MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Semi-Annual Report
November 30, 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.
Statements and other information herein are as dated and are subject
to change.
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
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
The US economy continues to enjoy the best of both worlds, moderate
growth coupled with low inflation. After falling to a below-trend
1.3% rate in the second quarter of 1995, gross domestic product
(GDP) growth rose an estimated 4.2% in the third quarter. While this
jump may appear alarming and raise renewed concern of inflationary
pressures, underlying data indicate third quarter growth may be
overstated and unsustainable at its reported pace. Residential
investment, one of the components of GDP, rose 10.9% during the
quarter, well above its trailing fourth-quarter trend of -1.4%.
Relative to that trend, residential construction added 0.4% to GDP.
However, much of the increase in residential outlays stemmed from a
July surge in housing starts. Since then, new housing starts have
been declining.
In what may be a seasonal event in the final quarter of the US
Government's fiscal year, Federal expenditures rose 4.9% during the
third quarter. However, the recent overall trend of Federal spending
has been declining at nearly 4% annually and should continue to
decline once a major budget agreement is reached. Nevertheless, the
impact of third quarter expenditures added 0.5% to GDP. A similar
event occurred in the third quarter of 1994 as Federal spending
surged 10.9%, but in the following quarter spending fell 14.4%.
Recent economic data has been mixed. On the positive side, inflation
is low and decelerating. By November 30, 1995, the Consumer Price
Index (CPI) rose at a 2.6% annualized rate. More recently though,
the CPI has been decelerating, rising at just a 1.8% annualized rate
over the previous six months. Inflation fundamentals remain
favorable as compensation costs continue to be restrained. The
Employment Cost Index (ECI), a broad measure of worker compensation
costs, has shown no sign of higher wage pressures. Through
September, the ECI rose 2.7% over the past year, the lowest year-
over-year rise on record. In addition, employment growth has
rebounded following a decline earlier in the year. As of November
1995, the unemployment rate had fallen to 5.6%.
On the negative side, the Index of Leading Economic Indicators
(LEI), a predictor of overall economic activity, was reported to
have fallen 0.5% in October, the steepest drop since April and the
seventh drop in the last nine months. In addition, the National
Association of Purchasing Managers Index, a gauge of future business
activity, was reported below 50 in six of the last seven months. An
Index below 50 is indicative of a contraction in the manufacturing
sector. Although the Federal Reserve Board has left monetary policy
unchanged since July 1995, investors continued to anticipate further
Federal Reserve Board interest rate reductions during the three
months ended November 30, 1995. (The Federal Reserve Board did cut
interest rates on December 19, 1995.) During the three months ended
November 30, 1995, the US Treasury yield curve flattened
considerably as three-month Treasury bill yields rose 0.04% to
5.48%, while 30-year US Treasury bond yields fell 0.51% to 6.13%.
Despite economic weakness in some sectors, it does not appear the US
economy is headed toward a recession. Nevertheless, there still
remains a likely possibility that the Federal Reserve Board will
continue to ease monetary policy for three reasons. First, inflation
is low and should allow the Federal Reserve Board leeway in its
decision making process in setting policy. Second, current policy is
still somewhat restrictive as real short-term interest rates remain
historically high. Finally, should a credible, multi-year deficit
reduction plan be adopted between the US Congress and the White
House, Federal spending will ultimately be cut. Since Federal
spending accounts for nearly 25% of GDP, an easing of monetary
policy can provide an economic stimulus to offset declines in
Federal expenditures.
Portfolio Matters
Prepayments of adjustable rate mortgage securities (ARMS) increased
considerably during the three-month period ended November 30, 1995,
as falling interest rates coupled with a flat yield curve enticed
many ARM homeowners to refinance their mortgages. Because coupon
adjustments of ARMS typically lag changes of market interest rates,
lower interest rates have provided homeowners of fully indexed
adjustable rate mortgages an incentive to refinance their mortgage
debt at lower costs. As a result, prepayment rates of ARMS have
risen over 50% above their historical norms, dampening their prices.
Although prepayment volatility increased, the net asset values of
the Fund remained relatively stable. (For complete performance
information, see pages 4--6 of this report to shareholders.)
Our investment strategy during the three-month period ended November
30, 1995 focused on limiting the negative effects of faster
prepayments upon the Fund. As such, we held a large concentration 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) have not seen a surge in prepayments,
primarily as a result of current interest rate insensitivity among
the remaining mortgagors in these ARM pools. We also invested in
ARMS with structured prepayment lockouts, whereby current
prepayments are allocated to other classes or tranches within the
ARM security, thus providing "call protection" to our class holding.
