unit Holder sells or redeems a Unit for cash he is deemed thereby to
have disposed of his entire pro rata interest in all Trust assets represented by
the Unit and will have taxable gain or loss measured by the difference between
his per Unit tax basis for such assets, as described above, and the amount
realized.
Each Unit Holder's interest in each Treasury Obligation is treated as an
interest in an original issue discount obligation. The original issue discount
on each Treasury Obligation will be taxed as ordinary income for federal income
tax purposes and will be equal to the excess of the maturity value of the Unit
Holder's interest in the Treasury Obligation over its cost to the Unit Holder. A
Unit Holder will be required to include in gross income for each taxable year a
portion of this original issue discount and will be subject to income tax
thereon even though the income is not distributed. Original issue discount is
treated for federal income tax purposes as income earned under a constant
interest formula
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which takes into account the semi-annual compounding of accrued interest,
resulting in an increasing amount of original issue discount accruing in each
year.
A Unit Holder who is neither a citizen nor a resident of the United States
and is not a United States domestic corporation (a 'foreign Unit Holder') will
not generally be subject to United States federal income taxes, including
withholding taxes, on his pro rata share of the original issue discount on the
Treasury Obligations held in the Trust, any gain from the sale or other
disposition of his, her or its pro rata interest in a Treasury Obligation or
fund share held in the Trust, any undistributed gain retained by the fund and
designated by the fund to be taken into account by its shareholders or any
capital gain dividend received by the Trust from the fund, which original issue
discount is not effectively connected with the conduct by the foreign Unit
Holder of a trade or business within the United States and which gain is either
(I) not from sources within the United States or (II) not so effectively
connected, provided that:
(a) with respect to original issue discount (i) the Treasury Obligations
are in registered form and were issued after July 18, 1984, and (ii) the
foreign Unit Holder is not a controlled foreign corporation related (within
the meaning of Section 864(d)(4) of the Code) to The Prudential Insurance
Company of America;
(b) with respect to any U.S.-source capital gain, the foreign Unit
Holder (if an individual) is not present in the United States for 183 days
or more during his or her taxable year in which the gain was realized and so
certifies; and
(c) the foreign Unit Holder provides the required certifications
regarding (i) his, her or its status, (ii) in the case of U.S.-source
income, the fact that the original issue discount or gain is not effectively
connected with the conduct by the foreign Unit Holder of a trade or business
within the United States, and (iii) if determined to be required, the
controlled foreign corporation matter mentioned in clause (a)(ii) above.
Fund distributions paid to foreign Unit Holders either directly or through
the Trust and not constituting income effectively connected with the conduct of
a trade or business within the United States by the distributee will be subject
to United States federal withholding taxes at a 30% rate or a lesser rate
established by treaty unless the fund distribution is a capital gain dividend.
Foreign Unit Holders should consult their own tax counsel with respect to United
States tax consequences of ownership of Units.
Each Unit Holder (other than a foreign Unit Holder who has properly provided
the certifications described in the preceding paragraph) will be requested to
provide the Unit Holder's taxpayer identification number to the Trustee and to
certify that the Unit Holder has not been notified that payments to the Unit
Holder are subject to back-up withholding. If the taxpayer identification number
and an appropriate certification are not provided as required, a 31% back-up
withholding will apply.
The fund has elected to qualify for and intends to remain qualified for the
special tax treatment afforded regulated investment companies under the Code and
to meet applicable requirements with respect to its gross income,
diversification of holdings and distributions so that the fund (but not the
Trust Unit Holders) will be relieved of federal income tax on the amounts
distributed by the fund to the Trust. Such distributions may include taxable net
investment income, net capital gain and the unreinvested proceeds of sales of
securities held by the fund. It is also possible for the fund to retain net
capital gains for investment, in which event the fund will be subject to federal
income tax on the retained amount; but may, as a regulated investment company,
designate the retained amount as undistributed capital gains in a notice to
those persons who were its shareholders (including the Trust and thus its Unit
Holders) at the close of the fund's taxable year.
If the fund were to so retain any net capital gains for investment, its
shareholders (including Trust Unit Holders) (a) would be required to include in
gross income for tax purposes, as long-term capital gains, their proportionate
shares of the undistributed net capital gain of the fund, and (b) would be
deemed to have paid their proportionate shares of the tax paid by the fund on
the undistributed net capital gain so that the amount of tax deemed paid by each
such shareholder would be credited against the shareholder's United States
federal income tax liability and a refund could be claimed to the extent that
credits exceeded such liability. For United States federal income tax purposes,
the basis of shares of the fund owned by a shareholder of the fund (including a
Trust Unit Holder) would be increased by an amount equal to the difference
between the amount of undistributed capital gains required to be so included in
computing such fund shareholder's long-term capital gains and the tax deemed
paid on such undistributed capital gains by such shareholder in respect of such
shares.
Capital gain distributions, if any, made by the fund, as a regulated
investment company, are taxable as long-term capital gain, regardless of how
long the fund shareholder (including a Trust Unit Holder) has held the fund's
shares, and
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<PAGE>
are not eligible for the dividends received deduction available to corporations.
Other dividend distributions by the fund may, depending upon the circumstances,
be eligible for such dividends received deduction, in whole or in part.
Generally, dividends paid by the fund, as a regulated investment company,
are treated as received by the Trust, and thus its Unit Holders, in the taxable
year in which the distribution is made by the fund; however, any dividend
declared by the fund in October, November or December of any calendar year,
payable to shareholders of record on a specified date in such a month and
actually paid during January of the following year, will be treated as received
on December 31 of the preceding year.
Non-taxable fund distributions reduce the Unit Holder's tax cost basis with
respect to his interest in fund shares held by the Trust and are treated as a
gain from the sale of such interest if and to the extent that such distributions
exceed the tax cost basis of the Unit Holder with respect to his interest in
fund shares held by the Trust.
Income received by the fund may be subject to withholding and other taxes
imposed by foreign jurisdictions. In some instances, these taxes are limited by
treaty between the United States and the relevant foreign jurisdiction. Treaty
benefits may be available to the fund to the same extent as they would be to
individual U.S. shareholders. However, in some situations the fund will be
eligible for such benefits only if it can establish that a minimum specified
percentage of the capital of the fund is owned directly or indirectly by
individual residents or citizens of the United States.
If more than 50% of the value of the fund's total assets at the close of a
taxable year for which the fund qualifies as a regulated investment company
consists of stock or securities in foreign corporations and the fund so elects,
the fund will forego any claim to a deduction or credit for any foreign income
taxes paid or accrued during the taxable year by the fund but the amount of such
taxes will be allowed as an addition to the fund's dividends paid deduction for
such year. In such a case, each fund shareholder (including a Trust Unit Holder)
is required to include in gross income and treat as paid by him his
proportionate share of such taxes and to treat as gross income from sources
within the respective foreign countries the sum of his proportionate share of
such taxes and the portion of any dividend paid by the fund which represents
income derived from sources within foreign countries. The fund expects to
qualify for and intends to make this election.
Each fund shareholder (including a Trust Unit Holder) who is a citizen or
resident of the United States will be entitled either to (i) deduct the amount
of such foreign taxes (if in the case of a fund shareholder who is an
individual, he itemizes deductions), or (ii) subject to applicable limitations,
credit the amount of such taxes against the fund shareholder's United States
federal income tax liability. A fund shareholder (including a Trust Unit Holder)
who is a non-resident alien individual or which is a foreign corporation will be
entitled to a deduction or credit of the foreign tax only if the income received
from the fund is effectively connected with the conduct of a trade or business
within the United States. Fund shareholders should be aware that, for purposes
of computing applicable limitations on the foreign tax credit, dividends and
interest received by the fund in respect of securities of foreign issuers are
expected to give rise to foreign source income but that gains from the sale or
exchange of such securities will be treated as U.S. source income. Because
availability of the foreign tax credit and application of the foreign tax credit
limitation depend on the particular circumstances of each fund shareholder
(including a Trust Unit Holder), each Unit Holder should consult his own tax
adviser in this regard.
