(ICON)
Prudential
Mortgage
Income
Fund, Inc.
SEMI
ANNUAL
REPORT
June 30, 1996
(LOGO)
<PAGE>
Prudential Mortgage Income Fund, Inc.
Performance At A Glance.
Indications of a stronger than expected U.S. economy and the failure to achieve
a successful federal budget agreement prompted interest rates to rise in the
first half of 1996. This climb began slowly in the first quarter but the upturn
became sharper in the second quarter. Since bond prices fall when interest rates
rise, bond funds struggled. Your bond fund, which invests primarily in mortgage
backed securities, was no exception. The Prudential Mortgage Income Fund
finished the first half of 1996 in line with the average U.S. mortgage fund.
<TABLE>
<CAPTION>
Cumulative Total Returns1 As of 6/30/96
Six One Five Ten Since
Months Year Years Years Inception2
<S> <C> <C> <C> <C> <C>
Class A -1.0% 3.9% 37.9% N/A 54.2%
Class B -1.3 3.2 33.8 88.9% 225.0
Class C -1.3 3.2 N/A N/A 11.9
Lipper U.S. Mortgage
Fund Avg3 -0.8 4.6 38.8 107.4 272.7%
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns1 As of 6/30/96
One Five Ten Since
Year Years Years Inception2
<S> <C> <C> <C> <C>
Class A -0.3% 5.8% N/A 6.3%
Class B -1.8 5.8 6.6% 8.6
Class C 2.2 N/A N/A 6.1
</TABLE>
<TABLE>
<CAPTION>
Total Dividends 30-Day
Paid for Six Mos. SEC Yield
<S> <C> <C> <C>
Dividends
& Yields Class A $0.45 5.83%
As of Class B $0.41 5.47
6/30/96 Class C $0.41 5.48
</TABLE>
Past performance is not indicative of future results. Principal and investment
return will fluctuate so that an investor's shares, when redeemed, may be worth
more or less than their original cost.
1Source: Prudential Mutual 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 4% for Class A shares and a declining,
six-year contingent deferred sales charge (CDSC) of 5%, 4%, 3%, 2%, 1% and 1%
for Class B shares. Class C shares have a 1% CDSC for one year. Class B shares
automatically convert to Class A shares on a quarterly basis, after
approximately seven years.
2Inception dates: 1/22/90 Class A; 3/25/82 Class B; 8/1/94 Class C.
3The Lipper U.S. Mortgage Fund average includes 60 funds for six months, 60
funds for one year, 23 funds for five years, 15 funds for 10 years and 3 funds
since inception of the Class B shares on 3/25/82.
How Investments Compared.
(As of 6/30/96)
(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>
Barbara L. Kenworthy, Fund Manager (PHOTO)
Portfolio
Manager's Report
The Fund invests primarily in mortgage backed securities issued by U.S.
government agencies and non-agency issuers. The Fund may also invest in
other U.S. government obligations, investment grade corporate bonds, notes
and debentures and high quality money market instruments. The Fund'scredit
quality is investment grade and its effective maturity is generally in the
intermediate-term range.
Flexibility.
Your Fund now has the flexibility to invest without restriction in government
agency securities, such as conventional FNMA ("Fannie Mae") and FHLMC ("Freddie
Mac") mortgages, as well as traditional GNMA ("Ginnie Mae") bonds. This
capability helped our performance in 1996 and we expect it to help us in the
future, since we anticipate the government will increasingly issue more agency
securities, but likely fewer GNMAs.
Strategy Session.
A combination of forces led to rising interest rates in early 1996. At the end
of 1995, it seemed likely that the President and Congress would reach a
historic agreement on a balanced budget. When the long-awaited agreement
failed to materialize, investors retreated and began to sell their bonds,
causing interest rates to edge up and bond prices to fall.
Just as this happened, some economic reports began to suggest that the U.S.
economy was gaining strength, sparking fears of rising inflation. Inflation
is bad news for bonds because it lessens the value of the fixed interest that
they pay and their principal value at maturity.
