(ICON)
Prudential
Distressed
Securities
Fund, Inc.
SEMI
ANNUAL
REPORT
May 31, 1996
(LOGO)
<PAGE>
Prudential Distressed Securities Fund, Inc.
Performance At A Glance.
Welcome to the Prudential Distressed Securities Fund, and to its first
report to shareholders. It's been a healthy time for the U.S. stock
market and for stock mutual funds. Stocks continued to rise this
spring, overcoming jitters caused by rising interest rates. Most
major stock market indexes hit new highs, although prices were
volatile. The Prudential Distressed Securities Fund produced good
returns during its initial months of operations.
<PAGE>
<TABLE>
Cumulative Total Returns1 As of 5/31/96
<CAPTION>
<C> <C>
Since Since
Inception2 Inception2
(Without Sales Charge) (With Sales Charge)
Class A 5.5% 0.8%
Class B 5.4 0.4
Class C 5.4 4.4
Lipper Capital
Appreciation Fund Avg3 8.7 N/A
</TABLE>
[/CAPTION]
past performance is not indicative of future results. Investment return
and principal value will fluctuate so that an investor's shares, when
redeemed, may be worth more or less than their original cost. Average
annual returns cannot be meaningfully calculated for this fund, because
it has been in existence less than a year.
1Source: Prudential Mutual Funds and Lipper Analytical Services. The
Fund charges a maximum front end sales load of 5% for Class A shares.
Class B shares are subject to a declining contingent deferred sales
charge (CDSC) of 5%, 4%, 3%, 2%, 1% and 1%, during the first six years.
Class C shares are subject to a 1-year contingent deferred sales charge
of 1%. Class B shares will automatically convert to Class A shares on a
quarterly basis, approximately seven years after purchase.
2Inception dates: 3/26/96 Class A, B and C shares.
3These are the average returns of 218 funds in Lipper's capital
appreciation fund category since inception of the Class A, B and
C shares.
How Investments Compared.
(As of 5/31/96)
(CHART)
Source: Lipper Analytical Services. Financial markets change, so a
mutual fund's past performance should never be used to predict future
results. The risks to each of the investments listed above are
different -- we provide 12-month total returns for several Lipper
mutual fund categories to show you that reaching for higher yields
means tolerating more risk. The greater the risk, the larger the
potential reward or loss. In addition, we've included historical
20-year average annual returns. These returns assume the reinvestment
of dividends.
U.S. Growth Funds will fluctuate a great deal. Investors have received
higher historical total returns from stocks than from most other
investments. Smaller capitalization stocks offer greater potential
for long-term growth but may be more volatile than larger
capitalization stocks.
General Bond Funds provide more income than stock funds, which can
help smooth out their total returns year by year. But their prices
still fluctuate (sometimes significantly) and their returns have
been historically lower than those of stock funds.
General Municipal Debt Funds invest in bonds issued by state
governments, state agencies and/or municipalities. This investment
provides income that is usually exempt from federal and state
income taxes.
Money Market Funds attempt to preserve a constant share value;
they don't fluctuate much in price but, historically, their returns
have been generally among the lowest of the major investment categories.
<PAGE>
Leigh R. Goehring and George Edwards, Fund Managers (PICTURE)
(PICTURE)
Portfolio
Managers' Report
Welcome to the Prudential Distressed Securities Fund, and to its
first report to shareholders. It's been a healthy time for the U.S.
stock market and for stock mutual funds. Stocks continued to rise
this spring, overcoming jitters caused by rising interest rates.
Most major stock market indexes hit new highs, although prices were
volatile. The Prudential Distressed Securities Fund produced good
returns during its initial months of operations.
Strategy Session.
Our strategy is to buy the stocks and bonds of financially troubled
companies that we believe offer good prospects for a turnaround
because of changing economic conditions, new management or corporate
restructuring. When we were first investing the Fund in March, we
decided to hold one third of assets each in stocks, bonds, and cash.
As of May 31, 1996, we held 26% of total net assets in stocks and 45%
in bonds.
We use a value investment style to identify companies that are not
well known, or are temporarily out of favor, or whose assets are
worth more than their securities. To find them, we have access to
extensive resources -- including a team of credit analysts. We
use our specialized knowledge of troubled securities to evaluate
the underlying assets of these companies. This can help the Fund
buy stocks and bonds at attractive prices.
These are the types of securities we like to buy:
- -- Bonds of bankrupt companies. In many bankruptcies, bonds
are replaced by newly-issued securities (often equity) with
potentially greater value.
