MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Annual Report
May 31, 1997
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
Joseph T. Monagle Jr., 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
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
<PAGE>
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
DEAR SHAREHOLDER
Economic Environment
US gross domestic product (GDP) surged 5.8% in the first quarter of
1997, well above the economy's non-inflationary growth potential and
our own expectations. First-quarter growth was driven by a huge
pickup in consumer spending and stronger-than-expected inventory
accumulation. However, the latest economic data suggest these gains
are moderating. As such, we expect second-quarter growth to fall to
a more moderate 2%--2.5% rate.
Real consumer spending rose at its fastest pace in nine years during
the first quarter, rising 6.4% compared to 2.6% for all of 1996. The
"persisting strength of demand" was cited by Federal Reserve Board
(FRB) Chairman Alan Greenspan as the chief contributing factor in
the FRB's decision to raise interest rates in March. Nonetheless,
consumer demand appears to be slowing to a more temperate pace in
the second quarter. Early economic reports show retail sales
softening and vehicle sales declining. Inventory building
unexpectedly grew at its fastest pace in two years and added 2% to
first-quarter GDP growth. Unless consumer demand remains excessively
strong, the rate of inventory building in the first quarter is
probably unsustainable. As a result, we expect inventory
accumulation to decelerate and act as a drag on second-quarter GDP.
In May, the US unemployment rate fell to 4.8%, the lowest rate in
nearly 24 years. Despite a tight labor market, there are no labor
cost pressures in the inflation pipeline. The employment cost index
rose 0.6% in the first quarter and is up just 2.9% from a year ago,
which is near the slowest compensation pace in 50 years. Overall,
inflation still remains dormant. Both the core consumer price and
core producer price indexes rose just 2.5% and 0.8%, respectively,
on a year-over-year basis through April. In addition, the Journal of
Commerce Industrial Price Index, a broad measure of inflationary
trends, fell to a three-year low in May.
Although we believe the US economy continues to enjoy the best of
all worlds and will continue on its low inflation, moderate growth
path, there are risks which could increase interest rate volatility
in the interim. The FRB faces two immediate concerns. First,
aggregate demand remains overly strong causing capacity to become
stressed. Second, continued tightening of the labor markets will
lead to rising wage inflation. Should either of these conditions
fail to lessen, it is likely the FRB will continue to tighten
monetary policy by raising interest rates. Regardless, we believe
overall interest rate risk should be limited, as long as inflation
remains subdued.
<PAGE>
Fiscal Year in Review
The Fund's fiscal year ended May 31, 1997 marked a period in which
interest rates moved in tandem with changes in economic growth.
However, despite pronounced swings in GDP, stable inflation kept
interest rates within a relatively narrow trading band. As a result,
interest rate volatility declined, causing adjustable rate mortgage
securities (ARMS) to once again perform exceptionally well. Though
the Fund's fiscal year began and ended with interest rates virtually
unchanged for the second year in a row, the net asset values of all
the Fund's classes of shares rose during the 12-month period ended
May 31,1997. (For complete performance information, including
average annual total returns, see pages 4--7 of this report to
shareholders.)
As the 1996 second quarter unfolded, robust economic growth pushed
interest rates higher causing the one-year Treasury bill to reach
its 1996 peak yield of 5.96% in July. As it became apparent that
growth was slowing in the third quarter of 1996, the bond market
staged an eventful rally, causing the one-year Treasury bill yield
to fall to its 1996 low of 5.35% in November 1996. However, as the
US economy regained momentum during the fourth quarter of 1996 and
the first quarter of 1997, interest rates once again moved higher
culminating with the FRB raising interest rates in March. Finally,
with the latest economic data indicating slower second-quarter
growth, interest rates fell from their 1997 highs. The one-year
Treasury bill ended May yielding 5.76%.
Our basic investment strategy during the year ended May 31, 1997
again focused on holding "seasoned" ARMS. Seasoned ARMS--those that
were originated over five years ago and have experienced various
interest rate cycles--typically prepay much slower than other ARMS
because either the underlying ARM loans cannot be refinanced or
there is interest rate insensitivity among the remaining mortgagors
in the ARM pools. Not only did the Fund benefit from the relatively
stable cashflows of our seasoned ARMS, but their yield spreads
narrowed as well and prices rose significantly. As a result, ARMS
once again outperformed money market instruments. In addition, the
Fund increased its holdings of short-term US Treasury securities in
the third quarter of 1996 as interest rates neared their highs.
