(ICON)
Prudential
Diversified
Bond
Fund, Inc.
Semi Annual Report
June 30, 1995
Prudential Mutual Funds
Building Your Future
On Our StrengthSM (LOGO)
<PAGE>
Prudential Diversified Bond Fund, Inc.
Performance At A Glance.
Bond investors have enjoyed significant gains from the bond market this year,
the best six months of performance in nine years. Interest rates fell and bond
prices rose as investors watched the economic recovery lose steam following a
year of rising interest rates. For our inaugural six months in operation, we're
pleased to announce that the Prudential Diversified Bond Fund, Inc. produced
higher total returns than the average general bond fund, as reported by Lipper
Analytical Services.
<TABLE>
Cumulative Total Returns1 As of 6/30/95
<CAPTION>
--------------------------------------------------------------
Since
Inception2
--------------------------------------------------------------
<S> <C>
Class A 11.2%
--------------------------------------------------------------
Class B 10.9
--------------------------------------------------------------
Class C 10.9
--------------------------------------------------------------
Lipper General Bond Avg* 10.7
--------------------------------------------------------------
</TABLE>
<TABLE>
Average Annual Total Returns1 As of 6/30/95
<CAPTION>
--------------------------------------------------------------
Since
Inception2
--------------------------------------------------------------
<S> <C>
Class A 6.8%
--------------------------------------------------------------
Class B 6.0
--------------------------------------------------------------
Class C 9.9
--------------------------------------------------------------
</TABLE>
An investment in the Fund is neither insured nor guaranteed
by the U.S. government. 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.
1Source: Prudential Mutual Fund Management, Inc. and Lipper Analytical
Services, Inc. The cumulative total returns do not take into account sales
charges. Average annual total returns do take into account sales charges. The
Fund charges a minimum 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, approximately seven years after purchase.
2Inception dates: 1/10/95 Class A, Class B & Class C.
*The Lipper General Bond Average measures the performance of 181 funds since
the Fund's inception on 1/10/95.
GRAPH
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
Portfolio
Manager's Report
The Prudential Diversified Bond Fund allocates its assets among different
sectors of the fixed income markets: U.S. government securities, mortgage
backed securities, corporate debt securities and foreign (mainly government)
securities.
1. Strategy Session.
What We See Now.
We have been cautiously optimistic for most of the year, lengthening our bond
maturities whenever interest rates appeared on the brink of falling. It appears
at this writing that the Federal Reserve has been successful in slowing the
economic engine without sending it into a stall. This may be the "soft landing"
economists have been looking for; economic growth has slowed to around 2.7% and
inflation is tame at roughly 3.5% in annualized growth:
- We anticipate that our preferred maturity range, for all types of securities,
will be intermediate- and long-term bonds for the next few months. These
maturity ranges offer higher coupons than shorter maturities, which may help
support the Fund's dividend if interest rates -- and bond yields --continue
to fall. In addition, their prices will appreciate more than short-term
securities if interest rates fall.
- Also, we're emphasizing corporate bonds from issuers that can withstand the
economic slowdown we're seeing right now. We especially like BBB-rated
credits and some of the BB-rated junk bonds. We especially like bonds with
the potential for a rating upgrade--those with positive sales and earnings.
We have tried to select issuers that could weather a slowdown--with careful
credit research, we may find some bonds that will actually improve while the
economy is in a moderate-growth phase.
GRAHP
Overview.
Barbara Kenworthy is a "value" investor. She looks for bonds that offer
competitive yields and appear to be priced lower than she believes their
inherent worth would merit.
<PAGE>
2. What Went Well.
Corporate Bonds
A Good Buy.
Our decision for most of the year to buy high-grade corporate bonds, currently
at 74% of total net assets, worked well. Corporate bonds have produced higher
total returns than government bonds in the past six months, and we expect that
to continue through the end of the year. Occidental Petroleum, the oil
producer, is one example of a holding that offered healthy coupon income
without much additional risk.