- -- Underpriced stocks and bonds of solvent but troubled
companies. These include high-yield junk bonds of companies
that are out of favor or in financial difficulty but are not
expected to default.
- -- Securities issued by companies emerging from bankruptcy.
Industry Breakdown.
Expressed as a percentage of
total net assets as of 5/31/96.
(CHART)
Understanding Risk.
The Fund invests in bonds as well as stocks. On May 31, 1996, 32%
of the Fund's total net assets were invested in bonds that are
below investment grade or not rated. These bonds are commonly
know as "junk bonds" and are subject to greater risk of
loss of principal and interest than higher rated bonds. This
figure includes defaulted securities, which comprised about 30%
of assets. The Fund may also invest in foreign securities, which
are subject to special risks of currency fluctuations and
social, political and economic change. On May 31, 1996, only 2%
of assets were invested in non-U.S. bonds.
<PAGE>
What We Bought And...
We Bought Retail
At Wholesale.
Retail has been our single largest industry since the Fund opened in
March (we held about 23% of total net assets on May 31, 1996). The
industry has been in a classically stressed condition over the last
year. There seemed to be too many stores, then consumers slowed down
their spending, and as a result there were several highly publicized
bankruptcies.
With the industry in turmoil, investors became increasingly nervous
and pessimistic, driving securities prices down. In recent months,
consumer spending seems to have revived, and most retailers have
generated improved sales (on a same-store basis), dispelling some
of the gloom and boosting the prices of many retailers' securities.
The Fund owns Bradlees and K-Mart, because we believe their assets
are worth more than the value of their securities. We also own
Charming Shoppes (women's clothes), J. Baker (shoes), The Bombay
Company (furniture); and Lechters (housewares).
An Interest In Energy.
The Fund has also focused on several other industries, including
energy, where the rising prices of oil and natural gas have improved
the financial position of most exploration and production companies.
The Fund has also invested in casino gaming securities, which have
enjoyed growing popularity across the country. The Fund owns energy
companies Grant Geophysical and Gerrity Oil & Gas and casino operators
Argosy Gaming and Lady Luck.
Not Daunted
By Defaults.
The Fund owns several securities that were in default when we bought
them. Usually the issuers are in discussions with their creditors
in an attempt to reorganize their businesses, and will ultimately
issue a package of securities in exchange for existing bonds or stock.
Sometimes the package can be very attractive. For example, we own
7-Up/RC Bottling bonds. The company has negotiated a reorganization
package with its creditors. If approved by the court, bond holders
will receive most of the proceeds from the sale
of its Puerto Rican bottling operation and equity in the remaining
southern California bottling facilities.
Five Largest Holdings.
4.4% Grant Geophysical
Convertible Preferred Stock
3.9% Talley Industries
Convertible Preferred Stock
3.4% Hemmeter Enterprises
Senior Notes
3.4% Charming Shoppes
Common Stock
3.2% J. Baker
Common Stock/Corporate Bond
Expressed as a percentage of total net
assets as of 5/31/96.
Turn the
page for a
closer
look ...
Looking Ahead.
Economic growth clearly accelerated this spring, lifting our
stocks and helping performance in general. But this growth has
created uncertainty for the bond market, driving yields higher
and bond prices lower. Today's higher interest rates could
drive tomorrow's corporate costs higher, perhaps overwhelming the
advantage of higher sales that faster economic growth might bring.
We expect interest rates will remain relatively stable and economic
growth should be moderate. Those are favorable conditions for
distressed securities.
1
<PAGE>
A Closer Look At Our Five Largest Holdings.
Grant Geophysical, 4.4%
Convertible Preferred Stock
This company collects and analyzes seismic data for oil and gas
exploration drilling purposes. It has not paid a dividend in five
years, but we believe higher oil and gas prices and improving
profitability make it an attractive takeover candidate.
Talley Industries, 3.9%
Convertible Preferred Stock
This pioneer in the airbag industry made an unprofitable foray
into real estate and suspended its dividend five years ago. Talley
continues to realign its mix of businesses, reducing its dependence
on the defense industry and strengthening and diversifying its
product lines. We believe that restructuring will benefit the
company's shares.
Hemmeter Enterprises, 3.4%
Senior Notes
This casino operator has sold its Louisiana riverboat since filing
for reorganization under Chapter 11 of the federal bank-ruptcy code,
allowing it to concentrate on its remaining facilities in Colorado,
which have been renamed Colorado Gaming. The company should begin
to show solid improvement as management focuses on its two Colorado
casinos, rather than attempting to develop a nationwide empire.
