MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Semi-Annual Report
November 30, 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.
Merrill Lynch
Adjustable Rate
Securities Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
<PAGE>
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
Gregory Mark Maunz, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Donald C. Burke, Vice President
Jeffrey B. Hewson, Vice President
Theodore J. Magnani, Vice President
Gerald M. Richard, Treasurer
Ira P. Shapiro, Secretary
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
<PAGE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1997
DEAR SHAREHOLDER
Economic Environment
The US economy continued to exhibit moderately strong growth during
the three months ended November 30, 1997. Led by a surge in consumer
spending, gross domestic product (GDP) rose 3.1% during the third
quarter of 1997. Nonetheless, inflationary pressures remained
benign. As a result, investors reacted positively to the reports of
low inflation by pushing interest rates lower.
Consumer demand increased sharply during the latest period. After
rising just 0.9% in the second quarter of 1997, consumer spending
rose 5.8% in the third quarter, the fastest pace in five years. In
addition, falling mortgage rates and consumer exuberance continued
to support the real estate market. Existing home sales rose to a 4.4
million unit annual rate in October, an all time high and the third
consecutive month with a record reading. The US labor market,
showing no signs of slackening, remained remarkably strong. Job
growth surged by 404,000 in November, the largest gain in 18 months.
Consequently, the unemployment rate fell to 4.6%--a new 24-year low.
Nevertheless, despite the recent economic performance, there are
indications growth may be tempered in the upcoming months. Although
consumer spending jumped in the third quarter, preliminary data
indicate spending is moderating as retail sales fell in October and
rose just 0.2% in November. Moreover, the Asian financial crisis,
which sent shock waves throughout the global equity markets, could
dampen export growth, since nearly 30% of all US exports are to the
Asian region. Finally, the recent flattening of the US Treasury
yield curve, a sensitive indicator of future economic growth,
suggests growth could moderate in 1998. At the close of November,
the US Treasury yield curve narrowed to 85 basis points (0.85%)
between 3-month Treasury bills and 30-year Treasury bonds. The last
time the yield curve was this narrow, GDP growth slowed to around 2%
in the following year.
Continued low inflation has allowed the Federal Reserve Board (FRB)
to refrain from adjusting monetary policy despite stronger-than-
anticipated economic growth. Both the Producer Price Index (PPI) and
the Consumer Price Index (CPI) remain at, or near, 30-year lows.
Through November, the PPI and CPI rose just 0.3% and 2.1%,
respectively, over the past year. Furthermore, gold and industrial
prices continued to decline. Gold fell to a 13-year low in November,
while the Journal of Commerce Industrial Price index, a broad
measure of commodity prices, fell to a 3.5-year low. More
importantly, the underlying fundamentals remain extremely positive
for continued low inflation into 1998. Production bottleneck
pressures are absent, while unit labor costs are declining because
of gains in productivity and capital spending. In addition, the
devaluation of several Asian currencies should limit advances in
import prices.
<PAGE>
While the specter of an interest rate hike by the FRB remains a
possibility as a result of the unprecedented strength of the US
economy, we believe changes in monetary policy will remain on hold
in the near term. The turmoil in the Asian markets coupled with the
lack of domestic inflationary pressures should allow the FRB an
extended time window in compiling additional data to determine the
future growth prospects of the US economy. In any event, since
rising interest rates erode fixed-income prices, we remain vigilant
toward the prospect of a tightening by the FRB in the near term.
Portfolio Strategy
Interest rates fell during the three-month period ended November 30,
1997 amid continued reports of low inflation and an apparent flight
to quality in the US Treasury market resulting from the Asian
financial crisis. The one-year US Treasury bill fell 6 basis points
to 5.50%, while the 30-year US Treasury bond fell 57 basis points to
6.04%, causing a substantial flattening of the US Treasury yield
curve. A flat yield curve offers both advantages and disadvantages
for adjustable rate mortgages (ARMs). In a flattening yield curve
environment, projected forward rates (a predictor of future interest
rates based upon current market interest rates) decline. As a
result, the interest rate caps inherent in ARMs become less likely
to be attained, causing ARM prices to increase. However, ARM
prepayments typically increase in a flat yield curve environment,
because of the incentive for the ARM mortgagor to refinance into a
lower fixed-rate mortgage.
