Prudential
Mortgage Income Fund, Inc.
SEMI ANNUAL REPORT
June 30, 1995
(LOGO)
<PAGE>
Prudential Mortgage Income Fund, Inc.
Performance At A Glance.
Mortgage backed securities generated solid returns in the first six months of
the year. As the economy slowed and interest rates fell, bond
prices -- including those of Mortgage Income Fund -- rose in one of the
strongest bond market rallies in years. We're pleased to report the Prudential
Mortgage Income Fund performed in line with the Lipper Analytical Services GNMA
mutual fund average.
Cumulative Total Returns1 As of 6/30/95
<TABLE>
<CAPTION>
Six One Five Ten Since
Months Year Years Years Inception2
<S> <C> <C> <C> <C> <C>
Class A 10.2% 11.1% 44.3% N/A 48.5%
Class B 9.8 10.4 39.9 104.4 214.8
Class C 9.8 N/A N/A N/A 8.4
Lipper GNMA Fund Avg* 10.2 11.1 48.5 131.5 289.6
</TABLE>
Average Annual Total Returns1 As of 6/30/95
<TABLE>
<CAPTION>
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A 6.6% 6.7% N/A 6.7%
Class B 5.4 6.8 7.4 9.0
Class C N/A N/A N/A 8.1
</TABLE
</TABLE>
<TABLE>
<CAPTION>
30-Day
Dividend SEC-Yield
<S> <C> <C>
Your Class A $0.080 6.49%
Dividend Class B $0.073 6.08%
As of 6/30/95 Class C $0.073 6.07%
</TABLE>
Past performance is not a guarantee of future results. Investment return and
principal value will fluctuate so that an investor's shares, when redeemed,
may be worth more or less than their original cost.
1 Source: Prudential Mutual Fund Management, Inc. and Lipper Analytical
Services, Inc. The cumulative total returns do not take into account sales
charges. The average annual total returns do take into account applicable sales
charges. The Fund charges a maximum front end sales load of 4% for Class A
shares. Class B shares are subject to a declining contingent deferred sales
charge (CDSC) of 5%, 4%, 3%, 2%, 1% and 1%, for six years. Class C shares have
a 1% CDSC for one year. Class B shares will automatically convert to Class A
shares on a quarterly basis, after approximately seven years.
2 Inception dates: 1/22/90 Class A; 3/25/82 Class B; 8/1/94 Class C.*
These are the average returns of 121 funds in the GNMA category for six months;
102 funds for one year; 11 funds for five years; and 10 since inception, as
determined by Lipper Analytical Services, Inc.
Without a waiver of management fees and/or expense subsidization, the Fund's
average annual total return would have been lower.
(CHART)
Source: Lipper Analytical Services, Inc. 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 added
historical 20-year average annual returns to show that 1995's returns (so far)
are higher than normal. These returns assume the reinvestment of dividends.
Stock funds will fluctuate a great deal. Smaller capitalization stocks offer
greater potential for long term growth but may be more volatile than larger
capitalization stocks. Investors receive higher historical total returns from
stocks than from most other investments.
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
a good deal) and their returns are historically lower than those of stock
funds.
Sector or specialty stock funds usually entail the greatest risks because they
are not widely diversified. They are designed for sophisticated investors who
can tolerate additional risk in exchange for higher potential rewards or
losses.
Money market funds attempt to preserve a constant share value; they don't
fluctuate much in price but their returns are generally among the lowest of
the major investment categories.
<PAGE>
Barbara Kenworthy, Fund Manager
(PICTURE)
Portfolio
Manager's Report
The Fund invests primarily in mortgage backed securities guaranteed as to
timely payment of principal and interest by the Government National Mortgage
Association (GNMA). The Fund also invests in other U.S. government obligations
and high quality, asset backed securities. The Fund's credit quality is high
and its effective maturity is generally in the intermediate range.
Our New Manager
In May, Barbara Kenworthy was named portfolio manager. Barbara has more than
20 years experience managing bond investments. She joined Prudential last year
from the Dreyfus Corp. Barbara oversees the investment of $6.5 billion in
government securities, including the $1.5 billion Prudential Government Income
Fund andthe new Prudential Diversified Bond Fund.
(CHART)
1. Strategy Session.
What We See Now.
Mortgage backed securities are generally valued by investors seeking higher
yields than U.S. Treasurys. Like all bonds, their prices usually rise when
interest rates fall, and vice versa. However, they may rise less in price than
U.S. Treasurys when interest rates fall, because that is when homeowners tend
to refinance their mortgages, increasing prepayments. Prepayments work against
investors because higher-yielding bonds are paid off early, forcing investors
to reinvest the proceeds at lower interest rates.
