MERRILL
LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Annual Report May 31, 1994
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 pro-
spectus. Past performance results shown in this report
should not be considered a representation of future per-
formance. 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
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
<PAGE>
Officers and
Directors
Arthur Zeikel, President and Director
Joe Grills, 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
DEAR SHAREHOLDER
Economic Environment
The US economy is continuing its expansion, although at a more
moderate pace. Gross domestic product (GDP) was reported at 3.0%
in the February quarter, down sharply from the 7.0% level repor-
ted in the final quarter of 1993. Nevertheless, the Federal Reserve
Board, sensing the resulting effects of the stimulus provided by
an accommodative monetary policy, shifted its stance to a neutral
directive. In doing so, the central bank moved interest rates
higher by tightening the Federal Funds rate 25 basis points (0.25%)
on February 4, 1994. Since then, the Federal Reserve Board has
acted on three separate occasions, raising the Federal Funds rate
a total of 100 basis points to 4.25% and the discount rate 50 basis
points to 3.50%. In affirming its resolve in its current fight
against inflation, the Federal Reserve Board has increased the
Federal Funds rate faster than it has during the eight previous
cycles of tightening dating back to the mid 1950s.
<PAGE>
Recent economic data supports the trend of moderating growth, as
both consumer and housing sectors have decelerated sharply from
1993 levels. April reports indicate consumer spending, personal
income, new home sales and factory orders all posted declines, while
the Index of Leading Economic Indicators remained unchanged. Higher
interest rates along with the effects of severe winter weather have
caused housing starts and new home sales to fall far below the peak
levels reached during the latter half of 1993. In addition, higher
mortgage rates have virtually ended mortgage refinancing activity,
a major source of consumer spending power in 1993. As a result,
real consumer spending declined 0.4% in April. The industrial sec-
tor continues to advance, but at a more sustainable pace. In April
durable goods orders generated a weaker-than-expected 0.1% gain.
Overall, factory orders slipped 0.1%, with factory shipments down
0.3% and inventories rising 0.2%.
On the positive side, inflation remains subdued. Both the Producer
Price Index (PPI) and Consumer Price Index (CPI) continue to indicate
that minimal inflationary forces exist in the economy. In May the
PPI was reported to be down 0.1% and down 0.4% over the prior year.
More important, prices at all three stages of production indicate
no underlying inflationary pressures anywhere, as prices of crude,
intermediate and finished goods are all flat to down. Meanwhile, the
CPI, reported at 0.2% in May and 2.3% for the past year, remains
well below expansionary historical averages and poses no threat
to overall economic health. In addition, wage pressures continue to
remain under control as unit labor costs rose less than 1% over the
prior year.
The months ahead bode well for the fixed-income markets, in our
opinion. As economic growth moderates and the economy continues to
grow at its noninflationary potential, we expect inflationary
pressures to remain nonexistent. Although we expect GDP to be
higher during the June quarter as weather-depressed sectors correct
for a weak performance in the February quarter, the momentum is
unlikely to be carried over to the latter half of 1994. Higher
interest rates will curb private domestic demand and limit growth
in the second half of 1994.
Fiscal Year in Review
For the fiscal year ended May 31, 1994, the fixed-income markets can
only be described as tumultuous. Interest rates reached historical
lows before rising dramatically. As a result of Federal Reserve Board
monetary policy, the yield curve flattened. The Mortgage Bankers
Association Refinance Index hit an all time high before plunging more
than 90%. In addition, the derivative market exhibited its volatile
nature by casting unprecedented losses.