Because US Treasury securities offer superior return characteristics
in a declining interest rate environment, the Fund benefited as
interest rates rallied in the third and fourth quarters of 1996.
Looking ahead, while we believe that the US economy will continue on
its low inflation, moderate growth path and interest rates will
remain within a modest range, we will not be lulled into a sense of
complacency. As such, we have identified two possible risks to the
ARMS market. First, should economic growth fail to subside, the FRB
could engineer a series of policy tightenings, pushing short-term
interest rates up sharply. In such a scenario, interest rate
volatility would increase dramatically and push ARMS prices down.
Second, should economic growth become weaker than expected, the bond
market could rally, increasing prepayment risk. Because most ARMS
trade at premium prices, faster prepayments could dampen those
prices. In any event, our overall investment strategy will continue
to emphasize yield enhancement, while limiting net asset value
fluctuation.
<PAGE>
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
June 24, 1997
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. However, in the case of certain
eligible investors, the shares were simultaneously exchanged for
Class A Shares.
<PAGE>
* 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. Figures shown in the "Average Annual Total
Return" tables as well as the total returns and cumulative total
returns in the "Performance Summary" tables assume reinvestment of
all dividends and capital gains distributions at net asset value on
the payable date. 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.
Total Return
Based on a
$10,000 Investment
A line graph depicting the growth of an investment in the Fund's
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:
Class A & Class C Shares
10/21/94* 5/31/97
ML Adjustable Rate Securities Fund, Inc++-- $ 9,600 $11,512
Class A Shares*
<PAGE>
ML Adjustable Rate Securities Fund, Inc++-- $10,000 $11,717
Class C Shares*
Lehman Brothers Short Government Index $10,000 $11,844
(1-2 Years)++++
Six-Month Treasury Bill Index++++++ $10,000 $11,518
Class B & Class D Shares
8/2/91* 5/31/97
ML Adjustable Rate Securities Fund, Inc++-- $10,000 $12,742
Class B Shares*
ML Adjustable Rate Securities Fund, Inc++-- $ 9,600 $12,602
Class D Shares*
Lehman Brothers Short Government Index $10,000 $14,069
(1-2 Years)++++
Six-Month Treasury Bill Index++++++ $10,000 $13,088
[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 securities 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 unmaneged Index is comprised of US Treasury bills
maturing in up to six months.
Past Performance is not predictive of future performance.
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/97 +7.17% +2.88%
Inception (10/21/94) through 3/31/97 +7.09 +5.31
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<PAGE>
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/97 +6.35% +2.35%
Five Years Ended 3/31/97 +4.03 +4.03
Inception (8/2/91) through 3/31/97 +4.17 +4.17
[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 3/31/97 +6.20% +5.20%
Inception (10/21/94) through 3/31/97 +6.18 +6.18
[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 3/31/97 +6.90% +2.63%
Five Years Ended 3/31/97 +4.54 +3.69
Inception (8/2/91) through 3/31/97 +4.68 +3.93
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
PERFORMANCE DATA (concluded)
<PAGE>
<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
1996 9.53 9.63 -- 0.587 +7.42
1/1/97--5/31/97 9.63 9.65 -- 0.229 +2.78
------
Total $1.532
Cumulative total return as of 5/31/97: +19.93%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures 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
1995 9.33 9.54 -- 0.533 +8.13
1996 9.54 9.60 -- 0.512 +6.16
1/1/97--5/31/97 9.60 9.62 -- 0.200 +2.45
------
Total $2.709
Cumulative total return as of 5/31/97: +27.42%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not reflect deduction of any sales charge; results
would be lower if sales charge was deducted.
</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
1996 9.54 9.61 -- 0.509 +6.23
1/1/97--5/31/97 9.61 9.63 -- 0.199 +2.44
------
Total $1.331
Cumulative total return as of 5/31/97: +17.17%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures 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 -- 0.434 +0.26
1995 9.32 9.53 -- 0.582 +8.69
1996 9.53 9.60 -- 0.562 +6.82
1/1/97--5/31/97 9.60 9.62 -- 0.219 +2.67
------
Total $2.995
Cumulative total return as of 5/31/97: +31.27%**
<FN>
*Figures may include short-term capital gains distributions.