Early this year, as interest rates started to decline, mortgages performed
better than other bonds -- U.S. government, corporate or high yield bonds. But
as the year progressed -- and interest rates fell faster -- mortgages were hurt
by rising prepayment fears.
Over the last six months, we took some profits in mortgage backed securities
and moved more assets into U.S. Treasury securities and government agency
bonds, which have more appreciation potential when interest rates fall. We
reduced holdings in mortgage backed securities by 7 percentage points to 92.9%
of total net assets, and lowered the effective maturity to 5.5 years from 6.3
years.
<PAGE>
2. What Went Well.
We Took Profits In Mortgage Backed Securities.
As the bond market rallied, we sold some of our GNMAs (mostly 9% coupons) that
had appreciated, reducing them to 76% of assets from 83%. By reducing our
exposure to mortgages, we gained some protection from prepayment risk. With the
proceeds, we purchased U.S. agency securities, which had greater price
appreciation potential as interest rates fell.
We Hold A Mix Of Coupons.
Currently, the Fund is balanced by holding current coupon and premium coupon
GNMAs. We hold 33% of assets with 7% coupon mortgage backed securities and 28%
in mortgages with 8.5% to 9% coupons. The higher-coupon mortgages help us pay
an attractive dividend, and the lower coupons tend to appreciate more when
interest rates fall and are also less susceptible to prepayment risk. In
addition, we were able to purchase some mortgages with 9% coupons late in the
second quarter when they became attractively priced.
3. And Not So Well.
Although we must keep 65% of assets in mortgage backed securities, we could
have reduced our position earlier and invested more assets in U.S. Treasurys,
which were better performers later in the second quarter.
4. Looking Ahead.
Mortgage backed securities should continue to perform well, although we don't
expect the same type of gains experienced in the first half of the year.
Investors of the Fund should expect to earn mainly coupon income, with
possibly some price gains. You should also be prepared for more price
volatility than in the first half, because interest rates may fluctuate until
the pace of economic growth and inflation become more clear.
While the Federal Reserve did reduce its target for short-term interest rates
in July by a quarter of a percentage point to 5.75%, it is not clear at this
writing when the central bank can be expected to act again. In the interim, if
interest rates move higher or are volatile, mortgage backed securities may
provide better performance than U.S. Treasurys.
Investment
Policy Changes
Proposed.
Shareholders have voted to change the Fund's investment policy to expand the
Fund's ability to purchase mortgage instruments issued by agency issuers other
than GNMA and by non-agency private issuers. Until now, the Fund invested 65%
of assets in GNMAs. To reflect its new investment policy, the name of the Fund
has been changed to Prudential Mortgage Income Fund, Inc.
1
<PAGE>
President's Letter June 19, 1995
(PICTURE)
Dear Shareholder:
You've probably noticed your shareholder report looks different this month.
We've designed it to provide clear, concise and forthright information about
your investment, its performance, risks and potential rewards. And, from time
to time, I'll share some thoughts with you about the industry, mutual fund
trends and how we're responding to them at Prudential Mutual Funds.
On The Hill
One recent trend we like is part of the "Contract with America." It's called
the American Dream Savings Account and it was approved by the House of
Representatives earlier in the year. The Senate has now taken up the proposal,
which would improve the traditional Individual Retirement Account program by
allowing higher non-working spouse contributions. The proposed law would also
allow tax-free and penalty-free withdrawals from the account before age
59 1/2, for certain expenses. Prudential Mutual Funds supports the proposal
and we urge you to share your opinion about it with your Senator. You can reach
your Senator's office by calling 202-224-3121.
In Closing
One final note: if you're a Class B shareholder, you'll begin noticing a
change on your statements once you've held your shares for seven years. At
that time they will automatically begin to convert to Class A shares on a
quarterly basis. Since Class A shares carry lower annual distribution charges
than Class B shares, your total returns will automatically rise after the
conversion. Conversions started earlier this year and will occur each calendar
quarter--beginning in December 1995, they'll take place every March, June,
September and December.
I hope you'll find this information useful as you work with your financial
advisor or registered representative to develop your personal investment plan.
Thank you for choosing Prudential Mutual Funds for your mutual fund investment.