<PAGE>
Much of the rise in interest rates has been concentrated in short-
term US Treasury securities, causing the US Treasury yield curve to
flatten. A year ago, the 2-year--30-year US Treasury yield spread
stood at 275 basis points before narrowing to 145 basis points at
the close of the fiscal year ended May 31, 1994. During this past
year, the two-year US Treasury note rose 185 basis points to 5.98%,
while the 30-year US Treasury bond increased only 55 basis points
to 7.43%. As a result of the flattening, cap risk has become a real-
ity in the adjustable rate mortgage (ARM) market as the periodic caps
inherent in virtually all ARM securities limited their coupon adjust-
ments. This in turn caused the duration of most ARMs to extend and
prices to decline. In particular, teaser ARMs (ARMs with low initial
coupons) have experienced the greatest declines. However, it is our
opinion that these setbacks are only temporary and will eventually
reverse once the ARMs coupons become fully adjusted. As such, some
of the Fund's holdings have had their coupon adjustments restrained
as a result of their periodic caps and the sudden rise in interest
rates, which in turn has negatively impacted the Fund's net asset
value. However, this negative effect is not expected to be perma-
nent, absent continued substantial increases in short-term interest
rates over the near term, and we expect the Fund's net asset value
to begin to rebound once the underlying ARMs fully reset off higher
indexed rates. Also contributing to the Fund's decline in net asset
value, although to a lesser extent, has been the relative lack of
overall market liquidity causing ARM spreads to widen. As interest
rates have risen, investors have chosen to remain on the sidelines,
causing dealers to increase their inventories as they absorb vir-
tually all supply. In an effort to entice investors back into the
market, dealers gradually have widened spreads. We view this situ-
ation as temporary. As short-term interest rates begin to stabilize,
we expect investors to look to reenter the market, causing spreads
to tighten once again.
The fiscal year closed with per share net asset value for the Fund's
Class A and Class B Shares at $9.53 and $9.53, respectively, down
$.23 and $.23, respectively, from May 31, 1993. These declines are
attributable to the aforementioned factors. For the fiscal year
ended May 31, 1994, Class A and Class B Shares had average annu-
alized yields of 3.63% and 3.23%, respectively, approximately 75
basis points--125 basis points greater than the average major commer-
cial bank six-month certificate of deposit. (However, unlike the
Fund, bank certificates of deposit are guaranteed by the Federal
Deposit Insurance Corporation.)
<PAGE>
The Fund continues to remain conservatively invested, seeking high
current market yields with minimal net asset value fluctuation
through the use of high coupon, frequently adjusting ARMs. In the
period ahead, the Fund will seek to increase its holdings of ARMs
tied to interest rate sensitive indexes such as the one-year Constant
Maturity Treasury Index and the London Interbank Offered Rate Index.
In addition, the Fund will seek to improve its liquidity value by
adding lower dollar-priced US Government-backed agency ARMs.
In Conclusion
We thank you for your continued investment in Merrill Lynch Adjust-
able Rate Securities Fund, Inc., and we look forward to reviewing our
outlook and strategy again with you in our upcoming quarterly report
to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and
Portfolio Manager
June 29, 1994
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.
Total Return
Based on a
$10,000
Investment
GRAPHIC MATERIAL APPEARS HERE. SEE APPENDIX:
GRAPHIC AND IMAGE MATERIAL, ITEM 1.
Average Annual
Total Return
<PAGE>
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/94 +2.89% -0.20%
Inception (8/2/91) through 3/31/94 +3.76 +2.58
[FN]
*Maximum sales charge is 3%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/94 +2.27% -0.70%
Inception (8/2/91) through 3/31/94 +3.21 +2.86
[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>
Performance
Summary--
Class A Shares
<CAPTION>
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
1993 9.77 9.73 -- 0.362 +3.35
1/1/94--5/31/94 9.73 9.53 -- 0.141 -0.52
------
Total $1.339
Cumulative total return as of 5/31/94: +9.27%**
<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.
</TABLE>
<PAGE>
<TABLE>
Performance
Summary--
Class B Shares
<CAPTION>
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
1993 9.77 9.73 -- 0.313 +2.83
1/1/94--5/31/94 9.73 9.53 -- 0.122 -0.71
------
Total $1.200
Cumulative total return as of 5/31/94: +7.73%**
<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>
Recent
Performance
Results
<CAPTION>
12 Month 3 Month
5/31/94 2/28/94 5/31/93 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares $9.53 $9.72 $9.76 -2.36% -1.95%
Class B Shares 9.53 9.72 9.76 -2.36 -1.95
Class A Shares--Total Return +1.28(1) -1.00(2)
Class B Shares--Total Return +0.77(3) -1.12(4)
Class A Shares--Standardized 30-day Yield 4.05%
Class B Shares--Standardized 30-day Yield 3.67%
<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 $0.355 per share ordinary income dividends.