These developments called for us to be more cautious. As interest rates rise
and bond prices fall, bonds with shorter maturities tend to retain more value
than those with longer maturities. (Maturity is the length of time until a
bond's principal must be repaid.) When this happens, an often smart strategy
is to sell bonds with longer maturities and buy ones with shorter maturities.
The duration of the portfolio is therefore shortened. The shorter the duration
of a portfolio, the less negative the impact of rising interest rates on the
value of your Fund's shares (the value goes down as interest rates go up).
Late last year, we began to anticipate a rise in interest rates and, in January,
began to shorten your Fund's duration. We were vindicated as interest rates
began rising slowly in February and March.
Mortgage backed securities weathered the rise in interest rates better than
other types of bonds because prepayments slowed and fewer mortgages were
generated, making existing mortgage backed securities more valuable.
Nearly Half Of Assets In GNMAs.
Expressed as a percentage of
total net assets as of 6/30/96.
(GRAPH)
<PAGE>
What Went Well.
Right About Rates.
Many bond investors were caught off guard after interest rates fell throughout
1995. However, as some signs of economic growth appeared, we began to expect a
rise in interest rates. Our duration at the end of 1995 was 3.3 years, which
was, in our view, somewhat shorter than or equal to that of comparable funds.
We actively trimmed your Fund's duration by selling some Treasury bonds to
raise our cash level but rising rates lifted duration to 4.3 years on June 30,
1996.
And Not So Well.
Wrong About How High.
Although we anticipated an interest rate rise, we were surprised at the speed
and amount of the rise, particularly at the beginning of the second quarter
when the release of economic data sent bond prices rapidly lower. In the first
half of 1996, the yield on the 30-year U.S. Treasury bond rose 94 basis points
(a basis point is 1/100 of a percentage point), to 6.9%, at times topping the
important 7% milestone. We were able to adjust the Fund's duration, but not
quickly enough to override the effects of rising interest rates on the value
of the Fund's shares.
Coupons--Biggest
Would Have Been Best.
Although we were able to buy some higher yielding bonds early in the year, we
could have boosted your Fund's returns more if we sold more of our bonds that
were paying 7-7 1/2% for bonds that were paying 8-9%. We didn't and this cost
us some performance. When interest rates rise, bonds that pay more income, or
have higher coupons, can retain their value better than those with lower
coupons, helping the Fund's returns.
Very High Quality.
Expressed as a percentage of
total net assets as of 6/30/96.
(GRAPH)
Looking Ahead.
Today's higher interest rates will eventually act as a brake on economic
growth. This, in turn, should help the bond market turn around. Once this
happens, interest rates could begin to fall by year-end. Until then, we
believe that bond yields will continue to rise until inflation fears recede.
Employment and job creation data are particularly important indicators, and
we will be watching them closely.
Our strategy in the face of this uncertainty is to stand at attention and be
prepared. We expect to maintain a shorter-to-average duration until bond
prices become more stable and to continue to seek out the special opportunities
the mortgage backed market offers.
- --------------------------------------------------------------------------------
1
<PAGE>
President's Letter August 1, 1996
(PHOTO)
Dear Shareholder:
Last year, U.S. stocks and bonds generally posted extraordinary returns.
Investors celebrated this performance by putting record amounts of new money
into mutual funds in the first few months of 1996. According to figures
released by the Investment Company Institute, a mutual fund industry trade
group, new investments in mutual funds reached an all-time monthly high of
$33 billion in January of 1996. An additional $66 billion was invested in
the following three months, although this rapid inflow subsided somewhat in
late spring.
While we are pleased that mutual funds are attracting new investors, we're
concerned that some of them may be "buying last year's returns." Few expect
1995's virtual non-stop returns from the stock and bond markets. In fact,
1996's markets have been volatile so far (stock and bond prices go down just
as they go up). There's no better time than now to be talking with your
Financial Advisor or Registered Representative. She or he can help you
determine reasonable expectations about both the potential performance and
risks associated with your investments.
