<PAGE>
(ICON)
Prudential
Diversified
Bond
Fund, Inc.
SEMI
ANNUAL
REPORT
June 30, 1999
(LOGO)
<PAGE>
A Message from the Fund's President August 20, 1999
(PHOTO)
Dear Shareholder,
Prudential Diversified Bond Fund posted negative returns for the
six-month period that ended on June 30, 1999, as did its benchmark,
the Lipper General Bond Fund Average. The Fund's performance
primarily reflected the bearish trend in the fixed-income market,
particularly in investment-grade U.S. corporate bonds and U.S.
Treasuries. The debt market sold off amid concern about the
potential for higher inflation. Since rising inflation erodes
the value of bonds' fixed interest payments, investors demanded
higher yields on most debt securities. As a result, prices of
these debt securities--which move in the opposite direction of
their yields--fell significantly. The following report takes a
closer look at developments in the bond market during the
six-month reporting period, and explains how Prudential
Diversified Bond Fund was positioned accordingly.
Our integrated and expanded team
I would like to take this opportunity to tell you about
some changes we've made to our Fixed Income Group. Earlier
in the year, we combined our fixed-income areas into one
integrated group that will manage money for Prudential's
retail and institutional investors, as well as its
policyholders. This integrated group now manages
approximately $145 billion in assets, making it one of
the three largest fixed-income money managers in the country.
The expanded depth, breadth, and scale of our investment team
also allow us to tap the best talent and share investment ideas,
proprietary research, and analytical tools. The group is co-headed
by Senior Managing Directors Jim Sullivan, who is responsible for
portfolio management and credit research, and Jack Gaston, who is
in charge of risk management and quantitative research.
To utilize these integrated resources more effectively, Mr.
Sullivan recently organized the group into teams, each
specializing in a different sector of the fixed-income
market. The Corporate Sector team will now be responsible
for the day-to-day management of your Prudential Diversified
Bond Fund. Many of the investment professionals who supported
the management of the Fund in the past are part of this new
team that will work together to share their knowledge and
strive to enhance performance.
Thank you for your continued confidence in Prudential mutual
funds. I firmly believe that the group's combined resources
and our new team approach will make us a powerhouse in the
world of fixed-income investing across all sectors.
Sincerely,
John R. Strangfeld
President and Chief Investment Officer
Prudential Diversified Bond Fund, Inc.
<PAGE>
Performance Review
<TABLE>
Cumulative Total Returns1 As of 6/30/99
<CAPTION>
Six One Three Since
Months Year Years Inception2
<S> <C> <C> <C> <C>
Class A -1.58% (-1.66) -0.51% (-0.59) 20.12% (19.55) 41.60% (40.59)
Class B -1.81 (-1.88) -1.05 (-1.13) 17.90 (17.34) 37.90 (36.92)
Class C -1.81 (-1.89) -1.05 (-1.13) 17.90 (17.34) 37.87 (36.89)
Class Z -1.48 (-1.55) -0.33 (-0.40) N/A 18.09 (17.62)
Lipper General
Bond Fund Avg.3 -0.82 1.54 23.88 ***
</TABLE>
<TABLE>
Average Annual Total Returns1 As of 6/30/99
<CAPTION>
One Three Since
Year Years Inception2
<S> <C> <C> <C>
Class A -4.49% (-4.57) 4.86% (4.70) 7.11% (6.94)
Class B -6.05 (-6.13) 4.74 (4.57) 7.28 (7.11)
Class C -3.04 (-3.12) 5.29 (5.12) 7.21 (7.04)
Class Z -0.33 (-0.40) N/A 6.15 (6.00)
</TABLE>
<TABLE>
Distributions and Yields As of 6/30/99
<CAPTION>
Total Distributions 30-Day
Paid for Six Mos. SEC Yield
<S> <C> <C>
Class A $0.39 6.24%
Class B $0.36 6.00%
Class C $0.36 5.94%
Class Z $0.40 6.76%
</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.
1 Source: Prudential Investments Fund Management LLC and Lipper,
Inc. The cumulative total returns do not take into account sales
charges. The average annual total returns do take into account
applicable sales charges. The Fund charges a maximum front-end
sales charge 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 B shares will automatically
convert to Class A shares, on a quarterly basis, approximately
seven years after purchase. Class C shares are subject to a
front-end sales charge of 1% and a CDSC of 1% for 18 months.
Class C shares bought before November 2, 1998, have a 1% CDSC
if sold within one year. Class Z shares are not subject to a
sales charge or distribution and service (12b-1) fees. Without
waiver of management fees and/or expense subsidization, the
Fund's cumulative and average annual total returns would have
been lower, as indicated in parentheses ( ).
2 Inception dates: Class A, B, and C, 1/10/95; and Class Z, 9/16/96.
3 Lipper average returns are for all funds in each share class
for the six-month, one-, and three-year periods in the General
Bond Fund category.
***Lipper Since Inception returns are 47.94% for Class A, B, and
C; and 20.81% for Class Z, based on all funds in each share class.
Inflation fears roiled bond market
The first half of 1999 proved to be a challenging time for
many major bonds markets. The U.S. economy expanded rapidly
in the first three months of the year, then throttled down to
a still respectable pace of growth in the second quarter. The
healthy U.S. economy, a burgeoning recovery in the global
economy, and rising oil prices could ignite higher inflation,
which erodes the value of bonds' fixed interest payments. To
compensate for this risk, investors began to push bond yields
higher (and their prices lower), particularly in the major
sectors of the U.S. debt market. This trend is the primary
reason the Fund posted negative returns for the six-month
period. The Fund lagged its benchmark Lipper Average partly
because it cannot invest in stocks and did not benefit from
the equity market rally as did some of its competitors in
the Lipper universe.
We sold longer-term, high-grade corporate bonds
The yield on the 30-year U.S. Treasury bond climbed from 5.09%
on December 31, 1998 to above 6.00% in late June 1999. Yields
in the U.S. investment-grade corporate bond market also climbed,
but the fear of inflation was not the only factor driving these
yields higher. Many companies rushed to issue bonds to avoid
any complications that might arise later in the year because
of the potential year 2000 computer problem. Investors demanded
higher yields on this large supply of new debt securities. As
a result, corporate bonds cheapened relative to Treasuries
late in the six-month period.
We had sold some of the Fund's longer-term, investment-grade
U.S. corporate bonds and purchased shorter-term corporate
debt securities late in the first and early in the second
quarter of 1999. This strategy helped the Fund during the
time that corporate bonds cheapened relative to Treasuries
because prices of shorter-term bonds usually decline less
than prices of longer-term bonds when debt markets sell off.
<PAGE>
Some of the proceeds from our sale of longer-term,
investment-grade U.S. corporate bonds were also used
to purchase short- to intermediate-term emerging market
bonds, which rose from 2.00% of the Fund's total investments
as of December 31, 1998 to 7.00% as of June 30, 1999. All of
the Fund's emerging market bonds are denominated in U.S.
dollars.
On the whole, emerging market bonds performed better than
debt securities in other fixed-income markets in the first
half of 1999, based on Lehman Brothers indexes. Demand for
emerging market bonds began to increase after Brazil
apparently weathered a financial crisis far better than
expected. In addition, investor sentiment toward emerging
market bonds of Southeast Asian countries improved as
economic stability returned to that region. Emerging
market bonds provide high yields because they are often
rated below investment grade and carry greater credit
risk than the government bonds of developed western
economies. For these reasons, we limit the Fund's
exposure to emerging market bonds.
We also bought better-quality U.S. high-yield bonds,
known as "junk" bonds. The high-yield bond market posted
positive returns for the six months and performed better
than all other U.S. debt markets, based on Lehman Brothers
indexes. But here again, we were careful to limit the Fund's
exposure to high-yield bonds because they heighten the Fund's
credit risk profile.
The Fed took steps to curb U.S. economic growth
Our shifts in asset allocation lowered the Fund's duration, which
is a measure of its sensitivity to fluctuations in the level of
bond yields. The duration stood at 6.5 years on December 31, 1998,
and declined to 5.5 years by the end of June 1999. Shortening the
duration was the right strategy because it lessened the Fund's
vulnerability to the rise in bond yields (and the decline in
their prices). In hindsight, we should have moved more quickly
to reduce the Fund's duration in light of the steep rise in
bond yields that occurred in the spring as more investors
realized the Federal Reserve would take steps to rein in the
powerful U.S. economy.
