MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Semi-Annual Report
November 30, 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
Financial Data Services, Inc.
4800 Deer Lake Drive East
Jacksonville, FL 32246-6484
(800) 637-3863
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1998
DEAR SHAREHOLDER
During the three-month period ended November 30, 1998, global market
volatility increased, caused by a series of adverse business,
economic and political developments. Despite a precipitous drop in
interest rates, US credit market spreads widened significantly
during the quarter, as investors became more risk averse in response
to the deepening global financial problems. In an effort to
alleviate the liquidity squeeze gripping the US credit market and
prevent the US economy from tumbling into a recession, the Federal
Reserve Board lowered interest rates in late September, in mid-
October and again in mid-November.
Numerous events caused market volatility to increase and credit
market spreads to widen. The disclosure of massive losses by a
prominent hedge fund, coupled with deteriorating economic conditions
in Latin America and Japan and US presidential impeachment
proceedings, prompted wide gyrations in US equity prices and a
tightening of bank credit standards. Consequently, US credit spreads
widened to levels seen only in past recessions. In a preemptive move
to ease the liquidity strain upon the credit markets, the Federal
Reserve Board lowered the Federal Funds rate by 75 basis points
(0.75%) to 4.75% and the discount rate was reduced 50 basis points
to 4.50% over a span of just seven weeks, the fastest easing move
since the last economic recession in 1991.
Despite global economic turmoil, the US economy continued to exhibit
stronger-than-expected growth in the third quarter of 1998. Gross
domestic product (GDP), led by an improved trade deficit and strong
consumer demand, rose 3.7% during the November quarter. After a 2.2%
and 2.1% reduction from GDP during the first and second quarters of
1998, respectively, fewer imports helped improve the trade deficit
in the third quarter of 1998. As a result, the US trade deficit
subtracted just 0.4% from third-quarter GDP. More important,
consumer spending, which rose 4.1% in the third quarter, remains
exceptionally strong and continues to outstrip income growth. In
addition, new home sales and new housing starts are at or near their
all-time highs, keeping housing growth particularly strong.
Nonetheless, despite the recent economic euphoria, we see signs that
US economic growth could slow in 1999.
Structural imbalances in two sectors of the US economy could cause
growth to slow in 1999. First, consumer spending, which has exploded
from strong employment growth and personal asset gains, could begin
to moderate, and job growth is slowing. The three-month average gain
in non-farm payrolls through November 1998 is the lowest in three
years. In addition, consumer confidence is falling and is at a 19-
month low. Slower income growth from smaller job gains, coupled with
declining consumer confidence, could slow spending growth in 1999.
Second, capital spending, which has grown at a double-digit pace
since 1991, is beginning to slow. Over the last several years, large
capital spending investments have allowed companies to increase
their output capacity. However, slowing global economies have
reduced demand and left companies with capacity overhang. As a
result, capacity utilization, which has fallen steadily, was at an
80.6% rate in November, a five-year low. Consequently, we expect
capital spending growth to slow in 1999. Finally, the US trade
deficit could widen because of reduced global demand amid a
continuing global economic slowdown, resulting in a further drag on
US economic growth. Should US economic growth begin to show signs of
weakness, we expect the Federal Reserve Board to ease monetary
policy further.
Portfolio Strategy
During the quarter ended November 30, 1998, US interest rates fell
once again and the US Treasury yield curve narrowed further. The
yield of the one-year US Treasury bill declined 0.35% to 4.50%,
while the yield of the 30-year US Treasury bond fell 0.18% to 5.07%.
In spite of interest rate declines, the Fund's net asset value
declined slightly as adjustable rate mortgage securities (ARMS)
yield spreads widened during the period. We kept the Fund's duration
in a 0.5-year--0.75-year range to limit interest rate sensitivity
and to reduce fluctuation in the Fund's net asset value. However,
the negative effects of the yield spread widening overwhelmed the
positive effects of falling interest rates, causing ARMS prices to
decline. ARMS yield spreads widened for two primary reasons. First,
amid signs of diminished liquidity in the banking system and a
heightened aversion to risk, a global "flight to quality" ensued,
pushing US Treasury yields to their lowest levels in more than a
generation. As a result, virtually all credit market spreads widened
during the period. Second, as interest rates fell and the US
Treasury curve narrowed further, investors raised their prepayment
expectations. Consequently, ARMS yield spreads widened in response
to an anticipated faster prepayment environment.
