MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Annual Report
May 31, 1995
This report is not authorized for use as an offer of sale or a
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
<PAGE>
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
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
90 Washington Street, 12th Floor
New York, New York 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
(800) 637-3863
DEAR SHAREHOLDER
Economic Environment
US economic growth, after rising sharply in fourth quarter 1994,
contracted abruptly in the first quarter of 1995 as consumer
retrenchment from fourth quarter 1994 spending led the decline.
Gross domestic product (GDP), which rose at an above-trend rate of
5.1% in fourth quarter 1994, rose 2.7% in the first quarter of 1995.
Furthermore, recent economic data indicates that second quarter GDP
is likely to be lower, with some economists forecasting negative GDP
growth.
<PAGE>
Much of the slowdown is attributable to a marked decline in consumer
spending. Retail sales, which rose at an annualized 6.4% rate in the
fourth quarter of 1994, were negative in two of the three previous
months. In addition, higher interest rates as a result of tighter
monetary policy forced consumers to postpone home buying decisions.
New home sales in the first quarter fell 9.9% from their fourth
quarter pace, while existing home sales fell 7.2% over the same
period. More importantly, new housing starts, an indicator of future
housing trend growth, declined substantially in 1995 as first
quarter starts fell 14.1% from their fourth quarter 1994 pace.
The US labor market also deteriorated rapidly. After increasing by a
monthly average of 292,000 in 1994, payroll employment reportedly
dropped by 101,000 workers in May, following a 7,000 worker decline
in April. In addition, hours worked fell 0.3% while average hourly
earnings fell by 0.2%, further indication of a weakening economy.
The index of leading economic indicators, a gauge of future economic
activity, fell 0.6% in April. The drop in April marked the third
consecutive monthly decline and the first time since September 1992
that the index declined for three consecutive months. Historically,
three consecutive monthly declines in the index signal a recession.
While not an exact forecaster of recessions, the index accurately
predicted all nine US postwar recessions. In addition, the National
Association of Purchasing Managers Index (NAPM), a gauge of future
business activity, fell sharply in May to a four-year low of 46.1
from 52.0. According to NAPM, an index level below 50.0 is
indicative of a contraction in the manufacturing sector, while an
index level below 44.0 is indicative of a contraction in the entire
economy.
While there is little doubt economic growth has weakened in 1995, it
is unclear whether the US economy is pausing temporarily or headed
towards a recession. The precipitous decline of interest rates thus
far in 1995 as well as the recent inversion of the US Treasury yield
curve involving short-term interest rates, indicates investors'
belief of an impending recession accompanied by an easing of
monetary policy. While this may be the case, two factors bear
watching. The dramatic weakening of the US dollar in 1995 could spur
US export growth and raise overall economic activity because US
goods and services would become cheaper abroad. In addition,
consumer confidence remains high. Since July 1990, consumer
sentiment was higher only in December 1994 and April 1995. Despite
signs of a slowing in economic growth, consumers still continue to
feel secure about their jobs, their family income and the immediate
future of the economy.
<PAGE>
Fiscal Year in Review
The Fund's fiscal year was marked by a period of extreme interest
rate volatility. After rising sharply throughout 1994, amid stronger
economic growth and tighter monetary policy, interest rates began to
fall in 1995 as signals of economic weakness became apparent.
Throughout 1994 the Federal Reserve Board tightened monetary policy
by pushing interest rates higher on six different occasions,
ultimately causing short-term interest rates to peak in December as
the yield of the one-year Treasury bill rose to 7.33%. As short-term
interest rates rose 350 basis points (3.50%) in 1994, coupon
adjustments of adjust-able rate mortgage securities (ARMS) could not
keep pace because their interim caps limited their adjustments.
Therefore, ARMS prices declined as investors demanded wider yield
spreads of ARMS securities to compensate for lagging coupon
adjustments. During this period, we took a proactive stance to limit
losses. First, we improved the Fund's liquidity value by more than
doubling our holdings of US Government agency-backed obligations.
Second, to minimize the limiting effects of interim interest rate
caps in a rising interest rate environment, we sought higher coupon
and quicker resetting ARMS.