About 10% of the Fund is invested in high yield bonds, which offer better
yields than high grade bonds. We've asked our credit research team to look for
high yield issuers that have the potential for a credit rating upgrade. For
instance, our Transco Energy holdings appreciated in price when the company
was acquired by Williams Co. and upgraded to BBB- from B, as a result. High
yield bonds can be lucrative, but also volatile and subject to greater credit
risk. With some concerns about a slowdown, we don't anticipate that the junk
bond weighting will rise significantly above its current weighting.
Yankees, Yes!
We've also devoted 12% of net assets to U.S.-dollar denominated bonds issued by
foreign countries and companies, called "yankee" bonds. These bonds often pay
higher coupons than comparable quality U.S. issues, and we avoid currency risk
with them since they're denominated in U.S. dollar. These bonds haven't
appreciated as much as U.S. bonds this year, so we believe their prices will
begin to rise during the second half. Bonds from Finland and Sweden have
already produced good gains.
3. And Not So Well.
Latin America
Remains Risky.
Our purchase of Latin American bonds has been extremely limited because the
risk to these credits is still enormous. These bonds have posted substantial
gains this year, and the Fund's total return was held back by our decision not
to buy more of them. The same can be said about our decision not to hold non-
U.S.-dollar denominated bonds--these too are appreciating (more from currency
gains than price appreciation), but not enough to compensate for their risks,
in our view.
Five Largest
Holdings*
5.0% BankAmerica Corp.
4.8% United Air Lines, Inc.
4.7% Occidental Petroleum Corp.
4.2% Auburn Hills Trust
3.8% Federal Home Loan Mortgage Corp.
*Expressed as a percentage of total net assets.
4. Looking Ahead.
For the rest of 1995, U.S. bond market performance will be heavily impacted by
economic reports. After weighing the risks in various other markets, we believe
bonds are the asset class of choice for the rest of the year. Certainly,
however, we won't see the stellar returns of the first half repeated any
time soon. Investors will probably earn at least interest income --and possibly
a bit more in price appreciation. We will monitor the various market sectors
carefully and attempt to adjust the portfolio to maintain competitive returns.
<PAGE>
President's Letter
August 21, 1995
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. This fall the Senate has will take 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
<PAGE>
Portfolio of Investments as
of June 30, 1995 (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
------------------------------------------------------------
------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
<S> <C> <C> <C>
------------------------------------------------------------
LONG-TERM INVESTMENTS--94.0%
------------------------------------------------------------
Domestic Corporate Bonds--72.7%
Ba3 $ 1,000 American Standard, Inc.,
Sr. Deb.,
11.375%, 5/15/04
(Consumer services) $ 1,095,000
A3 1,500 Auburn Hills Trust,
Gtd. Cert.,
12.00%, 5/1/20
(Automobiles) 2,194,425
A3 2,500 BankAmerica Corp.,
Sub. Notes,
7.75%, 7/15/02
(Financial services) 2,606,375
Baa2 1,000 BayBanks, Inc.,
Fltg. Rate Note,
6.125%, 9/30/97
(Financial services) 996,500
A1 1,000 Boeing Co., 990,070
7.25%, 6/15/25
(Transportation)
Baa3 1,000 Capital One Bank, 1,028,200
8.125%, 2/27/98
(Financial services)
B2 1,000 Centennial Cellular
Corp., Sr. Notes,
10.125%, 5/15/05
(Telecommunications) 985,000
Baa3 500 Centex Corp., 484,375
Sub. Notes,
7.375%, 6/1/05
(Construction)
Baa3 1,000 Coso Funding Corp., 1,066,250
8.87%, 12/31/01
(Financial services)
Ba1 1,000 Delta Air Lines, Inc.,
Sr. Notes,
9.875%, 5/15/00
(Transportation) 1,098,980
Baa3 $ 1,000 Enterprise Rent-A-Car
Co.,
7.875%, 3/15/98
(Transportation) $ 1,032,500
A3 500 Equitable of Iowa, 545,285
8.50%, 2/15/05
(Financial services)
Ba1 1,000 Fleming Cos. Inc.,
Sr. Notes,
10.625%, 12/15/01
(Consumer services) 1,052,500
A3 500 General Motors
Acceptance Corp.,
8.625%, 6/15/99
(Financial services) 533,490
NR 500 Liberty Mutual Insurance
Co.,
8.50%, 5/15/25
(Insurance) 511,415
Baa2 1,000 Louisiana Land &
Exploration Co.,
7.65%, 12/1/23
(Oil & gas) 970,450
Aa3 1,000 Lubrizol Corp., 991,840
7.25%, 6/15/25
(Chemical)
Aa3 600 Massachusetts Mutual
Life Insurance Co.,
7.625%, 11/15/23
(Insurance) 582,546
Nabisco, Inc.,
Baa2 1,000 8.00%, 1/15/00 1,047,560
Baa2 500 6.70%, 6/15/02
(Consumer goods) 496,065
Ba2 1,000 Nat'l. Med. Enterprises,
Inc.,
Sr. Notes,
9.625%, 9/1/02
(Consumer services) 1,055,000
--------------------------------------------------------------------------------
See Notes to Financial Statements.