During the November period, ARM yield spreads widened by 10 basis
points--25 basis points, and prices declined 0.375 point--1 point in
response to two major events. First, as a result of declining
interest rates and a flattening yield curve, ARM prepayments spiked.
Since faster prepayments have a negative effect on ARM yields,
investors widened ARM spreads to compensate for lower expected
yields. Second, the anticipated reduction and supply of US Treasury
securities, because in part of the declining budget deficit, caused
the interest rate relationship between the London Interbank Offered
Rate (LIBOR) and the US Treasury market to widen. Since short-term
funding costs are tied closely to LIBOR, and most ARM indexes are
Treasury based, the effective ARM yield spread to LIBOR narrowed. As
a result, most ARM spreads widened to align with the higher LIBOR
funding rates.
<PAGE>
Our investment strategy of holding seasoned ARMs, as well as LIBOR
and certificate of deposit-indexed ARMs, allowed us to mitigate much
of the spread widening effect on the Fund. For some time now, we
have expressed our preference for holding seasoned ARMs because of
their less prepayment-sensitive characteristics. As a result, most
of the Fund's holdings have not been greatly impacted by the decline
in interest rates and the overall increase in ARM prepayments. In
addition, we have also diversified the index composition of our
holdings. At the close of November, nearly 35% of our holdings were
indexed off the higher LIBOR and certificate of deposit rates. As a
result, not only did we benefit from the higher rate reset of these
securities, but also their yield spreads narrowed as a result of the
increased investor demand for LIBOR indexed securities. Looking
ahead, we believe both the fundamental and technical outlook for
ARMs looks bright in the near term. The recent widening of ARM
spreads has made ARMs extremely attractive on a duration-adjusted
basis compared to similar short duration alternatives. As such, we
remain committed to this sector in achieving the highest possible
yields with limited net asset value fluctuation.
In Conclusion
We thank you for your continued investment in Merrill Lynch
Adjustable Rate Securities Fund, Inc., and we look forward to
discussing 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, 1997
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1997
<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. However, in the case of certain
eligible investors, the shares 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. 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.
<PAGE>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/97 +7.15% +2.86%
Inception (10/21/94) through 9/30/97 +7.14 +5.66
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/97 +6.11% +2.11%
Five Years Ended 9/30/97 +4.24 +4.24
Inception (8/2/91) through 9/30/97 +4.33 +4.33
[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 9/30/97 +6.07% +5.07%
Inception (10/21/94) through 9/30/97 +6.16 +6.16
<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 9/30/97 +6.66% +2.40%
Five Years Ended 9/30/97 +4.78 +3.93
Inception (8/2/91) through 9/30/97 +4.84 +4.15
[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**
<C> <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--11/30/97 9.63 9.63 -- 0.520 +5.70
------
Total $1.823
Cumulative total return as of 11/30/97: +23.34%**
<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**
<C> <C> <C> <C> <C> <C>
8/2/91--12/31/91 $10.00 $9.99 -- $0.268 +2.60%
1992 9.99 9.77 -- 0.497 +2.84
1993 9.77 9.73 -- 0.313 +2.83
1994 9.73 9.33 -- 0.386 -0.14
1995 9.33 9.54 -- 0.533 +8.13
1996 9.54 9.60 -- 0.512 +6.16
1/1/97--11/30/97 9.60 9.60 -- 0.453 +4.96
------
Total $2.962
Cumulative total return as of 11/30/97: +30.54%**
<PAGE>
<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 C Shares
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<C> <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--11/30/97 9.61 9.60 -- 0.450 +4.82
------
Total $1.582
Cumulative total return as of 11/30/97: +19.89%**
<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>
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1997
PERFORMANCE DATA (concluded)
<TABLE>
Performance
Summary--
Class D Shares
<CAPTION>
Net Asset Value Capital Gains Dividends
Period Covered Beginning Ending Distributed Paid* % Change**
<C> <C> <C> <C> <C> <C>
8/2/91--12/31/91 $10.00 $9.99 -- $0.289 +2.82%
1992 9.99 9.77 -- 0.547 +3.36
1993 9.77 9.73 -- 0.362 +3.35
1994 9.73 9.32 -- 0.435 +0.26
1995 9.32 9.53 -- 0.582 +8.69
1996 9.53 9.60 -- 0.562 +6.82
1/1/97--11/30/97 9.60 9.60 -- 0.497 +5.46
------
Total $3.274
Cumulative total return as of 11/30/97: +34.83%**
<PAGE>
<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>
Recent
Performance
Results
<CAPTION>
12 Month 3 Month
11/30/97 8/31/97 11/30/96 % Change % Change
<S> <C> <C> <C> <C> <C>
Class A Shares* $9.63 $9.65 $9.63 0.00% -0.21%
Class B Shares* 9.60 9.62 9.62 -0.21 -0.21
Class C Shares* 9.60 9.63 9.62 -0.21 -0.31
Class D Shares* 9.60 9.62 9.61 -0.10 -0.21
Class A Shares--Total Return* +6.25(1) +1.30(2)
Class B Shares--Total Return* +5.22(3) +1.11(4)
Class C Shares--Total Return* +5.18(5) +0.99(6)
Class D Shares--Total Return* +5.87(7) +1.24(8)
Class A Shares--Standardized 30-day Yield 5.75%
Class B Shares--Standardized 30-day Yield 5.21%
Class C Shares--Standardized 30-day Yield 5.17%
Class D Shares--Standardized 30-day Yield 5.50%
<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 $0.586 per share ordinary
income dividends.