This strategy allowed the Fund to maintain yield and price stability
in an environment of increased prepayment volatility.
In this current environment, ARMS remain attractive on a fundamental
basis for two reasons. First, unless long-term interest rates fall
sharply, ARM prepayment speeds should gradually decline as ARM
coupons begin to reset downward giving ARM homeowners less of a
refinancing incentive. Because investors have already widened ARM
yield spreads to compensate for a fast prepayment environment, a
general decline in prepayment speeds should cause ARM yield spreads
to narrow and prices to rise. Second, should the Federal Reserve
Board continue to ease monetary policy and cut short-term interest
rates, the US Treasury yield curve should begin to steepen as
Federal Funds are reduced. Lower market funding costs should
increase investor demand for ARMS and push prices higher, as ARMS
become a more attractive, low-risk, leveraged investment for
investors. As such, we continue to hold nearly 88% of our portfolio
in ARMS at November 30, 1995. However, should the yield curve
steepen, we should anticipate that we could lock in gains from our
higher-priced ARMS and invest in securities which will benefit from
rolling down a steeper yield curve.
In Conclusion
We thank you for your investment in Merrill Lynch Adjustable Rate
Securities Fund, Inc., and we look forward to reviewing our outlook
and strategy with you again in our next report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
January 3, 1996
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.
* 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 all of the Fund's shares are presented in the
"Recent Performance Results" and the "Performance Summary" tables on
pages 4, 5 and 6. Data for the Fund's Class B and Class D Shares are
presented in the "Average Annual Total Return" tables on page 6.
Data for Class A and Class C Shares are also presented in the
"Aggregate Total Return" tables on page 6.
The "Recent Performance Results" table shows investment results
before the deduction of any sales charges for all of the Fund's
shares for the 12-month and 3-month periods ended November 30, 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>
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%
1/1/95--11/30/95 9.33 9.53 -- 0.533 +8.26
------
Total $0.643
Cumulative total return as of 11/30/95: +8.03%**
<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 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
1/1/95--11/30/95 9.33 9.53 -- 0.469 +7.53
------
Total $1.933
Cumulative total return as of 11/30/95: +16.51%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
<TABLE>
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%
1/1/95--11/30/95 9.33 9.53 -- 0.465 +7.49
------
Total $0.560
Cumulative total return as of 11/30/95: +7.08%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures assume reinvestment of all dividends and capital gains
distributions at net asset value on the payable date, and do not
reflect deduction of any sales charge; results would be lower if
sales charge was deducted.
</TABLE>
<TABLE>
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
1/1/95--11/30/95 9.32 9.52 -- 0.512 +8.02
------
Total $2.145
Cumulative total return as of 11/30/95: +18.94%**
<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.
***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>
PERFORMANCE DATA (concluded)
<TABLE>
Recent
Performance
Results
<CAPTION>
12 Month 3 Month
11/30/95 8/31/95 11/30/94 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.53 $9.52 $9.37 +1.71% +0.11%
Class B Shares* 9.53 9.52 9.38 +1.60 +0.11
Class C Shares* 9.53 9.52 9.37 +1.71 +0.11
Class D Shares* 9.52 9.51 9.37 +1.60 +0.11
Class A Shares--Total Return* +8.41(1) +1.69(2)
Class B Shares--Total Return* +7.46(3) +1.49(4)
Class C Shares--Total Return* +7.52(5) +1.48(6)
Class D Shares--Total Return* +8.01(7) +1.62(8)
Class A Shares--Standardized 30-day Yield 5.81%
Class B Shares--Standardized 30-day Yield 5.30%
Class C Shares--Standardized 30-day Yield 5.25%
Class D Shares--Standardized 30-day Yield 5.57%
<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 $0.606 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.150 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.533 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.132 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.528 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.131 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.582 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.144 per share ordinary
income dividends.