Sincerely,
Richard A. Redeker
President
2
<PAGE>
Portfolio of Investments as
of June 30, 1995 (Unaudited) PRUDENTIAL MORTGAGE INCOME FUND, INC.*
------------------------------------------------------------
------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
------------------------------------------------------------
LONG-TERM INVESTMENTS--103.8%
------------------------------------------------------------
U.S. Government Agency Mortgage
Pass-Through Obligations--6.3%
Federal Home Loan Mortgage
Association,
$ 5,000 6.71%, 6/11/02 $ 5,014,250
Federal National Mortgage
Association,
10,000 6.63%, 6/20/05 10,051,000
-------------
Total U.S. government agency
mortgage pass-through obligations
(cost US$15,099,600) 15,065,250
------------------------------------------------------------
Mortgage-Related Securities--83.6%
Federal National Mortgage
Association,
11 7.00%, 4/01/08 11,263
Government National Mortgage
Association,
16,960 6.50%, 6/20/25, ARM 17,331,000
79,681 7.00%, 7/15/22 - 8/15/24 78,410,646
26,619 7.50%, 7/15/07 - 6/15/25 26,942,372
10,369 8.00%, 9/15/17 - 5/15/25 10,642,687
21,797 8.50%, 2/15/20 - 4/15/25 22,630,307
41,056 9.00%, 4/15/01 - 4/15/25 43,196,447
-------------
Total mortgage-related securities
(cost US$190,667,910) 199,164,722
------------------------------------------------------------
Collateralized Mortgage Obligation--3.0%
Greenwich Capital Acceptance, Inc.,
82,525 2.25%, 1/25/24, ARM/IO 3,300,994
Structured Asset Securities Corp.,
4,000 7.375%, 9/25/24 3,686,250
-------------
Total collateralized mortgage
obligations (cost US$9,447,878) 6,987,244
U.S. Government Obligations--10.9%
United States Treasury Notes,
$ 2,000 6.50%, 5/15/05 $ 2,042,500
22,000 7.50%, 2/15/05 23,956,020
-------------
Total U.S. government obligations
(cost US$25,304,219) 25,998,520
-------------
Total long-term investments
(cost US$240,519,607) 247,215,736
-------------
SHORT-TERM INVESTMENTS--0.6%
------------------------------------------------------------
Repurchase Agreement--0.6%
Joint Repurchase Agreement Account,
1,361 6.12%, 7/3/95 (Note 5)
(cost US$1,361,000) 1,361,000
------------------------------------------------------------
Total Investments--104.4%
(cost US$241,880,607; Note 4) 248,576,736
Liabilities in excess of other
assets--(4.4%) (10,380,526)
-------------
Net Assets--100% $ 238,196,210
-------------
-------------
</TABLE>
---------------
ARM--Adjustable Rate Mortgage.
IO--Interest Only.
-----------------------------------------------------------------
*See Page 6
See Notes to Financial Statements.
3 -----
<PAGE>
Statement of Assets and
Liabilities (Unaudited) PRUDENTIAL MORTGAGE INCOME FUND, INC.*
--------------------------------------------------------------------------------
<TABLE>
<S>
<C>
Assets
June 30, 1995
Investments, at value (cost
$241,880,607)................................................................
.... $248,576,736
Cash.........................................................................
................................ 21,674
Interest
receivable...................................................................
....................... 2,102,919
Receivable for Fund shares
sold.........................................................................
..... 28,963
Deferred expenses and other
assets.......................................................................
.... 21,588
------------
Total
assets.......................................................................
....................... 250,751,880
------------
Liabilities
Payable for investments
purchased....................................................................
........ 11,246,899
Payable for Fund shares
reacquired...................................................................
........ 639,396
Dividends
payable......................................................................
...................... 390,566
Due to
Managers.....................................................................
......................... 98,906
Due to
Distributors.................................................................
......................... 98,566
Accrued
expenses.....................................................................
........................ 64,280
Deferred directors
fees.........................................................................
............. 17,057
------------
Total
liabilities..................................................................
....................... 12,555,670
------------
Net
Assets.......................................................................
............................ $238,196,210
------------
------------
Net assets were comprised of:
Common stock, at
par..........................................................................
............ $ 165,665
Paid-in capital in excess of
par..........................................................................
258,161,053
------------
258,326,718
Undistributed net investment
income.......................................................................
652,236
Accumulated net realized loss on
investments..............................................................
(27,478,873)
Net unrealized appreciation on
investments................................................................
6,696,129
------------
Net assets, June 30,
1995.........................................................................
........... $238,196,210
------------
------------
Class A:
Net asset value and redemption price per share
($100,007,167 / 6,944,761 shares of common stock issued and
outstanding)............................... $14.40
Maximum sales charge (4% of offering
price)...............................................................
.60
Maximum offering price to
public..........................................................................
$15.00
Class B:
Net asset value, offering price and redemption price per share
($137,628,666 / 9,582,755 shares of common stock issued and
outstanding)............................... $14.36
Class C:
Net asset value, offering price and redemption price per share
($560,377 / 39,017 shares of common stock issued and
outstanding)...................................... $14.36
</TABLE>
--------------------------------------------------------------------------------
*See Page 6
See Notes to Financial Statements.
