MERRILL
LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Semi-Annual Report November 30, 1993
This report is not authorized for use as an offer of sale
or solicitation of an offer to buy shares of the Fund unless
accompanied or preceded by the Fund's current prospectus.
Past performance results shown in this report should not be
considered a representation of future performance. Investment
return and principal value of shares will fluctuate so that
shares, when redeemed, may be worth more or less than their
original cost.
Merrill Lynch
Adjustable Rate Securities Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Officers and
Directors
Arthur Zeikel, President and Director
Walter Mintz, Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Harry Woolf, Director
Terry K. Glenn, Executive Vice President
N. John Hewitt, Senior Vice President
Donald C. Burke, Vice President
Jeffrey B. Hewson, Vice President
Theodore J. Magnani, Vice President
Gregory Mark Maunz, Vice President
Gerald M. Richard, Treasurer
Michael J. Hennewinkel, Secretary
Custodian
The Bank of New York
110 Washington Street
New York, New York 10286
Transfer Agent
Financial Data Services, Inc.
Transfer Agency Mutual Fund Operations
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
DEAR SHAREHOLDER
Economic Environment
We may be entering the best of all economic situations, a growing
economy with no signs of inflation. People are working; in fact,
the national unemployment level dropped dramatically in November
from 6.8% to 6.4%. The factory workweek is the longest since World
War II. In November, leading economic indicators and factory orders
increased 0.5% and 1.2%, respectively, the third increase over the
last three months. Auto sales were up 10.4% in November, and sales
of existing homes are at a 14-year high. Third-quarter gross domestic
product (GDP) was +2.8%, and fourth-quarter projections run as high as
5%, although no one expects that level to be sustained.
This economic environment is thus far without a hint of inflation. The
consumer price index (CPI) is running at an annualized rate below 3%.
Furthermore, the recent decline in oil prices equates to a 0.5% decline
in the annual rate of inflation as energy prices comprise 7% of the CPI.
Alan Greenspan, Chairman of the Federal Reserve Board, has stated that
inflation may be returning to the levels of the pre-Vietnam War buildup.
In any event, his resolve in fighting inflation is well-known within the
investment community.
A recovering economy and subdued inflation translate into greater con-
sumer confidence. The Conference Board reported a huge increase in
consumer confidence for November to the highest level since the increases
following the Presidential election. Personal income is flat but consumer
financial health has improved, largely because of home refinancings that
have significantly reduced mortgage payments. Consumer spending is up
for the seventh straight month and is twice income growth, resulting in
a drop in the savings rate to 3.7%. Consumer activity, the largest com-
ponent of GDP, is important for economic health, and the holiday
season is the most important period for consumer spending.
Investment Strategy
Some of the portfolio strategies implemented in the August quarter
performed as anticipated, enabling Merrill Lynch Adjustable Rate
Securities Fund, Inc. to maintain net asset value stability during a
period of volatile market conditions. In reducing its interest-only
securities (IOs) holdings to 1% of net assets, the Fund avoided the
25%-30% market value decline that IOs experienced amid faster prepayment
expectations caused by long-term interest rates falling 75 basis points
(0.75%) from the beginning of August. The reduction of holdings tied to
the 11th District Cost of Funds Index (COFI), which lags short-term
interest rate movements, also benefited the Fund as market values of
COFI securities declined 2.50 points during the November quarter amid
low levels of market liquidity and rising short-term interest rates.
The continued flattening of the yield curve, as evidenced by the
narrowing of the 1-year--30-year Treasury spread by more than 30 basis
points during the November quarter, has produced numerous implications
for the adjustable rate mortgage (ARM) market. Most important, as short-
term interest rates rise, imbedded periodic and lifetime cap features can
limit price performance of ARM securities until the underlying loans fully
reset to market interest rates. This can temporarily cause the Fund's net
asset value to decline until such a reset. In order to limit the impact on
net asset value, the Fund is over 57% invested in frequently adjusting,
one-year Constant Maturing Treasury and London Interbank Offered Rate
indexed ARMs and cash equivalent investments.