(2) Percent change includes reinvestment of $0.094 per share ordinary income dividends.
(3) Percent change includes reinvestment of $0.306 per share ordinary income dividends.
(4) Percent change includes reinvestment of $0.082 per share ordinary income dividends.
</TABLE>
<PAGE>
<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 Constant Maturity $ 5,464,276 Bear Stearns Secured Investors, Inc. II,
Mortgage- Treasury Indexed Pass-Through 91-1-A, 7.90% due 11/25/2021 $ 5,567,262 $ 5,445,479 1.37%
Backed Obligations Federal Home Loan Mortgage Corporation:
Obliga- 12,235,245 5.537% due 8/01/2031 12,648,185 12,502,891 3.15
tions** 101,234 7.265% due 8/01/2020 103,575 100,474 0.03
3,207,604 7.732% due 5/01/2015 3,261,732 3,318,868 0.83
Federal National Mortgage Association:
2,505,006 5.31% due 11/01/2013 2,577,025 2,569,197 0.65
1,871,109 6.25% due 9/01/2015 1,924,903 1,907,946 0.48
703,611 6.628% due 10/01/2013 723,840 719,222 0.18
7,461,212 6.792% due 12/01/2021 7,615,099 7,619,763 1.92
26,351,591 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-35-A1, 5.947%
due 10/01/2022 27,010,381 26,475,127 6.66
Resolution Trust Corporation, REMIC (a):
10,000,000 92-4-B2, 5.729% due 7/25/2028 10,102,247 10,000,000 2.52
2,892,605 91-M7-A3, 6.365% due 1/25/2021 2,901,645 2,892,605 0.73
14,365,846 91-M6-A3, 6.385% due 6/25/2021 14,755,546 14,442,164 3.63
39,063,765 91-M2-A1, 6.76% due 9/25/2020 39,078,985 39,234,669 9.87
21,287,353 91-M2-A3, 6.828% due 9/25/2020 21,340,570 21,619,968 5.44
5,579,206 92-6-B4, 7.367% due 11/25/2025 5,716,682 5,561,743 1.40
14,125,630 Sears Mortgage Securities Corporation,
REMIC (a) 92-11-A1, 5.524% due
4/25/2022 14,267,924 14,010,859 3.53
Cost of Funds 10,162,396 DLJ Mortgage Acceptance Corp., REMIC (a)
Indexed 91-6-A1, 7.828% due 9/01/2021 10,397,401 10,241,789 2.58
Obligations Federal National Mortgage Association:
27,930,903 4.96% due 5/01/2018 28,694,603 27,599,224 6.94
1,411,511 5.625% due 7/01/2017 1,466,979 1,407,983 0.35
11,494,480 5.625% due 10/01/2028 11,946,177 11,458,560 2.88
11,184,110 5.625% due 2/01/2029 11,623,611 11,103,724 2.79
2,148,064 Kidder Peabody Acceptance Corporation I,
REMIC (a) 88-04-A, 6.669% due 1/01/2019 2,225,932 2,126,584 0.53
Resolution Trust Corporation, REMIC (a):
9,037,206 91-M6-A2, 5.487% due 6/25/2021 9,202,421 8,828,175 2.22
17,638,005 91-M2-A2, 7.552% due 9/25/2020 17,708,248 17,671,076 4.45
2,888,813 Ryland--First Nationwide Trust, REMIC (a)
88-1-A, 5.773% due 10/25/2018 2,982,699 2,863,536 0.72
<PAGE>
London Interbank 13,402,100 Federal Home Loan Mortgage Corporation,
Offered Rate REMIC (a) 92-1363-C, 47.00% (c) due
Indexed Obligations 8/15/2022 (d) 1,596,897 958,250 0.24
5,913,846 Federal Home Loan Mortgage Corporation,
3.766% due 2/01/2024 6,067,450 5,751,216 1.45
5,400,244 Fund America Investors Corporation II,
Pass-Through (a) 93-K-F, 6.187%
due 1/25/2023 5,400,244 5,400,244 1.36
Resolution Trust Corporation, REMIC (a):
4,242,827 91-M4-B, 5.937% due 2/25/2020 4,240,175 4,221,613 1.06
6,509,430 91-M7-B, 5.937% due 1/25/2021 6,509,430 6,631,481 1.67