Five Largest Issuers
Expressed as a percentage of net assets as of 6/30/99
U.S. Treasury Notes 6.9%
Equity Residential Properties 2.1
Niagara Mohawk Power 2.0
United Airlines 1.9
News America, Inc. 1.9
Portfolio Composition
Expressed as a percentage of total investments as of 6/30/99
U.S. Corporate Bonds 69.4%
Foreign Gov't Securities 9.3
U.S. Gov't Securities 8.9
Foreign Corporate Bonds 4.0
Asset-Backed Securities 3.1
Cash & Equivalents 5.3
Investment Goals and Style
The Fund's investment objective is high current income
consistent with the appropriate balance between risk and
reward as determined by the Fund's investment adviser. This
means we allocate assets primarily among debt securities,
including U.S. government securities, mortgage-related
securities, corporate debt securities and foreign securities.
We normally invest at least 65% of the Fund's total assets in
investment-grade debt securities. The Fund may also invest
up to 35% of its net assets in non-investment-grade securities
having a rating of not lower than CCC--also known as high-yield
or "junk" bonds. There can be no assurance that the Fund will
achieve its investment objective.
1
<PAGE>
Review Cont'd.
Indeed, after a regularly scheduled meeting in mid-May, Federal
Reserve policy makers announced they were leaning toward increasing
short-term interest rates because of the potential for a buildup in
inflationary pressures. On June 30, 1999, the U.S. central bank
boosted the Federal funds rate (the rate U.S. banks charge each
other for overnight loans) by a quarter of a percentage point
to 5.00%. This marked the first rate increase since March 1997.
Looking Ahead
Fed less likely to move after August meeting
In August, the Federal Reserve raised both the discount rate
(the rate the Fed charges member banks that borrow at the
discount window) and the Federal funds rate by a quarter of
a percentage point to 4.75% and 5.25%, respectively. The
benign tone of a statement released by the Fed at that time
lessened market concern about further rate increases this
year. Taken together, the statement and the U.S. central
bank's concerns about the potential year 2000 computer
problem support the outlook for stable money policy for
the remainder of 1999.
2
<PAGE>
Portfolio of Investments as of
June 30, 1999 (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
- ------------------------------------------------------------
<C> <C> <S> <C>
LONG-TERM INVESTMENTS--94.4%
- ------------------------------------------------------------
Asset Backed Securities--3.1%
Aaa $ 5,000 Citibank Credit Card Master
Trust I, Series 1999-5,
Class A,
6.10%, 5/15/08 $ 4,895,500
Aaa 4,700 MBNA Master Credit Card
Trust,
Series 1999 B, Class A
5.90%, 8/15/11 4,432,553
------------
Total asset backed securities
(cost $9,679,922) 9,328,053
------------
- ------------------------------------------------------------
Domestic Corporate Bonds--69.1%
Ba1 700 AES Corp., Sr. Note,
9.50%, 6/1/09 719,250
Ba3 4,000 Allied Waste North America,
Sr. Note,
7.625%, 1/1/06 3,740,000
Aa3 1,400 Archer-Daniels-Midland,
Deb.,
6.625%, 5/1/29 1,281,546
A2 1,500 AT&T Corp., Deb.,
10.125%, 4/15/22 1,953,465
Baa2 2,000 BJ Services Co.,
Sr. Note,
7.00%, 2/1/06 1,968,040
Ba2 2,000 Calair Capital Corp.,
Sr. Note,
8.125%, 4/1/08 1,862,500
Calenergy Co., Inc., Sr.
Notes,
Baa3 2,000 6.96%, 9/15/03 1,982,600
Baa3 2,000 7.23%, 9/15/05 1,985,960
Baa2 3,000 Camden Property Trust,
Note,
7.23%, 10/30/00 3,003,300
Baa2 3,000 Capital One Financial,
Medium Term Note,
7.08%, 10/30/01 3,026,370
Note,
Baa3 1,600 7.25%, 5/1/06 1,550,000
B2 $ 2,000 Charter Communications
Holdings LLC, Sr. Note,
8.25%, 4/1/07 $ 1,905,000
A1 1,000 Chrysler Financial Co. LLC,
Medium Term Note,
5.25%, 10/22/01 977,560
Ba3 1,200 CMS Energy Corp.,
Sr. Note,
8.00%, 7/1/01 1,197,000
Baa2 600 Coca Cola Bottling
Co., Deb.,
6.375%, 5/1/09 563,190
Ba1 3,200 Cogentrix Energy, Inc.,
Sr. Note,
8.75%, 10/15/08 3,152,000
Baa1 2,000 Comdisco, Inc.,
Medium Term Note,
6.32%, 11/27/00 2,001,860
Baa3 3,500 Commonwealth Edison
Co., Note,
7.625%, 1/15/07 3,606,715
Baa3 4,000 Connecticut Light & Power
Co., Series C,
7.75%, 6/1/02 4,093,760
Ba3 70 Conseco Financing Trust II,
Bond,
8.70%, 11/15/26 62,729
Ba3 1,700 Conseco Financing Trust III,
Bond,
8.796%, 4/1/27 1,538,330
Continental Airlines, Inc.,
Pass-Through Trust,
Series 1997 1A,
Aa3 1,331 7.461%, 4/1/15 1,348,597
Sr. Note,
Ba2 2,540 8.00%, 12/15/05 2,424,532
Baa1 900 Cox Enterprises, Inc., Note,
6.625%, 6/14/02 899,397
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 3
<PAGE>
Portfolio of Investments as of
June 30, 1999 (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
Domestic Corporate Bonds (cont'd.)
CSC Holdings, Inc.,
Sr. Notes,
Ba2 $ 700 7.875%, 12/15/07 $ 694,848
Ba2 900 7.25%, 7/15/08 857,430
A3 2,000 Dayton Hudson Corp.,
Note,
6.40%, 2/15/03 1,990,700
A1 600 Deutsche Bank Capital Funding
Trust I, Note, F.R.N.,
7.872%, 12/29/49 580,872
Aa2 3,300 Dresdner Funding Trust I,
Note,
8.151%, 6/30/31 3,178,296
Baa2 800 Duke Realty L.P.,
Sr. Note,
7.30%, 6/30/03 805,760
A3 800 Edison Mission Energy,
Sr. Note,
7.73%, 6/15/09 808,288
Ba2 1,500 El Paso Electric Co.,
First Mtge. Bond,
9.40%, 5/1/11 1,661,145
A2 800 Electric Lightwave, Inc.,
Note,
6.05%, 5/15/04 773,472
ERP Operating L.P.,
Bond,
A3 1,200 6.63%, 4/13/05 1,157,832
Notes,
A3 5,000 6.15%, 9/15/00 4,967,500
A3 375 7.10%, 6/23/04 375,266
B2 2,000 Falcon Holdings Group, L.P.,
Deb., Series B,
8.375%, 4/15/10 1,990,000
Baa2 5,100 Federated Dept. Stores, Inc.,
Sr. Note,
8.50%, 6/15/03 5,399,319
Baa2 5,000 First Industial, L.P., Note,
6.50%, 4/5/01 4,903,450
Aa3 75 FMR Corp., Bond,
7.57%, 6/15/29 74,730
A1 $ 3,000 Ford Motor Co., Deb.,
6.375%, 2/1/29 $ 2,604,270
Baa2 2,000 Fort James Corp., Note,
6.234%, 3/15/01 1,981,900
Baa2 3,500 Gables Reality L.P.,
Sr. Note,
6.55%, 10/1/00 3,489,290
A2 3,000 General Motors Acceptance
Corp., Note,
5.95%, 3/14/03 2,929,470
A1 1,250 Goldman Sachs Group,
Note,
5.56%, 1/11/01 1,240,625
A3 800 Heller Financial, Inc.,
Note,
6.00%, 3/19/04 774,408
NR 3,000 ICG Holdings, Inc.,
Sr. Note,
Zero Coupon, 3/15/07 2,070,000
A1 2,000 International Business
Machines Corp., Medium Term
Note,
Series MTN
5.625%, 4/12/04 1,922,000
A1 4,000 International Lease Finance
Corp., Medium Term Note,
Series MTNJ
5.90%, 3/12/03 3,908,240
B2 2,000 ITC Deltacom Inc.,
9.75%, 11/15/08 2,060,000
ITT Corp., Notes,
Ba1 1,200 6.25%, 11/15/00 1,173,396
Ba1 2,000 6.75%, 11/15/03 1,875,760
Baa2 4,000 K N Energy, Inc., Note,
6.30%, 3/1/01 3,986,240
Kroger Co., Deb.,
Baa3 550 7.70%, 6/1/29 544,500
Notes,
Baa3 1,700 6.34%, 6/1/01 1,685,656
Baa3 1,000 7.25%, 6/1/09 995,625
Ba1 5,000 LCI Internationa,l Inc.,
Sr. Note,
7.25%, 6/15/07 4,909,550
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 4
<PAGE>
Portfolio of Investments as of
June 30, 1999 (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
Domestic Corporate Bonds (cont'd.)