Board of Directors Election.
In addition to this report, we are including a notice about a special
shareholder meeting to elect new Prudential mutual fund boards of directors.
Your Board of Directors has approved a proposal to place a common board of
experienced directors across many of Prudential's mutual funds to improve
business efficiency. The enclosed material contains more complete information
about this proposal.
Changes at Prudential.
Finally, there have been some important changes recently at Prudential that
were made with you in mind. Prudential Mutual Funds has moved under the
umbrella of Prudential's newly created "Money Management Group." This group
manages and administers nearly $190 billion in client assets and provides
mutual funds, annuities, defined benefit and defined contribution plans to
our individual and institutional investors. We plan to improve the range
and quality of investment products and services that we can provide you by
better leveraging Prudential's strengths. There will, however, be no change
in the service you receive from your Financial Advisor, Registered
Representative or our Customer Service unit.
We're excited about our future and hope that you are, too. Thank you for your
continued support and confidence in Prudential Mutual Funds.
Sincerely,
Richard A. Redeker
President
- --------------------------------------------------------------------------------
2
<PAGE>
Portfolio of Investments as of
June 30, 1996 (Unaudited) PRUDENTIAL MORTGAGE INCOME FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Amount
(000) Description Value (Note 1)
<C> <S> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--94.2%
- ------------------------------------------------------------
U.S. Government Agency Mortgage
Pass-Through Obligations--39.8%
Federal National
Mortgage Association,
$ 10 7.00%, 4/01/08 $ 9,663
29,726 7.50%, 3/01/24 - 9/01/25 29,370,450
50,232 8.00%, 7/01/24 - 5/01/26 50,649,839
-------------
Total U.S. government agency
mortgage pass-through obligations
(cost $80,376,011) 80,029,952
-------------
- ------------------------------------------------------------
Mortgage-Related Securities--48.2%
Government National Mortgage
Association,
14,882 7.00%, 11/15/22 - 6/15/24 14,407,576
25,220 7.50%, 7/15/07 - 6/15/25 25,221,053
38,291 8.00%, 2/15/04 - 11/15/25 38,759,511
17,672 9.00%, 4/15/01 - 4/15/25 18,602,442
-------------
Total mortgage-related securities
(cost $96,073,986) 96,990,582
-------------
- ------------------------------------------------------------
Collateralized Mortgage Obligation--2.6%
Greenwich Capital Acceptance, Inc.,
51,982 2.24%, 1/25/24, (Interest only) 1,559,457
Structured Asset Securities Corp.,
4,000 7.375%, 9/25/24 3,797,500
-------------
Total collateralized mortgage
obligations
(cost $8,343,746) 5,356,957
-------------
U.S. Government Obligations--3.6%
United States Treasury Bonds,
$ 2,500 7.125%, 2/15/23 $ 2,526,950
United States Treasury Notes,
3,500 12.375%, 5/15/04 4,702,565
-------------
Total U.S. government obligations
(cost $7,726,836) 7,229,515
-------------
Total long-term investments
(cost $192,520,579) 189,607,006
-------------
SHORT-TERM INVESTMENTS--5.7%
- ------------------------------------------------------------
Repurchase Agreement--5.7%
Joint Repurchase Agreement Account,
11,455 5.46%, 7/01/96, (Note 5)
(cost $11,455,000) 11,455,000
-------------
- ------------------------------------------------------------
Total Investments--99.9%
(cost $203,975,579; Note 4) 201,062,006
Other assets in excess of
liabilities--0.1% 148,988
-------------
Net Assets--100% $ 201,210,994
-------------
-------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3 -----
<PAGE>
Statement of Assets
and Liabilities (Unaudited) PRUDENTIAL MORTGAGE INCOME FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S>
<C>
Assets
June 30, 1996
Investments, at value (cost
$203,975,579)...................................................................