15,000,000 92-C1-B, 5.937% due 8/25/2023 14,446,875 15,225,000 3.83
27,000,000 Saxon Mortgage Securities Corporation,
REMIC (a) 92-3-B, 5.551% due 10/01/2021 27,620,000 27,472,500 6.91
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 331,724,743 327,381,930 82.37
Fixed Rate 35,377,546 Capstead Mortgage Securities Corporation
Mortgage- II, REMIC (a) 93-I-A3, 12.01% (c) due
Backed 9/25/2023 (d) 505,632 420,108 0.11
Obligations** 1,003,045 Citicorp Mortgage Securities Inc., REMIC
(a) 92-12-A3, 8.00% due 3/25/2021 1,020,660 989,253 0.25
3,266,961 Collateralized Mortgage Securities Corp.,
REMIC (a) 90-5-L, 11.981% (b) due
9/20/2020 761,229 506,379 0.13
101,156,947 DLJ Mortgage Acceptance Corp., REMIC (a)
92-6-A1, 14.753% (c) due 7/25/2022 (d) 1,705,161 1,244,230 0.31
Federal National Mortgage Association,
REMIC (a):
4,496,068 91-G-46-K, 9.00% (b) due 12/25/2009 1,659,427 1,157,738 0.29
453,540 90-142-K, 10.99% (b) due 7/25/2014 140,966 19,956 0.00
4,105,287 Federal National Mortgage Association,
Trust 32-2, 8.46% (c) due 4/01/2018 (d) 3,457,655 1,275,205 0.32
8,513,834 Kidder Peabody Acceptance Corporation,
REMIC (a) 93-M1-A2, 7.15% due 4/25/2025 8,477,003 8,146,675 2.05
Prudential Home Mortgage Securities
Company, Inc., REMIC (a):
23,112,384 93-44-A2, 6.75% due 8/25/2023 23,542,600 23,061,826 5.80
42,338 92-1-A9, 13.00% (c) due 2/25/2022 80,259 24,556 0.01
29,947,399 Residential Funding Mortgage Securities I,
Inc., REMIC (a) 92-S3-A9, 14.00% (c)
due 1/01/2007 (d) 2,198,796 89,842 0.02
8,926,386 Resolution Trust Corporation, REMIC (a)
92-CHF-B, 7.15% due 12/25/2020 9,036,623 8,937,544 2.25
Sears Mortgage Securities Corp., REMIC
(a):
67,318,483 92-12-A3, 18.00% (c) due 7/25/2023 (d) 851,848 883,555 0.22
513,729 91-K-A4, 18.00% (b) due 9/25/2021 753,622 780,868 0.20
<PAGE>
Total Investments in Fixed Rate
Mortgage-Backed Obligations 54,191,481 47,537,735 11.96
Total Investments in Mortgage-Backed
Obligations 385,916,224 374,919,665 94.33
</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>
Short-Term Repurchase $ 15,800,000 Nikko Securities International, Inc.,
Securities Agreements*** purchased on 5/31/1994 to yield 4.30%
to 6/01/1994 $ 15,800,000 $ 15,800,000 3.98%
US Government 10,000,000 Federal Home Loan Mortgage Association,
& Agency 4.17% due 6/27/1994 9,969,883 9,969,883 2.51
Obligations****
Total Investments in Short-Term Securities 25,769,883 25,769,883 6.49
Total Investments $411,686,107 400,689,548 100.82
============
Liabilities in Excess of Other Assets (3,270,253) (0.82)
------------ -------
Net Assets $397,419,295 100.00%
============ =======
<PAGE>
<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.
****US Government & Agency Obligations are traded on a discount basis;
the interest rate shown is the discount rate paid at the time of purchase
by the Fund.
(a) Real Estate Mortgage Investment Conduits (REMIC).
(b) 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 amortization,
due to prepayments, reduces considerably the net interest income
earned on these securities.
(c) Represents the approximate yield to maturity.
