MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Semi-Annual Report
November 30, 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 dated and are
subject to change.
<PAGE>
Merrill Lynch
Adjustable Rate
Securities Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
Printed on post-consumer recycled paper
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
James W. Harshaw, 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
After exhibiting strong growth in the second quarter, US economic
activity moderated in the third quarter as gross domestic product
(GDP) was reported to have risen at a 2.0% rate. Consequently, the
US bond market staged a momentous rally during the period, as
investor fears of a rapidly expanding economy subsided. The US
economy is currently enjoying its most favorable environment in more
than two decades. Inflation is at its lowest rate in more than 30
years, the unemployment rate is near its lowest level in 23 years,
and the US Federal budget deficit is at a 22-year low.
The November 1996 US election results provided a favorable backdrop
to the bond market rally during the November quarter. The
Republican/ Democrat split in Government reassured investors that a
system of checks and balances should prevail over any future course
of fiscal policy. Meanwhile, several sectors of the economy slowed
noticeably from their second-quarter strength. Housing demand has
slackened. New housing starts and permits fell in October to their
lowest level in more than 12 months. In addition, job growth slowed
as well. Non-farm payroll growth, which averaged 240,000 new jobs
through the first eight months of 1996, slowed to an average of
113,000 new jobs over the last three months through November. As a
result, the unemployment rate rose slightly in November to 5.4%.
Rising wages, which unsettled the bond market throughout much of
1996, apparently have had no inflationary impact on the US economy.
Although hourly earnings are higher, rising at a 3.5% rate on a year-
over-year basis through November, the core consumer price index
still continues to run at a 30-year low, rising just 2.6% on a year-
over-year basis. More importantly, wholesale inflation is actually
decelerating. The core producer price index has risen just 0.9% on a
year-over-year basis through October after rising 2.5% at the start
of the year.
<PAGE>
While some sectors of the US economy have slowed, overall economic
activity is far from weak and remains on a moderate non-inflationary
growth path. Despite some investor speculation that the Federal
Reserve Board will ease monetary policy early next year to thwart
impending recessionary conditions in 1997, we expect fourth-quarter
GDP growth to be similar to third-quarter growth and believe that a
recessionary outlook is too premature. At this point, we do not see
any overt influences altering the current track of economic growth.
As such, we expect the Federal Reserve Board to refrain from
changing monetary policy during the remainder of this year and into
early 1997.
Portfolio Strategy
During the quarter ended November 30, 1996, US bond prices rallied
significantly. The yield on the one-year US Treasury bill fell 54
basis points (0.54%) to 5.35%, while the 30-year US Treasury bond
yield fell 75 basis points to 6.36%. As a result, the yield curve
flattened considerably. The front end of the yield curve felt the
greatest impact as the three-month--three-year Treasury spread
narrowed to 56 basis points from 125 basis points just three months
ago.
The adjustable rate mortgage securities (ARMS) market experienced
heightened prepayment and refinancing concerns during the three-
month period as the ten-year US Treasury yield fell 89 basis points
to 6.05%, its lowest level since March 1996 (the ten-year Treasury
is a benchmark from which 30-year fixed mortgage rates are derived).
In addition, the Mortgage Bankers Refinance Index jumped 60% during
the three-month period ended November 30, 1996. However, the Index
still remains well below the peak attained in February 1996. While
it is possible prepayments will pick up slightly, we do not
anticipate a rapid acceleration of prepayments unless the ten-year
Treasury yield falls further. Despite a flatter yield curve and
prepayment concerns, ARMS continue to perform well. The outstanding
performance in 1996 has been largely attributable to the relatively
low levels of ARM origination coupled with overwhelming investor
demand.
During the three-month period ended November 30, 1996, we added
short-term US Treasury securities to our core portfolio holdings. US
Treasury securities offer superior return characteristics in a
sharply declining interest rate environment. In addition, we also
seek to increase portfolio value by focusing on anomalies within the
ARMS market. One such anomaly involves the seasoning effect of ARMS.
ARMS that originated more than five years ago are considered
seasoned, and as such command premium prices as a result of having
narrower yield spreads to their respective indexes. Those ARMS which
have slightly less than five years' seasoning have lower prices and
offer wider yield spreads. In this context, those ARMS just outside
the seasoning window can offer upside price potential as they cross
the seasoned threshold and their yield spreads tighten. We intend to
take advantage of the seasoning anomaly as opportunities present
themselves.