$201,062,006
Interest
receivable...................................................................
...................... 1,166,118
Receivable for Fund shares
sold.........................................................................
.... 23,689
Deferred expenses and other
assets..........................................................................
7,373
-------------
Total
assets.......................................................................
...................... 202,259,186
-------------
Liabilities
Dividends
payable......................................................................
..................... 329,818
Accrued
expenses.....................................................................
....................... 278,883
Payable for Fund shares
reacquired...................................................................
....... 250,037
Management fee
payable......................................................................
................ 82,555
Distribution fee
payable......................................................................
.............. 78,513
Deferred director`s
fees.........................................................................
........... 28,386
-------------
Total
liabilities..................................................................
...................... 1,048,192
-------------
Net
Assets.......................................................................
........................... $201,210,994
-------------
-------------
Net assets were comprised of:
Common stock, at
par..........................................................................
........... $ 143,707
Paid-in capital in excess of
par.........................................................................
226,215,894
-------------
226,359,601
Undistributed net investment
income......................................................................
953,539
Accumulated net realized loss on
investments.............................................................
(23,188,573 )
Net unrealized depreciation on
investments...............................................................
(2,913,573 )
-------------
Net assets, June 30,
1996.........................................................................
.......... $201,210,994
-------------
-------------
Class A:
Net asset value and redemption price per share
($93,507,584 / 6,669,264 shares of common stock issued and
outstanding)............................... $14.02
Maximum sales charge (4.0% of offering
price)............................................................
.58
------
Maximum offering price to
public.........................................................................
$14.60
------
------
Class B:
Net asset value, offering price and redemption price per share
($106,949,082 / 7,647,499 shares of common stock issued and
outstanding).............................. $13.98
------
------
Class C:
Net asset value, offering price and redemption price per share
($754,328 / 53,940 shares of common stock issued and
outstanding)..................................... $13.98
------
------
</TABLE>
- --------------------------------------------------------------------------------
- ----- 4 See Notes to Financial Statements.
<PAGE>
PRUDENTIAL MORTGAGE INCOME FUND, INC.
Statement of Operations (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
Investment Income June 30, 1996
<S> <C>
Income
Interest.................................... $ 8,157,328
-------------
Expenses
Distribution fee--Class A................... 71,121
Distribution fee--Class B................... 437,606
Distribution fee--Class C................... 2,519
Management fee.............................. 530,486
Transfer agent's fees and expenses.......... 197,000
Custodian's fees and expenses............... 150,000
Reports to shareholders..................... 54,000
Registration fees........................... 38,000
Franchise taxes............................. 30,000
Audit fee and expenses...................... 28,000
Directors' fees and expenses................ 26,000
Legal fees and expenses..................... 17,000
Miscellaneous............................... 4,415
-------------
Total expenses........................... 1,586,147
-------------
Net investment income.......................... 6,571,181
-------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain on investment transactions... 1,879,794
Net change in unrealized depreciation of
investments................................. (10,911,035)
-------------
Net loss on investments........................ (9,031,241)
-------------
Net Decrease in Net Assets
Resulting from Operations...................... $ (2,460,060)
-------------
-------------
</TABLE>
PRUDENTIAL MORTGAGE INCOME FUND, INC.