(d) 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 May 31, 1994
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$411,686,107) (Notes 1a & 1b) $400,689,548
Cash 145,408
Receivables:
Interest $ 2,144,671
Principal paydowns 702,780
Capital shares sold 296,728 3,144,179
------------
Deferred organization expenses (Note 1g) 51,197
Prepaid registration fees and other assets (Note 1g) 74,675
------------
Total assets 404,105,007
------------
<PAGE>
Liabilities: Payables:
Capital shares redeemed 5,508,500
Dividends to shareholders (Note 1h) 521,552
Distributor (Note 2) 243,640
Investment adviser (Note 2) 169,204 6,442,896
------------
Accrued expenses and other liabilities 242,816
------------
Total liabilities 6,685,712
------------
Net Assets: Net assets $397,419,295
============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares authorized $241,816
Consist of: Class B Common Stock, $0.10 par value, 200,000,000 shares authorized 3,926,889
Paid-in capital in excess of par 427,747,212
Undistributed investment income--net 362,953
Accumulated realized capital losses--net (Note 5) (23,863,016)
Unrealized depreciation on investments--net (10,996,559)
------------
Net assets $397,419,295
============
Net Asset Class A--Based on net assets of $23,043,432 and 2,418,159 shares outstanding $ 9.53
Value: ============
Class B--Based on net assets of $374,375,863 and 39,268,886 shares outstanding $ 9.53
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended May 31, 1994
<S> <S> <C>
Investment Interest and discount earned, net of premium amortization $ 25,076,112
Income Other 217,119
(Note 1f): ------------
Total income 25,293,231
------------
<PAGE>
Expenses: Distribution fees--Class B (Note 2) 3,808,315
Investment advisory fees (Note 2) 2,710,336
Transfer agent fees--Class B (Note 2) 451,897
Accounting services (Note 2) 226,047
Printing and shareholder reports 145,025
Professional fees 87,612
Maintenance fees--Class A (Note 2) 85,730
Custodian fees 64,345
Registration fees (Note 1g) 51,643
Directors' fees and expenses 40,587
Transfer agent fees--Class A (Note 2) 28,456
Amortization of organization expenses (Note 1g) 23,565
Other 41,965
------------
Total expenses 7,765,523
------------
Investment income--net 17,527,708
------------
Realized & Realized loss on investments--net (19,663,874)
Unrealized Change in unrealized depreciation on investments--net 8,608,834
Gain (Loss) ------------
on Invest- Net Increase in Net Assets Resulting from Operations $ 6,472,668
ments--Net ============
(Notes 1f & 3):
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended May 31,
Increase (Decrease) in Net Assets: 1994 1993
<S> <S> <C> <C>
Operations: Investment income--net $ 17,527,708 $ 39,959,417
Realized loss on investments--net (19,663,874) (3,230,836)
Change in unrealized depreciation on investments--net 8,608,834 (13,586,313)
------------ ------------
Net increase in net assets resulting from operations 6,472,668 23,142,268
------------ ------------
Dividends to Investment income--net:
Shareholders Class A (1,245,307) (3,578,083)
(Note 1h): Class B (15,919,448) (36,381,334)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders (17,164,755) (39,959,417)
------------ ------------
<PAGE>
Capital Net decrease in net assets derived from capital share transactions (332,880,261) (209,712,303)
Share ------------ ------------
Transactions
(Note 4):
Net Assets: Total decrease in net assets (343,572,348) (226,529,452)
Beginning of year 740,991,643 967,521,095
------------ ------------
End of year* $397,419,295 $740,991,643
============ ============
*Undistributed investment income--net $ 362,953 $ --
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and Class A Class B
ratios have been derived from For the For the
information provided in the finan- Period Period
cial statements. August 2, August 2,
1991++ to 1991++ to
Increase (Decrease) in For the Year Ended May 31, May 31, For the Year Ended May 31, May 31,
Net Asset Value: 1994 1993 1992 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of
Operating period $ 9.76 $ 9.92 $ 10.00 $ 9.76 $ 9.92 $ 10.00
Performance: --------- --------- -------- -------- -------- ---------
Investment income--net .37 .45 .56 .32 .40 .52
Realized and unrealized loss on
investments--net (.24) (.16) (.08) (.24) (.16) (.08)
--------- --------- -------- -------- -------- ---------
Total from investment
operations .13 .29 .48 .08 .24 .44
--------- --------- -------- -------- -------- ---------
Less dividends:
Investment income--net (.36) (.45) (.56) (.31) (.40) (.52)
--------- --------- -------- -------- -------- ---------
Net asset value, end of
period $ 9.53 $ 9.76 $ 9.92 $ 9.53 $ 9.76 $ 9.92