</TABLE>
Aggregate
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Inception (10/21/94) through 9/30/95 +6.90% +2.62%
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Inception (10/21/94) through 9/30/95 +6.10% +5.10%
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
Average Annual
Total Return
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/95 +6.30% +2.30%
Inception (8/2/91) through 9/30/95 +3.48 +3.48
[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 9/30/95 +6.96% +2.68%
Inception (8/2/91) through 9/30/95 +4.03 +3.01
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<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 of $ 5,707,653 Federal National Mortgage Association,
Rate* Deposit Indexed #307622, 7.658% due 4/01/2023 $ 5,874,346 $ 5,843,209 3.24%
Mortgage- Obligations
Backed
Obligations** Constant Federal Home Loan Mortgage
Maturity Corporation:
Treasury 2,639,998 #645073, 7.806% due 5/01/2015 2,684,548 2,694,448 1.49
Indexed 4,884,990 #606108, 7.875% due 9/01/2019 4,984,934 5,037,646 2.79
Obligations 3,365,022 #755194, 7.665% due 3/01/2020 3,374,381 3,418,122 1.89
66,894 #785173, 8.164% due 8/01/2020 68,441 67,355 0.04
5,010,835 #845139, 7.693% due 3/01/2022 5,088,035 5,155,699 2.86
7,717,215 #845535, 7.937% due 10/01/2023 7,867,547 7,929,438 4.39
9,930,037 #755170, 7.985% due 8/01/2031 10,265,176 10,158,130 5.63
Federal National Mortgage Association:
581,609 #21041, 6.89% due 10/01/2013 598,330 579,526 0.32
2,114,545 #21059, 7.46% due 11/01/2013 2,175,339 2,113,552 1.17
1,368,021 #20293, 6.46% due 9/01/2015 1,407,351 1,361,933 0.75
5,610,143 #142069, 6.824% due 12/01/2021 5,725,852 5,697,829 3.16
5,616,520 #200009, 7.604% due 2/01/2023 5,637,382 5,737,627 3.18
10,098,328 #291252, 7.701% due 8/01/2024 10,229,251 10,376,032 5.75
4,954,483 #324905, 5.631% due 9/01/2025 5,005,412 5,065,959 2.81
Government National Mortgage
Association:
10,112,480 #8685, 6.50% due 8/20/2025 10,197,511 10,267,328 5.69
9,800,001 #8717, 6% due 10/01/2025 9,842,815 9,873,501 5.47
13,984,010 Prudential Home Mortgage Securities
Company, Inc., REMIC (a), 92-35-A1,
8.116% due 10/01/2022 14,333,610 14,254,950 7.90
Cost of Funds 5,901,566 DLJ Mortgage Acceptance Corp.,
Indexed REMIC (a) 91-6-A1, 7.813% due
Obligations 9/01/2021 6,002,538 5,857,304 3.24
1,056,165 Resolution Trust Corporation, REMIC
(a) 91-M3-A, 8.032% due 2/25/2020 1,019,199 941,967 0.52
London Interbank Federal National Mortgage Association:
Offered Rate 3,342,531 #291256, 7.746% due 8/01/2024 3,407,559 3,426,095 1.90
Indexed 8,536,477 #305729, 7.353% due 2/01/2025 8,793,645 8,760,559 4.85
Obligations Resolution Trust Corporation, REMIC (a):
6,510,811 91-M7-B, 7.937% due 1/25/2021 6,510,811 6,543,365 3.62
15,005,310 92-C1-B, 7.937% due 8/25/2023 14,452,231 15,202,255 8.42
12,000,000 Saxon Mortgage Securities Corporation,
REMIC (a) 92-3-B, 7.622% due
11/25/2022 12,270,781 12,142,500 6.73
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 157,817,025 158,506,329 87.81
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value Percent of
Index Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Derivative $ 21,763,447 Capstead Mortgage Securities
Mortgage-Backed Corporation II, REMIC (a) 93-I-A3,
Obligations**-- 0.50% due 9/25/2023 $ 319,977 $ 138,198 0.08%
Interest 75,857,098 DLJ Mortgage Acceptance Corp., REMIC
Only (b) (a) 92-6-A1, 0.644% due 7/25/2022 1,194,721 1,107,514 0.61
101,022 Federal Home Loan Mortgage Corporation,
REMIC (a)(c) 92-1363-C, 304% due
2/25/2022 1,601,480 459,651 0.25
884 Federal National Mortgage Association,
REMIC (a) 90-142-K, 1,163% due 7/25/2014 66,861 3,137 0.00
243 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-1-A9,
42,989% due 2/25/2022 17,375 63,431 0.03
22,674,348 Residential Funding Mortgage Securities
I, Inc., REMIC (a) 92-S3-A9, 0.50% due
1/01/2007 1,999,680 54,872 0.03
Sears Mortgage Securities Corp.,
REMIC (a):
5,761 91-K-A4, 5,774% due 9/25/2021 778,484 633,667 0.35