Charming Shoppes, 3.4%
Common Stock
This women's apparel retailer was beaten down in 1995 by weak
consumer spending and a change in buying habits. This year, it
has benefited from a change in management, corporate restructuring
and a change in merchandising strategy. The company's
first quarter results were above analysts' expectations, although
they were still negative. It closed 78 stores and opened two new
ones from February to April.
J. Baker, 3.2%
Common Stock/Corporate Bond
This clothing and footwear retailer was hurt by weak consumer
spending that set back many retailers in 1995. As a result, it
liquidated its 357-store unprofitable Fayva shoe chain last year.
As part of its corporate restructuring and attempt to
return to profitability, it is also attempting to sell its Shoe
Corporation of America division, which operates footwear departments
under leases in 500 specialty and department stores.
All holdings are expressed as a percentage of total net
assets as of 5/31/96.
2
<PAGE>
President's Letter July 1, 1996
(PICTURE)
Dear Shareholder:
Last year, U.S. stocks and bonds generally posted extraordinary returns.
Investors celebrated this performance by putting record amounts of new
money into mutual funds in the first few months of 1996. According to
figures released by the Investment Company Institute, a mutual fund
industry trade group, new investments in mutual funds reached an
all-time monthly high of $33 billion in January of 1996. An additional
$66 billion was invested in the following three months.
While we are pleased that mutual funds are attracting new investors,
we're concerned that some of them may be "buying last year's
returns." Few expect 1995's virtual non-stop returns from the
stock and bond markets. In fact, 1996's markets have been
volatile so far (stock and bond prices go down just as they go
up). There's no better time than now to be talking with your Financial
Advisor or Registered Representative. She or he can help you
determine reasonable expectations about both the
potential performance and risks associated with your investments.
Board of Directors Election.
Late this summer, we'll be sending you a notice about a special
shareholder meeting to elect new Prudential mutual fund boards
of directors. Your Board of Directors has approved a proposal to
place a common board of experienced directors across many
of Prudential's mutual funds to improve business efficiency. The
materials you'll receive this summer will contain more complete
information about this proposal.
Changes at Prudential.
Finally, there have been some important changes recently at Prudential
that were made with you in mind. Prudential Mutual Funds has moved
under the umbrella of Prudential's newly created "Money Management
Group." This group manages and administers nearly $190 billion in
client assets and provides mutual funds, annuities, defined benefit
and defined contribution plans to our individual and institutional
investors. We plan to improve the range and quality of investment
products and services that we can provide you by better leveraging
Prudential's strengths. There will, however, be no change in the
service you receive from your Financial Advisor, Registered
Representative or our Customer Service unit.
We're excited about our future and hope that you are, too. Thank
you for your continued support and confidence in Prudential Mutual Funds.
Sincerely,
Richard A. Redeker
President
3
<PAGE>
Portfolio of Investments as of PRUDENTIAL DISTRESSED
May 31, 1996 (Unaudited) SECURITIES FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--70.5%
COMMON STOCKS--25.8%
Energy--1.9%
35,000 Great Bay Power Corp.* $ 262,500
- ------------------------------------------------------------
Engineering--3.5%
20,000 EMCOR Group, Inc.* 326,250
16,000 Washington Construction Group* 166,000
-------------
492,250
- ------------------------------------------------------------
Entertainment--1.4%
25,000 Argosy Gaming Co.* 196,875
- ------------------------------------------------------------
Industrials--1.8%
20,000 Walter Industries, Inc.* 257,500
- ------------------------------------------------------------
Metals--1.3%
100,000 Ladish Company, Inc.* 175,000
- ------------------------------------------------------------
Mining--2.1%
25,000 Nord Resources Corp.* 150,000
100,000 Sunshine Mining & Refining Co.* 150,000
-------------
300,000
- ------------------------------------------------------------
Retail--13.8%
12,000 Baker (J.), Inc. 115,500
60,000 Charming Shoppes, Inc.* 480,000
50,000 Gantos Inc.* 343,750
22,000 Hills Stores Co.* 266,750
20,000 Phar-Mor, Inc.* 162,500
40,000 The Bombay Company, Inc.* 310,000
35,000 Venture Stores, Inc.* 253,750
-------------
1,932,250
-------------
Total common stocks
(cost $3,277,573) 3,616,375
-------------
PREFERRED STOCKS--15.0%
- ------------------------------------------------------------
Drugs & Health Care--2.1%
10,131 Fox Meyer Corp.,
Ser. A, Exch. $4.20 $ 295,065
- ------------------------------------------------------------
Industrials--8.8%
29,500 Grant Geophysical Inc.,
Conv. Exch., $2.4375 612,125
800 Pantry Pride Inc.,
Exch., $14.875, Ser. B 80,000
28,888 Talley Industries Inc.,
Conv., Ser B, $1.00 543,600
-------------
1,235,725
- ------------------------------------------------------------
Oil & Gas--3.1%
35,000 Gerrity Oil & Gas Corp.,
Conv. Exch., $1.50, Ser. PVT, ADS 433,125
- ------------------------------------------------------------
Retail--1.0%
3,018 Loehmann's Holdings, Inc.,
Ser. A, $0.056, PIK 1,358
5,000 Venture Stores, Inc.,
Conv. $3.25 132,500
-------------
133,858
-------------
Total preferred stocks
(cost $1,932,064) 2,097,773
-------------
WARRANTS*--0.0%
- ------------------------------------------------------------
Engineering--0.0%
960 ICF Kaiser International, Inc.,
Expiring December, 1998 0
-------------
- --------------------------------------------------------------------------------
- ----- 4 See Notes to Financial Statements.