<PAGE>
Looking forward, our dominant investment strategy will continue to
emphasize seasoned ARMS to lessen the prepayment effect on the
Fund's yield and net asset value. Furthermore, we continue to stress
overall portfolio quality. All of the Fund's holdings are either US
Government agency securities or high-quality investment-grade
securities rated AA or better by at least one of the major rating
agencies.
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 with you in our upcoming
quarterly report to shareholders.
Sincerely,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Vice President and Portfolio Manager
December 31, 1996
<PAGE>
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. (There is no initial
sales charge for automatic share conversions.)
* 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.
Average Annual
Total Return
<PAGE>
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/96 +6.94% +2.66%
Inception (10/21/94) through 9/30/96 +7.12 +4.90
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/96 +6.10% +2.10%
Five Years Ended 9/30/96 +3.84 +3.84
Inception (8/2/91) through 9/30/96 +3.98 +3.98
[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 % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 9/30/96 +5.95% +4.95%
Inception (10/21/94) through 9/30/96 +6.20 +6.20
<PAGE>
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 9/30/96 +6.45% +2.19%
Five Years Ended 9/30/96 +4.36 +3.51
Inception (8/2/91) through 9/30/96 +4.49 +3.67
[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--11/30/96 9.53 9.63 -- 0.520 +6.87
------
Total $1.236
Cumulative total return as of 11/30/96: +16.09%**
<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 wereredesignated to Class D Shares.
</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--11/30/96 9.54 9.62 -- 0.454 +5.90
------
Total $2.451
<PAGE>
Cumulative total return as of 11/30/96: +24.07%**
<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%
1995 9.33 9.54 -- 0.528 +8.08
1/1/96--11/30/96 9.54 9.62 -- 0.451 +5.86
------
Total $1.074
Cumulative total return as of 11/30/96: +13.99%**
<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>
PERFORMANCE DATA (concluded)
<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 -- 0.434 +0.25
1995 9.32 9.53 -- 0.582 +8.69
1/1/96--11/30/96 9.53 9.61 -- 0.498 +6.41
------
Total $2.712
<PAGE>
Cumulative total return as of 11/30/96: +27.35%**
<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>
<TABLE>
Recent
Performance
Results
<CAPTION>
12 Month 3 Month
11/30/96 8/31/96 11/30/95 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.63 $9.56 $9.53 +1.05% +0.73%
Class B Shares* 9.62 9.54 9.53 +0.94 +0.84
Class C Shares* 9.62 9.55 9.53 +0.94 +0.73
Class D Shares* 9.61 9.54 9.52 +0.95 +0.73
Class A Shares--Total Return* +7.43(1) +2.24(2)
Class B Shares--Total Return* +6.49(3) +2.16(4)
Class C Shares--Total Return* +6.45(5) +2.04(6)
Class D Shares--Total Return* +7.05(7) +2.18(8)
Class A Shares--Standardized 30-day Yield 5.91%
Class B Shares--Standardized 30-day Yield 5.41%
Class C Shares--Standardized 30-day Yield 5.36%
Class D Shares--Standardized 30-day Yield 5.68%
<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 $0.593 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.145 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.518 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.126 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.514 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.125 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.568 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.139 per share ordinary
income dividends.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Value Percent of
Index Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Adjustable Rate* Certificate of Federal National Mortgage
Mortgage-Backed Deposit Indexed Association:
Obligations** Obligations $ 345 #162619, 6.753% due 6/01/2022 $ 349 $ 351 0.00%
4,743,439 #307622, 7.371% due 4/01/2023 4,880,219 4,900,589 3.59
Constant Maturity Federal Home Loan Mortgage
Treasury Indexed Corporation:
Obligations 2,278,595 #645073, 7.769% due 5/01/2015 2,317,046 2,353,823 1.72
4,294,745 #606108, 7.662% due 9/01/2019 4,381,170 4,482,640 3.28
2,846,190 #775194, 7.184% due 3/01/2020 2,853,973 2,924,005 2.14
65,889 #785173, 7.416% due 8/01/2020 67,413 67,156 0.05