**Figures do not include sales charge; results would be lower if
sales charge was included.
</TABLE>
<PAGE>
<TABLE>
Recent
Performance
Results
<CAPTION>
12 Month 3 Month
5/31/97 2/28/97 5/31/96 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.65 $9.63 $9.54 +1.15% +0.21%
Class B Shares* 9.62 9.61 9.53 +0.94 +0.10
Class C Shares* 9.63 9.62 9.53 +1.05 +0.10
Class D Shares* 9.62 9.61 9.52 +1.05 +0.10
Class A Shares--Total Return* +7.48(1) +1.74(2)
Class B Shares--Total Return* +6.44(3) +1.44(4)
Class C Shares--Total Return* +6.51(5) +1.44(6)
Class D Shares--Total Return* +7.11(7) +1.58(8)
Class A Shares--Standardized 30-day Yield 5.68%
Class B Shares--Standardized 30-day Yield 5.18%
Class C Shares--Standardized 30-day Yield 5.12%
Class D Shares--Standardized 30-day Yield 5.45%
<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 $0.584 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.148 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.509 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.129 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.506 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.128 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.559 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.142 per share ordinary
income dividends.
</TABLE>
<PAGE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Value Percent of
Index Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Adjustable Rate* Certificate of Deposit $ 4,222,688 Federal National Mortgage
Mortgage-Backed Indexed Obligations Association, #307622, 7.403%
Obligations** due 4/01/2023 $ 4,343,668 $ 4,352,662 3.49%
Constant Maturity Federal Home Loan Mortgage
Treasury Indexed Corporation:
Obligations 2,107,567 #645073, 7.762% due 5/01/2015 2,143,132 2,174,322 1.74
3,830,652 #606108, 7.807% due 9/01/2019 3,907,146 4,031,762 3.23
2,500,737 #775194, 7.131% due 3/01/2020 2,507,515 2,581,236 2.07
65,360 #785173, 7.64% due 8/01/2020 66,871 66,953 0.05
2,913,559 #845139, 8.036% due 3/01/2022 2,957,665 3,061,072 2.45
5,221,670 #845535, 7.881% due 10/01/2023 5,321,716 5,487,662 4.39
7,921,860 #755170, 7.607% due 8/01/2031 8,189,222 8,185,499 6.55
Federal National Mortgage
Association:
531,615 #21041, 7.31% due 10/01/2013 546,899 529,127 0.42
1,417,131 #21059, 7.29% due 11/01/2013 1,457,874 1,413,121 1.13
1,129,257 #20293, 6.78% due 9/01/2015 1,161,723 1,119,625 0.90
4,563,301 #142069, 7.26% due 12/01/2021 4,657,419 4,742,274 3.80
1,969,254 #181278, 7.378% due 9/01/2022 2,018,893 2,012,332 1.61
4,294,267 #200009, 7.58% due 2/01/2023 4,309,933 4,435,849 3.55
5,924,866 #291252, 7.993% due 8/01/2024 6,000,600 6,188,700 4.96
997,662 #309653, 7.22% due 5/01/2025 1,021,237 1,020,269 0.82
2,350,964 #324905, 7.768% due 9/01/2025 2,374,820 2,452,296 1.96
7,736,184 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-35-A1,
8.286% due 11/25/2022 7,929,589 7,899,369 6.32
Cost of Funds 3,743,454 DLJ Mortgage Acceptance Corp.,
Indexed Obligations REMIC (a)91-6-A1, 7.827% due