(2)Percent change includes reinvestment of $0.146 per share ordinary
income dividends.
(3)Percent change includes reinvestment of $0.511 per share ordinary
income dividends.
(4)Percent change includes reinvestment of $0.127 per share ordinary
income dividends.
(5)Percent change includes reinvestment of $0.508 per share ordinary
income dividends.
(6)Percent change includes reinvestment of $0.126 per share ordinary
income dividends.
(7)Percent change includes reinvestment of $0.561 per share ordinary
income dividends.
(8)Percent change includes reinvestment of $0.140 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> <C> <C> <C> <C>
Adjustable Rate* Certificate of Federal National Mortgage
Mortgage-Backed Deposit Indexed Association:
Obligations** Obligations $ 2,131,848 #131221, 7.20% due 9/01/2021 $ 2,197,028 $ 2,199,801 1.86%
1,877,252 #138541, 7.235% due 12/01/2021 1,934,949 1,927,703 1.63
3,992,302 #307622, 7.625% due 4/01/2023 4,106,037 4,181,298 3.53
Constant Maturity Federal Home Loan Mortgage
Treasury Indexed Corporation:
Obligations 1,995,625 #645073, 7.744% due 5/01/2015 2,029,301 2,077,715 1.75
3,858,163 #840032, 7.435% due 1/01/2019 4,021,088 4,005,275 3.38
3,475,444 #606108, 7.874% due 9/01/2019 3,544,272 3,655,750 3.09
2,285,554 #775194, 7.255% due 3/01/2020 2,291,698 2,360,909 1.99
64,821 #785173, 7.64% due 8/01/2020 66,320 66,452 0.06
2,545,251 #845139, 8.025% due 3/01/2022 2,583,524 2,649,454 2.24
4,586,680 #845535, 7.921% due 10/01/2023 4,674,059 4,838,947 4.08
6,959,125 #755170, 7.808% due 8/01/2031 7,193,995 7,228,791 6.10
Federal National Mortgage
Association:
6,668,861 #70169, 7.353% due 12/01/2018 6,954,901 6,937,700 5.86
3,614,408 #142069, 7.634% due 12/01/2021 3,688,955 3,746,009 3.16
2,217,900 #139312, 7.777% due 12/01/2021 2,313,141 2,310,076 1.95
1,379,742 #181278, 7.527% due 9/01/2022 1,414,283 1,432,776 1.21
3,754,711 #200009, 7.581% due 2/01/2023 3,768,319 3,914,286 3.30
4,592,663 #291252, 8.053% due 8/01/2024 4,651,075 4,732,601 3.99
749,476 #309653, 7.256% due 5/01/2025 767,085 769,150 0.65
1,644,891 #324905, 7.81% due 9/01/2025 1,661,500 1,712,552 1.45
6,111,754 Prudential Home Mortgage
Securities Company, Inc., REMIC
(a) 92-35-A1, 8.127% due
11/25/2022 6,264,548 6,214,890 5.25
Cost of Funds 3,192,248 DLJ Mortgage Acceptance Corp.,
Indexed Obligations REMIC (a) 91-6-A1, 7.828% due
9/25/2021 3,246,865 3,164,315 2.67
London Interbank 4,884,986 Federal National Mortgage
Offered Rate Indexed Association, #305729, 8.053%
Obligations due 2/01/2025 5,029,398 5,095,675 4.30
15,005,587 Resolution Trust Corporation,
REMIC (a), 92-C1-B, 7.625% due
8/25/2023 14,452,510 15,005,587 12.67
12,000,000 Saxon Mortgage Securities
Corporation, REMIC (a) 92-3-B,
7.799% due 11/25/2022 12,248,097 12,072,000 10.19
Total Investments in Adjustable
Rate Mortgate-Backed Obligations 101,102,948 102,299,712 86.36
</TABLE>
<PAGE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1997
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value Percent of
Amount Issue Cost (Note 1a) Net Assets
<S> <C> <S> <C> <C> <C>
Derivative $12,515,296 Capstead Mortgage Securities
Mortgage-Backed Corporation II, REMIC
Obligations**-- (a) 93-2I-A3, 0.50%
Interest Only (b) due 9/25/2023 $ 197,067 $ 43,804 0.04%
50,720,037 DLJ Mortgage Acceptance Corp.,
REMIC (a)92-6-A1, 0.649% due
7/25/2022 773,420 375,328 0.32
69,073 Federal Home Loan Mortgage
Corporation, REMIC (a)(c)
92-1363-C, 323% due 8/15/2022 1,195,108 600,680 0.51
54 Prudential Home Mortgage
Securities Company, Inc.,
REMIC (a) 92-1-A9, 42,989%
due 2/25/2022 15,687 6,026 0.00
Sears Mortgage Securities Corp.,
REMIC (a):
3,489 91-K-A4, 5,810% due 9/25/2021 479,339 320,569 0.27
27,272,824 92-12-A3, 0.49% due 7/25/2022 321,193 272,728 0.23
Total Investments in
Derivative Mortgage-Backed
Obligations--Interest Only 2,981,814 1,619,135 1.37
