MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Annual Report
May 31, 1996
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.Statements and other information herein are as datedand are
subject to change.
<PAGE>
Merrill Lynch
Adjustable Rate
Securities Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
MERRILL LYNCH ADJUSTABLE RATE SECURITIES FUND, INC.
Officers and
Directors
Arthur Zeikel, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, 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
Ira P. Shapiro, Secretary
<PAGE>
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
The US economy has reawakened. After exhibiting lackluster growth in
1995, economic activity increased significantly in 1996. Gross
domestic product (GDP) was reported to have risen 2.3% in the first
calendar quarter of 1996 after reaching a revised 0.5% in the fourth
quarter of 1995. Much of the strength in the first quarter was
attributable to a surge in housing demand as well as a jump in
consumer spending. This strength, which pushed interest rates
higher, has carried over into the second quarter of 1996. As a
result, second quarter GDP is expected to be reported even higher.
The demand for housing is strong. For the first four months of 1996,
new home sales rose 24.5% as compared to the same period in 1995,
despite rising mortgage rates and the effects of a severe winter. In
addition, for the three months ended April 30, 1996, existing home
sales rose 29.3% on an annualized basis as compared to the three-
month period ended January 31, 1996. Although the current demand for
housing has exceeded expectations, it is anticipated higher mortgage
rates will lessen housing activity in the latter half of 1996. In
spite of consumer indebtedness reaching near all-time highs,
consumer spending rose sharply in the first quarter of 1996. After
rising 1.4% in the fourth quarter of 1995, real consumer spending
jumped 3.5% in the first quarter of 1996, sparking a jump in the
consumer confidence index to a six-year high in April.
Increases in job growth in 1996 have led to fears of higher
inflation in response to increased wage pressures. In 1995, the US
economy created an average of 185,000 new jobs per month. However,
through May 1996, non-farm payrolls have increased by 20% to an
average of 222,000 new jobs.
<PAGE>
Although wage growth is running slightly higher for the first five
months of 1996 versus all of 1995 (3.5% and 2.9%, respectively) and
energy prices are higher, the underlying core rate of inflation has
been well contained. Through April 1996, the core consumer price
index rose at a 2.9% rate versus 3.0% for all of 1995. More
importantly, there is minimal pressure at the wholesale level as
wholesale inflation actually decelerated. The core producer price
index rose at just a 0.4% rate through April 1996 after rising 2.6%
in 1995.
The sudden strength in economic activity has led to a dramatic
change in investor perception over the future direction of interest
rates. After beginning the year with the belief the US economy was
headed toward recession, investors expected that the Federal Reserve
Board would continue to lower interest rates. However, with the rise
in economic activity, investors now anticipate that the Federal
Reserve Board will need to raise interest rates to stem inflation
concerns resulting from an overheating economy. While we believe GDP
growth is likely to be stronger in the second quarter of 1996,
largely in response to increased production levels and a rebuilding
of inventories, we do not anticipate this as being the start of a
long-term cycle. Higher interest rates should begin to curb growth
in the latter half of 1996. Nevertheless, for as long as economic
activity remains strong, the risk of higher interest rates
continues, increasing the possibility of a tightening of monetary
policy by the Federal Reserve Board.
Fiscal Year in Review
The Fund's fiscal year ended May 31, 1996 once again marked a stark
contrast of interest rates during the investment period. Interest
rates fell precipitously in 1995 and into 1996 as the US economy
exhibited signs of near recessionary conditions. The Federal Reserve
Board lowered interest rates on three separate occasions in its
efforts to revive economic activity. However, the investment climate
once again changed in 1996, as the economy began to show renewed
vigor. Reports of strong economic data brought about increased
inflationary fears, prompting investors to push up interest rates.
Although the yield of the one-year US Treasury bill began and ended
the fiscal year virtually unchanged at 5.75%, the range during the
period was quite dramatic. The yield of the one-year Treasury bill
fell as low as 4.78% and rose as high as 5.88%, a spread of 110
basis points (1.10%). In addition, the US Treasury yield curve
steepened quite dramatically during the year. At the start of the
year, the spread between the three-month Treasury bill and 30-year
Treasury bond stood at 85 basis points. However, by the end of the
Fund's fiscal year this spread had widened to 181 basis points. A
steeper yield curve enhances the Fund's yield advantage compared to
similar short-term investment alternatives.
