ANNUAL REPORT February 28, 1995
Prudential
Adjustable Rate
Securities
Fund, Inc.
(ICON)
(LOGO)
<PAGE>
Letter to Shareholders
April 3, 1995
Dear Shareholder:
In the past year, adjustable rate securities have felt the impact of a series of
seven interest rate increases. Yields have risen and some bond prices have
fallen drastically, but adjustable rate securities with short-term maturities
were resistant -- their prices aren't as sensitive to rising interest rates
since their coupons adjust periodically. We're pleased to report that the
Prudential Adjustable Rate Securities Fund has produced positive, above-average
total returns this year, as measured by Lipper Analytical Services, Inc.
<TABLE>
<CAPTION>
FUND PERFORMANCE
Cumulative Returns Average Annual Returns1
30-Day As of 2/28/95 As of 3/31/95
SEC Yield 1 Year Since Incep. 1 Year Since
Incep.*
<S> <C> <C> <C> <C> <C>
Class A 4.7% 3.1% 7.4% 2.6% 2.4%
Class B 4.8% 3.0% 7.3% 2.6% 2.7%
Lipper Adj.
Rate* N/A -1.6% 3.7% N/A N/A
</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 Mutual Fund Management Inc. and Lipper Analytical Services
Inc. The cumulative total returns do not take into account applicable sales
charges. The average annual returns do take into account applicable sales
charges. The Fund charges a maximum front-end sales load of 1% for Class A
shares and a contingent deferred sales charge of 1% (for redemptions in the
first year only) for Class B shares.
*Inception date: 6/10/92.
Note: Without expense subsidies and management fee waivers, the Fund's 1-year
average annual total returns would have been 2.6% for Class A shares and 2.2%
for Class B shares. The returns since inception would have been 2.3% and 1.6%,
respectively. Subsidies and management fee waivers may be reduced or terminated
in the future.
-1-
<PAGE>
The Objective.
The Prudential Adjustable Rate Securities Fund seeks high current income
consistent with low volatility of principal. Of course, there is no assurance
the Fund will meet that objective. At least 65% of the portfolio is in
adjustable rate securities, mainly adjustable rate mortgages (ARMs), with the
rest in fixed- rate bonds. Under normal market conditions, 75% of the Fund's
assets are in bonds rated double-A or better by the credit rating services.
Currently, the Fund maintains a short-term effective maturity, similar to that
of the one-year Treasury note.
Stronger growth spurred rising interest rates.
When the economy shifts into high gear as it has in the past year, bond
investors start to worry that inflation will follow and erode the value of their
returns. The Federal Reserve, which governs U.S. monetary policy, decided that
annualized growth of 6% in the fourth quarter of 1993 was too high for comfort;
they began last February to engineer a "soft landing" that would cool off growth
and dampen inflationary expectations without sending the economy into a
recession. Their primary tool? The federal funds target rate (the overnight
interbank lending rate), which was raised seven times to 6% at this writing from
3% at it's lowest in 1994.
The result? The Lehman Brothers Short-term Treasury Index rose a posted 0.5%
in total return the past 12 months. Of course, long-term rates also rose and
investors in long-term government bonds really suffered, with losses of 7.7%,
as reported by Lehman. The silver lining is that yields have risen and the
Fund's SEC-standardized 30-day yield on February 28, 1995 was 4.7% and 4.8%,
up from 3.5% and 3.6% for Class A and B, respectively, a year ago.
The Fund stood up well in this bearish bond market, producing a positive total
return of 2.6% for both Class A and Class B for the 12 months ended 3/31/95, the
worst bond market in 75 years. This compares to the average fund adjustable
rate mortgage fund, which posted negative earnings for the year according to
Lipper Analytical Services Inc. The Fund is 3.5% above the average ARM fund
and 3% above the average U.S. government fund. We hope to continue this trend.
A couple good decisions helped performance.
As short-term interest rates rose, we restructured the portfolio in an attempt
to limit price volatility. Our strategy was the same throughout most of the
year: we raised cash, shifted to liquid bonds in the marketplace and
concentrated on ARMs with high coupons. These ARMs saw less of a price decline
since their high coupons became more desirable in a rising interest rate
environment.
