MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Annual Report
May 31, 1999
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
Terry K. Glenn, President and Director
Joe Grills, Director
Walter Mintz, Director
Robert S. Salomon Jr., Director
Melvin R. Seiden, Director
Stephen B. Swensrud, Director
Arthur Zeikel, Director
Gregory Mark Maunz, Senior Vice President
Joseph T. Monagle Jr., Senior Vice President
Jeffrey B. Hewson, Vice President
Theodore J. Magnani, Vice President
Donald C. Burke, Vice President and Treasurer
Ira P. Shapiro, Secretary
Custodian
The Bank of New York
90 Washington Street, 12th Floor
New York, NY 10286
Transfer Agent
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, 1999
DEAR SHAREHOLDER
Gross domestic product (GDP) growth rose 4.1% in the first quarter
of 1999, as robust consumer spending continued to fuel US growth and
prop up flagging economies globally. US consumer spending rose 6.8%
in the first quarter of 1999, the fastest pace in nearly 15 years.
In addition, had the US trade deficit not reached record levels in
the quarter, GDP would have been reported much higher. Consequently,
as a result of excessive growth, inflationary fears were kindled in
the financial markets and interest rates rose during the three-month
period ended May 31, 1999.
Many sectors of the US economy continued to remain vibrant. In
April, new home sales were reported at a 978,000-unit rate, the
second highest level ever recorded while vehicle sales in April rose
to a 13-year high. The manufacturing sector was strong and appeared
to be gaining momentum as the National Association of Purchasing
Managers Index (NAPM), a measure of strength within the
manufacturing sector of the US economy, rose to a 19-month high in
May. More interestingly, strength within the manufacturing sector
appeared to be broad based as every component within the NAPM index
rose in May, with the exception of inventory accumulation. US labor
market conditions remained taut. Although non-farm payrolls were
reported to have decreased by 5,000 in May, the US unemployment rate
continued to decline and is currently near a 29-year low of 4.3%.
More importantly, hourly wages rose 0.4% in June and are up 3.7%
from a year ago, compared to a 3.5% year-over-year rise the previous
two months. As a result of these series of strong economic reports,
the Federal Reserve Board adopted a tightening toward monetary
policy at its Federal Open Market Committee meeting in May. The
Federal Reserve Board ultimately raised the Federal Funds rate 0.25%
to 5.00% after the quarter's close on June 30, 1999.
Recent statements from Federal Reserve Board officials indicated
they were becoming more concerned about the US economy growing too
quickly. Although economic growth is exceptionally strong,
inflationary pressures have yet to emerge. The core consumer price
index (CPI), a broad measure of inflation excluding volatile food
and energy costs, is up just 1.8% this year through May and 2.2%
over the last 12 months. The last time the core CPI was this low
over a 12-month period was in 1966. The inflation outlook remains
positive as well. With the exception of the labor market, the US
economy did not face any binding resource constraints. Capacity
utilization rates were low and continued to create capacity
overhang. This is the primary reason US corporations lacked the
ability to raise prices.
With inflation currently at a 33-year low, we believe the likelihood
of a protracted series of interest rate hikes by the Federal Reserve
Board is minimal, for two reasons. First, with the possible
exception of wage pressures, there are no indications other sectors
of the economy are experiencing inflationary strains. Second, while
many foreign countries have rebounded nicely from last year's global
economic turmoil, there are still several countries in the midst of
the recovery process. A sharp increase in US interest rates could be
detrimental to the global economy. Key economic indicators, which
dictate Federal Reserve Board policy, are employment reports, retail
sales reports and CPI reports. On June 30, 1999, the Federal Reserve
Board did increase interest rates 0.25%.
Fiscal Year in Review
The 12-month period ended May 31, 1999 proved to be challenging for
fixed-income investors. Although intermediate-term and long-term
interest rates began and ended the fiscal year essentially
unchanged, interim volatility proved quite taxing for the adjustable
rate mortgage securities (ARMS) market. As the fiscal year unfolded,
the spread between short-term US Treasury yields and long-term US
Treasury yields narrowed. The flattening of the US Treasury yield
curve caused fixed mortgage rates to become more attractive relative
to adjustable mortgage rates, increasing the refinancing incentive
of ARMS. As a result, ARMS yield spreads widened and prices declined
to compensate for the increase in prepayments. During August and
September 1998, mounting global economic and financial concerns
prompted a massive flight to quality toward the US Treasury market,
causing US interest rates to fall dramatically. Consequently, credit
spreads in virtually all fixed-income sectors widened significantly
as a temporary credit paralysis gripped investors.