46,917,167 92-12-A3, 0.52% due 7/25/2023 607,825 405,833 0.22
Total Investments in Derivative
Mortgage-Backed Obligations--Interest
Only 6,586,403 2,866,303 1.57
Fixed Rate 7,868,504 Kidder Peabody Acceptance Corporation,
Mortgage-Backed REMIC (a) 93-M1-A2, 7.15% due
Obligations** 4/25/2025 7,834,464 7,907,846 4.38
6,230,616 Resolution Trust Corporation, REMIC
(a) 92-CHF-B, 7.15% due 12/25/2020 6,305,997 6,281,239 3.48
Total Investments in Fixed Rate
Mortgage-Backed Obligations 14,140,461 14,189,085 7.86
Total Investments in Mortgage-Backed
Obligations 178,543,889 175,561,717 97.24
Short-Term Repurchase 4,650,000 Nikko Securities International,
Securities Agreements*** Inc., purchased on 11/30/1995 to
yield 5.93% to 12/01/1995 4,650,000 4,650,000 2.58
Total Short-Term Securities 4,650,000 4,650,000 2.58
Total Investments $ 183,193,889 180,211,717 99.82
=============
Other Assets Less Liabilities 317,110 0.18
------------- -------
Net Assets $ 180,528,827 100.00%
============= =======
<FN>
*Adjustable Rate Obligations have coupon rates which reset
periodically.
**Mortgage-Backed Obligations are subject to principal paydowns as a
result of prepayments or refinancings of the underlying mortgage
instruments. As a result, the average life may be substantially less
than the original maturity.
***Repurchase Agreements are fully collateralized by US Government &
Agency Obligations.
(a)Real Estate Mortgage Investment Conduits (REMIC).
(b)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 November 30, 1995
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$183,193,889) (Note 1a) $180,211,717
Cash 592
Receivables:
Interest $ 1,203,935
Principal paydowns 471,559
Capital shares sold 177,429 1,852,923
------------
Deferred organization expenses (Note 1f) 27,632
Prepaid registration fees and other assets (Note 1f) 81,940
------------
Total assets 182,174,804
------------
Liabilities: Payables:
Capital shares redeemed 859,547
Dividends to shareholders (Note 1g) 387,830
Distributor (Note 2) 107,654
Investment adviser (Note 2) 75,344 1,430,375
------------
Accrued expenses and other liabilities 215,602
------------
Total liabilities 1,645,977
------------
Net Assets: Net assets $180,528,827
============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares
Consist of: authorized $ 3,343
Class B Common Stock, $0.10 par value, 200,000,000 shares
authorized 1,746,317
Class C Common Stock, $0.10 par value, 100,000,000 shares
authorized 12,680
Class D Common Stock, $0.10 par value, 200,000,000 shares
authorized 132,557
Paid-in capital in excess of par 214,653,947
Accumulated investment loss--net (71,217)
Accumulated realized capital losses on investments--net (Note 5) (32,966,628)
Unrealized depreciation on investments--net (2,982,172)
------------
Net assets . $180,528,827
============
Net Asset Class A--Based on net assets of $318,594 and 33,434
Value: shares outstanding $ 9.53
============
Class B--Based on net assets of $166,379,163 and 17,463,171
shares outstanding $ 9.53
============
Class C--Based on net assets of $1,208,703 and 126,804
shares outstanding $ 9.53
============
Class D--Based on net assets of $12,622,367 and 1,325,570
shares outstanding $ 9.52
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
For the Six Months Ended November 30, 1995
<S> <S> <C>
Investment Interest and discount earned, net of premium amortization $ 7,137,065
Income (Note 1e):
Expenses: Account maintenance and distribution fees--Class B (Note 2) 689,052
Investment advisory fees (Note 2) 500,610
Transfer agent fees--Class B (Note 2) 137,479
Printing and shareholder reports 69,787
Accounting services (Note 2) 45,598
Registration fees (Note 1f) 45,289
Professional fees 23,721
Directors' fees and expenses 22,306
Account maintenance fees--Class D (Note 2) 18,531
Custodian fees 16,631
Amortization of organization expenses (Note 1f) 11,570
Transfer agent fees--Class D (Note 2) 9,439