3
<PAGE>
<PAGE>
Portfolio of Investments as
of June 30, 1995 (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
<S> <C> <C> <C>
------------------------------------------------------------
Aa3 $ 1,000 Nationwide Life
Insurance Co.,
9.875%, 2/15/25
(Insurance) $ 1,101,250
Ba1 1,000 News America Hldgs.,
Inc., Sr. Notes,
9.125%, 10/15/99
(Media) 1,084,650
Baa3 1,000 Niagara Mohawk Pwr.
Corp.,
First Mtge.,
7.75%, 5/15/06
(Utilities) 1,017,340
Occidental Petroleum
Corp.,
Baa3 1,000 10.125%, 11/15/01 1,162,420
Sr. Notes,
Baa3 1,000 11.125%, 8/1/10
(Oil & Gas) 1,315,640
Paramount
Communications Inc.,
Sr. Notes,
Ba2 1,000 5.875%, 7/15/00 953,750
Ba2 500 7.50%, 1/15/02
(Media) 501,875
Ba2 1,250 Parker & Parsley
Petroleum Co., Sr.
Notes,
8.875%, 4/15/05
(Oil & Gas) 1,339,975
Baa1 1,000 Price/Costco Inc., 1,004,660
7.125%, 6/15/05
(Retail)
Ba2 1,000 Royal Caribbean Cruises
Ltd., Sr. Sub. Notes,
11.375%, 5/15/02
(Entertainment) 1,095,000
Ba1 1,000 Time Warner Inc., 992,750
7.75%, 6/15/05
(Media)
Transco Energy Co.,
Baa2 500 9.125%, 5/1/98 531,990
Baa2 500 9.375%, 8/15/01
(Oil & gas) 561,300
B2 $ 550 Ucar Global Enterprises,
Inc.,
Sr. Sub. Notes,
12.00%, 1/15/05
(Steel) $ 594,000
Baa3 2,200 United Air Lines, Inc.,
10.67%, 5/1/04
(Transportation) 2,534,510
Ba2 1,000 Viacom Inc., 1,009,640
Sr. Notes,
7.75%, 6/1/05
(Entertainment)
Total Domestic Corporate
Bonds
(cost $37,128,511) 38,164,576
------------------------------------------------------------
Foreign Corporate Bonds--10.5%
Ba1 1,000 Banco de Commercio
Exterior de Columbia,
8.625%, 6/2/00
(Financial services) 1,010,000
BBB-* 500 Financiera Energetica
Nacional,
9.00%, 11/8/99
(Financial Services) 508,250
A3 1,000 Kansallis Osake Pankki
Bank, Sub. Notes,
10.00%, 5/1/02
(Financial services) 1,159,370
A2 1,000 Manufacturer's Life
Insurance Co.,
Sub. Notes,
7.875%, 4/15/05
(Insurance) 1,043,200
Ba3 750 Rogers Cablesystems
Ltd.,
Sr. Notes,
10.00%, 3/15/05
(Telecommunications) 770,625
A1 1,000 Santander Fin'l.
Issuances Ltd., Sub.
