(ICON)
Prudential
Distressed
Securities
Fund, Inc.
SEMI
ANNUAL
REPORT
May 31, 1998
(LOGO)
<PAGE>
Prudential Distressed Securities Fund, Inc.
Performance At A Glance.
A vibrant U.S. economy steamed ahead during the six months
ended May 31, 1998, enabling many companies that we invested
in to resolve their financial and operational difficulties,
which boosted prices of their stocks and bonds. As a result,
Prudential Distressed Securities Fund was able to provide
returns that surpassed by a wide margin the average capital
appreciation fund, as measured by Lipper Analytical Services.
<TABLE>
Cumulative TotalReturns1 As of 5/31/98
<CAPTION>
Six One Since
Months Year Inception2
<S> <C> <C> <C>
Class A 13.80% (12.42) 36.31% (33.09) 42.78% (34.82)
Class B 13.37 (11.99) 35.41 (32.21) 40.55 (32.69)
Class C 13.37 (11.99) 35.41 (32.21) 40.55 (32.69)
Lipper Capital
Appreciation Fund Avg3 9.06 22.76 42.00
</TABLE>
Average Annual TotalReturns1 As of 6/30/98
<TABLE>
<CAPTION>
One Since
Year Inception2
<S> <C> <C>
Class A 18.62% (16.17) 12.64% (10.03)
Class B 18.95 (16.37) 13.26 (10.57)
Class C 22.95 (20.37) 14.38 (11.73)
</TABLE>
Without waiver of management fees and/or expense subsidization,
the Fund's cumulative total returns and average annual returns
would have been lower, as indicated in the parentheses ( ).
Past performance is not indicative of future results. Principal
and investment return will fluctuate so that an investor's shares,
when redeemed, may be worth more or less than their original cost.
1Source: Prudential Investments Fund Management and Lipper
Analytical Services. The cumulative total returns do not
take into account sales charges. The average annual returns
do take into account applicable sales charges. The Fund charges a
maximum front-end sales load of 5% for Class A shares and a
declining contingent deferred sales charge (CDSC) of 5%, 4%,
3%, 2%, 1% and 1% for six years for Class B shares. Class C
shares have a 1% CDSC for one year. Class B shares will
automatically convert to Class A shares, on a quarterly basis,
approximately seven years after purchase.
2Inception date: Class A, B, and C, 3/26/96.
3Lipper average returns are for all funds in each share class
for the six-month, one-year, and since inception periods.
How Investments Compared.
(As of 5/31/98)
(GRAPH)
U.S. General General U.S.
Growth Bond Muni Debt Taxable
Funds Funds Funds Money Funds
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 returns 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.
U.S. Taxable Money 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>
George Edwards and Paul Price, Fund Managers
Portfolio (PHOTO) (PHOTO)
Managers' Report
The Prudential Distressed Securities Fund seeks capital
appreciation by investing in debt and equity securities
of companies with operational or financial difficulties.
Some of these companies may be in default or bankruptcy.
The Fund will purchase securities that we believe are
undervalued or temporarily out of favor, despite the
long-term appreciation we expect. Investment in these
types of securities may be considered speculative. As a
result, the Fund will assume greater risk than other
Prudential mutual funds. There can be no assurance that
the Fund will achieve its investment objective.
Out of Asia.
Soaring corporate bankruptcies in countries such
as Indonesia and Thailand have resulted in a
burgeoning supply of distressed securities in
Asian markets. However, we have avoided those
markets, where, in some cases, the bankruptcy code
is new and untested. Instead, we remained focused
on later-stage distressed securities in the U.S.,
where the reorganization process is well-established.
Strategy Session.
We Stuck To Our Guns.
We continued to emphasize later-stage distressed securities
(bonds and stocks of corporations that announced plans to
file for bankruptcy or restructuring). We can gauge more
accurately a company's business prospects and financial
standing by investing at a later stage of the reorganization
process. Employing this strategy provided double-digit
returns over the past six months, as it did over the
previous year. Therefore, we saw no need to adopt a
different approach.
Sticking with the same strategy worked well as the U.S.
economy defied Wall Street forecasts by expanding more
rapidly in the first three months of 1998 than in the
final quarter of 1997. U.S. economic growth had been
expected to slow in the aftermath of an Asian economic
crisis that erupted last autumn. Instead, the U.S.
economy raced ahead as companies boosted inventories
by a hefty $100 billion and consumer demand for goods
and services remained strong. Although analysts reduced
earnings expectations in the first quarter, the domestic
economy was still robust. The corporate bond default
rate, as measured by Moody's Investors Service, edged
up to approximately 2.5% this year from 1.5%, still
well below its historical average.
The low rate of bond defaults led us to seek investment
opportunities among later-stage distressed securities.
However, we avoided Asian markets where skyrocketing
bankruptcies spawned a burgeoning supply of distressed
securities.
Credit Quality.
Expressed as a percentage of
total investments as of 5/31/98.
(PIE CHART)
<PAGE>
What Went Well.
Wise Choices.
