<PAGE>
(ICON)
Prudential
Diversified
Bond
Fund, Inc.
ANNUAL
REPORT
Dec. 31, 1996
(LOGO)
Prudential Diversified Bond Fund, Inc.
Performance At A Glance.
Bonds were a bit of a disappointment as interest rates rose in 1996. Although
the U.S. bond market rallied in the second half of 1996 after a difficult
first half, interest rates never did fall to year-end 1995 levels. Despite
this difficulty, your Prudential Diversified Bond Fund Class A shares
maintained an attractive 30-day SEC yield of 6.16% as of December 31, because
of its significant holdings in high yield corporate and foreign bonds. At the
same time, however, your Fund returned less than the average general bond fund
monitored by Lipper Analytical Services, because we held longer maturities
early in the year when interest rates rose suddenly. In addition, we also
did not own bonds denominated in foreign currencies, which performed well
earlier in the year.
<TABLE>
<CAPTION>
Cumulative Total Returns1 As of 12/31/96
One Since
Year Inception2
<S> <C> <C>
Class A 5.8% 26.8%
Class B 5.2 25.3
Class C 5.2 25.3
Class Z N/A 5.4
Lipper General Bond Avg3 6.1 **
</TABLE>
<TABLE>
<CAPTION>
Average Annual Total Returns1 As of 12/31/96
One Since
Year Inception2
<S> <C> <C>
Class A 1.6% (1.3)4 10.4% (10.1)4
Class B 0.2 (-0.1)4 10.2 (9.9)4
Class C 4.2 (3.9)4 12.1 (11.7)4
</TABLE>
<TABLE>
<CAPTION>
Dividends
& Yields Total Dividends 30-Day
As of 12/31/96 Paid for 12 Mos. SEC Yield
<S> <C> <C>
Class A $0.93 6.16%
Class B $0.85 5.82
Class C $0.85 5.82
Class Z $0.28 6.56
</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 contingent deferred sales charge of 5%, 4%, 3%, 2%, 1% and 1% for
six years, for Class B shares. Class C shares have a 1% CDSC for one year.
Class B shares automatically convert to Class A shares on a quarterly basis,
after approximately seven years. Class Z shares are not subject to a sales
charge or a distribution fee. Since Class Z shares have been in existence less
than a year, no average annual total returns are shown.
2Inception dates: 1/10/95 Class A, Class B and Class C; 9/16/96 Class Z.
3Lipper average returns are for 40 funds for one year.
4The numbers in parentheses () show the Fund's average annual total returns
without waiver of management fees and/or expense subsidization.
**Lipper since inception returns are: Class A, Class B and Class C 24.6% for
34 funds. Class Z returns are not available. Lipper provides data on a monthly
basis, so for comparative purposes, this return reflects the Fund's first full
calendar month of performance.
How Investments Compared.
(As of 12/31/96)
(CHART)
U.S. General General U.S.
Growth Bond Muni Debt Taxable
Funds Funds Funds Money Funds
Source: Lipper Analytical Services. Financial markets change, so a mutual
fund's past performance should never be used to predict future results. The
risks to each of the investments listed above are different - we provide
12-month total returns for several Lipper mutual fund categories to show
you that reaching for higher 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.
U.S. Taxable Money Funds attempt to preserve a constant share value; they
don't fluctuate much in price but, historically, their returns have been
generally among the lowest of the major investment categories.
<PAGE>
Barbara L. Kenworthy, Fund Manager
Portfolio (PICTURE)
Manager's Report
The Prudential Diversified Bond Fund allocates its assets among different
types of bonds: U.S. government securities, mortgage backed securities,
corporate debt securities and foreign (mainly government) securities.
Barbara Kenworthy is a value investor. She looks for bonds that, in her
view, offer competitive yields and appear to be priced inexpensively.
There can be no assurance that the Fund will achieve its investment objective.
Strategy Session.
1996 Was No 1995.
Bonds were a disappointment in 1996, although they did end the year on a more
positive note.
Bond prices fell early in 1996 when economic growth accelerated, because
investors feared rising inflation and higher interest rates. When economic
growth slowed over the summer, bond prices rose, although not enough to recoup
their earlier losses.
Your Fund seeks high current income by allocating resources among the major
sectors of the bond market. We followed three strategies to earn coupon income
and protect principal in 1996:
- - Sold governments, bought corporates. We dramatically increased our holdings
in corporate bonds, raising them to 78% of total investments at year end. At
the same time, we sold all our government bonds. This worked well for us
because the higher-yielding corporate bonds held their principal better in
1996 than U.S. governments.
- - Junk was golden. We more than doubled our holdings in high yield corporate
or junk bonds, to 35% of total investments. These below investment grade
issues, which carry a greater risk of default than investment grade bonds,
led all other segments of the bond market. High yield bonds did well because
their high coupons insulated them from falling interest rates. Plus, rising
corporate profits helped improve their financial position.
- - Offshore was on target. We also significantly increased our holdings in
foreign bonds to 26% of total investments at year end. The emerging markets
of Latin America and Eastern Europe had a spectacular year - the Emerging
Americas Index (calculated by Lehman Brothers) was up 28%.
Foreign Bonds.
The Fund can invest up to 45% of its total net assets in foreign bonds,
including those issued by corporations and governments. Although these
investments can offer higher returns than U.S. bonds, they can also be
subject to the risks of currency fluctuation (if they are not denominated
in U.S. dollars) and social, political and economic change. We held 26% of
assets in foreign bonds as of December 31, 1996, up from 16% a year ago. For
most of the year, these holdings were denominated in U.S. dollars.
Sector Breakdown.
Expressed as a percentage of
total investments as of 12/31/96.
(CHART)
<PAGE>
What Went Well.
Going Global.
Foreign markets offered some of the best returns in the bond market in 1996.
In developing countries of South America and Eastern Europe, for example,
interest rates were not as troublesome as they were in the U.S., the local
economies were gathering strength, and investors worldwide were taking notice.
The largest holding in our Fund was in Mexico, where we held 4.7% of assets,
and where bonds rose 24% in 1996, as measured by Lehman Brothers. We also had
significant holdings in Poland, our fifth largest holding, at 3.9% of assets,
where the market rose 36%, according to Lehman. Other countries we liked this
year were Argentina where the market was up 26%, and the Philippines where the
market rose 23%.
Up With Corporates.