----- 4
<PAGE>
PRUDENTIAL MORTGAGE INCOME FUND, INC.*
Statement of Operations (Unaudited)
Changes in Net Assets (Unaudited)
------------------------------------------------------------
------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
June 30,
Investment Income 1995
------------
<S> <C>
Income
Interest.................................... $ 9,445,193
------------
Expenses
Distribution fee--Class A................... 61,749
Distribution fee--Class B................... 601,247
Distribution fee--Class C................... 2,008
Management fee.............................. 608,000
Transfer agent's fees and expenses.......... 259,000
Custodian's fees and expenses............... 242,000
Registration fees........................... 37,000
Reports to shareholders..................... 30,000
Audit fee................................... 28,000
Franchise taxes............................. 28,000
Directors' fees............................. 26,000
Legal fees.................................. 17,000
Miscellaneous............................... 6,448
------------
Total expenses........................... 1,946,452
------------
Net investment income.......................... 7,498,741
------------
Realized and Unrealized
Gain on Investments
Net realized gain on investment transactions... 2,451,360
Net change in unrealized
appreciation/depreciation
of investments.............................. 13,654,700
------------
Net gain on investments........................ 16,106,060
------------
Net Increase in Net Assets
Resulting from Operations...................... $ 23,604,801
------------
------------
</TABLE>
<TABLE>
PRUDENTIAL MORTGAGE INCOME FUND, INC.*
Statement of Changes in Net Assets (Unaudited)
Changes in Net Assets (Unaudited)
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) June 30,
in Net Assets 1995 December 31, 1994
------------ -----------------
<S> <C> <C>
Operations
Net investment income........ $ 7,498,741 $ 16,926,800
Net realized gain (loss) on
investments............... 2,451,360 (18,606,161)
Net change in unrealized
appreciation/depreciation
of investments............ 13,654,700 (6,286,536)
------------ -----------------
Net increase (decrease) in
net assets resulting from
operations................ 23,604,801 (7,965,897)
------------ -----------------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment income
Class A................... (2,640,278) (634,109)
Class B................... (4,842,511) (16,282,437)
Class C................... (15,952) (10,254)
------------ -----------------
(7,498,741) (16,926,800)
------------ -----------------
Dividends to shareholders in
excess of net investment
income
Class A................... (229,840) --
Class B................... (180,535) --
Class C................... (879) --
------------ -----------------
(411,254) --
------------ -----------------
Tax return of capital
distributions
Class A................... -- (37,535)
Class B................... -- (1,004,614)
Class C................... -- (1,833)
------------ -----------------
-- (1,043,982)
------------ -----------------
Fund share transactions (net of
share conversions) (Note 6)
Proceeds from shares sold.... 114,135,427 27,166,084
Net asset value of shares
issued in reinvestment of
dividends................. 4,400,569 10,985,801
Cost of shares reacquired.... (150,748,611) (87,764,556)
------------ -----------------
Net decrease in net assets
from Fund share
transactions.............. (32,212,615) (49,612,671)
------------ -----------------
Total decrease.................. (16,517,809) (75,549,350)
Net Assets
Beginning of period............. 254,714,019 330,263,369
------------ -----------------
End of period................... $238,196,210 $ 254,714,019
------------ -----------------
------------ -----------------
</TABLE>
--------------------------------------------------------------------------------
*See Page 6
See Notes to Financial Statements.
5 -----
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL MORTGAGE INCOME FUND, INC.
--------------------------------------------------------------------------------
The Prudential Mortgage Income Fund, Inc. (the ``Fund''), is registered under
the Investment Company Act of 1940 as a diversified, open-end management
investment company. The investment objective of the Fund is to achieve a high
level of income over the long-term consistent with providing reasonable safety
by investing primarily in mortgage-backed securities guaranteed as to timely
payment of principal and interest by the Government National Mortgage
Association (GNMA) and other readily marketable fixed-income securities. The
ability of issuers of debt securities, other than those issued or guaranteed by
the U.S. Government, held by the Fund to meet their obligations may be affected
by economic developments in a specific industry or region. The Fund changed its
name from The Prudential GNMA Fund to The Prudential Mortgage Income Fund, Inc.,
effective August 16, 1995.
------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation: The Fund values portfolio securities on the basis of prices
provided by dealers or by a pricing service which uses information such as
market values, maturities, yields, call features and developments relating to
specific securities in determining values.
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 which approximate market value.