- -- Casino Magic's bonds appreciated after news of a planned
merger with Hollywood Park, a gaming and entertainment
holding company. Standard & Poor's Corp. announced it may
upgrade Casino Magic's credit ratings, reflecting the company's
agreement to be acquired by more highly rated Hollywood Park.
As the Casino Magic debt rallied, we sold our position at a
sizable profit.
- -- Waste Systems International's common stock nearly tripled
in price in the past six months as the company undertook an
aggressive acquisition program that helped improve earnings
and expanded the geographical area it serves.
- -- Geneva Steel's preferred stock rallied sharply on several
positive developments. The company reported the average
price for its products increased approximately $9 per ton
in the second fiscal quarter ended March 31, 1998, compared
to the previous three-month period. It also completed the
final project associated with its plans to modernize. More
good news followed in May as Geneva Steel employees ratified
a three-year labor agreement with the United Steelworkers of
America.
- -- We purchased five-year notes and warrants to buy stock of
Discovery Zone, believing this operator of indoor playgrounds
for children would advance rapidly on the road to recovery.
But Discovery Zone progressed more slowly than expected.
Fortunately, we sold the units at a price slightly above
their face value in March. Since then, the bonds have
declined as the company said renovating its FunCenters
will cost more and take longer than originally anticipated.
We got out at the right time.
And Not So Well.
Under A Cloud.
In 1997, UNIFI Communications was ranked No.20 out of
500 in Inc. magazine's list of the fastest-growing
private companies in the U.S. We owned bonds and
warrants to buy the stock of this provider of
international fax and delivery services. But
UNIFI Communications' bright outlook rapidly
turned dark as a change in the pricing structure
for international communications hurt the profitability
of its base product line and raised doubts about the
company's viability. Shortly after the
reporting period ended in May, we sold the bonds and
warrants at a loss.
Five Largest Holdings.
7.7% Waste Systems Intl., Inc.
Waste Management
4.9% GPA Group plc
Financial
4.1% Ladish Company, Inc.
Metals
3.4% Dr. Pepper Bottling
Hldgs., Inc.
Beverages
3.4% Geneva Steel Co.
Industrials
Expressed as a percentage of net assets as of 5/31/98.
Looking Ahead.
Just as we expected, corporations have sold a flood of new
high yield or junk bonds thus far in 1998. Nearly $77
billion of these below- investment-grade bonds were issued in the
first five months of the year, according to Lehman Brothers,
which predicts another record-breaking year for junk bond
issuance. Some of the bonds are bound to default within a
year or two, providing more candidates for the distressed securities
market. The default rate could climb, particularly if the
U.S. economy falters as Asian economic troubles linger.
1
<PAGE>
President's Letter July 13, 1998
See You On the Net!
Dear Shareholder:
We are proud to be part of the worldwide web and we invite you
to visit our two web sites, if you have not already done so.
Yes, we currently offer two sites -- each with its own distinctive identity.
http://www.prudential.com
The Prudential web site features information on
personal investing, retirement planning, commercial
and residential real estate opportunities, as well as
insurance products for life, health, home and property.
You can look up performance data on your Prudential
mutual funds, learn about proven investment strategies,
or take one of our many interactive quizzes that will
help guide you in determining long-term goals -- like
how much to save for your child's
college education or for your retirement.
http://www.prusec.com
The Prudential Securities Virtual Branch Office is a full-service
brokerage web site specifically designed to provide investors
with the information they need to make informed financial
decisions. It was rated the No. 1 full-service brokerage web
site of its type by Financial Net News (February 1998), a
subsidiary of Institutional Investor magazine, and was also
rated among the top corporate web sites by Fortune magazine
(Winter 1998).
What investors can find here are -- daily market commentaries,
stock quotes, economic forecasts, product news, and current
market research, in addition to interactive investing programs.
Investors, through their Prudential Securities Financial
Advisors, may also enroll in Prudential Online(R) and have
access to their personal account information which includes
balances, security values, transactions and account activities.
They can also easily E-mail their Financial Advisor.
Both sites also contain professional opportunities for
people who are searching for employment or considering a
change of career paths.
We plan to make further enhancements to our web pages as the
year progresses. So please, the next time you
are "web browsing" or "surfing the net," pay us a
visit. Let us know what you think and what you'd like
to see added in the future.
Sincerely,
Brian M. Storms
President, Prudential Mutual Funds & Annuities
2
<PAGE>
PRUDENTIAL DISTRESSED
Portfolio of Investments as
of May 31, 1998 (Unaudited) SECURITIES FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
LONG-TERM INVESTMENTS--84.5%
COMMON STOCKS(c)--34.4%
------------------------------------------------------------
Airlines--1.2%
39,100 Canadian Airlines Corp.