Ba1 $ 5,000 Lear Corp., Sr. Note,
7.96%, 5/15/05 $ 4,837,500
Lehman Brothers Holdings,
Notes,
Baa1 3,605 6.625%, 4/1/04 3,511,775
Baa1 1,175 6.625%, 2/5/06 1,144,097
Liberty Media Group,
Bond,
Baa3 400 7.875%, 7/15/09 397,616
Note,
Baa3 700 8.50%, 7/15/29 698,089
A2 2,800 Lucent Technologies Inc.,
Deb.,
6.45%, 3/15/29 2,532,908
Ba3 650 Lyondell Chemical Co.,
9.625%, 5/1/07 664,625
Baa2 2,000 Mallinckrodt, Inc.
Bond,
6.30%, 3/15/01 1,965,000
McLeod, Inc., Sr. Notes,
B2 2,000 9.25%, 7/15/07 1,985,000
B2 2,000 8.125%, 2/15/09 1,865,000
Aa3 2,500 Morgan Stanley Dean Witter,
Inc.,
Note,
6.09%, 3/9/01 2,490,100
Baa2 3,000 National Oilwell, Inc.,
Sr. Note,
6.875%, 7/1/05 2,898,510
A1 1,000 Nationwide Life Insurance
Co., Deb.,
9.875%, 2/15/25 1,088,438
Navistar International Corp.,
Sr. Notes,
Baa3 1,000 7.00%, 2/1/03 975,000
Ba2 4,500 8.00%, 2/1/08 4,410,000
Baa3 6,000 News America, Inc.,
6.703%, 5/21/04 5,891,160
B2 $ 4,000 Nextel Communications, Inc.,
Sr. Disc. Note,
Zero Coupon, 10/31/07 $ 2,790,000
Niagara Mohawk Power Corp.,
First Mtge. Bonds,
Baa2 2,000 6.875%, 4/1/03 2,022,520
Baa2 2,000 7.375%, 8/1/03 2,048,940
Baa2 2,000 8.00%, 6/1/04 2,083,600
B3 3,250 NTL Communications Corp.,
Sr. Note, Series B,
Zero Coupon, 10/1/08 2,153,125
Baa3 4,000 Owens Corning, Inc., Note,
7.50%, 5/1/05 3,953,750
Ba1 2,100 Owens Illinois, Inc., Deb.,
7.50%, 5/15/10 1,997,373
Baa3 500 Paramount Communications,
Inc.,
Sr. Note,
7.50%, 1/15/02 510,965
A2 600 Pennsylvania Electric Co.,
Sr. Note, Series A,
5.75%, 4/1/04 581,736
Ba1 2,400 Qwest Communications Int'l,
Inc.,
Sr. Note,
7.50%, 11/1/08 2,328,000
Baa1 1,300 Raytheon Co., Note,
6.50%, 7/15/05 1,284,829
Rohm & Haas Co., Deb.,
A3 1,000 7.85%, 7/15/29 999,270
Notes,
A3 1,200 6.95%, 7/15/04 698,691
A3 500 7.40%, 7/15/09 499,880
Aa3 3,000 Salomon Smith Barney
Holdings, Inc., Sr. Note,
6.65%, 7/15/01 3,023,760
Aa3 1,500 Salomon, Inc.,
Sr. Note,
6.59%, 2/21/01 1,509,615
Baa2 3,700 Scotia Pacific Co. LLC,
Series B, Class A 3,
7.71%, 1/20/14 2,682,500
Baa3 300 Seagram (Joseph) & Sons,
Inc.,
5.79%, 4/15/01 296,130
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 5
<PAGE>
Portfolio of Investments as of
June 30, 1999 (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
Domestic Corporate Bonds (cont'd.)
B3 $ 1,500 SFX Entertainment, Inc.
Sr. Sub. Note,
9.125%, 12/1/08 $ 1,440,000
Baa1 2,000 Sprint Capital Corp.,
Note,
6.875%, 11/15/28 1,813,240
A2 1,000 Tele-Communications,
Inc., Deb.,
6.34%, 2/1/02 1,002,890
Telecom de Puerto Rico,
Notes,
Baa2 1,800 6.65%, 5/15/06 1,747,926
Baa2 1,500 6.80%, 5/15/09 1,440,945
B2 1,000 Time Warner Telecom LLC,
Sr. Note,
9.75%, 7/15/08 1,025,000
Baa3 1,000 Time Warner, Inc., Deb.,
8.11%, 8/15/06 1,048,160
Aa3 500 Travelers Group, Inc.,
Sr. Note,
7.25%, 5/1/01 509,000
Baa3 1,500 Turner Broadcasting Systems,
Inc.,
Sr. Note,
7.40%, 2/1/04 1,543,755
NR 2,000 TVN Entertainment Corp.,
Sr. Note,
14.00%, 8/1/08 1,660,000
United Airlines, Inc., Deb.,
Baa3 3,000 10.67%, 5/1/04 3,388,170
Baa3 2,000 11.21%, 5/1/14 2,560,120
B2 2,000 United States Can Corp.,
Sr. Sub. Note, Series B,
10.125%, 10/15/06 2,105,000
Baa2 2,000 Waste Management, Inc.,
Note,
6.125%, 7/15/01 1,988,020
B1 2,000 World Color Press, Inc.,
Sr. Sub. Note,
7.75%, 2/15/09 1,860,000
Worldcom, Inc., Notes,
A3 $ 900 6.125%, 8/15/01 $ 897,156
A3 2,700 6.95%, 8/15/28 2,559,465
------------
Total domestic corporate
bonds
(cost $217,537,598) 212,621,888
------------
- ------------------------------------------------------------
Foreign Government Securities--9.3%
B2 2,000 Bulgaria,
Series A, F.R.N.,
5.875%, 7/28/24 1,355,000
Aaa 2,370 Bundesrepublik Deutschland
6.50%, 7/4/27 2,805,148
NR 2,159 Commonwealth of Australia,
7.50%, 9/15/09 1,562,674
NR 4,250 New Zealand Government,
7.00%, 7/15/09 2,320,218
A2 2,500 Quebec Province,
(Canada) Deb.,
7.50%, 7/15/23 2,541,650
B2 3,000 Republic of Brazil,
11.625%, 4/15/04 2,820,000
Republic of Colombia,
Note, F.R.N.
Baa3 2,500 9.705%, 8/13/05 2,175,000
Unsub.
Baa3 700 9.75%, 4/23/09 577,500
Republic of Panama,
Deb., F.R.N.,
Ba1 1,700 4.00%, 7/17/14 1,250,562
Note,
Ba1 4,000 7.875%, 2/13/02 3,900,000
Republic of Philippines,
Bonds,
Ba1 700 8.875%, 4/15/08 681,128
Ba1 2,500 9.875%, 1/15/19 2,431,250
Baa3 2,100 Republic of Poland,
Series RSTA, F.R.N.,
4.00%, 10/27/24 1,354,500
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 6
<PAGE>
Portfolio of Investments as of
June 30, 1999 (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
<C> <C> <S> <C>
- ------------------------------------------------------------
Foreign Government Securities (cont'd.)