In connection with transactions in repurchase agreements with U.S. financial
institutions, it is the Fund's policy that its custodian or designated
subcustodians, as the case may be under triparty repurchasement agreements,
takes possession of the underlying collateral securities, the value of which
exceeds the principal amount of the repurchase transaction, including accrued
interest. If the seller defaults and the value of the collateral declines or if
bankruptcy proceedings are commenced with respect to the seller of the security,
realization of the collateral by the Fund may be delayed or limited.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Since certain mortgage-backed securities, such as
GNMAs, only settle on one day each month, there can be occasions when, pending
settlement, there may be substantial short-term securities in the portfolio
available to fund the purchases of these mortgage-backed securities. Realized
gains and losses on sales of investments are calculated on the identified cost
basis. Interest income is recorded on the accrual basis. The Fund amortizes
original issue discount paid on purchases of portfolio securities as adjustments
to interest income.
Net investment income (other than distribution fees) and unrealized and realized
gains or losses are allocated daily to each class of shares based upon the
relative proportion of net assets of each class at the beginning of the day.
Dollar Rolls: The Fund enters into mortgage dollar rolls in which the Fund sells
mortgage securities for delivery in the current month, realizing a gain or loss,
and simultaneously contracts to repurchase somewhat similar (same type, coupon
and maturity) securities on a specified future date. During the roll period the
Fund forgoes principal and interest paid on the securities. The Fund is
compensated by the interest earned on the cash proceeds of the initial sale and
by the lower repurchase price at the future date. The difference between the
sale proceeds and the lower repurchase price is taken into income. The Fund
maintains a segregated account, the dollar value of which is equal to its
obligations, in respect of dollar rolls.
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income and net capital gains,
if any, to its shareholders. Therefore, no federal income tax provision is
required.
Dividends and Distributions: Dividends from net investment income are declared
daily and paid monthly. The Fund will distribute at least annually any net
capital gains in excess of loss carryforwards. 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.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with 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 decrease paid-in capital and increase
undistributed net investment income by $1,066,350 for the six months ended
December 31, 1994. Tax return of capital distributions are charged to paid-in
capital. Net investment income, net realized gains and net assets were not
affected by this change.
--------------------------------------------------------------------------------
----- 6
<PAGE>
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL MORTGAGE INCOME FUND, INC.
--------------------------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with Prudential Mutual Fund Management, Inc.
(``PMF''). Pursuant to this agreement, PMF has responsibility for all investment
advisory services and supervises the subadviser's performance of such services.
PMF has entered into a subadvisory agreement with The Prudential Investment
Corporation (``PIC''); PIC furnishes investment advisory services in connection
with the management of the Fund. PMF pays for the cost of the subadviser's
services, the compensation of officers of the Fund, occupancy and certain
clerical and bookkeeping costs of the Fund. The Fund bears all other costs and
expenses.
The management fee paid PMF is computed daily and payable monthly, at an annual
rate of .50 of 1% of the Fund's average daily net assets.
The Fund has distribution agreements with Prudential Mutual Fund Distributors,
Inc. (``PMFD''), which acts as the distributor of the Class A shares of the
Fund, and with Prudential Securities Incorporated (``PSI''), which acts as
distributor of the Class B and Class C shares of the Fund (collectively the
``Distributors''). The Fund compensates the Distributors for distributing and
servicing the Fund's Class A, Class B and Class C shares, pursuant to plans of
distribution, (the ``Class A, B and 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 the Distributors
for distribution-related activities at an annual rate of up to .30 of 1%, .75%
of 1% and 1%, of the average daily net assets of the Class A, B and C shares,
respectively. Such expenses under the Class A Plan were .15 of 1% of the average
daily net assets of Class A shares and .75 of 1% of the average daily net assets
under the Class B and C Plans of, both, the Class B and Class C shares,
respectively for the fiscal year ended December 31, 1994.
PMFD has advised the Fund that it has received approximately $28,000 in
front-end sales charges resulting from sales of Class A shares during the six
months ended June 30, 1995. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
PSI advised the Fund that for the six months ended June 30, 1995, it received
approximately $304,000 in contingent deferred sales charges imposed upon certain
redemptions by Class B and C shareholders.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
------------------------------------------------------------
Note 3. Other Transactions with Affiliates
Prudential Mutual Fund Services, Inc. (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent and during the six months ended June
30, 1995, the Fund incurred fees of approximately $180,000 for the services of
PMFS. As of June 30, 1995, approximately $29,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments
and dollar rolls, for the six months ended June 30, 1995 aggregated $287,917,462
and $322,658,947, respectively.
The cost basis of investments for federal income tax purposes is substantially
the same as the basis for financial reporting purposes and, accordingly, as of
June 30, 1995 net unrealized depreciation of investments for federal income tax
purposes was $6,696,129 (gross unrealized appreciation--$9,237,321; gross
unrealized depreciation--$2,541,192).