The Code places a floor of 2% of adjusted gross income on miscellaneous
itemized deductions, including investment expenses, of individuals (and estates
and trusts other than grantor trusts, to the extent provided in regulations).
The Code also directs the Secretary of the Treasury to issue regulations
prohibiting indirect deductions through a mutual fund or other pass-through
entity of amounts not allowable as a deduction under this rule if paid or
incurred directly by such an investor, but such regulations are not to apply to
indirect deductions through a 'publicly offered regulated investment company,'
which the fund is believed to be. The 2% floor rule will, however, apply in any
event to investment expenses of the Trust, as opposed to the fund, and affected
Unit Holders should aggregate such expenses with their other miscellaneous
deductions in applying the 2% rule.
The fund has filed its information returns as a 'publicly offered regulated
investment company.' The Trust cannot predict whether or not the fund will
qualify as a 'publicly offered regulated investment company' for 1999 or any
later year. The term 'publicly offered regulated investment company' is defined
as meaning a regulated investment company the shares of which are 'continuously
offered' or regularly traded on an established securities market or 'held by or
for no fewer than 500 persons at all times during the taxable year.'
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<PAGE>
In addition, under the Code, the allowable amount of certain itemized
deductions claimed by individual taxpayers, including investment expenses, is
subject to an overall limitation applicable to individual taxpayers with
adjusted gross income in excess of a $117,950 threshold amount ($58,975 for a
married taxpayer filing separately). The $117,950 (or $58,975) threshold amount
will be indexed for inflation after 1996. The overall limitation reduces the
otherwise allowable amount of the affected itemized deductions by the lesser of
(i) 3% of the adjusted gross income in excess of the threshold amount or (ii)
80% of the amount of the otherwise allowable affected itemized deductions. The
other limitations contained in the Code on the deduction of itemized expenses,
including the 2% floor described above, are applied prior to this overall
limitation.
The Code also imposes a 4% excise tax on untaxed undistributed income of
regulated investment companies. If the fund distributes in each calendar year an
amount equal to the sum of at least 98% of its ordinary income for such calendar
year and 98% of its capital gain net income for the 12 month period ended on
October 31 of each calendar year (or on December 31 if the fund qualifies to so
elect and does so) and distributes an amount equal to the 2% balances not later
than the close of the succeeding calendar year, the fund will not be subject to
this 4% excise tax. For purposes of this excise tax, any net long-term capital
gain in excess of net short-term capital loss retained by the fund for any
fiscal year ending on or before the close of the calendar year but designated as
undistributed capital gains taxable to shareholders as described above is
treated as if distributed to the fund's shareholders.
The fund may invest in passive foreign investment companies, various options
and futures contracts and hedging transactions and may be subject to foreign
currency fluctuations, all of which have unique federal income tax consequences.
Such investments and currency fluctuations may affect the character, timing and
amount of gain or ordinary income to be recognized by persons holding fund
shares.
Interest paid by a Unit Holder other than a corporation on indebtedness
properly allocable to Units will be deductible as investment interest to the
extent permitted by Section 163(d) of the Code.
As of the end of each calendar year, the Trustee will furnish to each Unit
Holder an annual statement containing information relating to the dividends
(including capital gain dividends) received or deemed received, rebated 12b-1
fees received from the Sponsor, discount accrued on the Securities, the gross
proceeds received by the Trust from the disposition of any Security (resulting
from redemption or payment at maturity of any Security or the sale by the Trust
of any Security), and the fees and expenses paid by the Trust.
The foregoing discussion relates only to United States federal income taxes.
Unit Holders may be subject to state, local or foreign taxation.
Investors should consult their tax counsel for advice with respect to their
own particular tax situations.
RETIREMENT PLANS
Units in the Trust may be suitable for purchase by Individual Retirement
Accounts, Keogh Plans, pension funds and other qualified retirement plans.
Investors considering participation in any such plan should review the laws
specifically related thereto and should consult their attorneys or tax advisers
with respect to the establishment and maintenance of any such plan.
PUBLIC OFFERING OF UNITS
Public Offering Price
The Public Offering Price of the Units will be computed by adding to the
aggregate bid side evaluation of the Treasury Obligations the aggregate net
asset value of fund shares in the Trust, dividing such sum by the number of
Units outstanding and then adding a sales charge of 5.25% of the Public Offering
Price (5.541% of the net amount invested). Money in the Income and Principal
Accounts other than money required to redeem previously tendered Units will be
added to the Public Offering Price.
The Public Offering Price on the date of this Prospectus or on any
subsequent date will vary from the Public Offering Price set forth in the
'Summary of Essential Information' in accordance with fluctuations in the value
of the Treasury Obligations and net asset value of the fund shares in the Trust.
B-20
<PAGE>
The Public Offering Price shall be determined for the Trust by the Evaluator
in the following manner: the aggregate value of the Units shall be determined on
the basis of the bid prices for the Treasury Obligations (determined by the
Evaluator) and the net asset value of the fund shares as determined by Templeton
Developing Markets Trust.
Public Distribution
Units acquired by the Sponsor in the secondary market referred to below may
be offered to the public by this Prospectus at the then current Public Offering
Price calculated daily.
The Sponsor intends to qualify Units in states selected by the Sponsor for
sale by the Sponsor and through dealers who are members of the National
Association of Securities Dealers, Inc. Sales to dealers will be made at prices
which include a concession of 68% per Unit, but subject to change from time to
time at the discretion of the Sponsor (such price does not include volume
purchase discounts, which are available only to non-dealer purchasers). The
Sponsor reserves the right to reject, in whole or in part, any order for the
purchase of Units.
A dealer will receive a concession of the sales charge per Unit as set forth
under Volume Discount herein. Sales by a dealer will be aggregated with the
dealer receiving the greatest concession level for all Units sold by such dealer
up to a maximum of 75% of the sales load.
Secondary Market
While not obligated to do so, it is the Sponsor's present intention to
maintain a secondary market for Units and to continuously offer to repurchase
Units from Unit Holders at the applicable Sponsor's Repurchase Price (see
'Summary of Essential Information'). The Sponsor's Repurchase Price is computed
by adding to the aggregate of the bid side evaluation of the Treasury
Obligations the net asset value of fund shares in the Trust, and cash on hand in
the Trust and dividends receivable on fund shares (other than cash deposited by
the Sponsor for the purchase of Securities) deducting therefrom amounts required
to redeem previously tendered Units and amounts required for distribution to
Unit Holders of record as of a date prior to the evaluation, accrued expenses of
the Trustee, Evaluator, and counsel, taxes and governmental charges, if any, and
any Reserve Account and then dividing the resulting sum by the number of Units
outstanding, as of the date of such computation. There is no sales charge
incurred when a Unit Holder sells Units back to the Sponsor. Any Units
repurchased by the Sponsor at the Sponsor's Repurchase Price may be reoffered to
the public by the Sponsor at the then current Public Offering Price. Any profit
or loss resulting from the resale of such Units will be for the account of the
Sponsor.
If the supply of Units exceeds demand (or for any other business reason),
the Sponsor may, at any time, occasionally, from time to time, or permanently,
discontinue the repurchase of Units of this Series at the Sponsor's Repurchase
Price, without notice. In such event, although under no obligation to do so, the
Sponsor may, as a service to Unit Holders, offer to repurchase Units at the
'Redemption Price,' a price based on the current bid prices for the Treasury
Obligations and the net asset value of the fund shares. Alternatively, Unit
Holders may redeem their Units through the Trustee.