Statement of Changes in Net Assets (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months Year Ended
Increase (Decrease) Ended December 31,
in Net Assets June 30, 1996 1995
<S> <C> <C>
Operations
Net investment income............. $ 6,571,181 $ 14,237,495
Net realized gain on
investments................. 1,879,794 4,861,866
Net change in unrealized
appreciation-depreciation of
investments................. (10,911,035) 14,956,033
------------ ------------
Net increase (decrease) in net
assets resulting from
operations.................. (2,460,060) 34,055,394
------------ ------------
Dividends and distributions (Note
1)
Dividends to shareholders from
net investment income
Class A..................... (3,005,816) (5,693,222)
Class B..................... (3,334,916) (8,509,991)
Class C..................... (19,278) (34,282)
------------ ------------
(6,360,010) (14,237,495)
------------ ------------
Dividends to shareholders in
excess of net investment
income
Class A..................... -- (460,031)
Class B..................... -- (480,301)
Class C..................... -- (2,442)
------------ ------------
-- (942,774)
------------ ------------
Fund share transactions (net of
share conversions) (Note 6)
Proceeds from shares sold...... 4,416,863 12,534,282
Net asset value of shares
issued in reinvestment of
dividends................... 3,873,278 8,784,795
Cost of shares reacquired...... (23,559,558) (69,607,739)
------------ ------------
Net decrease in net assets from
Fund share transactions..... (15,269,417) (48,288,662)
------------ ------------
Total decrease.................... (24,089,487) (29,413,537)
Net Assets
Beginning of period............... 225,300,481 254,714,018
------------ ------------
End of period..................... $201,210,994 $225,300,481
------------ ------------
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
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-related instruments, including securities
guaranteed as to timely payment of principal and interest by the Government
National Mortgage Association (GNMA), other mortgage-backed securities issued
or
guaranteed by agencies or instrumentalities of the U.S. Government, and
non-agency mortgage instruments, along with obligations using mortgages as
collateral. The ability of issuers of debt securities, held by the Fund, other
than those issued or guaranteed by the U.S. Government, to meet their
obligations may be affected by economic developments in a specific industry or
region.
- ------------------------------------------------------------
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 approximates 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 repurchase 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 Net 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. Expenses are recorded on the accural 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 based upon the
relative proportion of net assets of each class at the beginning of the day.
Federal Income Taxes: It is the Fund's policy to continue to meet the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute all of its taxable net income 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 the American Institute of
Certified Public Accountant's 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 $651,652 for the year ended December 31, 1995. Net realized
gains and net assets were not affected by this change.
- ------------------------------------------------------------
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
- --------------------------------------------------------------------------------
- ----- 6
<PAGE>
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL MORTGAGE INCOME FUND, INC.
- --------------------------------------------------------------------------------
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 acted as the distributor of the Class A shares of the
Fund through January 1, 1996. Effective January 2, 1996 Prudential Securities
Incorporated (``PSI'') became the distributor of the Class A shares of the Fund
and is serving the Fund under the same terms and conditions as under the
arrangement with PMFD. PSI is also distributor of the Class B and Class C shares
of the Fund. The Fund compensated PMFD and PSI 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 PSI, and PMFD for
the period June 1, 1995 through January 1, 1996 with respect to Class A shares,
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 under the Class B and C Plans, .75 of 1%
of the average daily net assets of both the Class B and Class C shares,
respectively, for the six months ended June 30, 1996.
PMFD and PSI have advised the Fund that they have received approximately $12,700
in front-end sales charges resulting from sales of Class A shares during the six
months ended June 30, 1996. From these fees, PMFD and PSI paid such sales
charges to PRUCO Securities Corporation, affiliated broker-dealers, which in
turn paid commissions to salespersons and incurred other distribution costs.
PSI advised the Fund that for the six months ended June 30, 1996, it received
approximately $145,100 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, 1996, the Fund incurred fees of approximately $159,000 for the services of
PMFS. As of June 30, 1996, approximately $26,500 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of Operations include certain
out-of-pocket expenses paid to non-affiliates.
- ------------------------------------------------------------
Note 4. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments
and dollar rolls, for the six months ended June 30, 1996 aggregated $65,304,564
and $75,720,852, 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, 1996 net unrealized depreciation of investments for federal income tax
purposes was $2,913,573 (gross unrealized appreciation--$2,037,983; gross
unrealized depreciation--$4,951,556).
The Fund had a capital loss carryforward as of December 31, 1995 of
approximately $25,068,500 of which $3,126,000 expires in 1996, $3,073,700
expires in 1997, $2,647,800 expires in 1998 and $16,221,000 expires in 2002.