In addition, a continued flattening of the yield curve could ultimately
cause an increase in ARM prepayment speeds. With narrow spreads between
adjustable and fixed-mortgage rates, homeowners may opt to refinance into
fixed-rate mortgages. But while a flattening yield curve environment could
cause ARM prepayments to increase, the absolute levels of fixed-rate
mortgages will be the driving force behind the actual pace at which ARMs
prepay. Nevertheless, the Fund has limited its prepayment exposure by
predominately holding nonconvertible ARMs and multifamily ARMs which have
fewer refinancing alternatives.
Looking forward to 1994, the ARMs market is poised for another year of
solid performance, barring a significant rise in short-term interest rates.
Strong demand from banks and institutional investors utilizing leveraging
techniques coupled with limited product origination should enable ARMs to
perform well once again versus comparable short-term instruments.
We thank you for your continued investment in Merrill Lynch Adjustable
Rate Securities Fund, Inc., and we look forward to reviewing our outlook
and strategy again with you in our upcoming quarterly report to share-
holders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and
Portfolio Manager
December 31, 1993
<TABLE>
PERFORMANCE DATA
None of the past results shown should be considered a representation of future performance.
Investment return and principal value of Class A and Class B Shares will fluctuate so that
shares, when redeemed, may be worth more or less than their original cost.
<CAPTION>
Performance
Summary--
Class A Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
8/2/91-12/31/91 $10.00 $9.99 -- $0.289 +2.82%
1992 9.99 9.77 -- 0.547 +3.36
1/1/93-11/30/93 9.77 9.71 -- 0.319 +2.79
------
Total $1.155
Cumulative total return as of 11/30/93: +9.24%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains distributions at net asset value on the
payable date, and do not include sales charge; results would be lower if sales charge was included.
<CAPTION>
Performance
Summary--
Class B Shares
Net Asset Value Capital Gains
Period Covered Beginning Ending Distributed Dividends Paid* % Change**
<C> <C> <C> <C> <C> <C>
8/2/91-12/31/91 $10.00 $9.99 -- $0.268 +2.60%
1992 9.99 9.77 -- 0.497 +2.84
1/1/93-11/30/93 9.77 9.71 -- 0.276 +2.34
------
Total $1.041
Cumulative total return as of 11/30/93: +7.98%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains distributions at net asset value on the
payable date, and do not reflect deduction of any sales charge; results would be lower if sales charge
was deducted.
</TABLE>
<TABLE>
<CAPTION>
Recent
Performance
Results*
12 month 3 Month
11/30/93 8/31/93 11/30/92 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares $9.71 $9.76 $9.78 -0.72% -0.51%
Class B Shares 9.71 9.77 9.78 -0.72 -0.61
Class A Shares--Total Return +3.08(1) +0.36(2)
Class B Shares--Total Return +2.57(3) +0.13(4)
Class A Shares--Standardized 30-day Yield 3.75%
Class B Shares--Standardized 30-day Yield 3.37%
<FN>
*Investment results shown for the 3-month and 12-month periods are before the deduction of any sales charges.
(1)Percent change includes reinvestment of $0.367 per share ordinary income dividends.
(2)Percent change includes reinvestment of $0.085 per share ordinary income dividends.
(3)Percent change includes reinvestment of $0.318 per share ordinary income dividends.
(4)Percent change includes reinvestment of $0.073 per share ordinary income dividends.
<CAPTION>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
<S> <C> <C>
Class A Shares*
Year Ended 9/30/93 +2.89% -0.20%
Inception (8/2/91) through 9/30/93 +4.08 +2.62
*Maximum sales charge is 3%.
**Assuming maximum sales charge.
<CAPTION>
% Return % Return
Without CDSC With CDSC**
<S> <C> <C>
Class B Shares*
Year Ended 9/30/93 +2.38% -0.59%
Inception (8/2/91) through 9/30/93 +3.61 +3.18
<FN>
*Maximum contingent deferred sales charge is 3% and is reduced to 0%
after 3 years.
