(ICON)
Prudential
Distressed
Securities
Fund, Inc.
ANNUAL
REPORT
Nov. 30, 1997
(LOGO)
<PAGE>
Prudential Distressed Securities Fund, Inc.
Performance At A Glance.
The Prudential Distressed Securities Fund enjoyed a banner year.
Your Fund beat the average capital appreciation fund tracked by
Lipper Analytical Services by a significant margin as we emphasized
investments in companies that have substantially completed their
financial reorganizations. Aided by a vibrant U.S. economy, some
of these companies have experienced positive developments that
sent their stocks, bonds or trade claims higher.
<TABLE>
<CAPTION>
One Since
Year Inception2
<C> <S> <C> <C>
Cumulative Class A 32.35% (28.52%)4 25.47% (19.03%)4
Total Class B 31.44 (27.63)4 23.98 (17.60)4
Returns1 Class C 31.44 (27.63)4 23.98 (17.60)4
As of 11/30/97 Lipper Capital
Appreciation Fund Average3 18.03 ***
</TABLE>
<TABLE>
<CAPTION>
One Since
Year Inception2
<C> <S> <C> <C>
Average Class A 26.52% (22.83%)4 10.86% (7.33%)4
Annual Total Class B 27.30 (23.45)4 11.24 (7.58)4
Returns1 Class C 31.30 (27.45)4 13.31 (9.71)4
As of 12/31/97
</TABLE>
Past performance is not indicative of future results. Investment
return and principal will fluctuate so that an investor's shares,
when redeemed may be worth more or less than their original cost.
1 Source: 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.
2 Inception dates: 3/26/96 Class A, B and C shares.
3 Lipper average returns are 17 funds for one year.
4 Without waiver of management fees and/or expense subsidization,
the Fund's cumulative and average annual total returns would have
been lower as indicated in the parentheses ( ).
***Lipper Since Inception returns are 29.31% for Class A, B, and C
shares for all funds in each share class.
How Investments Compared.
(As of 11/30/97)
(GRAPH)
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>
George Edwards, Fund Manager (PICTURE)
Portfolio
Managers' Report
The Prudential Distressed Securities Fund seeks capital appreciation
by investing in stocks and bonds 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.
Above The Fray.
The Southeast Asian economic crisis that rattled global financial
markets and sent the Dow Jones Industrial Average down 554 points
in October had little effect on distressed securities. Why?
Because distressed securities prices tend to fluctuate based
on developments in their own special and individual situations.
Strategy Session.
Favorable Conditions
Aided Us.
Strong consumer spending and increased capital investment
by businesses helped the U.S. economy speed ahead during
the past 12 months even as inflationary pressures remained
subdued.
Under these favorable conditions, corporate earnings and
cash flow rose, enabling many companies with lower credit
quality to make timely interest and principal payments on
their bonds. Although the corporate debt default rate crept
marginally higher in 1997, it stayed well below its average
of 3.36% as measured by Moody's Investors Service. Not
surprisingly, the amount of companies on the brink of
financial collapse (early-stage distressed securities)
remained modest, leaving us to search elsewhere for
investment opportunities.
We turned to later-stage distressed securities, which
are bonds and stocks of firms that have already announced
plans to file for bankruptcy or restructuring. By investing
at a later stage of the reorganization process, it is
possible to estimate a company's business prospects and
financial strength with greater certainty. The returns
are generally quite attractive and the holding period
until resolution of the reorganization is considerably shorter.
Shares of recently reorganized companies that trade
inefficiently were also attractive because there were
many opportunities to buy them at low prices. As of
November 30, about 49% of your Fund's total investments
were in bonds, 36% in stocks and 15% in preferred equities.
Credit Quality.
Expressed as a percentage of
total investments as of 11/30/97.
(PIE CHART)
<PAGE>
What Went Well.
Good News
For Good Moves.
- - Motion picture marketer and distributor LIVE Entertainment was
purchased in July by a group of investors who bought back all
of the company's stocks and bonds. We booked a profit when the
new owners paid face value for our LIVE Entertainment preferred
stock, which we had purchased at a discount.
- - GPA Group, an aircraft leasing company based in Ireland, sold
assets and paid off a substantial amount of its debt, which
strengthened the company's balance sheet. We had purchased
GPA preferred stock before the asset sale. The preferred
stock appreciated as investors applauded the reduction in
GPA debt.