9/25/2021 3,807,502 3,755,152 3.01
London Interbank 5,400,781 Federal National Mortgage
Offered Rate Indexed Association, #305729, 7.626%
Obligations due 2/01/2025 5,561,013 5,587,270 4.47
Resolution Trust Corporation,
REMIC (a):
6,510,813 91-M7-B, 7.75% due 1/25/2021 6,510,813 6,532,716 5.23
15,005,514 92-C1-B, 7.75% due 8/25/2023 14,452,436 15,080,541 12.07
12,000,000 Saxon Mortgage Securities
Corporation, REMIC (a) 92-3-B,
7.819% due 11/25/2022 12,249,724 12,090,000 9.68
Total Investments in Adjustable
Rate Mortgage-Backed Obligations 103,497,410 104,799,809 83.90
<PAGE>
Derivative 14,345,214 Capstead Mortgage Securities
Mortgage-Backed Corporation II, REMIC (a) 93-2I-A3,
Obligations**-- 0.50% due 9/25/2023 218,728 71,726 0.06
Interest Only (b) 60,669,172 DLJ Mortgage Acceptance Corp., REMIC
(a) 92-6-A1, 0.644% due 7/25/2022 839,528 594,558 0.47
76,211 Federal Home Loan Mortgage
Corporation, REMIC (a)(c) 92-1363-C,
323% due 8/15/2022 1,247,520 595,750 0.48
91 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-1-A9,
42,989% due 2/25/2022 22,001 10,325 0.01
Sears Mortgage Securities Corp.,
REMIC (a):
3,924 91-K-A4, 5,879% due 9/25/2021 535,120 370,831 0.30
31,621,325 92-12-A3, 0.51% due 7/25/2022 359,745 331,036 0.26
Total Investments in Derivative
Mortgage-Backed Obligations--
Interest Only 3,222,642 1,974,226 1.58
Fixed Rate 3,811,635 Resolution Trust Corporation, REMIC
Mortgage-Backed (a) 92-CHF-B, 7.15% due 12/25/2020 3,856,685 3,815,804 3.06
Obligations**
Total Investments in Fixed Rate
Mortgage-Backed Obligations 3,856,685 3,815,804 3.06
Total Investments in Mortgage-
Backed Obligations 110,576,737 110,589,839 88.54
US Government United States Treasury Notes:
Obligations 7,000,000 6.125% due 8/31/1998 6,969,922 7,010,920 5.62
5,000,000 6% due 8/15/1999 4,942,656 4,974,200 3.98
Total Investments in US Government
Obligations 11,912,578 11,985,120 9.60
Short-Term Repurchase 2,464,000 Nikko Securities International,
Securities Agreements*** Inc., purchased on 5/30/1997 to
yield 5.58% to 6/02/1997 2,464,000 2,464,000 1.97
Total Short-Term Securities 2,464,000 2,464,000 1.97
Total Investments $124,953,315 125,038,959 100.11
============
Liabilities in Excess of Other
Assets (131,173) (.11)
------------ -------
Net Assets $124,907,786 100.00%
============ =======
<PAGE>
<FN>
*Adjustable Rate Obligations have coupon rates which reset
periodically.
**Mortgage-Backed Obligations are subject to principal paydowns as a
result of prepayments or refinancings of the underlying mortgage
instruments. As a result, the average life may be substantially less
than the original maturity.
***Repurchase Agreements are fully collateralized by US Government &
Agency Obligations.
(a)Real Estate Mortgage Investment Conduits (REMIC).
(b)Securities which receive some or all of the interest portion of
the underlying collateral and little or no principal. Interest only
securities have either a nominal or a notional amount of principal.