During the three-month period ended November 30, 1998, our strategy
remained defensive. In the beginning of the quarter, we reduced our
ARMS holdings to 70% of net assets (the Fund must hold a minimum 65%
of its net assets in adjustable rate securities). However, later in
the quarter, we took advantage of the widening in ARMS spreads and
increased our ARMS holdings to 75% of net assets. As we move ahead,
we believe the current ARMS environment is extremely attractive
because yield spreads are at their widest levels in over eight
years. Consequently, we intend to further increase our holdings of
ARMS, since we believe the end of the flight to quality seen this
past quarter could cause spreads to tighten favorably. In any event,
we remain focused on our strategy to provide the highest possible
yields consistent with limited net asset volatility.
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,
(Arthur Zeikel)
Arthur Zeikel
President
(Gregory Mark Maunz)
Gregory Mark Maunz
Senior Vice President and
Portfolio Manager
January 13, 1999
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 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 "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.
<TABLE>
Recent
Performance
Results*
<CAPTION>
Since Standardized
12 Month 3 Month Inception 30-Day Yield
Total Return Total Return Total Return As of 11/30/98
<S> <C> <C> <C> <C>
ML Adjustable Rate Securities Fund, Inc. Class A Shares +4.35% +0.61% +28.71% 5.05%
ML Adjustable Rate Securities Fund, Inc. Class B Shares +3.55 +0.52 +35.18 4.49
ML Adjustable Rate Securities Fund, Inc. Class C Shares +3.51 +0.40 +24.10 4.45
ML Adjustable Rate Securities Fund, Inc. Class D Shares +3.98 +0.54 +40.20 4.82
<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 11/30/98 and Class B & Class D Shares, from 8/2/91 to
11/30/98.
</TABLE>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/98 +4.58% +0.40%
Inception (10/21/94) through 9/30/98 +6.48 +5.39
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/98 +3.78% -0.17%
Five Years Ended 9/30/98 +4.52 +4.52
Inception (8/2/91) through 9/30/98 +4.25 +4.25
[FN]
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 9/30/98 +3.74% +2.75%
Inception (10/21/94) through 9/30/98 +5.54 +5.54
[FN]
*Maximum contingent deferred sales charge is 1% and is reduced to 0%
after 1 year.
**Assuming payment of applicable contingent deferred sales charge.
% Return Without % Return With
Sales Charge Sales Charge**
Class D Shares*
Year Ended 9/30/98 +4.43% +0.25%
Five Years Ended 9/30/98 +5.09 +4.24
Inception (8/2/91) through 9/30/98 +4.78 +4.19
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1998
<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 $ 2,262,531 Federal National Mortgage
Mortgage-Backed Deposit Indexed Association, #307622, 7.51%
Obligations** Obligations due 4/01/2023 $ 2,326,029 $ 2,303,189 2.22%
Constant Maturity Federal Home Loan Mortgage
Treasury Indexed Corporation:
Obligations 1,498,281 #645073, 7.717% due 5/01/2015 1,523,564 1,546,026 1.49
1,083,993 #607129, 7.261% due 1/01/2016 1,117,268 1,093,391 1.05
4,697,461 #840032, 7.261% due 1/01/2019 4,877,080 4,753,267 4.58
2,299,805 #606108, 7.581% due 9/01/2019 2,344,380 2,349,389 2.26
1,960,869 #775194, 7.08% due 3/01/2020 1,966,032 1,973,497 1.90
63,649 #785173, 7.365% due 8/01/2020 65,121 63,629 0.06
1,550,841 #845139, 7.785% due 3/01/2022 1,573,779 1,567,326 1.51
3,923,479 #845535, 7.593% due 10/01/2023 4,008,218 3,985,045 3.84
5,019,242 #755170, 7.351% due 8/01/2031 5,188,642 5,075,709 4.89
Federal National Mortgage
Association:
7,798,148 #70169, 7.167% due 12/01/2018 8,106,118 7,934,616 7.64
3,132,686 #142069, 7.120% due 12/01/2021 3,197,297 3,182,621 3.06
1,870,881 #139312, 7.519% due 12/01/2021 1,945,844 1,900,790 1.83
1,041,890 #181278, 7.007% due 9/01/2022 1,067,528 1,060,123 1.02
2,444,412 #200009, 7.571% due 2/01/2023 2,453,148 2,471,911 2.38
2,738,266 #291252, 7.607% due 8/01/2024 2,772,573 2,781,476 2.68
577,011 #324905, 7.636% due 9/01/2025 582,769 583,615 0.56