Gtd. Notes,
7.875%, 4/15/05
(Financial services) 1,050,520
--------------------------------------------------------------------------------
4 See Notes to Financial Statements.
<PAGE>
<PAGE>
Portfolio of Investments as
of June 30, 1995 (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
<S> <C> <C> <C>
------------------------------------------------------------
Total Foreign Corporate
Bonds (cost
$5,387,590) $ 5,541,965
------------------------------------------------------------
Foreign Government Securities--1.0%
Ba1 $ 500 Republic of Columbia,
8.75%, 10/6/99
(cost $512,850) 517,500
------------------------------------------------------------
U.S. Government Securities--6.0%
1,500 U.S. Treasury Bond,
7.625%, 2/15/25 1,694,055
U.S. Treasury Notes,
500 7.50%, 5/12/02 537,109
875 6.50%, 5/15/05 893,594
---------------
Total U.S. Government
Securities
(cost $3,134,023) 3,124,758
------------------------------------------------------------
U.S. Government Agency--3.8%
2,000 Federal Home Loan
Mortgage Corporation,
6.71%, 6/11/02
(cost $2,000,000) 2,005,700
---------------
Total Long-Term
Investments
(cost $48,162,974) 49,354,499
SHORT-TERM INVESTMENTS--4.8%
------------------------------------------------------------
Corporate Bond--1.0%
Baa1 500 Salomon Inc.,
7.10%, 2/14/96
(Financial services)
(cost $500,000) 499,520
Repurchase Agreement--3.8%
$ 2,023 Joint Repurchase
Agreement Account,
6.12%, 7/3/95, (Note
6) (cost $2,023,000) $ 2,023,000
---------------
Total Short-Term
Investments
(cost $2,523,000) 2,522,520
------------------------------------------------------------
Total Investments--98.8%
(cost $50,685,974; Note 5) 51,877,019
Other assets in excess
of other
liabilities--1.2% 613,424
---------------
Net Assets--100% $ 52,490,443
---------------
---------------
</TABLE>
---------------
NR--Not Rated by Moody's or Standard & Poor's.
* Standard & Poor's rating.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
The industry classification of portfolio holdings and net liabilities shown as
a percentage of net assets as of June 30, 1995 was as follows:
<TABLE>
<S> <C>
Financial Services.................................... 21.0
Oil & Gas............................................. 11.2
Transportation........................................ 10.8
U.S. Government Securities............................ 9.8
Media................................................. 6.7
Insurance............................................. 6.2
Consumer Services..................................... 6.1
Auto.................................................. 4.2
Entertainment......................................... 4.0
U.S. Government Agency................................ 3.8
Telecommunications.................................... 3.3
Consumer Goods........................................ 3.0
Chemical.............................................. 1.9
Retail................................................ 1.9
Utilities............................................. 1.9
Steel................................................. 1.1
Foreign Government Securities......................... 1.0
Construction.......................................... .9
Assets in excess of other liabilities................. 1.2
-----
100.0%
-----
-----
</TABLE>
--------------------------------------------------------------------------------
See Notes to Financial Statements.
5
<PAGE>
<PAGE>
Portfolio of Investments as
of June 30, 1995 (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<S>
<C>
Assets
June 30, 1995
Investments, at value (cost
$50,685,974).................................................................
..... $51,877,019
Cash.........................................................................
................................. 20,034
Receivable for investments
sold.........................................................................
...... 1,509,708
Receivable for Fund shares
sold.........................................................................
...... 1,294,081
Interest
receivable...................................................................
........................ 854,539
Due from
Manager......................................................................
........................ 46,255
Deferred expenses and other
assets.......................................................................
..... 226,894
-----------
Total
assets.......................................................................
........................ 55,828,530
-----------
Liabilities
Payable for investments
purchased....................................................................
......... 2,553,906
Payable for Fund shares
reacquired...................................................................
......... 513,244
Accrued expenses and other
liabilities..................................................................
...... 162,549
Dividends
payable......................................................................
....................... 82,638
Distribution fees
payable......................................................................
............... 25,750
-----------
Total
liabilities..................................................................
........................ 3,338,087
-----------
Net
Assets.......................................................................
............................. $52,490,443
-----------
-----------
Net assets were comprised of:
Common stock, at
par..........................................................................
............. $ 3,895
Paid-in capital in excess of
par...........................................................................
50,385,359
-----------
50,389,254
Accumulated net realized gain on
investments...............................................................