In an effort to loosen the credit strains, the Federal Reserve Board
eased monetary policy by lowering the Federal Funds rate a total of
0.75% on three separate occasions. This proved to be a boon for US
homeowners as fixed mortgage rates fell to their lowest level in
nearly 30 years. However, ARMS came under further pressure as
prepayments once again soared, causing yield spreads to increase to
their broadest levels in over eight years. As 1999 began, concerns
of widespread global economic gloom slowly subsided. However, US
interest rates began to rise on reports of stronger-than-expected
economic growth. Despite rising interest rates, the performance of
ARMS in 1999 has been stellar as yield spreads narrowed and prices
rose. In fact, the ARMS sector has been one of the few fixed-income
sectors to generate a positive total rate of return in 1999 through
May.
In light of the difficult environment during the 12 months ended May
31, 1999, we employed three key strategies that we believe helped
limit portfolio volatility and contributed to our investment
performance over the past year. First, we kept the Fund's effective
duration within a 0.50-year--0.75-year range throughout the majority
of the period. (Duration is a measure of a security's price
sensitivity to interest rate changes.) This helped to make the
Fund's net asset values less sensitive to the increased interest
rate volatility during the period. Second, we actively strove to
keep the rate-reset distribution of our ARM securities balanced. By
effectively balancing the Fund's rate resets over the entire year,
we were able to avoid wide swings in the Fund's yields as a result
of the volatile interest rate environment. Finally, as global
economic conditions began to deteriorate last fall, we reduced our
ARMS holdings to 70% of net assets (the Fund must hold a minimum of
65% of adjustable rate securities). We offset our reduced ARM
exposure with short-term agency debentures, which benefited from the
flight to quality rally in the US Treasury market. This allowed us
to avoid some of the negative impact of the yield spread widening
and resulting price declines on the Fund's net asset values.
However, in early 1999 we increased the Fund's holdings of ARMS to
87% of net assets in view of their attractive yield spreads. This
allowed the Fund to capture some of the price appreciation as a
result of the narrowing of yield spreads.
Investment Outlook
As we begin the new fiscal year, we believe the ARMS environment is
still very attractive despite the narrowing of yield spreads earlier
this year. Although yield spreads have narrowed, they still remain
wider than their pre-global crisis levels. In addition, US interest
rates have risen sharply since the beginning of the year. As of May
31, 1999, the two-year US Treasury note rose 0.87% to 5.40%, while
the ten-year US Treasury note rose 0.97% to 5.62%. More importantly,
the US Treasury yield curve has steepened. The spread between the
three-month US Treasury bill and 30-year US Treasury bond widened
from 0.64% at the start of the year to 1.20% at the close of the
period. Higher interest rates coupled with a steeper yield curve
should reduce the incentive to refinance ARMS into fixed rate
mortgages. Consequently, we believe ARMS yield spreads may narrow
further as investor prepayment assumptions are lowered. We remain
focused on our goal of balancing attractive yields and total return
potential.
In Conclusion
We thank you for your investment in Merrill Lynch Adjustable Rate
Securities Fund, Inc., and we look forward to reviewing our outlook
and strategy with you in our next report to shareholders.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
(Gregory Mark Maunz)
Gregory Mark Maunz
Senior Vice President and
Portfolio Manager
July 12, 1999
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 1999
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 "Recent Performance
Results" and "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
Salomon Six-Month Treasury Bill Index:
10/21/94** 5/99
ML Adjustable Rate Securities Fund,
Inc.++--Class A Shares* $ 9,600 $12,722
ML Adjustable Rate Securities Fund,
Inc.++--Class C Shares* $10,000 $12,728
Lehman Brothers Short Government
Index (1-2 Years)++++ $10,000 $13,251
Salomon Six-Month Treasury Bill
Index++++++ $10,000 $12,747
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
Salomon Six-Month Treasury Bill Index. Beginning and ending values are:
8/02/91** 5/99
ML Adjustable Rate Securities Fund,
Inc.++--Class B Shares* $10,000 $13,866
ML Adjustable Rate Securities Fund,
Inc.++--Class D Shares* $ 9,600 $13,857
Lehman Brothers Short Government
Index (1-2 Years)++++ $10,000 $15,776
Salomon Six-Month Treasury Bill
Index++++++ $10,000 $14,484
[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. The
starting date for the Index in the Class A and Class C Shares graph
is from 10/31/94 and in the Class B and Class D Shares graph is from
7/31/91.