The Fund had a capital loss carryforward as of December 31, 1994 of
approximately $27,545,000 of which $5,602,500 expires in 1996, $3,073,700
expires in 1997, $2,647,800 expires in 1998 and $16,221,000 expires in 2002. No
capital gains distribution is expected to be paid to shareholders until net
gains have been realized in excess of such carryforward.
The Fund will elect to treat net capital losses of approximately $2,385,000
incurred in the two month period ended December 31, 1994 as having been incurred
in the following fiscal year.
------------------------------------------------------------
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 June 30, 1995, the Fund
has a 0.2% undivided interest in the joint account. The undivided interest for
the Fund represents $1,361,000 in the
--------------------------------------------------------------------------------
7 -----
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL MORTGAGE INCOME FUND, INC.
--------------------------------------------------------------------------------
principal amount. As of such date, each repurchase agreement in the joint
account and the value of the collateral therefor were as follows:
Bear, Stearns & Co. Inc., 6.125%, in the principal amount of $200,000,000,
repurchase price $200,102,083, due 7/3/95; collateralized by $22,600,000 U.S.
Treasury Notes, 6.875%, due 7/31/99 and $137,000,000 U.S. Treasury Bonds, 9.25%,
due 2/15/16; approximate aggregate value including accrued interest is
$204,321,562.
CS First Boston Corp., 6.13%, in the principal amount of $160,000,000,
repurchase price $160,081,733, due 7/3/95. The value of the collateral including
accrued interest is $163,246,196.
Goldman, Sachs & Co., 6.10%, in the principal amount of $116,557,000, repurchase
price $116,616,250, due 7/3/95. The value of the collateral including accrued
interest is $118,889,059.
Smith Barney Inc., 6.13%, in the principal amount of $200,000,000, repurchase
price $200,102,166, due 7/3/95. The value of the collateral including accrued
interest is $204,000,775.
------------------------------------------------------------
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 4%. 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 commencing on or about February 1995. Each class of shares
has equal rights as to earnings, assets and voting privileges except that each
class bears different distribution expenses and has exclusive voting rights with
respect to its distribution plan. The Fund has authorized 500 million shares of
common stock, $.01 par value per share, equally divided into three classes,
designated Class A, Class B and Class C.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
------------------------------------ ---------- -------------
<S> <C> <C>
Six months ended June 30, 1995:
Shares sold......................... 132,765 $ 1,844,278
Shares issued in reinvestment of
dividends and distributions....... 124,951 1,763,791
Shares reacquired................... (1,691,764) (23,539,769)
---------- -------------
Net decrease in shares outstanding
before conversion................. (1,434,048) (19,931,700)
Shares issued upon conversion from
Class B........................... 7,729,918 106,532,546
---------- -------------
Net increase in shares
outstanding....................... 6,295,870 $ 86,600,846
---------- -------------
---------- -------------
Year ended December 31, 1994:
Shares sold......................... 160,285 $ 2,252,534
Shares issued in reinvestment of
dividends and distributions....... 23,025 322,132
Shares reacquired................... (271,037) (3,788,946)
---------- -------------
Net decrease in shares
outstanding....................... (87,727) $ (1,214,280)
---------- -------------
---------- -------------
<CAPTION>
Class B
------------------------------------
<S> <C> <C>
Six months ended June 30, 1995:
Shares sold......................... 414,354 $ 5,743,966
Shares issued in reinvestment of
dividends and distributions....... 189,200 2,633,837
Shares reacquired................... (1,491,294) (20,669,784)
---------- -------------
Net decrease in shares outstanding
before conversion................. (887,740) (12,291,981)
Shares reacquired upon conversion
into Class A...................... (7,752,400) (106,532,546)
---------- -------------
Net decrease in shares
outstanding....................... (8,640,140) $(118,824,527)
---------- -------------
---------- -------------
Year ended December 31, 1994:
Shares sold......................... 1,730,458 $ 24,377,281
Shares issued in reinvestment of
dividends and distributions....... 764,245 10,662,126
Shares reacquired................... (5,988,535) (83,970,630)
---------- -------------
Net decrease in shares
outstanding....................... (3,493,832) $ (48,931,223)
---------- -------------
---------- -------------
</TABLE>
--------------------------------------------------------------------------------
----- 8
<PAGE>
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL MORTGAGE INCOME FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C Shares Amount
------------------------------------ ---------- -------------
<S> <C> <C>
Six months ended June 30, 1995:
Shares sold......................... 1,049 $ 14,637
Shares issued in reinvestment of
dividends and distributions....... 210 2,941
Shares reacquired................... (456) (6,512)
---------- -------------
Net increase in shares
outstanding....................... 803 $ 11,066
---------- -------------
---------- -------------
August 1, 1994* through
December 31, 1994:
Shares sold......................... 38,470 $ 536,269
Shares issued in reinvestment of
dividends and distributions....... 114 1,543
Shares reacquired................... (370) (4,980)
---------- -------------
Net increase in shares
outstanding....................... 38,214 $ 532,832
---------- -------------
---------- -------------
</TABLE>
---------------
* Commencement of offering of Class C shares.