Profit of Sponsor
The Sponsor receives a sales charge on the Units as indicated herein in the
chart below under 'Volume Discount.' Templeton Distributor will reimburse the
Sponsor for expenses incurred by the Sponsor in connection with the creation of
the Trust and the offering of units of the Trust in an amount not to exceed
$300,000. On the sale of Units to dealers, the Sponsor will retain the
difference between the dealer concession and the sales charge (see 'Public
Distribution').
The Sponsor may have also realized a profit (or sustained a loss) on the
deposit of the Treasury Obligations in the Trust representing the difference
between the cost of the Treasury Obligations to the Sponsor and the cost of the
Treasury Obligations to the Trust. The Sponsor will deposit all fund shares into
the Trust at net asset value. To the extent additional Units continue to be
issued and offered for sale to the public, the Sponsor may realize additional
profit (or sustain a loss) due to daily fluctuations in the offering prices of
the Treasury Obligations and in the net asset value of the fund shares in the
Trust and thus in the Public Offering Price of Units received by the Sponsor.
Cash, if any, received by the Sponsor from the Unit Holders prior to the
settlement date for purchase of Units or prior to the payment for Securities
upon their delivery may be used in the Sponsor's business to the extent
permitted by applicable regulations and may be of benefit to the Sponsor.
B-21
<PAGE>
The Sponsor may also realize profits (or sustain losses) while maintaining a
secondary market in the Units, in the amount of any difference between the
prices at which the Sponsor buys Units and the prices at which the Sponsor
resells such Units or the prices at which the Sponsor redeems such Units, as the
case may be.
Volume Discount
Although under no obligation to do so, the Sponsor intends to permit volume
purchasers of Units to purchase Units at a reduced sales charge. The Sponsor may
at any time upon prior notice to Unit Holders change the amount by which the
sales charge is reduced, or may discontinue the discount altogether.
The sales charges for the Trust in the primary and secondary market will be
reduced pursuant to the following graduated scale for sales to any person of at
least 1,667 Units.
<TABLE>
<CAPTION>
Sales Charge
Primary and Secondary Market
---------------------------------------
Percent of Public Percent of Net Dealer
Number of Units Offering Price Amount Invested Concession
- ------------------------------------------------------ ------------------ --------------- ----------
<S> <C> <C> <C>
Less than 1,667 Units................................. 5.25% 5.541% 65%
1,667-6,666 Units..................................... 5.00% 5.263% 65%
6,667-16,666 Units.................................... 4.50% 4.712% 70%
16,667-33,333 Units................................... 4.00% 4.167% 73%
33,334-66,666 Units................................... 3.00% 3.092% 75%
66,667 Units or more.................................. 2.00% 2.041% 75%
</TABLE>
The reduced sales charges as shown on the chart above will apply to such
purchases of Units in any fourteen-day period which qualify for the volume
discount by the same person, including a partnership or corporation, other than
a dealer, in the amounts stated herein, and for this purpose, purchases of Units
of this Trust will be aggregated with concurrent purchases of Units of any other
trust that may be offered by the Sponsor.
Units held in the name of the purchaser's spouse or in the name of a
purchaser's child under the age of 21 are deemed for the purposes hereof to be
registered in the name of the purchaser. The reduced sales charges are also
applicable to a trustee or other fiduciary, including a partnership or
corporation, purchasing Units for a single trust estate or single fiduciary
account.
Employee Discount
The Sponsor intends, at the discretion of the Sponsor, to permit employees
of Prudential Securities Incorporated and its subsidiaries and affiliates to
purchase Units of the Trust at a price based on the bid side evaluation of the
Treasury Obligations and the net asset value of fund shares in the Trust plus a
reduced sales charge of $5.00 per 100 Units, subject to a limit of 5% of the
Units.
EXCHANGE OPTION
Unit Holders may elect to exchange any or all of their Units of this Series
of the Government Securities Equity Trust for units of one or more of any other
series in the Prudential Securities Incorporated family of unit investment
trusts (except Series of Government Securities Equity Trust) or for any units of
any additional trusts that may from time to time be made available for such
exchange by the Sponsor (collectively referred to as the 'Exchange Trusts').
Such units may be acquired at prices based on reduced sales charges per unit.
The purpose of such reduced sales charge is to permit the Sponsor to pass on to
the Unit Holder who wishes to exchange Units the cost savings resulting from
such exchange of Units. The cost savings result from reductions in the time and
expense related to advice, financial planning and operational expense required
for the Exchange Option.
Exchange Trusts may have different investment objectives; a Unit Holder
should read the prospectus for the applicable Exchange Trust carefully to
determine its investment objective prior to exercise of this option.
This option will be available provided the Sponsor maintains a secondary
market in both the Units of this Series and units of the applicable Exchange
Trust and provided that units of the applicable Exchange Trust are available for
sale and are lawfully qualified for sale in the jurisdiction in which the Unit
Holder is a resident. While it is the Sponsor's present intention to maintain a
secondary market for the units of all such trusts, there is no obligation on its
part to do so.
B-22
<PAGE>
Therefore, there is no assurance that a market for units will in fact exist on
any given date on which a Unit Holder wishes to sell or exchange his Units; thus
there is no assurance that the Exchange Option will be available to any Unit
Holder. The Sponsor reserves the right to modify, suspend or terminate this
option at any time without further notice to Unit Holders. In the event the
Exchange Option is not available to a Unit Holder at the time he wishes to
exercise it, the Unit Holder will be immediately notified and no action will be
taken with respect to his Units without further instruction from the Unit
Holder.
To exercise the Exchange Option, a Unit Holder should notify the Sponsor of
his desire to exchange his Units for one or more units of the Exchange Trusts.
If units of the applicable outstanding series of the Exchange Trust are at that
time available for sale, the Unit Holder may select the series or group of
series for which he desires his Units to be exchanged. The Unit Holder will be
provided with a current prospectus or prospectuses relating to each series in
which he indicates interest.
Units of the Exchange Trust trading in the secondary market maintained by
the Sponsor, if so maintained, will be sold to the Unit Holder at a price equal
to the evaluation price per unit of the securities in that portfolio and the
applicable sales charge of $15 per unit of the Exchange Trust. The reduced sales
charge for units of any Exchange Trust acquired during the initial offering
period for such units will result in a price for such units equal to the
offering side evaluation per unit of the securities in the Exchange Trust's
portfolio plus accrued interest plus a reduced sales charge of $25 per Exchange
Trust unit. The reduced sales charge for a unit holder of an Exchange Trust
exchanging into this series of Government Securities Equity Trust will be $.23
per Unit for Units purchased in the secondary market and $.37 per Unit for Units
purchased during the initial offering period. Exchange transactions will be
effected only in whole units; thus, any proceeds not used to acquire whole units
will be paid to the exchanging Unit Holder unless the Unit Holder adds the
amount of cash necessary to purchase one additional whole Exchange Trust unit.
Owners of units of any registered unit investment trust, other than
Prudential Securities Incorporated sponsored trusts, which was initially offered
at a minimum applicable sales charge of 3.0% of the public offering price
exclusive of any applicable sales charge discounts, may elect to apply the cash
proceeds of sale or redemption of those units directly to acquire units of any
Exchange Trust trading in the secondary market at the reduced sales charge of
$20 per Unit, subject to the terms and conditions applicable to the Exchange
Option. To exercise this option, the owner should notify his retail broker. He
will be given a prospectus of each series in which he indicates interest, units
of which are available. The Sponsor reserves the right to modify, suspend or
terminate the option at any time without further notice, including the right to
increase the reduced sales charge applicable to this option (but not in excess
of $5 more per unit than the corresponding fee then charged for a unit of an
Exchange Trust which is being exchanged).