910,144
Net unrealized appreciation on
investments.................................................................
1,191,045
-----------
Net assets, June 30,
1995.........................................................................
............ $52,490,443
-----------
-----------
Class A:
Net asset value and redemption price per share
($7,203,331 / 534,535 shares of common stock issued and
outstanding).................................... $13.48
Maximum sales charge (4.0% of offering
price)..............................................................
.56
Maximum offering price to
public.......................................................................
.... $14.04
Class B:
Net asset value, offering price and redemption price per share
($44,032,149 / 3,267,040 shares of common stock issued and
outstanding)................................. $13.48
Class C:
Net asset value, offering price and redemption price per share
($1,254,963 / 93,114 shares of common stock issued and
outstanding)..................................... $13.48
</TABLE>
--------------------------------------------------------------------------------
6 See Notes to Financial Statements.
<PAGE>
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Statement of Operations (Unaudited)
------------------------------------------------------------
------------------------------------------------------------
<TABLE>
<CAPTION>
January 10,
1995(a)
Through
Net Investment Income June 30, 1995
--------------
<S> <C>
Income
Interest and discount earned................. $1,060,292
----------
Expenses
Distribution fee--Class A.................... 3,304
Distribution fee--Class B.................... 80,615
Distribution fee--Class C.................... 2,484
Management fee, net waiver of $53,131........ 13,283
Custodian's fees and expenses................ 50,000
Amortization of deferred organization
expense................................... 23,425
Transfer agent's fees and expenses........... 23,000
Reports to shareholders...................... 15,000
Directors' fees.............................. 12,000
Audit fee.................................... 12,000
Legal fees................................... 10,000
Registration fees............................ 10,000
Miscellaneous................................ 910
----------
Total expenses............................ 256,021
Less: expense subsidy (Note 4).................. (74,928)
----------
Net expenses.............................. 181,093
----------
Net investment income........................... 879,199
----------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions...................... 913,347
Written options transactions................. (3,203)
----------
910,144
Net unrealized appreciation on investments...... 1,191,045
----------
Net gain on investments......................... 2,101,189
----------
Net Increase in Net Assets
Resulting from Operations....................... $2,980,388
----------
----------
</TABLE>
---------------
(a) Commencement of investment operations.
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Statement of Changes in Net Assets (Unaudited)
<TABLE>
<CAPTION>
January 10,
1995(a)
Through
June 30, 1995
-------------
Increase (Decrease)
in Net Assets
<S> <C>
Operations
Net investment income....................... $ 879,199
Net realized gain on investment
transactions............................. 910,144
Net unrealized appreciation on
investments.............................. 1,191,045
-------------
Net increase in net assets resulting from
operations............................... 2,980,388
-------------
Dividends to shareholders from net investment
income (Note 1)
Class A..................................... (157,499)
Class B..................................... (700,473)
Class C..................................... (21,227)
-------------
(879,199)
-------------
Fund share transactions (net of share
conversions)
(Note 7)
Net proceeds from shares sold............... 53,280,900
Net asset value of shares issued to
shareholders in reinvestment of
dividends................................ 485,308
Cost of shares reacquired................... (3,476,954)
-------------
Net increase in net assets from Fund share
transactions............................. 50,289,254
-------------
Total increase................................. 52,390,443
Net Assets
Beginning of period............................ 100,000
-------------
End of period.................................. $ 52,490,443
-------------
-------------
</TABLE>
---------------
(a) Commencement of investment operations.
--------------------------------------------------------------------------------
See Notes to Financial Statements.
7
<PAGE>
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
--------------------------------------------------------------------------------
Prudential Diversified Bond Fund, Inc. (the ``Fund''), which was incorporated
in
Maryland on September 1, 1994, is registered under the Investment Company Act
of
1940 as a diversified, open-end management investment company. The Fund had no
significant operations other than the issuance of 2,667 shares each of Class A
and Class B and 2,666 shares of Class C common stock for $100,000 on October 5,
1994 to Prudential Mutual Fund Management, Inc. (PMF). There are 2 billion
shares of $.001 par value common stock authorized divided into three classes,
designated Class A, Class B and Class C, each of which consists of 1 billion,
500 million and 500 million authorized shares, respectively. Investment
operations commenced on January 10, 1995.