As hints of weakening economic activity became evident in January
1995, US interest rates began to fall. The decline in interest rates
culminated with the yield of the one-year US Treasury bill falling
to 5.37% at the close of the May quarter. As a result of falling
interest rates, interim cap risk became less of a concern, causing
ARMS to perform exceptionally well. Yield spreads to their
respective indexes on ARMS narrowed and prices rose. However, the
decline in interest rates in 1995 brought about a renewed concern of
pickup in prepayments for ARMS, as fixed-mortgage rates fell below
fully indexed adjustable mortgage rates. While a pickup in
prepayments is likely and will affect yields on ARMS because of
their premium prices, the effect upon the Fund's yield should not be
significant because we purchased most of our ARMS at lower dollar
prices. Nevertheless, ARMS remain attractive. After peaking in 1994,
originations on ARMS have been declining because of the overall drop
in interest rates and the flat yield curve environment where yield
ranges across all maturities are narrow. Therefore, limited supply
should limit downside spread risk because of normal supply and
demand constraints. In addition, the current flat yield curve
environment has left few comparable investment alternatives in terms
of yield on a duration adjusted basis.
Our investment strategy will continue to focus on enhancing yield,
seeking to minimize net asset value volatility while preserving the
Fund's quality and liquidity value. Despite narrowing this year, we
feel spreads are still attractive at current levels. However, should
spreads narrow further we will begin to lock in gains. In addition,
should the yield curve begin to steepen, we will look to take
advantage of the spread differentials and roll down effects by
moving slightly out of the yield curve.
<PAGE>
Despite high interest rate volatility during the quarter ended May
31, 1995, net asset value of the Fund's shares rose modestly as
their yields also increased. (For complete performance information,
see pages 4 to 7 of this report to shareholders.)
In Conclusion
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 shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
June 30, 1995
PROXY RESULTS
During the year ended May 31, 1995, Merrill Lynch Adjustable Rate
Securities Fund, Inc. shareholders voted on the following proposals.
Proposals 1, 2 and 4 were approved at a special shareholders'
meeting on September 27, 1994. Proposal 3 was passed at a special
shareholders' meeting on January 31, 1995. The description of each
proposal and number of shares voted are as follows:
<PAGE>
<TABLE>
<CAPTION>
Shares Voted Shares Voted
For Without Authority
<S> <S> <C> <C>
1. To elect the Fund's Board of Directors: Joe Grills 35,531,362 1,177,981
Walter Mintz 35,526,783 1,182,560
Melvin R. Seiden 35,528,881 1,180,462
Stephen B. Swensrud 35,528,881 1,180,462
Harry Woolf 35,528,487 1,180,856
Arthur Zeikel 35,522,428 1,186,915
<CAPTION>
Shares Voted Shares Voted Shares Voted
For Against Abstain
<S> <C> <C> <C>
2. To select Deloitte & Touche LLP as the Fund's independent auditors. 34,782,965 453,272 1,473,106
3. To approve certain changes to the Fund's fundamental investment restrictions. 17,160,382 954,326 1,710,576
4. To amend the Fund's articles of incorporation to implement the Merrill Lynch
Select Pricing SM System. 31,766,496 1,954,597 2,988,250
</TABLE>
PERFORMANCE DATA
About Fund
Performance
Since October 21, 1994, investors have been able to purchase shares
of the Fund through the Merrill Lynch Select Pricing SM System,
which offers four pricing alternatives:
* Class A Shares incur a maximum initial sales charge (front-end
load) of 4% and bear no ongoing distribution or account maintenance
fees. Class A Shares are available only to eligible investors, as
detailed in the Fund's prospectus. If you were a Class A shareholder
prior to October 21, 1994, your Class A Shares were redesignated to
Class D Shares on October 21, 1994, which, in the case of certain
eligible investors, were simultaneously exchanged for Class A
Shares.
* Class B Shares are subject to a maximum contingent deferred sales
charge of 4% if redeemed during the first year, decreasing 1% each
year thereafter to 0% after the fourth year. In addition, Class B
Shares are subject to a distribution fee of 0.50% and an account
maintenance fee of 0.25%. These shares automatically convert to
Class D Shares after 10 years.
* Class C Shares are subject to a distribution fee of 0.55% and an
account maintenance fee of 0.25%. In addition, Class C Shares are
subject to a 1% contingent deferred sales charge if redeemed within
one year of purchase.