++++++This unmanaged Index is comprised of all US Treasury bills
maturing in up to six months. The starting date for the Index in the
Class A and Class C Shares graph is from 10/31/94 and in the Class B
and Class D Shares graph is from 7/31/91.
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/99 +4.65% +0.46%
Inception (10/21/94) through 3/31/99 +6.38 +5.41
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/99 +3.73% -0.22%
Five Years Ended 3/31/99 +4.86 +4.86
Inception (8/02/91) through 3/31/99 +4.28 +4.28
[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 3/31/99 +3.69% +2.70%
Inception (10/21/94) through 3/31/99 +5.45 +5.45
[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 3/31/99 +4.38% +0.21%
Five Years Ended 3/31/99 +5.39 +4.53
Inception (8/02/91) through 3/31/99 +4.82 +4.26
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 1999
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 5/31/99
<S> <C> <C> <C> <C>
ML Adjustable Rate Securities Fund, Inc. Class A Shares +4.59% +1.36% +32.53% 4.81%
ML Adjustable Rate Securities Fund, Inc. Class B Shares +3.78 +1.16 +38.66 4.23
ML Adjustable Rate Securities Fund, Inc. Class C Shares +3.74 +1.15 +27.28 4.20
ML Adjustable Rate Securities Fund, Inc. Class D Shares +4.32 +1.40 +44.34 4.54
<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 since inception periods are Class A & Class C Shares, from
10/21/94 to 5/31/99 and Class B & Class D Shares, from 8/2/91 to
5/31/99.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Value Percent of
Index Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <S> <C> <C> <C>
Adjustable Rate* Certificate of $ 1,652,723 Federal National Mortgage
Mortgage-Backed Deposit Indexed Association, #307622, 6.857%
Obligations** Obligations due 4/01/2023 $ 1,698,483 $ 1,681,910 1.9%
Constant Maturity Federal Home Loan Mortgage
Treasury Indexed Corporation:
Obligations 1,399,415 #645073, 7.722% due 5/01/2015 1,423,030 1,441,983 1.6
1,012,487 #607129, 6.949% due 1/01/2016 1,043,051 1,035,743 1.2
4,309,741 #840032, 6.505% due 1/01/2019 4,472,053 4,439,723 5.0
1,935,435 #606108, 7.025% due 9/01/2019 1,972,323 1,991,389 2.2
1,756,735 #755194, 6.404% due 3/01/2020 1,761,279 1,795,436 2.0
62,990 #785173, 6.515% due 8/01/2020 64,446 63,905 0.1
1,044,748 #845139, 6.971% due 3/01/2022 1,059,947 1,074,784 1.2
3,197,959 #845535, 7.229% due 10/01/2023 3,266,349 3,291,500 3.7
4,368,170 #755170, 6.505% due 8/01/2031 4,515,596 4,469,206 5.0
Federal National Mortgage
Association:
6,822,140 #70169, 6.529% due 12/01/2018 7,087,613 6,987,646 7.8
2,305,010 #142069, 6.238% due 12/01/2021 2,352,551 2,374,530 2.7
2,287,540 #139312, 6.883% due 12/01/2021 2,362,182 2,349,448 2.6
738,303 #181278, 6.946% due 9/01/2022 756,309 750,264 0.8