- - Real estate developer and manager Cadillac Fairview declared
bankruptcy in 1996. After careful consideration, we purchased
Cadillac common stock, believing that operational improvements
would result in reduced expenses. The situation turned out
even better than expected as an initial public offering of
Cadillac stock was purchased in November of 1997 by investors
anticipating improvement in North American property values.
The new equity offering soared nearly 10% on the first day
of trading. We took advantage of the rally by selling our
common stock at a profit.
- - EMCOR, which builds and services mechanical and electrical
systems, emerged from bankruptcy in 1994. Since then, the robust
U.S. economic expansion bolstered demand for large-scale electrical
construction projects, which helped lift EMCOR stock in 1997. (The
shares hit a 52-week high shortly after the reporting period
closed.) We hold EMCOR stock and expect further appreciation
if the Connecticut-based firm establishes a solid earnings record.
And Not So Well.
- - Molten Metal Technology created a stir on Wall Street by
inventing a treatment process that broke down hazardous waste
into industrially usable products. The company, however, was
strapped for cash. Molten Metal filed to reorganize shortly
after the reporting period ended. While we sold Molten Metal
preferred stock at a loss, we got out long before it filed
for bankruptcy.
- - Our shares of International Semi-Tech declined as its
subsidiary Singer, the sewing machine maker, suffered
because of significant exposure to weakened Southeast
Asian markets.
Five Largest Issuers.
6.2% Ladish Company
Metals
6.2% Today's Man
Retail
5.3% GPA Group Plc.
Financial
4.9% EMCOR Group
Building & Related
Industries
3.9% Merisel
Distribution &
Wholesale
Expressed as a percentage of net assets
as of 11/30/97.
Looking Ahead.
With default rates inching up and issuance of high yield or
junk bonds setting a new record in 1997, we look forward to
an increasing supply of distressed securities. Rated just
below investment grade, junk bonds are considered a step
above distressed securities. Junk bonds have fared well
as a rapidly expanding U.S. economy enabled the average
firm that issues high yield bonds to increase earnings
and cash flow. But if the economy hits a speed bump in
1998, a growing number of junk bond companies are bound
to run into trouble and seek protection under the
bankruptcy code. If that happens, we'll be ready.
1
<PAGE>
President's Letter January 22, 1998
(PICTURE)
New Opportunities for You.
Dear Shareholder:
By many measures, 1997 was very good for investors. Thanks to a
sixth-straight year of moderate economic growth and subdued
inflation, the stock market enjoyed its third year of double-digit
returns while bond values rose as yields declined. But it's time
to close the books on 1997 and look ahead to the opportunities of 1998.
Perhaps the best thing you can do at this time of year is review
your investment strategy. Wise investors know that the only thing
constant in life is change, and now, more than ever before, it's
important to review your situation. Why?
The Federal Taxpayer Relief Act of 1997 is changing the way
America invests and creating exciting new opportunities for
you to accumulate wealth, save for college or build a nest
egg for retirement. Consider --
- - Expanded IRAs. Rules governing traditional Individual Retirement
Accounts have been extensively revised. Deductibility and
contribution limits have been broadened as has the list for
penalty-free early withdrawals, including first-time home buyers.
- - New Roth IRAs. The Roth IRA features tax-free distributions
and does not require mandatory withdrawals, which should be of
particular interest to retirees seeking to shelter assets in a
tax-free account.
- - New Education IRAs. Similar to a traditional IRA, but
specifically designed for higher education. The new law also
creates credits and deductions to help defray college costs.
- - Revised Capital Gains Tax Rates. The good news is long-term
rates are down, which may benefit certain mutual fund investors.
The bad news is there are now three separate tax rates covering
short-, mid- and long-term capital gains, and you'll probably
need a professional tax preparer to sort things out in 1998.
To learn more about the Taxpayer Relief Act and how it may benefit
you, please contact your Prudential Securities Financial Advisor or
Pruco Securities Registered Representative.
Thank you for your continued confidence in Prudential Mutual Funds
& Annuities.