The Fund's investment objective is to achieve high current income consistent
with an appropriate balance between risk and reward. The Fund will seek to
achieve this objective by allocating its assets among sectors of the fixed
income securities markets, U.S. Government securities, mortgage-backed
securities, corporate debt, and foreign securities (mainly government) based
upon an evaluation of current market and economic conditions.
------------------------------------------------------------
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: Securities listed on a securities exchange (other than
options in securities and indices) are valued at the last sales price on the day
of valuation, or, if there was no sale on such day, at the average of readily
available closing bid and asked prices on such day as provided by a pricing
service. Corporate bonds (other than convertible debt securities) and U.S.
Government securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed to be
over-the-counter, shall be valued by an independent pricing service. Convertible
debt securities that are actively traded in the over-the-counter market,
including listed securities for which the primary market is believed to be
over-the-counter, shall be valued at the average of the most recently quoted bid
and asked prices provided by a principal market maker or dealer. Options on
securities and indices traded on an exchange shall be valued at the average of
the most recently quoted bid and asked prices provided by the respective
exchange and futures contracts and options thereon are valued at the last sales
price as of the close of business of the exchange. Securities for which market
quotations are not readily available are valued at fair value as determined in
good faith by or under the direction of the Board of Directors of the Fund.
Short-term securities which mature in more than 60 days are valued at current
market quotations. Short-term securities which mature in 60 days or less are
valued at amortized cost.
In connection with repurchase agreement transactions, the Fund's 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. To the extent that any repurchase transaction exceeds one
business day, the value of the collateral is marked-to-market on a daily basis
to ensure the adequacy of the collateral. 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.
Options: The Fund may either purchase or write options in order to hedge against
adverse market movements or fluctuations in value caused by changes in
prevailing interest rates or foreign currency exchange rates with respect to
securities or currencies which the Fund currently owns or intends to purchase.
When the Fund purchases an option, it pays a premium and an amount equal to that
premium is recorded as an investment. When the Fund writes an option, it
receives a premium and an amount equal to that premium is recorded as a
liability. The investment or liability is adjusted daily to reflect the current
market value of the option. If an option expires unexercised, the Fund realizes
a gain or loss to the extent of the premium received or paid. If an option is
exercised, the premium received or paid is an adjustment to the proceeds from
the sale or the cost of the purchase in determining whether the Fund has
realized a gain or loss. The difference between the premium and the amount
received or paid on effecting a closing purchase or sale transaction is also
treated as a realized gain or loss. Gain or loss on purchased options is
included in net realized gain (loss) on investment transactions. Gain or loss
on
written options is presented separately as net realized gain (loss) on written
option transactions.
The Fund, as a writer of an option, has no control over whether the underlying
securities may be sold (called) or purchased (put). As a result, the Fund bears
the market risk of an unfavorable change in the price of the security or
currency underlying the written option. The Fund, as purchaser of an option,
bears the risk of the potential inability of the counterparties to meet the
terms of their contracts.
Securities Transactions and Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of securities
--------------------------------------------------------------------------------
8
<PAGE>
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
--------------------------------------------------------------------------------
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Fund amortizes premiums and discounts paid on purchases of
portfolio securities as adjustments to interest income.
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.
Dividends and Distributions: The Fund declares daily and pays monthly dividends
from net investment income. 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.
Federal Income Taxes: It is the Fund's policy to meet the requirements of the
Internal Revenue Code applicable to regulated investment companies and to
distribute all of its taxable net income to its shareholders. Therefore, no
federal income tax provision is required.
Deferred Organization Expenses: Approximately $250,000 of expenses were incurred
in connection with the organization of the Fund. These costs have been deferred
and are being amortized ratably over a period of sixty months from the date the
Fund commenced investment operations.
------------------------------------------------------------
Note 2. Agreements
The Fund has a management agreement with 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 average daily net assets of the Fund. For the period
ended June 30, 1995, PMF waived 80% of its management fee. The amount of fees
waived for the period ended June 30, 1995 amounted to $53,131 ($.01 per share
for Class A, B and C shares; .40 of
1% of average daily net assets, annualized). The Fund is not required to
reimburse PMF for such waiver.
