MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Annual Report
May 31, 1998
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
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
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 1998
DEAR SHAREHOLDER
Economic Environment
The US economy continued to expand at an above-trend pace for the
three months ended May 31, 1998. Despite declining export growth and
a relatively high real interest rate environment, gross domestic
product (GDP) rose 5.4% in the first quarter of 1998, marking the
sixth consecutive quarter that the annualized growth rate of GDP has
exceeded 3.0%. Consumer spending, which has more than offset the
trade drag resulting from the Asian economic crisis, rose 6.1% in
the first quarter and has been largely responsible for the strong
showing of the US economy. Nonetheless, despite continued overall
economic strength, the Federal Reserve Board refrained from raising
interest rates during the May quarter.
Two fundamental catalysts contributing to the surge in consumer
spending have been the strength of the job market and the strength
of the US equity market. With an average gain of 245,000 new jobs
per month through the first five months of 1998, employment growth
in the United States remains strong. As a result, the unemployment
rate has fallen to a 28-year low of 4.3%. More important, labor
costs continue to trend upward. Average hourly earnings rose 4.3%
over the 12 months ended May 31, 1998, the highest year-over-year
pace in the current economic expansion and well above the current
rate of inflation. Consumer spending has also been influenced by the
strength of the US stock market. In the three years since December
1994, the overall net wealth of US households has risen 38% in
response to the climb of equity prices. As a result, US households
are spending more and saving less of their personal income, while
still seeing their overall net wealth increase.
The strength of consumer demand has carried over to other sectors of
the economy as well. Reflecting a confluence of favorable factors
(low mortgage rates, strong income growth and high consumer
confidence), housing remains exceptionally strong. New housing
starts rose to an annualized 1.58 million-unit rate in the first
quarter of 1998, the fastest pace in ten years. In addition, both
new and existing home sales are currently at or near record levels.
Despite rising wage growth and strong domestic demand, the lack of
corporate pricing power has kept inflation subdued. During the 12-
month period ended May 31, 1998, the consumer price index rose just
1.5%, while the producer price index fell 1.2%.
Although the Asian currency crisis is likely to continue to hamper
export growth and act as a drag on GDP, we do not expect consumer
spending to slow significantly in the second half of 1998, barring a
major stock market correction. Since domestic demand accounts for
nearly two-thirds of GDP, we expect economic growth to remain
moderately strong through-out 1998. Meanwhile, should labor markets
tighten further, the current benign inflationary environment could
be threatened by escalating wage pressures. Consequently, we believe
that the risk of a tightening in monetary policy by the Federal
Reserve Board has increased and that interest rates could rise in
the near term.
Fiscal Year in Review
A difficult market environment marked the Fund's fiscal year ended
May 31, 1998. Declining interest rates coupled with a flattening of
the US Treasury yield curve prompted a substantial rise in
prepayments of adjustable rate mortgage securities (ARMS). Since
most ARMS trade at premium prices, high prepayments have a negative
effect on the yield of ARMS. As a result, ARMS yield spreads
widened, and prices declined to compensate for the increase in
prepayments.
As of the close of the 12-month period ended May 31, 1998, the one-
year US Treasury bill fell 35 basis points (0.35%) to 5.41% while
the 30-year Treasury bond fell 111 basis points to 5.80%. Four
primary factors contributed to the change in the interest rate
environment during the year. First, as the rate of inflation
decelerated, investors became more comfortable with the prospect of
a continued low-inflation environment and pushed interest rates down
accordingly. Second, the effects of the Asian economic crisis
prompted a flight to quality toward the US financial markets,
causing bond market yields to move lower. Third, the robust US
economy brought unanticipated excess revenue to the Federal
Government in the form of additional tax receipts. As a result, it
is expected that the Federal Government will post a budget surplus
in 1998, the first such surplus in 29 years. Consequently, it is
anticipated that the US Treasury will need to issue fewer securities
resulting in a technical supply and demand situation, which has
exerted a downward influence on interest rates. Finally, since
Federal Reserve Board monetary policy remained unchanged, short-term
interest rates essentially remained stable as investors pegged short-
term interest rates to the Federal Reserve Board policy directive.