**Assuming payment of applicable contingent deferred sales charge.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Value Percent of
Index Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Adjustable Rate* Constant Maturity $ 7,745,043 Bear Stearns Secured Investors, Inc. II,
Mortgage-Backed Treasury Indexed Pass-Through 91-1-A, 7.917% due 11/25/2021 $ 7,891,253 $ 7,943,510 1.53%
Obligations** Obligations Federal Home Loan Mortgage Corporation:
13,607,593 5.381% due 8/01/2031 14,066,849 14,245,448 2.74
3,948,423 7.754% due 5/01/2015 4,015,053 4,124,868 0.79
267,737 8.396% due 8/01/2020 273,929 278,280 0.05
Federal National Mortgage Association:
2,145,983 5.68% due 9/01/2015 2,207,680 2,236,517 0.43
2,799,452 5.71% due 11/01/2013 2,879,936 2,917,554 0.56
777,138 5.85% due 10/01/2013 799,481 809,924 0.16
8,718,824 6.781% due 12/01/2021 8,898,650 9,040,331 1.74
11,760,000 Government National Mortgage Association,
4.50% due 11/20/2023 11,947,182 11,760,000 2.26
34,306,743 Prudential Home Mortgage Securities Company,
Inc., REMIC (a) 92-35-A1, 5.689% due 35,164,412 35,507,479 6.82
11/25/2022
Resolution Trust Corporation, REMIC (a):
10,000,247 92-4-B2, 5.839% due 7/25/2028 10,100,247 9,962,746 1.91
14,807,487 91-M6-A3, 6.145% due 6/25/2021 15,209,168 14,974,072 2.88
3,412,676 91-M7-A3, 6.604% due 1/25/2021 3,423,340 3,442,537 0.66
45,378,956 91-M2-A1, 6.747% due 9/25/2020 45,378,956 47,023,943 9.04
22,691,513 91-M2-A3, 6.809% due 9/25/2020 22,748,241 23,514,081 4.52
5,579,083 92-6-B4, 7.836% due 11/25/2025 5,716,558 5,716,816 1.10
17,187,395 Sears Mortgage Securities Corporation, REMIC
(a) 92-11-A1, 6.117% due 6/25/2022 17,360,565 17,466,690 3.36
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value Percent of
Index Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Adjustable Rate* Cost of Funds $12,544,936 DLJ Mortgage Acceptance Corp., REMIC (a)
Mortgage-Backed Indexed 91-6-A1, 7.827% due 9/01/2021 $ 12,835,038 $ 12,913,443 2.48%
Obligations** Obligations Federal National Mortgage Association:
(concluded) 10,053,780 5.259% due 3/01/2018 10,393,094 10,173,168 1.95
15,524,540 5.304% due 5/01/2018 16,048,494 15,708,894 3.02
1,594,748 5.875% due 7/01/2017 1,657,417 1,623,653 0.31
12,183,568 5.875% due 10/01/2028 12,662,344 12,412,010 2.38
11,944,080 5.875% due 2/01/2029 12,413,445 12,168,032 2.34
2,268,894 Federal National Mortgage Association, REMIC
(a) 92-41-S, 27.69% due 3/25/2022 2,563,818 2,300,800 0.44
3,497,724 Kidder Peabody Acceptance Corporation I, REMIC
(a) 88-04-A, 6.805% due 1/01/2019 3,624,517 3,473,677 0.67
3,698,758 Mortgage Participation Securities, First Nation-
wide Trust, CMO (b) 88-1-A, 6.177% due 3,818,968 3,698,758 0.71
10/25/2018
Resolution Trust Corporation, REMIC (a):
9,565,883 91-M6-A2, 5.758% due 6/25/2021 9,741,498 9,709,371 1.87
19,485,305 91-M2-A2, 7.395% due 9/25/2020 19,562,906 20,191,648 3.88
London Interbank 197,358 Federal Home Loan Mortgage Corporation, REMIC
Offered Rate (a) 92-1363-C, 47.00% (c) due 8/15/2022 2,351,570 1,430,842 0.27
Indexed Resolution Trust Corporation, REMIC (a):