<PAGE>
* Class D Shares incur a maximum initial sales charge of 4% and an
account maintenance fee of 0.25% (but no distribution fee).
Performance data for the Fund's Class B and Class D Shares are
presented in the "Total Return Based on a $10,000 Investment,"
"Performance Summary" and "Average Annual Total Return" tables on
pages 6 and 7. Data for Class A and Class C Shares are presented in
the "Aggregate Total Return" table on page 7. Data for all of the
Fund's shares are presented in the "Recent Performance Results"
table on page 5.
The "Recent Performance Results" table shows investment results
before the deduction of any sales charges for Class B and Class D
Shares for the 12-month and 3-month periods ended May 31, 1995 and
for Class A and Class C Shares for the since inception and 3-month
periods ended May 31, 1995. All data in this table assume imposition
of the actual total expenses incurred by each class of shares during
the relevant period.
None of the past results shown should 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. Dividends paid to each class
of shares will vary because of the different levels of account
maintenance, distribution and transfer agency fees applicable to
each class, which are deducted from the income available to be paid
to shareholders.
<TABLE>
Recent
Performance
Results
<CAPTION>
12 Month 3 Month
5/31/95 2/28/95 5/31/94++ % Change++ % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.55 $9.43 $9.46 +0.95% +1.27%
Class B Shares* 9.56 9.44 9.53 +0.31 +1.27
Class C Shares* 9.56 9.44 9.46 +1.06 +1.27
Class D Shares* 9.55 9.43 9.53 +0.21 +1.27
Class A Shares--Total Return* +4.85(1) +2.92(2)
Class B Shares--Total Return* +5.48(3) +2.83(4)
Class C Shares--Total Return* +4.47(5) +2.71(6)
Class D Shares--Total Return* +5.91(7) +2.85(8)
Class A Shares--Standardized 30-day Yield 6.03%
Class B Shares--Standardized 30-day Yield 5.51%
Class C Shares--Standardized 30-day Yield 5.46%
Class D Shares--Standardized 30-day Yield 5.77%
<PAGE>
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
++Investment results shown for Class A and Class C Shares are since
inception (10/21/94).
(1)Percent change includes reinvestment of $0.338 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.154 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.465 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.135 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.294 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.134 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.514 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.148 per share ordinary
income dividends.
</TABLE>
PERFORMANCE DATA (concluded)
Total Return
Based on a
$10,000
Investment
A line graph depicting the growth of an investment in the Fund's
Class B and Class D Shares compared to 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** 5/31/95
ML Adjustable Rate Securities
Fund, Inc.++--Class B Shares* $10,000 $11,268
ML Adjustable Rate Securities
Fund, Inc.++--Class D Shares* $9,600 $11,109
Lehman Brothers Short
Government Index (1-2 years)++++ $10,000 $12,532
Six-Month Treasury Bill Index++++++ $10,000 $11,750
<PAGE>
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of Operations
++ML Adjustable Rate Securities Fund, Inc. invests primarily in
adjustable rate securities, consisting principally of mortgage-
backed and asset-backed securities.
++++This unmanaged Index is comprised of all US Government 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.
Past performance is not predictive of future performance.
Average Annual
Total Return
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/95 +2.48% -1.43%
Inception (8/2/91) through 3/31/95 +3.01 +2.76
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to
0% after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 3/31/95 +2.91% -1.21%
Inception (8/2/91) through 3/31/95 +3.53 +2.38
<PAGE>
[FN]
*Maximum sales charge is 4%. On 10/21/94, Class A Shares were
redesignated to Class D Shares.
**Assuming maximum sales charge.
Aggregate
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (10/21/94) through 3/31/95 +2.84% -1.27%
[FN]
*Maximum sales charge is 4%. On 10/21/94, Class A Shares were
redesignated to Class D Shares.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (10/21/94) through 3/31/95 +2.49% +1.49%
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
<TABLE>
Performance
Summary--
Class B Shares
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed 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
1994 9.73 9.33 -- 0.386 -0.14
1/1/95--5/31/95 9.33 9.56 -- 0.201 +4.89
------
Total $1.665
Cumulative total return as of 5/31/95: +13.64%**
<PAGE>
<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>
<TABLE>
Performance
Summary--
Class D Shares***
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed 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
1994 9.73 9.32 -- 0.435 +0.26
1/1/95--5/31/95 9.32 9.55 -- 0.219 +5.09
------
Total $1.852
Cumulative total return as of 5/31/95: +15.72%**
<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.