<PAGE>
Unlike in the rising interest rate environment of 1994 when the
interim caps of adjustable rate mortgage securities (ARMS) limited
their coupon adjustments, fast prepayments hindered the performance
of ARMS in 1995 as interest fell. To mitigate the effects of fast
prepayments in a declining interest rate environment, we opted to
hold a high percentage of seasoned ARMS and ARMS with prepayment
lockouts. Seasoned ARMS (those that were originated over five years
ago and have experienced various interest rate cycles) typically
prepay much slower because either the underlying ARM loans cannot be
refinanced or there is interest rate insensitivity among the
remaining mortgagors in the ARM pools. We also invested in ARMS with
structured prepayment lockouts, whereby current prepayments are
allocated to other classes within the ARM security. This investment
strategy benefited the Fund as we were able to avoid much of the
prepayment phenomena of 1995 and early 1996.
As 1996 began we elected to keep the Fund's duration at less than
one year to limit net asset value fluctuation by maintaining our
holding of seasoned ARMS. This again proved beneficial to the Fund,
as the availabililty of seasoned ARMS became limited (seasoned ARMS
constitute less than 20% of all outstanding ARMS). As a result,
yield spreads of seasoned ARMS narrowed and their prices rose. In
addition, as a result of our seasoned ARMS being fully indexed, the
rise in interest rates in 1996 had a limited effect on their values.
As we approach the midpoint of 1996 amidst a rising interest rate
and steepening yield curve environment, we are closely monitoring
two potential risks to the ARMS market. First, should short-term
interest rates continue to rise, interim cap risk may cause yield
spreads to widen. However, unlike 1994 when short-term interest
rates rose 350 basis points, short-term interest rates have risen
less than 100 basis points through the end of the Fund's 1996 fiscal
year. Second, as a result of the yield curve steepening and interest
rates rising, ARM originations could increase as homeowners opt for
lower home funding costs. Increased supply has historically caused
yield spreads to widen. However, since a high percentage of our
holdings are seasoned ARMS, a different segment of the market, their
yield spreads should withstand an increase in newly originated ARMS.
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,
<PAGE>
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
June 28, 1996
PERFORMANCE DATA
About Fund
Performance
Investors are 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 approximately 10 years.
<PAGE>
* 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.
* Class D Shares incur a maximum initial sales charge of 4% and an
account maintenance fee of 0.25% (but no distribution fee).
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
5/31/96 2/29/96 5/31/95 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.54 $9.52 $9.55 -0.10% +0.21%
Class B Shares* 9.53 9.53 9.56 -0.31 0.00
Class C Shares* 9.53 9.53 9.56 -0.31 0.00
Class D Shares* 9.52 9.52 9.55 -0.31 0.00
Class A Shares--Total Return* +6.41(1) +1.80(2)
Class B Shares--Total Return* +5.34(3) +1.38(4)
Class C Shares--Total Return* +5.30(5) +1.38(6)
Class D Shares--Total Return* +5.91(7) +1.52(8)
Class A Shares--Standardized 30-day Yield 5.69%
Class B Shares--Standardized 30-day Yield 5.18%
Class C Shares--Standardized 30-day Yield 5.13%
Class D Shares--Standardized 30-day Yield 5.46%
<PAGE>
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included.
(1)Percent change includes reinvestment of $0.609 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.159 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.534 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.139 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.530 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.138 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.584 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.152 per share ordinary
income dividends.
</TABLE>
Total Return
Based on a
$10,000
Investment--
Class A and
Class C Shares
A line graph depicting the growth of an investment in the Fund's
Class A and Class C Shares compared to growth of an investment in
the Lehman Brothers Short Government Index and the Six-Month
Treasury Bill Index. Beginning and ending values are:
10/21/94* 5/31/96
ML Adjustable Rate Securities Fund, $ 9,600 $10,711
Inc.++--Class A Shares*
ML Adjustable Rate Securities Fund, $10,000 $11,001
Inc.++--Class C Shares*
Lehman Brothers Short Government $10,000 $11,123
Index (1-2 Years)++++
Six-Month Treasury Bill Index++++++ $10,000 $10,929
[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 inmanaged 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.