Obligations 4,773,318 91-M4-B, 5.187% due 2/25/2020 4,770,334 4,841,935 0.93
6,508,566 91-M7-B, 5.187% due 1/25/2021 6,508,565 6,512,633 1.25
15,000,000 92-C1-B, 5.187% due 8/25/2023 14,446,875 14,995,313 2.88
27,000,000 Saxon Mortgage Securities Corporation, REMIC
(a) 92-3-B, 5.461% due 11/25/2022 27,620,000 27,877,500 5.36
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 369,100,383 370,996,473 71.29
Fixed Rate 39,935,855 Capstead Mortgage Securities Corporation II,
Mortgage-Backed REMIC (a) 93-I-A3, 12.013% (d)
Obligations** due 9/25/2023 (e) 574,333 561,598 0.11
6,309,423 Citicorp Mortgage Securities Inc., REMIC (a)
92-12-A3, 8.00% due 3/25/2021 6,420,821 6,380,404 1.23
43,346 Collateralized Mortgage Securities Corp., REMIC
(a) 90-5-L, 11.981% (c) due 9/20/2020 1,010,038 572,173 0.11
23,000,000 Countrywide Mortgage, REMIC (a)
93-9-A, 6.50% due 8/25/2000 23,638,390 23,531,875 4.52
86,546,483 DLJ Mortgage Acceptance Corp., REMIC (a)
92-6-A1, 14.753% (d) due 7/25/2022 (e) 1,511,137 1,376,089 0.26
Federal National Mortgage Association, REMIC (a):
54,196 91-G-46-K, 9.00% (c) due 12/25/2009 2,000,268 1,246,496 0.24
10,558 90-142-K, 10.99% (c) due 7/25/2014 328,145 73,904 0.01
5,987,484 Federal National Mortgage Association Trust 32-2,
8.46% (d) due 4/01/2018 (e) 3,622,745 888,767 0.17
8,558,932 Kidder Peabody Acceptance Corporation, REMIC (a)
93-M1-A2, 7.15% due 4/25/2025 8,521,906 8,660,569 1.66
Prudential Home Mortgage Securities, Inc., REMIC
(a):
24,875,859 93-44-A1, 6.75% due 10/25/2023 25,340,955 25,318,961 4.87
964 92-1-A9, 13.00% (c) due 2/25/2022 182,703 86,741 0.02
50,869,750 Residential Funding Mortgage Securities I, Inc.,
REMIC (a) 92-S3-A9, 14.00% (d) due 2/25/2007 (e) 2,270,347 132,261 0.03
Resolution Trust Corporation, REMIC (a):
10,285,263 92-CHF-B, 7.15% due 12/25/2020 10,413,084 10,513,467 2.02
2,275,503 92-7-A2A, 8.35% due 6/25/2029 2,325,635 2,291,147 0.44
Sears Mortgage Securities Corp., REMIC (a):
5,459 91-K-A4, 18.00% (c) due 9/25/2021 799,366 873,419 0.17
72,302,024 92-12-A3, 18.00% (d) due 7/25/2022 (e) 953,241 1,050,639 0.20
Total Investments in Fixed Rate
Mortgage-Backed Obligations 89,913,114 83,558,510 16.06
Total Investments in Mortgage-Backed
Obligations 459,013,497 454,554,983 87.35
Short-Term Repurchase 20,000,000 Greenwich Capital, Inc., purchased on
Securities Agreements*** 11/30/1993 to yield 3.20% to 12/01/1993 20,000,000 20,000,000 3.84
14,502,000 Nikko Securities International, Inc., pur-
chased on 11/30/1993 to yield 3.25% to 14,502,000 14,502,000 2.79
12/01/1993
Total Short-Term Securities 34,502,000 34,502,000 6.63
Total Investments $ 493,515,497 489,056,983 93.98
=============
Other Assets Less Liabilities 31,303,175 6.02
------------ ------
Net Assets $520,360,158 100.00%
<FN> ============ ======
*Adjustable Rate Obligations have coupon rates which reset
periodically.
**Mortgage-Backed Obligations are subject to principal paydowns as
a result of prepayments or refinancings of the underlying mortgage
instruments. As a result, the average life may be substantially less
than the original maturity.