Hence, as long-term interest rates declined, short-term and long-
term Treasury rates narrowed, causing the US Treasury yield curve to
flatten.
Despite the presence of a difficult market environment for ARMS, we
took several steps to limit prepayment risk and improve performance
to the Fund. We continued to emphasize "seasoned" ARMS as the core
holdings in our portfolio. Seasoned ARMS are typically less
prepayment sensitive to a major refinancing wave for several
reasons. First, many seasoned ARMS were originated with interest
rates much higher than their current interest rate. As a result,
mortgage payments of these ARMS today are less than at origination.
Second, homeowners with seasoned adjustable rate mortgages have had
numerous opportunities to refinance in even lower interest rate
environments. Finally, seasoned ARMS typically have smaller loan
balances. Consequently, refinancing into a fixed-rate mortgage
offers very little in savings, which reduces the incentive to
refinance. Our strategy has proven successful, as the prepayments of
our seasoned ARMS holdings have been quite stable. During the
period, we took advantage of the widening between the London
Interbank Offered Rate (LIBOR) curve and US Treasury curve, by
increasing our holdings of LIBOR and certificates of deposit indexed
ARMS. At May 31, 1998, LIBOR ranged from 43 basis points to 68 basis
points more than similar maturity Treasury rates. These strategies
helped to stabilize the Fund's total return in a difficult market
environment.
Looking ahead, we expect ARMS to perform well as prepayments begin
to decline. By May 31, 1998, the Mortgage Bankers Association
Refinance Index had fallen by roughly two-thirds from its peak in
mid-January 1998. We expect this to translate into slower ARMS
prepayment speeds. In addition, the decline in interest rates is
likely to cause ARMS coupons to reset slightly downward. We believe
this provides an additional incentive for homeowners to refrain from
refinancing, the result of their mortgage payments moving lower.
Finally, a positive technical situation has developed in the ARMS
market. The recent refinancing wave has caused the origination and
outstanding availability of ARMS to decline significantly. According
to the Federal Home Loan Mortgage Corporation, just 5% of the
mortgages originated so far in 1998 are ARMS. As such, we believe
there is a tremendous opportunity for ARMS yield spreads to narrow
and prices to rise in the second half of 1998.
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
Senior Vice President and
Portfolio Manager
June 30, 1998
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 1998
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 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
Class A Shares and Class C Shares compared to growth of an
investment in the Lehman Brothers Short Government Index (1-2 Years)
and the Six-Month Treasury Bill Index:
10/21/94** 5/98
ML Adjustable Rate Securities Fund++--
Class A Shares* $ 9,600 $12,164
ML Adjustable Rate Securities Fund++--
Class C Shares* $10,000 $12,269
Lehman Brothers Short Government
Index (1-2 years) ++++-- $10,000 $12,623
Six-Month Treasury Bill Index++++++-- $10,000 $12,144
A line graph depicting the growth of an investment in the Fund's
Class B Shares and Class D Shares compared to growth of an
investment in the Lehman Brothers Short Government Index (1-2 Years)
and the Six-Month Treasury Bill Index:
Beginning and ending values are:
8/2/91** 5/98
ML Adjustable Rate Securities Fund++--
Class B Shares* $ 9,600 $13,361
ML Adjustable Rate Securities Fund++--
Class D Shares* $10,000 $13,283
Lehman Brothers Short Government
Index (1-2 years) ++++-- $10,000 $14,995
Six-Month Treasury Bill Index++++++-- $10,000 $13,800
[FN]
*Assuming maximum sales charge, transaction costs and other
operating expenses, including advisory fees.
**Commencement of operations.
++ML Adjustable Rate Securities Fund, Inc. invests primarily in
adjustable rate securities, consisting principally of mortgage-
backed and asset-backed securities.
++++This unmanaged Index is comprised of all US Government agency
and Treasury securities with maturities of one to two years.