Sincerely,
Brian M. Storms
President, Prudential Mutual Funds & Annuities
2
<PAGE>
Portfolio of Investments as PRUDENTIAL DISTRESSED
of November 30, 1997 SECURITIES FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
LONG-TERM INVESTMENTS--99.2%
COMMON STOCKS(c)--36.1%
------------------------------------------------------------
Beverages--2.6%
10,000 Dr. Pepper Bottling Holdings, Inc. $ 203,125
- ------------------------------------------------------------
Broadcasting--2.4%
15,000 On Command Corp. 186,562
- ------------------------------------------------------------
Building & Related Industries--4.9%
19,000 EMCOR Group, Inc. 380,000
- ------------------------------------------------------------
Casinos--7.0%
30,000 Alliance Gaming Corp. 120,938
13,357 Casino America, Inc. 38,401
50,127 Colorado Gaming & Entertainment Co. 281,964
7,000 Grand Casinos, Inc. 91,875
10,000 Lady Luck Gaming Corp. 11,250
------------
544,428
- ------------------------------------------------------------
Consumer Goods & Services--0.2%
1,400 Coinstar, Inc.(b)
(cost $11,039; purchased 10/7/96) 13,475
- ------------------------------------------------------------
Electronics--1.1%
15,000 Electronic Retailing Systems
International, Inc. 83,438
- ------------------------------------------------------------
Energy--3.3%
35,000 Baycorp Holdings, Ltd. 258,125
- ------------------------------------------------------------
Food Serving - Fast Foods
50 AmeriKing, Inc. 2,500
- ------------------------------------------------------------
Metals--6.2%
150,000 Ladish Company, Inc. 487,500
Mining--1.1%
100,000 Sunshine Mining & Refining Co. $ 87,500
- ------------------------------------------------------------
Retail--3.8%
20,000 Phar-Mor, Inc. 167,500
10,000 Sassco Fashions, Ltd. 132,500
------------
300,000
- ------------------------------------------------------------
Telecommunications--0.6%
2,500 Jordon Telecommunications Products 0
5,000 PageMart Wireless, Inc., Class A 49,375
------------
49,375
- ------------------------------------------------------------
Waste Management--2.9%
318,800 Waste Systems International, Inc. 229,137
------------
Total common stocks
(cost $2,262,736) 2,825,165
------------
PREFERRED STOCKS--15.1%
- ------------------------------------------------------------
Communications--0.6%
500 American Communications Services,
12.75%, PIK 48,875
- ------------------------------------------------------------
Consumer Goods & Services--2.3%
1,800 Pantry Pride, Inc.,
Conv. Exch., $14.875, Ser. B 181,800
- ------------------------------------------------------------
Energy--1.0%
15,500 Grant Geophysical, Inc.,(c)
Conv. Exch., $2.4375 75,563
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
Portfolio of Investments as PRUDENTIAL DISTRESSED
of November 30, 1997 SECURITIES FUND, INC.
- ------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Shares Description Value (Note 1)
<C> <S> <C>
- --------------------------------------------------------
Financial--5.3%
750,000 GPA Group Plc.(b)
(Ireland)
Conv., 7.00%
(cost $316,875; purchased 11/6/96) $ 410,625
- ------------------------------------------------------------
Industrials--2.3%
2,000 Geneva Steel Co.,
Conv. Exch., 14.25%, Ser. B 180,000
- ------------------------------------------------------------
Telecommunications--3.6%
2,500 Jordan Telecommunication Products,
Conv. Exch. 13.25% 285,000
------------
Total preferred stocks
(cost $1,225,475) 1,181,863
------------
WARRANTS(c)
Units
- ------------------------------------------------------------
Building & Related Industries
960 ICF Kaiser International, Inc.,
expiring 12/31/03 480
- ------------------------------------------------------------
Casinos
2,968 Casino America, Inc.,
expiring 5/3/01 148
- ------------------------------------------------------------
Communications
860 Price Communications Corp.,
expiring 8/1/07 0
125 UNIFI Communications, Inc.,
expiring 3/1/07 2,500
------------
2,500
- ------------------------------------------------------------
Recreation
125 Discovery Zone, Inc.,
expiring 8/1/07 0
------------
Total warrants
(cost $2,500) 3,128
------------
</TABLE>
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
CORPORATE BONDS--48.0%
- ------------------------------------------------------------
Building & Related Industries--12.2%
B2 $ 250 Clean Harbors, Inc.,
Sr. Notes,
12.50%, 5/15/01 $ 250,000
Caa 300 DeGeorge Home Alliance, Inc.