<PAGE>
Portfolio of Investments as of PRUDENTIAL DISTRESSED
May 31, 1996 (Unaudited) SECURITIES FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
CORPORATE BONDS--29.7%
- ------------------------------------------------------------
Consumer Goods & Services--5.8%
Caa $ 250 Fresh Del Monte Produce
N.V. (Netherlands
Antilies),
Sr. Notes,
10.00%, 5/1/03 $ 235,000
B3 250 Grand Union Co.,
12.00%, 9/1/04 235,000
Caa 500 Seven Up/RC Bottling Co.
of Southern California
Inc.,*D
Sr. Notes,
11.50%, 8/1/99 340,000
--------------
810,000
- ------------------------------------------------------------
Engineering--2.7%
B3 200 ICF Kaiser International,
Inc.,
Sr. Sub. Notes,
13.00%, 12/31/03 189,000
B3 250 Wickes Lumber Co.,
Sr. Sub. Notes,
11.625%, 12/15/03 191,250
--------------
380,250
- ------------------------------------------------------------
Entertainment--5.2%
NR 1,000 Hemmeter Enterprises
Inc.,*D
Sr. Notes,
12.00%, 12/15/00 480,000
B3 250 Lady Luck Gaming Corp.,
11.875%, 3/1/01 247,500
--------------
727,500
- ------------------------------------------------------------
Financial Services--1.6%
NR 615 Olympia & York Maiden
Lane,D
10.375%, 12/31/95 227,550
- ------------------------------------------------------------
Industrials--1.8%
Ca 250 Haynes International,
Inc.,
Sr. Sub. Deb.,
13.50%, 8/15/99 250,000
Retail--8.6%
B3 $ 400 Baker (J.) Inc.,
7.00%, 6/1/02 $ 334,000
Caa 750 Bradlees, Inc.,*D
Sr. Sub. Notes,
11.00%, 8/1/02 120,000
311 Edison Brothers Trd
Claims,
Zero Coupon, 1/1/49 192,974
Ba3 250 K-Mart Corp.,
7.95%, 2/1/23 195,000
NR 500 Lechters Inc.,
Conv. Bond,
5.00%, 9/27/01 355,000
--------------
1,196,974
- ------------------------------------------------------------
Technology--1.8%
Caa 350 Audiovox Corp.,
Conv. Sub. Deb.,
6.25%, 3/15/01 255,500
- ------------------------------------------------------------
Telecommunications--2.2%
B3 500 Nextel Communications,
Inc.,
Sr. Notes,
Zero Coupon, 8/15/04 303,750
--------------
Total corporate bonds
(cost $4,022,938) 4,151,524
--------------
Total long-term
investments
(cost $9,232,575) 9,865,672
--------------
SHORT-TERM INVESTMENTS--28.4%
REPURCHASE AGREEMENT--28.4%
3,964 Joint Repurchase Agreement Account,
5.317%, 6/3/96 (Note 5)
(cost $3,964,000) 3,964,000
- ------------------------------------------------------------
Total Investments--98.9%
(cost $13,196,575; Note 4) 13,829,672
Other assets in excess of
liabilities--1.1% 158,655
--------------
Net Assets--100% $ 13,988,327
--------------
--------------
- ---------------
* Non-income producing security.
D In default.
ADS--American Depository Shares.