For example, assume that a Unit Holder, who has three units of a Trust with
a 4.25% sales charge and a current price of $1,100 per unit, sells his units and
exchanges the proceeds for units of a series of an Exchange Trust with a current
price of $950 per unit and an ordinary sales charge of 4.25%. The proceeds from
the Unit Holder's units will aggregate $3,300. Since only whole units of an
Exchange Trust may be purchased under the Exchange Option, the Holder would be
able to acquire four units in the Exchange Trust for a total cost of $3,860
($3,800 for units and $60 for the $15 per unit sales charge) by adding an extra
$560 in cash. Were the Unit Holder to acquire the same number of units at the
same time in the regular secondary market maintained by the Sponsor, the price
would be $3,968.68 [$3,800 for the units and $168.68 for the 4.25% sales charge
(4.439% of the net amount invested)].
Federal Income Tax Consequences
An exchange of Units pursuant to the Exchange Option will generally
constitute a 'taxable event' under the Code, i.e., a Unit Holder will recognize
gain or loss at the time of the exchange. However, an exchange of Units of this
Series of the Government Securities Equity Trust for units of any other series
of the Exchange Trusts which are grantor trusts for United States federal income
tax purposes will not constitute a taxable event to the extent that the
underlying securities in each trust do not differ materially in kind or extent.
Unit Holders are advised to consult their own tax advisors as to the tax
consequences of exchanging Units in their particular case. In particular, Unit
Holders who exchange Units of this Series of the Government Securities Equity
Trust for units of any other series of Exchange Trusts within 91 days of
acquisition of the Units should consult their tax advisors as to the possible
application of Section 852(f) of the Code to the exchange.
B-23
<PAGE>
REINVESTMENT OF TRUST DISTRIBUTIONS
Distributions by the Trust, if any, of dividend income received by the
Trust, 12b-1 fee amounts paid by the Sponsor, distributions of any net capital
gains received in respect of fund shares and proceeds of the sale of fund shares
not used to redeem Units will be made quarterly on or shortly after the
Quarterly Distribution Date to Unit Holders of record on the Quarterly Record
Date immediately preceding such Quarterly Distribution Date. A Unit Holder will
receive such amounts in cash unless such Unit Holder directs The Chase Manhattan
Bank, acting as distribution agent, to invest such amounts on behalf of the
participating Unit Holder in fund shares at such shares' net asset value, which
shares will be subject to 12b-1 expenses. Investment in fund shares is
conditioned upon their lawful qualification for sale in the jurisdiction in
which the Unit Holder resides. There can be no assurance, however, that such
qualification will be obtained.
The appropriate prospectus will be sent to the Unit Holder. A Unit Holder's
election to participate in a reinvestment program will apply to all Units of the
Trust owned by such Unit Holder. The Unit Holder should read the prospectus for
the reinvestment program carefully before deciding to participate.
EXPENSES AND CHARGES
Initial Expenses
All expenses and charges incurred prior to or in the establishment of the
Trust were incurred by the Sponsor and Templeton Distributor.
Fees
The Trustee will receive for its services under the Indenture an annual fee
in the amount set forth in the 'Summary of Essential Information.'
For each evaluation of the Treasury Obligations in the Trust, the Evaluator
shall receive a fee as set forth in the 'Summary of Essential Information.'
The Trustee's fees and the Evaluator's fees are payable quarterly on or
before each Distribution Date from the Income Account, to the extent funds are
available therein and thereafter from the Principal Account. Any of such fees
may be increased without approval of the Unit Holders in proportion to increases
under the classification 'All Services Less Rent' in the Consumer Price Index
published by the United States Department of Labor. The Trustee also receives
benefits to the extent that it holds funds on deposit in various non-interest
bearing accounts created under the Agreement.
Other Charges
The following additional charges are or may be incurred by the Trust as more
fully described in the Indenture: (a) fees of the Trustee for extraordinary
services, (b) expenses of the Trustee (including legal and auditing expenses)
and of counsel designated by the Sponsor, (c) various governmental charges, (d)
expenses and costs of any action taken by the Trustee to protect the Trust and
the rights and interests of the Unit Holders, (e) indemnification of the Trustee
for any loss, liability or expenses incurred by it in the administration of the
Trust without gross negligence, bad faith, willful misfeasance or willful
misconduct on its part or reckless disregard of its obligations and duties, (f)
indemnification of the Sponsor for any losses, liabilities and expenses incurred
in acting as Sponsor or Depositor under the Indenture without gross negligence,
bad faith, willful misfeasance or willful misconduct or reckless disregard of
its obligations and duties, (g) expenditures incurred in contacting Unit Holders
upon termination of the Trust and (h) to the extent then lawful, expenses
(including legal, auditing and printing expenses) of maintaining registration or
qualification of the Units and/or the Trust under Federal or State securities
laws subsequent to initial registration so long as the Sponsor is maintaining a
market for the Units. The accounts of the Trust will be audited not less
frequently than annually by independent public accountants selected by the
Sponsor. The cost of such audit will be an expense of the Trust.
The fees and expenses set forth herein are payable out of the Trust and when
paid by or owing to the Trustee are secured by a lien on the Trust. If the cash
dividend, capital gains distributions and 12b-1 fee payments made by the Sponsor
to the Trust are insufficient to provide for amounts payable by the Trust, the
Trustee has the power to sell fund shares (not Treasury Obligations) to pay such
amounts. To the extent fund shares are sold, the size of the Trust will be
B-24
<PAGE>
reduced and the proportions of the types of Securities will change. Such sales
might be required at a time when fund shares would not otherwise be sold and
might result in lower prices than might otherwise be realized. Moreover, due to
the minimum amount in which fund shares may be required to be sold, the proceeds
of such sales may exceed the amount necessary for the payment of such fees and
expenses. If the cash dividends, capital gains distributions and 12b-1 fee
payments made by the Sponsor to the Trust and proceeds of fund shares sold after
deducting the ordinary expenses are insufficient to pay the extraordinary
expenses of the Trust, the Trustee has the power to sell Treasury Obligations to
pay such extraordinary expenses.
B-25
<PAGE>
Government Securities Equity Trust Series 7
REINVESTMENT APPLICATION
I/We hereby authorize and direct The Chase Manhattan Bank to apply all
distributions that I/we have elected to be reinvested as a registered
unitholder(s) of a Government Securities Equity Trust Series towards the
purchase of additional shares of the Templeton Developing Markets Trust.
I/We hold Government Securities Equity Trust Series 7
(This Series can only reinvest into the Templeton Developing Markets Trust.)
The authorization shall continue in effect until written notice of revocation is
given by the certificate holder or his personal representatives.
Name(s) in Which Unit Trust is Registered
Social Security or Tax Identification Number
Signature DATE
Signature of Joint Tenant (if any) DATE
My/Our Brokerage Firm Is:
My/Our Account Number Is:
Forward application to: The Chase Manhattan Bank
P.O. Box 888--Cooper Station
New York, NY 10276
<PAGE>
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
RIGHTS OF UNIT HOLDERS
Certificates
Ownership of Units is evidenced by registered certificates executed by the
Trustee and the Sponsor. Certificates are transferable or interchangeable upon
presentation at the corporate trust office of the Trustee, properly endorsed or
accompanied by an instrument of transfer satisfactory to the Trustee and
executed by the Unit Holder or his authorized attorney, together with the
payment of $2.00, if required by the Trustee (not currently required), or such
other amount as may be determined by the Trustee and approved by the Sponsor,
and any other tax or governmental charge imposed upon the transfer of
Certificates. The Trustee will replace any mutilated, lost, stolen or destroyed
Certificate upon proper identification, satisfactory indemnity and payment of
charges incurred. Any mutilated Certificate must be presented to the Trustee
before any substitute Certificate will be issued.
Certain Limitations
The death or incapacity of any Unit Holder will not operate to terminate the
Trust nor entitle the legal representatives or heirs of such Unit Holder to
claim an accounting or to take any other action or proceeding in any court for a
partition or winding up of the Trust.
No Unit Holder shall have the right to vote except with respect to removal
of the Trustee or amendment and termination of the Trust as prescribed in the
Indenture (see 'Administration of the Trust--Amendment' and 'Administration of
the Trust--Termination'). Unit Holders shall have no right to control the
operation or administration of the Trust in any manner.