***As a result of the implementation of the Merrill Lynch Select
Pricing SM System, Class A Shares of the Fund outstanding prior to
October 21, 1994 were redesignated to Class D Shares.
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
Face Value Percent of
Index Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Adjustable Rate* Constant $ 4,113,070 Bear Stearns Secured Investors,
Mortgage-Backed Maturity Inc. II, Pass-Through 91-1-A, 8.321%
Obligations** Treasury due 11/25/2021 $ 4,190,354 $ 4,133,635 1.87%
Indexed Federal Home Loan Mortgage Corporation:
Obligations 2,818,588 #645073, 7.809% due 5/01/2015 2,866,151 2,882,006 1.30
4,943,717 #606108, 7.552% due 9/01/2019 5,045,554 5,169,274 2.34
3,460,364 #755194, 7.099% due 3/01/2020 3,470,052 3,452,267 1.56
67,270 #785173, 8.163% due 8/01/2020 68,825 67,322 0.03
6,302,611 #845139, 7.689% due 3/01/2022 6,400,287 6,494,651 2.94
8,882,145 #845535, 7.313% due 10/01/2023 9,055,911 9,234,655 4.18
14,463,701 #845889, 5.597% due 9/01/2024 14,593,336 14,949,536 6.76
10,708,447 #755170, 7.516% due 8/01/2031 11,069,857 10,987,830 4.97
Federal National Mortgage Association:
656,306 #21041, 7.61% due 10/01/2013 675,175 656,798 0.30
2,214,770 #21059, 7.60% due 11/01/2013 2,278,445 2,226,531 1.01
1,625,153 #20293, 7.88% due 9/01/2015 1,671,876 1,626,372 0.74
6,288,582 #142069, 6.808% due 12/01/2021 6,418,284 6,390,772 2.89
6,285,394 #200009, 7.601% due 2/01/2023 6,308,868 6,438,601 2.91
13,321,739 #291252, 5.744% due 8/01/2024 13,494,694 13,796,326 6.24
18,525,108 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-35-A1,
7.793% due 10/01/2022 18,988,236 19,063,494 8.62
5,579,390 Resolution Trust Corporation, REMIC
(a) 92-6-B4, 7.442% due 11/25/2025 5,716,866 5,616,005 2.54
Cost of Funds 6,835,342 DLJ Mortgage Acceptance Corp., REMIC
Indexed (a) 91-6-A1, 7.811% due 9/01/2021 6,952,290 6,822,526 3.09
Obligations 1,203,446 Resolution Trust Corporation, REMIC
(a) 91-M3-A, 7.864% due 2/25/2020 1,161,326 1,162,830 0.53
London Federal National Mortgage Association:
Interbank 6,037,505 #307622, 7.595% due 4/01/2023 6,214,810 6,246,931 2.82
Offered Rate 4,652,938 #291256, 6.74% due 8/01/2024 4,743,755 4,815,791 2.18
Indexed 9,629,831 #305729, 6.378% due 2/01/2025 9,921,333 9,954,838 4.50
Obligations Resolution Trust Corporation, REMIC
(a):
6,510,700 91-M7-B, 8.125% due 1/25/2021 6,510,700 6,571,738 2.97
15,004,156 92-C1-B, 8.125% due 8/25/2023 14,451,077 15,304,239 6.92
12,000,000 Saxon Mortgage Securities Corporation,
REMIC (a) 92-3-B, 6.805% due
11/25/2022 12,270,781 12,090,000 5.47
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 174,538,843 176,154,968 79.68
<PAGE>
Derivative 27,162,904 Capstead Mortgage Securities Corporation
Mortgage-Backed II, REMIC (a) 93-I-A3, 0.50% due
Obligations** 9/25/2023 378,828 226,672 0.10
- --Interest 85,870,075 DLJ Mortgage Acceptance Corp., REMIC
Only (b) (a) 92-6-A1, 0.64% due 7/25/2022 1,349,776 1,279,464 0.58
111,736 Federal Home Loan Mortgage Corporation,
REMIC (a)(c) 92-1363-C, 265.793% due
8/15/2022 1,561,278 419,010 0.19
1,512 Federal National Mortgage Association,
REMIC (a) 90-142-K, 1,163% due 7/25/2014 75,022 9,221 0.00
304 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-1-A9,
42,989% due 2/25/2022 47,477 72,490 0.03
25,559,664 Residential Funding Mortgage Securities
I, Inc., REMIC (a) 92-S3-A9, 0.50%
due 1/25/2007 2,060,013 71,874 0.03
Sears Mortgage Securities Corp.,
REMIC (a):
6,169 91-K-A4, 5,774% due 9/25/2021 842,221 680,049 0.31
55,174,079 92-12-A3, 0.52% due 7/25/2022 672,377 482,773 0.22
Total Investments in Derivative
Mortgage-Backed Obligations--
Interest Only 6,986,992 3,241,553 1.46
Fixed Rate 8,419,764 Kidder Peabody Acceptance Corporation,
Mortgage-Backed REMIC (a) 93-M1-A2, 7.15% due
Obligations** 4/25/2025 8,383,340 8,325,041 3.77
7,093,656 Resolution Trust Corporation, REMIC
(a) 92-CHF-B, 7.15% due 12/25/2020 7,180,093 7,060,404 3.19
Total Investments in Fixed Rate
Mortgage-Backed Obligations 15,563,433 15,385,445 6.96
Total Investments in Mortgage-Backed
Obligations 197,089,268 194,781,966 88.10
Short-Term Repurchase 14,600,000 Nikko Securities International, Inc.,
Securities Agreements*** purchased on 5/31/1995 to yield 6.17%
to 6/01/1995 14,600,000 14,600,000 6.61
10,000,000 PaineWebber Group, Inc., purchased on