NR--Not Rated by Moody's or Standard & Poor's
PIK--Paid in Kind.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5 -----
<PAGE>
Statement of Assets and PRUDENTIAL DISTRESSED
Liabilities (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S>
<C>
Assets
May 31, 1996
Investments, at value (cost
$13,196,575).................................................................
.... $13,829,672
Receivable for Fund shares
sold.........................................................................
..... 110,552
Dividends and interest
receivable...................................................................
......... 97,857
Due from
Manager......................................................................
....................... 43,484
Deferred organization and offering costs (Note
1)............................................................ 225,152
------------
Total
assets.......................................................................
....................... 14,306,717
------------
Liabilities
Deferred organization and offering costs payable (Note
1).................................................... 224,371
Accrued
expenses.....................................................................
........................ 43,990
Payable for investments
purchased....................................................................
........ 31,305
Payable for Fund shares
reacquired...................................................................
........ 10,126
Due to
Distributor..................................................................
......................... 8,598
------------
Total
liabilities..................................................................
....................... 318,390
------------
Net
Assets.......................................................................
............................ $13,988,327
------------
------------
Net assets were comprised of:
Common stock, at
par..........................................................................
............ $ 1,062
Paid-in capital in excess of
par..........................................................................
13,275,165
------------
13,276,227
Undistributed net investment
income.......................................................................
9,175
Accumulated net realized gain on
investments..............................................................
69,828
Net unrealized appreciation on
investments................................................................
633,097
------------
Net assets, May 31,
1996.........................................................................
............ $13,988,327
------------
------------
Class A:
Net asset value and redemption price per share
($4,844,637 / 367,375 shares of common stock issued and
outstanding)................................... $13.19
Maximum sales charge (5% of offering
price)...............................................................
.69
------------
Maximum offering price to
public..........................................................................
$13.88
------------
------------
Class B:
Net asset value, offering price and redemption price per share
($7,324,132 / 556,161 shares of common stock issued and
outstanding)................................... $13.17
------------
------------
Class C:
Net asset value, offering price and redemption price per share
($1,819,558 / 138,170 shares of common stock issued and
outstanding)................................... $13.17
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
- ----- 6 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Operations (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
March 26, 1996(a)
Through
Net Investment Income May 31, 1996
<S> <C>
Income
Interest............................... $ 105,231
Dividends.............................. 8,458
--------
113,689
--------
Expenses
Management fee......................... 18,300
Distribution fee--Class A.............. 2,116
Distribution fee--Class B.............. 12,777
Distribution fee--Class C.............. 3,161
Custodian's fees and expenses.......... 31,300
Amortization of deferred organizational
and offering costs.................. 25,328
Transfer agent's fees and expenses..... 21,200
Reports to shareholders................ 13,400
Registration fees...................... 12,700
Trustees' fees and expenses............ 9,800
Legal fees and expenses................ 8,000
Audit fees and expenses................ 6,700
Miscellaneous.......................... 1,515
--------
Total expenses...................... 166,297
Less: expense reimbursement (Note 2)... (61,783)
--------
Net expenses........................ 104,514
--------
Net investment income..................... 9,175
--------
Realized and Unrealized
Gain on Investments
Net realized gain on investment
transactions........................... 69,829
Net change in unrealized appreciation on
investments............................ 633,097
--------
Net gain on investments................... 702,926
--------
Net Increase in Net Assets
Resulting from Operations................. $ 712,101
--------
--------
</TABLE>
- ---------------
(a) Commencement of investment operations.
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Changes in Net Assets (Unaudited)
<TABLE>
<CAPTION>
March 26, 1996(a)
Increase Through
in Net Assets May 31, 1996
<S> <C>
Operations
Net investment income................... $ 9,175
Net realized gain on investment......... 69,829
Net change in unrealized appreciation of
investments.......................... 633,097
-----------------
Net increase in net assets resulting
from operations...................... 712,101
-----------------
Fund share transactions
Net proceeds from shares subscribed..... 13,743,282
Cost of shares reacquired............... (567,056)
-----------------
Net increase in net assets from Fund
share transactions................... 13,176,226
-----------------
Total increase............................. 13,888,327
Net Assets
Beginning of period........................ 100,000
-----------------
End of period.............................. $13,988,327
-----------------
-----------------
- ---------------
(a) Commencement of investment operations.