(Canada) $ 128,324
- ------------------------------------------------------------
Beverages--2.9%
10,000 Dr. Pepper Bottling Holdings, Inc. 310,000
- ------------------------------------------------------------
Building & Related Industries--1.0%
6,642 Edison Building LLC(b)
(cost $13,555; purchased 4/30/97) 13,284
4,750 EMCOR Group, Inc. 94,703
------------
107,987
- ------------------------------------------------------------
Casinos--5.6%
30,000 Alliance Gaming Corp. 137,812
13,357 Casino America, Inc. 53,428
50,127 Colorado Gaming & Entertainment Co. 281,964
7,000 Grand Casinos, Inc. 122,938
2,000 Nevada Gold & Casinos, Inc. 7,688
------------
603,830
- ------------------------------------------------------------
Consumer Goods & Services--0.1%
1,400 Coinstar, Inc. 11,988
- ------------------------------------------------------------
Distribution/Wholesalers--0.3%
12,700 Merisel, Inc. 37,703
- ------------------------------------------------------------
Electronics--1.9%
50,000 Electronic Retailing Systems
International, Inc. 200,000
- ------------------------------------------------------------
Energy--2.0%
29,000 Baycorp Holdings, Ltd. 210,250
- ------------------------------------------------------------
Food Serving - Fast Foods
50 AmeriKing, Inc. 2,500
Medical Products--0.7%
9,500 Columbia Laboratories, Inc. $ 80,156
Metals--3.4%
25,000 Ladish Company, Inc. 368,750
- ------------------------------------------------------------
Mining--0.4%
50,000 Sunshine Mining & Refining Co. 46,875
- ------------------------------------------------------------
Retail--4.3%
6,579 Edison Brothers Stores, Inc. 40,296
6,000 Homeland Holding Corp. 47,250
7,000 Musicland Stores Corp. 101,063
10,000 Sassco Fashions, Ltd 139,375
50,839 Today's Man, Inc. 130,275
------------
458,259
- ------------------------------------------------------------
Telecommunications--2.9%
2,500 Jordan Telecommunications Products 62,500
5,000 PageMart Wireless, Inc., Class A 45,313
17,000 Paxson Communications Corp. 200,812
115 Scott Cable Communications, Inc. 0
------------
308,625
- ------------------------------------------------------------
Textiles & Apparel--1.2%
13,304 Forstmann & Co., Inc. 128,051
- ------------------------------------------------------------
Waste Management--6.5%
78,260 Waste Systems International, Inc. 704,340
------------
Total common stocks
(cost $2,837,534) 3,707,638
------------
PREFERRED STOCKS--10.4%
- ------------------------------------------------------------
Energy--0.7%
15,500 Grant Geophysical, Inc.,(b)/(c)
Conv. Exch., $2.4375
(cost $237,500; purchased 3/26/96) 75,563
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
PRUDENTIAL DISTRESSED
Portfolio of Investments as
of May 31, 1998 (Unaudited) SECURITIES FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Description Value
Shares (Note 1)
<C> <S> <C>
- -------------------------------------------------------
Financial--4.2%
750,000 GPA Group Plc.(b)
(Ireland)
Conv., 7.00%
(cost $316,875; purchased 11/6/96) $ 450,000
- ------------------------------------------------------------
Industrials--2.8%
2,000 Geneva Steel Co.
Conv. Exch., 14.00%, Ser. B 310,000
- ------------------------------------------------------------
Telecommunications--2.7%
2,500 Jordan Telecommunication Products,
Conv. Exch., 13.25% 265,000
500 NEXTLINK Communications, Inc.,
Conv. Exch., 6.50% 24,000
------------
289,000
------------
Total preferred stocks
(cost $1,018,875) 1,124,563
------------
WARRANTS(c)
Units
- ------------
- ------------------------------------------------------------
Building & Related Industries
960 ICF Kaiser International, Inc.,
expiring 12/31/03 96
- ------------------------------------------------------------
Cable
500 People's Choice TV Corp.,
expiring 6/1/00 0
- ------------------------------------------------------------
Casinos
2,968 Casino America, Inc.,
expiring 5/3/01 148
- ------------------------------------------------------------
Communications
125 UNIFI Communications, Inc.,
expiring 3/1/07 1
------------
Total warrants
(cost $2,500) 245
------------
</TABLE>
<TABLE>
<C> <C> <S> <C>
CORPORATE BONDS--39.7%
- ------------------------------------------------------------
Broadcasting--2.5%
B1 $ 250 Telemundo Group, Inc.,
Sr. Disc. Notes,
7.00%, 2/15/06 $ 268,750
- ------------------------------------------------------------
Building & Related Industries--10.9%
B2 250 Clean Harbors, Inc.,
Sr. Notes,
12.50%, 5/15/01 235,000
Caa 300 DeGeorge Home Alliance, Inc.,
Sr. Notes,
12.00%, 4/1/01 264,000
B2 225 Hechinger Co.,
Sr. Notes,
6.95%, 10/15/03 168,750
B3 250 ICF Kaiser International,
Inc.,
Sr. Sub. Notes,
13.00%, 12/31/03 270,625
B3 250 The Presley Companies,
Sr. Notes,
12.50%, 7/1/01 235,000
-----------
1,173,375
- ------------------------------------------------------------
Cable--1.5%
Caa 500 People's Choice TV Corp.,
Sr. Disc. Notes,
Zero Coupon, 6/1/04 160,000
- ------------------------------------------------------------
Communications--0.2%
NR 125 UNIFI Communications, Inc.,
Sr. Notes,
14.00%, 3/1/04 23,125
- ------------------------------------------------------------
Consumer Goods & Services--5.6%
NR 50 Coinstar, Inc.,
Sr. Disc Notes,
Zero Coupon, 10/1/06 41,750
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
PRUDENTIAL DISTRESSED
Portfolio of Investments as
of May 31, 1998 (Unaudited) SECURITIES FUND, INC.