--------------------------------------------------------------------------------
9 -----
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL MORTGAGE INCOME FUND, INC.*
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-------------------------------------------------------------------------
January 22,
Six Months
1990*
Ended Year Ended
December 31, through
June 30,
---------------------------------------- December 31,
1995 1994 1993
1992 1991 1990
<S> <C> <C> <C>
<C> <C> <C>
----------- ------ -------
------ ------ ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 13.50 $14.75 $ 15.07
$15.30 $14.84 $14.73
----------- ------ -------
------ ------ ------
Income from investment operations
Net investment income..................... .44 .90 .95
1.10 1.14 1.17
Net realized and unrealized gain (loss) on
investment transactions................. .94 (1.19) (.21)
(.15) .61 .15
----------- ------ -------
------ ------ ------
Total from investment operations....... 1.38 (.29) .74
.95 1.75 1.32
----------- ------ -------
------ ------ ------
Less distributions
Dividends to shareholders from net
investment income....................... (.44) (.90) (.95)
(1.10) (1.14) (1.17)
Dividends to shareholders in excess of net
investment income....................... (.04) -- (.11)
(.08) (.15) (.04)
Tax return of capital distributions.... -- (.06) --
-- -- --
----------- ------ -------
------ ------ ------
Total distributions.................... (.48) (.96) (1.06)
(1.18) (1.29) (1.21)
----------- ------ -------
------ ------ ------
Net asset value, end of period............ $ 14.40 $13.50 $ 14.75
$15.07 $15.30 $14.84
----------- ------ -------
------ ------ ------
----------- ------ -------
------ ------ ------
TOTAL RETURN(b):.......................... 5.24% (2.01)% 4.97%
6.42% 12.48% 9.41%
RATIOS TO AVERAGE NET ASSETS:
Net assets, end of period (000)........... $100,007 $8,762 $10,863
$9,045 $6,268 $1,604
Average net assets (000).................. $83,014 $9,874 $10,199
$6,651 $3,035 $756
Ratios to average net assets:
Expenses, including distribution
fees................................ 1.22%(a) 1.13% 1.00%
1.00% 1.11% 1.15%(a)
Expenses, excluding distribution
fees................................ 1.07%(a) .98% .85%
.85% .96% .99%(a)
Net investment income.................. 6.41%(a) 6.42% 6.42%
7.26% 7.81% 9.16%(a)
Portfolio turnover........................ 118% 560% 134%
33% 118% 481%
</TABLE>
---------------
(a) Annualized.
(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.
* Commencement of offering of Class A shares.
--------------------------------------------------------------------------------
*See Page 6
See Notes to Financial Statements.
----- 10
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL MORTGAGE INCOME FUND, INC.*
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-----------------------------------------------------------------------------
Six Months
Ended
Year Ended December 31,
June 30,
------------------------------------------------------------
1995 1994
1993 1992 1991 1990
<S> <C> <C> <C>
<C> <C> <C>
------------ --------
-------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 13.47 $ 14.71 $
15.04 $ 15.27 $ 14.81 $ 14.86
------------ --------
-------- -------- -------- --------
Income from investment operations
Net investment income..................... .42 .82
.87 1.02 1.06 1.15
Net realized and unrealized gain (loss) on
investment transactions................. .91 (1.19)
(.23) (.16) .60 (.01)
------------ --------
-------- -------- -------- --------
Total from investment operations....... 1.33 (.37)
.64 .86 1.66 1.14
------------ --------
-------- -------- -------- --------
Less distributions
Dividends to shareholders from net
investment income....................... (.42) (.82)
(.87) (1.02) (1.06) (1.15)
Dividends to shareholders in excess of net
investment income....................... (.02) --
(.10) (.07) (.14) (.04)
Tax return of capital distributions....... -- (.05)
-- -- -- --
------------ --------
-------- -------- -------- --------
Total distributions.................... (.44) (.87)
(.97) (1.09) (1.20) (1.19)
------------ --------
-------- -------- -------- --------
Net asset value, end of period............ $ 14.36 $ 13.47 $
14.71 $ 15.04 $ 15.27 $ 14.81
------------ --------
-------- -------- -------- --------
------------ --------
-------- -------- -------- --------
TOTAL RETURN(b): 2.24% (2.57)%
4.29% 5.80% 11.82% 8.10%
RATIOS TO AVERAGE NET ASSETS:
Net assets, end of period (000)........... $137,629 $245,437
$319,401 $325,969 $272,661 $226,605
Average net assets (000).................. $161,661 $279,946
$332,731 $295,255 $243,749 $218,749
Ratios to average net assets:(c)
Expenses, including distribution
fees................................ 1.80%(a) 1.73%
1.60% 1.60% 1.71% 1.74%
Expenses, excluding distribution
fees................................ 1.05%(a) .98%
.85% .85% .96% .99%
Net investment income.................. 6.04%(a) 5.82%
5.82% 6.66% 7.21% 7.96%
Portfolio turnover........................ 118% 560%
134% 33% 118% 481%
<CAPTION>