Distributions
The terms of the Treasury Obligations do not provide for periodic payment to
the holders thereof of the annual accrual of discount. To the extent that
dividends, distributions and/or 12b-1 fee payments from the Sponsor become
payable with respect to the fund shares held in the Trust, the Trustee will
collect such amounts as they become payable and credit such amounts to a
separate Income Account created pursuant to the Indenture. All other moneys
received by the Trustee with respect to the fund shares shall be credited to the
Principal Account. Quarterly distributions to each Unit Holder of record as of
the immediately preceding Quarterly Record Date will be made on the next
following Quarterly Distribution Date and shall consist of an amount
substantially equal to such Unit Holder's pro rata share of the distributable
cash balances in the Income Account and the Principal Account, if any, computed
as of the close of business on such Quarterly Record Date. No quarterly
distribution will be made if the amount available for distribution is less than
$2.50 per 100 Units, except that, no less than once a year, on a Quarterly
Distribution Date, the Trustee shall distribute the entire cash balances in the
Principal and Income Accounts. All funds collected or received will be held by
the Trustee in trust without interest to Unit Holders as part of the Trust until
required to be disbursed in accordance with the provisions of the Indenture.
Such funds will be segregated by separate recordation on the trust ledger of the
Trustee so long as such practice preserves a valid preference of Unit Holders
under the bankruptcy laws of the United States, or if such preference is not
preserved, the Trustee shall handle such funds in such other manner as shall
constitute the segregation and holding thereof in trust within the meaning of
the Investment Company Act of 1940, as the same may be from time to time
amended. To the extent permitted by the Indenture and applicable banking
regulations, such funds are available for use by the Trustee pursuant to normal
banking procedures.
The Trustee is authorized by the Indenture to withdraw from the Principal
Account to the extent funds are not sufficient in the Income Account such
amounts as it deems necessary to establish a reserve for any taxes or other
governmental charges that may be payable out of the Trust, which amounts will be
credited to a separate Reserve Account. If the Trustee determines that the
amount in the Reserve Account is greater than the amount necessary for payment
of any taxes or other governmental charges, it will promptly recredit the excess
to the Account from which it was withdrawn. In addition, the Trustee may
withdraw from the Income Account, to the extent available, that portion of the
Redemption Price which represents income.
The balance paid on any redemption, including income, if any, shall be
withdrawn from the Principal Account of the Trust to the extent that funds are
available. If such available balance is insufficient, the Trustee is empowered
to sell Securities in order to provide moneys for redemption of Units tendered
(see 'Rights of Unit Holders--Redemption').
B-26
<PAGE>
Reports and Records
With each distribution, the Trustee will furnish to the Unit Holders a
statement of the amount of dividends and other receipts, if any, distributed,
expressed in each case as a dollar amount per Unit.
Within a reasonable time after the end of each calendar year, the Trustee
will furnish to each person who was a Unit Holder of record at any time during
the calendar year a statement setting forth: (1) as to the Income Account:
dividends and other cash amounts received, deductions for payment of applicable
taxes and for fees and expenses of the Trust, redemptions of Units, and the
balance remaining after such distributions and deductions, expressed both as a
total dollar amount and as a dollar amount representing the pro rata share of
each Unit outstanding on the last business day of such calendar year; (2) as to
the Principal Account: the dates of disposition and identity of any Securities
and the net proceeds received therefrom, deductions for payments of applicable
taxes and for fees and expenses of the Trust and redemptions of Units, and the
balance remaining after such distributions and deductions, expressed both as a
total dollar amount and as a dollar amount representing the pro rata share of
each Unit outstanding on the last business day of such calendar year; (3) a list
of the Securities held and the number of Units outstanding on the last business
day of such calendar year; (4) the Redemption Price per Unit based upon the last
computation thereof made during such calendar year; (5) amounts actually
distributed during such calendar year from the Income Account and from the
Principal Account, separately stated, expressed both as total dollar amounts and
as dollar amounts representing the pro rata share of each Unit outstanding on
the last business day of such calendar year; and (6) an annual report of
original issue discount accrual.
The Trustee shall keep available for inspection by Unit Holders at all
reasonable times during usual business hours books of record and account of its
transactions as Trustee, including records of the names and addresses of Unit
Holders, a current list of Securities in the portfolio and a copy of the
Indenture.
Redemption
Tender of Units
Units may be tendered to the Trustee for redemption at its unit investment
trust office at 4 New York Plaza, New York, New York 10004, upon delivery of a
request for redemption and the Certificates for the Units requested to be
redeemed and payment of any relevant tax. At the present time there are no
specific taxes related to the redemption of the Units. No redemption fee will be
charged by the Sponsor or the Trustee. Units redeemed by the Trustee will be
cancelled.
Certificates for Units to be redeemed must be properly endorsed or
accompanied by a written instrument of transfer, although redemptions without
the necessity of Certificate presentation will be effected for record Unit
Holders for whom Certificates have not been issued. Unit Holders must sign
exactly as their name appears on the face of the Certificate with the signature
guaranteed by an officer of a national bank or trust company or by a member firm
of either the New York, Midwest or Pacific Stock Exchanges or other financial
institution acceptable to the Trustee, if any. In certain instances the Trustee
may require additional documents such as, but not limited to, trust instruments,
certificates of death, appointments as executor or administrator or certificates
of corporate authority.
Within seven calendar days following such tender, or if the seventh calendar
day is not a business day, on the first business day prior thereto, the Unit
Holder will be entitled to receive in cash an amount for each Unit tendered
equal to the Redemption Price per Unit computed as of the Evaluation Time set
forth in the 'Summary of Essential Information' on the date of tender (see
'Redemption--Computation of Redemption Price per Unit'). The 'date of tender' is
deemed to be the date on which Units are received by the Trustee, except that as
regards Units received after the Evaluation Time, the date of tender is the next
day on which such Exchange is open for trading, and such Units will be deemed to
have been tendered to the Trustee on such day for redemption at the Redemption
Price computed on that day.
There is no sales charge incurred when a Unit Holder tenders his Units to
the Trustee for redemption. All amounts paid on redemption representing income
will be withdrawn from the Income Account to the extent moneys are available;
all other amounts will be paid from the Principal Account. The Trustee is
required by the Indenture to sell fund shares and Treasury Obligations, to the
extent possible in the same ratio as the ratio of fund shares and Treasury
Obligations then held in the Trust, in order to provide moneys for redemption of
Units tendered. To the extent Securities are sold, the size of the Trust will be
reduced. Such sales could result in a loss to the Trust. The redemption of a
Unit for cash will constitute a taxable event for the Unit Holder under the Code
(see 'Tax Status of the Trust').
B-27
<PAGE>
Purchase by the Sponsor of Units Tendered for Redemption
The Indenture requires that the Trustee notify the Sponsor of any tender of
Units for redemption. So long as the Sponsor is maintaining a bid in the
secondary market, the Sponsor, prior to the close of business on the second
succeeding business day, may purchase any Units tendered to the Trustee for
redemption at the price so bid by making payment therefor to the Unit Holder in
an amount not less than the Redemption Price and not later than the day on which
the Units would otherwise have been redeemed by the Trustee, i.e., the Unit
Holder will receive the Redemption Price from the Sponsor within 7 days of the
date of tender (see 'Public Offering of Units--Secondary Market'). Units held by
the Sponsor may be tendered to the Trustee for redemption as any other Units.
The price of any Units resold by the Sponsor will be the Public Offering Price
determined in the manner provided in this Prospectus (see 'Public Offering of
Units--Public Offering Price'). Any profit resulting from the resale of such
Units will belong to the Sponsor, which likewise will bear any loss resulting
from a reduction in the offering or redemption price subsequent to its
acquisition of such Units (see 'Public Offering of Units--Profit of Sponsor').