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7 -----
<PAGE>
PRUDENTIAL DISTRESSED
Notes to Financial Statements (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
Prudential Distressed Securities Fund, Inc. (the ``Fund''), is registered under
the Investment Company Act of 1940, as a diversified, open-end management
company. The Fund was incorporated in Maryland on November 30, 1995. The Fund
had no significant operations other than the issuance of 2,667 shares of Class
A, 2667 shares of Class B and 2,666 shares of Class C common stock for $100,000
on February 8, 1996 to Prudential Mutual Fund Management, Inc. (``PMF'').
Investment operations commenced on March 26, 1996.
The investment objective of the Fund is capital appreciation by investing
primarily in debt and equity securities by financially troubled or bankrupt
companies (financially troubled issuers) and in equity securities of companies
that in the view of its investment adviser are currently undervalued
out-of-favor or price-depressed relative to their potential for growth and
income (operationally troubled issuers). Investment in the securities of
financially and operationally troubled issuers may be considered speculative and
may present potential for substantial loss.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Securities Valuation: Investments listed on a securities exchange and NASDAQ
National Market System securities (other than options on stock and stock
indices) are valued at the last sales price on the day of valuation, or, if
there was no sale on such day, the average between the last bid and asked prices
on such day, as provided by a pricing service. Corporate bonds (other than
convertible debt securities) and U.S. Government securities that are actively
traded in the over-the-counter market, including listed securities for which the
primary market is believed to be over-the-counter, are valued by an independent
pricing service. Convertible debt securities that are actively traded in the
over-the-counter market, including listed securities for which the primary
market is believed to be over-the-counter, are valued at the average of the most
recently quoted bid and asked prices provided by principal market makers.
Options on stock and stock indices traded on an exchange are valued at the
average between the most recently quoted bid and asked prices provided by the
respective exchange and futures contracts and options thereon are valued at the
last sales price as of the close of business of the exchange will be valued at
fair value determined in good faith by or under the direction of the Board of
Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with transactions in repurchase agreements, it is the Fund's
policy that its custodian or designated subcustodians, under triparty repurchase
agreements as the case may be, take possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. If the seller defaults and the value
of
the collateral declines or if bankruptcy proceedings are commenced with respect
to the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Dividend income is recorded on the
ex-dividend date; interest income is recorded on the accrual basis. The Fund
amorizes premiums and discounts paid on purchases of portfolio securities as
adjustments to interest income. Expenses are recorded on the accrual basis which
may require the use of certain estimates by management.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares of the Fund based
upon the relative proportion of net assets of each class at the beginning of the
day.
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income to its shareholders.
Therefore, no federal income tax provision is required.
Withholding taxes on foreign dividends have been provided for in accordance with
the Fund's understanding of the applicable country's tax rates.
Dividends and Distributions: The Fund expects to pay dividends out of net
investment income quarterly and make distributions at least annually of any net
capital gains. Dividends and distributions are recorded on the ex-dividend date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Deferred Organization and Offering Costs: The Fund incurred approximately
$250,000 in connection with the organization and offering of the
- --------------------------------------------------------------------------------
- ----- 8
<PAGE>
PRUDENTIAL DISTRESSED
Notes to Financial Statements (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
Fund. Offering costs are being amortized over a period of 12 months ending March
1997. Organization costs are being amortized over a period of 60 months ending
March 2001.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the services of PIC, the
compensation of officers of the Fund, occupancy and certain clerical and
bookkeeping costs of the Fund. The Fund bears all other costs and expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .75 of 1% of the average daily net assets of the Fund.
PMF has agreed that, in any fiscal year, it will reimburse the Fund for expenses
(including the fees of PMF but excluding interest, taxes, brokerage commissions,
distribution fees, litigation and indemnification expenses and other
extraordinary expenses) in excess of the most restrictive expense limitation
imposed by state securities commissions. The most restrictive expense limitation
is presently believed to be 2 1/2% of the Fund's average daily net assets up to
$30 million, 2% of the next $70 million of such assets and 1 1/2% of such assets
in excess of $100 million. Such expense reimbursement, if any, is estimated and
accrued daily and payable monthly. For the period March 26, 1996 (commencement
of investment operations) through May 31, 1996, such reimbursement amounted to
$61,783 (1.68% of average net assets).
The Fund has a distribution agreement with Prudential Securities Incorporated
(PSI) for distribution of the Fund's shares. The Fund compensates PSI for
distributing and servicing the Fund's Class A, Class B and Class C shares
pursuant to plans of distribution, (the Class A, Class B and Class C Plans)
regardless of expenses actually incurred by them. The distribution fees are
accrued daily and payable monthly.