3,585,636 #845139, 7.779% due 3/01/2022 3,640,203 3,742,508 2.74
5,819,393 #845535, 7.807% due 10/01/2023 5,931,498 6,026,069 4.41
8,298,401 #755170, 7.644% due 8/01/2031 8,578,472 8,527,934 6.24
Federal National Mortgage
Association:
541,333 #21041, 6.93% due 10/01/2013 556,897 539,617 0.40
1,603,759 #21059, 6.96% due 11/01/2013 1,649,867 1,603,566 1.17
1,225,752 #20293, 7.37% due 9/01/2015 1,260,993 1,224,845 0.90
5,320,467 #142069, 6.816% due 12/01/2021 5,430,202 5,455,980 4.00
4,552,486 #200009, 7.563% due 2/01/2023 4,569,196 4,699,713 3.44
7,245,948 #291252, 7.985% due 8/01/2024 7,339,045 7,550,495 5.53
1,127,115 #309653, 7.227% due 5/01/2025 1,153,876 1,151,594 0.84
2,686,127 #324905, 7.315% due 9/01/2025 2,713,488 2,787,696 2.04
9,154,252 Prudential Home Mortgage
Securities Company, Inc., REMIC
(a) 92-35-A1, 8.307% due
10/01/2022 9,383,108 9,280,123 6.80
Cost of Funds 4,136,631 DLJ Mortgage Acceptance Corp.,
Indexed Obligations REMIC (a) 91-6-A1, 7.831% due
9/01/2021 4,207,406 4,154,729 3.04
<PAGE>
London Interbank 6,445,838 Federal National Mortgage
Offered Rate Association, #305729, 7.735%
Indexed Obligations due 2/01/2025 6,638,176 6,671,442 4.89
Resolution Trust Corporation,
REMIC (a):
6,510,813 91-M7-B, 7.437% due 1/25/2021 6,510,813 6,595,552 4.83
15,005,373 92-C1-B, 7.437% due 8/25/2023 14,452,295 15,028,819 11.00
12,000,000 Saxon Mortgage Securities
Corporation, REMIC (a)92-3-B,
7.851% due 11/25/2022 12,270,781 12,165,000 8.91
Total Investments in Adjustable
Rate Mortgage-Backed Obligations 110,786,486 111,934,246 81.96
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value Percent of
Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Derivative $16,401,959 Capstead Mortgage Securities
Mortgage-Backed Corporation II, REMIC (a)
Obligations**-- 93-2I-A3, 0.50% due 9/25/2023 $ 230,094 $ 95,131 0.07%
Interest Only (b) 66,024,289 DLJ Mortgage Acceptance Corp.,
REMIC (a) 92-6-A1, 0.644% due
7/25/2022 939,778 726,267 0.53
82,354 Federal Home Loan Mortgage
Corporation, REMIC (a)(c)
92-1363-C, 371% due 8/15/2022 1,361,448 654,712 0.48
138 Prudential Home Mortgage
Securities Company, Inc., REMIC
(a) 92-1-A9, 42,989% due 2/25/2022 28,261 19,601 0.01
17,161,940 Residential Funding Mortgage
Securities I, Inc., REMIC (a)
92-S3-A9, 0.50% due 1/25/2007 1,891,001 1,030 0.00
Sears Mortgage Securities Corp.,
REMIC (a):
4,374 91-K-A4, 5,779% due 9/25/2021 582,823 424,284 0.31
34,487,761 92-12-A3, 0.51% due 7/25/2022 403,160 441,874 0.33
Total Investments in Derivative
Mortgage-Backed Obligations--
Interest Only 5,436,565 2,362,899 1.73
<PAGE>
Fixed Rate 4,500,347 Resolution Trust Corporation,
Mortgage-Backed REMIC (a) 92-CHF-B, 7.15% due
Obligations** 12/25/2020 4,553,970 4,529,881 3.32
Total Investments in Fixed Rate
Mortgage-Backed Obligations 4,553,970 4,529,881 3.32
Total Investments in Mortgage-
Backed Obligations 120,777,021 118,827,026 87.01
US Government United States Treasury Notes:
Obligations 7,000,000 6.125% due 8/31/1998 6,969,922 7,063,420 5.17
8,000,000 6% due 8/15/1999 7,913,125 8,066,240 5.91
Total Investments in US
Government Obligations 14,883,047 15,129,660 11.08
Short-Term Repurchase 3,850,000 Nikko Securities International,
Securities Agreements*** Inc., purchased on 11/29/1996 to
yield 5.70% to 12/02/1996 3,850,000 3,850,000 2.82
Total Short-Term Securities 3,850,000 3,850,000 2.82
Total Investments $139,510,068 137,806,686 100.91
============
Liabilities in Excess of Other
Assets (1,238,549) (.91)
------------ -------
Net Assets $136,568,137 100.00%
============ =======
<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>
<PAGE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of November 30, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$139,510,068) (Note 1a) $ 137,806,686
Receivables:
Interest $ 1,156,350
Principal paydowns 307,794
Capital shares sold 15,690 1,479,834
-------------
Deferred organization expenses (Note 1f) 4,003
Prepaid registration fees and other assets (Note 1f) 82,744
-------------
Total assets 139,373,267
-------------
Liabilities: Payables:
Securities purchased 1,158,861
Capital shares redeemed 1,106,576
Dividends to shareholders (Note 1g) 208,196
Distributor (Note 2) 82,236
Investment adviser (Note 2) 58,575 2,614,444
-------------
Accrued expenses and other liabilities 190,686
-------------
Total liabilities 2,805,130
-------------