++++++This unmanaged Index is comprised of all US Treasury bills
maturing in up to six months.
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/98 +6.42% +2.16%
Inception (10/21/94) through 3/31/98 +6.89 +5.63
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/98 +5.49% +1.49%
Five Years Ended 3/31/98 +4.56 +4.56
Inception (8/2/91) through 3/31/98 +4.37 +4.37
[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 3/31/98 +5.46% +4.46%
Inception (10/21/94) through 3/31/98 +5.97 +5.97
[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 3/31/98 +6.04% +1.80%
Five Years Ended 3/31/98 +5.08 +4.23
Inception (8/2/91) through 3/31/98 +4.89 +4.24
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 1998
PERFORMANCE DATA (concluded)
<TABLE>
Recent
Performance
Results*
<CAPTION>
Since Standardized
12 Month 3 Month Inception 30-Day Yield
Total Return Total Return Total Return As of 5/31/98
<S> <C> <C> <C> <C>
ML Adjustable Rate Securities Fund, Inc. Class A Shares +5.66% +1.12% +26.72% 5.23%
ML Adjustable Rate Securities Fund, Inc. Class B Shares +4.85 +0.92 +33.61 4.67
ML Adjustable Rate Securities Fund, Inc. Class C Shares +4.71 +0.91 +22.69 4.63
ML Adjustable Rate Securities Fund, Inc. Class D Shares +5.40 +1.16 +38.36 4.98
<FN>
*Investment results shown do not reflect sales charges; results
shown would be lower if a sales charge was included. Total
investment returns are based on changes in net asset values for the
periods shown, and assume reinvestment of all dividends and capital
gains distributions at net asset value on the payable date. The
Fund's inception dates are: Class A and Class C Shares, 10/21/94;
and Class B and Class D Shares, 8/2/91.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Value Percent of
Index Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Adjustable Certificate of $ 3,281,234 Federal National Mortgage Association,
Rate* Deposit Indexed #307622, 7.399% due 4/01/2023 $ 3,373,935 $ 3,430,432 3.12%
Mortgage- Obligations
Backed
Obligations**
Constant Maturity Federal Home Loan Mortgage Corporation:
Treasury Indexed 1,795,843 #645073, 7.732% due 5/01/2015 1,826,148 1,861,140 1.69
Obligations 1,133,885 #607129, 7.444% due 1/01/2016 1,169,212 1,161,165 1.05
5,464,518 #840032, 7.359% due 1/01/2019 5,675,867 5,664,301 5.16
2,982,853 #606108, 7.745% due 9/01/2019 3,041,326 3,116,604 2.84
2,055,487 #775194, 7.104% due 3/01/2020 2,060,955 2,122,290 1.93
64,255 #785173, 7.365% due 8/01/2020 65,741 65,791 0.06
2,318,413 #845139, 7.801% due 3/01/2022 2,352,972 2,436,861 2.22
3,913,087 #845535, 7.851% due 10/01/2023 3,987,136 4,079,495 3.72
6,240,135 #755170, 7.487% due 8/01/2031 6,450,740 6,487,806 5.91
Federal National Mortgage Association:
5,787,684 #70169, 7.29% due 12/01/2018 6,033,238 5,983,018 5.45
3,421,940 #142069, 7.25% due 12/01/2021 3,492,517 3,563,095 3.25
1,874,347 #139312, 7.64% due 12/01/2021 1,954,194 1,953,126 1.78
1,166,293 #181278, 7.498% due 9/01/2022 1,195,274 1,203,469 1.10
3,231,619 #200009, 7.566% due 2/01/2023 3,243,252 3,372,001 3.07
3,924,205 #291252, 8.047% due 8/01/2024 3,973,835 4,049,309 3.69
446,233 #309653, 7.37% due 5/01/2025 456,657 455,715 0.41
902,225 #324905, 7.558% due 9/01/2025 911,276 932,862 0.85
5,197,941 Prudential Home Mortgage Securities
