MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Annual Report
May 31, 2000
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, 2000
DEAR SHAREHOLDER
Economic Environment
US economic growth sizzled over the turn of the century. Gross
domestic product (GDP) rose an astounding 7.3% in the final quarter
of 1999, followed by an equally impressive 5.4% gain in the first
quarter of 2000. Consequently, in an effort to temper potential
inflationary pressures the Federal Reserve Board again raised
interest rates during the six-month period ended May 31, 2000. In
pushing both the Federal Funds interest and discount rates up 25
basis points (0.25%) in February and March and 50 basis points at
its May Federal Open Market Committee meeting, the Federal Reserve
Board in all has raised the Federal Funds rate 1.75% and the
discount rate 1.50% over the last 12 months.
Strong equity market advances coupled with low unemployment remain
the catalysts behind consumer spending, which continues to drive GDP
growth. In the fourth quarter of 1999, consumer spending rose 5.9%
followed by a 7.5% increase in the first quarter of 2000. Despite
rising mortgage rates, the US housing market remains vigorous. New
housing starts rose to a 1.8 million unit annualized rate in
February, the highest level since 1986. In addition, auto sales
remain exceptionally strong. In March, vehicle sales (automobiles
and light trucks) rose at a 19.2 million unit annualized rate, an
all-time high. More importantly, labor market conditions remain
tight. Non-farm payrolls have risen by a monthly average of 323,000
this year through May compared with an average of 229,000 per month
in 1999. As a result, the unemployment rate fell to 3.9% in April, a
30-year low.
Nonetheless, in spite of robust consumer spending and a strong labor
market, core measures of inflation remain benign at both the retail
and wholesale level. Although crude oil prices rose to more than $34
per barrel in February creating headline inflation, both the core
consumer index (CPI) and producer price index (PPI) remained steady.
In May, the core CPI was up 2.3% over the last 12 months, up just
0.2% from the same 12-month period in 1999. In May, the core PPI
rose 1.4% during the last 12 months compared to 1.6% for the same
period in 1999. Finally, despite extreme volatility in the equity
markets this year, consumer confidence remains strong. The
Conference Board's survey of consumer confidence reached an all-time
high in January, followed by the second-highest reading ever in May.
Early indications point to a slight moderation of economic growth
for the second half of the year. Retail sales declined in both April
and May, the first set of declines in the last 20 months. In
addition, real mortgage rates (30-year mortgage rates less the core
CPI) have exceeded 6%, for the first time since 1990. Historically,
housing growth has slowed when real mortgage rates have exceeded 6%.
Nonetheless, we believe the risks remain skewed toward additional
interest rate increases by the Federal Reserve Board.
We believe there are three key factors that will dictate the course
of future Federal Reserve Board monetary policy. First, US consumer
spending remains far too strong. We believe that until spending
falls to within a more tolerable 3.5%--4.5% range, the Federal
Reserve Board will remain biased toward tightening. Second, US labor
markets remain too firm. Consequently, wage inflation pressures
remain real. If job growth continues to strengthen, we expect the
Federal Reserve Board to continue to raise interest rates. Finally,
global economic growth is on the rise. After growing at less than a
2.5% rate per annum over the past two years, global economic growth
is forecast to rise over 4% this year. Accordingly, US export growth
could expand. If US consumer spending fails to slow and exports
rise, GDP will remain above trend. In this scenario, the Federal
Reserve Board will remain focused on raising interest rates.
Fiscal Year in Review
It was a tumultuous period for fixed-income investors during the
Fund's fiscal year ended May 31, 2000. A confluence of events caused
interest rates to rise, volatility to soar and yield spreads to
widen. First, as the Federal Reserve Board tightened monetary
policy, interest rates followed suit and moved higher. During the 12-
month period ended May 31, 2000, the one-year US Treasury bill rose
1.20% to 6.17%. Second, as 1999 drew to a close, Year 2000 (Y2K)
issues and fears dominated the financial markets. Consequently,
supply and demand balances became abnormal, causing market liquidity
to suffer. As a result, yield spreads widened. However, as the New
Year began, computer-related Y2K fears quickly dissipated and yield
spreads rapidly tightened back. Third, in January 2000, as a result
of US Government budget surpluses, the US Treasury announced its
intention to buy back US Treasury securities. In its announcement,
the US Treasury stated it would initially focus its repurchases in
longer maturing Treasury issues. After the announcement, long-term
interest rates declined and bond prices rose sharply as investors
assigned a scarcity premium to these securities. As a result,
fluctuations in the shape of the US Treasury yield curve developed
as the decline in long-term interest rates coupled with the Federal
Reserve Board's raising of short-term interest rates caused the US
Treasury yield curve to invert for the first time in over ten years.
Finally, legislative efforts were renewed to reform the status of
the US Government Sponsored Enterprises (GSE) (such as Fannie Mae
and Freddie Mac).
The GSEs are federally chartered private companies created by
Congress with the goal of supporting the public housing market.
Because the GSEs operate with Government oversight, financial risk
is reduced. While GSE securitized debt is not Government guaranteed,
GSEs are able to issue debt at more favorable levels than private
companies because of their government oversight. Reform is being
sought because of the enormous growth of the GSEs over the last
several years and their potential impact upon the US economy in the
event of a severe financial crisis. Consequently, uncertainty over
the future status of the GSEs caused yield spreads of agency debt to
fluctuate and ultimately widen significantly.