5/31/1995 to yield 6.17% to 6/01/1995 10,000,000 10,000,000 4.52
Total Short-Term Securities 24,600,000 24,600,000 11.13
Total Investments $221,689,268 219,381,966 99.23
============
Other Assets Less Liabilities 1,698,576 0.77
------------ -------
Net Assets $221,080,542 100.00%
============ =======
<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.
(a)Real Estate Mortgage Investment Conduits (REMIC).
(b)Securities which receive some or all of the interest portion of
the underlying collateral and little or no principal. Interest only
securities have either a nominal or a notional amount of principal.
(c)Adjustable rate coupon that resets inversely to changes in the
London Interbank Offered Rate.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of May 31, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$221,689,268) (Note 1a) $219,381,966
Receivables:
Capital shares sold $ 1,904,767
Interest 1,368,415
Principal paydowns 890,213 4,163,395
------------
Deferred organization expenses (Note 1g) 27,632
Prepaid registration fees and other assets (Note 1g) 81,940
------------
Total assets 223,654,933
------------
Liabilities: Payables:
Capital shares redeemed 1,600,564
Dividends to shareholders (Note 1h) 454,952
Distributor (Note 2) 134,911
Investment adviser (Note 2) 94,771 2,285,198
------------
Accrued expenses and other liabilities 289,193
------------
Total liabilities 2,574,391
------------
Net Assets: Net assets $221,080,542
============
<PAGE>
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares
Consist of: authorized $ 3,607
Class B Common Stock, $0.10 par value, 200,000,000 shares
authorized 2,117,347
Class C Common Stock, $0.10 par value, 100,000,000 shares
authorized 14,745
Class D Common Stock, $0.10 par value, 200,000,000 shares
authorized 177,904
Paid-in capital in excess of par 254,124,404
Undistributed investment income--net 80,308
Accumulated realized capital losses on investments--net (Note 5) (33,130,471)
Unrealized depreciation on investments--net (2,307,302)
------------
Net assets . $221,080,542
============
Net Asset Class A--Based on net assets of $344,607 and 36,067 shares
Value: outstanding $ 9.55
============
Class B--Based on net assets of $202,333,797 and 21,173,475
shares outstanding $ 9.56
============
Class C--Based on net assets of $1,409,236 and 147,451 shares
outstanding $ 9.56
============
Class D--Based on net assets of $16,992,902 and 1,779,040 shares
outstanding $ 9.55
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended May 31, 1995
<S> <S> <C>
Investment Interest and discount earned, net of premium amortization $ 18,944,393
Income (Note 1f):
<PAGE>
Expenses: Account maintenance and distribution fees--Class B (Note 2) 2,051,491
Investment advisory fees (Note 2) 1,463,526
Transfer agent fees--Class B (Note 2) 324,267
Professional fees 159,271
Printing and shareholder reports 156,492
Accounting services (Note 2) 119,474
Registration fees (Note 1g) 84,290
Directors' fees and expenses 49,070
Account maintenance fees--Class D (Note 2) 46,862
Custodian fees 37,663
Amortization of organization expenses (Note 1g) 23,565
Transfer agent fees--Class D (Note 2) 19,367
Pricing fees 2,607
Account maintenance and distribution fees--Class C (Note 2) 1,591
Transfer agent fees--Class A (Note 2) 265
Transfer agent fees--Class C (Note 2) 258
Other 21,327
------------
Total expenses 4,561,386
------------
Investment income--net 14,383,007
------------
Realized & Realized loss on investments--net (9,607,152)
Unrealized Change in unrealized depreciation on investments--net 8,689,257
Loss on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 13,465,112
- --Net (Notes 1c, ============
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: 1995 1994
<S> <S> <C> <C>
Operations: Investment income--net $ 14,383,007 $ 17,527,708
Realized loss on investments--net (9,607,152) (19,663,874)
Change in unrealized depreciation on investments--net 8,689,257 8,608,834
------------ ------------
Net increase in net assets resulting from operations 13,465,112 6,472,668
------------ ------------
Dividends to Investment income--net:
Shareholders Class A (14,494) (1,245,307)
(Notes 1h): Class B (13,293,732) (15,919,448)
Class C (11,227) --
Class D (1,017,584) --
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (14,337,037) (17,164,755)