(c)Adjustable rate coupon that resets inversely to changes in the
London Interbank Offered Rate.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
As of May 31, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$124,953,315) (Note 1a) $125,038,959
Cash 242
Receivables:
Interest $ 1,047,126
Principal paydowns 286,465
Capital shares sold 10,590 1,344,181
------------
Prepaid registration fees and other assets (Note 1f) 90,988
------------
Total assets 126,474,370
------------
Liabilities: Payables:
Capital shares redeemed 1,141,678
Dividends to shareholders (Note 1g) 180,210
Distributor (Note 2) 76,925
Investment adviser (Note 2) 55,222 1,454,035
------------
Accrued expenses and other liabilities 112,549
------------
Total liabilities 1,566,584
------------
Net Assets: Net assets $124,907,786
============
<PAGE>
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares authorized $ 2,749
Consist of: Class B Common Stock, $0.10 par value, 600,000,000 shares authorized 1,102,284
Class C Common Stock, $0.10 par value, 100,000,000 shares authorized 55,214
Class D Common Stock, $0.10 par value, 200,000,000 shares authorized 137,950
Paid-in capital in excess of par 158,237,079
Accumulated realized capital losses on investments--net (Note 5) (34,713,134)
Unrealized appreciation on investments--net 85,644
------------
Net assets $124,907,786
============
Net Asset Class A--Based on net assets of $265,239 and 27,491
Value: shares outstanding $ 9.65
============
Class B--Based on net assets of $106,060,849 and 11,022,844
shares outstanding $ 9.62
============
Class C--Based on net assets of $5,315,233 and 552,141
shares outstanding $ 9.63
============
Class D--Based on net assets of $13,266,465 and 1,379,496
shares outstanding $ 9.62
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
For the Year Ended May 31, 1997
<S> <S> <C>
Investment Income Interest and discount earned, net of premium amortization $ 9,650,937
(Note 1e): ------------
Expenses: Account maintenance and distribution fees--Class B (Note 2) 905,720
Investment advisory fees (Note 2) 689,185
Transfer agent fees--Class B (Note 2) 131,694
Accounting services (Note 2) 98,039
Professional fees 80,005
Registration fees (Note 1f) 73,122
Printing and shareholder reports 68,928
Directors' fees and expenses 40,439
Account maintenance fees--Class D (Note 2) 32,462
Account maintenance and distribution fees--Class C (Note 2) 30,129
Custodian fees 24,582
Transfer agent fees--Class D (Note 2) 11,235
Amortization of organization expenses (Note 1f) 4,003
Transfer agent fees--Class C (Note 2) 3,634
Pricing fees 1,711
Transfer agent fees--Class A (Note 2) 313
Other 14,968
------------
Total expenses 2,210,169
------------
Investment income--net 7,440,768
------------
<PAGE>
Realized & Realized loss on investments--net (1,901,359)
Unrealized Gain Change in unrealized depreciation on investments--net 3,283,381
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 8,822,790
(Notes 1c, 1e & 3): ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended May 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <S> <C> <C>
Operations: Investment income--net $ 7,440,768 $ 10,070,282
Realized gain (loss) on investments--net (1,901,359) 318,695
Change in unrealized appreciation/depreciation on investments--net 3,283,381 (890,435)
------------ ------------
Net increase in net assets resulting from operations 8,822,790 9,498,542
------------ ------------
Dividends to Investment income--net:
Shareholders Class A (21,887) (27,553)
(Note 1g): Class B (6,440,557) (9,248,234)
Class C (200,022) (81,537)
Class D (758,871) (812,697)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders (7,421,337) (10,170,021)
------------ ------------
Capital Share Net decrease in net assets derived from capital share transactions (30,039,497) (66,863,233)
Transactions ------------ ------------
(Note 4):
Net Assets: Total decrease in net assets (28,638,044) (67,534,712)
Beginning of year 153,545,830 221,080,542
------------ ------------
End of year $124,907,786 $153,545,830
============ ============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
For the
Period
The following per share data and ratios have been derived For the Oct. 21,
from information provided in the financial statements. Year Ended 1994++ to
May 31, May 31,
Increase (Decrease) in Net Asset Value: 1997+++++ 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 .59 .56 .36
Realized and unrealized gain on investments--net .10 .03 .09
-------- -------- --------
Total from investment operations .69 .59 .45
-------- -------- --------
Less dividends from investment income--net (.58) (.60) (.36)
-------- -------- --------
Net asset value, end of period $ 9.65 $ 9.54 $ 9.55
======== ======== ========
Total Investment Based on net asset value per share 7.48% 6.41% 4.85%+++
Return:** ======== ======== ========
Ratios to Average Expenses .89% .81% .87%*
Net Assets: ======== ======== ========
Investment income--net 6.13% 6.20% 6.18%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 265 $ 281 $ 345
Data: ======== ======== ========
Portfolio turnover 18.48% 25.30% 102.55%
======== ======== ========
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class B
For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 1997+++++ 1996+++++ 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.53 $ 9.56 $ 9.53 $ 9.76 $ 9.92
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .51 .52 .46 .32 .40
Realized and unrealized gain (loss) on
investments--net .09 (.02) .04 (.24) (.16)
-------- -------- -------- -------- --------
Total from investment operations .60 .50 .50 .08 .24
-------- -------- -------- -------- --------
Less dividends from investment income--net (.51) (.53) (.47) (.31) (.40)
-------- -------- -------- -------- --------
Net asset value, end of year $ 9.62 $ 9.53 $ 9.56 $ 9.53 $ 9.76
======== ======== ======== ======== ========
<PAGE>
Total Investment Based on net asset value per share 6.44% 5.34% 5.48% .77% 2.48%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.65% 1.59% 1.59% 1.46% 1.40%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 5.35% 5.45% 4.88% 3.20% 4.15%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $106,061 $137,387 $202,334 $374,376 $689,593
Data: ======== ======== ======== ======== ========
Portfolio turnover 18.48% 25.30% 102.55% 60.38% 104.71%
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
+++++Based on average shares outstanding during the period.