Company, Inc., REMIC (a) 92-35-A1,
8.092% due 11/25/2022 5,327,889 5,303,906 4.83
Cost of Funds 2,800,899 DLJ Mortgage Acceptance Corp., REMIC
Indexed (a) 91-6-A1, 7.831% due 9/25/2021 2,848,820 2,777,266 2.53
Obligations 4,038,155 Federal National Mortgage Association,
London Interbank #305729, 7.932% due 2/01/2025 4,156,799 4,200,327 3.83
Offered Rate 15,005,815 Resolution Trust Corporation, REMIC
Indexed (a), 92-C1-B, 7.687% due 8/25/2023 14,452,738 15,005,815 13.67
Obligations 7,883,758 Resolution Trust Corporation, REMIC
(a), 92-C8-A2, 7.037% due 12/25/2023 7,925,946 7,903,467 7.20
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 85,976,467 87,129,261 79.36
Derivative 9,020,944 Capstead Mortgage Securities
Mortgage- Corporation II, REMIC (a) 93-2I-A3,
Backed 0.50% due 9/25/2023 173,590 74,152 0.07
Obligations** 41,954,529 DLJ Mortgage Acceptance Corp.,
- --Interest REMIC (a) 92-6-A1, 0.65% due 7/25/2022 643,574 318,225 0.29
Only (b) 58,134 Federal Home Loan Mortgage Corporation,
REMIC (a)(c) 92-1363-C, 333% due
8/15/2022 1,048,441 527,155 0.48
Sears Mortgage Securities Corp.,
REMIC (a):
3,065 91-K-A4, 5,774% due 9/25/2021 425,146 279,731 0.25
21,710,984 92-12-A3, 0.49% due 7/25/2022 270,676 217,110 0.20
Total Investments in Derivative
Mortgage-Backed Obligations--
Interest Only 2,561,427 1,416,373 1.29
Fixed Rate 1,713,745 Federal National Mortgage Association,
Mortgage-Backed #201892, 8.50% due 9/01/2011 1,793,138 1,768,190 1.61
Obligations**
Total Investments in Fixed Rate
Mortgage-Backed Obligations 1,793,138 1,768,190 1.61
Total Investments in Mortgage-Backed
Obligations 90,331,032 90,313,824 82.26
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 1998
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value Percent of
Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
US Government $ 8,000,000 Federal Home Loan Mortgage Corporation,
Agency Obligations 6.54% due 5/19/2000 $ 8,122,796 $ 8,045,600 7.33%
Total Investments in US Government
Agency Obligations 8,122,796 8,045,600 7.33
US Government 5,000,000 United States Treasury Notes, 5.50%
Obligations due 2/29/2000 4,995,313 4,995,300 4.55
Total Investments in US Government
Obligations 4,995,313 4,995,300 4.55
Short-Term Repurchase 5,497,000 Nikko Securities International, Inc.,
Securities Agreements*** purchased on 5/29/1998 to yield 5.60%
to 6/01/1998 5,497,000 5,497,000 5.00
Total Short-Term Securities 5,497,000 5,497,000 5.00
Total Investments $108,946,141 108,851,724 99.14
============
Other Assets Less Liabilities 939,946 0.86
------------ -------
Net Assets $109,791,670 100.00%
============ =======
<FN>
*Adjustable Rate Obligations have coupon rates which reset
periodically.
**Mortgage-Backed Obligations are subject to principal paydowns as a
result of prepayments or refinancings of the underlying mortgage
instruments. As a result, the average life may be substantially less
than the original maturity.
***Repurchase Agreements are fully collateralized by US Government &
Agency Obligations.
(a)Real Estate Mortgage Investment Conduits (REMIC).
(b)Securities which receive some or all of the interest portion of
the underlying collateral and little or no principal. Interest only
securities have either a nominal or a notional amount of principal.