Computation of Redemption Price per Unit
The Redemption Price per Unit is determined as of the Evaluation Time on the
date any such determination is made. The Redemption Price is each Unit's pro
rata share, determined by the Trustee, of the sum of:
(1) the aggregate bid side evaluation of the Treasury Obligations in the
Trust, as determined by the Evaluator, and the net asset value of the fund
shares in the Trust determined as of the Evaluation Time set forth in the
'Summary of Essential Information'; and
(2) cash on hand in the Trust and dividends receivable on fund shares
(other than cash deposited by the Sponsor for the purchase of Securities);
less amounts representing (a) accrued taxes and governmental charges payable out
of the Trust, (b) the accrued expenses of the Trust, (c) cash held with respect
to previously tendered Units or for distribution to Unit Holders of record as of
a date prior to the evaluation, and (d) any Reserve Account ('Redemption
Price').
The right of redemption may be suspended and payment of the Redemption Price
per Unit postponed for more than seven calendar days following a tender of Units
for redemption for any period during which the New York Stock Exchange is
closed, other than for weekend and holiday closing, or trading on that Exchange
is restricted or during which (as determined by the Securities and Exchange
Commission) an emergency exists as a result of which disposal or evaluation of
the Securities is not reasonably practicable, or for such other periods as the
Securities and Exchange Commission may by order permit. Neither the Trustee nor
the Sponsor is liable to any person or in any way for any loss or damage that
may result from any such suspension or postponement.
SPONSOR
Prudential Securities Incorporated is a Delaware corporation and is engaged
in the underwriting, securities and commodities brokerage business and is a
member of the New York Stock Exchange, Inc., other major securities exchanges
and commodity exchanges and the National Association of Securities Dealers, Inc.
Prudential Securities Incorporated, a wholly-owned subsidiary of Prudential
Securities Group Inc. and an indirect wholly-owned subsidiary of The Prudential
Insurance Company of America, is engaged in the investment advisory business.
Prudential Securities Incorporated has acted as principal underwriter and
managing underwriter of other investment companies. In addition to participating
as a member of various selling groups or as an agent of other investment
companies, Prudential Securities Incorporated executes orders on behalf of
investment companies for the purchase and sale of securities of such companies
and sells securities to such companies in its capacity as a broker or dealer in
securities.
Prudential Securities Incorporated is distributor for series of Prudential
Government Securities Trust, The BlackRock Government Income Trust, Command
Government Fund, Command Money Fund, Command Tax-Free Fund, Global Utility Fund,
Inc., Nicholas-Applegate Fund, Inc., 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., The Prudential Global Government Plus Fund, Inc., Prudential Global
Limited Maturity Fund, Inc., Prudential Global Natural Resources Fund, Inc., The
Global Total Return Fund, Inc., Prudential Government Income Fund, Prudential
High Yield Fund, Inc., Prudential Institutional Liquidity Portfolio, Inc.,
Prudential Intermediate Global Income Fund, Inc., Prudential Jennison Series
Fund, Inc., Prudential MoneyMart Assets,
B-28
<PAGE>
Inc., Prudential Mortgage Income Fund, Inc., Prudential Multi-Sector Fund, Inc.,
Prudential Municipal Bond Fund, Prudential Municipal Series Fund, Prudential
National Municipals Fund, Inc., Prudential Pacific Growth Fund, Inc., Prudential
Small Companies Fund, Inc., Prudential Special Money Market Fund, Inc.,
Prudential Structured Maturity Fund, Inc., Prudential Tax-Free Money Fund, Inc.,
Prudential Utility Fund, Inc., and Prudential World Fund, Inc.
Limitations on Liability
The Sponsor is liable for the performance of its obligations arising from
its responsibilities under the Indenture, but will be under no liability to Unit
Holders for taking any action or refraining from taking any action in good faith
or for errors in judgment and will not be responsible in any way for any
default, failure or defect in any Security or for depreciation or loss incurred
by reason of the sale of any Securities, except in cases of willful misfeasance,
bad faith, gross negligence or reckless disregard for its obligations and duties
(see 'Sponsor--Responsibility').
Responsibility
The Trust is not a managed registered investment company. Securities will
not be sold by the Trustee to take advantage of ordinary market fluctuations.
Although the Sponsor and Trustee do not presently intend to dispose of
Securities, the Indenture permits the Sponsor to direct the Trustee to dispose
of any Security in the Trust for the purpose of redeeming Units tendered for
redemption and to dispose of fund shares to pay Trust expenses.
The proceeds resulting from the disposition of any Security in the Trust
will be distributed as set forth under 'Rights of Unit Holders--Distributions'
to the extent such proceeds are not utilized for the purpose of redeeming Units
or paying Trust expenses.
Resignation
If at any time the Sponsor shall resign under the Indenture or shall fail to
perform or be incapable of performing its duties thereunder or shall become
bankrupt or its affairs are taken over by public authorities, the Indenture
directs the Trustee to either (1) appoint a successor Sponsor or Sponsors at
rates of compensation deemed reasonable by the Trustee not exceeding amounts
prescribed by the Securities and Exchange Commission, (2) act as Sponsor itself
without terminating the Trust or (3) terminate the Trust. The Trustee will
promptly notify Unit Holders of any such action.
TRUSTEE
The Trustee is The Chase Manhattan Bank, a New York Bank with its principal
executive office at 270 Park Avenue, New York, New York 10017 and its unit
investment trust office at 4 New York Plaza, New York, New York 10004. The
Trustee is subject to supervision by the Superintendent of Banks of the State of
New York, the Federal Deposit Insurance Corporation and the Board of Governors
of the Federal Reserve System. In connection with the storage and handling of
certain Securities deposited in the Trust, the Trustee may use the services of
The Depository Trust Company. These services may include safekeeping of the
Securities and coupon-clipping, computer book-entry transfer and institutional
delivery services. The Depository Trust Company is limited purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System and a clearing agency registered under the Securities
Exchange Act of 1934.
Limitations on Liability
The Trustee shall not be liable or responsible in any way for depreciation
or loss incurred by reason of the disposition of any moneys, Securities or
Certificates or in respect of any evaluation or for any action taken in good
faith reliance on prima facie properly executed documents except in cases of
willful misfeasance, bad faith, gross negligence or reckless disregard for its
obligations and duties. In addition, the Indenture provides that the Trustee
shall not be personally liable for any taxes or other governmental charges
imposed upon or in respect of the Trust which the Trustee may be required to pay
under current or future laws of the United States or any other taxing authority
having jurisdiction.
Responsibility
The Trustee shall not be liable for any default, failure or defect in any
Security or for any depreciation or loss by reason of any such sale of fund
shares or by reason of the failure of the Sponsor to give directions to the
Trustee.
B-29
<PAGE>
Additionally, the Trustee may sell Securities designated by the Sponsor, or
if not so directed, in its own discretion, for the purpose of redeeming Units
tendered for redemption. fund shares will be sold first unless the Sponsor is
able to sell Treasury Obligations and fund shares in the proportionate
relationship between the maturity values of the Treasury Obligations and the
number of fund shares.
Amounts received by the Trust upon the sale of any Security under the
conditions set forth above will be deposited in the Principal Account when
received and to the extent not used for the redemption of Units will be
distributable by the Trustee to Unit Holders of record on the Quarterly Record
Date next prior to a Quarterly Distribution Date.
For information relating to the responsibilities of the Trustee under the
Indenture, reference is also made to the material set forth under 'Rights of
Unit Holders' and 'Sponsor--Resignation.'