Account maintenance and distribution fees--Class C (Note 2) 5,083
Transfer agent fees--Class C (Note 2) 869
Pricing fees 867
Transfer agent fees--Class A (Note 2) 260
Other 2,542
------------
Total expenses 1,599,634
------------
Investment income--net 5,537,431
------------
Realized & Unreal- Realized gain on investments--net 163,843
ized Gain Change in unrealized depreciation on investments--net (674,870)
(Loss) on ------------
Investments Net Increase in Net Assets Resulting from Operations $ 5,026,404
- --Net (Notes 1c, ============
1e & 3):
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
Increase (Decrease) in Net Assets: Nov. 30, 1995 May 31, 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 5,537,431 $ 14,383,007
Realized gain (loss) on investments--net 163,843 (9,607,152)
Change in unrealized depreciation on investments--net (674,870) 8,689,257
------------ ------------
Net increase in net assets resulting from operations 5,026,404 13,465,112
------------ ------------
Dividends to Investment income--net:
Shareholders Class A (12,975) (14,494)
(Note 1g): Class B (5,183,016) (13,293,732)
Class C (35,596) (11,227)
Class D (457,369) (1,017,584)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (5,688,956) (14,337,037)
------------ ------------
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (39,889,163) (175,466,828)
(Note 4): ------------ ------------
Net Assets: Total decrease in net assets (40,551,715) (176,338,753)
Beginning of period 221,080,542 397,419,295
------------ ------------
End of period* $180,528,827 $221,080,542
============ ============
<FN>
*Undistributed (accumulated) investment income
(loss)--net $ (71,217) $ 80,308
============ ============
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A Class B
The following per share data
and ratios have been derived For the For the For the For the
from information provided Six Period Six Period
in the financial statements. Months Oct. 21, Months Aug. 2,
Ended 1994++ to Ended For the Year 1991++ to
Increase (Decrease) in Nov. 30, May 31, Nov. 30, Ended May 31, May 31,
Net Asset Value: 1995+++++ 1995 1995+++++ 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 9.55 $ 9.46 $ 9.56 $ 9.53 $ 9.76 $ 9.92 $ 10.00
Performance: -------- -------- -------- -------- -------- -------- --------
Investment income--net .31 .36 .26 .46 .32 .40 .52
Realized and unrealized
gain (loss) on invest-
ments--net (.02) .09 (.02) .04 (.24) (.16) (.08)
-------- -------- -------- -------- -------- -------- --------
Total from investment
operations .29 .45 .24 .50 .08 .24 .44
-------- -------- -------- -------- -------- -------- --------
Less dividends from
investment income--net (.31) (.36) (.27) (.47) (.31) (.40) (.52)
-------- -------- -------- -------- -------- -------- --------
Net asset value, end of
period $ 9.53 $ 9.55 $ 9.53 $ 9.56 $ 9.53 $ 9.76 $ 9.92
======== ======== ======== ======== ======== ======== ========
Total Investment Based on net asset value
Return:** per share 3.03%+++ 4.85%+++ 2.52%+++ 5.48% .77% 2.48% 4.33%+++
======== ======== ======== ======== ======== ======== ========
Ratios to Average Expenses, net of re-
Net Assets: imbursement and excluding
account maintenance and
distribution fees .87%* .88%* .89%* .84% .71% .65% .61%*
======== ======== ======== ======== ======== ======== ========
Expenses, net of re-
imbursement .87%* .87%* 1.63%* 1.59% 1.46% 1.40% 1.36%*
======== ======== ======== ======== ======== ======== ========
Expenses .87%* .87%* 1.63%* 1.59% 1.46% 1.40% 1.47%*
======== ======== ======== ======== ======== ======== ========
Investment income--net 6.23%* 6.18%* 5.47%* 4.88% 3.20% 4.15% 6.07%*
======== ======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 319 $ 345 $166,379 $202,334 $374,376 $689,593 $887,110
======== ======== ======== ======== ======== ======== ========
Portfolio turnover 17.43% 102.55% 17.43% 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.