<PAGE>
Average Annual
Total Returns--
Class A and
Class C Shares
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/96 +7.30% +3.01%
Inception (10/21/94) through 3/31/96 +7.06 +4.07
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return With
Without CDSC CDSC**
Class C Shares*
Year Ended 3/31/96 +6.31% +5.31%
Inception (10/21/94) through 3/31/96 +6.12 +6.12
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
PERFORMANCE DATA (concluded)
Total Return
Based on a
$10,000
Investment--
Class B and
Class D Shares
<PAGE>
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 and the Six-Month
Treasury Bill Index. Beginning and ending values are:
8/2/91* 5/31/96
ML Adjustable Rate Securities Fund, $10,000 $11,971
Inc.++--Class B Shares*
ML Adjustable Rate Securities Fund, $ 9,600 $11,766
Inc.++--Class D Shares*
Lehman Brothers Short Government $10,000 $13,212
Index (1-2 Years)++++
Six-Month Treasury Bill Index++++++ $10,000 $12,419
[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 Returns--
Class B and
Class D Shares
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/96 +6.25% +2.25%
Inception (8/2/91) through 3/31/96 +3.69 +3.69
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
<PAGE>
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 3/31/96 +6.80% +2.53%
Inception (8/2/91) through 3/31/96 +4.22 +3.31
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<TABLE>
Performance
Summary--
Class A Shares++
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $9.46 $9.33 -- $0.110 -0.21%
1995 9.33 9.53 -- 0.606 +8.86
1/1/96--5/31/96 9.53 9.54 -- 0.231 +2.72
------
Total $0.947
Cumulative total return as of 5/31/96: +11.58%**
</TABLE>
<TABLE>
Performance
Summary--
Class B Shares
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change***
<S> <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
1995 9.33 9.54 -- 0.533 +8.13
1/1/96--5/31/96 9.54 9.53 -- 0.202 +2.18
------
Total $2.199
Cumulative total return as of 5/31/96: +19.71%***
</TABLE>
<PAGE>
<TABLE>
Performance
Summary--
Class C Shares
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change***
<S> <C> <C> <C> <C> <C>
10/21/94--12/31/94 $9.46 $9.33 -- $0.095 -0.37%
1995 9.33 9.54 -- 0.528 +8.08
1/1/96--5/31/96 9.54 9.53 -- 0.201 +2.16
------
Total $0.824
Cumulative total return as of 5/31/96: +10.01%***
</TABLE>
<TABLE>
Performance
Summary--
Class D Shares++
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<S> <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
1995 9.32 9.53 -- 0.582 +8.69
1/1/96--5/31/96 9.53 9.52 -- 0.222 +2.40
------
Total $2.437
Cumulative total return as of 5/31/96: +22.56%**
<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.
***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
<CAPTION>
Face Value Percent of
Index Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Adjustable* Certificate Federal National Mortgage Association:
Rate of Deposit $ 547,425 #162619, 6.829% due 6/01/2022 $ 550,675 $ 548,622 0.36%
Mortgage- Indexed 4,797,361 #307622, 6.962% due 4/01/2023 4,936,446 4,900,793 3.19
Backed Obligations
Obligations**
Constant Maturity Federal Home Loan Mortgage
Treasury Indexed Corporation:
Obligations 2,552,014 #645073, 7.753% due 5/01/2015 2,595,079 2,607,903 1.70
4,634,245 #606108, 7.752% due 9/01/2019 4,728,294 4,805,156 3.13
3,192,019 #755194, 7.204% due 3/01/2020 3,200,819 3,253,880 2.12
66,401 #785173, 7.416% due 8/01/2020 67,937 66,971 0.04
3,795,906 #845139, 7.783% due 3/01/2022 3,854,041 3,891,411 2.54
6,607,927 #845535, 7.925% due 10/01/2023 6,735,972 6,788,852 4.42