-2-
<PAGE>
- -- Cash. We kept about one-fifth of the Fund in short-term securities (17.9%
at 2/28/95) compared to 10% as of 2/28/94. These short-term securities reduce
the Fund's average maturity and, of course, it's value does not react to
interest rates. Since short-term securities generate less income than long-term
securities, our 30-day SEC yield has not risen as much as market rates (120
basis points for the Fund, compared to 275 basis points for the federal funds
rate).
- -- Liquidity. When the markets are turbulent -- as they were for most of the
reporting period -- high-quality GNMA and FNMA securities are our favorite
bonds. We limited our holdings in privately-issued mortgages because their
yields were not sufficient to compensate us for additional risk.
The Constant Maturity Treasury Index. The portfolio is predominately in
adjustable rate mortgages, whose coupon adjustment is based on the Constant
Maturity Treasury (CMT) Index, because these securities have been priced to
produce the attractive yields in the adjustable rate mortgage market.
Higher rates should slow growth and quell inflation fears.
Looking into the rest of 1995, we expect limited Federal Reserve action and more
investor-friendly markets. The rise in interest rates that created havoc last
year should result in moderate economic growth and keep inflationary
expectations in check. We think investors should look for moderate returns, in
line with historical averages -- in other words, expect to earn coupon income,
and possibly modest price gains.
We appreciate having you as a Prudential Adjustable Rate Securities Fund
shareholder and remain committed to managing the portfolio for your benefit.
Sincerely,
Lawrence C. McQuade
President
David Graham
Portfolio Manager
-3-
<PAGE>
PORTFOLIO Q&A
(PICTURE)
Dennis Bushe
Many investors avoided bond funds in the past year, fearing that rising interest
rates would erode their returns and add volatility to their investment
portfolio. If you are contemplating putting cash into the bond market -- in
taxable or tax-exempt securities -- you might want to consider some of the
following points. We talked with Prudential Mutual Funds chief fixed income
strategist Dennis Bushe about why bonds and bond mutual funds may make sense
in today's investment environment.
Q. Why are bonds an attractive buy right now?
A. First, bond prices corrected in 1994, which put interest rates at very
attractive levels in 1995. Second, real rates of return (the interest rate
minus the inflation rate) are still very high historically. According to
Ibbotson Associates, a nationally recognized investment analysis firm, the
annual inflation-adjusted return on bonds from 1926 to 1994 was between 2.5% and
3.0%. Today's investors receive over 4.5% in total inflation-adjusted,
annualized total return. Of course, these numbers are just for illustration, but
they show how much higher interest rates improve bond total returns when
inflation is only 2.7%, as measured by the Consumer Price Index. And beating
inflation is one primary goal of long-term investing.
Q. Why buy a bond fund instead of an individual bond?
A. One of the biggest risks to bond investing is credit quality. Of course you
can avoid virtually all credit risk in a government bond fund, but some
investors need higher income than Uncle Sam provides. Bond funds help manage
this risk, and that may be especially important in 1995. First of all, if the
U.S. economy is beginning to slow down, as many economists believe, then credit
quality is a concern. A credit team becomes very valuable, carefully selecting
bonds in different sectors and industries for bond portfolios. In addition, few
individual investors have the resources or clout to continually monitor
companies, unearth possible credit problems before they surface, and negotiate
favorable terms with troubled issuers -- a bond fund does. Finally, the
diversification of a bond fund may help investors avoid wide price swings if
one holding does experience financial difficulties.