We held significantly more corporate bonds (U.S. and foreign) than the bond
market as a whole - 78% of total investments. This was the place to be in the
U.S. bond market this year, particularly in those companies with lower credit
ratings. Corporate bonds do better than governments when interest rates rise
because they offer higher coupons, which protects their principal. In
addition, corporate profits continued to improve in 1996, despite approaching
the sixth year in the current economic recovery, one of the most remarkable on
record. Improving corporate profits bolstered the balance sheets of the
companies that we own, and that drove the prices of their bonds up.
Among the industries we preferred in 1996 were airlines, entertain-ment
and telecommunications. Among the companies we liked were Delta, United
Airlines, Time Warner and Newscorp.
And Not So Well.
Being Shorter, Earlier.
We would have benefited more if we had shortened our duration earlier in 1996,
before interest rates spiked suddenly. (Duration is a measure of bonds'
sensitivity to interest rates. Historically, the shorter the duration, the
less bonds have lost when interest rates rise.) We shortened significantly
during the first half of the year, to 5.2 years on June 30 from 6 years at
year-end 1995. Then, as it began to appear that interest rates would work
their way lower again (as investors believed that economic growth was once
again slowing), we started to increase duration again, reaching 5.8 years at
year-end 1996. We also would have performed better in the first half by
holding some foreign bonds in local currencies, because they did well.
Five Largest Issuers.
4.7% United Mexican States
Foreign Bonds
4.6% Federated Dept. Stores
Retail
4.0% Tenet Healthcare
Health Care
4.0% Time Warner
Media
3.9% Poland
Foreign Bond
Expressed as a percentage of total net assets as of 12/31/96.
Looking Ahead.
Volatility.
The U.S. bond market may be quite volatile in 1997, with interest rates
rising and falling frequently and rapidly, but within a narrower range than
in prior years. By year end, interest rates will probably remain flat or
perhaps even fall, if economic growth weakens.
We are in a rapidly changing market. Bond prices are moving up and down as
investors fret whether inflation could rise or fall or whether economic growth
is speeding up or slowing down. The value of the dollar is also important,
because its strength in 1996 attracted substantial buying from overseas, which
helped to keep U.S. interest rates down.
We'll continue to concentrate on corporate bonds, keeping a close eye on
profit levels. Emerging markets and high yield debt should also remain
attractive in the year ahead.
- ------------------------------------------------------------------------
1
<PAGE>
President's Letter February 3, 1997
(PICTURE)
Dear Shareholder:
For many investors, 1996 was the second year of back-to-back, double-digit
stock market returns. In late November, the Dow Jones Industrial Average
passed 6500 - only weeks after breaking the 6000 mark in mid-October - and
another record high was reached in January 1997. America's economic expansion
is entering its sixth year and there seems little evidence of an end to the
continued modest growth and low inflation we've enjoyed for the last several
years.
This is good news. For most investors it's meant an increase in their share
values for college funds, retirement nest eggs or other long-term financial
goals. However, as you read your year-end account statements and make plans
for 1997, it's important to remember that there never is a "sure thing" when
it comes to investment returns. Stock and bond markets go down just as they
go up. (Did you notice the brief period of decline this past summer?) No one
likes to see the value of their investments fall but such periods remind us
we must keep our expectations realistic.
Regardless of the market's direction, a wise investor plans for tomorrow's
needs today. Your Financial Advisor or Registered Representative can help you:
- - Review your portfolio and suggest strategies for 1997, such as diversifying
across different types of investments. Financial markets seldom move in
lockstep. By investing in a mix of stock and bond funds (foreign &
domestic) and money market funds you may be in a better position to
achieve your long-term goals and to weather periods of uncertainty.
- - See why annuities have become popular retirement planning tools. The
choices are broader than ever. Our new Discovery SelectSM Variable Annuity
offers you many of the keys to successful retirement planning, including a
personalized asset allocation program and a choice of 21 variable- or
fixed-rate investment options offering a broad array of investment
objectives and styles.
- - Explain new retirement savings developments. For example, Congress has
expanded the contribution limit on spousal IRAs. And don't forget, it's
not too late for you to make a contribution to your IRA or open one for
1996. The IRS deadline is April 15, 1997, but it's best to act sooner.
Why not contact your Financial Advisor or Registered Representative today?
If you are interested in Discovery SelectSM call for a prospectus, which
contains more complete information. Read it carefully before you invest.
Sincerely,
Brian M. Storms
President, Prudential Mutual Funds & Annuities
P.S. Your 1997 Prudential IRA contribution may qualify you for a waiver of
the annual custodial fee. Ask your financial representative for details.
- ---------------------------------------------------------------------------
2
<PAGE>
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED
December 31, 1996 BOND FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
LONG-TERM INVESTMENTS--97.8%
- ------------------------------------------------------------
Domestic Corporate Bonds--69.7%
Ba3 US$ 2,000 Agco Corp.,
Sr. Sub. Notes,
8.50%, 3/15/06
(Agricultural Equipment) $ 2,052,500
Baa3 3,000 Allegiance Corp.,
7.80%, 10/15/16
(Financial Services) 3,047,070
Ba3 1,000 American Standard, Inc.,
Sr. Deb.,
11.375%, 5/15/04
(Consumer Goods & Services) 1,070,000
A1 3,000 Bank of New York Co.,
7.97%, 12/31/26
(Banking) 3,029,820
NR 2,400 BankAmerica Corp.,
Sub. Notes, F.R.N.,
6.03125%(a), 5/17/99
(Banking) 2,418,000
Ba1 2,000 BJ Services Co.,
Sr. Notes,
7.00%, 2/1/06 1,947,400
(Oil & Gas Equipment &
Services)
NR 3,100 Conseco, Inc.,
8.70%, 11/15/26
(Insurance) 3,126,722
Baa2 1,500 Continental Cablevision,
Inc.,
Sr. Notes, 1,597,905
8.30%, 5/15/06
(Cable & Pay Television
Systems)
Baa3 1,000 Delta Air Lines, Inc.,
Sr. Notes,
9.875%, 5/15/00
(Airlines) 1,083,220
Ba1 1,000 Digital Equipment Corp.,
7.125%, 10/15/02
(Computers) 954,250
Ba3 US$ 1,500 El Paso Electric Co.,
9.40%, 5/1/11
(Utilities) $ 1,590,000
Enterprise Rent-A-Car Co.,
Baa2 1,000 7.875%, 3/15/98 1,022,250
Baa3 5,500 7.00%, 6/15/00
(Financial Services) 5,566,550
Federated Dept. Stores, Inc.