8,892,228 #755170, 7.44% due 8/01/2031 9,192,341 9,089,546 5.92
Federal National Mortgage Association:
572,396 #21041, 6.73% due 10/01/2013 588,852 571,869 0.37
1,790,325 #21059, 6.96% due 11/01/2013 1,841,796 1,791,667 1.17
1,258,817 #20293, 6.17% due 9/01/2015 1,295,008 1,246,367 0.81
5,408,767 #142069, 6.817% due 12/01/2021 5,520,323 5,497,525 3.58
4,834,880 #200009, 7.566% due 2/01/2023 4,852,733 4,949,708 3.22
8,489,796 #291252, 7.76% due 8/01/2024 8,599,332 8,751,112 5.70
3,326,499 #324905, 7.205% due 9/01/2025 3,360,549 3,373,278 2.20
10,811,981 Prudential Home Mortgage Securities
Company, Inc.,REMIC (a) 92-35-A1,
8.166% due 10/01/2022 11,082,281 10,947,131 7.13
Cost of Funds 4,954,328 DLJ Mortgage Acceptance Corp.,
Indexed REMIC (a) 91-6-A1, 7.817% due
Obligations 9/01/2021 5,039,094 5,000,775 3.26
820,867 Resolution Trust Corporation, REMIC
(a) 91-M3-A, 7.909% due 2/25/2020 792,106 720,545 0.47
London Interbank 7,510,783 Federal National Mortgage Association,
Offered Rate Indexed #305729, 7.751% due 2/01/2025 7,736,043 7,756,086 5.05
Obligations Resolution Trust Corporation, REMIC (a):
6,510,813 91-M7-B, 7.50% due 1/25/2021 6,510,813 6,514,915 4.24
15,005,310 92-C1-B, 7.50% due 8/25/2023 14,452,231 15,155,363 9.87
12,000,000 Saxon Mortgage Securities Corporation,
REMIC (a) 92-3-B, 7.48% due
11/25/2022 12,270,781 12,180,000 7.93
<PAGE>
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 119,803,546 120,409,475 78.42
Derivative 18,631,373 Capstead Mortgage Securities
Mortgage-Backed Corporation II, REMIC (a) 93-2I-A3,
Obligations**-- 0.50% due 9/25/2023 264,842 122,967 0.08
Interest Only (b) 75,850,364 DLJ Mortgage Acceptance Corp., REMIC (a)
92-6-A1, 0.646% due 7/25/2022 1,091,130 849,524 0.55
90,204 Federal Home Loan Mortgage Corporation,
REMIC (a)(c) 92-1363-C, 371% due
8/15/2022 1,470,159 739,674 0.48
212 Federal National Mortgage Association,
REMIC (a) 90-142-K, 1,163% due 7/25/2014 62,139 521 0.00
188 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-1-A9,
42,989% due 2/25/2022 29,067 40,031 0.03
19,883,411 Residential Funding Mortgage
Securities I, Inc., REMIC (a) 92-S3-A9,
0.50% due 1/25/2007 1,936,972 15,111 0.01
Sears Mortgage Securities Corp.,
REMIC (a):
5,033 91-K-A4, 5,829% due 9/25/2021 670,212 503,311 0.33
40,927,726 92-12-A3, 0.52% due 7/25/2022 476,020 390,092 0.25
Total Investments in Derivative
Mortgage-Backed Obligations--
Interest Only 6,000,541 2,661,231 1.73
Fixed Rate 7,707,487 Kidder Peabody Acceptance Corporation,
Mortgage-Backed REMIC (a) 93-M1-A2, 7.15% due 4/25/2025 7,674,144 7,408,822 4.83
Obligations**
5,333,847 Resolution Trust Corporation, REMIC
(a) 92-CHF-B, 7.15% due 12/25/2020 5,397,895 5,324,680 3.47
Total Investments in Fixed Rate
Mortgage-Backed Obligations 13,072,039 12,733,502 8.30
Total Investments in Mortgage-Backed
Obligations 138,876,126 135,804,208 88.45
<PAGE>
US Government 10,000,000 United States Treasury Notes, 5.125%
Obligations due 2/28/1998 9,949,219 9,823,400 6.40
Total Investments in US Government
Obligations 9,949,219 9,823,400 6.40
Short-Term Repurchase 4,351,000 Nikko Securities International,
Securities Agreements*** Inc., purchased on 5/31/1996 to
yield 5.33% to 6/03/1996 4,351,000 4,351,000 2.83
Total Short-Term Securities 4,351,000 4,351,000 2.83
Total Investments $153,176,345 149,978,608 97.68
============
Other Assets Less Liabilities 3,567,222 2.32
------------ -------
Net Assets $153,545,830 100.00%
============ =======
<FN>
(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.