Such carryforward is after utilization of approximately $2,476,540 of net
taxable gains realized and recognized during the year ended December 31, 1995.
Accordingly, no capital gains distribution is expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
- ------------------------------------------------------------
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, 1996, the Fund
has a 1.03% undivided interest in the joint account. The undivided interest for
the Fund represents $11,455,000 in the principal amount. As of such date, each
repurchase agreement in the joint account and the collateral therefore were as
follows:
Bear, Stearns & Co. Inc., 5.40%, in the principal amount of $369,000,000,
repurchase price $369,055,350, due 7/1/96. The value of the collateral including
accrued interest is $377,194,429.
- --------------------------------------------------------------------------------
7 -----
<PAGE>
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL MORTGAGE INCOME FUND, INC.
- --------------------------------------------------------------------------------
Goldman, Sachs & Co., 5.47%, in the principal amount of $369,000,000, repurchase
price $369,056,068 due 7/1/96. The value of the collateral including accrued
interest is $376,380,556.
Smith Barney, Inc., 5.50%, in the principal amount of $369,000,000, repurchase
price $369,056,375, due 7/1/96. The value of the collateral including accrued
interest is $376,380,118.
- ------------------------------------------------------------
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. A special exchange privilege is also available for
shareholders who qualified to purchase Class A shares at net asset value. 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, 1996:
Shares sold......................... 62,932 $ 899,717
Shares issued in reinvestment of
dividends and distributions....... 141,726 2,020,430
Shares reacquired................... (639,144) (9,105,525)
---------- -------------
Net decrease in shares outstanding
before conversion................. (434,486) (6,185,378)
Shares issued upon conversion from
Class B........................... 313,430 4,398,732
---------- -------------
Net decrease in shares
outstanding....................... (121,056) $ (1,786,646)
---------- -------------
---------- -------------
<CAPTION>
Class A Shares Amount
- ------------------------------------ ---------- -------------
<S> <C> <C>
Year ended December 31, 1995:
Shares sold......................... 232,288 $ 3,271,412
Shares issued in reinvestment of
dividends and distributions....... 278,118 3,964,381
Shares reacquired................... (2,365,659) (33,244,174)
---------- -------------
Net decrease in shares outstanding
before conversion................. (1,855,253) (26,008,381)
Shares issued upon conversion from
Class B........................... 7,996,682 110,374,476
---------- -------------
Net increase in shares
outstanding....................... 6,141,429 $ 84,366,095
---------- -------------
---------- -------------
<CAPTION>
Class B
- ------------------------------------
<S> <C> <C>
Six months ended June 30, 1996:
Shares sold......................... 237,664 $ 3,394,405
Shares issued in reinvestment of
dividends and distributions....... 129,900 1,847,732
Shares reacquired................... (1,017,882) (14,452,973)
---------- -------------
Net decrease in shares outstanding
before conversion................. (650,318) (9,210,836)
Shares reacquired upon conversion
into Class A...................... (314,326) (4,398,732)
---------- -------------
Net decrease in shares
outstanding....................... (964,644) $ (13,609,568)
---------- -------------
---------- -------------
Year ended December 31, 1995:
Shares sold......................... 649,378 $ 9,115,051
Shares issued in reinvestment of
dividends and distributions....... 341,323 4,813,667
Shares reacquired................... (2,581,546) (36,305,288)
---------- -------------
Net decrease in shares outstanding
before conversion................. (1,590,845) (22,376,570)
Shares reacquired upon conversion
into Class A...................... (8,019,907) (110,374,476)
---------- -------------
Net decrease in shares
outstanding....................... (9,610,752) $(132,751,046)
---------- -------------