***Repurchase Agreements are fully collateralized by US Government
& Agency Obligations.
(a)Real Estate Mortgage Investment Conduits (REMIC).
(b)Collateralized Mortgage Obligation (CMO).
(c)Represents the approximate yield to maturity. These securities have
a high coupon interest rate and were purchased at a substantial
premium to their original face amounts. Monthly premium amortiza-
tion, due to prepayments, reduces considerably the net interest income
earned on these securities.
(d)Represents the approximate yield to maturity.
(e)Represents the interest only portion of a mortgage-backed obligation.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of November 30, 1993
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$493,515,497) (Notes 1a & 1b) $489,056,983
Cash 417,863
Receivables:
Securities sold $ 32,158,218
Interest 2,800,526
Capital shares sold 197,537
Principal paydowns 58,542 35,214,823
Deferred organization expenses (Note 1g) ------------ 74,762
Prepaid registration fees and other assets (Note 1g) 148,007
------------
Total assets 524,912,438
------------
Liabilities: Payables:
Capital shares redeemed 3,232,632
Dividends to shareholders (Note 1h) 526,540
Distributor (Note 2) 315,999
Investment adviser (Note 2) 220,679 4,295,850
------------
Accrued expenses and other liabilities 256,430
------------
Total liabilities 4,552,280
------------
Net Assets: Net assets $520,360,158
============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares authorized $ 362,383
Consist of: Class B Common Stock, $0.10 par value, 200,000,000 shares authorized 4,994,943
Paid-in capital in excess of par 541,811,524
Accumulated realized capital losses--net (22,350,178)
Unrealized depreciation on investments--net (4,458,514)
------------
Net assets $520,360,158
============
Net Asset Class A--Based on net assets of $35,183,610 and 3,623,829 shares outstanding $ 9.71
Value: ============
Class B--Based on net assets of $485,176,548 and 49,949,434 shares outstanding $ 9.71
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended November 30, 1993
<S> <S> <C>
Investment Interest and discount earned, net of premium amortization $ 13,822,171
Income Other 217,119
(Note 1f): ------------
Total income 14,039,290
------------
Expenses: Distribution fees--Class B (Note 2) 2,212,074
Investment advisory fees (Note 2) 1,579,014
Transfer agent fees--Class B (Note 2) 253,671
Accounting services (Note 2) 95,048
Printing and shareholder reports 72,138
Registration fees (Note 1g) 62,608
Maintenance fees--Class A (Note 2) 52,149
Professional fees 42,223
Custodian fees 37,805
Directors' fees and expenses 17,609
Transfer agent fees--Class A (Note 2) 16,831
Amortization of organization expenses (Note 1g) 11,865
Other 21,332
------------
Total expenses 4,474,367
------------
Investment income--net 9,564,923
------------
Realized & Realized loss on investments--net (18,157,499)
Unrealized Change in unrealized depreciation on investments--net 15,146,879
Gain (Loss) ------------
on Invest- Net Increase in Net Assets Resulting from Operations $ 6,554,303
ments--Net ============
(Notes 1f & 3):
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
Increase (Decrease) in Net Assets: Nov. 30, 1993 May 31, 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 9,564,923 $ 39,959,417
Realized loss on investments--net (18,157,499) (3,230,836)
Change in unrealized depreciation on investments--net 15,146,879 (13,586,313)
------------ ------------
Net increase in net assets resulting from operations 6,554,303 23,142,268
------------ ------------
Dividends to Investment income--net:
Shareholders Class A (730,241) (3,578,083)
(Note 1h): Class B (8,834,682) (36,381,334)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders (9,564,923) (39,959,417)
------------ ------------
Capital Net decrease in net assets derived from capital share transactions (217,620,865) (209,712,303)
Share ------------ ------------
Transactions
(Note 4):
Net Assets: Total decrease in net assets (220,631,485) (226,529,452)
Beginning of period 740,991,643 967,521,095
------------ ------------
End of period $520,360,158 $740,991,643
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
For the
For the Period
The following per share data and ratios have been derived Six Months For the August 2,
from information provided in the financial statements. Ended Year Ended 1991++ to
November 30, May 31, May 31,
Increase (Decrease) in Net Asset Value: 1993 1993 1992
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.76 $ 9.92 $ 10.00
Operating -------- -------- --------
Performance: Investment income--net .17 .45 .56