2,169,900 #200009, 6.558% due 2/01/2023 2,177,520 2,241,788 2.5
2,136,529 #291252, 7.599% due 8/01/2024 2,163,120 2,230,002 2.5
463,011 #324905, 6.715% due 9/01/2025 467,572 476,071 0.5
Government National Mortgage
Association:
7,301,790 #8123, 6.375% due 1/20/2023 7,435,618 7,430,267 8.3
3,297,656 #8217, 6.875% due 6/20/2023 3,336,445 3,342,999 3.7
2,817,827 Prudential Home Mortgage
Securities Company, Inc.,
REMIC (a), 92-35-A1, 7.8348%
due 11/25/2022 2,888,273 2,807,852 3.1
Cost of Funds 1,703,773 DLJ Mortgage Acceptance Corp.,
Indexed REMIC (a), 91-6-A1,7.7898% due
Obligations 9/25/2021 1,732,924 1,704,284 1.9
London Interbank 1,652,208 Federal National Mortgage
Offered Rate Association, #305729,
Indexed 7.187% due 2/01/2025 1,699,885 1,682,674 1.9
Obligations Resolution Trust Corporation,
REMIC (a):
13,064,540 92-C1-B, 6.9375% due 8/25/2023 13,004,350 13,065,324 14.6
3,122,470 92-C8-A2, 6.2875% due
12/25/2023 3,124,717 3,127,622 3.5
Total Investments in Adjustable
Rate Mortgage-Backed Obligations 71,865,636 71,856,350 80.3
Derivative 25,271,735 DLJ Mortgage Acceptance Corp.,
Mortgage-Backed REMIC (a), 92-6-A1,
Obligations**-- 0.6498% due 7/25/2022 446,835 196,685 0.2
Interest Only (b) 36,111 Federal Home Loan Mortgage
Corporation, REMIC (a)(c),
92-1363-C, 447% due 8/15/2022 891,820 271,415 0.3
Sears Mortgage Securities
Corp., REMIC (a):
1,655 91-K-A4, 5,990% due 9/25/2021 298,710 148,304 0.2
13,971,882 92-12-A3, 0.5012% due 7/25/2022 183,459 139,719 0.2
Total Investments in Derivative
Mortgage-Backed Obligations 1,820,824 756,123 0.9
Fixed Rate 1,155,569 Federal National Mortgage
Mortgage-Backed Association, #201892, 8.50% due
Obligations** 9/01/2011 1,206,725 1,194,131 1.3
Total Investments in Fixed Rate
Mortgage-Backed Obligations 1,206,725 1,194,131 1.3
Total Investments in
Mortgage-Backed Obligations 74,893,185 73,806,604 82.5
US Government 8,000,000 Federal National Mortgage
Agency Association, 5.625% due 3/15/2001 8,107,261 7,997,520 8.9
Obligations
Total Investments in US
Government Agency Obligations 8,107,261 7,997,520 8.9
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Value Percent of
Amount Issue Cost (Note 1a) Net Assets
<S> <S> <C> <C> <C> <C>
Short-Term Repurchase $6,862,000 Morgan Stanley, Dean Witter,
Securities Agreements*** Discover & Company,
purchased on 5/28/1999 to
yield 4.73% to 6/01/1999 $ 6,862,000 $ 6,862,000 7.7%
Total Short-Term Securities 6,862,000 6,862,000 7.7
Total Investments $ 89,862,446 88,666,124 99.1
============
Other Assets Less Liabilities 819,888 0.9
------------ ------
Net Assets $ 89,486,012 100.0%
============ ======
<FN>
(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.
*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.