United Mexican States,
Series A, F.R.N.,
Ba2 $ 600 5.875%, 12/31/19 $ 498,375
Series B, F.R.N.,
Ba2 1,200 5.875%, 12/31/19 996,750
Series C, F.R.N.,
Ba2 1,700 5.874%, 12/31/19 1,412,062
------------
Total foreign government
securities
(cost $30,285,364) 28,681,817
------------
- ------------------------------------------------------------
Foreign Corporate Bonds--4.0%
Aaa 2,500 Bayerische Landesbank,
(Germany-Banks), Sub. Note,
5.875%, 12/1/08 2,319,775
Baa2 2,000 British Sky Broadcasting
Group
(United Kingdom-Cable),
Bond,
6.875%, 2/23/09 1,824,620
Baa1 400 Cable & Wireless
Communication
(United Kingdom-
Telecommunications), Note,
6.75%, 12/1/08 385,044
A3 600 Hanson Overseas B.V.
(United Kingdom-Building
Materials), Sr. Note,
7.375%, 1/15/03 617,934
A2 1,400 HSBC Holdings PLC
(United Kingdom-Banks),
Sub. Note,
7.50%, 7/15/09 1,414,462
A2 1,000 Kansallis-Osake-Pankki, N.Y.
(Finland-Banks), Sub. Note,
10.00%, 5/1/02 1,083,720
A1 1,200 National Australia Bank Ltd.
(Australia-Banks),
6.40%, 12/10/07 1,192,464
Ba3 2,000 Rogers Cablesystems, Inc.
(Canada-Cable), Sr. Sec'd
Note,
10.00%, 3/15/05 2,140,000
Baa1 550 Tyco International Group SA
(Luxembourg-Diversified
Operations),
6.875%, 1/15/29 505,720
Baa2 $ 830 United News & Media PLC
(United Kingdom-Media),
Note,
7.25%, 7/1/04 $ 822,447
------------
Total foreign corporate bonds
(cost $12,579,403) 12,306,186
------------
- ------------------------------------------------------------
U.S. Government Securities--8.9%
Aaa 3,932 Small Business
Administration,
Series 98-I,
6.00%, 9/1/18 3,907,355
United States Treasury Bonds,
Aaa 1,340 5.25%, 5/15/04 1,316,764
Aaa 800 8.125%, 8/15/21 975,376
United States Treasury Notes,
Aaa 2,900 4.75%, 11/15/08 2,663,012
Aaa 600 6.25%, 6/30/02 609,846
Aaa 1,070 5.50%, 5/15/09 1,045,251
Aaa 19,035(b) 5.25%, 11/15/28 16,872,815
------------
Total U.S. government securities
(cost $27,940,019) 27,390,419
------------
- ------------------------------------------------------------
Units
----------
Warrants(a)
2,000 TVN Entertainment Corp.,
expiring 8/1/08 0
------------
- ------------------------------------------------------------
Rights(a)
5,384 United Mexican States,
expiring 12/31/19 0
------------
Total long-term investments
(cost $298,022,306) 290,328,363
------------
SHORT-TERM INVESTMENTS--5.2%
- ------------------------------------------------------------
Domestic Corporate Bonds--2.1%
Baa1 3,500 Comdisco Inc.,
Notes,
6.50%, 6/15/00 3,512,390
Baa2 2,000 Cox Communications, Inc.,
Note,
6.375%, 6/15/00 2,005,140
Baa3 1,000 Delta Air Lines, Inc., Deb.,
9.875%, 5/15/00 1,028,400
------------
(cost $6,607,075) 6,545,930
------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 7
<PAGE>
Portfolio of Investments as of
June 30, 1999 (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Principal
Moody's Amount
Rating (000) Description Value (Note 1)
<C> <C> <S> <C>
Foreign Government Securities--0.3%
Baa3 $ 1,000 Banco de Commercio Exterior
de Colombia,
8.625%, 6/2/00
(cost $1,008,540) $ 988,750
------------
- ------------------------------------------------------------
Repurchase Agreements--2.8%
8,575 Joint Repurchase Agreement
Account, 5.96%, 7/1/99
(cost $8,575,000; Note 6) 8,575,000
------------
Total short-term investments
(cost $16,190,615) 16,109,680
------------
- ------------------------------------------------------------
Total Investments Before Short Sales--99.6%
(cost $314,212,921) 306,438,043
------------
- ------------------------------------------------------------
INVESTMENTS SOLD SHORT(a)--(0.2%)
U.S. Government Securities
Aaa 600 United States Treasury,
5.50%, 1/31/03
(proceeds $592,688) (596,436)
------------
Total Investments, Net of Short Sales--99.4% 305,841,607
Other assets in excess of
liabilities--0.6% 1,844,955
------------
Net Assets--100% $307,686,562
------------
------------
</TABLE>
- ---------------
F.R.N.--Floating Rate Note.
NR--Not Rated by Moody's or Standard & Poor's.
The Fund's current Prospectus contains a description of Moody's and Standard &
Poor's ratings.
(a) Non-income producing security.
(b) Pledged as intial margin on financial futures contracts.
The industry classification of portfolio holdings and other
assets shown as a percentage of net assets as of June 30,
1999 was as follows:
Telecommunications.................................... 11.0%
Utilities............................................. 9.7
Foreign Government Securities......................... 9.3
U.S. Government Securities (net of investments sold
short).............................................. 8.7
Financial Services.................................... 8.2
Real Estate Investment Trust.......................... 6.1
Aerospace & Airlines.................................. 4.9
Automobiles........................................... 4.2
Investment Banking.................................... 4.2
Media................................................. 4.2
Foreign Corporate Bonds............................... 4.0
Asset Back Securities................................. 3.1
Cable................................................. 3.1
Building Materials.................................... 2.8
Retail................................................ 2.4
Waste Management...................................... 1.9
Food & Beverage....................................... 1.7
Oil & Gas............................................. 1.6
Hotels................................................ 1.0
Chemicals............................................. 0.9
Containers............................................ 0.7
Entertainment......................................... 0.7
Paper Related Products................................ 0.6
Medical............................................... 0.6
Computers............................................. 0.6
Consumer Services..................................... 0.4
Other assets in excess of liabilities (including Joint
Repurchase Agreement)............................... 3.4
-----
100.0%
-----
-----
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 8
<PAGE>
Statement of Assets and Liabilities
(Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Assets June 30, 1999
<S> <C>
Investments, at value (cost $314,212,921)................................................................... $306,438,043
Cash........................................................................................................ 138,741
Receivable for investments sold............................................................................. 5,227,271
Interest receivable......................................................................................... 4,859,695
Receivable for Fund shares sold............................................................................. 1,058,209
Receivable for investments sold short....................................................................... 152,111
Forward currency contracts - net amount receivable from counterparties...................................... 101,996
Due from manager............................................................................................ 61,519
Due from broker - variation margin.......................................................................... 30,625
Deferred expenses........................................................................................... 22,831
-------------
Total assets............................................................................................. 318,091,041
-------------
Liabilities
Payable for investments purchased........................................................................... 8,185,507
Payable for Fund shares reacquired.......................................................................... 685,242
Investments sold short, at value (proceeds $592,688)........................................................ 596,436
Dividends payable........................................................................................... 441,109
Accrued expenses............................................................................................ 190,746
Distribution fee payable.................................................................................... 132,063
Management fee payable...................................................................................... 94,126
Forward currency contracts - net amount payable to counterparties........................................... 79,250
-------------
Total liabilities........................................................................................ 10,404,479
-------------
Net Assets.................................................................................................. $307,686,562
-------------
-------------
Net assets were comprised of:
Common stock, at par..................................................................................... $ 24,355
Paid-in capital in excess of par......................................................................... 325,675,238
-------------
325,699,593
Undistributed net investment income...................................................................... 836,812
Accumulated net realized loss on investments............................................................. (11,006,084 )
Net unrealized depreciation on investments and foreign currencies........................................ (7,843,759 )
-------------
Net assets, June 30, 1999................................................................................... $307,686,562
-------------
-------------
Class A:
Net asset value and redemption price per share
($61,420,886 / 4,861,575 shares of common stock issued and outstanding)............................... $12.63
Maximum sales charge (4.0% of offering price)............................................................ .53
-------------
Maximum offering price to public......................................................................... $13.16
-------------
-------------
Class B:
Net asset value, offering price and redemption price per share
($184,508,092 / 14,602,745 shares of common stock issued and outstanding)............................. $12.64
-------------
-------------
Class C:
Net asset value and redemption price per share
($10,228,735 / 809,519 shares of common stock issued and outstanding)................................. $12.64
Sales charge (1% of offering price)...................................................................... .13
-------------
Offering price to public................................................................................. $12.77
-------------
-------------
Class Z:
Net asset value, offering price and redemption price per share
($51,528,849 / 4,080,779 shares of common stock issued and outstanding)............................... $12.63
-------------
-------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 9
<PAGE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Statement of Operations (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended
Net Investment Income June 30, 1999
<S> <C>
Interest and discount earned.................. $ 11,177,409
-------------
Expenses
Distribution fee--Class A..................... 74,451
Distribution fee--Class B..................... 697,911
Distribution fee--Class C..................... 35,477
Management fee................................ 769,040
Transfer agent's fees and expenses............ 321,000
Custodian's fees and expenses................. 88,000
Reports to shareholders....................... 42,000
Registration fees............................. 33,000
Amortization of deferred organization
expenses.................................... 19,903
Audit fee and expenses........................ 12,500
Legal fees and expenses....................... 12,000
Directors' fees and expenses.................. 10,000
Miscellaneous................................. 2,523
-------------
Total expenses........................... 2,117,805
Less: Expense subsidy (Note 4)................ (155,909)
-------------
Net expenses............................. 1,961,896
-------------
Net investment income.......................... 9,215,513
-------------
Realized and Unrealized Gain (Loss) on
Investments and Foreign Currencies
Net realized gain (loss) on:
Investment transactions....................... (5,663,724)
Financial futures transactions................ (652,166)
Foreign currency transactions................. 128,317
Short sale transactions....................... 384,755
-------------
(5,802,818)
-------------
Net change in unrealized depreciation on:
Investments................................... (8,394,800)
Financial futures............................. (86,172)
Short sales................................... (3,748)
-------------
(8,484,720)
-------------
Net loss on investments........................ (14,287,538)
-------------
Net Decrease in Net Assets
Resulting from Operations...................... $ (5,072,025)
-------------
-------------
</TABLE>
PRUDENTIAL DIVERSIFIED BOND FUND, INC.
Statement of Changes in Net Assets (Unaudited)
- ------------------------------------------------------------
<TABLE>
<CAPTION>
Six Months
Ended Year Ended
Increase (Decrease) June 30, December 31,
in Net Assets 1999 1998
<S> <C> <C>
Operations
Net investment income............. $ 9,215,513 $16,855,176
Net realized loss on investment
and foreign currency
transactions.................... (5,802,818) (4,757,242 )
Net change in unrealized
appreciation (depreciation) of
investments and foreign
currencies...................... (8,484,720) 631,551
------------ ------------
Net increase (decrease) in net
assets resulting from
operations...................... (5,072,025) 12,729,485
------------ ------------
Dividends and distributions (Note
1)
Dividends from net investment
income
Class A......................... (1,868,464) (3,300,618 )
Class B......................... (5,364,616) (9,936,206 )
Class C......................... (272,106) (424,457 )
Class Z......................... (1,710,327) (3,193,895 )
------------ ------------
(9,215,513) (16,855,176 )
------------ ------------
Distributions in excess of net
investment income
Class A......................... -- (680 )
Class B......................... -- (2,156 )
Class C......................... -- (85 )
Class Z......................... -- (693 )
------------ ------------
-- (3,614 )
------------ ------------
Fund share transactions (net of
share conversions) (Note 7)
Net proceeds from shares sold..... 54,685,144 129,677,477
Net asset value of shares issued
to shareholders in reinvestment
of dividends and
distributions................... 7,152,007 13,554,825
Cost of shares reacquired......... (47,869,211) (83,173,090 )
------------ ------------
Net increase in net assets from
Fund share transactions......... 13,967,940 60,059,212
------------ ------------
Total increase (decrease).......... (319,598) 55,929,907
Net Assets
Beginning of period................ 308,006,160 252,076,253
------------ ------------
End of period(a)................... $307,686,562 $308,006,160
------------ ------------
------------ ------------
- ---------------
(a) Includes undistributed net
investment income of:.......... $ 836,812 $ 836,812
------------ ------------
</TABLE>
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 10
<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 common stock and 2,666 shares of Class C common stock for $100,000
on October 5, 1994 to Prudential Investments Fund Management LLC ('PIFM').
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. The ability of issuers of debt
securities held by the Fund to meet their obligations may be affected by
economic developments in a specific industry or region.
- ------------------------------------------------------------
Note 1. Accounting Policies
The following is a summary of significant accounting policies followed by the
Fund in the preparation of its financial statements.
Security Valuation: Securities listed on a securities exchange are valued at the
last sales price on the day of valuation, or, if there was no sale on such day,
at the average of readily available closing bid and asked prices on such day as
provided by a pricing service. Corporate bonds and U.S. Government securities
that are actively traded in the over-the-counter market, 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. 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 period, 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 period. 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 period.
Net realized gains and losses on foreign currency transactions represent net
foreign exchange gains and 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 period 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 instability and
the level of governmental supervision and regulation of foreign securities
markets.
- --------------------------------------------------------------------------------
11
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
Financial Futures Contracts: A financial futures contract is an agreement to
purchase (long) or sell (short) an agreed amount of securities at a set price
for delivery on a future date. Upon entering into a financial futures contract,
the Fund is required to pledge to the broker an amount of cash and/or other
assets equal to a certain percentage of the contract amount. This amount is
known as the 'initial margin.' Subsequent payments, known as 'variation margin,'
are made or received by the Fund each day, depending on the daily fluctuations
in the value of the underlying security. Such variation margin is recorded for
financial statement purposes on a daily basis as unrealized gain or loss. When
the contract expires or is closed, the gain or loss is realized and is presented
in the statement of operations as net realized gain (loss) on financial futures
contracts.
The Fund invests in financial futures contracts in order to hedge its existing
portfolio securities, or securities the Fund intends to purchase, against
fluctuations in value caused by changes in prevailing interest rates. Should
interest rates move unexpectedly, the Fund may not achieve the anticipated
benefits of the financial futures contracts and may realize a loss. The use of
futures transactions involves the risk of imperfect correlation in movements in
the price of futures contracts, interest rates and the underlying hedged assets.
Forward Currency Contracts: A forward currency contract is a commitment to
purchase or sell a foreign currency at a future date at a negotiated forward
rate. The Fund enters into forward currency contracts in order to hedge its
exposure to changes in foreign currency exchange rates on its foreign portfolio
holdings or on specific receivables and payables denominated in a foreign
currency. The contracts are valued daily at current exchange rates and any
unrealized gain or loss is included in net unrealized appreciation or
depreciation on investments and foreign currencies. Gain or loss is realized on
the settlement date of the contract equal to the difference between the
settlement value of the original and renegotiated forward contracts. This gain
or loss, if any, is included in net realized gain (loss) on foreign currency
transactions. Risks may arise upon entering into these contracts from the
potential inability of the counterparties to meet the terms of their contracts.
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
broker-dealer through which it made the short sale. The proceeds received from
the short sale are maintained 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 at 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 PIFM. Pursuant to this agreement, PIFM
has responsibility for all investment advisory services and supervises the
subadviser's performance of such services. PIFM has entered into a subadvisory
agreement with The Prudential Investment Corporation ('PIC'); PIC furnishes
investment advisory services in connection with the management of the Fund. PIFM
pays for the 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.
- --------------------------------------------------------------------------------
12
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
The management fee paid PIFM is computed daily and payable monthly, at an annual
rate of .50 of 1% of the average daily net assets of the Fund.