Sr. Notes,
12.00%, 4/1/01 262,500
B3 200 ICF Kaiser International,
Inc.,
Sr. Sub. Notes,
13.00%, 12/31/03 207,500
B3 250 Wickes Lumber Co.,
Sr. Sub. Notes,
11.625%, 12/15/03 240,000
----------
960,000
- ------------------------------------------------------------
Casinos--4.0%
B3 250 Casino Magic Corp.,
First Mortgage Notes
13.00%, 8/15/03 245,000
NR 64 Colorado Gaming &
Entertainment Co.,
12.00%, 6/1/03, PIK 69,364
----------
314,364
- ------------------------------------------------------------
Communications--3.3%
Caa1 250 Price Communications Cellular,
Zero Coupon, 8/1/07 143,750
NR 125 UNIFI Communications, Inc.,
Sr. Notes,
14.00%, 3/1/04 115,000
----------
258,750
- ------------------------------------------------------------
Consumer Goods & Services--0.5%
NR 50 Coinstar, Inc.,(b)
Sr. Sub. Notes, Zero Coupon
until 10/1/99, 13.00%,
10/1/06
(cost $38,684; purchased
10/17/96) 40,000
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
Portfolio of Investments as PRUDENTIAL DISTRESSED
of November 30, 1997 SECURITIES FUND, INC.
- -----------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ----------------------------------------
Distribution/Wholesalers--3.9%
Ca $ 250 Merisel, Inc.
Sr. Notes,
12.50%, 12/31/04 $ 302,500
- ------------------------------------------------------------
Finance--1.2%
Caa 100 Trumps Castle Funding, Inc.,
Mortgage Bond,
11.75%, 11/15/03 93,250
- ------------------------------------------------------------
Packaging--3.2%
NR 266 Packaging Resources, Inc.,
Sr. Notes,
13.00%, 6/30/03 248,944
- ------------------------------------------------------------
Recreation--1.6%
NR 125 Discovery Zone, Inc.,
Sr. Notes,
13.50%, 8/1/02 130,000
- ------------------------------------------------------------
Restaurants--1.5%
NR 118 American Restaurant Group,
Inc.,
Sr. Sec'd. Notes, Ser. 92
13.00%, 9/15/98 114,443
- ------------------------------------------------------------
Retail--14.5%
B3 250 Barry's Jewelers, Inc.(a)/(b)
Sr. Sec'd. Notes,
11.00%, 12/22/00
(cost $200,229; purchased
2/13/97) 150,000
Caa1 250 Duane Reade Holding Corp.,
Sr. Sub. Notes, Ser. B,
Zero Coupon, 9/15/04 208,125
NR 299 Edison Brothers Trade
Claims,(a)
Zero Coupon, 1/1/49 239,404
B1 125 International Semi-Tech
Microelectronics Inc.,
Zero Coupon, 8/15/03 52,500
NR $ 519 Today's Man, Inc. Trade
Claims,(a)/(b)
Sr. Notes, Zero Coupon,
1/1/49
(cost $306,259; purchased
1/17/97) $ 482,748
----------
1,132,777
- ------------------------------------------------------------
Textiles & Apparel--2.1%
NR 250 Forstmann & Company, Inc.,(a)
Sr. Sub. Notes,
14.75%, 4/15/99 165,000
----------
Total corporate bonds
(cost $3,306,569) 3,760,028
----------
Total long-term investments
(cost $6,797,280) 7,770,184
----------
- ------------------------------------------------------------
SHORT-TERM INVESTMENTS--1.0%
JOINT REPURCHASE AGREEMENT--1.0%
82,000 Joint Repurchase Agreement
Account,
5.70%, 12/1/97
(cost $82,000; Note 5) 82,000
----------
- ------------------------------------------------------------
Total Investments--100.2%
(cost $6,879,280; Note 4) 7,852,184
Liabilities in excess of other
assets--(0.2%) (16,307)
----------
Net Assets--100% $7,835,877
----------
----------
</TABLE>
- ---------------
(a) Represents issuer in default on interest payments; non-income producing
security.