Pursuant to the Class A, B & C Plans, the Fund compensates PSI for its
distribution related activities at an annual rate of up to .30 of 1%, 1% and 1%
of the average daily net assets value of the Class A, B & C shares,
repsectively. Such expenses under the Plan were .25 of 1%, 1% and 1% of the
average daily net assets of the Class A, B and C shares, respectively, for the
period March 26, 1996 through May 31, 1996.
PSI has advised the Fund that it has received approximately $115,400 in
front-end sales charges resulting from sales of Class A shares during the period
ended May 31, 1996. From these fees, PSI paid such sales charges to dealers,
which in turn paid commissions to salespersons.
PSI, PIC and PMF are indirect wholly-owned subsidiaries of The Prudential
Insurance Company of America.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and for the period March 26, 1996
through May 31, 1996, the Fund incurred fees of approximately $1,500 for the
services of PMFS. As of May 31, 1996, approximately $500 of such fees were due
to PMFS. Transfer agent fees and expenses in the Statement of Operations include
certain out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the period ended May 31, 1996 were $10,736,581 and $1,584,409, respectively.
The United States federal income tax basis of the Fund's investments at May 31,
1996 was substantially the same as for financial reporting purposes and,
accordingly, net unrealized appreciation of investments, for United States
federal income tax purposes was $633,097 (gross unrealized
appreciation--$923,089; gross unrealized depreciation--$289,992).
- ------------------------------------------------------------
Note 5. Joint Repurchase Agreement Account
The Fund, along with other affiliated registered investment companies, transfers
uninvested cash balances into a single joint account, the daily aggregate
balance of which is invested in one or more repurchase agreements collateralized
by U.S. Treasury or federal agency obligations. At May 31, 1996, the Fund had
a
0.3% undivided interest in the repurchase agreements in the joint account. The
undivided interest for the Fund represented $3,964,000 in principal amount. As
of such date, each repurchase agreement in the joint account and the value of
the collateral therefor was as follows:
Bear, Stearns & Co., 5.32%, in the principal amount of $359,000,000, repurchase
price $359,159,157, due 6/3/96. The value of the collateral including accrued
interest is $367,322,500.
- --------------------------------------------------------------------------------
9 -----
<PAGE>
PRUDENTIAL DISTRESSED
Notes to Financial Statements (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
CS First Boston Corp., 5.35%, in the principal amount of $300,000,000,
repurchase price $300,133,750, due 6/3/96. The value of the collateral including
accrued interest is $306,002,116.
Chase Securities Inc., 5.25%, in the principal amount of $173,690,000,
repurchase price $173,765,989, due 6/3/96. The value of the collateral including
accrued interest is $177,814,913.
Morgan Stanley & Co., 5.27%, in the principal amount of $59,000,000, repurchase
price $59,025,911, due 6/3/96. The value of the collateral including accrued
interest is $60,337,647.
Smith Barney, Inc., 5.33%, in the principal amount of $359,000,000, repurchase
price $359,159,456, due 6/3/96. The value of the collateral including accrued
interest is $366,180,343.
- ------------------------------------------------------------
Note 6. Capital
The Fund offers Class A, Class B and Class C shares. Class A shares are sold
with a front-end sales charge of up to 5%. Class B shares are sold with a
contingent deferred sales charge which declines from 5% to zero depending on the
period of time the shares are held. Class C shares are sold with a contingent
deferred sales charge of 1% during the first year. Class B shares will
automatically convert to Class A shares on a quarterly basis approximately seven
years after purchase. A special exchange privilege is also available for
shareholders who qualify to purchase Class A shares at net asset value.
There are 2 billion shares of $.001 par value common stock authorized divided
into three classes, designated Class A, Class B and Class C, each of which
consists of 1 billion, 500 million and 500 million authorized shares,
respectively.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- --------------------------------------- ------- ----------
<S> <C> <C>
March 26, 1996* through
May 31, 1996:
Shares sold............................ 385,122 $4,822,226
Shares reacquired...................... (20,414) (262,557)
------- ----------
Net increase in shares outstanding..... 364,708 $4,559,669
------- ----------
------- ----------
<CAPTION>
Class B Shares Amount
- --------------------------------------- ------- ----------
<S> <C> <C>
March 26, 1996* through
May 31, 1996:
Shares sold............................ 575,015 $7,191,221
Shares reacquired...................... (21,521) (269,587)
------- ----------
Net increase in shares outstanding..... 553,494 $6,921,634
------- ----------
------- ----------
<CAPTION>
Class C
- ---------------------------------------
<S> <C> <C>
March 26, 1996* through
May 31, 1996:
Shares sold............................ 138,304 $1,729,835
Shares reacquired...................... (2,800) (34,912)
------- ----------
Net increase in shares outstanding..... 135,504 $1,694,923
------- ----------
------- ----------
</TABLE>
- ---------------
* Commencement of investment operation.