Fixed Rate 3,229,506 Resolution Trust Corporation,
Mortgage-Backed REMIC (a) 92-CHF-B, 7.15% due
Obligations** 12/25/2020 3,267,355 3,215,380 2.71
Total Investments in Fixed Rate
Mortgage-Backed Obligations 3,267,355 3,215,380 2.71
Total Investments in
Mortgage-Backed Obligations 107,352,117 107,134,227 90.44
US Government 5,000,000 United States Treasury Notes,
Obligations 6.125% due 8/31/1998 4,978,516 5,014,050 4.23
Total Investments in
US Government Obligations 4,978,516 5,014,050 4.23
<PAGE>
Short-Term Repurchase 5,726,000 Nikko Securities International,
Securities Agreements*** Inc., purchased on 11/28/1997
to yield 5.75% to 12/01/1997 5,726,000 5,726,000 4.84
Total Short-Term Securities 5,726,000 5,726,000 4.84
Total Investments $118,056,633 117,874,277 99.51
============
Other Assets Less Liabilities 580,547 0.49
------------ -------
Net Assets $118,454,824 100.00%
============ =======
<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 orginal 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 ANDLIABILITIES
<CAPTION>
As of November 30, 1997
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$118,056,633) (Note 1a) $ 117,874,277
Cash 114,108
Receivables:
Interest $ 922,026
Principal paydowns 338,734
Capital shares sold 156,491 1,417,251
-------------
Prepaid registration fees and other assets (Note 1f) 90,988
-------------
Total assets 119,496,624
-------------
<PAGE>
Liabilities: Payables:
Capital shares redeemed 590,804
Dividends to shareholders (Note 1g) 174,529
Distributor (Note 2) 60,822
Investment adviser (Note 2) 45,919 872,074
-------------
Accrued expenses and other liabilities 169,726
-------------
Total liabilities 1,041,800
-------------
Net Assets: Net assets $ 118,454,824
=============
Net Assets Class A Common Stock, $0.10 par value,
Consist of: 100,000,000 shares authorized $ 9,628
Class B Common Stock, $0.10 par value, 600,000,000
shares authorized 957,548
Class C Common Stock, $0.10 par value, 100,000,000
shares authorized 60,074
Class D Common Stock, $0.10 par value, 200,000,000
shares authorized 206,549
Paid-in capital in excess of par 152,102,266
Accumulated realized capital losses on investments--net (Note 5) (34,698,885)
Unrealized depreciation on investments--net (182,356)
-------------
Net assets $ 118,454,824
=============
Net Asset Class A--Based on net assets of $927,432 and 96,275
Value: shares outstanding $ 9.63
=============
Class B--Based on net assets of $91,935,634 and 9,575,484
shares outstanding $ 9.60
=============
Class C--Based on net assets of $5,769,723 and 600,739
shares outstanding $ 9.60
=============
Class D--Based on net assets of $19,822,035 and 2,065,487
shares outstanding $ 9.60
=============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1997
<PAGE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended November 30, 1997
<S> <S> <C>
Investment Income Interest and discount earned, net of premium amortization $ 4,303,774
(Note 1e): -------------
Expenses: Account maintenance and distribution fees--Class B (Note 2) 368,053
Investment advisory fees (Note 2) 307,773
Transfer agent fees--Class B (Note 2) 56,787
Accounting services (Note 2) 53,101
Registration fees (Note 1f) 51,057
Printing and shareholder reports 35,609
Professional fees 34,496
Account maintenance fees--Class D (Note 2) 23,548
Account maintenance and distribution fees--Class C (Note 2) 21,760
Directors' fees and expenses 17,032
Custodian fees 12,703
Transfer agent fees--Class D (Note 2) 8,757
Transfer agent fees--Class C (Note 2) 2,767
Pricing fees 1,761
Transfer agent fees--Class A (Note 2) 317
Other 8,518
-------------
Total expenses 1,004,039
-------------
Investment income--net 3,299,735
-------------
Realized & Realized gain on investments--net 14,249
Unrealized Gain Change in unrealized appreciation/depreciation on investments--net (268,000)