*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.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of May 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$153,176,345) (Note 1a) $ 149,978,608
Cash 383
Receivables:
Capital shares sold $ 2,497,271
Interest 1,220,892
Principal paydowns 814,419
Loaned securities 2,917 4,535,499
-------------
Deferred organization expenses (Note 1f) 4,003
Prepaid registration fees and other assets (Note 1f) 82,744
-------------
Total assets 154,601,237
-------------
Liabilities: Payables:
Capital shares redeemed 488,926
Dividends to shareholders (Note 1g) 216,198
Distributor (Note 2) 97,961
Investment adviser (Note 2) 68,994 872,079
-------------
Accrued expenses and other liabilities 183,328
-------------
Total liabilities 1,055,407
-------------
Net Assets: Net assets $ 153,545,830
=============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares authorized $ 2,947
Consist of: Class B Common Stock, $0.10 par value, 200,000,000 shares authorized 1,442,184
Class C Common Stock, $0.10 par value, 100,000,000 shares authorized 32,288
Class D Common Stock, $0.10 par value, 200,000,000 shares authorized 134,460
Paid-in capital in excess of par 187,962,894
Accumulated investment loss--net (19,431)
Accumulated realized capital losses on investments--net (Note 5) (32,811,775)
Unrealized depreciation on investments--net (3,197,737)
-------------
Net assets $ 153,545,830
=============
Net Asset Class A--Based on net assets of $281,218 and 29,470 shares
Value: outstanding $ 9.54
=============
Class B--Based on net assets of $137,386,527 and 14,421,836
shares outstanding $ 9.53
=============
Class C--Based on net assets of $3,077,953 and 322,882
shares outstanding $ 9.53
=============
Class D--Based on net assets of $12,800,132 and 1,344,599
shares outstanding $ 9.52
=============
<PAGE>
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended May 31, 1996
<S> <S> <C>
Investment Income Interest and discount earned, net of premium amortization $ 12,899,854
(Note 1e): Other 2,917
-------------
Total income 12,902,771
-------------
Expenses: Account maintenance and distribution fees--Class B (Note 2) 1,256,198
Investment advisory fees (Note 2) 914,312
Transfer agent fees--Class B (Note 2) 198,647
Accounting services (Note 2) 90,588
Printing and shareholder reports 79,815
Registration fees (Note 1f) 69,155
Professional fees 53,094
Directors' fees and expenses 47,900
Custodian fees 33,881
Account maintenance fees--Class D (Note 2) 33,515
Amortization of organization expenses (Note 1f) 23,629
Transfer agent fees--Class D (Note 2) 12,866
Account maintenance and distribution fees--Class C (Note 2) 11,933
Pricing fees 1,593
Transfer agent fees--Class C (Note 2) 1,374
Transfer agent fees--Class A (Note 2) 414
Other 3,575
-------------
Total expenses 2,832,489
-------------
Investment income--net 10,070,282
-------------
Realized & Realized gain on investments--net 318,695
Unrealized Gain Change in unrealized depreciation on investments--net (890,435)
Investments--Net -------------
(Notes 1c, Net Increase in Net Assets Resulting from Operations $ 9,498,542
1e & 3): =============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended May 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 10,070,282 $ 14,383,007
Realized gain (loss) on investments--net 318,695 (9,607,152)
Change in unrealized depreciation on investments--net (890,435) 8,689,257
------------- -------------
Net increase in net assets resulting from operations 9,498,542 13,465,112
------------- -------------
Dividends to Investment income--net:
Shareholders Class A (27,553) (14,494)
(Note 1g): Class B (9,248,234) (13,293,732)
Class C (81,537) (11,227)
Class D (812,697) (1,017,584)
------------- -------------
Net decrease in net assets resulting from dividends to
shareholders (10,170,021) (14,337,037)
------------- -------------
Capital Shares Net decrease in net assets derived from capital share
Transactions transactions (66,863,233) (175,466,828)
(Note 4): ------------- -------------
Net Assets: Total decrease in net assets (67,534,712) (176,338,753)
Beginning of year 221,080,542 397,419,295
------------- -------------
End of year* $ 153,545,830 $ 221,080,542
============= =============
<FN>
*Undistributed (accumulated) investment income (loss)--net $ (19,431) $ 80,308