---------- -------------
<CAPTION>
Class C
- ------------------------------------
<S> <C> <C>
Six months ended June 30, 1996:
Shares sold......................... 8,709 $ 122,741
Shares issued in reinvestment of
dividends and distributions....... 361 5,116
Shares reacquired................... (75) (1,060)
---------- -------------
Net increase in shares
outstanding....................... 8,995 $ 126,797
---------- -------------
---------- -------------
Year ended December 31, 1995:
Shares sold......................... 10,317 $ 147,818
Shares issued in reinvestment of
dividends and distributions....... 475 6,747
Shares reacquired................... (4,061) (58,277)
---------- -------------
Net increase in shares
outstanding....................... 6,731 $ 96,288
---------- -------------
---------- -------------
</TABLE>
- --------------------------------------------------------------------------------
- ----- 8
<PAGE>
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL MORTGAGE INCOME FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
- ---------------------------------------------------------------------
Six Months
Ended
Year Ended December 31,
June 30
- -----------------------------------------------------
1996 1995
1994 1993 1992 1991
----------- --------
- ------ ------- ------ ------
<S> <C> <C> <C>
<C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 14.61 $ 13.50
$14.75 $ 15.07 $15.30 $14.84
----------- --------
- ------ ------- ------ ------
Income from investment operations
Net investment income...................... .46 .89
.90 .95 1.10 1.14
Net realized and unrealized gain (loss) on
investment transactions................. (.60) 1.18
(1.19) (.21) (.15) .61
----------- --------
- ------ ------- ------ ------
Total from investment operations........ (.14) 2.07
(.29) .74 .95 1.75
----------- --------
- ------ ------- ------ ------
Less distributions
Dividends to shareholders from net
investment income....................... (.45) (.89)
(.90) (.95) (1.10) (1.14)
Dividends to shareholders in excess of net
investment income....................... -- (.07)
-- (.11) (.08) (.15)
Tax return of capital distributions........ -- --
(.06) -- -- --
----------- --------
- ------ ------- ------ ------
Total distributions..................... (.45) (.96)
(.96) (1.06) (1.18) (1.29)
----------- --------
- ------ ------- ------ ------
Net asset value, end of period............. $ 14.02 $ 14.61
$13.50 $ 14.75 $15.07 $15.30
----------- --------
- ------ ------- ------ ------
----------- --------
- ------ ------- ------ ------
TOTAL RETURN(b):........................... (.97)% 15.53%
(2.01)% 4.97% 6.42% 12.48%
RATIOS TO AVERAGE NET ASSETS:
Net assets, end of period (000)............ $93,508 $99,183
$8,762 $10,863 $9,045 $6,268
Average net assets (000)................... $95,348 $90,854
$9,874 $10,199 $6,651 $3,035
Ratios to average net assets:
Expenses, including distribution fees... 1.16%(a) 1.27%
1.13% 1.00% 1.00% 1.11%
Expenses, excluding distribution fees... 1.01%(a) 1.12%
.98% .85% .85% .96%
Net investment income................... 6.53%(a) 6.27%
6.42% 6.42% 7.26% 7.81%
Portfolio turnover......................... 31% 193%
560% 134% 33% 118%
</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.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 9 -----
<PAGE>
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL MORTGAGE INCOME FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
- ---------------------------------------------------------------------------
Six Months
Ended
Year Ended December 31,
June 30,
- ------------------------------------------------------------
1996 1995
1994 1993 1992 1991
---------- --------
- -------- -------- -------- --------
<S> <C> <C> <C>
<C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 14.57 $ 13.47 $
14.71 $ 15.04 $ 15.27 $ 14.81
---------- --------
- -------- -------- -------- --------
Income from investment operations
Net investment income...................... .43 .82
.82 .87 1.02 1.06
Net realized and unrealized gain (loss) on
investment transactions................. (.61) 1.15
(1.19) (.23) (.16) .60
---------- --------
- -------- -------- -------- --------
Total from investment operations........ (.18) 1.97
(.37) .64 .86 1.66
---------- --------
- -------- -------- -------- --------