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of May 31, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$89,862,446) (Note 1a) $ 88,666,124
Cash 527
Receivables:
Interest $ 646,260
Principal paydowns 554,352
Capital shares sold 17,243 1,217,855
------------
Prepaid registration fees and other assets (Note 1f) 76,529
------------
Total assets 89,961,035
------------
Liabilities: Payables:
Capital shares redeemed 143,718
Dividends to shareholders (Note 1g) 111,980
Distributor (Note 2) 49,383
Investment adviser (Note 2) 35,917 340,998
------------
Accrued expenses and other liabilities 134,025
------------
Total liabilities 475,023
------------
Net Assets: Net assets $ 89,486,012
============
Net Assets Class A Common Stock, $0.10 par value,
Consist of: 100,000,000 shares authorized $ 9,949
Class B Common Stock, $0.10 par value,
600,000,000 shares authorized 767,791
Class C Common Stock, $0.10 par value,
100,000,000 shares authorized 65,889
Class D Common Stock, $0.10 par value,
200,000,000 shares authorized 99,154
Paid-in capital in excess of par 124,648,160
Accumulated realized capital losses on investments--net (Note 5) (34,908,609)
Unrealized depreciation on investments--net (1,196,322)
------------
Net assets $ 89,486,012
============
Net Asset Class A--Based on net assets of $947,440 and
Value: 99,487 shares outstanding $ 9.52
============
Class B--Based on net assets of $72,875,392 and
7,677,912 shares outstanding $ 9.49
============
Class C--Based on net assets of $6,255,526 and
658,894 shares outstanding $ 9.49
============
Class D--Based on net assets of $9,407,654 and
991,544 shares outstanding $ 9.49
============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 1999
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended May 31, 1999
<S> <S> <C> <C>
Investment Income Interest and discount earned, net of premium amortization $ 6,398,341
(Note 1e):
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 588,651
Investment advisory fees (Note 2) 503,198
Professional fees 93,331
Transfer agent fees--Class B (Note 2) 87,774
Registration fees (Note 1f) 67,730
Printing and shareholder reports 55,901
Accounting services (Note 2) 51,747
Account maintenance fees--Class D (Note 2) 40,345
Account maintenance and distribution fees--Class C (Note 2) 39,923
Directors' fees and expenses 26,903
Custodian fees 23,594
Transfer agent fees--Class D (Note 2) 14,498
Transfer agent fees--Class C (Note 2) 4,985
Pricing fees 3,338
Transfer agent fees--Class A (Note 2) 919
Other 13,434
------------
Total expenses 1,616,271
------------
Investment income--net 4,782,070
------------
Realized & Realized gain on investments--net 103,526
Unrealized Gain Change in unrealized depreciation on investments--net (1,101,905)
(Loss) on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 3,783,691
(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: 1999 1998
<S> <S> <C> <C>
Operations: Investment income--net $ 4,782,070 $ 6,265,385
Realized gain (loss) on investments--net 103,526 (299,001)
Change in unrealized appreciation/depreciation on
investments--net (1,101,905) (180,061)
------------ ------------
Net increase in net assets resulting from operations 3,783,691 5,786,323
------------ ------------
Dividends to Investment income--net:
Shareholders Class A (55,645) (49,343)
(Note 1g): Class B (3,659,684) (4,834,537)
Class C (230,608) (278,673)
Class D (836,133) (1,102,832)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (4,782,070) (6,265,385)
------------ ------------
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (19,307,279) (14,637,054)
(Note 4): ------------ ------------
Net Assets: Total decrease in net assets (20,305,658) (15,116,116)
Beginning of year 109,791,670 124,907,786
------------ ------------
End of year $ 89,486,012 $109,791,670
============ ============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 1999
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. 1994++ to
For the Year Ended May 31, May 31,
Increase (Decrease) in Net Asset Value: 1999 1998 1997++++ 1996++++ 1995
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.61 $ 9.65 $ 9.54 $ 9.55 $ 9.46
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .53 .57 .59 .56 .36
Realized and unrealized gain (loss)
on investments--net (.09) (.04) .10 .03 .09
--------- --------- --------- --------- ---------
Total from investment operations .44 .53 .69 .59 .45
--------- --------- --------- --------- ---------
Less dividends from investment
income--net (.53) (.57) (.58) (.60) (.36)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 9.52 $ 9.61 $ 9.65 $ 9.54 $ 9.55
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 4.59% 5.66% 7.48% 6.41% 4.85%+++
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses .92% .92% .89% .81% .87%*
Net Assets: ========= ========= ========= ========= =========
Investment income--net 5.43% 5.93% 6.13% 6.20% 6.18%*
========= ========= ========= ========= =========
Supplemental Net assets, end of period
Data: (in thousands) $ 947 $ 1,071 $ 265 $ 281 $ 345
========= ========= ========= ========= =========
Portfolio turnover 48.76% 47.55% 18.48% 25.30% 102.55%
========= ========= ========= ========= =========
<CAPTION>
The following per share data and ratios have been derived Class B
from information provided in the financial statements.