Sr. Notes,
Ba1 2,600 8.125%, 10/15/02 2,661,204
Ba1 5,000 8.50%, 6/15/03
(Retail) 5,207,450
A3 1,500 First Tennessee National
Corp.,
8.07%, 1/6/27
(Banking) 1,491,562
A1 3,000 First Union Corp.,
7.85%, 1/1/27
(Banking) 2,972,625
B2 2,000 Impsat Corp.,
Sr. Notes,
12.125%, 7/15/03
(Telecommunications) 2,125,000
Ba3 1,000 Kmart Corp.,
Medium Term Notes,
9.80%, 6/15/98
(Retail) 1,010,000
Baa1 3,000 Lehman Brothers, Inc.,
Medium Term Notes,
6.84%, 9/25/98
(Financial Services) 3,022,740
A2 3,000 Liberty Mutual Insurance
Co.,
8.20%, 5/4/07
(Insurance) 3,185,820
A2 5,000 Mellon Capital,
Gtd. Notes,
7.995%, 1/15/27
(Banking) 5,031,250
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3 -----
<PAGE>
<PAGE>
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED
December 31, 1996 BOND FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
Domestic Corporate Bonds (cont'd.)
B1 US$ 3,000 MFS Communications, Inc.,
Sr. Disc. Notes,
Zero Coupon, 1/15/06,
(Telecommunications) $ 2,182,500
A1 1,000 Nationwide Life Insurance
Co.,
9.875%, 2/15/25
(Insurance) 1,105,480
Baa3 3,000 News America Hldgs., Inc.,
Sr. Notes,
7.75%, 12/1/45
(Media) 2,793,570
Ba2 1,500 Noble Drilling Corp.,
Sr. Notes,
9.125%, 7/1/06 1,612,500
(Oil & Gas Equipment &
Services)
Occidental Petroleum Corp.,
Baa2 1,000 10.125%, 11/15/01 1,139,030
Baa2 1,000 11.125%, 8/1/10
(Oil & Gas) 1,307,060
A2 2,590 Orchard Hardware Supply
Corp.,
Sr. Notes,
9.375%, 2/15/02
(Retail) 2,725,975
Paramount Communications,
Inc.,
Sr. Notes,
Ba2 1,857 5.875%, 7/15/00 1,793,992
Ba2 500 7.50%, 1/15/02
(Media) 499,585
Baa3 1,250 Parker & Parsley Petroleum
Co.,
Sr. Notes,
8.25%, 8/15/07
(Oil & Gas) 1,343,938
A1 3,000 Republic New York Capital,
7.53%, 12/4/26
(Banking) 2,940,369
Ba2 1,000 Royal Caribbean Cruises
Ltd.,
Sr. Sub. Notes,
11.375%, 5/15/02
(Entertainment) 1,065,000
Salomon, Inc.,
Baa1 US$ 2,000 5.98%, 2/2/98 $ 1,999,020
Baa1 3,800 7.00%, 5/15/99 3,830,020
Baa1 500 7.25%, 5/1/01
(Financial Services) 504,730
A1 3,000 State Street Boston Corp.,
7.94%, 12/30/26
(Banking) 2,990,625
Tele-Communications, Inc.,
Ba1 3,000 6.875%, 2/15/06 2,726,220
Ba1 1,000 9.80%, 2/1/12 1,082,200
Ba1 1,500 10.125%, 4/15/22 1,647,030
(Cable & Pay Television
Systems)
Tenet Healthcare Corp.,
Sr. Notes,
Ba1 2,000 9.625%, 9/1/02 2,190,000
Ba1 4,500 8.625%, 12/1/03
(Health Care) 4,747,500
Time Warner, Inc.,
Ba1 2,500 7.75%, 6/15/05 2,514,825
Ba1 2,000 6.85%, 1/15/26
(Media) 1,950,060
Transco Energy Co.,
Baa2 500 9.125%, 5/1/98 518,970
Baa2 500 9.375%, 8/15/01
(Oil & Gas) 551,160
Ba1 1,500 Turner Broadcasting Systems,
Inc.,
Sr. Notes,
7.40%, 2/1/04
(Media) 1,484,340
B1 295 UCAR Global Enterprises,
Inc.,
Sr. Sub. Notes,
12.00%, 1/15/05
(Steel) 339,988
Ba1 1,000 Union Planters Corp.,
8.20%, 12/15/26
(Financial Services) 990,180
United Airlines, Inc.,
Baa3 3,000 10.67%, 5/1/04 3,548,070
Baa3 2,000 11.21%, 5/1/14
(Airlines) 2,622,340
</TABLE>
- --------------------------------------------------------------------------------
- ----- 4 See Notes to Financial Statements.
<PAGE>
<PAGE>
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED
December 31, 1996 BOND FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
Domestic Corporate Bonds (cont'd.)
B2 US$ 2,000 United States Can Corp.,
Sr. Sub. Notes,
10.125%, 10/15/06
(Containers) $ 2,102,500
Ba2 1,450 Viacom, Inc.,
Sr. Notes,
7.75%, 6/1/05
(Media) 1,427,771
A1 4,000 Wells Fargo Securities, 3,998,280
Inc.,
7.96%, 12/15/26
(Financial Services)
Total domestic corporate
bonds
(cost $117,511,924) 119,488,166
------------
- ------------------------------------------------------------
Foreign Government Securities--16.6%
Baa3 1,000 Banco de Commercio Exterior
de Colombia,
8.625%, 6/2/00 1,035,000
Aa1 C$ 3,000 Canadian Gov't. Bonds,
8.00%, 6/1/23 2,366,266
B1 US$ 1,960 Republic of Argentina,
6.625%, 3/31/05 1,716,837
Republic of Colombia,
Baa3 1,000 8.75%, 10/6/99 1,045,000
Baa3 250 8.00%, 6/14/01 253,657
Republic of The Philippines,
B1 2,325 8.75%, 10/7/16 2,395,477
Baa3 8,000 Republic of Poland,
4.00%, 10/27/14 6,770,000
Ba2 2,000 Republic of Venezuela
6.50%(a), F.R.N., 12/18/07 1,762,500
NR 3,000 Rio de Janeiro Municipality,
10.375%, 7/12/99
(Brazil) 3,082,500
United Mexican States,
Baa3 7,000 7.5625%, 8/6/01 7,016,100
NR 1,000 11.50%, 5/15/26 1,057,500
------------
Total foreign government
securities
(cost $28,102,150) 28,500,837
------------
Foreign Corporate Bonds--7.3%
A3 US$ 1,000 Kansallis-Osake-Pankki,
(Finland) Sub. Notes,
10.00%, 5/1/02
(Banking) $ 1,134,900
Ba2 4,900 National Pwr. Corp.,
(United Kingdom)
Gtd. Bond,
8.40%, 12/15/16
(Utilities) 4,924,500
Ba3 4,000 Polysindo Int'l. Finance Co.