3,899,302 Government National Mortgage
Association, #8217, 6.875% due
6/20/2023 3,945,542 3,950,500 3.80
3,870,617 Prudential Home Mortgage
Securities Company, Inc.,
REMIC (a), 92-35-A1, 7.851%
due 11/25/2022 3,967,383 3,904,660 3.76
Cost of Funds 2,186,242 DLJ Mortgage Acceptance Corp.,
Indexed Obligations REMIC (a),91-6-A1, 7.804%
due 9/25/2021 2,223,647 2,178,043 2.10
London Interbank 2,686,559 Federal National Mortgage
Offered Rate Association, #305729, 7.829%
Indexed due 2/01/2025 2,764,978 2,757,081 2.65
Obligations 15,005,921 Resolution Trust Corporation,
REMIC (a), 92-C1-B,
7.063% due 8/25/2023 14,452,844 15,019,989 14.46
5,394,848 Resolution Trust Corporation,
REMIC (a), 92-C8-A2,
6.475% due 12/25/2023 5,411,493 5,347,643 5.15
Total Investments in
Adjustable Rate
Mortgage-Backed Obligations 77,881,277 77,783,536 74.89
Derivative 32,590,854 DLJ Mortgage Acceptance Corp.,
Mortgage-Backed REMIC (a),92-6-A1, 0.648%
Obligations**-- due 7/25/2022 505,468 283,026 0.27
Interest Only (b) 46,628 Federal Home Loan Mortgage
Corporation, REMIC (a)(c), 92-1363-C,
390% due 8/15/2022 958,098 284,531 0.27
Sears Mortgage Securities Corp.,
REMIC (a):
2,083 91-K-A4, 5,814% due 9/25/2021 349,917 188,025 0.18
17,178,115 92-12-A3, 0.494% due 7/25/2022 216,684 171,781 0.17
Total Investments in Derivative
Mortgage-Backed Obligations--
Interest Only 2,030,167 927,363 0.89
Fixed Rate 1,452,028 Federal National Mortgage
Mortgage-Backed Association, #201892, 8.50% due
Obligations** 9/01/2011 1,517,832 1,499,364 1.44
Total Investments in Fixed Rate
Mortgage-Backed Obligations 1,517,832 1,499,364 1.44
Total Investments in
Mortgage-Backed Obligations 81,429,276 80,210,263 77.22
US Government 8,000,000 Federal Home Loan Mortgage
Agency Obligations Corporation, 6.54% due 5/19/2000 8,092,999 8,177,608 7.87
Total Investments in US Government
Agency Obligations 8,092,999 8,177,608 7.87
US Government 5,000,000 United States Treasury Notes,
Obligations 5.50% due 2/29/2000 4,995,313 5,050,000 4.86
Total Investments in
US Government Obligations 4,995,313 5,050,000 4.86
Short-Term Repurchase 9,596,000 Morgan Stanley, Dean Witter &
Securities Agreements*** Company, purchased on 11/30/1998
to yield 5.375% to 12/01/1998 9,596,000 9,596,000 9.24
Total Short-Term Securities 9,596,000 9,596,000 9.24
Total Investments $104,113,588 103,033,871 99.19
============
Other Assets Less Liabilities 845,722 0.81
------------ -------
Net Assets $103,879,593 100.00%
============ =======
<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 stated 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., November 30, 1998
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of November 30, 1998
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$104,113,588) (Note 1a) $103,033,871
Cash 234
Receivables:
Principal paydowns $ 850,054
Interest 742,411
Capital shares sold 13,462 1,605,927
------------
Prepaid registration fees and other assets (Note 1f) 83,030
------------
Total assets 104,723,062
------------
Liabilities: Payables:
Capital shares redeemed 440,743
Dividends to shareholders (Note 1g) 150,850
Distributor (Note 2) 54,492
Investment adviser (Note 2) 41,806 687,891
------------
Accrued expenses and other liabilities 155,578
------------
Total liabilities 843,469
------------
Net Assets: Net assets $103,879,593
============
Net Assets Class A Common Stock, $0.10 par value, 100,000,000 shares authorized $ 9,708
Consist of: Class B Common Stock, $0.10 par value, 600,000,000 shares authorized 834,471
Class C Common Stock, $0.10 par value, 100,000,000 shares authorized 48,932
Class D Common Stock, $0.10 par value, 200,000,000 shares authorized 204,056
Paid-in capital in excess of par 139,145,866
Accumulated realized capital losses on investments--net (Note 5) (35,283,723)
Unrealized depreciation on investments--net (1,079,717)
------------
Net assets $103,879,593
============
Net Asset Class A--Based on net assets of $922,410 and 97,075
Value: shares outstanding $ 9.50