Realized and unrealized loss on investments--net (.05) (.16) (.08)
-------- -------- --------
Total from investment operations .12 .29 .48
Less dividends: -------- -------- --------
Investment income--net (.17) (.45) (.56)
-------- -------- --------
Net asset value, end of period $ 9.71 $ 9.76 $ 9.92
======== ======== ========
Total Based on net asset value per share 1.26%+++ 2.99% 4.75%+++
Investment ======== ======== ========
Return:**
Ratios to Expenses, net of reimbursement and excluding maintenance fees .69%* .66% .62%*
Average ======== ======== ========
Net Assets: Expenses, net of reimbursement .94%* .91% .87%*
======== ======== ========
Expenses .94%* .91% .96%*
======== ======== ========
Investment income--net 3.50%* 4.79% 6.54%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 35,184 $ 51,398 $ 80,411
Data: ======== ======== ========
Portfolio turnover 35.75% 104.71% 94.72%
======== ======== ========
<FN>
* Annualized.
** Total investment returns exclude the effects of sales loads.
++ Commencement of Operations.
++++ Aggregate total investment return.
See Notes to Financial Statements.
Class B
For the
<CAPTION> For the Period
The following per share data and ratios have been derived Six Months For the August 2,
from information provided in the financial statements. Ended Year Ended 1991++ to
November 30, May 31, May 31,
Increase (Decrease) in Net Asset Value: 1993 1993 1992
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.76 $ 9.92 $ 10.00
Operating -------- -------- --------
Performance: Investment income--net .15 .40 .52
Realized and unrealized loss on investments--net (.05) (.16) (.08)
-------- -------- --------
Total from investment operations .10 .24 .44
Less dividends: -------- -------- --------
Investment income--net (.15) (.40) (.52)
-------- -------- --------
Net asset value, end of period $ 9.71 $ 9.76 $ 9.92
======== ======== ========
Total Based on net asset value per share 1.00%+++ 2.48% 4.33%+++
Investment ======== ======== ========
Return:**
Ratios to Expenses, net of reimbursement and excluding distribution fees .70%* .65% .61%*
Average ======== ======== ========
Net Assets: Expenses, net of reimbursement 1.45%* 1.40% 1.36%*
======== ======== ========
Expenses 1.45%* 1.40% 1.47%*
======== ======== ========
Investment income--net 3.00%* 4.15% 6.07%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $485,177 $689,593 $887,110
Data: ======== ======== ========
Portfolio turnover 35.75% 104.71% 94.72%
======== ======== ========
<FN>
* Annualized.
** Total investment returns exclude the effects of sales loads.
++ Commencement of Operations.
+++ Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Adjustable Rate Securities Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a diversi-
fied, open-end investment management company. The Fund offers
both Class A and Class B Shares. Class A Shares are sold with a
front-end sales charge. Class B Shares may be subject to a contin-
gent deferred sales charge. Both classes of shares have identical
voting, dividend, liquidation and other rights and the same terms
and conditions, except that Class A Shares bear the expenses of the
ongoing account maintenance fee and have exclusive voting rights
with respect to such maintenance fee expenditures and Class B
Shares bear the expenses of the ongoing account maintenance fee
and certain expenses related to the distribution of such shares
and have exclusive voting rights with respect to matters relating
to such distribution expenditures. The following is a summary of
significant accounting policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are
traded in the market are valued at the last available bid price in the
market or on the basis of yield equivalents as obtained from one or
more dealers that make markets in such securities. Options on mortgage-
backed securities and other securities of the Fund which are traded on
exchanges are valued at their last bid price in the case of options
purchased by the Fund and their last asked price in the case of options
written by the Fund. Options traded on the market are valued at their
last bid price or asked price as obtained from at least two independent
entities (one of which is not a party to the option). Interest rate futures
contracts and options thereon, which are traded on exchanges, are valued
at their last sale price as of the close of such exchanges. Securities
for which market quotations are not readily available are valued at their
fair value as determined in good faith by or under the direction of the
Board of Directors of the Fund.