-4-
<PAGE>
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC. Portfolio of Investments
February 28, 1995
<TABLE>
<CAPTION>
Principal
Amount Value
(000) Description (Note 1)
<C> <S> <C>
LONG-TERM INVESTMENTS--71.6%
Adjustable Rate Mortgage
Pass-Throughs--71.6%
Federal Home Loan Mortgage
Corporation,
$ 9,794# 5.01%, 7/01/24................ $ 9,779,057
8,065 5.03%, 8/01/24................ 8,097,562
5,458 5.13%, 5/01/24................ 5,413,207
97 7.14%, 10/01/23............... 99,617
29 7.38%, 7/01/22................ 29,968
Federal National Mortgage
Association,
7,931 5.90%, 11/01/24............... 8,121,892
3,000 6.75%, 1/01/23................ 3,057,188
Resolution Trust Corporation,
7,876 7.09%, 12/25/20............... 7,949,376
-----------
Total Adjustable Rate Mortgage
Pass-Throughs
(cost $42,225,353).......... 42,547,867
-----------
Total long-term investments
(cost $42,225,353).......... 42,547,867
-----------
SHORT-TERM INVESTMENTS--17.9%
Adjustable Rate Mortgage
Pass-Throughs--8.4%
Federal National Mortgage
Association,
$ 5,000 5.89%, 3/07/95
(cost $4,999,454)........... $ 5,000,000
-----------
Corporate Bonds--5.0%
Salomon Incorporated,
3,000 7.10%, 2/14/96
(cost $3,000,000)........... 2,991,750
-----------
Repurchase Agreement--4.5%
Joint Repurchase Agreement
2,677 Account, 6.07%, 3/01/95
(cost $2,677,000; Note 5)... 2,677,000
-----------
Total short-term investments
(cost $10,676,454).......... 10,668,750
-----------
Total Investments--89.5%
(cost $52,901,807; Note 4).... 53,216,617
U.S. Government Obligation
Sold Short--(11.9)%
U.S. Treasury Note,
7,000 7.25%, 2/15/98
(proceeds $6,977,305)....... (7,066,710)
-----------
Total investments, net of
short sales--77.6%.......... 46,149,907
Other assets in excess of
liabilities--22.4%.......... 13,306,502
-----------
Net Assets--100%.............. $59,456,409
-----------
-----------
</TABLE>
- ---------------
# Pledged as collateral on short sale.
-5- See Notes to Financial Statements.
<PAGE>
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
Statement of Assets and Liabilities
<TABLE>
<CAPTION>
Assets
February 28, 1995
- -----------------
<S>
<C>
Investments, at value (cost
$52,901,807)................................................. $53,216,617
Cash............................................................................
......... 4,907
Receivable for investments
sold.......................................................... 9,826,794
Receivable for investment sold
short..................................................... 6,977,305
Interest
receivable......................................................................
548,912
Receivable for Fund shares
sold.......................................................... 2,020
Deferred expenses and other
assets....................................................... 84,381
- -----------------
Total
assets..........................................................................
. 70,660,936
- -----------------
Liabilities
Investment sold short, at value (proceeds
$6,977,305).................................... 7,066,710
Payable for investments
purchased........................................................ 3,080,898
Payable for Fund shares
reacquired....................................................... 849,122
Accrued
expenses........................................................................
. 137,328
Dividends
payable........................................................................
47,224
Due to
Manager.........................................................................
.. 23,245
- -----------------
Total
liabilities.....................................................................
. 11,204,527
- -----------------
Net
Assets..........................................................................
..... $59,456,409
- -----------------
- -----------------
Net assets were comprised of:
Common stock, at
par................................................................... $
6,222
Paid-in capital in excess of
par....................................................... 68,231,556
- -----------------
68,237,778
Accumulated net realized loss on
investments........................................... (9,006,774)
Net unrealized appreciation on
investments............................................. 225,405
- -----------------
Net assets, February 28,
1995........................................................ $59,456,409
- -----------------
- -----------------
Class A:
Net asset value and redemption price per share
($58,709,948 / 6,144,443 shares of common stock issued and
outstanding).............. $9.55
Maximum sales charge (1.0% of offering
price).......................................... .10
- -----------------
Maximum offering price to
public....................................................... $9.65
- -----------------
Class B:
Net asset value, offering price and redemption price per share
($746,461 / 77,858 shares of common stock issued and
outstanding).................... $9.59
- -----------------
- -----------------
</TABLE>
See Notes to Financial Statements.