============
Class B--Based on net assets of $79,011,211 and 8,344,715
shares outstanding $ 9.47
============
Class C--Based on net assets of $4,633,985 and 489,321
shares outstanding $ 9.47
============
Class D--Based on net assets of $19,311,987 and 2,040,564
shares outstanding $ 9.46
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended November 30, 1998
<S> <S> <C> <C>
Investment Income Interest and discount earned, net of premium amortization $ 3,379,222
(Note 1e):
Expenses: Account maintenance and distribution fees--Class B (Note 2) $ 306,437
Investment advisory fees (Note 2) 267,160
Accounting services (Note 2) 47,430
Transfer agent fees--Class B (Note 2) 44,092
Professional fees 35,301
Registration fees (Note 1f) 30,098
Printing and shareholder reports 29,935
Account maintenance fees--Class D (Note 2) 24,167
Account maintenance and distribution fees--Class C (Note 2) 18,830
Directors' fees and expenses 13,392
Custodian fees 12,649
Transfer agent fees--Class D (Note 2) 8,309
Transfer agent fees--Class C (Note 2) 2,253
Pricing fees 1,485
Transfer agent fees--Class A (Note 2) 476
Other 6,773
------------
Total expenses 848,787
------------
Investment income--net 2,530,435
------------
Realized & Realized loss on investments--net (271,588)
Unrealized Change in unrealized depreciation on investments--net (985,300)
Loss on ------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 1,273,547
(Notes 1c, 1e & 3): ============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1998
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the Year
Months Ended Ended
Increase (Decrease) in Net Assets: Nov. 30, 1998 May 31, 1998
<S> <S> <C> <C>
Operations: Investment income--net $ 2,530,435 $ 6,265,385
Realized loss on investments--net (271,588) (299,001)
Change in unrealized appreciation/depreciation on investments--net (985,300) (180,061)
------------ ------------
Net increase in net assets resulting from operations 1,273,547 5,786,323
------------ ------------
Dividends to Investment income--net:
Shareholders Class A (29,901) (49,343)
(Note 1g): Class B (1,893,979) (4,834,537)
Class C (108,112) (278,673)
Class D (498,443) (1,102,832)
------------ ------------
Net decrease in net assets resulting from dividends
to shareholders (2,530,435) (6,265,385)
------------ ------------
Capital Share Net decrease in net assets derived from capital share
Transactions transactions (4,655,189) (14,637,054)
(Note 4): ------------ ------------
Net Assets: Total decrease in net assets (5,912,077) (15,116,116)
Beginning of period 109,791,670 124,907,786
------------ ------------
End of period $103,879,593 $109,791,670
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
For the
For the Six Period
The following per share data and ratios have been derived Months Oct. 21,
from information provided in the financial statements. Ended 1994++ to
Nov. 30, For the Year Ended May 31, May 31,
Increase (Decrease) in Net Asset Value: 1998 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 .26 .57 .59 .56 .36
Realized and unrealized gain
(loss) on investments--net (.11) (.04) .10 .03 .09
--------- --------- --------- --------- ---------
Total from investment operations .15 .53 .69 .59 .45
--------- --------- --------- --------- ---------
Less dividends from investment income--net (.26) (.57) (.58) (.60) (.36)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 9.50 $ 9.61 $ 9.65 $ 9.54 $ 9.55
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 1.57%+++ 5.66% 7.48% 6.41% 4.85%+++
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses .92%* .92% .89% .81% .87%*
Net Assets: ========= ========= ========= ========= =========
Investment income--net 5.40%* 5.93% 6.13% 6.20% 6.18%*
========= ========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $ 923 $ 1,071 $ 265 $ 281 $ 345
Data: ========= ========= ========= ========= =========
Portfolio turnover 8.74% 47.55% 18.48% 25.30% 102.55%
========= ========= ========= ========= =========
<FN>
++Commencement of operations.