(b) Repurchase agreements--The Fund invests in US Government
securities pursuant to repurchase agreements with a member bank
of the Federal Reserve System or a primary dealer in US Government
securities. Under such agreements, the bank or primary dealer agrees
to repurchase the security at a mutually agreed upon time and price.
The Fund takes possession of the underlying securities, marks to
market such securities and, if necessary, receives additions to such
securities daily to ensure that the contract is fully collateralized.
(c) Options--When the Fund sells an option, an amount equal to the
premium received by the Fund is reflected as an asset and an equiva-
lent liability. The amount of the liability is subsequently marked to
market to reflect the current market value of the option written.
When a security is purchased or sold through an exercise of an option,
the related premium paid (or received) is added to (or deducted
from) the basis of the security acquired or deducted from (or added
to) the proceeds of the security sold. When an option expires (or the
Fund enters into a closing transaction), the Fund realizes a gain or
loss on the option to the extent of the premiums received or paid
(or gain or loss to the extent that the cost of the closing transaction
is less than or greater than the premiums paid or received).
Written and purchased options are non-income producing
investments.
(d) Futures contracts--The Fund may purchase or sell interest rate
futures contracts and related options on such futures contracts.
Upon entering into a contract, the Fund deposits and maintains as
collateral such initial margin as required by the exchange on which
the transaction is effected. Pursuant to the contract, the Fund
agrees to receive from or pay to the broker an amount of cash equal
to the daily fluctuation in value of the contract. Such receipts or
payments are known as variation margins and are recorded by the
Fund as unrealized gains or losses. When the contract is closed,
the Fund records a realized gain or loss equal to the difference
between the value of the contract at the time it was opened and the
value at the time it was closed.
(e) Income taxes--It is the Fund's policy to comply with the require-
ments of the Internal Revenue Code applicable to regulated invest-
ment companies and to distribute substantially all of its taxable
income to its shareholders. Therefore, no Federal income tax
provision is required.
(f) Security transactions and investment income--Security trans-
actions are recorded on the dates the transactions are entered into
(the trade dates). Interest income (including amortization of dis-
count and premiums) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.
(g) Deferred organization expenses and prepaid registration fees--
Deferred organization expenses are charged to expense on a
straight-line basis over a five-year period. Prepaid registration fees
are charged to expense as the related shares are issued.
(h) Dividends and distributions--All or a portion of the Fund's net
investment income is declared daily and paid monthly. Distributions
paid by the Fund are recorded on the ex-dividend dates.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management ("MLAM"). MLAM is the name
under which Merrill Lynch Investment Management, Inc. ("MLIM")
does business. MLIM is an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc. The Fund has also entered into Distribution
Agreements and a Distribution Plan with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned sub-
sidiary of MLIM.
MLAM is responsible for the management of the Fund's portfolio
and provides the necessary personnel, facilities, equipment and
certain other services necessary to the operations of the Fund. For
such services, the Fund pays a monthly fee of 0.50%, on an annual
basis, of the average daily value of the Fund's net assets. For the six
months ended November 30, 1993, MLAM earned fees of $1,579,014.
The Investment Advisory Agreement obligates MLAM to reimburse
the Fund to the extent the Fund's expenses (excluding interest,
taxes, distribution fees, brokerage fees and commissions, and
extraordinary items) exceed 2.5% of the Fund's first $30 million
of average daily net assets, 2.0% of the Fund's next $70 million of
average daily net assets, and 1.5% of the average daily net assets
in excess thereof. No fee payment will be made to MLAM during
any fiscal year which will cause such expenses to exceed the most
restrictive expense limitation at the time of such payment.