------------ ------------
<PAGE>
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (175,466,828) (332,880,261)
(Note 4): ------------ ------------
Net Assets: Total decrease in net assets (176,338,753) (343,572,348)
Beginning of year 397,419,295 740,991,643
------------ ------------
End of year* $221,080,542 $397,419,295
============ ============
<FN>
*Undistributed investment income--net $ 80,308 $ 362,953
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A Class B
For the For the
The following per share data and ratios Period Period
have been derived from information provided Oct. 21, Aug. 2,
in the financial statements. 1994++ to For the Year 1991++ to
May 31, Ended May 31, May 31,
Increase (Decrease) in Net Asset Value: 1995 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.46 $ 9.53 $ 9.76 $ 9.92 $ 10.00
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .36 .46 .32 .40 .52
Realized and unrealized gain (loss) on
investments--net .09 .04 (.24) (.16) (.08)
-------- -------- -------- -------- --------
Total from investment operations .45 .50 .08 .24 .44
-------- -------- -------- -------- --------
Less dividends from investment income--net (.36) (.47) (.31) (.40) (.52)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.55 $ 9.56 $ 9.53 $ 9.76 $ 9.92
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 4.85%+++ 5.48% .77% 2.48% 4.33%+++
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses, net of reimbursement and
Net Assets: excluding account maintenance and
distribution fees .87%* .84%* .71% .65% .61%*
======== ======== ======== ======== ========
Expenses, net of reimbursement .87%* 1.59%* 1.46% 1.40% 1.36%*
======== ======== ======== ======== ========
Expenses .87%* 1.59%* 1.46% 1.40% 1.47%*
======== ======== ======== ======== ========
Investment income--net 6.18%* 4.88%* 3.20% 4.15% 6.07%*
======== ======== ======== ======== ========
<PAGE>
Supplemental Net assets, end of period (in thousands) $ 345 $202,334 $374,376 $689,593 $887,110
Data: ======== ======== ======== ======== ========
Portfolio turnover 102.55% 102.55% 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>
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class C Class D
For the For the
The following per share data and ratios Period Period
have been derived from information provided Oct. 21, Aug. 2,
in the financial statements. 1994++ to For the Year 1991++ to
May 31, Ended May 31, May 31,
Increase (Decrease) in Net Asset Value: 1995 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.46 $ 9.53 $ 9.76 $ 9.92 $ 10.00
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .31 .51 .37 .45 .56
Realized and unrealized gain (loss) on
investments--net .10 .03 (.24) (.16) (.08)
-------- -------- -------- -------- --------
Total from investment operations .41 .54 .13 .29 .48
-------- -------- -------- -------- --------
Less dividends from investment income--net (.31) (.52) (.36) (.45) (.56)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.56 $ 9.55 $ 9.53 $ 9.76 $ 9.92
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 4.47%+++ 5.91% 1.28% 2.99% 4.75%+++
Return:** ======== ======== ======== ======== ========
<PAGE>
Ratios to Average Expenses, net of reimbursement and
Net Assets: excluding account maintenance and
distribution fees .88%* .83%* .71% .66% .62%*
======== ======== ======== ======== ========
Expenses, net of reimbursement 1.68%* 1.08%* .96% .91% .87%*
======== ======== ======== ======== ========
Expenses 1.68%* 1.08%* .96% .91% .96%*
======== ======== ======== ======== ========
Investment income--net 5.51%* 5.44%* 3.69% 4.79% 6.54%*
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in
Data: thousands) $ 1,409 $ 16,993 $ 23,043 $ 51,398 $ 80,411
======== ======== ======== ======== ========
Portfolio turnover 102.55% 102.55% 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
diversified, open-end management investment company. The Fund offers
four classes of shares under the Merrill Lynch Select Pricing SM
System. Shares of Class A and Class D are sold with a front-end
sales charge. Shares of Class B and Class C may be subject to a
contingent deferred sales charge. All classes of shares have
identical voting, dividend, liquidation and other rights and the
same terms and conditions, except that Class B, Class C and Class D