For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 1999 1998 1997++++ 1996++++ 1995
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.58 $ 9.62 $ 9.53 $ 9.56 $ 9.53
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .46 .50 .51 .52 .46
Realized and unrealized gain
(loss) on investments--net (.09) (.04) .09 (.02) .04
--------- --------- --------- --------- ---------
Total from investment operations .37 .46 .60 .50 .50
--------- --------- --------- --------- ---------
Less dividends from investment
income--net (.46) (.50) (.51) (.53) (.47)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 9.49 $ 9.58 $ 9.62 $ 9.53 $ 9.56
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 3.78% 4.85% 6.44% 5.34% 5.48%
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses 1.70% 1.70% 1.65% 1.59% 1.59%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 4.66% 5.19% 5.35% 5.45% 4.88%
========= ========= ========= ========= =========
Supplemental Net assets, end of year
Data: (in thousands) $ 72,875 $ 85,094 $ 106,061 $ 137,387 $ 202,334
========= ========= ========= ========= =========
Portfolio turnover 48.76% 47.55% 18.48% 25.30% 102.55%
========= ========= ========= ========= =========
<CAPTION>
Class C
For the
Period
The following per share data and ratios have been derived Oct. 21,
from information provided in the financial statements. 1994++ to
For the Year Ended May 31, May 31,
Increase (Decrease) in Net Asset Value: 1999 1998 1997++++ 1996++++ 1995
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.58 $ 9.63 $ 9.53 $ 9.56 $ 9.46
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .45 .49 .50 .48 .31
Realized and unrealized gain (loss)
on investments--net (.09) (.05) .11 .01 .10
--------- --------- --------- --------- ---------
Total from investment operations .36 .44 .61 .49 .41
--------- --------- --------- --------- ---------
Less dividends from investment
income--net (.45) (.49) (.51) (.52) (.31)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 9.49 $ 9.58 $ 9.63 $ 9.53 $ 9.56
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 3.74% 4.71% 6.51% 5.30% 4.47%+++
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses 1.73% 1.74% 1.70% 1.57% 1.68%*
Net Assets: ========= ========= ========= ========= =========
Investment income--net 4.62% 5.15% 5.34% 5.40% 5.51%*
========= ========= ========= ========= =========
Supplemental Net assets, end of period
Data: (in thousands) $ 6,256 $ 4,434 $ 5,315 $ 3,078 $ 1,409
========= ========= ========= ========= =========
Portfolio turnover 48.76% 47.55% 18.48% 25.30% 102.55%
========= ========= ========= ========= =========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales loads.
++Commencement of operations.
++++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 1999
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
The following per share data and ratios have been derived Class D
from information provided in the financial statements.
For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 1999 1998 1997++ 1996++ 1995
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.58 $ 9.62 $ 9.52 $ 9.55 $ 9.53
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .51 .55 .57 .56 .51
Realized and unrealized gain (loss)
on investments--net (.09) (.04) .09 (.01) .03
--------- --------- --------- --------- ---------
Total from investment operations .42 .51 .66 .55 .54
--------- --------- --------- --------- ---------
Less dividends from investment
income--net (.51) (.55) (.56) (.58) (.52)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 9.49 $ 9.58 $ 9.62 $ 9.52 $ 9.55
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 4.32% 5.40% 7.11% 5.91% 5.91%
Return:* ========= ========= ========= ========= =========
Ratios to Average Expenses 1.17% 1.18% 1.13% 1.06% 1.08%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 5.18% 5.70% 5.87% 5.98% 5.44%
========= ========= ========= ========= =========
Supplemental Net assets, end of year
Data: (in thousands) $ 9,408 $ 19,193 $ 13,267 $ 12,800 $ 16,993
========= ========= ========= ========= =========
Portfolio turnover 48.76% 47.55% 18.48% 25.30% 102.55%
========= ========= ========= ========= =========
<FN>
++Based on average shares outstanding.