The Fund has a distribution agreement with Prudential Investment Management
Services LLC ('PIMS'), which acts as the distributor of Class A, Class B, Class
C and Class Z shares of the Fund. The Fund compensates PIMS 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.
No distribution or service fees are paid to PIMS as distributor for Class Z
shares of the Fund.
Pursuant to the Class A, B and C Plans, the Fund compensates PIMS 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 Plans were .15 of 1% of the average daily net assets of
Class A shares and .75% of the average daily net assets of both the Class B and
Class C shares for the year ended December 31, 1998. Effective January 1, 1999,
the annual rate for Class A shares was increased to .25 of 1%.
PIMS has advised the Fund that it received approximately $107,600 in front-end
sales charges resulting from sales of Class A and $20,700 in Class C shares
during the six months ended June 30, 1999. From these fees, PIMS paid such sales
charges to Pruco Securities Corporation and affiliated broker-dealers, which in
turn paid commissions to salespersons and incurred other distribution costs.
PIMS has advised the Fund that for the six months ended June 30, 1999, it
received approximately $258,800 and $3,000 in contingent deferred sales charges
imposed upon redemptions by certain Class B and Class C shareholders,
respectively.
PIFM, PIMS and PIC are indirect, wholly owned subsidiaries of The Prudential
Insurance Company of America.
As of March 11, 1999, the Fund, along with other affiliated registered
investment companies (the 'Funds'), entered into a syndicated credit agreement
('SCA') with an unaffiliated lender. The maximum commitment under the SCA is $1
billion. The Funds pay a commitment fee at an annual rate of .065 of 1% on the
unused portion of the credit facility, which is accrued and paid quarterly on a
pro rata basis by the Funds. The SCA expires on March 9, 2000. Prior to March
11, 1999, the Funds had a credit agreement with a maximum commitment of
$200,000,000. The commitment fee was .055 of 1% on the unused portion of the
credit facility. The Fund did not borrow any amounts pursuant to either
agreement during the six months ended June 30, 1999. The purpose of the
agreements is to serve as an alternative source of funding for capital share
redemptions.
- ------------------------------------------------------------
Note 3. Other Transactions With Affiliates
Prudential Mutual Fund Services LLC ('PMFS'), a wholly owned subsidiary of PIFM,
serves as the Fund's transfer agent. During the six months ended June 30, 1999,
the Fund incurred fees of approximately $317,000 for the services of PMFS. As of
June 30, 1999, approximately $53,700 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 nonaffiliates.
- ------------------------------------------------------------
Note 4. Expense Subsidy
PIFM voluntarily agreed to subsidize operating expenses so that total Fund
operating expenses do not exceed 1.00%, 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. For the six months ended June 30, 1999, such reimbursement
amounted to $155,909 ($0.01 per share for Class A, B, C and Z shares; .05% of
average net assets). The Fund is not required to reimburse PIFM for such
subsidy.
- ------------------------------------------------------------
Note 5. Portfolio Securities
Purchases and sales of investment securities, other than short-term investments,
for the six months ended June 30, 1999 were $487,627,329 and $478,358,759,
respectively.
The federal income tax cost basis of the Fund's investments at June 30, 1999 was
$314,198,315 and, accordingly, net unrealized depreciation for federal income
tax purposes was $8,356,708 (gross unrealized appreciation--$2,028,208; gross
unrealized depreciation--$10,384,916).
For federal income tax purposes, the Fund has a capital loss carryforward as of
December 31, 1998 of which approximately $5,204,000 expires in 2006.
Accordingly, no capital gains distribution is expected to be paid to
shareholders until net gains have been realized in excess of such carryforward.
During the six months ended June 30, 1999, the Fund entered into financial
futures contracts. Details of open contracts at June 30, 1999 are as follows:
<TABLE>
<CAPTION>
Value at Value at Unrealized
Number of Expiration June 30, Trade Appreciation
Contracts Type Date 1999 Date (Depreciation)
- --------- ------------------ ----------- ---------- ---------- --------------
<C> <S> <C> <C> <C> <C>
Long Positions:
35 30 yr. T-Bond Sept. 1999 $4,056,719 $4,143,672 $(86,953)
-------
-------
</TABLE>
- --------------------------------------------------------------------------------
13
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
At June 30, 1999, the Fund had outstanding forward currency contracts to
purchase and sell foreign currency as follows:
<TABLE>
<CAPTION>
Value at
Forward Currency Settlement Date Current
Purchase Contracts Payable Value Appreciation
- --------------------------- --------------- ----------- -------------
<S> <C> <C> <C>
Australian Dollars,
expiring 7/15/99......... $ 3,185,061 $ 3,210,238 $ 25,177
Swedish Kronas,
expiring 7/9/99.......... 3,187,114 3,211,807 24,693
--------------- ----------- -------------
$ 6,372,175 $ 6,422,045 $ 49,870
--------------- ----------- -------------
--------------- ----------- -------------
</TABLE>
<TABLE>
<CAPTION>
Value at
Forward Currency Settlement Date Current Appreciation/
Sale Contracts Receivable Value (Depreciation)
- ------------------------ --------------- ----------- -------------
<S> <C> <C> <C>
Australian Dollars,
expiring 7/15/99...... $ 4,960,657 $ 4,980,507 $ (19,850)
Euros,
expiring 7/13/99...... 3,262,314 3,210,188 52,126
Swedish Kronas,
expiring 7/9/99....... 3,152,407 3,211,807 (59,400)
--------------- ----------- -------------
$11,375,378 $11,402,502 $ (27,124)
--------------- ----------- -------------
--------------- ----------- -------------
</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, 1999, the Fund
had a 1.1% undivided interest in the joint account. The undivided interest for
the Fund represents $8,575,000 in principal amount. As of such date, each
repurchase agreement in the joint account and the collateral therefor were as
follows:
Deutsche Bank Securities Inc., 4.75%, in the principal amount of $150,000,000,
repurchase price $150,019,792, due 7/1/99. The value of the collateral including
accrued interest was $153,000,548.
Goldman Sachs & Co., 4.85%, in the principal amount of $200,000,000, repurchase
price $200,026,944, due 7/1/99. The value of the collateral including accrued
interest was $204,001,378.
Morgan Stanley Dean Witter, 4.70%, in the principal amount of $178,944,000,
repurchase price $178,967,362, due 7/1/99. The value of the collateral including
accrued interest was $182,666,733.
Morgan Stanley Dean Witter, 4.72%, in the principal amount of $50,000,000,
repurchase price $50,006,556, due 7/1/99. The value of the collateral including
accrued interest was $51,021,154.
Warburg Dillon Read LLC, 4.81%, in the principal amount of $200,000,000,
repurchase price $200,026,722, due 7/1/99. The value of the collateral including
accrued interest was $204,001,326.
- ------------------------------------------------------------
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 front-end
sales charge of 1% and a contingent deferred sales charge of 1% during the first
18 months. 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. 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 authorized, $.001 par value per
share, divided into four classes, designated Class A, B, C and Class Z, each of
which consists of 500 million, 500 million, 500 million and 500 million
authorized shares, respectively. Of the 24,354,618 shares of common stock issued
and outstanding at June 30, 1999, PIFM owned 8,271.