Net Assets: Net assets $ 136,568,137
=============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares
Consist of: authorized $ 2,883
Class B Common Stock, $0.10 par value, 200,000,000 shares
authorized 1,263,827
Class C Common Stock, $0.10 par value, 100,000,000 shares
authorized 19,739
Class D Common Stock, $0.10 par value, 200,000,000 shares
authorized 133,523
Paid-in capital in excess of par 169,816,707
Accumulated investment loss--net (48,176)
Accumulated realized capital losses on investments--net
(Note 5) (32,916,984)
Unrealized depreciation on investments--net (1,703,382)
-------------
Net assets $ 136,568,137
=============
<PAGE>
Net Asset Class A--Based on net assets of $277,716 and 28,827 shares
Value: outstanding $ 9.63
=============
Class B--Based on net assets of $121,556,484 and 12,638,269
shares outstanding $ 9.62
=============
Class C--Based on net assets of $1,899,610 and 197,385
shares outstanding $ 9.62
=============
Class D--Based on net assets of $12,834,327 and 1,335,228
shares outstanding $ 9.61
=============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended November 30, 1996
<S> <S> <C>
Investment Income Interest and discount earned, net of premium amortization $ 4,944,112
(Note 1e): -------------
Expenses: Account maintenance and distribution fees--Class B (Note 2) 480,066
Investment advisory fees (Note 2) 358,013
Transfer agent fees--Class B (Note 2) 82,367
Professional fees 43,605
Registration fees (Note 1f) 35,357
Accounting services (Note 2) 31,936
Printing and shareholder reports 28,178
Directors' fees and expenses 20,704
Account maintenance fees--Class D (Note 2) 15,884
Custodian fees 14,832
Account maintenance and distribution fees--Class C (Note 2) 9,040
Transfer agent fees--Class D (Note 2) 6,688
Amortization of organization expenses (Note 1f) 2,049
Transfer agent fees--Class C (Note 2) 1,324
Pricing fees 623
Transfer agent fees--Class A (Note 2) 153
Other 7,759
-------------
Total expenses 1,138,578
-------------
Investment income--net 3,805,534
-------------
<PAGE>
Realized & Realized loss on investments--net (105,208)
Unrealized Gain Change in unrealized depreciation on investments--net 1,494,355
(Loss) on -------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 5,194,681
(Notes 1c, 1e & 3): =============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the
Months Ended Year Ended
November 30, May 31,
Increase (Decrease) in Net Assets: 1996 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 3,805,534 $ 10,070,282
Realized gain (loss) on investments--net (105,208) 318,695
Change in unrealized depreciation on investments--net 1,494,355 (890,435)
------------- -------------
Net increase in net assets resulting from operations 5,194,681 9,498,542
------------- -------------
Dividends to Investment income--net:
Shareholders Class A (8,775) (27,553)
(Note 1g): Class B (3,397,658) (9,248,234)
Class C (59,202) (81,537)
Class D (368,644) (812,697)
------------- -------------
Net decrease in net assets resulting from dividends to
shareholders (3,834,279) (10,170,021)
------------- -------------
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (18,338,095) (66,863,233)
(Note 4): ------------- -------------
Net Assets: Total decrease in net assets (16,977,693) (67,534,712)
Beginning of period 153,545,830 221,080,542
------------- -------------
End of period $ 136,568,137 $ 153,545,830
============= =============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
For the
The following per share data and ratios have been For the Six Period
derived from information provided in the financial Months For the Oct. 21,
statements. Ended Year Ended 1994++ to
Nov. 30, May 31, May 31,
Increase (Decrease) in Net Asset Value: 1996+++++ 1996+++++ 1995
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.54 $ 9.55 $ 9.46
Operating -------- -------- --------
Performance: Investment income--net .30 .56 .36
Realized and unrealized gain on investments--net .08 .03 .09
-------- -------- --------
Total from investment operations .38 .59 .45
-------- -------- --------
Less dividends from investment income--net (.29) (.60) (.36)
-------- -------- --------
Net asset value, end of period $ 9.63 $ 9.54 $ 9.55
======== ======== ========
Total Investment Based on net asset value per share 4.04%+++ 6.41% 4.85%+++
Return:** ======== ======== ========
Ratios to Average Expenses .86%* .81% .87%*