*Total investment returns exclude the effects of sales loads.
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's
financial statements are prepared in accordance with generally
accepted accounting principles which may require the use of
management accruals and estimates. 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
or purchased are valued at the last sale price in the case of
exchange-traded options. In the case of options traded in the over-
the-counter market, valuation is the last asked price (options
written) or the last bid price (options purchased). 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. Under such agreements,
the counterparty 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 additional 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 is was closed.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 1999
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 ("MLFD" or the "Distributor"), a division of Princeton
Funds Distributor, Inc. ("PFD"), which is 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 Incorporated ("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, 1999, MLFD earned underwriting discounts
and MLPF&S earned dealer concessions on sales of the Fund's Class A
and Class D Shares as follows:
MLFD MLPF&S
Class A -- $ 453
Class D $797 $10,232
For the year ended May 31, 1999, MLPF&S received contingent deferred
sales charges of $122,352 and $2,898 relating to transactions in
Class B and Class C Shares, respectively.
For the year ended May 31, 1999, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $1,794 for
security price quotations to compute the net asset value of the
Fund.
Financial Data Services, Inc. ("FDS"), 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, FDS, PFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended May 31, 1999 were $45,851,711 and $65,292,869,
respectively.
Net realized gains for the year ended May 31, 1999 and net
unrealized losses as of May 31, 1999 were as follows:
Realized Unrealized
Gains Losses
Long-term investments $ 103,526 $ (1,196,322)
----------- -------------
Total $ 103,526 $ (1,196,322)
=========== =============
As of May 31, 1999, net unrealized depreciation for Federal income
tax purposes aggregated $1,196,322, of which $344,225 related to
appreciated securities and $1,540,547 related to depreciated
securities. The aggregate cost of investments at May 31, 1999 for
Federal income tax purposes was $89,862,446.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $19,307,279 and $14,637,054 for the years ended May 31, 1999 and
May 31, 1998, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended May 31, 1999 Shares Amount
Shares sold 317,428 $ 3,033,210
Shares issued to shareholders
in reinvestment of dividends 3,452 32,959
------------ -------------
Total issued 320,880 3,066,169
Shares redeemed (332,797) (3,178,358)
------------ -------------
Net decrease (11,917) $ (112,189)
============ =============
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 B Shares for the Year Dollar
Ended May 31, 1999 Shares Amount
Shares sold 2,325,387 $ 22,030,937
Shares issued to shareholders
in reinvestment of dividends 219,122 2,181,486
------------ -------------
Total issued 2,544,509 24,212,423
Automatic conversion of shares (18,010) (175,541)
Shares redeemed (3,730,285) (35,491,399)
------------ -------------
Net decrease (1,203,786) $ (11,454,517)
============ =============
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 C Shares for the Year Dollar
Ended May 31, 1999 Shares Amount
Shares sold 724,961 $ 6,910,713
Shares issued to shareholders
in reinvestment of dividends 18,509 176,108
------------ -------------
Total issued 743,470 7,086,821
Shares redeemed (547,342) (5,218,920)
------------ -------------
Net increase 196,128 $ 1,867,901
============ =============
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 D Shares for the Year Dollar
Ended May 31, 1999 Shares Amount
Shares sold 488,064 $ 4,641,647
Automatic conversion of shares 18,013 175,541
Shares issued to shareholders
in reinvestment of dividends 57,441 546,632
------------ -------------
Total issued 563,518 5,363,820
Shares redeemed (1,576,087) (14,972,294)
------------ -------------
Net decrease (1,012,569) $ (9,608,474)
============ =============
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
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
============ =============
5. Capital Loss Carryforward:
At May 31, 1999, the Fund had a net capital loss carryforward of
approximately $34,876,000, 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, $1,820,000 expires in 2006 and $298,000 expires in
2007. 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, 1999, 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,
1999 by correspondence with the custodian. 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,
1999, 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 12, 1999
</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, 1999 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, 1998 4.44%
November 30, 1998 4.82%
February 28, 1999 0.00%
May 31, 1999 0.00%
Of the Fund's ordinary income dividends paid during the fiscal year
ended May 31, 1999, 2.83% 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.