========= ========= ======== ======== ======== =========
Total Based on net asset value
Investment per share 1.28% 2.99% 4.75%++++ 0.77% 2.48% 4.33%++++
Return:** ========= ========= ======== ======== ======== =========
<PAGE>
Ratios to Expenses, net of reimbursement
Average Net and excluding maintenance and
Assets: distribution fees .71% .66% .62%* .71% .65% .61%*
========= ========= ======== ======== ======== =========
Expenses, net of reimbursement .96% .91% .87%* 1.46% 1.40% 1.36%*
========= ========= ======== ======== ======== =========
Expenses .96% .91% .96%* 1.46% 1.40% 1.47%*
========= ========= ======== ======== ======== =========
Investment income--net 3.69% 4.79% 6.54%* 3.20% 4.15% 6.07%*
========= ========= ======== ======== ======== =========
Supplemental Net assets, end of period
Data: (in thousands) $ 23,043 $ 51,398 $ 80,411 $374,376 $689,593 $ 887,110
========= ========= ======== ======== ======== =========
Portfolio turnover 60.38% 104.71% 94.72% 60.38% 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 management investment 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 contingent
deferred sales charge. Both classes of shares have identical voting,
dividend, liquidation and other rights and the same terms and con-
ditions, except that Class A Shares bear the expenses of the on-
going account maintenance fee and have exclusive voting rights with
respect to such maintenance fee expenditures and Class B Shares bear
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.
<PAGE>
(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 deal-
ers 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 secur-
ities pursuant to repurchase agreements with a member bank of the Fed-
eral 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 secur-
ities 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 trans-
action is less than or greater than the premiums paid or received).
Written and purchased options are non-income producing
investments.
<PAGE>
(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 col-
lateral 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 real-
ized 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 pro-
vision 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.
(i) Dollar rolls--The Fund sells mortgage-backed securities for
delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity)
securities on a specific future date.
<PAGE>
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). Effective January 1,
1994, the investment advisory business of MLAM was reorganized
from a corporation to a limited partnership. Both prior to and after
the reorganization, ultimate control of MLAM was vested with
Merrill Lynch & Co., Inc. ("ML & Co."). The general partner of
MLAM is Princeton Services, Inc., an indirect wholly-owned
subsidiary of ML & Co. The limited partners are ML & Co. and
Merrill Lynch Investment Management, Inc. ("MLIM"), which is also
an indirect wholly-owned subsidiary of ML & Co. The Fund has
entered into a Distribution Agreement and a Distribution Plan with
Merrill Lynch Funds Distributor, Inc. ("MLFD" or "Distributor"),
a wholly-owned subsidiary 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
year ended May 31, 1994, MLAM earned fees of $2,710,336. The Invest-
ment 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.
<PAGE>
The Fund has adopted separate Plans of Distribution (the "Distri-
bution Plans") for Class A and Class B Shares in accordance with
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 mainte-
nance activities, and (b) an account maintenance fee and a distribu-
tion fee relating to Class B Shares, accrued daily and paid monthly,
at the annual rate of 0.25% and 0.50%, respectively, of the average
daily net assets of the Fund attributable to Class B Shares. In order
to compensate the Distributor for the services it provides and the
expenses borne by the Distributor under the Distribution Agree-
ment. 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 year ended May 31, 1994, MLFD
earned $85,730 and $3,808,315 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 year ended May 31,
1994, MLFD earned underwriting discounts of $11,772, and MLPF&S
earned dealer concessions of $49,708 on the sale of the Fund's
Class A Shares. MLPF&S also received contingent deferred sales
charges of $2,010,325 relating to Class B Share transactions during
the year.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., 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, MLFD, and/or ML & Co.
NOTES TO FINANCIAL STATEMENTS (concluded)
<PAGE>
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended May 31, 1994 were $328,517,202 and $715,564,238,
respectively.