Net Assets: ======== ======== ========
Investment income--net 6.04%* 6.20% 6.18%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 278 $ 281 $ 345
Data: ======== ======== ========
Portfolio turnover 14.02% 25.30% 102.55%
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Class B
The following per share data and ratios have For the
been derived from information provided in the Six Months
financial statements. Ended
Nov. 30, For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 1996+++++ 1996+++++ 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.53 $ 9.56 $ 9.53 $ 9.76 $ 9.92
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .25 .52 .46 .32 .40
Realized and unrealized gain (loss) on
investments--net .09 (.02) .04 (.24) (.16)
-------- -------- -------- -------- --------
Total from investment operations .34 .50 .50 .08 .24
-------- -------- -------- -------- --------
Less dividends from investment income--net (.25) (.53) (.47) (.31) (.40)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.62 $ 9.53 $ 9.56 $ 9.53 $ 9.76
======== ======== ======== ======== ========
<PAGE>
Total Investment Based on net asset value per share 3.64%+++ 5.34% 5.48% .77% 2.48%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.64%* 1.59% 1.59% 1.46% 1.40%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 5.27%* 5.45% 4.88% 3.20% 4.15%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $121,556 $137,387 $202,334 $374,376 $689,593
Data: ======== ======== ======== ======== ========
Portfolio turnover 14.02% 25.30% 102.55% 60.38% 104.71%
======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
Class C
For the
The following per share data and ratios have been For the Six Period
derived from information provided in the financial Months For the Oct. 21,
statements. Ended Year Ended 1994++ to
Nov. 30, May 31, May 31,
Increase (Decrease) in Net Asset Value: 1996+++++ 1996+++++ 1995
<S> <S> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.53 $ 9.56 $ 9.46
Operating -------- -------- --------
Performance: Investment income--net .24 .48 .31
Realized and unrealized gain on investments--net .10 .01 .10
-------- -------- --------
Total from investment operations .34 .49 .41
-------- -------- --------
Less dividends from investment income--net (.25) (.52) (.31)
-------- -------- --------
Net asset value, end of period $ 9.62 $ 9.53 $ 9.56
======== ======== ========
<PAGE>
Total Investment Based on net asset value per share 3.62%+++ 5.30% 4.47%+++
Return:** ======== ======== ========
Ratios to Average Expenses 1.68%* 1.57% 1.68%*
Net Assets: ======== ======== ========
Investment income--net 5.23%* 5.40% 5.51%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 1,900 $ 3,078 $ 1,409
Data: ======== ======== ========
Portfolio turnover 14.02% 25.30% 102.55%
======== ======== ========
<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>
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class D
The following per share data and ratios have For the
been derived from information provided in the Six Months
financial statements. Ended
Nov. 30, For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 1996+++++ 1996+++++ 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.52 $ 9.55 $ 9.53 $ 9.76 $ 9.92
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .28 .56 .51 .37 .45
Realized and unrealized gain (loss) on
investments--net .09 (.01) .03 (.24) (.16)
-------- -------- -------- -------- --------
Total from investment operations .37 .55 .54 .13 .29
-------- -------- -------- -------- --------
Less dividends from investment income--net (.28) (.58) (.52) (.36) (.45)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.61 $ 9.52 $ 9.55 $ 9.53 $ 9.76
======== ======== ======== ======== ========
<PAGE>
Total Investment Based on net asset value per share 3.91%+++ 5.91% 5.91% 1.28% 2.99%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.12%* 1.06% 1.08% .96% .91%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 5.78%* 5.98% 5.44% 3.69% 4.79%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 12,834 $ 12,800 $ 16,993 $ 23,043 $ 51,398
Data: ======== ======== ======== ======== ========
Portfolio turnover 14.02% 25.30% 102.55% 60.38% 104.71%
======== ======== ======== ======== ========
<FN>
*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. 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.