============= =============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A Class B
The following per share data
and ratios have been derived For the For the
from information provided Period Period
in the financial statements. For the Oct. 21, Aug.2,
Year Ended 1994++ to For the Year Ended May 31, 1991++ to
Increase (Decrease) in May 31, May 31, May 31,
Net Asset Value: 1996+++++ 1995 1996+++++ 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period $ 9.55 $ 9.46 $ 9.56 $ 9.53 $ 9.76 $ 9.92 $ 10.00
Performance: -------- -------- -------- -------- -------- -------- --------
Investment income--net .56 .36 .52 .46 .32 .40 .52
-------- -------- -------- -------- -------- -------- --------
Realized and unrealized
gain (loss) on investments
--net .03 .09 (.02) .04 (.24) (.16) (.08)
-------- -------- -------- -------- -------- -------- --------
Total from investment
operations .59 .45 .50 .50 .08 .24 .44
-------- -------- -------- -------- -------- -------- --------
Less dividends from
investment income--net (.60) (.36) (.53) (.47) (.31) (.40) (.52)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end
of period $ 9.54 $ 9.55 $ 9.53 $ 9.56 $ 9.53 $ 9.76 $ 9.92
======== ======== ======== ======== ======== ======== ========
Total Investment Based on net asset value
Return:** per share 6.41% 4.85%+++ 5.34% 5.48% .77% 2.48% 4.33%+++
======== ======== ======== ======== ======== ======== ========
Ratios to Average Expenses, net of
Net Assets: reimbursement .81% .87%* 1.59% 1.59% 1.46% 1.40% 1.36%*
======== ======== ======== ======== ======== ======== ========
Expenses .81% .87%* 1.59% 1.59% 1.46% 1.40% 1.47%*
======== ======== ======== ======== ======== ======== ========
Investment income--net 6.20% 6.18%* 5.45% 4.88% 3.20% 4.15% 6.07%*
======== ======== ======== ======== ======== ======== ========
Supplemental Net assets, end of
Data: period (in thousands) $ 281 $ 345 $137,387 $202,334 $374,376 $689,593 $887,110
======== ======== ======== ======== ======== ======== ========
Portfolio turnover 25.30% 102.55% 25.30% 102.55% 60.38% 104.71% 94.72%
======== ======== ======== ======== ======== ======== ========
<FN>
++Commencement of Operations.
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
+++++Based on average shares outstanding during the period.
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class C Class D
The following per share data
and ratios have been derived For the For the
from information provided For the Period Period
in the financial statements. Year Oct. 21, Aug.2,
Ended 1994++ to For the Year Ended May 31, 1991++ to
Increase (Decrease) in May 31, May 31, May 31,
Net Asset Value: 1996+++++ 1995 1996+++++ 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value,
Operating beginning of period $ 9.56 $ 9.46 $ 9.55 $ 9.53 $ 9.76 $ 9.92 $ 10.00
Performance: -------- -------- -------- -------- -------- -------- --------
Investment income--net .48 .31 .56 .51 .37 .45 .56
Realized and unrealized
gain (loss) on investments
--net .01 .10 (.01) .03 (.24) (.16) (.08)
-------- -------- -------- -------- -------- -------- --------
Total from investment
operations .49 .41 .55 .54 .13 .29 .48
-------- -------- -------- -------- -------- -------- --------
Less dividends from
investment income--net (.52) (.31) (.58) (.52) (.36) (.45) (.56)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period $ 9.53 $ 9.56 $ 9.52 $ 9.55 $ 9.53 $ 9.76 $ 9.92
======== ======== ======== ======== ======== ======== ========
Total Investment Based on net asset value
Return:** per share 5.30% 4.47%+++ 5.91% 5.91% 1.28% 2.99% 4.75%+++
======== ======== ======== ======== ======== ======== ========
Ratios to Average Expenses, net of
Net Assets: reimbursement 1.57% 1.68%* 1.06% 1.08% .96% .91% .87%*
======== ======== ======== ======== ======== ======== ========
Expenses 1.57% 1.68%* 1.06% 1.08% .96% .91% .96%*
======== ======== ======== ======== ======== ======== ========
Investment income--net 5.40% 5.51%* 5.98% 5.44% 3.69% 4.79% 6.54%*
======== ======== ======== ======== ======== ======== ========
Supplemental Net assets, end of
Data: period (in thousands) $ 3,078 $ 1,409 $ 12,800 $ 16,993 $ 23,043 $ 51,398 $ 80,411
======== ======== ======== ======== ======== ======== ========
Portfolio turnover 25.30% 102.55% 25.30% 102.55% 60.38% 104.71% 94.72%
======== ======== ======== ======== ======== ======== ========
<PAGE>
<FN>
++Commencement of Operations.