Less distributions
Dividends to shareholders from net
investment income....................... (.41) (.82)
(.82) (.87) (1.02) (1.06)
Dividends to shareholders in excess of net
investment income....................... -- (.05)
-- (.10) (.07) (.14)
Tax return of capital distributions........ -- --
(.05) -- -- --
---------- --------
- -------- -------- -------- --------
Total distributions..................... (.41) (.87)
(.87) (.97) (1.09) (1.20)
---------- --------
- -------- -------- -------- --------
Net asset value, end of period............. $ 13.98 $ 14.57 $
13.47 $ 14.71 $ 15.04 $ 15.27
---------- --------
- -------- -------- -------- --------
---------- --------
- -------- -------- -------- --------
TOTAL RETURN(b): (1.28)% 14.78%
(2.57)% 4.29% 5.80% 11.82%
RATIOS TO AVERAGE NET ASSETS:
Net assets, end of period (000)............ $106,949 $125,463
$245,437 $319,401 $325,969 $272,661
Average net assets (000)................... $117,336 $146,290
$279,946 $332,731 $295,255 $243,749
Ratios to average net assets:
Expenses, including distribution fees... 1.76%(a) 1.87%
1.73% 1.60% 1.60% 1.71%
Expenses, excluding distribution fees... 1.01%(a) 1.12%
.98% .85% .85% .96%
Net investment income................... 5.92%(a) 5.82%
5.82% 5.82% 6.66% 7.21%
Portfolio turnover......................... 31% 193%
560% 134% 33% 118%
<CAPTION>
Class C
August 1,
Six Months
1994(c)
Ended Year Ended
through
June 30, December 31,
December 31,
1996 1995
1994
---------- ------------
- ------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period....... $ 14.57 $ 13.47
$ 14.01
------ ------
------
Income from investment operations
Net investment income...................... .43 .81
.30
Net realized and unrealized gain (loss) on
investment transactions................. (.61) 1.16
(.49)
------ ------
------
Total from investment operations........ (.18) 1.97
(.19)
------ ------
------
Less distributions
Dividends to shareholders from net
investment income....................... (.41) (.81)
(.30)
Dividends to shareholders in excess of net
investment income....................... -- (.06)
--
Tax return of capital distributions........ -- --
(.05)
------ ------
------
Total distributions..................... (.41) (.87)
(.35)
---------- ------
------
Net asset value, end of period............. $ 13.98 $ 14.57
$ 13.47
--------- ------
------
--------- ------
------
TOTAL RETURN(b): (1.28)% 14.78%
(1.32)%
RATIOS TO AVERAGE NET ASSETS:
Net assets, end of period (000)............ $754 $655
$515
Average net assets (000)................... $676 $599
$460
Ratios to average net assets:
Expenses, including distribution fees... 1.76%(a) 1.87%
1.82%(a)
Expenses, excluding distribution fees... 1.01%(a) 1.12%
1.08%(a)
Net investment income................... 5.95%(a) 5.72%
5.32%
Portfolio turnover......................... 31% 193%
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) Commencement of offering of Class C shares.
- --------------------------------------------------------------------------------
- ----- 10 See Notes to Financial Statements.
<PAGE>
<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>
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>
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
(800) 225-1852
http:\\www.prudential.com
Directors
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Thomas T. MooneyT
homas H. O'Brien
Richard A. Redeker
Nancy Hays Teeters
Officers
Richard A. Redeker, President
David W. Drasnin, Vice President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
S. Jane Rose, Secretary
Deborah A. 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
Distributor
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent 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 views expressed in this report and information about the Fund's portfolio
holdings are for the period covered by this report and are subject to change
thereafter.
The accompanying financial statements as of June 30, 1996 were not audited
and, accordingly, no opinion is expressed on them.
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
<PAGE>
(LOGO)
BULK RATE
Prudential Mutual Funds U.S. POSTAGE
One Seaport Plaza PAID
New York, NY 10292 Permit 6807
(800) 225-1852 New York, NY
743915209
743915100 MF102E2
743915308 Cat# 44400P5