BV.
(Indonesia)
11.375%, 6/15/06
(Financial Services) 4,370,000
Ba3 2,000 Rogers Cablesystems, Inc., 2,130,000
(Canada) Sr. Sec'd Notes,
10.00%, 3/15/05
(Cable & Pay Television
Systems)
Total foreign corporate
bonds
(cost $12,015,192) 12,559,400
------------
- ------------------------------------------------------------
U.S. Government Securities--2.2%
United States Treasury
Notes,
750 5.875%, 11/30/01 739,103
1,000 5.75%, 8/15/03 970,000
2,000 6.50%, 10/15/06 2,010,940
------------
Total U.S. government
securities
(cost $3,736,500) 3,720,043
------------
- ------------------------------------------------------------
Preferred Stocks--2.0%
2,150 Time Warner, Inc.,
(Media) 2,343,500
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5 -----
<PAGE>
<PAGE>
Portfolio of Investments as of PRUDENTIAL DIVERSIFIED
December 31, 1996 BOND FUND, INC.
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Moody's Principal
Rating Amount
(Unaudited) (000) Description Value (Note 1)
<S> <C> <C> <C>
- ------------------------------------------------------------
Preferred Stocks (cont'd.)
40,000 TransCanada Capital,
(Gas Pipelines) $ 1,022,200
------------
Total preferred stocks
(cost $3,096,892) 3,365,700
------------
Total long-term investments
(cost $164,462,658) 167,634,146
------------
SHORT-TERM INVESTMENTS--4.5%
- ------------------------------------------------------------
Domestic Corporate Bond--1.2%
Baa3 US$ 2,000 Advanta National Bank,
6.26%, 9/1/97
(Banking)
(cost $1,997,160) 2,002,000
- ------------------------------------------------------------
Foreign Government Security--1.2%
Ba1 2,000 Trinidad & Tobago,
(Trinidad)
11.50%, 11/20/97
(cost $2,120,000) 2,070,000
- ------------------------------------------------------------
Foreign Corporate Bond--1.2%
Ba3 2,000 Grupo Embotelladora De
Mexicana,
(Mexico)
(Beverages)
10.75%, 11/19/97
(cost $2,055,000) 2,047,500
- ------------------------------------------------------------
Repurchase Agreement--0.9%
1,542 Joint Repurchase Agreement
Account,
6.61%, 1/2/97, (Note 6)
(cost $1,542,000) 1,542,000
------------
Total short-term investments
(cost $7,714,160) 7,661,500
------------
Total investments before short sales--102.3%
(cost $172,176,818; Note 5) 175,295,646
------------
INVESTMENT SOLD SHORT(b)--(2.5%)
- ------------------------------------------------------------
U.S. Government Securities--(2.5%)
US$ 4,225 United States Treasury Bond,
6.75%, 8/15/26
(proceeds at cost
$4,312,566) $ (4,256,688)
------------
Total Investments, net of short sales--99.8% 171,038,958
Other assets in excess of
other liabilities--0.2% 422,301
------------
Net Assets--100% $171,461,259
------------
------------
</TABLE>
- ---------------
F.R.N.--Floating Rate Note.
NR--Not Rated by Moody's or Standard & Poor's.
(a) Rate shown reflects current rate of variable rate instruments.
(b) Non-income producing security.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
The industry classification of portfolio holdings and other net assets shown as
a percentage of net assets as of December 31, 1996 was as follows:
<TABLE>
<S> <C>
Foreign Government Securities......................... 17.8%
Financial Services.................................... 16.5
Banking............................................... 14.0
Media................................................. 8.6
Retail................................................ 6.8
Cable & Pay Television Systems........................ 5.4
Insurance............................................. 4.3
Airlines.............................................. 4.2
Health Care........................................... 4.0
Utilities............................................. 3.8
Oil & Gas............................................. 3.0
Telecommunications.................................... 2.5
Oil & Gas Equipment & Services........................ 2.1
Agricultural Equipment................................ 1.2
Beverages............................................. 1.2
Containers............................................ 1.2
U.S. Government & Agency Securities................... .6
Computers............................................. .6
Consumer Goods & Services............................. .6
Gas Pipelines......................................... .6
Entertainment......................................... .6
Steel................................................. .2
Other assets in excess of other liabilities........... .2
-----
100%
-----
-----
</TABLE>
- --------------------------------------------------------------------------------
- ----- 6 See Notes to Financial Statements.
<PAGE>
<PAGE>
Statement of Assets and Liabilities PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- -------------------------------------------------------------------------------
<TABLE>
Assets December 31, 1996
<S> <C>
Investments, at value (cost $172,176,818)............................................................... $ 175,295,646
Foreign currency, at value (cost $267,023).............................................................. 262,525
Cash.................................................................................................... 62,868
Receivable for securities sold short.................................................................... 4,973,143
Interest receivable..................................................................................... 2,409,582
Receivable for Fund shares sold......................................................................... 443,865
Deferred expenses and other assets...................................................................... 125,078
Dividends receivable.................................................................................... 21,875
-----------------
Total assets......................................................................................... 183,594,582
-----------------
Liabilities
Payable for investments purchased....................................................................... 7,367,179
Investments sold short, at value (proceeds $4,312,566).................................................. 4,256,688
Payable for Fund shares reacquired...................................................................... 200,640
Accrued expenses and other liabilities.................................................................. 168,321
Distribution fee payable................................................................................ 84,038
Dividends payable....................................................................................... 42,055
Management fee payable.................................................................................. 14,402
-----------------
Total liabilities.................................................................................... 12,133,323
-----------------
Net Assets.............................................................................................. $ 171,461,259
-----------------
-----------------
Net assets were comprised of:
Common stock, at par................................................................................. $ 12,630
Paid-in capital in excess of par..................................................................... 167,811,623
-----------------
167,824,253
Accumulated net realized gain on investments......................................................... 466,859
Net unrealized appreciation on investments and foreign currencies.................................... 3,170,147
-----------------
Net assets, December 31, 1996........................................................................... $ 171,461,259
-----------------
-----------------
Class A:
Net asset value and redemption price per share
($30,656,557 / 2,258,565 shares of common stock issued and outstanding)........................... $13.57
Maximum sales charge (4.0% of offering price)........................................................ .57
-----------------
Maximum offering price to public..................................................................... $14.14
-----------------
-----------------
Class B:
Net asset value, offering price and redemption price per share
($136,054,003 / 10,021,557 shares of common stock issued and outstanding)......................... $13.58
-----------------
-----------------
Class C:
Net asset value, offering price and redemption price per share