(c)Adjustable rate coupon that resets inversely to changes in the
London Interbank Offered Rate.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 1998
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of May 31, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$108,946,141) (Note 1a) $108,851,724
Receivables:
Interest $ 748,986
Principal paydowns 719,546
Capital shares sold 158,728 1,627,260
------------
Prepaid registration fees and other assets (Note 1f) 80,155
------------
Total assets 110,559,139
------------
Liabilities: Payables:
Capital shares redeemed 395,794
Dividends to shareholders (Note 1g) 141,168
Distributor (Note 2) 61,560
Investment adviser (Note 2) 46,792 645,314
------------
Accrued expenses and other liabilities 122,155
------------
Total liabilities 767,469
------------
Net Assets: Net assets $109,791,670
============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000
Consist of: shares authorized $ 11,140
Class B Common Stock, $0.10 par value, 600,000,000
shares authorized 888,170
Class C Common Stock, $0.10 par value, 100,000,000
shares authorized 46,277
Class D Common Stock, $0.10 par value, 200,000,000
shares authorized 200,411
Paid-in capital in excess of par 143,752,224
Accumulated realized capital losses on investments--net
(Note 5) (35,012,135)
Unrealized depreciation on investments--net (94,417)
------------
Net assets $109,791,670
============
Net Asset Class A--Based on net assets of $1,070,654 and 111,404
Value: shares outstanding $ 9.61
============
Class B--Based on net assets of $85,093,922 and 8,881,698
shares outstanding $ 9.58
============
Class C--Based on net assets of $4,434,496 and 462,766
shares outstanding $ 9.58
============
Class D--Based on net assets of $19,192,598 and 2,004,113
shares outstanding $ 9.58
============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 1998
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended May 31, 1998
<S> <S> <C> <C>
Investment Income Interest and discount earned, net of premium amortization $ 8,179,160
(Note 1e): ------------
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 698,910
Investment advisory fees (Note 2) 593,905
Transfer agent fees--Class B (Note 2) 104,074
Accounting services (Note 2) 102,693
Registration fees (Note 1f) 89,405
Professional fees 70,466
Printing and shareholder reports 65,122
Account maintenance fees--Class D (Note 2) 48,385
Account maintenance and distribution fees--Class C (Note 2) 43,254
Directors' fees and expenses 32,832
Custodian fees 23,383
Transfer agent fees--Class D (Note 2) 17,188
Transfer agent fees--Class C (Note 2) 5,290
Pricing fees 2,797
Transfer agent fees--Class A (Note 2) 735
Other 15,336
------------
Total expenses 1,913,775
------------
Investment income--net 6,265,385
------------
Realized & Realized loss on investments--net (299,001)
Unrealized Change in unrealized appreciation/depreciation on investments--net (180,061)
Loss on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 5,786,323
(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: 1998 1997
<S> <S> <C> <C>
Operations: Investment income--net $ 6,265,385 $ 7,440,768
Realized loss on investments--net (299,001) (1,901,359)
Change in unrealized appreciation/depreciation on
investments--net (180,061) 3,283,381
------------ ------------
Net increase in net assets resulting from operations 5,786,323 8,822,790
------------ ------------
Dividends to Investment income--net:
Shareholders Class A (49,343) (21,887)
(Note 1g): Class B (4,834,537) (6,440,557)
Class C (278,673) (200,022)
Class D (1,102,832) (758,871)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (6,265,385) (7,421,337)
------------ ------------
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (14,637,054) (30,039,497)
(Note 4): ------------ ------------
Net Assets: Total decrease in net assets (15,116,116) (28,638,044)
Beginning of year 124,907,786 153,545,830
------------ ------------
End of year $109,791,670 $124,907,786
============ ============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 1998
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
For the
The following per share data and ratios have Period
been derived from information provided in the Oct. 21,
financial statements. 1994++ to
For the Year Ended May 31, May 31,
Increase (Decrease) in Net Asset Value: 1998 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 .57 .59 .56 .36
Realized and unrealized gain (loss) on
investments--net (.04) .10 .03 .09
--------- --------- --------- ---------