Shares bear certain expenses related to the account maintenance of
such shares, and Class B and Class C Shares also bear certain
expenses related to the distribution of such shares. Each class has
exclusive voting rights with respect to matters relating to its
account maintenance and 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 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) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Options--The Fund is authorized to purchase and write covered call
and put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent 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 the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing
investments.
<PAGE>
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and related options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. 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.
NOTES TO FINANCIAL STATEMENTS (continued)
(e) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment 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
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
discount 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.
(j) Reclassification--Generally accepted accounting principles
require that certain differences between undistributed net
investment income for financial reporting and tax purposes, if
permanent, be reclassified to accumulated net realized capital
losses and paid-in capital. Accordingly, current year's permanent
book/tax differences of $38,785 have been reclassified from
undistributed net investment income to accumulated net realized
capital losses and paid-in capital. These reclassifications have no
effect on net assets or net asset values per share.
<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"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
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. 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.
Pursuant to the distribution plans ("the Distribution Plans")
adopted by the Fund in accordance with Rule 12b-1 under the
Investment Company Act of 1940, the Fund pays the Distributor
ongoing account maintenance and distribution fees. The fees are
accrued daily and paid monthly at annual rates based upon the
average daily net assets of the shares as follows:
Account
Maintenance Distribution
Fee Fee
Class B 0.25% 0.50%
Class C 0.25% 0.55%
Class D 0.25% --
Pursuant to a sub-agreement with the Distributor, Merrill Lynch,
Pierce, Fenner & Smith Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
<PAGE>
For the year ended May 31, 1995, MLFD earned underwriting discounts
and MLPF&S earned dealer concessions on sales of the Fund's Class A
and Class D Shares as follows:
MLFD MLPF&S
Class A $ 7 $ 84
Class D $4,133 $25,380
For the year ended May 31, 1995, MLPF&S received contingent deferred
sales charges of $672,278 and $1,343 relating to transactions in
Class B and Class C Shares, respectively.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), 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 MLAM, PSI, MLPF&S, MLFDS, ML & Co., and/or MLFD.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended May 31, 1995 were $276,876,698 and $440,089,628,
respectively.
Net realized and unrealized losses as of May 31, 1995 were as
follows:
Realized Unrealized
Losses Losses
Long-term investments $ (9,607,152) $ (2,307,302)
------------ -------------
As of May 31, 1995, net unrealized depreciation for Federal income
tax purposes aggregated $2,686,488, of which $2,328,872 related to
appreciated securities and $5,015,360 related to depreciated
securities. The aggregate cost of investments at May 31, 1995 for
Federal income tax purposes was $222,068,454.
<PAGE>
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $175,466,828 and $332,880,261 for the years ended May 31, 1995
and May 31, 1994, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Period Dollar
October 21, 1994++ to May 31, 1995 Shares Amount
Shares sold 68,974 $ 651,499
Shares issued to shareholders in
reinvestment of dividends 60 570
------------ -------------
Total issued 69,034 652,069
Shares redeemed (32,967) (310,911)
------------ -------------
Net increase 36,067 $ 341,158
============ =============
[FN]
++Commencement of Operations.