(Loss) on -------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 3,045,984
(Notes 1c, 1e & 3): =============
See Notes to Financial Statements.
</TABLE>
<PAGE>
<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: 1997 1997
<S> <S> <C> <C>
Operations: Investment income--net $ 3,299,735 $ 7,440,768
Realized gain (loss) on investments--net 14,249 (1,901,359)
Change in unrealized appreciation/depreciation on
investments--net (268,000) 3,283,381
------------- -------------
Net increase in net assets resulting from operations 3,045,984 8,822,790
------------- -------------
Dividends to Investment income--net:
Shareholders Class A (20,618) (21,887)
(Note 1g): Class B (2,590,796) (6,440,557)
Class C (142,754) (200,022)
Class D (545,567) (758,871)
------------- -------------
Net decrease in net assets resulting from dividends
to shareholders (3,299,735) (7,421,337)
------------- -------------
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (6,199,211) (30,039,497)
(Note 4): ------------- -------------
Net Assets: Total decrease in net assets (6,452,962) (28,638,044)
Beginning of period 124,907,786 153,545,830
------------- -------------
End of period $ 118,454,824 $ 124,907,786
============= =============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1997
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
For the
The following per share data and ratios For the Period
have been derived from information provided Six Months For the Oct. 21,
in the financial statements. Ended Year Ended 1994++ to
Nov. 30, May 31, May 31,
Increase (Decrease) in Net Asset Value: 1997 1997+++++ 1996+++++ 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.65 $ 9.54 $ 9.55 $ 9.46
Operating -------- -------- -------- --------
Performance: Investment income--net .29 .59 .56 .36
Realized and unrealized gain (loss) on
investments--net (.02) .10 .03 .09
-------- -------- -------- --------
Total from investment operations .27 .69 .59 .45
-------- -------- -------- --------
Less dividends from investment income--net (.29) (.58) (.60) (.36)
-------- -------- -------- --------
Net asset value, end of period $ 9.63 $ 9.65 $ 9.54 $ 9.55
======== ======== ======== ========
Total Investment Based on net asset value per share 2.84%+++ 7.48% 6.41% 4.85%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses .94%* .89% .81% .87%*
Net Assets: ======== ======== ======== ========
Investment income--net 6.03%* 6.13% 6.20% 6.18%*
======== ======== ======== ========
Supplemental Data: Net assets, end of period (in thousands) $ 927 $ 265 $ 281 $ 345
======== ======== ======== ========
Portfolio turnover 15.63% 18.48% 25.30% 102.55%
======== ======== ======== ========
<PAGE>
<CAPTION>
Class B
The following per share data and ratios For the
have been derived from information provided Six Months
in the financial statements. Ended
Nov. 30, For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 1997 1997+++++ 1996+++++ 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.62 $ 9.53 $ 9.56 $ 9.53 $ 9.76
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .25 .51 .52 .46 .32
Realized and unrealized gain (loss)
on investments--net (.02) .09 (.02) .04 (.24)
-------- -------- -------- -------- --------
Total from investment operations .23 .60 .50 .50 .08
-------- -------- -------- -------- --------
Less dividends from investment income--net (.25) (.51) (.53) (.47) (.31)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.60 $ 9.62 $ 9.53 $ 9.56 $ 9.53
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 2.45%+++ 6.44% 5.34% 5.48% .77%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.71%* 1.65% 1.59% 1.59% 1.46%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 5.28%* 5.35% 5.45% 4.88% 3.20%
======== ======== ======== ======== ========