($4,142,998 / 305,165 shares of common stock issued and outstanding).............................. $13.58
-----------------
-----------------
Class Z:
Net asset value, offering price and redemption price per share
($607,701 / 44,777 shares of common stock issued and outstanding)................................. $13.57
-----------------
-----------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7 -----
<PAGE>
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Statement of Operations
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Year
Ended
December 31,
Net Investment Income 1996
<S> <C>
Income
Interest..................................... $ 10,868,355
Dividends.................................... 138,669
------------
Total income.............................. 11,007,024
------------
Expenses
Distribution fee--Class A.................... 32,801
Distribution fee--Class B.................... 859,203
Distribution fee--Class C.................... 26,501
Management fee............................... 699,988
Transfer agent's fees and expenses........... 295,000
Custodian's fees and expenses................ 145,000
Registration fees............................ 110,000
Reports to shareholders...................... 95,000
Amortization of deferred organization
expenses.................................. 41,968
Audit fee and expenses....................... 28,000
Directors' fees.............................. 17,000
Legal fees and expenses...................... 15,000
Miscellaneous................................ 2,526
------------
Total expenses............................ 2,367,987
Less: Management fee waiver (Note 2)......... (559,990)
------------
Net expenses.............................. 1,807,997
------------
Net investment income........................... 9,199,027
------------
Realized and Unrealized Gain (Loss)
on Investments and Foreign Currencies
Net realized gain (loss) on:
Investment transactions...................... 632,396
Foreign currency transactions................ (88,114)
------------
544,282
------------
Net change in unrealized appreciation on:
Investments.................................. (673,378)
Short sales.................................. 55,878
Foreign currencies........................... (4,498)
------------
(621,998)
------------
Net loss on investments......................... (77,716)
------------
Net Increase in Net Assets
Resulting from Operations....................... $ 9,121,311
------------
------------
</TABLE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Statement of Changes in Net Assets
- ------------------------------------------------------------
- ------------------------------------------------------------
<TABLE>
<CAPTION>
January 10,
Year 1995(a)
Ended Through
Increase (Decrease) December 31, December 31,
in Net Assets 1996 1995
<S> <C> <C>
Operations
Net investment income........... $ 9,199,027 $ 3,242,014
Net realized gain on investment
transactions................. 544,282 1,773,712
Net change in unrealized
appreciation
(depreciation) of
investments.................. (621,998) 3,792,145
------------ ------------
Net increase in net assets
resulting from operations.... 9,121,311 8,807,871
------------ ------------
Dividends and distributions (Note
1)
Dividends to shareholders from
net investment income
Class A...................... (1,551,620) (499,866)
Class B...................... (7,416,277) (2,663,152)
Class C...................... (228,430) (78,996)
Class Z...................... (2,700) --
------------ ------------
(9,199,027) (3,242,014)
------------ ------------
Distributions to shareholders
from net realized gains
Class A...................... (58,141) (209,652)
Class B...................... (257,928) (1,276,511)
Class C...................... (7,883) (40,430)
Class Z...................... (590) --
------------ ------------
(324,542) (1,526,593)
------------ ------------
Fund share transactions (net of
share conversions) (Note 7)
Net proceeds from shares sold... 96,732,342 108,185,016
Net asset value of shares issued
to shareholders in
reinvestment of dividends and
distributions................ 6,941,778 3,228,879
Cost of shares reacquired....... (34,213,705) (13,150,057)
------------ ------------
Net increase in net assets from
Fund share transactions...... 69,460,415 98,263,838
------------ ------------
Total increase..................... 69,058,157 102,303,102
Net Assets
Beginning of period................ 102,403,102 100,000
------------ ------------
End of period...................... $171,461,259 $102,403,102
------------ ------------
------------ ------------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- -------------------------------------------------------------------------------
- ----- 8 See Notes to Financial Statements.
<PAGE>
<PAGE>
Notes to Financial Statements 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 common stock and 2,666 shares of Class C common stock for $100,000
on October 5, 1994 to Prudential Mutual Fund Management LLC (``PMF'').
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 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 on 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, are 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, are 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 are 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 tri-party 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.
Foreign Currency Translation: The books and records of the Fund are maintained
in U.S. dollars. Foreign currency amounts are translated into U.S. dollars on
the following basis:
(i) market value of investment securities, other assets and liabilities--at the
closing daily rate of exchange;
(ii) purchases and sales of investment securities, income and expenses--at the
rate of exchange prevailing on the respective dates of such transactions.
Although the net assets of the Fund are presented at the foreign exchange rates
and market values at the close of the year, the Fund does not isolate that
portion of the results of operations arising as a result of changes in the
foreign exchange rates from the fluctuations arising from changes in the market
prices of securities held at the end of the year. Similarly, the Fund does not
isolate the effect of changes in foreign exchange rates from the fluctuations
arising from changes in the market prices of portfolio securities sold during
the year.
Net realized losses on foreign currency transactions represent net foreign
exchange losses from sales and maturities of short-term securities, disposition
of foreign currency, gains or losses realized between the trade and settlement
dates of security transactions, and the difference between amounts of dividends,
interest and foreign withholding taxes recorded on the Fund's books and the U.S.
dollar equivalent amounts actually received or paid. Net currency gains and
losses from valuing foreign currency denominated assets, except portfolio
securities, and liabilities at year end exchange rates are reflected as a
component of unrealized appreciation or depreciation on foreign currencies.
Foreign security and currency transactions may involve certain considerations
and risks not typically associated with those of domestic origin as a result of,
among other factors, the possibility of political and economic
- --------------------------------------------------------------------------------
9 -----
<PAGE>
<PAGE>
Notes to Financial Statements PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
instability and the level of governmental supervision and regulation of foreign
securities markets.
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.
Short Sales: The Fund may sell a security it does not own in anticipation of a
decline in the market value of that security (short sale). When the Fund makes a
short sale, it must borrow the security sold short and deliver it to the
broker-dealer through which it made the short sale as collateral for its
obligation to deliver the security upon conclusion of the sale. The Fund may
have to pay a fee to borrow the particular security and may be obligated to pay
over any payments received on such borrowed securities. A gain, limited to the
price at which the Fund sold the security short, or a loss, unlimited in
magnitude, will be recognized upon the termination of a short sale if the market
price at termination is less than or greater than, respectively, the proceeds
originally received.