Class B Shares for the Year Dollar
Ended May 31, 1995 Shares Amount
Shares sold 3,506,784 $ 33,206,006
Shares issued to shareholders in
reinvestment of dividends 809,890 7,574,701
------------ -------------
Total issued 4,316,674 40,780,707
Automatic conversion of shares (364) (3,468)
Shares redeemed (22,411,721) (211,944,078)
------------ -------------
Net decrease (18,095,411) $(171,166,839)
============ =============
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 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)
============ =============
<PAGE>
Class C Shares for the Period Dollar
October 21, 1994++ to May 31, 1995 Shares Amount
Shares sold 231,275 $ 2,187,668
Shares issued to shareholders in
reinvestment of dividends 794 7,491
------------ -------------
Total issued 232,069 2,195,159
Shares redeemed (84,618) (795,090)
------------ -------------
Net increase 147,451 $ 1,400,069
============ =============
[FN]
++Commencement of Operations.
NOTES TO FINANCIAL STATEMENTS (concluded)
Class D Shares for the Year Ended Dollar
May 31, 1995 Shares Amount
Shares sold 403,735 $ 3,830,957
Automatic conversion of shares 364 3,468
Shares issued to shareholders in
reinvestment of dividends 65,091 614,664
------------ -------------
Total issued 469,190 4,449,089
Shares redeemed (1,108,309) (10,490,305)
------------ -------------
Net decrease (639,119) $ (6,041,216)
============ =============
Class D Shares for the Year Ended Dollar
May 31, 1994 Shares Amount
Shares sold 1,365,792 $ 13,269,165
Shares issued to shareholders in
reinvestment of dividends 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>
As a result of the implementation of the Merrill Lynch Select
Pricing SM System, Class A Shares of the Fund outstanding prior to
October 21, 1994, have been redesignated Class D Shares. There were
2,010,429 shares redesignated, amounting to $21,918,414.
5. Capital Loss Carryforward:
At May 31, 1995, the Fund had a net capital loss carryforward of
approximately $24,866,000, of which $20,978,000 expires in 2002 and
$3,888,000 expires in 2003. 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, 1995, 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
three-year period then ended and the period August 2, 1991
(commencement of operations) to May 31, 1992. These financial
statements and the financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion
on these financial statements and the 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 the 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 May 31,
1995 by correspondence with the custodian and brokers. 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.
<PAGE>
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,
1995, the results of its operations, the changes in its net
assets,and the financial highlights for each of the respective
stated periods in conformity with generally accepted accounting
principles.
Deloitte & Touche LLP
Princeton, New Jersey
June 30, 1995
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
None of the ordinary income distributions paid daily by Merrill
Lynch Adjustable Rate Securities Fund, Inc. during the fiscal year
ended May 31, 1995 qualify for the dividends-received deduction for
corporations. Additionally, there were no long-term capital gains
distributed during the year.
The law varies in each state as to whether and what percentage of
dividend income attributable to Federal Obligations is exempt from
state income tax. We recommend that you consult your tax adviser to
determine if any portion of the dividends you received is exempt
from state income tax.
Listed below are the percentages of total assets of the Fund
invested in Federal Obligations as of the end of each quarter of the
fiscal year:
For the Quarter Ended Federal Obligations*
August 31, 1994 2.80%
November 30, 1994 10.09%
February 28, 1995 10.83%
May 31, 1995 0.00%
Of the Fund's dividends paid daily to shareholders from ordinary
income during the fiscal year ended May 31, 1995, 8.54% was
attributable to Federal Obligations. In calculating the foregoing
percentage, Fund expenses have been allocated on a pro rata basis.
Please retain this information for your records.
<PAGE>
[FN]
* For purposes of this calculation, Federal Obligations include US
Treasury Notes, US Treasury Bills and US Treasury Bonds. Also
included are obligations issued by the following agencies: Banks for
Cooperatives, Federal Intermediate Credit Banks, Federal Land Banks,
Federal Home Loan Banks, and the Student Loan Marketing Association.
Repurchase Agreements are not included in this calculation.