++++Based on average shares outstanding.
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1998
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
<CAPTION>
Class B
For the Six
The following per share data and ratios have been derived Months
from information provided in the financial statements. Ended
Nov. 30, For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 1998 1998 1997++ 1996++ 1995
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.58 $ 9.62 $ 9.53 $ 9.56 $ 9.53
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .22 .50 .51 .52 .46
Realized and unrealized gain
(loss) on investments--net (.11) (.04) .09 (.02) .04
--------- --------- --------- --------- ---------
Total from investment operations .11 .46 .60 .50 .50
--------- --------- --------- --------- ---------
Less dividends from investment income--net (.22) (.50) (.51) (.53) (.47)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 9.47 $ 9.58 $ 9.62 $ 9.53 $ 9.56
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 1.17%+++ 4.85% 6.44% 5.34% 5.48%
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses 1.69%* 1.70% 1.65% 1.59% 1.59%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 4.64%* 5.19% 5.35% 5.45% 4.88%
========= ========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $ 79,011 $ 85,094 $ 106,061 $ 137,387 $ 202,334
Data: ========= ========= ========= ========= =========
Portfolio turnover 8.74% 47.55% 18.48% 25.30% 102.55%
========= ========= ========= ========= =========
<FN>
++Based on average shares outstanding.
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
<CAPTION>
Class C
For the
For the Six Period
The following per share data and ratios have been derived Months Oct. 21,
from information provided in the financial statements. Ended 1994++ to
Nov. 30, For the Year Ended May 31, May 31,
Increase (Decrease) in Net Asset Value: 1998 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 .22 .49 .50 .48 .31
Realized and unrealized gain
(loss) on investments--net (.11) (.05) .11 .01 .10
--------- --------- --------- --------- ---------
Total from investment operations .11 .44 .61 .49 .41
--------- --------- --------- --------- ---------
Less dividends from investment income--net (.22) (.49) (.51) (.52) (.31)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 9.47 $ 9.58 $ 9.63 $ 9.53 $ 9.56
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 1.16%+++ 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 4.59%* 5.15% 5.34% 5.40% 5.51%*
========= ========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $ 4,634 $ 4,434 $ 5,315 $ 3,078 $ 1,409
Data: ========= ========= ========= ========= =========
Portfolio turnover 8.74% 47.55% 18.48% 25.30% 102.55%
========= ========= ========= ========= =========
<FN>
++Commencement of operations.
++++Based on average shares outstanding.
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1998
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<CAPTION>
Class D
For the Six
The following per share data and ratios have been derived Months
from information provided in the financial statements. Ended
Nov. 30, For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 1998 1998 1997++ 1996++ 1995
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.58 $ 9.62 $ 9.52 $ 9.55 $ 9.53
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .25 .55 .57 .56 .51
Realized and unrealized gain
(loss) on investments--net (.12) (.04) .09 (.01) .03
--------- --------- --------- --------- ---------
Total from investment operations .13 .51 .66 .55 .54
--------- --------- --------- --------- ---------
Less dividends from investment income--net (.25) (.55) (.56) (.58) (.52)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 9.46 $ 9.58 $ 9.62 $ 9.52 $ 9.55
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 1.33%+++ 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 5.16%* 5.70% 5.87% 5.98% 5.44%
========= ========= ========= ========= =========
Supplemental Net assets, end of period (in thousands) $ 19,312 $ 19,193 $ 13,267 $ 12,800 $ 16,993
Data: ========= ========= ========= ========= =========
Portfolio turnover 8.74% 47.55% 18.48% 25.30% 102.55%
========= ========= ========= ========= =========
<FN>
++Based on average shares outstanding.
*Annualized.
**Total investment returns exclude the effects of sales loads.
+++Aggregate total investment return.
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. These unaudited financial
statements reflect all adjustments which are, in the opinion of
management, necessary to a fair statement of the results for the
interim period presented. All such adjustments are of a normal
recurring nature. The Fund offers four classes of shares under the
Merrill Lynch Select Pricing SM System. Shares of Class A and Class
D are sold with a front-end sales charge. Shares of Class B and
Class C may be subject to a contingent deferred sales charge. All
classes of shares have identical voting, dividend, liquidation and
other rights and the same terms and conditions, except that Class B,
Class C and Class D Shares bear certain expenses related to the
account maintenance of such shares, and Class B and Class C Shares
also bear certain expenses related to the distribution of such
shares. Each class has exclusive voting rights with respect to
matters relating to its account maintenance and distribution
expenditures. The following is a summary of significant accounting
policies followed by the Fund.