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
+++++Based on average shares outstanding during the period.
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.
(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.
<PAGE>
(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.
* 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 is was closed.
(d) 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.
NOTES TO FINANCIAL STATEMENTS (continued)
(e) 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.
(f) 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.
(g) 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.
(h) 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.
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.
<PAGE>
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 Distribution
Maintenance 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.
For the year ended May 31, 1996, MLFD earned underwriting discounts
and MLPF&S earned dealer concessions on sales of the Fund's Class D
Shares as follows:
MLFD MLPF&S
Class D $2,485 $18,959
For the year ended May 31, 1996, MLPF&S received contingent deferred
sales charges of $12,780 and $3,334 relating to transactions in
Class B and Class C Shares, respectively.
For the year ended May 31, 1996, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $1,593 for
security price quotations to compute the net asset value of the
Fund.
<PAGE>
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, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended May 31, 1996 were $47,048,206 and $94,021,253,
respectively.
Net realized and unrealized gains (losses) as of May 31, 1996 were
as follows:
Realized Unrealized
Gains Losses
Long-term investments $ 318,695 $ (3,197,737)
------------- -------------
Total $ 318,695 $ (3,197,737)
============= =============
As of May 31, 1996, net unrealized depreciation for Federal income
tax purposes aggregated $3,432,624 of which $1,221,756 related to
appreciated securities and $4,654,380 related to depreciated
securities. The aggregate cost of investments at May 31, 1996 for
Federal income tax purposes was $153,411,232.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $66,863,233 and $175,466,828 for the years ended May 31, 1996
and May 31, 1995, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended May 31, 1996 Shares Amount
Shares sold 893,429 $ 8,512,092
Shares issued to shareholders
in reinvestment of dividends 151 1,444
------------- -------------
Total issued 893,580 8,513,536
Shares redeemed (900,177) (8,576,542)
------------- -------------
Net decrease (6,597) $ (63,006)
============= =============
<PAGE>
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, 1996 Shares Amount
Shares sold 3,209,190 $ 30,564,309
Shares issued to shareholders
in reinvestment of dividends 566,087 5,393,795
------------- -------------
Total issued 3,775,277 35,958,104
Automatic conversion of shares (2,712) (25,846)
Shares redeemed (10,524,204) (100,276,738)
------------- -------------
Net decrease (6,751,639) $ (64,344,480)
============= =============
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)
============= =============
<PAGE>
Class C Shares for the Year Dollar
Ended May 31, 1996 Shares Amount
Shares sold 1,331,201 $ 12,686,096
Shares issued to shareholders
in reinvestment of dividends 3,955 37,684
------------- -------------
Total issued 1,335,156 12,723,780
Shares redeemed (1,159,725) (11,052,376)
------------- -------------
Net increase 175,431 $ 1,671,404
============= =============
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 Dollar
Ended May 31, 1996 Shares Amount
Shares sold 2,963,785 $ 28,203,483
Automatic conversion of shares 2,713 25,846
Shares issued to shareholders
in reinvestment of dividends 43,150 410,938
------------- -------------
Total issued 3,009,648 28,640,267
Shares redeemed (3,444,089) (32,767,418)
------------- -------------
Net decrease (434,441) $ (4,127,151)
============= =============
Class D Shares for the Year Dollar
Ended May 31, 1995 Shares Amount
<PAGE>
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)
============= =============
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 Class D Shares. There were
2,010,429 shares redesignated, amounting to $21,918,414.
5. Capital Loss Carryforward:
At May 31, 1996, the Fund had a net capital loss carryforward of
approximately $32,506,000, of which $20,978,000 expires in 2002,
$3,887,000 expires in 2003 and $7,641,000 expires in 2004. 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, 1996, 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
four-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.
<PAGE>
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,
1996 by correspondence with the custodian and broker. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, such financial statements and financial highlights
present fairly, in all material respects, the financial position of
Merrill Lynch Adjustable Rate Securities Fund, Inc. as of May 31,
1996, 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 28, 1996
</AUDIT-REPORT>