(b) Indicates a restricted security; the aggregate cost of such securities is
$873,086. The aggregate value ($1,096,848) is approximately 14% 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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
PRUDENTIAL DISTRESSED
Statement of Assets and Liabilities SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Assets November 30, 1997
Investments, at value (cost $6,879,280)................................................................. $ 7,852,184
Cash.................................................................................................... 9,477
Interest and dividends receivable....................................................................... 67,986
Due from Manager........................................................................................ 14,822
Receivable for Fund shares sold......................................................................... 3,500
Receivable for investments sold......................................................................... 515
Deferred expenses and other assets...................................................................... 57,936
-----------------
Total assets......................................................................................... 8,006,420
-----------------
Liabilities
Accrued expenses........................................................................................ 125,525
Payable for Fund shares reacquired...................................................................... 39,750
Distribution fee payable................................................................................ 5,268
-----------------
Total liabilities.................................................................................... 170,543
-----------------
Net Assets.............................................................................................. $ 7,835,877
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 516
Paid-in capital in excess of par..................................................................... 6,511,014
-----------------
6,511,530
Undistributed net investment income.................................................................. 253,972
Accumulated net realized gain on investments......................................................... 97,471
Net unrealized appreciation on investments........................................................... 972,904
-----------------
Net assets, November 30, 1997........................................................................... $ 7,835,877
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($1,976,438 / 130,114 shares of common stock issued and outstanding).............................. $15.19
Maximum sales charge (5% of offering price).......................................................... .80
-----------------
Maximum offering price to public..................................................................... $15.99
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($5,028,743 / 331,606 shares of common stock issued and outstanding).............................. $15.16
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($830,696 / 54,778 shares of common stock issued and outstanding)................................. $15.16
-----------------
-----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Operations
- ------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
Year Ended
Net Investment Income November 30, 1997
Income
Interest and discount earned.......... $ 394,937
Dividends (net of foreign withholding
taxes of $30)...................... 74,540
-----------------
469,477
-----------------
Expenses
Management fee........................ 60,949
Distribution fee--Class A............. 5,417
Distribution fee--Class B............. 48,598
Distribution fee--Class C............. 10,998
Registration fees..................... 101,000
Custodian's fees and expenses......... 74,000
Reports to shareholders............... 45,000
Directors' fees and expenses.......... 23,000
Amortization of deferred
organizational costs............... 21,302
Audit fee............................. 20,000
Legal fees and expenses............... 12,000
Transfer agent's fees and expenses.... 8,800
Miscellaneous......................... 5,618
-----------------
Total expenses..................... 436,682
Less: expense reimbursement (Note
2)................................. (225,869)
-----------------
Net expenses....................... 210,813
-----------------
Net investment income.................... 258,664
-----------------
Realized and Unrealized Gain
on Investments
Net realized gain on investment
transactions.......................... 465,952
Net change in unrealized appreciation on
investments........................... 1,413,109
-----------------
Net gain on investments.................. 1,879,061
-----------------
Net Increase in Net Assets
Resulting from Operations................ $ 2,137,725
-----------------
-----------------
</TABLE>
PRUDENTIAL DISTRESSED
SECURITIES FUND, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year March 26,
Ended 1996(a)
Increase (Decrease) November 30, November 30,
in Net Assets 1997 1996
<S> <C> <C>
Operations
Net investment income............ $ 258,664 $ 163,021
Net realized gain (loss) on
investments................... 465,952 (368,481)
Net change in unrealized
appreciation/depreciation of
investments................... 1,413,109 (440,205)
------------ ------------
Net increase (decrease) in net
assets resulting from
operations.................... 2,137,725 (645,665)
------------ ------------
Dividends from net investment income
(Note 1)
Class A.......................... (90,663) --
Class B.......................... (108,026) --
Class C.......................... (29,623) --
------------ ------------
(228,312) --
------------ ------------
Fund share transactions (net of
share conversions) (Note 6)
Net proceeds from shares sold.... 909,156 14,160,097
Net asset value of shares issued
to shareholders in
reinvestment of dividends..... 216,983 --
Cost of shares reacquired........ (5,475,625) (3,338,482)
------------ ------------
Net increase (decrease) in net
assets from Fund share
transactions.................. (4,349,486) 10,821,615
------------ ------------
Total increase (decrease)........... (2,440,073) 10,175,950
Net Assets
Beginning of period................. 10,275,950 100,000
------------ ------------
End of period....................... $ 7,835,877 $ 10,275,950
------------ ------------
------------ ------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
PRUDENTIAL DISTRESSED
Notes to Financial Statements 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
November 30, 1997 include registration rights under which the Fund may demand
registration by the issuer.
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,
- --------------------------------------------------------------------------------
8
<PAGE>
PRUDENTIAL DISTRESSED
Notes to Financial Statements SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
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.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with the American Institute of
Certified Public Accountants' Statement of Position 93-2: Determination,
Disclosure, and Financial Statement Presentation of Income, Capital Gain, and
Return of Capital Distributions by Investment Companies. The effect of applying
this statement was to increase undistributed net investment income and decrease
paid-in capital in excess of par by $60,599 due to a non-deductible prior year
expense. Net investment income, net realized gains and net assets were not
affected by these changes.