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------- ---------- ------------
<S> <C> <C>
Six months ended June 30, 1999:
Shares sold.......................... 1,018,784 $ 13,258,568
Shares issued in reinvestment of
dividends.......................... 108,606 1,413,002
Shares reacquired.................... (860,890) (11,215,859)
---------- ------------
Net increase in shares outstanding
before conversion.................. 266,500 3,455,711
Shares issued upon conversion from
Class B............................ 121,265 1,547,978
---------- ------------
Net increase in shares outstanding... 387,765 $ 5,003,689
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
14
<PAGE>
Notes to Financial Statements
(Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A Shares Amount
- ------------------------------------- ---------- ------------
<S> <C> <C>
Year ended December 31, 1998:
Shares sold.......................... 2,495,893 $ 33,401,514
Shares issued in reinvestment of
dividends.......................... 194,963 2,602,189
Shares reacquired.................... (1,507,321) (20,108,457)
---------- ------------
Net increase in shares outstanding
before conversion.................. 1,183,535 15,895,246
Shares issued upon conversion from
Class B............................ 228,881 3,064,759
---------- ------------
Net increase in shares outstanding... 1,412,416 $ 18,960,005
---------- ------------
---------- ------------
<CAPTION>
Class B
- -------------------------------------
<S> <C> <C>
Six months ended June 30, 1999:
Shares sold.......................... 2,197,576 $ 28,626,344
Shares issued in reinvestment of
dividends.......................... 304,617 3,965,420
Shares reacquired.................... (1,886,717) (24,538,705)
---------- ------------
Net increase in shares outstanding
before conversion.................. 615,476 8,053,059
Shares reacquired upon conversion
into Class A....................... (121,265) (1,547,978)
---------- ------------
Net increase in shares outstanding... 494,211 $ 6,505,081
---------- ------------
---------- ------------
Year ended December 31, 1998:
Shares sold.......................... 4,920,054 $ 65,663,839
Shares issued in reinvestment of
dividends.......................... 562,773 7,514,653
Shares reacquired.................... (2,889,045) (38,488,622)
---------- ------------
Net increase in shares outstanding
before conversion.................. 2,593,782 34,689,870
Shares reacquired upon conversion
into Class A....................... (228,881) (3,064,759)
---------- ------------
Net increase in shares outstanding... 2,364,901 $ 31,625,111
---------- ------------
---------- ------------
<CAPTION>
Class C Shares Amount
- ------------------------------------- ---------- ------------
<S> <C> <C>
Six months ended June 30, 1999:
Shares sold.......................... 271,207 $ 3,534,939
Shares issued in reinvestment of
dividends.......................... 15,357 199,767
Shares reacquired.................... (178,579) (2,325,460)
---------- ------------
Net increase in shares outstanding... 107,985 $ 1,409,246
---------- ------------
---------- ------------
Year ended December 31, 1998:
Shares sold.......................... 412,554 $ 5,507,004
Shares issued in reinvestment of
dividends.......................... 25,359 338,435
Shares reacquired.................... (184,168) (2,450,323)
---------- ------------
Net increase in shares outstanding... 253,745 $ 3,395,116
---------- ------------
---------- ------------
<CAPTION>
Class Z
- -------------------------------------
<S> <C> <C>
Six months ended June 30, 1999:
Shares sold.......................... 711,405 $ 9,265,293
Shares issued in reinvestment of
dividends.......................... 120,985 1,573,818
Shares reacquired.................... (751,117) (9,789,187)
---------- ------------
Net increase in shares outstanding... 81,273 $ 1,049,924
---------- ------------
---------- ------------
Year ended December 31, 1998:
Shares sold.......................... 1,880,837 $ 25,105,120
Shares issued in reinvestment of
dividends.......................... 232,269 3,099,548
Shares reacquired.................... (1,659,265) (22,125,688)
---------- ------------
Net increase in shares outstanding... 453,841 $ 6,078,980
---------- ------------
---------- ------------
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class A
-----------------------------------------------------
Six Months
Ended Year Ended December 31,
June 30, --------------------------------------
1999 1998 1997 1996
---------- ------------ -------- --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......................... $ 13.23 $ 13.41 $ 13.57 $ 13.79
---------- ------ -------- --------
Income from investment operations
Net investment income(b)..................................... .39 .85 .98 .93
Net realized and unrealized gain (loss) on investment
transactions.............................................. (.60) (.18) .07 (.19)
---------- ------ -------- --------
Total from investment operations............................ (.21) .67 1.05 .74
---------- ------ -------- --------
Less distributions
Dividends from net investment income......................... (.39) (.85) (.98 ) (.93)
Distributions in excess of net investment income............. -- --(e) (.02 ) --
Distributions from net realized gains........................ -- -- (.21 ) (.03)
---------- ------ -------- --------
Total distributions......................................... (.39) (.85) (1.21 ) (.96)
---------- ------ -------- --------
Net asset value, end of period............................... $ 12.63 $ 13.23 $ 13.41 $ 13.57
---------- ------ -------- --------
---------- ------ -------- --------
TOTAL RETURN(d).............................................. (1.58)% 5.14% 7.96 % 5.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000).............................. $ 61,421 $ 59,186 $41,051 $ 30,657
Average net assets (000)..................................... $ 60,055 $ 51,915 $34,994 $ 21,867
Ratios to average net assets(b):
Expenses, including distribution fees....................... 1.00%(c) .90% .82 % .79%
Expenses, excluding distribution fees....................... .75%(c) .75% .67 % .64%
Net investment income....................................... 6.27%(c) 6.36% 7.14 % 7.08%
For Class A, B, C and Z shares:
Portfolio turnover rate...................................... 159% 304% 334 % 362%
<CAPTION>
January 10,
1995(a)
Through
December 31,
1995
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......................... $ 12.50
------
Income from investment operations
Net investment income(b)..................................... .90
Net realized and unrealized gain (loss) on investment
transactions.............................................. 1.51
------
Total from investment operations............................ 2.41
------
Less distributions
Dividends from net investment income......................... (.90)
Distributions in excess of net investment income............. --
Distributions from net realized gains........................ (.22)
------
Total distributions......................................... (1.12)
------
Net asset value, end of period............................... $ 13.79
------
------
TOTAL RETURN(d).............................................. 19.80%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000).............................. $ 14,276
Average net assets (000)..................................... $ 7,428
Ratios to average net assets(b):
Expenses, including distribution fees....................... .87%(c)
Expenses, excluding distribution fees....................... .72%(c)
Net investment income....................................... 6.92%(c)
For Class A, B, C and Z shares:
Portfolio turnover rate...................................... 260%
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy and/or 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) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 16
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class B
-------------------------------------------------------
Six Months
Ended Year Ended December 31,
June 30, --------------------------------------
1999 1998 1997 1996
------------ -------- ------------ --------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......................... $ 13.23 $ 13.41 $ 13.58 $ 13.79
------------ -------- ------------ --------
Income from investment operations
Net investment income(b)..................................... .36 .77 .89 .85
Net realized and unrealized gain (loss) on investment
transactions.............................................. (.59) (.18) .06 (.18)
------------ -------- ------------ --------
Total from investment operations............................ (.23) .59 .95 .67
------------ -------- ------------ --------
Less distributions
Dividends from net investment income......................... (.36) (.77) (.89) (.85)
Distributions in excess of net investment income............. -- --(e) (.02) --
Distributions from net realized gains........................ -- -- (.21) (.03)
------------ -------- ------------ --------
Total distributions......................................... (.36) (.77) (1.12) (.88)
------------ -------- ------------ --------
Net asset value, end of period............................... $ 12.64 $ 13.23 $ 13.41 $ 13.58
------------ -------- ------------ --------
------------ -------- ------------ --------
TOTAL RETURN(d).............................................. (1.81)% 4.51% 7.24% 5.19%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000).............................. $184,508 $186,659 $157,501 $136,054
Average net assets (000)..................................... $187,652 $172,326 $144,620 $114,560
Ratios to average net assets(b):
Expenses, including distribution fees....................... 1.50%(c) 1.50% 1.42% 1.39%
Expenses, excluding distribution fees....................... .75%(c) .75% .67% .64%
Net investment income....................................... 5.77%(c) 5.76% 6.54% 6.48%
<CAPTION>
January 10,
1995(a)
Through
December 31,
1995
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......................... $ 12.50
------
Income from investment operations
Net investment income(b)..................................... .82
Net realized and unrealized gain (loss) on investment
transactions.............................................. 1.51
------
Total from investment operations............................ 2.33
------
Less distributions
Dividends from net investment income......................... (.82)
Distributions in excess of net investment income............. --
Distributions from net realized gains........................ (.22)
------
Total distributions......................................... (1.04)
------
Net asset value, end of period............................... $ 13.79
------
------
TOTAL RETURN(d).............................................. 19.11%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000).............................. $ 85,472
Average net assets (000)..................................... $ 43,574
Ratios to average net assets(b):
Expenses, including distribution fees....................... 1.47%(c)
Expenses, excluding distribution fees....................... .72%(c)
Net investment income....................................... 6.32%(c)
</TABLE>
- ---------------
(a) Commencement of investment operations.