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%, 1% and
1%, of the average daily net assets of the Class A, B and C shares,
respectively. With respect to the Class A Plan, PMFD has agreed to limit its
distribution-related fees to .15 of 1% of average daily net assets for the
fiscal year ending December 31, 1995. With respect to the Class B and Class C
Plans, PMFD has agreed to limit its distribution fee, to .75 of 1% of average
daily net assets of Class B and Class C shares, respectively, for the fiscal
year ending December 31, 1995.
PMFD has advised the Fund that it has received approximately $162,900 in
front-end sales charges resulting from sales of Class A shares during the period
ended June 30, 1995. From these fees, PMFD paid such sales charges to PSI and
Pruco Securities Corporation, affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the period ended June 30, 1995, it received
approximately $3,700 in contingent deferred sales charges imposed upon
redemptions by certain Class B and Class 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. During the period ended June 30, 1995,
the Fund incurred fees of approximately $21,100 for the services of PMFS. As of
June 30, 1995, approximately $6,100 of such fees were due to PMFS. Transfer
agent fees and expenses in the Statement of
--------------------------------------------------------------------------------
9
<PAGE>
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
--------------------------------------------------------------------------------
Operations also include certain out-of-pocket expenses paid to non-affiliates.
------------------------------------------------------------
Note 4. Expense Subsidy
PMF voluntarily agreed to subsidize operating expenses so that total Fund
operating expenses do not exceed .90%, 1.50% and 1.50% of the average daily net
assets of the Class A, Class B and Class C shares, respectively. For the period
ended June 30, 1995, PMF subsidized $74,928 ($.019 per share for Class A, B and
C shares; .56% of average daily net assets, annualized) of the Fund's expenses.
The Fund is not required to reimburse PMF for such subsidy.
------------------------------------------------------------
Note 5. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the period ended June 30, 1995, were $99,200,571 and $51,959,345,
respectively.
The federal income tax cost basis of the Fund's investments, at June 30, 1995
was $50,686,334 and, accordingly, net unrealized appreciation for federal income
tax purposes was $1,190,685 (gross unrealized appreciation-$1,266,308; gross
unrealized depreciation-$75,623).
Transactions in written options during the period ended June 30, 1995 were as
follows:
<TABLE>
<CAPTION>
Number of Premiums
Contracts Received
<S> <C> <C>
----------- ---------
Options written 20 $ 9,688
Options expired (10) (3,047)
Options exercised (10) (6,641)
----------- ---------
Options outstanding at June 30, 1995 0 $ 0
----------- ---------
----------- ---------
</TABLE>
------------------------------------------------------------
Note 6. 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
had a .30% undivided interest in the repurchase agreements in the joint account.
The undivided interest for the Fund represents $2,023,000 in principal amount.
As of such date, each repurchase agreement in the joint account and the value
of
the collateral therefor was as follows:
Bear, Stearns & Co., Inc., 6.125%, in the principal amount of $200,000,000,
repurchase price $200,102,083, due 7/3/95. The value of the collateral including
accrued interest was $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 was $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 was $118,889,059.
Smith Barney, Inc., 6.13%, in the principal amount of $200,000,000, repurchase
price $200,102,167, due 7/3/95. The value of the collateral including accrued
interest was $204,000,775.
------------------------------------------------------------
Note 7. 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 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.
There are 2 billion shares of common stock, $.001 par value per share, divided
into three classes, designated Class A, B and Class C common stock.
Transactions in shares of common stock for the period ended June 30, 1995, were
as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
-------------------------------------- --------- -----------
<S> <C> <C>
January 10, 1995(a) through June 30,
1995:
Shares sold........................... 625,645 $ 8,032,438
Shares issued in reinvestment of
dividends........................... 8,008 105,245
Shares reacquired..................... (104,607) (1,362,600)
--------- -----------
Net increase in shares
outstanding before conversion....... 529,046 6,775,083
Shares issued upon conversion from
Class B............................. 2,822 37,363
--------- -----------
Net increase in shares outstanding.... 531,868 $ 6,812,446
--------- -----------
--------- -----------
---------------
(a) Commencement of investment operations.