- ------------------------------------------------------------
- -----------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
Consumer Goods & Services (cont'd.)
Ca $ 450 Grand Union Co.,
Sr. Notes,
12.00%, 9/1/04 $ 263,250
B3 125 Remington Products Co., LLC
Sr. Sub. Notes, Ser. B,
11.00%, 5/15/06 115,000
B3 200 Syratech Corp.,
Sr. Notes,
11.00%, 4/15/07 185,500
-----------
605,500
- ------------------------------------------------------------
Food & Beverage--2.2%
Specialty Foods Acquisition
Corp.,
Ca 250 Sr. Sec'd. Disc. Deb., Ser. B
Zero Coupon, 8/15/05 91,875
Caa 150 Sr. Sub. Notes, Ser. B,
11.25%, 8/15/03 138,000
-----------
229,875
- ------------------------------------------------------------
Gas Utilities--2.2%
Caa 250 Empire Gas Corp.,
Sr. Sec'd. Notes,
7.00%, 7/15/04 232,500
- ------------------------------------------------------------
Packaging--2.0%
NR 266 Packaging Resources, Inc.,
Sr. Notes,
13.00%, 6/30/03 213,000
Recreation--1.9%
Caa $ 250 Icon Health & Fitness
Holdings, Inc.,
Sr. Sec'd. Disc. Notes, Ser.
B,
Zero Coupon, 11/15/04 $ 202,500
- ------------------------------------------------------------
Retail--6.4%
Caa 250 Barry's Jewelers, Inc.(a)
Sr. Sec'd. Notes,
11.00%, 12/22/00 162,500
NR 77 Edison Brothers Stores, Inc.,
11.00%, 9/1/20 67,760
B2 250 Hills Stores Co.,
Sr. Notes, Ser. B,
12.50%, 7/1/03 243,750
B1 250 Speedy Muffler King, Inc.,
Sr. Notes,
10.875%, 10/1/06 220,000
-----------
694,010
- ------------------------------------------------------------
Telecommunications--1.1%
Scott Cable Communications,
NR 17 Inc.,
Jr. Sub. PIK Notes,
7/18/02 1,678
NR 115 15.00%, 3/18/02 116,150
-----------
117,828
- ------------------------------------------------------------
Trucking & Shipping--3.2%
B3 250 Ameritruck Distribution
Corp.,
Sr. Sub. Notes,
12.25%, 11/15/05 140,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Portfolio of Investments as of May 31, 1998 (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount Description Value (Note
Rating (000) 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
Trucking & Shipping (cont'd.)
B3 $ 250 TRISM, Inc.
Sr. Sub. Notes,
10.75%, 12/15/00 $ 208,750
-----------
348,750
Total corporate bonds
(cost $4,442,770) 4,269,213
-----------
- ------------------------------------------------------------
Total Investments--84.5%
(cost $8,301,679; Note 4) 9,101,659
Other assets in excess of
liabilities--15.5% 1,664,530
-----------
Net Assets--100% $10,766,189
-----------
-----------
- ---------------
(a) Represents issuer in default on interest payments; non-income producing
security.
(b) Indicates a restricted security; the aggregate cost of such securities is
$567,930. The aggregate value ($538,847) is approximately 5.0% of net
assets.
(c) Non-income producing securities.
NR--Not rated by Moody's or Standard & Poor's.