<PAGE>
(a) Valuation of investments--Portfolio securities which are traded
in the market are valued at the last available bid price or on the
basis of yield equivalents as obtained from one or more dealers that
make markets in such securities. Options written on mortgage-backed
securities and other securities of the Fund which are traded on
exchanges are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the
over-the-counter market, the last asked price. Options purchased by
the Fund are valued at their last sale price in the case of exchange-
traded options or, in the case of options traded in the over-the-
counter market, the last bid price. Interest rate futures contracts
and options thereon, which are traded on exchanges, are stated at
market value. Securities for which market quotations are not readily
available are valued at their fair value as determined in good faith
by or under the direction of the Board of Directors of the Fund.
(b) Repurchase agreements--The Fund invests in US Government
securities pursuant to repurchase agreements with a member bank of
the Federal Reserve System or a primary dealer in US Government
securities. Under such agreements, the bank or primary dealer agrees
to repurchase the security at a mutually agreed upon time and price.
The Fund takes possession of the underlying securities, marks to
market such securities and, if necessary, receives additions to such
securities daily to ensure that the contract is fully
collateralized.
(c) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Options--The Fund is authorized to purchase and write covered call
and put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
<PAGE>
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and related options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected. Pursuant to the contract, the Fund agrees to receive from
or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are
known as variation margins and are recorded by the Fund as
unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the
value of the contract at the time it was opened and the value at the
time is was closed.
NOTES TO FINANCIAL STATEMENTS (continued)
(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.
<PAGE>
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor, Inc. ("MLFD" or "Distributor"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc.
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to the operations of the Fund. For such
services, the Fund pays a monthly fee of 0.50%, on an annual basis,
of the average daily value of the Fund's net assets.
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, 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 $556 $6,265
For the six months ended November 30, 1996, MLPF&S received
contingent deferred sales charges of $36,420 and $3,724 relating to
transactions in Class B and Class C Shares, respectively.
<PAGE>
For the six months ended November 30, 1996, the Fund paid Merrill
Lynch Security Pricing Service, an affiliate of MLPF&S, $560 for
security price quotations to compute the net asset value of the
Fund.
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, 1996 were $19,573,835 and
$31,945,685, respectively.
Net realized and unrealized losses as of November 30, 1996 were as
follows:
Realized Unrealized
Losses Losses
Long-term investments $ (105,208) $ (1,703,382)
------------- -------------
Total $ (105,208) $ (1,703,382)
============= =============
As of November 30, 1996, net unrealized depreciation for Federal
income tax purposes aggregated $1,703,382, of which $1,847,334
related to appreciated securities and $3,550,716 related to
depreciated securities. The aggregate cost of investments at
November 30, 1996 for Federal income tax purposes was $139,510,068.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $18,338,095 and $66,863,233 for the six months ended November
30, 1996 and the year ended May 31, 1996, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Six Months Dollar
Ended November 30, 1996 Shares Amount
<PAGE>
Shares sold 122,987 $ 1,180,163
Shares issued to shareholders
in reinvestment of dividends 18 171
------------- -------------
Total issued 123,005 1,180,334
Shares redeemed (123,648) (1,186,791)
------------- -------------
Net decrease (643) $ (6,457)
============= =============
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)
============= =============
Class B Shares for the Six Months Dollar
Ended November 30, 1996 Shares Amount
Shares sold 3,087,963 $ 29,850,443
Shares issued to shareholders
in reinvestment of dividends 205,864 1,635,315
------------- -------------
Total issued 3,293,827 31,485,758
Automatic conversion of shares (2,374) (22,815)
Shares redeemed (5,075,020) (48,503,423)
------------- -------------
Net decrease (1,783,567) $ (17,040,480)
============= =============
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)
============= =============
<PAGE>
Class C Shares for the Six Months Dollar
Ended November 30, 1996 Shares Amount
Shares sold 245,289 $ 2,350,760
Shares issued to shareholders
in reinvestment of dividends 3,845 36,756
------------- -------------
Total issued 249,134 2,387,516
Shares redeemed (374,631) (3,586,453)
------------- -------------
Net decrease (125,497) $ (1,198,937)
============= =============
NOTES TO FINANCIAL STATEMENTS (concluded)
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 D Shares for the Six Months Dollar
Ended November 30, 1996 Shares Amount
Shares sold 1,916,512 $ 18,242,969
Automatic conversion of shares 2,377 22,815
Shares issued to shareholders
in reinvestment of dividends 19,830 189,566
------------- -------------
Total issued 1,938,719 18,455,350
Shares redeemed (1,948,090) (18,547,571)
------------- -------------
Net decrease (9,371) $ (92,221)
============= =============
<PAGE>
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)
============= =============
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.