</TABLE>
--------------------------------------------------------------------------------
10
<PAGE>
<PAGE>
Notes to Financial Statements (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B Shares Amount
-------------------------------------- --------- -----------
<S> <C> <C>
January 10, 1995(a) through June 30,
1995:
Shares sold........................... 3,400,907 $44,079,363
Shares issued in reinvestment of
dividends........................... 27,920 368,022
Shares reacquired..................... (161,632) (2,101,527)
--------- -----------
Net increase in shares
outstanding before conversion....... 3,267,195 42,345,858
Shares reacquired upon conversion
into Class A........................ (2,822) (37,363)
--------- -----------
Net increase in shares outstanding.... 3,264,373 $42,308,495
--------- -----------
--------- -----------
Class C
--------------------------------------
January 10, 1995(a) through
June 30, 1995:
Shares sold........................... 90,491 $ 1,169,099
Shares issued in reinvestment of
dividends........................... 914 12,041
Shares reacquired..................... (957) (12,827)
--------- -----------
Net increase in shares
outstanding......................... 90,448 $ 1,168,313
--------- -----------
--------- -----------
</TABLE>
---------------
(a) Commencement of investment operations.
--------------------------------------------------------------------------------
11
<PAGE>
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
----------- -----------
January 10, January 10,
1995(a) 1995(a)
Through Through
June 30, June 30,
1995 1995
----------- -----------
<S>
<C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period....................................................... $ 12.50
$ 12.50
----- -----------
Income from investment operations
Net investment
income(b)...................................................................
.43 .39
Net realized and unrealized gain on investment
transactions................................ .98 .98
----- -----------
Total from investment
operations......................................................... 1.41
1.37
Less distributions
Dividends from net investment
income....................................................... (.43)
(.39)
----- -----------
Net asset value, end of
period............................................................. $ 13.48
$ 13.48
----- -----------
----- -----------
TOTAL
RETURN(d):...................................................................
........ 11.24% 10.95%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)............................................................ $7,203
$44,032
Average net assets
(000)...................................................................
$4,702 $22,943
Ratios to average net assets(b)/(c):
Expenses, including distribution
fees................................................... .86%
1.46%
Expenses, excluding distribution
fees................................................... .71%
.71%
Net investment
income...................................................................
7.12% 6.52%
Portfolio turnover
rate....................................................................
190% 190%
</TABLE>
<TABLE>
<CAPTION>
Class C
January 10,
1995(a)
Through
June 30,
1995
-----------
<S>
<C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period....................................................... $ 12.50
-----
Income from investment operations
Net investment
income(b)...................................................................
.39
Net realized and unrealized gain on investment
transactions................................ .98
-----
Total from investment
operations......................................................... 1.37
Less distributions
Dividends from net investment
income....................................................... (.39)
-----
Net asset value, end of
period............................................................. $ 13.48
-----
-----
TOTAL
RETURN(d):...................................................................
........ 10.94%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period
(000)............................................................ $1,255
Average net assets
(000)...................................................................
$707
Ratios to average net assets(b)/(c):
Expenses, including distribution
fees................................................... 1.46%
Expenses, excluding distribution
fees................................................... .71%
Net investment
income...................................................................
6.52%
Portfolio turnover
rate....................................................................
190%
</TABLE>
---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy and fee waiver.
(c) Annualized.
(d) 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.
--------------------------------------------------------------------------------
12 See Notes to Financial Statements.
<PAGE>
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
Toll Free (800) 225-1852
Directors
Thomas R. Anderson
Eugene C. Dorsey
Richard A. Redeker
Robin B. Smith
Officers
Richard A. Redeker, President
Robert F. Gunia, Vice President
Eugene S. Stark, Treasurer
Stephen M. Ungerman, Assistant
Treasurer
S. Jane Rose, Secretary
Ellyn C. Acker, 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
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Shereff, Friedman, Hoffman & Goodman LLP
919 Third Avenue
New York, NY 10022
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>
BULK RATE
U.S. POSTAGE
PAID
Permit 6807
New York, NY
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
Toll Free (800) 225-1852
74431J102 MF166E274431J300
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