-6-
<PAGE>
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
Statement of Operations
<TABLE>
<CAPTION>
Year Ended
February 28,
Net Investment Income 1995
------------
<S> <C>
Income
Interest.............................. $ 4,299,982
------------
Expenses
Management fee........................ 456,738
Distribution fee--Class A, net of
waiver of
$445,344............................ --
Distribution fee--Class B, net of
waiver of
$22,789............................. --
Custodian's fees and expenses......... 168,000
Registration fees..................... 84,000
Reports to shareholders............... 73,000
Directors' fees....................... 48,000
Transfer agent's fees and expenses.... 47,000
Amortization of deferred organization
expenses............................ 37,000
Audit fee............................. 34,000
Legal fees............................ 13,000
Insurance expense..................... 4,000
Miscellaneous......................... 9,640
------------
Total expenses...................... 974,378
------------
Net investment income................... 3,325,604
------------
Realized and Unrealized
Gain (Loss) on Investments
Net realized gain (loss) on:
Investment transactions............... (2,250,608)
Short sales........................... 264,564
------------
(1,986,044)
------------
Net change in unrealized appreciation/depreciation
on:
Investments........................... 641,031
Short sales........................... (89,405)
------------
551,626
------------
Net loss on investments................. (1,434,418)
------------
Net Increase in Net Assets
Resulting from Operations............... $ 1,891,186
------------
------------
</TABLE>
PRUDENTIAL ADJUSTABLE RATE
SECURITIES FUND, INC.
Statement of Changes in Net Assets
<TABLE>
<CAPTION>
Year Ended February 28,
Increase (Decrease) in ----------------------------
Net Assets 1995 1994
------------ -------------
<S> <C> <C>
Operations
Net investment income.... $ 3,325,604 $ 8,392,463
Net realized loss on
investment
transactions........... (1,986,044) (7,020,730)
Net change in unrealized
appreciation/depreciation
on investments......... 551,626 1,125,105
------------ -------------
Net increase in net
assets resulting from
operations............. 1,891,186 2,496,838
------------ -------------
Contingent deferred sales
charges rebated.......... -- 87,220
------------ -------------
Dividends and distributions
(Note 1)
Dividends to shareholders
from net investment
income
Class A................ (3,246,500) (7,557,640)
Class B................ (79,104) (834,823)
------------ -------------
(3,325,604) (8,392,463)
------------ -------------
Distributions to
shareholders in excess
of net investment
income
Class A................ (100,808) (262,362)
Class B................ (6,354) (28,982)
------------ -------------
(107,162) (291,344)
------------ -------------
Fund share transactions
(net of share
conversions) (Note 6)
Net proceeds from shares
sold................... 2,804,234 75,303,969
Net asset value of shares
issued to shareholders
in reinvestment of
dividends and
distributions.......... 2,778,067 6,959,698
Cost of shares
reacquired............... (72,756,688) (206,110,076)
------------ -------------
Decrease in net assets
from Fund share
transactions........... (67,174,387) (123,846,409)
------------ -------------
Total decrease............. (68,715,967) (129,946,158)
Net Assets
Beginning of year.......... 128,172,376 258,118,534
------------ -------------
End of year................ $ 59,456,409 $ 128,172,376
------------ -------------
------------ -------------
</TABLE>
See Notes to Financial Statements. See Notes to Financial Statements.
-7-
<PAGE>
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
Notes to Financial Statements
The Prudential Adjustable Rate Securities Fund, Inc. (the ``Fund'') is
registered under the Investment Company Act of 1940 as a diversified, open-end
management investment company. The Fund was incorporated in Maryland on December
23, 1991 and had no operations until the issuance of 5,000 shares of Class A
common stock and 5,000 shares of Class B common stock for $100,000 on May 1,
1992 to Prudential Mutual Fund Management, Inc. (``PMF''). Investment operations
commenced on June 10, 1992. The Fund's investment objective is high current
income consistent with low volatility of principal by investing primarily in
adjustable rate securities, including mortgage-backed securities issued or
guaranteed by private institutions or the U.S. Government, its agencies or
instrumentalities, asset-backed securities and corporate and other debt
obligations, which have interest rates which reset at periodic intervals.
Note 1. Accounting The following is a summary
Policies of significant accounting poli-
cies followed by the Fund in the preparation of
its financial statements.