Class C
August 1,
Six Months 1994**
Ended through
June 30, December 31,
1995 1994
<S> <<C> <C>
------------ ------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period...... $ 13.47 $ 14.01
------ ------
Income from investment operations
Net investment income..................... .42 .30
Net realized and unrealized gain (loss) on
investment transactions................. .91 (.49)
------ ------
Total from investment operations....... 1.33 (.19)
------ ------
Less distributions
Dividends to shareholders from net
investment income....................... (.42) (.30)
Dividends to shareholders in excess of net
investment income....................... (.02) --
Tax return of capital distributions....... -- (.05)
------ ------
Total distributions.................... (.44) (.35)
------ ------
Net asset value, end of period............ $ 14.36 $ 13.47
------ ------
------ ------
TOTAL RETURN(b): 2.24% (1.32)%
RATIOS TO AVERAGE NET ASSETS:
Net assets, end of period (000)........... $560 $515
Average net assets (000).................. $540 $460
Ratios to average net assets:(c)
Expenses, including distribution
fees................................ 1.80%(a) 1.82%(a)
Expenses, excluding distribution
fees................................ 1.05%(a) 1.08%(a)
Net investment income.................. 5.96%(a) 5.32%(a)
Portfolio turnover........................ 118% 560%
</TABLE>
---------------
(a) Annualized.
(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) Because of the recent commencement of its offering, the ratios for the
Class C shares are not necessarily comparable to that of Class A or B
shares and are not necessarily indicative of future ratios.
** Commencement of offering of Class C shares.
--------------------------------------------------------------------------------
*See Page 6
See Notes to Financial Statements.
11 -----
<PAGE>
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
Toll Free (800) 225-1852
Directors
Edward D. Beach
Eugene Dorsey
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Thomas T. Mooney
Thomas H. O'Brien
Richard A. Redeker
Nancy H. Teeters
Officers
Richard A. Redeker, President
David W. Drasnin, Vice President
Robert F. Gunia, Vice President
Grace Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Deborah Docs, Assistant Secretary
Manager
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributors
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Price Waterhouse LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Sullivan & Cromwell
125 Broad Street
New York, NY 10004
The accompanying financial statements as of June 30, 1995 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>
Prudential Mortgage Income Fund, Inc. Salomon Index
The Prudential Mortgage Income Fund and the Salomon
Mortgage Index: Comparing a $10,000 Investment.
(CHART)
Past performance is no guarantee of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, will be
worth more or less than their original cost. The bar chart to the right
illustrates how much the Fund may fluctuate from year to year; it shows the
Fund's best and worst years, in terms of total annual return, since inception
of each share class.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in the Prudential Mortgage Income Fund (Class A,
Class B and Class C) with a similar investment in the Salomon Bros. Mortgage
Backed Security Index by portraying the initial account values at the
commencement of operations of each class, and subsequent account values at the
end of each fiscal year (December 31), as measured on a quarterly basis,
beginning in 1990 for Class A shares, in 1985 for Class B shares and in 1994
for Class C shares. For purposes of the graphs, and unless otherwise indicated,
in the accompanying tables it has been assumed (a) that the maximum applicable
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 June 30, 1995; (c) all recurring fees (including
management fees) were deducted; and (d) all dividends and distributions were
reinvested. Class B shares will automatically convert to Class A shares, on a
quarterly basis, beginning approximately seven years after purchase. This
conversion feature is not reflected in the graph.
The Index is comprised of mortgage backed, pass through securities consisting
70% of pass through securities issued by the Government National Mortgage
Association and 23% by the Federal Home Loan Mortgage Corporation, 5% by the
Federal National Mortgage Association and the balance in a mixture of
conventional and Federal Housing Administration mortgage pools. The Index is
unmanaged and includes the reinvestment of all dividends, but does not reflect
the payment of transaction costs and advisory fees associated with an
investment in the Fund. The securities that comprise Index may differ
substantially from the securities in the Fund's portfolio. The Index is not
the only one that may be used to characterize performance of mortgage backed
security funds and other indices may portray different comparative performance.
<PAGE>
(LOGO)
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