Resignation
By executing an instrument in writing and filing the same with the Sponsor,
the Trustee and any successor may resign. In such an event the Sponsor is
obligated to appoint a successor trustee as soon as possible. If the Trustee
becomes incapable of acting or becomes bankrupt or its affairs are taken over by
public authorities, the Sponsor may remove the Trustee and appoint a successor
as provided in the Indenture. The Sponsor may also remove the Trustee for any
other reason that the Sponsor determines to be in the best interest of the Unit
Holders. Such resignation or removal shall become effective upon the acceptance
of appointment by the successor trustee. If upon resignation of a trustee no
successor has been appointed and has accepted the appointment within thirty days
after notification, the retiring trustee may apply to a court of competent
jurisdiction for the appointment of a successor. The resignation or removal of a
trustee becomes effective only when the successor trustee accepts its
appointment as such or when a court of competent jurisdiction appoints a
successor trustee. A successor trustee has the same rights and duties as the
original trustee except to the extent, if any, that the Indenture is modified as
permitted by its terms.
EVALUATOR
The Evaluator is Kenny S&P Evaluation Services, a division of J.J. Kenny
Co., Inc., with main offices located at 65 Broadway, New York, New York 10006.
Limitations on Liability
The Trustee, Sponsor and Unit Holders may rely on any evaluation furnished
by the Evaluator and shall have no responsibility for the accuracy thereof.
Determinations by the Evaluator under the Indenture shall be made in good faith
upon the basis of the best information available to it; provided, however, that
the Evaluator shall be under no liability to the Trustee, Sponsor or Unit
Holders for errors in judgment. The Evaluator shall, however, be liable for its
own willful misfeasance, bad faith, gross negligence or reckless disregard of
its obligations and duties under the Indenture.
Responsibility
The Indenture requires the Evaluator to evaluate the Treasury Obligations on
the basis of their bid prices on the last business day of June and December in
each year, on the day on which any Unit is tendered for redemption and on any
other day such evaluation is desired by the Trustee or is requested by the
Sponsor. For information relating to the responsibility of the Evaluator to
evaluate the Treasury Obligations, see 'Public Offering of Units--Public
Offering Price.'
Resignation
The Evaluator may resign or may be removed by the Sponsor, and the Sponsor
is to use its best efforts to appoint a satisfactory successor. Such resignation
or removal shall become effective upon the acceptance of appointment by the
successor Evaluator. If upon resignation of the Evaluator no successor accepts
appointment within thirty days after notice of resignation, the Evaluator may
apply to a court of competent jurisdiction for the appointment of a successor.
B-30
<PAGE>
AMENDMENT AND TERMINATION OF THE INDENTURE
Amendment
The Indenture may be amended by the Trustee and the Sponsor without the
consent of Unit Holders (a) to cure any ambiguity or to correct or supplement
any provision thereof which may be defective or inconsistent, (b) to change any
provision thereof as may be required by the Securities and Exchange Commission
or any successor governmental agency, and (c) to make such other provisions as
shall not adversely affect the interest of the Unit Holders; provided that the
Indenture may also be amended by the Sponsor and the Trustee with the consent of
Unit Holders evidencing 51% of the Units at the time outstanding for the
purposes of adding any provisions to or changing in any manner or eliminating
any of the provisions of the Indenture or of modifying in any manner the rights
of Unit Holders. In no event shall the Indenture be amended so as to increase
the number of Units issuable thereunder except as the result of the additional
deposits of Securities, to permit the deposit of Securities after the Date of
Deposit except in accordance with the terms and conditions of the Indenture as
initially adopted, to permit any other acquisition of securities or other
property by the Trustee either in addition to or in substitution for any of the
Securities on hand in the Trust or to permit the Trustee to vary the investment
of the Unit Holders or to empower the Trustee to engage in business or to engage
in investment activities not specifically authorized in the Indenture as
originally adopted; or so as to adversely affect the characterization of the
Trust as a grantor trust for Federal income tax purposes. In the event of any
amendment, the Trustee is obligated to promptly notify all Unit Holders of the
substance of such amendment.
Termination
The Trust may be terminated at any time by the consent of the holders of 51%
of the Units or by the Trustee upon the direction of the Sponsor when the
aggregate net value of all Trust assets as shown by an evaluation made as
described under 'Evaluator--Responsibility' is less than 40% of the aggregate
maturity values of the Treasury Obligations deposited in the Trust on the Date
of Deposit and subsequent thereto calculated after the most recent deposit of
Treasury Obligations in the Trust or if there has been a material change in the
fund's objectives or if Replacement Treasury Obligations are not acquired.
However, in no event may the Trust continue beyond the Mandatory Termination
Date set forth under 'Summary of Essential Information.' In the event of
termination, written notice thereof will be sent by the Trustee to all Unit
Holders.
Within a reasonable period after termination, the Trustee will sell any
Securities remaining in the Trust (other than fund shares for which an in kind
distribution has been requested) and, after paying all expenses and charges
incurred by the Trust, will distribute to each Unit Holder, upon surrender for
cancellation of his Certificate for Units, his pro rata share of: (i) the amount
realized upon disposition of the fund shares unless the Unit Holder notifies the
Trustee in writing of his preference for distribution 'in kind,' (ii) the amount
realized upon the disposition or maturity of the Treasury Obligations and (iii)
any other assets of the Trust. A Unit Holder may invest the proceeds of the
Treasury Obligations in fund shares at such shares' net asset value, which shall
be subject to 12b-1 expenses. The sale of the Securities in the Trust upon
termination may result in a lower amount than might otherwise be realized if
such sale were not required at such time and, therefore, the amount realized by
a Unit Holder on termination may be less than the principal amount of Treasury
Obligations represented by the Units held by such Unit Holder.
Tax Impact of In Kind Distribution upon Termination
Under the position taken by the Internal Revenue Service in Revenue Ruling
90-7, a distribution by the Trustee to a Unit Holder (or to his agent) of his
pro rata share of the fund shares in kind upon termination of the Trust will not
be a taxable event to the Unit Holder. Such Unit Holder's basis for fund shares
so distributed (other than any fund shares purchased with his pro rata share of
the proceeds of Treasury Obligations) will be equal to his basis for the same
fund shares (previously represented by his Units) prior to such distribution and
his holding period for such fund shares will be the shorter of the period during
which he held his Units and the period for which the Securities were held in the
Trust. A Unit Holder will have a taxable gain or loss, which will be a capital
gain or loss except in the case of a dealer or a financial institution, when the
Unit Holder disposes of such Securities in a taxable transfer.
B-31
<PAGE>
LEGAL OPINIONS
The legality of the Units offered hereby has been passed upon by Messrs.
Cahill Gordon & Reindel, a partnership including a professional corporation, 80
Pine Street, New York, New York 10005, as special counsel for the Sponsor.
INDEPENDENT AUDITORS
The Statement of Financial Condition and Schedule of Portfolio Securities of
the Government Securities Equity Trust included in this Prospectus have been
audited by Deloitte & Touche LLP, certified public accountants, as stated in
their report appearing herein, and are included in reliance upon such report
given upon the authority of that firm as experts in accounting and auditing.