Securities Valuation: The Fund values portfolio securities on the basis of
current market quotations provided by dealers or by a pricing service approved
by the Board of Directors, which uses information such as quotations from
dealers, market transactions in comparable securities, various relationships
between securities and calculations on yield to maturity in determining values.
If market quotations are not readily available, a security is valued at fair
value as determined under procedures established by the Board of Directors.
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 transactions in repurchase agreements, it is the Fund's
policy that its custodian, or designated subcustodians, as the case may be under
triparty repurchase agreements, takes possession of the underlying collateral
securities, the value of which exceeds the principal amount of the repurchase
transaction, including accrued interest. If the seller defaults and the value of
the collateral declines or if bankruptcy proceedings are commenced with respect
to the seller of the security, realization of the collateral by the Fund may be
delayed or limited.
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. 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. The Fund is then obligated to
replace the security borrowed by purchasing it at the market price at the time
of replacement. The price at such time may be more or less than the price at
which the security was sold by the Fund. 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 Investment Income: Securities transactions are
recorded on the trade date. Realized gains and losses on sales of investments
are calculated on the identified cost basis. Interest income is recorded on the
accrual basis. The Fund amortizes premiums and discounts paid on purchases of
portfolio securities as adjustments to interest income.
Net investment income (other than distribution fees) and unrealized and
realized gains or losses are allocated daily to each class of shares based upon
the relative proportion of net assets of each class at the beginning of the day.
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.
Dividends and Distributions: The Fund declares daily and pays dividends monthly
from net investment income. Net capital gains, if any, will be distributed at
least annually. 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. These differences are primarily due to dividends in
excess of net investment income.
Reclassification of Capital Accounts: The Fund accounts and reports for
distributions to shareholders in accordance with A.I.C.P.A. Statement of
Position 93-2: Determination, Disclosure, and Financial Statement Presentation
of Income; Capital Gain, and Return of Capital Distributions by Investment
Companies. For the year ended February 28, 1995, the Fund reclassed $208,058 of
dividends
-8-
<PAGE>
in excess of net investment income to paid-in capital from accumulated
distributions in excess of net investment income. Net investment income, net
realized gains and net assets were not affected by this change.
Deferred Organization Expenses: Approximately $162,000 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 services of PIC, the cost of 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.
The Fund has distribution agreements with Prudential Mutual Fund
Distributors, Inc. (``PMFD''), which acts as the distributor of the Class A
shares of the Fund, and with Prudential Securities Incorporated (``PSI'') which
acts as distributor of the Class B shares of the Fund (collectively the
``Distributors''). To reimburse the Distributors for their expenses incurred in
distributing and servicing the Fund's Class A and B shares, the Fund, pursuant
to plans of distribution, pays the Distributors a reimbursement, accrued daily
and payable monthly.
Pursuant to the Class A Plan, the Fund may reimburse PMFD for its expenses
with respect to Class A shares, at an annual rate of up to .50 of 1% of the
average daily net asset value of the Class A shares. PMFD pays various
broker-dealers, including PSI and Pruco Securities Corporation (``Prusec''),
affiliated broker-dealers, for account servicing fees and other expenses
incurred by such broker-dealers. PMFD has waived, temporarily and voluntarily,
all payments to it under the Class A Plan. The amount of fees waived for the
year ended February 28, 1995, amounted to $445,344 ($.05 per Class A share; .50%
of Class A average net assets).
Pursuant to the Class B Plan, the Fund reimburses PSI for its
distribution-related expenses with respect to Class B shares at an annual rate
of up to 1% of the average daily net assets of the Class B shares. PSI has
waived, temporarily and voluntarily, all payments to it under the Class B Plan.
The amount of fees waived for the year ended February 28, 1995 amounted to
$22,789 ($.10 per Class B share; 1.00% of Class B average net assets).
The Class B distribution expenses include commission credits for payments of
commissions and account servicing fees to financial advisers and an allocation
for overhead and other distribution-related expenses, interest and/or carrying
charges, the cost of printing and mailing prospectuses to potential investors
and of advertising incurred in connection with the distribution of shares.