Supplemental Data: Net assets, end of period (in thousands) $ 91,936 $106,061 $137,387 $202,334 $374,376
======== ======== ======== ======== ========
Portfolio turnover 15.63% 18.48% 25.30% 102.55% 60.38%
======== ======== ======== ======== ========
<PAGE>
<CAPTION>
Class C
For the
The following per share data and ratios For the Period
have been derived from information provided Six Months For the Oct. 21,
in the financial statements. Ended Year Ended 1994++ to
Nov. 30, May 31, May 31,
Increase (Decrease) in Net Asset Value: 1997 1997+++++ 1996+++++ 1995
<S> <S> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.63 $ 9.53 $ 9.56 $ 9.46
Operating -------- -------- -------- --------
Performance: Investment income--net .25 .50 .48 .31
Realized and unrealized gain (loss) on
investments--net (.03) .11 .01 .10
-------- -------- -------- --------
Total from investment operations .22 .61 .49 .41
-------- -------- -------- --------
Less dividends from investment income--net (.25) (.51) (.52) (.31)
-------- -------- -------- --------
Net asset value, end of period $ 9.60 $ 9.63 $ 9.53 $ 9.56
======== ======== ======== ========
Total Investment Based on net asset value per share 2.32%+++ 6.51% 5.30% 4.47%+++
Return:** ======== ======== ======== ========
Ratios to Average Expenses 1.75%* 1.70% 1.57% 1.68%*
Net Assets: ======== ======== ======== ========
Investment income--net 5.25%* 5.34% 5.40% 5.51%*
======== ======== ======== ========
Supplemental Data: Net assets, end of period (in thousands) $ 5,770 $ 5,315 $ 3,078 $ 1,409
======== ======== ======== ========
Portfolio turnover 15.63% 18.48% 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.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1997
<PAGE>
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class D
The following per share data and ratios For the
have been derived from information provided Six Months
in the financial statements. Ended
Nov. 30, For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 1997 1997+++++ 1996+++++ 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.62 $ 9.52 $ 9.55 $ 9.53 $ 9.76
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .28 .57 .56 .51 .37
Realized and unrealized gain (loss)
on investments--net (.02) .09 (.01) .03 (.24)
-------- -------- -------- -------- --------
Total from investment operations .26 .66 .55 .54 .13
-------- -------- -------- -------- --------
Less dividends from investment income--net (.28) (.56) (.58) (.52) (.36)
-------- -------- -------- -------- --------
Net asset value, end of period $ 9.60 $ 9.62 $ 9.52 $ 9.55 $ 9.53
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 2.71%+++ 7.11% 5.91% 5.91% 1.28%
Return:** ======== ======== ======== ======== ========
Ratios to Average Expenses 1.19%* 1.13% 1.06% 1.08% .96%
Net Assets: ======== ======== ======== ======== ========
Investment income--net 5.79%* 5.87% 5.98% 5.44% 3.69%
======== ======== ======== ======== ========
Supplemental Net assets, end of period (in thousands) $ 19,822 $ 13,267 $ 12,800 $ 16,993 $ 23,043
Data: ======== ======== ======== ======== ========
Portfolio turnover 15.63% 18.48% 25.30% 102.55% 60.38%
======== ======== ======== ======== ========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
+++++Based on average shares outstanding.
See Notes to Financial Statements.
</TABLE>
<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. These unaudited
financial statements reflect all adjustments which are, in the
opinion of management, necessary to a fair statement of the results
for the interim period presented. All such adjustments are of a
normal recurring nature. The Fund offers four classes of shares
under the Merrill Lynch Select Pricing SM System. Shares of Class A
and Class D are sold with a front-end sales charge. Shares of Class
B and Class C may be subject to a contingent deferred sales charge.