- ------------------------------------------------------------
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.
Effective June 2, 1997, 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. Prior to June 2, 1997, PIFM reimbursed the
Fund for expenses (including the fees of PIFM 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. Such expense
reimbursements were estimated and accrued daily and paid monthly. For the year
ended November 30, 1997, such reimbursements amounted to $225,869 (2.78% of
average net assets; $0.44 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.
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
year ended November 30, 1997.
PSI has advised the Fund that it has received approximately $2,600 in front-end
sales charges resulting from sales of Class A shares for the year ended November
30, 1997. 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 year ended November 30, 1997, it received
approximately $29,400 and $1,200 in contingent deferred sales charges imposed
upon redemptions by certain Class B and Class C shareholders, respectively.
PSI, PIFM 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'), entered into a credit agreement (the 'Agreement') on December 31, 1996
with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. Interest on any such borrowings outstanding will be at market
rates. The purpose of the Agreement is to serve an an alternative source of
funding for capital share redemptions. The Fund has not borrowed any amounts
pursuant to the Agreement as of November 30, 1997. The Funds pay a commitment
fee at an annual rate of .055 of 1% on the unused portion of the credit
facility. The commitment fee is accrued and paid quarterly on a pro-rata basis
by the Funds. The Agreement expired on December 30, 1997 and has been extended
through December 29, 1998 under the same terms.
- --------------------------------------------------------------------------------
9
<PAGE>
PRUDENTIAL DISTRESSED
Notes to Financial Statements SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
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 fiscal year ended November 30,
1997 the Fund incurred fees of approximately $4,600 for the services of PMFS. As
of November 30, 1997, approximately $330 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended November 30, 1997 were $13,937,000 and $17,336,498,
respectively.
The federal income tax basis of the Fund's investments at November 30, 1997 was
substantially the same as for financial reporting purposes and, accordingly, net
unrealized appreciation for federal income tax purposes was $972,904 (gross
unrealized appreciation--$1,442,825; gross unrealized depreciation--$469,921).
The Fund utilized it's capital loss carryforward of approximately $99,000 to
offset net taxable gains realized and recognized during the fiscal year ended
November 30, 1997.
- ------------------------------------------------------------
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. As of November 30, 1997, the
Fund had a .007% undivided interest in the repurchase agreements in the joint
account. This undivided interest represented $82,000 in principal amount. As of
such date, the repurchase agreements in the joint account and the value of the
collateral therefor were as follows:
Bear, Stearns & Co., 5.74%, in the principal amount of $330,000,000, repurchase
price $330,157,842, due 12/1/97. The value of the collateral including accrued
interest was $337,310,022.
Credit Suisse First Boston Corp., 5.70%, in the principal amount of
$330,000,000, repurchase price $330,156,750, due 12/1/97. The value of the
collateral including accrued interest was $342,024,757.
Deutsche Morgan Grenfell, Inc., 5.70%, in the principal amount of $330,000,000,
repurchase price $330,156,750, due 12/1/97. The value of the collateral
including accrued interest was $336,600,387.
Morgan Stanley, Dean Witter, Discover & Co., 5.63%, in the principal amount of
$119,585,000, repurchase price $119,641,055, due 12/1/97. The value of the
collateral including accrued interest was $121,976,916.
- ------------------------------------------------------------
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, which consist of 1
billion, 500 million and 500 million authorized shares, respectively. Of the
516,498 shares of common stock issued and outstanding at November 30, 1997, 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>
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)
-------- -----------
-------- -----------
March 26, 1996* through
November 30, 1996:
Shares sold.......................... 408,299 $ 5,117,186
Shares reacquired.................... (123,706) (1,547,651)
-------- -----------
Net increase in shares outstanding... 284,593 $ 3,569,535
-------- -----------
-------- -----------
</TABLE>
- --------------------------------------------------------------------------------
10
<PAGE>
PRUDENTIAL DISTRESSED
Notes to Financial Statements SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
- ------------------------------------- -------- -----------
Year ended November 30, 1997:
<S> <C> <C>
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)
-------- -----------
-------- -----------
March 26, 1996* through
November 30, 1996:
Shares sold.......................... 582,979 $ 7,292,074
Shares reacquired.................... (128,555) (1,585,368)
-------- -----------
Net increase in shares outstanding... 454,424 $ 5,706,706
-------- -----------
-------- -----------
<CAPTION>
Class C
- -------------------------------------
<S> <C> <C>
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)
-------- -----------
-------- -----------
March 26, 1996* through
November 30, 1996:
Shares sold.......................... 139,916 $ 1,750,837
Shares reacquired.................... (16,666) (205,463)
-------- -----------
Net increase in shares outstanding... 123,250 $ 1,545,374
-------- -----------
-------- -----------
</TABLE>
- ---------------
* Commencement of investment operations.