(a) Valuation of investments--Portfolio securities which are traded
in the over-the-counter market are valued at the last available bid
price or on the basis of yield equivalents as obtained from one or
more dealers that make markets in such securities. Options written
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 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 is was closed.
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1998
NOTES TO FINANCIAL STATEMENTS (continued)
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income (including amortization of
discount and premiums) is recognized on the accrual basis. Realized
gains and losses on security transactions are determined on the
identified cost basis.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) Dividends and distributions--All or a portion of the Fund's net
investment income is declared daily and paid monthly. Distributions
paid by the Fund are recorded on the ex-dividend dates.
(h) Dollar rolls--The Fund sells mortgage-backed securities for
delivery in the current month and simultaneously contracts to
repurchase substantially similar (same type, coupon and maturity)
securities on a specific future date.
2. Investment Advisory Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner. The Fund has entered into a Distribution
Agreement and Distribution Plans with Merrill Lynch Funds
Distributor ("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 Inc. ("MLPF&S"), a subsidiary of ML & Co.,
also provides account maintenance and distribution services to the
Fund. The ongoing account maintenance fee compensates the
Distributor and MLPF&S for providing account maintenance services to
Class B, Class C and Class D shareholders. The ongoing distribution
fee compensates the Distributor and MLPF&S for providing shareholder
and distribution-related services to Class B and Class C
shareholders.
For the six months ended November 30, 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 six months ended November 30, 1998, MLPF&S received
contingent deferred sales charges of $37,413 and $1,383 relating to
transactions in Class B and Class C Shares, respectively.
For the six months ended November 30, 1998, the Fund paid Merrill
Lynch Security Pricing Service, an affiliate of MLPF&S, $515 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 six months ended November 30, 1998 were $8,687,413 and
$16,985,231, respectively.
Net realized losses for the six months ended November 30, 1998 and
unrealized losses as of November 30, 1998 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $ (271,588) $ (1,079,717)
------------ -------------
Total $ (271,588) $ (1,079,717)
============ =============
As of November 30, 1998, net unrealized depreciation for Federal
income tax purposes aggregated $1,079,717, of which $774,845 related
to appreciated securities and $1,854,562 related to depreciated
securities. The aggregate cost of investments at November 30, 1998
for Federal income tax purposes was $104,113,588.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $4,655,189 and $14,637,054 for the six months ended November 30,
1998 and the year ended May 31, 1998, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Six Months Dollar
Ended November 30, 1998 Shares Amount
Shares sold 282,193 $ 2,697,609
Shares issued to shareholders
in reinvestment of dividends 1,854 17,727
------------ -------------
Total issued 284,047 2,715,336
Shares redeemed (298,376) (2,850,358)
------------ -------------
Net decrease (14,329) $ (135,022)
============ =============
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 Six Months Dollar
Ended November 30, 1998 Shares Amount
Shares sold 1,362,315 $ 12,980,600
Shares issued to shareholders
in reinvestment of dividends 118,137 1,125,871
------------ -------------
Total issued 1,480,452 14,106,471
Automatic conversion of shares (10,099) (100,465)
Shares redeemed (2,007,336) (19,130,140)
------------ -------------
Net decrease (536,983) $ (5,124,134)
============ =============
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 Six Months Dollar
Ended November 30, 1998 Shares Amount
Shares sold 457,632 $ 4,370,875
Shares issued to shareholders
in reinvestment of dividends 8,441 80,421
------------ -------------
Total issued 466,073 4,451,296
Shares redeemed (439,518) (4,195,221)
------------ -------------
Net increase 26,555 $ 256,075
============ =============
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)
============ =============
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1998
NOTES TO FINANCIAL STATEMENTS (concluded)
Class D Shares for the Six Months Dollar
Ended November 30, 1998 Shares Amount
Shares sold 313,426 $ 2,984,222
Automatic conversion of shares 10,100 100,465
Shares issued to shareholders
in reinvestment of dividends 40,291 383,736
------------ -------------
Total issued 363,817 3,468,423
Shares redeemed (327,366) (3,120,531)
------------ -------------
Net increase 36,451 $ 347,892
============ =============
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, 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.