See Notes to Financial Statements.
</TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<TABLE>
Class C
For the
Period
The following per share data and ratios have been derived For the Oct. 21,
from information provided in the financial statements. Year Ended 1994++ to
May 31, May 31,
Increase (Decrease) in Net Asset Value: 1997+++++ 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 .50 .48 .31
Realized and unrealized gain on investments--net .11 .01 .10
-------- -------- --------
Total from investment operations .61 .49 .41
-------- -------- --------
Less dividends from investment income--net (.51) (.52) (.31)
-------- -------- --------
Net asset value, end of period $ 9.63 $ 9.53 $ 9.56
======== ======== ========
Total Investment Based on net asset value per share 6.51% 5.30% 4.47%+++
Return:** ======== ======== ========
<PAGE>
Ratios to Average Expenses 1.70% 1.57% 1.68%*
Net Assets: ======== ======== ========
Investment income--net 5.34% 5.40% 5.51%*
======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 5,315 $ 3,078 $ 1,409
Data: ======== ======== ========
Portfolio turnover 18.48% 25.30% 102.55%
======== ======== ========
<CAPTION>
The following per share data and ratios have been derived
from information provided in the financial statements. Class D
For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 1997+++++ 1996+++++ 1995 1994 1993
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.52 $ 9.55 $ 9.53 $ 9.76 $ 9.92
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .57 .56 .51 .37 .45
Realized and unrealized gain (loss) on
investments--net .09 (.01) .03 (.24) (.16)
-------- -------- -------- -------- --------
Total from investment operations .66 .55 .54 .13 .29
-------- -------- -------- -------- --------
Less dividends from investment income--net (.56) (.58) (.52) (.36) (.45)
-------- -------- -------- -------- --------
Net asset value, end of year $ 9.62 $ 9.52 $ 9.55 $ 9.53 $ 9.76
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 7.11% 5.91% 5.91% 1.28% 2.99%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.13% 1.06% 1.08% .96% .91%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 5.87% 5.98% 5.44% 3.69% 4.79%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in thousands) $ 13,267 $ 12,800 $ 16,993 $ 23,043 $ 51,398
Data: ======== ======== ======== ======== ========
Portfolio turnover 18.48% 25.30% 102.55% 60.38% 104.71%
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effect of sales loads.
++Commencement of Operations.
+++Aggregate total investment return.
+++++Based on average shares outstanding during the period.
See Notes to Financial Statements.
</TABLE>
<PAGE>
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 over-the-counter 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.
<PAGE>
(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.
NOTES TO FINANCIAL STATEMENTS (continued)
* 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.
<PAGE>
(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 the "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% --
<PAGE>
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, 1997, 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 $934 $10,352
For the year ended May 31, 1997, MLPF&S received contingent deferred
sales charges of $75,785 and $22,912 relating to transactions in
Class B and Class C Shares, respectively.
For the year ended May 31, 1997, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $2,821 for
security price quotations to compute the net asset values 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, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended May 31, 1997 were $24,745,553 and $47,869,879,
respectively.