The Fund has adopted separate Plans of Distribution (the "Distribution
Plans") for Class A and Class B Shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940, pursuant to which MLFD receives from the
Fund at the end of each month (a) an account maintenance fee, at an annual
rate of 0.25% of the average daily net assets of the Fund's Class A Shares,
in order to compensate the Distributor in connection with account maintenance
activities, and (b) an account maintenance fee at an annual rate of 0.25%
and a distribution fee at an annual rate of 0.50% of the average daily net
assets of the Fund's Class B Shares, in order to compensate the Distributor
for the services it provides and the expenses borne by the Distributor under
the Distribution Agreement. As authorized by the Distribution Plans, the
Distributor has entered into an agreement with Merrill Lynch, Pierce, Fenner &
Smith Inc. ("MLPF&S") which provides for the compensation of MLPF&S in
connection with account maintenance activities for Class A Shares and
for providing distribution-related services to the Fund for Class B Shares.
For the six months ended November 30, 1993, MLFD earned $52,149 and $2,212,074
for Class A and Class B Shares, respectively, under the Distribution Plans,
all of which was paid to MLPF&S pursuant to the agreement. For the six months
ended November 30, 1993, MLFD earned underwriting discounts of $10,521, and
MLPF&S earned dealer concessions of $39,209 on the sale of the Fund's Class
A Shares. MLPF&S also received contingent deferred sales charges of $1,318,217
relating to Class B Share transactions during the period.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
Merrill Lynch & Co., Inc., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, MLPF&S, FDS, and/or MLFD.
3. Investments:
Purchases and sales of investments, excluding short-term securi-
ties, for the six months ended November 30, 1993 were $228,147,470
and $547,227,370, respectively.
Net realized and unrealized gains (losses) as of November 30, 1993
were as follows:
Realized
Gains Unrealized
(Losses) Losses
Long-term investments $(18,157,521) $(4,458,514)
Short-term investments 22 --
------------ -----------
Total $(18,157,499) $(4,458,514)
============ ===========
As of November 30, 1993, net unrealized depreciation for Federal
income tax purposes aggregated $4,458,514, of which $5,442,325
related to appreciated securities and $9,900,839 related to depreci-
ated securities. The aggregate cost of investments at November 30,
1993 for Federal income tax purposes was $493,515,497.
NOTES TO FINANCIAL STATEMENTS (concluded)
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $217,620,865 and $209,712,303 for the six months ended
November 30, 1993 and the year ended May 31, 1993, respectively.
Transactions in capital shares for Class A and Class B Shares were
as follows:
Class A Shares for the Six Months Dollar
Ended November 30, 1993 Shares Amount
Shares sold 888,372 $ 8,656,667
Shares issued to shareholders in
reinvestment of dividends 47,271 460,597
---------- ------------
Total issued 935,643 9,117,264
Shares redeemed (2,578,481) (25,133,595)
---------- ------------
Net decrease (1,642,838) $(16,016,331)
========== ============
Class A Shares for the Year Dollar
Ended May 31, 1993 Shares Amount
Shares sold 5,909,926 $ 58,465,229
Shares issued to shareholders in
reinvestment of dividends 210,719 2,068,479
---------- ------------
Total issued 6,120,645 60,533,708
Shares redeemed (8,960,468) (87,979,025)
---------- ------------
Net decrease (2,839,823) $(27,445,317)
========== ============
Class B Shares for the Six Months Dollar
Ended November 30, 1993 Shares Amount
Shares sold 2,004,849 $ 19,536,709
Shares issued to shareholders in
reinvestment of dividends 544,411 5,307,424
----------- -------------
Total issued 2,549,260 24,844,133
Shares redeemed (23,234,468) (226,448,667)
----------- -------------
Net decrease (20,685,208) $(201,604,534)
=========== =============
Class B Shares for the Year Dollar
Ended May 31, 1993 Shares Amount
Shares sold 28,963,546 $ 285,135,805
Shares issued to shareholders in
reinvestment of dividends 2,110,164 20,705,785
----------- -------------
Total issued 31,073,710 305,841,590
Shares redeemed (49,873,230) (488,108,576)
----------- -------------
Net decrease (18,799,520) $(182,266,986)
=========== =============