Total from investment operations .53 .69 .59 .45
--------- --------- --------- ---------
Less dividends from investment income--net (.57) (.58) (.60) (.36)
--------- --------- --------- ---------
Net asset value, end of period $ 9.61 $ 9.65 $ 9.54 $ 9.55
========= ========= ========= =========
Total Investment Based on net asset value per share 5.66% 7.48% 6.41% 4.85%+++
Return:** ========= ========= ========= =========
Ratios to Average Expenses .92% .89% .81% .87%*
Net Assets: ========= ========= ========= =========
Investment income--net 5.93% 6.13% 6.20% 6.18%*
========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $ 1,071 $ 265 $ 281 $ 345
Data: ========= ========= ========= =========
Portfolio turnover 47.55% 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: 1998 1997+++++ 1996+++++ 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.62 $ 9.53 $ 9.56 $ 9.53 $ 9.76
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .50 .51 .52 .46 .32
Realized and unrealized gain (loss) on
investments--net (.04) .09 (.02) .04 (.24)
--------- --------- --------- --------- ---------
Total from investment operations .46 .60 .50 .50 .08
--------- --------- --------- --------- ---------
Less dividends from investment
income--net (.50) (.51) (.53) (.47) (.31)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 9.58 $ 9.62 $ 9.53 $ 9.56 $ 9.53
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 4.85% 6.44% 5.34% 5.48% .77%
Return:** ========= ========= ========= ========= =========
Ratios to Expenses 1.70% 1.65% 1.59% 1.59% 1.46%
Average ========= ========= ========= ========= =========
Net Assets: Investment income--net 5.19% 5.35% 5.45% 4.88% 3.20%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $ 85,094 $ 106,061 $ 137,387 $ 202,334 $ 374,376
Data: ========= ========= ========= ========= =========
Portfolio turnover 47.55% 18.48% 25.30% 102.55% 60.38%
========= ========= ========= ========= =========
<CAPTION>
Class C
For the
The following per share data and ratios have Period
been derived from information provided in the Oct. 21,
financial statements. 1994++ to
For the Year Ended May 31, May 31,
Increase (Decrease) in Net Asset Value: 1998 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 .49 .50 .48 .31
Realized and unrealized gain (loss) on
investments--net (.05) .11 .01 .10
--------- --------- --------- ---------
Total from investment operations .44 .61 .49 .41
--------- --------- --------- ---------
Less dividends from investment income--net (.49) (.51) (.52) (.31)
--------- --------- --------- ---------
Net asset value, end of period $ 9.58 $ 9.63 $ 9.53 $ 9.56
========= ========= ========= =========
Total Investment Based on net asset value per share 4.71% 6.51% 5.30% 4.47%+++
Return:** ========= ========= ========= =========
Ratios to Average Expenses 1.74% 1.70% 1.57% 1.68%*
Net Assets: ========= ========= ========= =========
Investment income--net 5.15% 5.34% 5.40% 5.51%*
========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $ 4,434 $ 5,315 $ 3,078 $ 1,409
Data: ========= ========= ========= =========
Portfolio turnover 47.55% 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., May 31, 1998
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<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: 1998 1997+++ 1996+++ 1995 1994
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.62 $ 9.52 $ 9.55 $ 9.53 $ 9.76
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .55 .57 .56 .51 .37
Realized and unrealized gain (loss)
on investments--net (.04) .09 (.01) .03 (.24)
--------- --------- --------- --------- ---------
Total from investment operations .51 .66 .55 .54 .13
--------- --------- --------- --------- ---------
Less dividends from investment
income--net (.55) (.56) (.58) (.52) (.36)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 9.58 $ 9.62 $ 9.52 $ 9.55 $ 9.53
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 5.40% 7.11% 5.91% 5.91% 1.28%
Return:* ========= ========= ========= ========= =========
Ratios to Expenses 1.18% 1.13% 1.06% 1.08% .96%
Average ========= ========= ========= ========= =========
Net Assets: Investment income--net 5.70% 5.87% 5.98% 5.44% 3.69%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $ 19,193 $ 13,267 $ 12,800 $ 16,993 $ 23,043
Data: ========= ========= ========= ========= =========
Portfolio turnover 47.55% 18.48% 25.30% 102.55% 60.38%
========= ========= ========= ========= =========
<FN>
*Total investment returns exclude the effects of sales loads.