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class C Class D
The following per share data
and ratios have been derived For the For the For the For the
from information provided Six Period Six Period
in the financial statements. Months Oct. 21, Months Aug. 2,
Ended 1994++ to Ended For the Year 1991++ to
Increase (Decrease) in Nov. 30, May 31, Nov. 30, Ended May 31, May 31,
Net Asset Value: 1995+++++ 1995 1995+++++ 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning
Operating of period $ 9.56 $ 9.46 $ 9.55 $ 9.53 $ 9.76 $ 9.92 $ 10.00
Performance: -------- -------- -------- -------- -------- -------- --------
Investment income--net .25 .31 .29 .51 .37 .45 .56
Realized and unrealized
gain (loss) on invest-
ments--net (.01) .10 (.03) .03 (.24) (.16) (.08)
-------- -------- -------- -------- -------- -------- --------
Total from investment
operations .24 .41 .26 .54 .13 .29 .48
-------- -------- -------- -------- -------- -------- --------
Less dividends from invest-
ment income--net (.27) (.31) (.29) (.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 2.50%+++ 4.47%+++ 2.79%+++ 5.91% 1.28% 2.99% 4.75%+++
======== ======== ======== ======== ======== ======== ========
Ratios to Average Expenses, net of reim-
Net Assets: bursement and excluding
account maintenance and
distribution fees .87%* .88%* .86%* .83% .71% .66% .62%
======== ======== ======== ======== ======== ======== ========
Expenses, net of
reimbursement 1.67%* 1.68%* 1.11%* 1.08% .96% .91% .87%
======== ======== ======== ======== ======== ======== ========
Expenses 1.67%* 1.68%* 1.11%* 1.08% .96% .91% .96%
======== ======== ======== ======== ======== ======== ========
Investment income--net 5.46%* 5.51%* 6.01%* 5.44% 3.69% 4.79% 6.54%
======== ======== ======== ======== ======== ======== ========
Supplemental Net assets, end of period
Data: (in thousands) $ 1,209 $ 1,409 $ 12,622 $ 16,993 $ 23,043 $ 51,398 $ 80,411
======== ======== ======== ======== ======== ======== ========
Portfolio turnover 17.43% 102.55% 17.43% 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.
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. These unaudited
financial statements reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results
for the interim period presented. All such adjustments are of a
normal recurring nature. 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.
(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.
(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.
NOTES TO FINANCIAL STATEMENTS (concluded)
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 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 six months ended November 30, 1995, 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 $1,902 $15,307
For the six months ended November 30, 1995, MLPF&S received
contingent deferred sales charges of $77,966 and $2,442 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, MLFD, and/or ML
& Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended November 30, 1995 were $36,445,498 and
$54,536,697, respectively.
Net realized and unrealized gain (losses) as of November 30, 1995
were as follows:
Realized Unrealized
Gains Losses
Long-term investments $ 163,843 $ (2,982,172)
------------ ------------
Total $ 163,843 $ (2,982,172)
============ ============
As of November 30, 1995, net unrealized depreciation for Federal
income tax purposes aggregated $2,982,172, of which $1,564,535
related to appreciated securities and $4,546,707 related to
depreciated securities. The aggregate cost of investments at
November 30, 1995 for Federal income tax purposes was $183,193,889.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $39,889,163 and $175,466,828 for the six months ended November
30, 1995 and the year ended May 31, 1995, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Six Months Dollar
Ended November 30, 1995 Shares Amount
Shares sold 129,058 $ 1,229,219
Shares issued to shareholders in
reinvestment of dividends 86 820
------------ -------------
Total issued 129,144 1,230,039
Shares redeemed (131,777) (1,255,377)
------------ -------------
Net decrease (2,633) $ (25,338)
============ =============
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 Six Months Dollar
Ended November 30, 1995 Shares Amount
Shares sold 1,616,921 $ 15,401,934
Shares issued to shareholders in
reinvestment of dividends 313,414 2,985,749
------------ -------------
Total issued 1,930,335 18,387,683
Automatic conversion of shares (38) (359)
Shares redeemed (5,640,601) (53,747,239)
------------ -------------
Net decrease (3,710,304) $ (35,359,915)
============ =============
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 C Shares for the Six Months Dollar
Ended November 30, 1995 Shares Amount
Shares sold 919,139 $ 8,757,073
Shares issued to shareholders
in reinvestment of dividends 1,520 14,479
------------ -------------
Total issued 920,659 8,771,552
Shares redeemed (941,306) (8,969,229)
------------ -------------
Net decrease (20,647) $ (197,677)
============ =============
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.
Class D Shares for the Six Months Dollar
Ended November 30, 1995 Shares Amount
Shares sold 636,441 $ 6,068,425
Automatic conversion of shares 38 359
Shares issued to shareholders
in reinvestment of dividends 24,546 233,805
------------ -------------
Total issued 661,025 6,302,589
Shares redeemed (1,114,495) (10,608,822)
------------ -------------
Net decrease (453,470) $ (4,306,233)
============ =============
Class D Shares for the Year Dollar
Ended 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)
============ =============
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, 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.