PMFD has advised the Fund that it has received approximately $1,900 in
front-end sales charges resulting from sales of Class A shares during the fiscal
year ended February 28, 1995. From these fees, PMFD paid such sales charges to
dealers (PSI and Prusec) which in turn paid commissions to salespersons.
With respect to the Class B Plan, at any given time, the amount of expenses
incurred by PSI in distributing the Fund's shares and not recovered through the
imposition of contingent deferred sales charges in connection with certain
redemptions of shares may exceed the total payment made by the Fund pursuant to
the Class B Plan. PSI advised the Fund that for the year ended February 28,
1995, it received approximately $5,000 in contingent deferred sales charges
imposed upon certain redemptions by investors. PSI, as distributor, has also
advised the Fund that at February 28, 1995, the amount of distribution expenses
incurred by PSI and not yet reimbursed by the Fund or recovered through
contingent deferred sales charges approximated $9,100. This amount may be
recovered through future payments under the Class B Plan or contingent deferred
sales charges.
PMFD is a wholly-owned subsidiary of PMF; PSI, PMF and PIC are indirect,
wholly-owned subsidiaries of The Prudential Insurance Company of America.
Note 3. Other Prudential Mutual Fund Ser-
Transactions vices, Inc. (``PMFS''), a
with Affiliates wholly-owned subsidiary of
PMF, serves as the Fund's transfer agent. During
the fiscal year ended February 28, 1995, the Fund incurred fees of approximately
$38,000 for the services of PMFS. As of February 28, 1995, approximately $2,400
of such fees were due to PMFS. Transfer agent fees and expenses in the Statement
of Operations include certain out-of-pocket expenses paid to non-affiliates.
Note 4. Portfolio Purchases and sales of invest-
Securities ment securities, other than
short-term investments, for
-9-
<PAGE>
the fiscal year ended February 28, 1995 were $224,246,307 and $286,453,845,
respectively.
The federal income tax basis of the Fund's investments at February 28, 1995
was substantially the same as the basis for financial reporting and,
accordingly, net unrealized depreciation for federal income tax purposes was
$314,810 (gross unrealized appreciation--$385,697; gross unrealized
depreciation--$70,887).
For federal income tax purposes, the Fund has a capital loss carryforward as
of February 28, 1995 of approximately $8,597,700 of which $3,282,600 expires in
2002 and $5,315,100 expires in 2003. Accordingly, no capital gains distribution
is expected to be paid to shareholders until net gains have been realized in
excess of such carryforward.
The Fund will elect to treat net capital losses of approximately $409,000
incurred in the four month period ended February 28, 1995 as having been
incurred in the following fiscal year.
Note 5. Joint The Fund along with other
Repurchase affiliated registered invest-
Agreement Account ment 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 February 28, 1995, the Fund has a 0.33% undivided interest in
the repurchase agreements in the joint account. The undivided interest for the
Fund represents $2,677,000 in the principal amount. As of such date, each
repurchase agreement in the joint account and the collateral therefor were as
follows:
Goldman, Sachs & Co., 6.08%, in the principal amount of $250,000,000,
repurchase price $250,042,222, due 3/1/95. The value of the collateral including
accrued interest is $255,043,078.
Bear, Stearns & Co., 6.07%, in the principal amount of $250,000,000,
repurchase price $250,042,153, due 3/1/95. The value of the collateral including
accrued interest is $255,223,281.
Barclays de Zoete Wedd Securities, Inc., 6.08%, in the principal amount of
$60,000,000, repurchase price $60,010,133, due 3/1/95. The value of the
collateral including accrued interest is $61,200,060.
Smith Barney Inc., 6.06%, in the principal amount of $250,000,000, repurchase
price $250,042,083 due 3/1/95. The value of the collateral including accrued
interest is $255,000,305.
Note 6. Capital The Fund offers both Class A
and Class B shares. Class A shares are sold with a
front-end sales charge of up to 1.0%. Class B shares are sold with a contingent
deferred sales charge of 1.0% if they are redeemed within one year of purchase.
Class B shares will be automatically converted into Class A shares after the
one-year contingent deferred sales charge period has expired. Both classes of
shares have equal rights as to earnings, assets and voting privileges except
that each class bears different distribution expenses and has exclusive voting
rights with respect to its distribution plan.