- --------------------------------------------------------------------------------
11
<PAGE>
PRUDENTIAL DISTRESSED
Financial Highlights SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
---------------------------------- ----------------------------------
Year March 26, 1996(d) Year March 26, 1996(d)
Ended Through Ended Through
November 30, November 30, November 30, November 30,
1997(e) 1996 1997(e) 1996
------------ ----------------- ------------ -----------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 11.85 $ 12.50 $ 11.79 $ 12.50
------ ------ ------ ------
Income from investment operations
Net investment income (a).............................. .49 .25 .39 .16
Net realized and unrealized gain (loss) on investment
transactions........................................ 3.23 (.90) 3.24 (.87)
------ ------ ------ ------
Total from investment operations.................... 3.72 (.65) 3.63 (.71)
------ ------ ------ ------
Less Distributions
Dividends from net investment income................... (.38) -- (.26) --
------ ------ ------ ------
Net asset value, end of period......................... $ 15.19 $ 11.85 $ 15.16 $ 11.79
------ ------ ------ ------
------ ------ ------ ------
TOTAL RETURN(b):....................................... 32.35% (5.20)% 31.44% (5.68)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $ 1,976 $ 3,404 $ 5,029 $ 5,387
Average net assets (000)............................... $ 2,167 $ 4,391 $ 4,860 $ 6,650
Ratios to average net assets(a):
Expenses, including distribution fees............... 2.04% 2.76%(c) 2.79% 3.51%(c)
Expenses, excluding distribution fees............... 1.79% 2.51%(c) 1.79% 2.51%(c)
Net investment income............................... 3.73% 2.37%(c) 2.98% 1.59%(c)
Portfolio turnover rate................................ 175% 61% 175% 61%
Average commission rate paid per share................. $ 0.0416 $0.0458 $ 0.0416 $0.0458
<CAPTION>
Class C
----------------------------------
Year March 26, 1996(d)
Ended Through
November 30, November 30,
1997(e) 1996
------------ -----------------
<S> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period................... $ 11.79 $ 12.50
------ ------
Income from investment operations
Net investment income (a).............................. .39 .16
Net realized and unrealized gain (loss) on investment
transactions........................................ 3.24 (.87)
------ ------
Total from investment operations.................... 3.63 (.71)
------ ------
Less Distributions
Dividends from net investment income................... (.26) --
------ ------
Net asset value, end of period......................... $ 15.16 $ 11.79
------ ------
------ ------
TOTAL RETURN(b):....................................... 31.44% (5.68)%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)........................ $ 831 $ 1,485
Average net assets (000)............................... $ 1,100 $ 1,678
Ratios to average net assets(a):
Expenses, including distribution fees............... 2.79% 3.51%(c)
Expenses, excluding distribution fees............... 1.79% 2.51%(c)
Net investment income............................... 2.98% 1.71%(c)
Portfolio turnover rate................................ 175% 61%
Average commission rate paid per share................. $ 0.0416 $0.0458
</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 year.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 12
<PAGE>
<PAGE>
PRUDENTIAL DISTRESSED
Report of Independent Accountants SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
To the Shareholders and Board of Directors of
Prudential Distressed Securities Fund, Inc.
In our opinion, the accompanying statement of assets and liabilities, including
the portfolio of investments, and the related statements of operations and of
changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Prudential Distressed Securities
Fund, Inc. (the 'Fund') at November 30, 1997, and the results of its operations,
the changes in its net assets and the financial highlights for the year then
ended, in conformity with generally accepted accounting principles. These
financial statements and financial highlights (hereafter referred to as
'financial statements') are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit, which included confirmation of securities at November
30, 1997 by correspondence with the custodian and brokers , provides a
reasonable basis for the opinion expressed above. The accompanying statement of
changes in net assets and the financial highlights for the period ended November
30, 1996 were audited by other independent accountants, whose opinion dated
January 10, 1997 was unqualified.
PRICE WATERHOUSE LLP
1177 Avenue of the Americas
New York, New York
January 21, 1998
- --------------------------------------------------------------------------------
13
<PAGE>
PRUDENTIAL DISTRESSED
Change of Auditors SECURITIES FUND, INC.