Securities Transactions and Net Investment Income: Securities transactions are
recorded on the trade date. Realized gains or losses on sales of securities 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. Expenses are recorded on
the accrual basis which may require the use of certain estimates by management.
Net investment income (other than distribution fees) and realized and unrealized
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 $210,000 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 year
ended December 31, 1996, PMF waived 80% of its management fee. The amount of
fees waived for the year ended December 31, 1996 amounted to $559,990 ($.05 per
share for Class A, B, C and Z shares; .40 of 1% of average daily net assets).
The Fund is not required to reimburse PMF for such waiver.
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 previous arrangement. PSI is also
distributor of the Class B, Class C and Class Z shares of the Fund. The Fund
compensated PSI for distributing and
- --------------------------------------------------------------------------------
- ----- 10
<PAGE>
<PAGE>
Notes to Financial Statements PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
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 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.
Such expenses under the Class A, Class B and Class C Plans were .15%, .75% and
.75%, respectively, of the average daily net assets of Class A, Class B and
Class C shares for the year ended December 31, 1996.
PSI has advised the Fund that it has received approximately $189,000 in
front-end sales charges resulting from sales of Class A shares during the year
ended December 31, 1996. From these fees, PSI paid such sales charges to Pruco
Securities Corporation and affiliated broker-dealers, which in turn paid
commissions to salespersons and incurred other distribution costs.
PSI has advised the Fund that for the year ended December 31, 1996, it received
approximately $335,000 and $2,500 in contingent deferred sales charges imposed
upon redemptions by certain Class B and Class C shareholders, respectively.
PSI, PMF and PIC are indirect, wholly-owned subsidiaries of The Prudential
Insurance Company of America.
The Fund, along with other affiliated registered investment companies (the
``Funds''), entered into a credit agreement (the ``Agreement'') on December 31,
1996 with an unaffiliated lender. The maximum commitment under the Agreement is
$200,000,000. The Agreement expires on December 30, 1997. Interest on any such
borrowings outstanding will be at market rates. The purpose of the Agreement is
to serve as an alternative source of funding for capital share redemptions. The
Fund has not borrowed any amounts pursuant to the Agreement as of December 31,
1996. The Funds pay a commitment fee at an annual rate of .055 of 1% on the
unused portion of the credit facility. The commitment fee is accrued and paid
quarterly on a pro-rata basis by the Funds.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC (``PMFS''), a wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During the year ended December 31,
1996, the Fund incurred fees of approximately $245,000 for the services of PMFS.
As of December 31, 1996, approximately $25,000 of such fees were due to PMFS.
Transfer agent fees and expenses in the Statement of 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%, 1.50% and .75% of the average
daily net assets of the Class A, Class B, Class C and Class Z shares,
respectively. No reimbursement was required for the year ended December 31,
1996.
- ------------------------------------------------------------
Note 5. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the year ended December 31, 1996 were $558,769,254 and $477,955,791,
respectively.
The federal income tax cost basis of the Fund's investments at December 31, 1996
was $172,177,291 and, accordingly, net unrealized appreciation for federal
income tax purposes was $3,118,355 (gross unrealized appreciation-$3,610,542;
gross unrealized depreciation-$492,187).
- ------------------------------------------------------------
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 December 31, 1996, the
Fund had a 0.1% undivided interest in the repurchase agreements in the joint
account. The undivided interest for the Fund represents $1,542,000 in principal
amount. As of such date, each repurchase agreement in the joint account and the
value of the collateral therefor were as follows:
Bear, Stearns & Co., 6.75%, in the principal amount of $341,000,000, repurchase
price $341,127,875, due 1/2/97. The value of the collateral including accrued
interest was $349,151,276.
Goldman, Sachs & Co., 6.60%, in the principal amount of $341,000,000, repurchase
price $341,125,033, due 1/2/97. The value of the collateral including accrued
interest was $347,820,889.
J.P. Morgan Securities, 6.60%, in the principal amount of $341,000,000,
repurchase price $341,125,033, due 1/2/97. The value of the collateral including
accrued interest was $347,822,540.
- --------------------------------------------------------------------------------
11 -----
<PAGE>
<PAGE>
Notes to Financial Statements PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
Sanwa Securities USA, 6.00%, in the principal amount of $68,014,000, repurchase
price $68,036,671, due 1/2/97. The value of the collateral including accrued
interest was $69,375,117.
- ------------------------------------------------------------
Note 7. Capital
The Fund offers Class A, Class B, Class C and Class Z 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.
Effective September 16, 1996 the Fund commenced offering Class Z shares. Class Z
shares are not subject to any sales or redemption charge and are offered
exclusively for sale to a limited group of investors.