PIK--Payment in kind securities.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Assets and Liabilities (Unaudited)
</TABLE>
<TABLE>
<CAPTION>
Assets May 31, 1998
<S> <C>
Investments, at value (cost $8,301,679).... $ 9,101,659
Receivable for Fund shares sold............ 1,534,507
Receivable for investments sold............ 260,357
Interest receivable........................ 97,534
Due from Manager........................... 65,938
Deferred expenses and other assets......... 47,091
------------
Total assets............................ 11,107,086
------------
Liabilities
Bank overdraft............................. 223,538
Accrued expenses........................... 105,072
Distribution fee payable................... 6,293
Payable for Fund shares reacquired......... 5,994
------------
Total liabilities....................... 340,897
------------
Net Assets................................. $10,766,189
------------
------------
Net assets were comprised of:
Common stock, at par.................... $ 653
Paid-in capital in excess of par........ 8,713,105
------------
8,713,758
Undistributed net investment income..... 626,056
Accumulated net realized gain on
investments.......................... 626,395
Net unrealized appreciation on
investments.......................... 799,980
------------
Net assets, May 31, 1998................... $10,766,189
------------
------------
Class A:
Net asset value and redemption price per
share ($4,167,289 / 252,540 shares of
common stock issued and
outstanding)......................... $16.50
Maximum sales charge (5% of offering
price)............................... .87
------------
Maximum offering price to public........ $17.37
------------
------------
Class B:
Net asset value, offering price and
redemption price per share
($5,420,659 / 329,028 shares of
common stock issued and
outstanding)......................... $16.47
------------
------------
Class C:
Net asset value, offering price and
redemption price per share
($1,178,241 / 71,518 shares of common
stock issued and outstanding)........ $16.47
------------
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Operations (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
Net Investment Income May 31, 1998
<S> <C>
Income
Interest and discount earned................. $ 691,166
Dividends.................................... 13,388
------------
704,554
------------
Expenses
Management fee............................... 31,655
Distribution fee--Class A.................... 2,745
Distribution fee--Class B.................... 26,345
Distribution fee--Class C.................... 4,882
Custodian's fees and expenses................ 46,000
Registration fees............................ 21,000
Reports to shareholders...................... 14,000
Legal fees and expenses...................... 12,000
Amortization of deferred organizational
costs..................................... 10,802
Audit fee.................................... 10,000
Directors' fees and expenses................. 4,000
Transfer agent's fees and expenses........... 4,000
Miscellaneous................................ 1,889
------------
Total expenses............................ 189,318
Less: expense reimbursement (Note 2)......... (113,121)
------------
Net expenses.............................. 76,197
------------
Net investment income........................... 628,357
------------
Realized and Unrealized Gain (Loss)
on Investments
Net realized gain on investment transactions.... 626,730
Net change in unrealized appreciation on
investments.................................. (172,924)
------------
Net gain on investments......................... 453,806
------------
Net Increase in Net Assets
Resulting from Operations....................... $1,082,163
------------
------------
</TABLE>
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Changes in Net Assets (Unaudited)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) May 31, November 30,
in Net Assets 1998 1997
<S> <C> <C>
Operations
Net investment income............ $ 628,357 $ 258,664
Net realized gain on
investments................... 626,730 465,952
Net change in unrealized
appreciation/depreciation of
investments................... (172,924) 1,413,109
----------- ------------
Net increase in net assets
resulting from operations..... 1,082,163 2,137,725
----------- ------------
Dividends and distributions (Note
1):
Dividends from net investment
income
Class A.......................... (69,788) (90,663)
Class B.......................... (159,644) (108,026)
Class C.......................... (26,841) (29,623)
----------- ------------
(256,273) (228,312)
----------- ------------
Distributions from net realized
gains
Class A.......................... (26,850) --
Class B.......................... (59,158) --
Class C.......................... (11,798) --
----------- ------------
(97,806) --
----------- ------------
Fund share transactions (net of
share conversions) (Note 5)
Net proceeds from shares sold.... 2,951,641 909,156
Net asset value of shares issued
to shareholders in
reinvestment of dividends and
distributions................. 324,242 216,983
Cost of shares reacquired........ (1,073,655) (5,475,625)
----------- ------------
Net increase (decrease) in net
assets from Fund share
transactions.................. 2,202,228 (4,349,486)
----------- ------------
Total increase (decrease)........... 2,930,312 (2,440,073)
Net Assets
Beginning of period................. 7,835,877 10,275,950
----------- ------------
End of period(a).................... $10,766,189 $ 7,835,877
----------- ------------
----------- ------------
- ---------------
(a) Includes undistributed net
investment income of............. $ 626,056 $ 253,972
----------- ------------
</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, 2,667 shares of Class B and 2,666 shares of Class C common stock for $100,000
on February 8, 1996 to Prudential Investments Fund Management LLC. ('PIFM').
Investment operations commenced on March 26, 1996.
The investment objective of the Fund is capital appreciation by investing
primarily in debt and equity securities issued 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 long-term potential for growth
and income (operationally troubled issuers). Securities of financially and
operationally troubled issuers are less liquid and more volatile than securities
of companies not experiencing financial difficulties. Investment in such
securities 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 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 and U.S. Government securities that are
actively traded in the over-the-counter market, are valued by an independent
pricing service. Convertible debt securities that are actively traded in the
over-the-counter market, are valued at the mean between the most recently quoted
bid and asked prices provided by principal market makers. Equity securities
issued in private placements shall be valued at the mean between the bid and
asked prices provided by primary market dealers. Debt securities issued in
private placements shall be valued on the bid side by primary market dealers.
Securities for which market quotations are not available, other than private
placements, shall each be valued at a price supplied by an independent pricing
agent. 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. Futures contracts and options thereon are valued at the
last sales price as of the close of business of the exchange. Securities for
which reliable market quotations are not available or for which the pricing
agent or principal market maker does not provide a valuation 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 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.
The Fund may hold up to 15% of its net assets in illiquid securities, including
those which are restricted as to disposition under securities law ('restricted
securities'). None of the issues of restricted securities held by the Fund at
May 31, 1998 include registration rights under which the Fund may demand
registration by the issuer.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
closing daily rate of exchange;
(ii) purchases and sales of investment securities, income and expenses--at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the period, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities held at the end of the period. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of portfolio securities sold during
the period.