+++Based on average shares outstanding.
See Notes to Financial Statements.
</TABLE>
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Merrill Lynch Adjustable Rate Securities Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a
diversified, open-end management investment company. 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. Financial 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.
(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
financial 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.
(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.
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 1998
NOTES TO FINANCIAL STATEMENTS (continued)
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
discount and premiums) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.
(f) 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 year ended May 31, 1998, MLFD earned underwriting discounts
and MLPF&S earned dealer concessions on sales of the Fund's Class D
Shares as follows:
MLFD MLPF&S
Class D $1,219 $13,008
For the year ended May 31, 1998, MLPF&S received contingent deferred
sales charges of $111,552 and $7,199 relating to transactions in
Class B and Class C Shares, respectively.
For the year ended May 31, 1998, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $1,404 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 year ended May 31, 1998 were $53,805,960 and $71,438,929,
respectively.
Net realized losses for the year ended May 31, 1998 and unrealized
losses as of May 31, 1998 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $ (299,001) $ (94,417)
----------- ------------
Total $ (299,001) $ (94,417)
=========== ============
As of May 31, 1998, net unrealized depreciation for Federal income
tax purposes aggregated $94,417, of which $1,342,652 related to
appreciated securities and $1,437,069 related to depreciated
securities. The aggregate cost of investments at May 31, 1998 for
Federal income tax purposes was $108,946,141.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $14,637,054 and $30,039,497 for the years ended May 31, 1998 and
May 31, 1997, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended May 31, 1998 Shares Amount
Shares sold 771,140 $ 7,441,376
Shares issued to shareholders
in reinvestment of dividends 3,289 31,720
------------ -------------
Total issued 774,429 7,473,096
Shares redeemed (690,516) (6,662,852)
------------ -------------
Net increase 83,913 $ 810,244
============ =============
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 Year Dollar
Ended May 31, 1998 Shares Amount
Shares sold 4,070,396 $ 39,158,320
Shares issued to shareholders
in reinvestment of dividends 297,976 2,866,127
------------ -------------
Total issued 4,368,372 42,024,447
Automatic conversion of shares (19,534) (187,749)
Shares redeemed (6,489,984) (62,440,387)
------------ -------------
Net decrease (2,141,146) $ (20,603,689)
============ =============
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)
============ =============
Class C Shares for the Year Dollar
Ended May 31, 1998 Shares Amount
Shares sold 1,544,770 $ 14,865,849
Shares issued to shareholders
in reinvestment of dividends 22,757 219,003
------------ -------------
Total issued 1,567,527 15,084,852
Shares redeemed (1,656,902) (15,944,236)
------------ -------------
Net decrease (89,375) $ (859,384)
============ =============
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
============ =============
Class D Shares for the Year Dollar
Ended May 31, 1998 Shares Amount
Shares sold 1,464,082 $ 14,083,453
Automatic conversion of shares 19,536 187,749
Shares issued to shareholders
in reinvestment of dividends 86,838 834,918
------------ -------------
Total issued 1,570,456 15,106,120
Shares redeemed (945,839) (9,090,345)
------------ -------------
Net increase 624,617 $ 6,015,775
============ =============
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
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, 1998, the Fund had a net capital loss carryforward of
approximately $34,578,000, of which $20,978,000 expires in 2002,
$3,888,000 expires in 2003, $7,641,000 expires in 2004, $251,000
expires in 2005 and $1,820,000 expires in 2006. 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, 1998, 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,
1998 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,
1998, the results of its operations, the changes in its net assets,
and the financial highlights for each of the respective stated
periods in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
July 7, 1998
</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, 1998 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:
Percentage of
For the Quarter Ended Federal Obligations*
August 31, 1997 3.54%
November 30, 1997 4.00%
February 28, 1998 4.48%
May 31, 1998 4.52%
Of the Fund's ordinary income dividends paid during the fiscal year
ended May 31, 1998, 4.65% 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.