There are 2 billion shares of common stock, $.001 par value per share, divided
into four classes, designated Class A, B, C and Class Z, each of which consists
of 1 billion, 500 million, 500 million and 500 million authorized shares,
respectively. Of the 12,630,065 shares of common stock issued and outstanding at
December 31, 1996, PMF owned 8,000.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- -------------------------------------- ---------- -----------
<S> <C> <C>
Year ended December 31, 1996:
Shares sold........................... 1,409,945 $18,784,906
Shares issued in reinvestment of
dividends and distributions......... 93,794 1,254,514
Shares reacquired..................... (477,222) (6,363,413)
---------- -----------
Net increase in shares outstanding
before conversion................... 1,026,517 13,676,007
Shares issued upon conversion from
Class B............................. 196,827 2,615,114
---------- -----------
Net increase in shares outstanding.... 1,223,344 $16,291,121
---------- -----------
---------- -----------
January 10, 1995(a) through
December 31, 1995:
Shares sold........................... 1,149,425 $15,161,009
Shares issued in reinvestment of
dividends and distributions......... 39,135 528,573
Shares reacquired..................... (242,566) (3,231,169)
---------- -----------
Net increase in shares outstanding
before conversion................... 945,994 12,458,413
Shares issued upon conversion from
Class B............................. 86,560 1,185,549
---------- -----------
Net increase in shares outstanding.... 1,032,554 $13,643,962
---------- -----------
---------- -----------
<CAPTION>
Class B Shares Amount
- -------------------------------------- ---------- -----------
<S> <C> <C>
Year ended December 31, 1996:
Shares sold........................... 5,615,168 $75,013,374
Shares issued in reinvestment of
dividends and distributions......... 412,093 5,507,751
Shares reacquired..................... (2,006,332) (26,854,321)
---------- -----------
Net increase in shares outstanding
before conversion................... 4,020,929 53,666,804
Shares reacquired upon conversion
into Class A........................ (196,827) (2,615,114)
---------- -----------
Net increase in shares outstanding.... 3,824,102 $51,051,690
---------- -----------
---------- -----------
January 10, 1995(a) through
December 31, 1995:
Shares sold........................... 6,807,170 $90,362,412
Shares issued in reinvestment of
dividends and distributions......... 193,355 2,618,478
Shares reacquired..................... (719,177) (9,697,206)
---------- -----------
Net increase in shares
outstanding before conversion....... 6,281,348 83,283,684
Shares reacquired upon conversion into
Class A............................. (86,560) (1,185,549)
---------- -----------
Net increase in shares outstanding.... 6,194,788 $82,098,135
---------- -----------
---------- -----------
<CAPTION>
Class C
- --------------------------------------
<S> <C> <C>
Year ended December 31, 1996:
Shares sold........................... 169,498 $ 2,266,712
Shares issued in reinvestment of
dividends and distributions......... 13,201 176,406
Shares reacquired..................... (70,076) (934,259)
---------- -----------
Net increase in shares outstanding.... 112,623 $ 1,508,859
---------- -----------
---------- -----------
January 10, 1995(a) through
December 31, 1995:
Shares sold........................... 200,032 $ 2,661,595
Shares issued in reinvestment of
dividends and distributions......... 6,043 81,828
Shares reacquired..................... (16,199) (221,682)
---------- -----------
Net increase in shares outstanding.... 189,876 $ 2,521,741
---------- -----------
---------- -----------
<CAPTION>
Class Z
- --------------------------------------
<S> <C> <C>
September 16, 1996(a) through
December 31, 1996
Shares sold........................... 49,040 $ 667,350
Shares issued in reinvestment of
dividends and distributions......... 229 3,107
Shares reacquired..................... (4,542) (61,712)
---------- -----------
Net increase in shares outstanding.... 44,727 $ 608,745
---------- -----------
---------- -----------
</TABLE>
- ---------------
(a) Commencement of investment operations.
- --------------------------------------------------------------------------------
- ----- 12
<PAGE>
<PAGE>
Financial Highlights PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Class B
------------------------------- -------------------------------
January 10, January 10,
Year 1995(a) Year 1995(a)
Ended Through Ended Through
December 31, December 31, December 31, December 31,
1996 1995 1996 1995
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......... $ 13.79 $ 12.50 $ 13.79 $ 12.50
------ ------ ------------- ------
Income from investment operations
Net investment income(b)...................... .93 .90 .85 .82
Net realized and unrealized gain (loss) on
investment transactions.................... (.19) 1.51 (.18) 1.51
------ ------ ------------- ------
Total from investment operations........... .74 2.41 .67 2.33
------ ------ ------------- ------
Less distributions
Dividends from net investment income.......... (.93) (.90) (.85) (.82)
Distributions from net realized gains......... (.03) (.22) (.03) (.22)
------ ------ ------------- ------
Total distributions........................ (.96) (1.12) (.88) (1.04)
------ ------ ------------- ------
Net asset value, end of period................ $ 13.57 $ 13.79 $ 13.58 $ 13.79
------ ------ ------------- ------
------ ------ ------------- ------
TOTAL RETURN(d)............................... 5.80% 19.80% 5.19% 19.11%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............... $30,657 $14,276 $ 136,054 $85,472
Average net assets (000)...................... $21,867 $ 7,428 $ 114,560 $43,574
Ratios to average net assets(b):
Expenses, including distribution fees...... .79% .87%(c) 1.39% 1.47%(c)
Expenses, excluding distribution fees...... .64% .72%(c) .64% .72%(c)
Net investment income...................... 7.08% 6.92%(c) 6.48% 6.32%(c)
Portfolio turnover rate....................... 362% 260% 362% 260%
<CAPTION>
Class C Class Z
------------------------------- -------------
January 10, September 16,
Year 1995(a) 1996(e)
Ended Through Through
December 31, December 31, December 31,
1996 1995 1996
------------- ------------- -------------
<S> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period.......... $ 13.79 $ 12.50 $ 13.20
----- ----- -----
Income from investment operations
Net investment income(b)...................... .85 .82 .28
Net realized and unrealized gain (loss) on
investment transactions.................... (.18) 1.51 .40
----- ----- -----
Total from investment operations........... .67 2.33 .68
----- ----- -----
Less distributions
Dividends from net investment income.......... (.85) (.82) (.28)
Distributions from net realized gains......... (.03) (.22) (.03)
----- ----- -----
Total distributions........................ (.88) (1.04) (.31)
----- ----- -----
Net asset value, end of period................ $ 13.58 $ 13.79 $ 13.57
----- ----- -----
----- ----- -----
TOTAL RETURN(d)............................... 5.19% 19.11% 5.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000)............... $ 4,143 $ 2,655 $ 608
Average net assets (000)...................... $ 3,534 $ 1,307 $ 125
Ratios to average net assets(b):
Expenses, including distribution fees...... 1.39% 1.47%(c) .64%(c)
Expenses, excluding distribution fees...... .64% .72%(c) .64%(c)
Net investment income...................... 6.48% 6.32%(c) 7.23%(c)
Portfolio turnover rate....................... 362% 260% 362%
</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.
(e) Commencement of offering of Class Z shares.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 13 -----
<PAGE>
<PAGE>
Independent Auditors' Report PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors
Prudential Diversified Bond Fund, Inc.
We have audited the accompanying statement of assets and liabilities, including
the portfolio of investments, of Prudential Diversified Bond Fund, Inc. as of
December 31, 1996, the related statement of operations and statement of changes
in net assets, and the financial highlights for the year then ended and for the
period January 10, 1995 (commencement of operations) to December 31, 1995. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at December
31, 1996 by correspondence with the custodian and brokers; where replies were
not received from brokers, we performed other auditing procedures. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Prudential
Diversified Bond Fund, Inc. as of December 31, 1996, the results of its
operations, the changes in its net assets and the financial highlights for the
above stated periods, in conformity with generally accepted accounting
principles.
DELOITTE & TOUCHE LLP
New York, New York
February 12, 1997
Tax Information PRUDENTIAL DIVERSIFIED BOND FUND, INC.
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As required by the Internal Revenue Code, we are to advise you within 60 days of
the Fund's fiscal year end (December 31, 1996) as to the federal tax status of
dividends and distributions paid by the Fund.
During the fiscal year ended December 31, 1996, the Fund paid dividends from net
investment income and a short-term capital gains distribution which was taxable
as ordinary income. We wish to advise you that the corporate dividends received
deduction for the Fund is 1.37%.