Net realized gains and losses on foreign currency transactions represent net
foreign exchange gains and losses from sales and maturities of
- --------------------------------------------------------------------------------
8
<PAGE>
PRUDENTIAL DISTRESSED
Notes to Financial Statements (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
short-term securities, disposition of foreign currency, gains or losses realized
between the trade and settlement dates of security transactions, and the
difference between amounts of dividends, interest and foreign withholding taxes
recorded on the Fund's books and the U.S. dollar equivalent amounts actually
received or paid. Net currency gains and losses from valuing foreign currency
denominated assets, except portfolio securities, and liabilities at period end
exchange rates are reflected as a component of unrealized appreciation or
depreciation on foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic instability and
the level of governmental supervision and regulation of foreign securities
markets.
Securities Transactions and Net 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
amortizes 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.
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 and make distributions of any net capital gains, if any, at
least annually. Dividends and distributions are recorded on the ex-dividend
date.
Income distributions and capital gain distributions are determined in accordance
with income tax regulations which may differ from generally accepted accounting
principles.
Deferred Organization Costs: The Fund incurred approximately $96,000 in
connection with the organization of the Fund. These costs were deferred and are
being amortized over a period of 60 months ending March 2001.
- ------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with PIFM. Pursuant to this agreement, PIFM
has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PIFM has entered into a subadvisory
agreement with The Prudential Investment Corporation ('PIC'); PIC furnishes
investment advisory services in connection with the management of the Fund. PIFM
pays for the services of PIC, the cost of compensation of officers of the Fund,
occupancy and certain clerical and bookkeeping costs of the Fund. The Fund bears
all other costs and expenses.
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .75 of 1% of the average daily net assets of the Fund.
PIFM voluntarily agreed to reimburse the Fund in order to reduce total expenses
so as not to exceed 1.25%, 2.00% and 2.00% of the average daily net assets of
the Class A, Class B and Class C shares, respectively, on an annualized basis.
For the six months ended May 31, 1998, such reimbursements amounted to $113,121
(1.34% of average net assets; $.17 per share for Class A, B and C shares).
The Fund has a distribution agreement with Prudential Securities Incorporated
('PSI'), which acts as the distributor of the Class A, B and C shares of the
Fund. 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. Effective July 1,
1998, Prudential Investment Management Services LLC will become the distributor
of the Fund and will serve the Fund under the same terms and conditions as under
the arrangement with PSI.
Pursuant to the Class A, B and 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 asset values of the Class A, B and C shares,
respectively. Such expenses under the Plans were .25 of 1%, 1% and 1% of the
average daily net assets of the Class A, B and C shares, respectively, for the
six months ended May 31, 1998.
- --------------------------------------------------------------------------------
9
<PAGE>
PRUDENTIAL DISTRESSED
Notes to Financial Statements (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
PSI has advised the Fund that it has received approximately $22,400 in front-end
sales charges resulting from sales of Class A shares for the six months ended
May 31, 1998. From these fees, PSI paid such sales charges to dealers, which in
turn paid commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the six months ended May 31, 1998, it received
approximately $14,300 and $100 in contingent deferred sales charges imposed upon
redemptions by certain Class B and Class C shareholders, respectively.
PSI, PIFM, PIMS and PIC are indirect, wholly owned subsidiaries of The
Prudential Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
'Funds'), has a credit agreement (the 'Agreement') with an unaffiliated lender.
The maximum commitment under the Agreement is $200,000,000. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of May 31, 1998.
The Funds pay a commitment fee at an annual rate of .055 of 1% on the unused
portion of the credit facility. The commitment fee is accrued and paid quarterly
on a pro rata basis by the Funds. The Agreement expired on December 30, 1997 and
has been extended through December 29, 1998 under the same terms.
- ------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the six months ended May 31, 1998
the Fund incurred fees of approximately $2,300 for the services of PMFS. As of
May 31, 1998, approximately $410 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 nonaffiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the six months ended May 31, 1998 were $10,111,988 and $9,323,221,
respectively.
The federal income tax basis of the Fund's investments at May 31, 1998 was
substantially the same as for financial reporting purposes and, accordingly, net
unrealized appreciation for federal income tax purposes was $799,980 (gross
unrealized appreciation--$1,541,207; gross unrealized depreciation--$741,227).