B-32
<PAGE>
- --------------------------------------------------------------------------------
No person is authorized to give any information or to make any
representations with respect to this investment company not contained in this
Prospectus; and any information or representation not contained herein must not
be relied upon as having been authorized. This Prospectus does not constitute an
offer to sell, or a solicitation of an offer to buy, securities in any state to
any person to whom it is not lawful to make such offer in such state.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
GOVERNMENT SECURITIES EQUITY TRUST
Series 7
Table of Contents
Page
-----
<S> <C>
Summary of Essential Information........................ A-vi
Independent Auditors' Report............................ A-1
Statement of Financial Condition........................ A-2
Schedule of Portfolio Securities........................ A-8
The Trust............................................... B-1
Trust Formation..................................... B-1
Securities Selection................................ B-2
Stripped U.S. Treasury Obligations.................. B-2
Templeton Developing Markets Trust.................. B-2
Goals and Strategies................................ B-4
Net Asset Value of the Fund Shares.................. B-10
The Fund's Management............................... B-11
The Fund's Plan of Distribution..................... B-12
Risk of Investment in Units......................... B-12
Fund Risk Factors................................... B-13
The Units........................................... B-16
Tax Status of the Trust................................. B-17
Retirement Plans........................................ B-20
Public Offering of Units................................ B-20
Public Offering Price............................... B-20
Public Distribution................................. B-21
Secondary Market.................................... B-21
Profit of Sponsor................................... B-21
Volume Discount..................................... B-22
Employee Discount................................... B-22
Exchange Option......................................... B-22
Federal Income Tax Consequences..................... B-23
Reinvestment of Trust Distributions..................... B-24
Expenses and Charges.................................... B-24
Initial Expenses.................................... B-24
Fees................................................ B-24
Other Charges....................................... B-24
Rights of Unit Holders.................................. B-26
Certificates........................................ B-26
Certain Limitations................................. B-26
Distributions....................................... B-26
Reports and Records................................. B-27
Redemption.......................................... B-27
Sponsor................................................. B-28
Limitations on Liability............................ B-29
Responsibility...................................... B-29
Resignation......................................... B-29
Trustee................................................. B-29
Limitations on Liability............................ B-29
Responsibility...................................... B-29
Resignation......................................... B-30
Evaluator............................................... B-30
Limitations on Liability............................ B-30
Responsibility...................................... B-30
Resignation......................................... B-30
Amendment and Termination of the Indenture.............. B-31
Amendment........................................... B-31
Termination......................................... B-31
Tax Impact of In Kind Distribution upon
Termination......................................... B-31
Legal Opinions.......................................... B-32
Independent Auditors.................................... B-32
</TABLE>
Sponsor
Prudential Securities Incorporated
One Seaport Plaza
199 Water Street
New York, New York 10292
Trustee
The Chase Manhattan Bank
270 Park Avenue
New York, New York 10017
Evaluator
Kenny S&P Evaluation Services
65 Broadway
New York, New York 10006
fund shares
Templeton Developing Markets Trust
700 Central Avenue
St. Petersburg, Florida 33701-3628
<PAGE>
This Post-Effective Amendment to the Registration Statement on
Form S-6 comprises the following papers and documents:
The facing sheet on Form S-6.
The Prospectus.
Signatures.
Consent of independent public accountants and consent of
evaluator; all other consents were previously filed.
The following Exhibits:
***Ex-3.(i) - Certificate of Incorporation of
Prudential Securities Incorporated
dated March 29, 1993.
*******Ex-3.(ii) - Revised By-Laws of Prudential
Securities Incorporated as amended
through September 28, 1998.
**Ex-4.a - Trust Indenture and Agreement dated
May 16, 1989.
*Ex-23 - Consent of Kenny S&P Evaluation
Services, a division of J.J. Kenny
Co., Inc. (as evaluator)
****Ex-24 - Powers of Attorney executed by a
majority of the Board of Directors of
Prudential Securities Incorporated.
Ex-99 - Information as to Officers and
Directors of Prudential Securities
Incorporated is incorporated by
reference to Schedules A and D of
Form BD filed by Prudential
Securities Incorporated pursuant to
Rules 15b-1 and 15b3-1 under the
Securities Exchange Act of 1934 (1934
Act File No. 8-16267).
*****Ex-99.2 - Affiliations of Sponsor with other
investment companies.
*****Ex-99.3 - Broker's Blanket Policies, Standard
Form No. 14 in the aggregate amount
of $62,500,000.
******Ex-99.4 - Investment Advisory Agreement.
____________________
* Filed herewith.
** Incorporated by reference to exhibit of same designation filed
with the Securities and Exchange Commission as an exhibit to
the Registration Statement under the Securities Act of 1933 of
II-1
<PAGE>
Government Securities Equity Trust Series 1, Registration
No. 33-25710.
*** Incorporated by reference to exhibit of same designation filed
with the Securities and Exchange Commission as an exhibit to
the Registration Statement under the Securities Act of 1933 of
Government Securities Equity Trust Series 5, Registration
No. 33-57992.
**** Incorporated by reference to exhibit of same designation filed
with the Securities and Exchange Commission as an exhibit to
the Registration Statement under the Securities Act of 1933 of
National Municipal Trust, Series 172, Registration No. 33-
54681, National Equity Trust, Top Ten Portfolio Series 3,
Registration No. 333-15919 and National Equity Trust, Low Five
Portfolio Series 17, Registration No. 333-44543.
***** Incorporated by reference to exhibit of same designation filed
with the Securities and Exchange Commission as an exhibit to
the Registration Statement under the Securities Act of 1933 of
Prudential Unit Trusts, Insured Tax-Exempt Series 1,
Registration No. 2-89263.
****** Incorporated by reference to exhibit of same designation filed
with the Securities and Exchange Commission as an exhibit to
the Registration Statement under the Securities Act of 1933 of
National Municipal Trust, Insured Series 43, Registration
No. 33-29314.
******* Incorporated by reference to exhibit of same designation filed
with the Securities and Exchange Commission as an exhibit to
the Registration Statement under the Securities Act of 1933 of
National Municipal Trust, Series 186, Registration No. 33-54697
and National Equity Trust, S&P 500 Strategy Trust Series 2,
Registration NO. 333-39521.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant, Government Securities Equity Trust Series 7 certifies that it
meets all of the requirements for effectiveness of this Registration
Statement pursuant to Rule 485(b) under the Securities Act of 1933 and
has duly caused this Registration Statement or amendment thereto to be
signed on its behalf by the undersigned thereunto duly authorized, in the
City of New York, and State of New York on the 28th day of July, 1999.
Government Securities Equity Trust Series 7
(Registrant)
By PRUDENTIAL SECURITIES INCORPORATED
(Depositor)
By the following persons,a who
constitute a majority of the
Board of Directors of Prudential
Securities Incorporated
A. Laurence Norton, Jr.
Leland B. Paton
Martin Pfinsgraff
Vincent T. Pica II
James D. Price
Hardwick Simmons
Lee B. Spencer, Jr.
By /s/ Kenneth Swankie
(Kenneth Swankie,
Senior Vice President,
Manager - Unit Investment
Trust Department, as
authorized signatory for
Prudential Securities
Incorporated and Attorney-
in-Fact for the persons
listed above)
* Pursuant to Powers of Attorney previously filed.
II-3
<PAGE>
CONSENT OF COUNSEL
The consent of counsel to the use of its name in the Prospectus
included in this Registration Statement is contained in its opinion filed
as Exhibit 5 to this Registration Statement.
II-4
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the use of our report, dated July 15, 1999, accompanying the
financial statements of the Government Securities Equity Trust Series 7
included herein, and to the reference to our Firm as experts under the
heading "Auditors" in the prospectus which is a part of this registration
statement.
DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
July 26, 1999
New York, New York
II-5
<PAGE>
Exhibit 23
Letterhead of Kenny S&P Evaluation Services
(a division of J.J. Kenny Co., Inc.)
July 28, 1999
Prudential Securities Incorporated
1 New York Plaza
New York, NY 10292
Re: Government Securities Equity Trust
Post-Effective Amendment No. 5
Government Securities Equity Trust Series 7
Gentlemen:
We have examined the post-effective Amendment to the
Registration Statement File No. 33-51937 for the above-captioned trust.
We hereby acknowledge that Kenny S&P Evaluation Services, a division of
J.J. Kenny Co., Inc. is currently acting as the evaluator for the trust.
We hereby consent to the use in the Registration Statement of the
references to Kenny S&P Evaluation Services, a division of J.J. Kenny
Co., Inc. as evaluator.
In addition, we hereby confirm that the ratings indicated in
the above-referenced Amendment to the Registration Statement for the
respective bonds comprising the Trust portfolio are the ratings currently
indicated in our KENNYBASE database as of the date of the evaluation
report.
You are hereby authorized to file a copy of this letter with
the Securities and Exchange Commission.
Sincerely,
Frank A. Ciccotto
Frank A. Ciccotto
Vice President