(b) Net of expense subsidy and/or 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) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 17
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class C
--------------------------------------------------------
Six Months
Ended Year Ended December 31,
June 30, -----------------------------------------
1999 1998 1997 1996
---------- ------------ ------------ -------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......................... $ 13.23 $13.41 $13.58 $ 13.79
---------- ----- ----- -------
Income from investment operations
Net investment income(b)..................................... .36 .77 .89 .85
Net realized and unrealized gain (loss) on investment
transactions.............................................. (.59) (.18) .06 (.18)
---------- ----- ----- -------
Total from investment operations............................ (.23) .59 .95 .67
---------- ----- ----- -------
Less distributions
Dividends from net investment income......................... (.36) (.77) (.89) (.85)
Distributions in excess of net investment income............. -- --(e) (.02) --
Distributions from net realized gains........................ -- -- (.21) (.03)
---------- ----- ----- -------
Total distributions......................................... (.36) (.77) (1.12) (.88)
---------- ----- ----- -------
Net asset value, end of period............................... $ 12.64 $13.23 $13.41 $ 13.58
---------- ----- ----- -------
---------- ----- ----- -------
TOTAL RETURN(d).............................................. (1.81)% 4.51% 7.24% 5.19%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000).............................. $ 10,229 $9,282 $6,005 $ 4,143
Average net assets (000)..................................... $ 9,539 $7,390 $4,747 $ 3,534
Ratios to average net assets(b):
Expenses, including distribution fees....................... 1.50%(c) 1.50% 1.42% 1.39%
Expenses, excluding distribution fees....................... .75%(c) .75% .67% .64%
Net investment income....................................... 5.75%(c) 5.76% 6.54% 6.48%
<CAPTION>
January 10,
1995(a)
Through
December 31,
1995
------------
<S> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......................... $12.50
-----
Income from investment operations
Net investment income(b)..................................... .82
Net realized and unrealized gain (loss) on investment
transactions.............................................. 1.51
-----
Total from investment operations............................ 2.33
-----
Less distributions
Dividends from net investment income......................... (.82)
Distributions in excess of net investment income............. --
Distributions from net realized gains........................ (.22)
-----
Total distributions......................................... (1.04)
-----
Net asset value, end of period............................... $13.79
-----
-----
TOTAL RETURN(d).............................................. 19.11%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000).............................. $2,655
Average net assets (000)..................................... $1,307
Ratios to average net assets(b):
Expenses, including distribution fees....................... 1.47%(c)
Expenses, excluding distribution fees....................... .72%(c)
Net investment income....................................... 6.32%(c)
</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) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 18
<PAGE>
Financial Highlights (Unaudited) PRUDENTIAL DIVERSIFIED BOND FUND, INC.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Class Z
----------------------------------------------------
September 16,
Six Months Year Ended December 1996(a)
Ended 31, Through
June 30, ------------------- December 31,
1999 1998 1997 1996
---------- ------- ------- -------------
<S> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE
Net asset value, beginning of period......................... $ 13.22 $ 13.40 $ 13.57 $ 13.20
---------- ------- ------- -----
Income from investment operations
Net investment income(b)..................................... .40 .87 1.00 .28
Net realized and unrealized gain (loss) on investment
transactions.............................................. (.59) (.18) .06 .40
---------- ------- ------- -----
Total from investment operations............................ (.19) .69 1.06 .68
---------- ------- ------- -----
Less distributions
Dividends from net investment income......................... (.40) (.87) (1.00) (.28)
Distributions in excess of net investment income............. -- --(e) (.02) --
Distributions from net realized gains........................ -- -- (.21) (.03)
---------- ------- ------- -----
Total distributions......................................... (.40) (.87) (1.23) (.31)
---------- ------- ------- -----
Net asset value, end of period............................... $ 12.63 $ 13.22 $ 13.40 $ 13.57
---------- ------- ------- -----
---------- ------- ------- -----
TOTAL RETURN(d).............................................. (1.48)% 5.30% 8.05% 5.35%
RATIOS/SUPPLEMENTAL DATA
Net assets, end of period (000).............................. $ 51,529 $52,879 $47,519 $ 608
Average net assets (000)..................................... $ 52,920 $48,988 $36,750 $ 125
Ratios to average net assets(b):
Expenses, including distribution fees....................... .75%(c) .75% .67% .64%(c)
Expenses, excluding distribution fees....................... .75%(c) .75% .67% .64%(c)
Net investment income....................................... 6.52%(c) 6.51% 7.29% 7.23%(c)
</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) Less than $.005 per share.
- --------------------------------------------------------------------------------
See Notes to Financial Statements. 19
<PAGE>
Getting the Most from Your Prudential Mutual Fund
How many times have you read these reports--or other
financial materials-- and stumbled across a word that
you don't understand?
Many shareholders have run into the same problem. We'd
like to help. So we'll use this space from time to time
to explain some of the words you might have read, but not
understood. And if you have a favorite word that no one
can explain to your satisfaction, please write to us.
Basis Point: 1/100th of 1%. For example, one-half of one
percent is 50 basis points.
Collateralized Mortgage Obligations (CMOs): Mortgage-backed
bonds that separate mortgage pools into different maturity
classes, called tranches. These instruments are sensitive
to changes in interest rates and homeowner refinancing
activity. They are subject to prepayment and maturity
extension risk.
Derivatives: Securities that derive their value from other
securities. The rate of return of these financial instruments
rises and falls--sometimes very suddenly --in response to
changes in some specific interest rate, currency, stock,
or other variable.
Discount Rate: The interest rate charged by the Federal
Reserve on loans to member banks.
Federal Funds Rate: The interest rate charged by one bank
to another on overnight loans.
Futures Contract: An agreement to purchase or sell a specific
amount of a commodity or financial instrument at a set price
at a specified date in the future.
Leverage: The use of borrowed assets to enhance return. The
expectation is that the interest rate charged on borrowed
funds will be lower than the return on the investment. While
leverage can increase profits, it can also magnify losses.
Liquidity: The ease with which a financial instrument (or
product) can be bought or sold (converted into cash) in the
financial markets.
Price/Earnings Ratio: The price of a share of stock divided
by the earnings per share for a 12-month period.
Option: An agreement to purchase or sell something, such as
shares of stock, by a certain time for a specified price. An
option need not be exercised.
Spread: The difference between two values; often used to
describe the difference between "bid" and "asked" prices
of a security, or between the yields of two similar maturity bonds.
Yankee Bond: A bond sold by a foreign company or government
in the U.S. market and denominated in U.S. dollars.
<PAGE>
Prudential Mutual Funds
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
(800) 225-1852
http://www.prudential.com
Directors
Edward D. Beach
Eugene C. Dorsey
Delayne Dedrick Gold
Robert F. Gunia
Thomas T. Mooney
Thomas H. O'Brien
John R. Strangfeld
Nancy H. Teeters
Louis A. Weil, III
Officers
John R. Strangfeld, President
Robert F. Gunia, Vice President
Grace C. Torres, Treasurer
Stephen M. Ungerman, Assistant Treasurer
Deborah A. Docs, Secretary
Manager
Prudential Investments Fund Management LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Investment Adviser
The Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07102-3777
Distributor
Prudential Investment Management Services LLC
Gateway Center Three
100 Mulberry Street
Newark, NJ 07102-4077
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services LLC
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
PricewaterhouseCoopers LLP
1177 Avenue of the Americas
New York, NY 10036
Legal Counsel
Swidler Berlin Shereff Friedman, LLP
919 Third Avenue
New York, NY 10022
The views expressed in this report and information about the
Fund's portfolio holdings are for the period covered by this
report and are subject to change thereafter.
The accompanying financial statements as of June 30, 1999,
were not audited and, accordingly, no opinion is expressed
on them.
This report is not authorized for distribution to prospective
investors unless preceded or accompanied by a current prospectus.
<PAGE>
(LOGO)
Prudential Mutual Funds BULK RATE
Gateway Center Three U.S. POSTAGE
100 Mulberry Street PAID
Newark, NJ 07102-4077 Permit 6807
(800) 225-1852 New York, NY
74431J102 MF166E2
74431J201
74431J300
74431J409