Note 5. 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, which consist of 1
billion, 500 million and 500 million authorized shares, respectively. Of the
653,086 shares of common stock issued and outstanding at May 31, 1998, PIFM
owned 2,667 shares of Class A, 2,667 shares of Class B and 2,666 shares of Class
C.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------- -------- -----------
<S> <C> <C>
Six months ended May 31, 1998:
Shares sold.......................... 132,853 $ 2,160,721
Shares issued in reinvestment of
dividends
and distributions.................. 5,220 79,164
Shares reacquired.................... (16,568) (252,837)
-------- -----------
Net increase in shares outstanding
before conversion.................. 121,505 1,987,048
Shares issued upon conversion from
Class B............................ 921 14,177
-------- -----------
Net increase in shares outstanding... 122,426 $ 2,001,225
-------- -----------
-------- -----------
Year ended November 30, 1997:
Shares sold.......................... 28,654 $ 390,626
Shares issued in reinvestment of
dividends.......................... 7,185 84,009
Shares reacquired.................... (193,700) (2,363,624)
-------- -----------
Net decrease in shares outstanding
before conversion.................. (157,861) (1,888,989)
Shares issued upon conversion from
Class B............................ 715 9,982
-------- -----------
Net decrease in shares outstanding... (157,146) $(1,879,007)
-------- -----------
-------- -----------
</TABLE>
- --------------------------------------------------------------------------------
10
<PAGE>
PRUDENTIAL DISTRESSED
Notes to Financial Statements (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- ------------------------------------- -------- -----------
<S> <C> <C>
Six months ended May 31, 1998:
Shares sold.......................... 31,948 $ 499,219
Shares issued in reinvestment of
dividends
and distributions.................. 13,872 210,051
Shares reacquired.................... (47,477) (758,076)
-------- -----------
Net decrease in shares outstanding
before conversion.................. (1,657) (48,806)
Shares reacquired upon conversion
into Class A....................... (921) (14,177)
-------- -----------
Net decrease in shares outstanding... (2,578) $ (62,983)
-------- -----------
-------- -----------
Year ended November 30, 1997:
Shares sold.......................... 16,501 $ 214,769
Shares issued in reinvestment of
dividends.......................... 8,896 104,821
Shares reacquired.................... (150,167) (1,863,184)
-------- -----------
Net decrease in shares outstanding
before conversion.................. (124,770) (1,543,594)
Shares reacquired upon conversion
into Class A....................... (715) (9,982)
-------- -----------
Net decrease in shares outstanding... (125,485) $(1,553,576)
-------- -----------
-------- -----------
<CAPTION>
Class C
- -------------------------------------
<S> <C> <C>
Six months ended May 31, 1998:
Shares sold.......................... 18,272 $ 291,701
Shares issued in reinvestment of
dividends
and distributions.................. 2,308 35,027
Shares reacquired.................... (3,840) (62,742)
-------- -----------
Net increase in shares outstanding... 16,740 $ 263,986
-------- -----------
-------- -----------
Year ended November 30, 1997:
Shares sold.......................... 23,901 $ 303,761
Shares issued in reinvestment of
dividends.......................... 2,403 28,153
Shares reacquired.................... (97,442) (1,248,817)
-------- -----------
Net decrease in shares outstanding... (71,138) $ (916,903)
-------- -----------
-------- -----------
</TABLE>
- --------------------------------------------------------------------------------
11
<PAGE>
PRUDENTIAL DISTRESSED
Financial Highlights (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------------------------------
Six March 26,
Months Year 1996(d)
Ended Ended Through
May 31, November 30, November 30,
1998(e) 1997(e) 1996
----------- ------------ ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................... $ 15.19 $ 11.85 $ 12.50
----- ------ ------
Income from investment operations
Net investment income (a).......................................... 1.06 .49 .25
Net realized and unrealized gain (loss) on investment
transactions.................................................... 1.08 3.23 (.90)
----- ------ ------
Total from investment operations................................ 2.14 3.72 (.65)
----- ------ ------
Less Distributions
Dividends from net investment income............................... (.66) (.38) --
Distributions from net realized gains.............................. (.17) -- --
----- ------ ------
Total distributions............................................. (.83) (.38) --
----- ------ ------
Net asset value, end of period..................................... $ 16.50 $ 15.19 $ 11.85
----- ------ ------
----- ------ ------
TOTAL RETURN(b):................................................... 13.80% 32.35% (5.20)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................... $ 4,167 $ 1,976 $ 3,404
Average net assets (000)........................................... $ 2,202 $ 2,167 $ 4,391
Ratios to average net assets(a):
Expenses, including distribution fees........................... 1.25%(c) 2.04% 2.76%(c)
Expenses, excluding distribution fees........................... 1.00%(c) 1.79% 2.51%(c)
Net investment income........................................... 15.44%(c) 3.73% 2.37%(c)
For Class A, B and C shares
Portfolio turnover rate......................................... 113% 175% 61%
</TABLE>
- ---------------
(a) Net of expense reimbursement.
(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.
(d) Commencement of investment operations.
(e) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 12
<PAGE>
PRUDENTIAL DISTRESSED
Financial Highlights (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-------------------------------------------------
Six March 26,
Months Year 1996(d)
Ended Ended Through
May 31, November 30, November 30,
1998(e) 1997(e) 1996
----------- ------------ ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................... $ 15.16 $ 11.79 $ 12.50
----- ------ ------
Income from investment operations
Net investment income (a).......................................... 1.17 .39 .16
Net realized and unrealized gain (loss) on investment
transactions.................................................... .92 3.24 (.87)
----- ------ ------
Total from investment operations................................ 2.09 3.63 (.71)
----- ------ ------
Less Distributions
Dividends from net investment income............................... (.61) (.26) --
Distributions from net realized gains.............................. (.17) -- --
----- ------ ------
Total distributions............................................. (.78) (.26) --
----- ------ ------
Net asset value, end of period..................................... $ 16.47 $ 15.16 $ 11.79
----- ------ ------
----- ------ ------
TOTAL RETURN(b):................................................... 13.37% 31.44% (5.68)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................... $ 5,421 $ 5,029 $ 5,387
Average net assets (000)........................................... $ 5,283 $ 4,860 $ 6,650
Ratios to average net assets(a):
Expenses, including distribution fees........................... 2.00%(c) 2.79% 3.51%(c)
Expenses, excluding distribution fees........................... 1.00%(c) 1.79% 2.51%(c)
Net investment income........................................... 14.69%(c) 2.98% 1.59%(c)
</TABLE>
- ---------------
(a) Net of expense reimbursement.