All classes of shares have identical voting, dividend, liquidation
and other rights and the same terms and conditions, except that
Class B, Class C and Class D Shares bear certain expenses related to
the account maintenance of such shares, and Class B and Class C
Shares also bear certain expenses related to the distribution of
such shares. Each class has exclusive voting rights with respect to
matters relating to its account maintenance and distribution
expenditures. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
in the 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 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.
* Financial futures contracts--The Fund may purchase or sell
interest rate futures contracts and related options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected.
Pursuant to the contract, the Fund agrees to receive from or pay to
the broker an amount of cash equal to the daily fluctuation in
value of the contract. Such receipts or payments are known as
variation margins and are recorded by the Fund as unrealized gains
or losses. When the contract is closed, the Fund records a realized
gain or loss equal to the difference between the value of the
contract at the time it was opened and the value at the time it was
closed.
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1997
<PAGE>
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) Prepaid registration fees--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 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, 1997, MLFD earned underwriting
discounts and MLPF&S earned dealer concessions on sales of the
Fund's Class D Shares as follows:
<PAGE>
MLFD MLPF&S
Class D $744 $6,667
For the six months ended November 30, 1997, MLPF&S received
contingent deferred sales charges of $50,052 and $4,293 relating to
transactions in Class B and Class C Shares, respectively.
For the six months ended November 30, 1997, the Fund paid Merrill
Lynch Security Pricing Service, an affiliate of MLPF&S, $189 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, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the six months ended November 30, 1997 were $18,293,811 and
$28,010,409, respectively.
Net realized and unrealized gains (losses) as of November 30, 1997
were as follows:
Realized Unrealized
Gains Losses
Long-term investments $ 14,249 $ (182,356)
----------- ------------
Total $ 14,249 $ (182,356)
=========== ============
As of November 30, 1997, net unrealized depreciation for Federal
income tax purposes aggregated $182,356, of which $1,583,928 related
to appreciated securities and $1,766,284 related to depreciated
securities. The aggregate cost of investments at November 30, 1997
for Federal income tax purposes was $118,056,633.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $6,199,211 and $30,039,497 for the six months ended November 30,
1997 and the year ended May 31, 1997, respectively.
Transactions in capital shares for each class were as follows:
<PAGE>
Class A Shares for the Six Months Dollar
Ended November 30, 1997 Shares Amount
Shares sold 437,223 $ 4,221,780
Shares issued to shareholders
in reinvestment of dividends 1,335 12,893
----------- -------------
Total issued 438,558 4,234,673
Shares redeemed (369,774) (3,570,447)
----------- -------------
Net increase 68,784 $ 664,226
=========== =============
Class A Shares for the Year Dollar
Ended 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 B Shares for the Six Months Dollar
Ended November 30, 1997 Shares Amount
Shares sold 2,308,386 $ 22,223,478
Shares issued to shareholders
in reinvestment of dividends 157,155 1,513,176
----------- -------------
Total issued 2,465,541 23,736,654
Automatic conversion of shares (1,206) (11,618)
Shares redeemed (3,911,695) (37,661,260)
----------- -------------
Net decrease (1,447,360) $ (13,936,224)
=========== =============
Class B Shares for the Year Dollar
Ended 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)
=========== =============
<PAGE>
Class C Shares for the Six Months Dollar
Ended November 30, 1997 Shares Amount
Shares sold 711,343 $ 6,854,256
Shares issued to shareholders
in reinvestment of dividends 11,566 111,411
----------- -------------
Total issued 722,909 6,965,667
Shares redeemed (674,311) (6,498,358)
----------- -------------
Net increase 48,598 $ 467,309
=========== =============
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
=========== =============
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
Class D Shares for the Six Months Dollar
Ended November 30, 1997 Shares Amount
Shares sold 1,019,888 $ 9,818,150
Automatic conversion of shares 1,207 11,618
Shares issued to shareholders
in reinvestment of dividends 40,509 389,876
----------- -------------
Total issued 1,061,604 10,219,644
Shares redeemed (375,613) (3,614,166)
----------- -------------
Net increase 685,991 $ 6,605,478
=========== =============
<PAGE>
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
=========== =============
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.