- --------------------------------------------------------------------------------
Effective March 1, 1997, Deloitte & Touche LLP was terminated as the Fund's
independent auditors. For the period ended November 30, 1996, Deloitte & Touche
LLP expressed an unqualified opinion on the Fund's financial statements. There
were no disagreements between Fund management and Deloitte & Touche LLP prior to
their termination. The Board of Directors approved the termination of Deloitte &
Touche LLP and the appointment of Price Waterhouse LLP as the Fund's independent
accountants.
- --------------------------------------------------------------------------------
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: One 1/100th of 1%. For example, one half of one
percentage point 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 federal income tax
rate for individuals on a long-term capital gain is up to
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>
Comparing A $10,000 Investment.
Prudential Distressed Securities Fund, Inc. vs.
the Lehman Brothers High Yield Bond Index
and the S&P 500 Index.
//Prudential Distressed Securities Fund, Inc.
- ---Lehman Bros. High Yield Bond Index
- - - -S&P 500 Index
Average Annual Total
Returns - Class A
- -------------------------- Class A
With Sales Load* (GRAPH)
11.01% Since Inception (7.59%)
25.73% for 1 Year (22.09%)
Without Sales Load*
14.45% Since Inception (10.92%)
32.35% for 1 Year (28.52%)
Average Annual Total
Returns - Class B
- -------------------------- Class B
With Sales Load* (GRAPH)
11.44% Since Inception (7.88%)
26.44% for 1 Year (22.63%)
Without Sales Load*
13.64% Since Inception (10.12%)
31.44% for 1 Year (26.63%)
Average Annual Total
Returns - Class C
- --------------------------- Class C
With Sales Load* (GRAPH)
13.64% Since Inception (10.12%)
30.44% for 1 Year (26.63%)
Without Sales Load*
13.64% Since Inception (10.12%)
31.44% for 1 Year (27.63%)
Past performance is not indicative of future results. Investment
return and principal will fluctuate so an investor's shares, when
redeemed, may be worth more or less than their original cost.
These graphs are furnished to you in accordance with SEC regulations.
They compare a $10,000 investment in the Prudential Distressed
Securities Fund (Class A, B and C) with a similar investment in
the S&P 500 Index and the Lehman Brothers High Yield
Bond Index by portraying initial account values at the
commencement of operations for each share class, and subsequent
account values at the end of the reporting period (November 30,
1997), as measured on a quarterly basis beginning in March 1996
for Class A, B and C shares. For purposes of the graphs, and
unless otherwise indicated, in the accompanying tables it has
been assumed (a) that the maximum applicable front-end sales
charge was deducted from the initial $10,000 investment in Class
A shares; (b) the maximum applicable contingent deferred sales
charge was deducted from the value of the investment in Class B
and Class C shares, assuming full redemption on November 30, 1997;
(c) all recurring fees (including management fees) were
deducted; and (d) any dividends and distributions were reinvested.
*Without waiver of management fees and/or expense subsidization,
the Fund's cumulative and average annual total returns would have
been lower as indicated in the parentheses ( ).
The S&P 500 Index is a capital-weighted index, representing the
aggregate market value of the common equity of 500 stocks
primarily traded on the New York Stock Exchange. The Lehman
Brothers High Yield Bond Index is a weighted index comprised of
corporate securities with one or more years remaining to
maturity that are publicly issued, rated below investment
grade and have $50 million or more outstanding. Both indexes
are unmanaged and include the reinvestment of all dividends but do not
reflect the payment of transaction costs and advisory fees
associated with an investment in the Fund. The securities
held in either index may differ substantially from those held
by the Fund. These indexes are not the only ones that may be used to
characterize performance of stock and/or bond funds and other
indexes may portray different comparative performance.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852http://www.prudential.com
Directors
Edward D. Beach
Delayne Dedrick Gold
Robert F. Gunia
Douglas H. McCorkindale
Mendel A. Melzer
Thomas T. Mooney
Stephen P. Munn
Richard A. Redeker
Robin B. Smith
Louis A. Weil, III
Clay T. Whitehead
Officers
Richard A. Redeker, President
Thomas A. Early, 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 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 LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Price Waterhouse 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.
This report is not authorized for distribution to prospective
investors unless preceded or accompanied by a current prospectus.
743966103 MF171E
743966202 Cat. #42M235P
743966301