(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.
(d) Commencement of investment operations.
(e) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 13
<PAGE>
PRUDENTIAL DISTRESSED
Financial Highlights (Unaudited) SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
-------------------------------------------------
Six March 26,
Months Year 1996(d)
Ended Ended Through
May 31, November 30, November 30,
1998(e) 1997(e) 1996
----------- ------------ ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period............................... $ 15.16 $ 11.79 $ 12.50
----- ------ ------
Income from investment operations
Net investment income (a).......................................... 1.14 .39 .16
Net realized and unrealized gain (loss) on investment
transactions.................................................... .95 3.24 (.87)
----- ------ ------
Total from investment operations................................ 2.09 3.63 (.71)
----- ------ ------
Less Distributions
Dividends from net investment income............................... (.61) (.26) --
Distributions from net realized gains.............................. (.17) -- --
----- ------ ------
Total distributions............................................. (.78) (.26) --
----- ------ ------
Net asset value, end of period..................................... $ 16.47 $ 15.16 $ 11.79
----- ------ ------
----- ------ ------
TOTAL RETURN(b):................................................... 13.37% 31.44% (5.68)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000).................................... $ 1,178 $ 831 $ 1,485
Average net assets (000)........................................... $ 979 $ 1,100 $ 1,678
Ratios to average net assets(a):
Expenses, including distribution fees........................... 2.00%(c) 2.79% 3.51%(c)
Expenses, excluding distribution fees........................... 1.00%(c) 1.79% 2.51%(c)
Net investment income........................................... 14.69%(c) 2.98% 1.71%(c)
</TABLE>
- ---------------
(a) Net of expense reimbursement.
(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.
(d) Commencement of investment operations.
(e) Calculated based upon weighted average shares outstanding during the period.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 14
<PAGE>
Getting The Most
From Your
Prudential Mutual
Fund.
How many times have you read these letters -- or other
financial materials -- and stumbled across a word that
you don't understand?
Many shareholders have run into the same problem. We'd
like to help. So we'll use this space from time to
time to explain some of the words you might have read,
but not understood. And if you have a favorite word that
no one can explain to your satisfaction, please write to us.
Basis Point: 1/100th of 1%. For example, one half of one
percent is 50 basis points.
Call Option: A contract giving the holder a right to buy stocks
or bonds at a predetermined price (called the strike price)
before a predetermined expiration date. A buyer of a call
option generally expects to benefit from a rise in the
price of the stock or bond.
Capital Gain/Capital Loss: The difference between the cost
of a capital asset (for example, a stock, bond, or mutual
fund share) and its selling price. Under current law, the
maximum federal income tax rate for individuals on a
long-term capital gain is 28%.
Collateralized Mortgage Obligations (CMOs): Pools of mortgage-backed
securities sliced in maturity ranges that bear differing interest
rates. These instruments are sensitive to changes in interest
rates and homeowner refinancing activity. They are
subject to prepayment and maturity extension risk.
Derivatives: Securities that derive their value from another
security. The rate of return of these financial products
rises and falls -- sometimes very suddenly -- in response
to changes in some specific interest rate, currency, stock,
or other variable.
Discount Rate: The interest rate charged by the Federal
Reserve on loans to banks and other depository institutions.
Federal Funds Rate: The interest rate charged by one bank to
another on overnight loans.
Futures Contract: An agreement to deliver a specific amount
of a commodity or financial instrument at a set price at a
stipulated time in the future.
Leverage: The use of borrowed assets to enhance return on
equity. The expectation is that the interest rate charged
will be lower than the return on the investment. While
leverage can increase profits, it can also magnify losses.
Liquidity: The ease with which a financial instrument (or
mutual fund) can be bought or sold (converted into cash)
in the financial markets.
Price/Earnings Ratio: The price of a share of stock divided
by the earnings per share for a 12-month period.
Option: An agreement to sell something, such as shares of
stock, by a certain time for a specified price. An option
need not be exercised.
Spread: The difference between two values; most often used
to describe the difference between prices bid and asked
for a security.
Yankee Bond: A bond denominated in U.S. dollars but sold by
a foreign company or government in the U.S. market.
<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
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Directors
Edward D. Beach
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
Mendel A. Melzer, CFA
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
Marguerite E.H. Morrison, Assistant Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
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, 1998
were not audited and, accordingly, no opinion is expressed
on them.
This report is not authorized for distribution to prospective
investors unless preceded or accompanied by a current prospectus.
<PAGE>
(LOGO)
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
743966103
743966202 MF171E2
743966301
BULK RATE
U.S. POSTAGE
PAID
Permit 6807
New York, NY