Net realized and unrealized losses as of May 31, 1994 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $(19,663,837) $(10,996,559)
Short-term investments (37) --
------------ ------------
Total $(19,663,874) $(10,996,559)
============ ============
As of May 31, 1994, net unrealized depreciation for Federal income
tax purposes aggregated $12,835,753, of which $1,456,009 related
to appreciated securities and $14,291,762 related to depreciated
securities. The aggregate cost of investments at May 31, 1994 for
Federal income tax purposes was $413,525,301.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $332,880,261 and $209,712,303 for the years ended May 31, 1994
and May 31, 1993, respectively.
Transactions in capital shares for Class A and Class B Shares were
as follows:
Class A Shares for the Year Dollar
Ended May 31, 1994 Shares Amount
Shares sold 1,365,792 $ 13,269,165
Shares issued to shareholders
in reinvestment of dividends
to shareholders 75,693 735,836
------------ -------------
Total issued 1,441,485 14,005,001
Shares redeemed (4,289,994) (41,714,877)
------------ -------------
Net decrease (2,848,509) $ (27,709,876)
============ =============
<PAGE>
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
to shareholders 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 Year Dollar
Ended May 31, 1994 Shares Amount
Shares sold 4,768,628 $ 46,269,096
Shares issued to shareholders
in reinvestment of dividends
to shareholders 966,330 9,395,018
------------ -------------
Total issued 5,734,958 55,664,114
Shares redeemed (37,100,715) (360,834,499)
------------ -------------
Net decrease (31,365,757) $(305,170,385)
============ =============
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
to shareholders 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)
============ =============
<PAGE>
5. Capital Loss Carryforward:
At May 31, 1994, the Fund had a net capital loss carryforward of
approximately $21,580,000, all of which expires in 2002. This amount
will be available to offset like amounts of any future taxable gains.
<AUDIT-REPORT>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Adjustable Rate Securities Fund, Inc.:
We have audited the accompanying statement of assets and liabilities,
including the schedule of investments, of Merrill Lynch Adjustable
Rate Securities Fund, Inc. as of May 31, 1994, the related statements
of operations for the year then ended, and changes in net assets for
each of the years in the two-year period then ended and financial
highlights for each of the years in the two-year period then ended
and the period August 2, 1991 (commencement of operations) to May 31,
1992. 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 high-
lights based on our audits.
We conducted our audits in accordance with generally accepted audit-
ing 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 misstate-
ment. An audit includes examining, on a test basis, evidence support-
ing the amounts and disclosures in the financial statements. Our
procedures included confirmation of securities owned at May 31, 1994
by correspondence with the custodian. An audit also includes assess-
ing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial state-
ment 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
Merrill Lynch Adjustable Rate Securities Fund, Inc. as of May 31,
1994, the results of its operations, the changes in its net assets
and financial highlights for each of the respective stated periods
in conformity with generally accepted accounting principles.
Deloitte & Touche
Princeton, New Jersey
June 30, 1994
</AUDIT-REPORT>
<PAGE>
APPENDIX: GRAPHIC AND IMAGE MATERIAL
Item 1:
Total Return Based on a $10,000 Investment
A line graph depicting the growth of an investment in the Fund's
Class A and Class B Shares compared to the growth of an investment in
the Lehman Brothers Short Government Index (1-2 years) and the
Six-Month Treasury Bill Index. Beginning and ending values are:
8/2/91** 5/31/94
ML Adjustable Rate Securities
Fund, Inc.++--Class A Shares* $ 9,700 $10,599
ML Adjustable Rate Securities
Fund, Inc.++--Class B Shares $10,000 $10,678
Lehman Brothers Short
Government Index (1-2 years)++++ $10,000 $11,713
Six-Month Treasury Bill Index++++++ $10,000 $11,145
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of Operations.
++Merrill Lynch Adjustable Rate Securities Fund, Inc. invests
primarily in adjustable rate securities, consisting
principally of morgage-backed and asset-backed securities.
++++This unmanaged index is comprised of all US Goverment
Agency and Treasury securities with maturities of one to
two years.
++++++This unmanaged Index is comprised of US Treasury bills
maturing in up to six months.