Net realized and unrealized gains (losses) as of May 31, 1997 were
as follows:
Realized Unrealized
Losses Gains
Long-term investments $ (1,901,359) $ 85,644
------------ ------------
Total $ (1,901,359) $ 85,644
============ ============
<PAGE>
As of May 31, 1997, net unrealized depreciation for Federal income
tax purposes aggregated $27,354, of which $1,732,876 related to
appreciated securities and $1,760,230 related to depreciated
securities. The aggregate cost of investments at May 31, 1997 for
Federal income tax purposes was $125,066,313.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $30,039,497 and $66,863,233 for the years ended May 31, 1997 and
May 31, 1996, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the
Year Ended Dollar
May 31, 1997 Shares Amount
Shares sold 965,067 $ 9,288,059
Shares issued to shareholders
in reinvestment of dividends 347 1,950
------------- -------------
Total issued 965,414 9,290,009
Shares redeemed (967,393) (9,308,472)
------------- -------------
Net decrease (1,979) $ (18,463)
============= =============
Class A Shares for the
Year Ended Dollar
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 B Shares for the
Year Ended Dollar
May 31, 1997 Shares Amount
Shares sold 5,764,174 $ 58,529,269
Shares issued to shareholders
in reinvestment of dividends 674,713 3,158,743
------------- -------------
Total issued 6,438,887 61,688,012
Automatic conversion of shares (51,870) (497,629)
Shares redeemed (9,786,009) (93,754,680)
------------- -------------
Net decrease (3,398,992) $ (32,564,297)
============= =============
Class B Shares for the
Year Ended Dollar
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 C Shares for the Year Dollar
Ended May 31, 1997 Shares Amount
Shares sold 1,790,501 $ 17,211,671
Shares issued to shareholders
in reinvestment of dividends 14,275 121,539
------------- -------------
Total issued 1,804,776 17,333,210
Shares redeemed (1,575,517) (15,123,053)
------------- -------------
Net increase 229,259 $ 2,210,157
============= =============
<PAGE>
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 Year Dollar
Ended May 31, 1997 Shares Amount
Shares sold 2,480,241 $ 23,652,524
Automatic conversion of shares 51,874 497,629
Shares issued to shareholders
in reinvestment of dividends 45,009 431,306
------------- -------------
Total issued 2,577,124 24,581,459
Shares redeemed (2,542,227) (24,248,353)
------------- -------------
Net increase 34,897 $ 333,106
============= =============
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)
============= =============
<PAGE>
5. Capital Loss Carryforward:
At May 31, 1997, the Fund had a net capital loss carryforward of
approximately $32,758,000, of which $20,978,000 expires in 2002
$3,888,000 expires in 2003, $7,641,000 expires in 2004 and $251,000
expires in 2005. 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, 1997, 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 the financial highlights for each of the years in the
five-year period then ended. These financial statements and the
financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these
financial statements and the financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements and the financial highlights are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements.
Our procedures included confirmation of securities owned at May 31,
1997 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,
1997, 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.
<PAGE>
Deloitte & Touche LLP
Princeton, New Jersey
June 27, 1997
</AUDIT-REPORT>
IMPORTANT TAX INFORMATION (unaudited)
None of the ordinary income distributions paid monthly by Merrill
Lynch Adjustable Rate Securities Fund, Inc. during the fiscal year
ended May 31, 1997 qualify for the dividends received deduction for
corporations. Additionally, there were no long-term capital gains
distributed by the Fund during the year.
The law varies in each state as to whether and what percentage of
dividend income attributable to Federal Obligations is exempt from
state income tax. We recommend that you consult your tax adviser to
determine if any portion of the dividends you received is exempt
from state income tax.
Listed to the right are the percentages of total assets of the Fund
invested in Federal Obligations as of the end of each quarter of the
fiscal year:
For the Quarter Ended Percentage of Federal Obligations*
August 31, 1996 6.71%
November 30, 1996 10.86%
February 28, 1997 10.26%
May 31, 1997 9.24%
Of the Fund's ordinary income dividends paid during the fiscal year
ended May 31, 1997, 7.75% was attributable to Federal Obligations.
In calculating the foregoing percentage, Fund expenses have been
allocated on a pro rata basis.
Please retain this information for your records.
[FN]
*For purposes of this calculation, Federal Obligations include US
Treasury Notes, US Treasury Bills and US Treasury Bonds. Also
included are obligations issued by the following agencies: Banks for
Cooperatives, Federal Intermediate Credit Banks, Federal Land Banks,
Federal Home Loan Banks, and the Student Loan Marketing Association.
Repurchase Agreements are not included in this calculation.
<PAGE>