There are 2 billion authorized shares of $.001 par value common stock divided
into two classes, designated Class A and Class B common stock, each of which
consists of 1 billion authorized shares. Of the 6,222,301 shares issued and
outstanding at February 28, 1995, PMF owned 10,015 Class A shares.
-10-
<PAGE>
Transactions in shares of common stock were as follows:
<TABLE>
<CAPTION>
Class A Shares Amount
- ------- ---------------- -------------
<S> <C> <C>
Year ended February 28, 1995:
Shares sold.................... 228,976 $ 2,205,352
Shares issued in reinvestment
of distributions............. 285,589 2,710,958
Shares reacquired.............. (7,570,166) (71,826,463)
---------------- -------------
Net decrease in shares
outstanding before
conversion................... (7,055,601) (66,910,153)
Shares issued upon conversion
from Class B................. 447,807 4,242,531
---------------- -------------
Net decrease in shares
outstanding.................. (6,607,794) $ (62,667,622)
---------------- -------------
---------------- -------------
Year ended February 28, 1994:
Shares sold.................... 3,885,604 $ 38,096,534
Shares issued in reinvestment
of distributions............. 643,966 6,301,453
Shares reacquired.............. (17,047,153) (166,644,600)
---------------- -------------
Net decrease in shares
outstanding before
conversion................... (12,517,583) $(122,246,613)
Shares issued upon conversion
from Class B................. 3,195,365 31,329,562
---------------- -------------
Net decrease in shares
outstanding.................. (9,322,218) $ (90,917,051)
---------------- -------------
---------------- -------------
<CAPTION>
Class B
- --------
<S> <C> <C>
Year ended February 28, 1995:
Shares sold.................... 62,621 $ 598,882
Shares issued in reinvestment
of distributions............. 7,031 67,109
Shares reacquired.............. (95,108) (930,225)
---------------- -------------
Net decrease in shares
outstanding before
conversion................... (25,456) (264,234)
Shares reacquired upon conver-
sion into Class A............ (446,322) (4,242,531)
---------------- -------------
Net decrease in shares
outstanding.................. (471,778) $ (4,506,765)
---------------- -------------
---------------- -------------
Year ended February 28, 1994:
Shares sold.................... 597,901 $ 5,877,873
Shares issued in reinvestment
of distributions............. 66,872 658,245
Shares reacquired.............. (827,247) (8,135,914)
---------------- -------------
Net decrease in shares
outstanding before
conversion................... (162,474) (1,599,796)
Shares reacquired upon
conversion into Class A...... (3,188,039) (31,329,562)
---------------- -------------
Net decrease in shares
outstanding.................. (3,350,513) $ (32,929,358)
---------------- -------------
---------------- -------------
</TABLE>
-11-
<PAGE>
PRUDENTIAL ADJUSTABLE RATE SECURITIES FUND, INC.