- --------------------------------------------------------------------------------
- ----- 10
<PAGE>
PRUDENTIAL DISTRESSED
Financial Highlights (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
Class B Class C
- ----------------- ----------------- -----------------
<S> <C>
<C> <C>
March 26,
1996(a) March 26, 1996(a) March 26, 1996(a)
Through
Through Through
May 31,
May 31, May 31,
1996
1996 1996
- ----------------- ----------------- -----------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....................... $ 12.50
$ 12.50 $ 12.50
------
------ ------
Income from investment operations
Net investment income...................................... .02
-- --
Net realized and unrealized gain on investment
transactions............................................ .67
.67 .67
------
------ ------
Total from investment operations........................ .69
.67 .67
------
------ ------
Net asset value, end of period............................. $ 13.19
$ 13.17 $ 13.17
------
------ ------
------
------ ------
TOTAL RETURN(b):........................................... 5.52%
5.36% 5.36%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)............................ $ 4,845
$ 7,324 $ 1,820
Average net assets (000)................................... $ 4,623
$ 6,980 $ 1,726
Ratios to average net assets:
Expenses, including distribution fees................... 2.67%(c)
3.42%(c) 3.42%(c)
Expenses, excluding distribution fees................... 2.42%(c)
2.42%(c) 2.42%(c)
Net investment income................................... 0.87%(c)
.12%(c) .12%(c)
Portfolio turnover......................................... 23%
23% 23%
Average commission rate paid per share..................... $0.0434
$0.0434 $0.0434
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Total return does not consider the effects of sales loads. Total return is
calculated assuming a purchase of shares on the first day and a sale on the
last day of each period reported and includes reinvestment of dividends and
distributions. Total returns for periods of less than a full year are not
annualized.
(c) Annualized.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 11 -----
<PAGE>
Getting
The Most
From Your
Prudential
Mutual
Fund.
When you invest through Prudential Mutual Funds, you receive
financial advice through a Prudential Securities financial
advisor or Prudential/Pruco Securities registered representative.
Your advisor or representative can provide you with the
following services:
There's No Reward Without Risk; But Is This Risk Worth It?
Your financial advisor or registered representative can help you
match the reward you seek with the risk you can tolerate. And risk
can be difficult to gauge --sometimes even the simplest investments
bear surprising risks. The educated investor knows that markets
seldom move in just one direction -- there are times when a market
sector or asset class will lose value or provide little in the way
of total return. Managing your own expectations is easier with help
from someone who understands the markets and who knows you!
Keeping Up With The Joneses.
A financial advisor or registered representative can help you wade
through the numerous mutual funds available to find the ones that
fit your own individual investment profile and risk tolerance. While
the newspapers and popular magazines are full of advice about
investing, they are aimed at generic groups of people or representative
individuals, not at you personally. Your financial advisor or
registered representative will review your investment objectives
with you. This means you can make financial decisions based on the
assets and liabilities in your current portfolio and your risk
tolerance -- not just based on the current investment fad.
Buy Low, Sell High.
Buying at the top of a market cycle and selling at the bottom are
among the most common investor mistakes. But sometimes it's difficult
to hold on to an investment when it's losing value every month. Your
financial advisor or registered representative can answer questions
when you're confused or worried about your investment, and remind you
that you're investing for the long haul.
<PAGE>
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
(800) 225-1852
http:\\www.prudential.com
Directors
Delayne Dedrick Gold
Douglas H. McCorkindale
Thomas T. Mooney
Stephen P. Munn
Richard A. Redeker
Robin B. Smith
Louis A. Weil, III
Clay T. Whitehead
Officers
Richard A. Redeker, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Ellyn C. Vogin, Assistant Secretary
Manager
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Auditors
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Gardner, Carton & Douglas
Quaker Tower
321 North Clark Street
Chicago, IL 60610-4795
The views expressed in this report and information about the
Fund's portfolio holdings are for the period covered by this
report and are subject to change thereafter.
The accompanying financial statements as of May 31, 1996 were
not audited and, accordingly, no opinion is expressed on them.
This report is not authorized for distribution to prospective
investors unless preceded or accompanied by a current
prospectus.
<PAGE>
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