For the purpose of preparing your annual federal income tax return, however, you
should report the amounts as reflected on the appropriate Form 1099-DIV or
substitute 1099-DIV.
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<PAGE>
<PAGE>
Supplemental Proxy Information PRUDENTIAL DIVERSIFIED BOND FUND, INC.
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The Annual Meeting of Shareholders of the Prudential Diversified Bond Fund,
Inc. (the ``Fund'') was held on Wednesday, October 30, 1996 at the offices of
Prudential Securities Incorporated, One Seaport Plaza, New York, New York. The
meeting was held for the following purposes:
(1) To elect Directors as follows: Edward D. Beach, Eugene C. Dorsey, Delayne D.
Gold, Robert F. Gunia, Harry A. Jacobs, Donald D. Lennox, Mendel A. Melzer,
Thomas T. Mooney, Thomas H. O'Brien, Richard A. Redeker, Nancy H. Teeters
and Louis A. Weil.
(2) To approve the proposed elimination of the Fund's fundamental investment
restriction relating to investment in securities of unseasoned issuers.
(3) To ratify the selection of Deloitte & Touche LLP as independent public
accountants for the fiscal year ending December 31, 1996.
The results of the proxy solicitation on the above matters were as follows:
<TABLE>
<CAPTION>
Director/Matter Votes for Votes against Abstentions
---------------- ------------- -----------
<S> <C> <C> <C>
(1) Edward D. Beach 5,516,941 -- 164,580
Eugene C. Dorsey 5,520,399 -- 161,122
Delayne D. Gold 5,510,826 -- 170,695
Robert F. Gunia 5,522,334 -- 159,187
Harry A. Jacobs 5,517,182 -- 164,339
Donald D. Lennox 5,508,189 -- 173,332
Mendel A. Melzer 5,521,584 -- 159,937
Thomas T. Mooney 5,522,078 -- 159,443
Thomas H. O'Brien 5,514,327 -- 167,194
Richard A. Redeker 5,518,040 -- 163,481
Nancy H. Teeters 5,508,964 -- 172,557
Louis A.Weil 5,522,092 -- 159,429
(2) Investment restriction--unseasoned issuers 4,164,368 210,614 307,741
(3) Deloitte & Touche LLP 5,377,779 87,624 216,118
</TABLE>
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15 -----
<PAGE>
Getting The Most
From Your Prudential
Mutual Fund.
When you invest through Prudential Mutual Funds, you receive financial
advice through a Prudential Securities financial advisor or Prudential/Pruco
Securities registered representative. Your advisor or representative can
provide you with the following services:
There's No Reward Without Risk; But Is This Risk Worth It?
Your financial advisor or registered representative can help you match the
reward you seek with the risk you can tolerate. And risk can be difficult to
gauge -sometimes even the simplest investments bear surprising risks. The
educated investor knows that markets seldom move in just one direction - there
are times when a market sector or asset class will lose value or provide little
in the way of total return. Managing your own expectations is easier with help
from someone who understands the markets and who knows you!
Keeping Up With The Joneses.
A financial advisor or registered representative can help you wade through
the numerous mutual funds available to find the ones that fit your own
individual investment profile and risk tolerance. While the newspapers and
popular magazines are full of advice about investing, they are aimed at
generic groups of people or representative individuals, not at you personally.
Your financial advisor or registered representative will review your
investment objectives with you. This means you can make financial decisions
based on the assets and liabilities in your current portfolio and your risk
tolerance - not just based on the current investment fad.
Buy Low, Sell High.
Buying at the top of a market cycle and selling at the bottom are among the
most common investor mistakes. But sometimes it's difficult to hold on to an
investment when it's losing value every month. Your financial advisor or
registered representative can answer questions when you're confused or
worried about your investment, and remind you that you're investing for
the long haul.
<PAGE>
Comparing A $10,000 Investment. Prudential Diversified
Prudential Diversified Bond Fund vs. the Lehman Bond Fund
Brothers Aggregate Bond Index.
Lehman Bros.
Aggregate Bond Index
Past performance is not indicative of future results. Investment return and
principal value will fluctuate so an investor's shares, when redeemed, may be
worth more or less than their original cost.
These graphs are furnished to you in accordance with SEC regulations. They
compare a $10,000 investment in the Prudential Diversified Bond Fund, Inc.
(Class A, Class B, Class C and Class Z) with a similar investment in the
Lehman Brothers Aggregate Bond Index by portraying the initial account
values at the end of this reporting period (December 31, 1996), as measured
on a quarterly basis, beginning in 1995 for Class A, Class B and Class C
shares and in 1996 for Class Z shares. For purposes of the graphs, and
unless otherwise indicated, in the accompanying tables it has been assumed
(a) that the maximum applicable front-end sales charge was deducted from the
initial $10,000 investment in Class A shares; (b) the maximum applicable
contingent deferred sales charge was deducted from the value of the
investment in Class B and Class C shares, assuming full redemption on
December 31, 1996; (c) all recurring fees (including management fees)
were deducted; and (d) all dividends and distributions were reinvested.
Class B shares will automatically convert to Class A shares, on a quarterly
basis, beginning approximately seven years after purchase. This conversion
feature is not reflected in the graph. Class Z shares do not have a sales
charge or a distribution fee. Since Class Z shares have been in existence
less than one year, no average annual total returns are shown. The graph and
accompanying tables reflect the past subsidy and/or waiver of expenses and/or
management fees.
The Index is a weighted index comprised of securities with a remaining
maturity of one to 30 years, which are issued or backed by the U.S.
government (including mortgage backed securities) and its agencies, or
issued by private corporations. It is an unmanaged index that includes the
reinvestment of all dividends, but does not reflect the transaction costs and
advisory fees paid by the Fund's investors. The Index's holdings differ from
the Fund's portfolio. The Index is not the only one that may be used to
characterize performance of bond funds and other indices may portray different
comparative performance.
Average Annual Total
Returns - Class A
With Sales Load
(CHART) 10.4% Since Inception
Class A Without Sales Load
12.7% Since Inception
1.6% for 1 Year
5.8% for 1 Year
Average Annual Total
Returns - Class B
With Sales Load
(CHART) 10.2% Since Inception
Class B 0.2% for 1 Year
Without Sales Load
12.1% Since Inception
5.2% for 1 Year
Average Annual Total
Returns - Class C
With Sales Load
(CHART) 12.1% Since Inception
Class C 4.2% for 1 Year
Without Sales Load
12.1% Since Inception
5.2% for 1 Year
(CHART)
Class Z