Financial Highlights
<TABLE>
<CAPTION>
Class A
Class B
--------------------------------------
- ---- ------------------------------------------
June
10, June 10,
Year Year 1992*
Year Year 1992*
Ended Ended
through Ended Ended through
February 28, February 28, February
28, February 28, February 28, February 28,
1995 1994 1993
1995 1994 1993
------------ ------------ --------
- ---- ------------ ------------ ------------
<S> <C> <C> <C>
<C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period.... $ 9.63 $ 9.94 $
10.00 $ 9.67 $ 9.94 $ 10.00
------------ ------------ --------
- ---- ------------ ------------ ------------
Income from investment operations
Net investment incomeD.................. .36 0.41
0.35 .36 0.41 0.31
Net realized and unrealized loss on
investment transactions............... (.07) (0.29)
(0.05) (.08) (0.29) (0.05)
------------ ------------ --------
- ---- ------------ ------------ ------------
Total from investment operations...... .29 0.12
0.30 .28 0.12 0.26
Less distributions
Dividends from net investment income.... (.35) (0.41)
(0.35) (.33) (0.41) (0.31)
Distributions in excess of net
investment income..................... (.01) (0.02)
(0.01) (.03) (0.01) (0.01)
------------ ------------ --------
- ---- ------------ ------------ ------------
Total distributions................... (.36) (0.43)
(0.36) (.36) (0.42) (0.32)
------------ ------------ --------
- ---- ------------ ------------ ------------
Contingent deferred sales charges
rebated............................... -- --
- -- -- .03 --
------------ ------------ --------
- ---- ------------ ------------ ------------
Net asset value, end of period.......... $ 9.56 $ 9.63 $
9.94 $ 9.59 $ 9.67 $ 9.94
------------ ------------ --------
- ---- ------------ ------------ ------------
------------ ------------ --------
- ---- ------------ ------------ ------------
TOTAL RETURN#........................... 3.07% 1.24%
2.92% 2.96% 1.58% 2.56%
RATIOS/SUPPLEMENTAL DATA:
Net assets, end of period (000)......... $58,710 $122,860
$219,352 $746 $5,312 $38,766
Average net assets (000)................ $89,069 $176,863
$217,329 $2,279 $19,742 $33,895
Ratios to average net assets:D
Expenses, including distribution
fees.................................. 1.07% 0.69%
0.77%** 1.03% 0.75% 1.27%**
Expenses, excluding distribution
fees.................................. 1.07% 0.63%
0.27%** 1.03% 0.63% 0.27%**
Net investment income................. 3.65% 4.29%
4.81%** 3.47% 4.23% 4.31%**
Portfolio turnover rate................. 268% 130%
45% 268% 130% 45%
- ---------------
</TABLE>
* Commencement of investment operations.
** Annualized.
D Net of management fee and/or distribution fee waivers.
# Total return does not consider the effect 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 reinvestments of
dividends and distributions. Total returns for periods of less than a
full year are not annualized.
See Notes to Financial Statements.
-12-
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholders and Board of Directors
Prudential Adjustable Rate Securities Fund, Inc.
We have audited the accompanying statement of assets and liabilities of
Prudential Adjustable Rate Securities Fund, Inc., including the portfolio of
investments, as of February 28, 1995, the related statements of operations for
the year then ended and of changes in net assets for each of the two years in
the period then ended and the financial highlights for each of the two years in
the period then ended and for the period June 10, 1992 (commencement of
operations) to February 28, 1993. 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 February
28, 1995 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
Adjustable Rate Securities Fund, Inc. at February 28, 1995, the results of its
operations, the changes in its net assets and the financial highlights for the
respective stated periods, in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
New York, New York
April 13, 1995
-13-
<PAGE>
Directors
Edward D. Beach
Delayne Dedrick Gold
Harry A. Jacobs, Jr.
Lawrence C. McQuade
Thomas T. Mooney
Thomas H. O'Brien
Thomas A. Owens, Jr.
Richard A. Redeker
Stanley E. Shirk
Officers
Lawrence C. McQuade, President
Robert F. Gunia, Vice President
Susan C. Cote, Treasurer
S. Jane Rose, Secretary
Deborah A. Docs, Assistant Secretary
Manager
Prudential Mutual Fund Management, Inc.
One Seaport Plaza
New York, NY 10292
Investment Adviser
Prudential Investment Corporation
Prudential Plaza
Newark, NJ 07101
Distributors
Prudential Mutual Fund Distributors, Inc.
Prudential Securities Incorporated
One Seaport Plaza
New York, NY 10292
Custodian
State Street Bank and Trust Company
One Heritage Drive
North Quincy, MA 02171
Transfer Agent
Prudential Mutual Fund Services, Inc.
P.O. Box 15005
New Brunswick, NJ 08906
Independent Accountants
Deloitte & Touche LLP
Two World Financial Center
New York, NY 10281
Legal Counsel
Shereff, Friedman, Hoffman & Goodman
919 Third Avenue
New York, NY 10022
Prudential Mutual Funds
One Seaport Plaza
New York, NY 10292
Toll Free (800) 225-1852, Collect (908) 417-7555
This report is not authorized for distribution to prospective investors unless
preceded or accompanied by a current prospectus.
74429J106 MF156E
74429J205 (LOGO) Cat. #444591Z