For the fiscal year ended May 31, 2000, the Fund's Class A, Class B,
Class C and Class D Shares had total returns of +4.76%, +3.96%,
+3.92% and +4.39%, respectively. (Fund results shown do not reflect
sales charges, and would be lower if sales charges were included.)
Despite a difficult investment environment, our investment strategy
during the fiscal year helped the Fund maintain a high level of
performance and limit net asset value volatility. We predominately
invested the Fund's assets in seasoned adjustable rate mortgage
securities (ARMS). Seasoned ARMS (ARMS originating more than seven
years ago) performed well for two reasons. First, because of their
higher annual and lifetime interest rate caps, coupon adjustments
were generally unaffected by rising interest rates. As a result,
yield spreads and prices of seasoned ARMS remained relatively steady
despite a volatile interest rate environment. At the close of the
period, 99% of the Fund's ARMS were seasoned. Second, prepayments of
seasoned ARMS reached record lows during the fiscal year.
Consequently, ARM yields improved as prepayment rates fell, which
helped offset the negative impact of rising interest rates. In fact,
during the fiscal year, the Fund experienced some of the lowest
prepayment rates in its history on an aggregate basis.
In addition, we increased our holdings of monthly resetting ARMS. In
doing so, we improved the rate-reset frequency of the Fund, which
allowed its coupon adjustments to be more sensitive to rising
interest rates. In addition, we limited the Fund's exposure to fixed-
rate securities and kept the Fund's overall duration within a tight
0.75 year--1.00 year range throughout the period. (Duration is a
measure of the Fund's price sensitivity to changes in interest
rates.) This helped limit the negative price impact of rising
interest rates on the Fund's net asset values.
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
June 28, 2000
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 2000
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. A lower maximum sales charge was in effect prior to
10/21/94, thus actual returns for the since inception periods would
have been higher.
Total Return
Based on a
$10,000 Investment
A line graph depicting the Total Return Based on a $10,000
Investment for Merrill Lynch Adjustable Rate Securities Fund, Inc.'s
Class A and Class C Shares. Beginning and ending values are:
10/21/94** 5/00
ML Adjustable Rate Securities
Fund, Inc.++--Class A Shares $ 9,600 $13,327
ML Adjustable Rate Securities
Fund, Inc.++--Class C Shares $10,000 $13,227
Lehman Brothers Short
Government Index (1-2 Years)++++ $10,000 $13,817
Salomon Six-Month Treasury Bill Index++++++ $10,000 $13,327
A line graph depicting the Total Return Based on a $10,000
Investment for Merrill Lynch Adjustable Rate Securities Fund, Inc.'s
Class B and Class D Shares. Beginning and ending values are:
8/2/91** 5/00
ML Adjustable Rate Securities
Fund, Inc.++--Class B Shares $10,000 $14,415
ML Adjustable Rate Securities
Fund, Inc.++--Class D Shares $ 9,600 $14,465
Lehman Brothers Short
Government Index (1-2 Years)++++ $10,000 $16,449
Salomon Six-Month Treasury Bill Index++++++ $10,000 $15,242
*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.
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 3/31/00 +4.98% +0.78%
Five Years Ended 3/31/00 +6.09 +5.22
Inception (10/21/94) through 3/31/00 +6.12 +5.33
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 3/31/00 +4.17% +0.19%
Five Years Ended 3/31/00 +5.20 +5.20
Inception (8/2/91) through 3/31/00 +4.27 +4.27
*Maximum contingent deferred sales charge is 4% and is reduced to 0%
after 4 years.
**Assuming payment of applicable contingent deferred sales charge.
Average Annual
Total Return
% Return % Return
Without CDSC With CDSC**
Class C Shares*
Year Ended 3/31/00 +4.13% +3.14%
Five Years Ended 3/31/00 +5.16 +5.16
Inception (10/21/94) through 3/31/00 +5.20 +5.20
*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 3/31/00 +4.60% +0.42%
Five Years Ended 3/31/00 +5.73 +4.87
Inception (8/2/91) through 3/31/00 +4.79 +4.30
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 2000
PERFORMANCE DATA (concluded)
<TABLE>
Recent
Performance
Results*
<CAPTION>
Since
6 Month 12 Month Inception Standardized
As of May 31, 2000 Total Return Total Return Total Return 30-Day Yield
<S> <C> <C> <C> <C>
ML Adjustable Rate Securities Fund, Inc. Class A Shares +2.26% +4.76% +38.85% 5.72%
ML Adjustable Rate Securities Fund, Inc. Class B Shares +1.86 +3.96 +44.15 5.16
ML Adjustable Rate Securities Fund, Inc. Class C Shares +1.84 +3.92 +32.27 5.13
ML Adjustable Rate Securities Fund, Inc. Class D Shares +2.13 +4.39 +50.68 5.47
<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 dates are from 10/21/94 for Class A & Class C
Shares and from 8/2/91 for Class B & Class D Shares.
</TABLE>
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Percent of
Index Amount Issue Value Net Assets
<S> <S> <C> <S> <C> <C>
Adjustable Rate* Certificate of $1,413,014 Federal National Mortgage Association,
Mortgage-Backed Deposit Indexed #307622, 8.088% due 4/01/2023 $ 1,455,179 1.8%
Obligations** Obligations
Constant Maturity Federal Home Loan Mortgage Corporation:
Treasury Indexed 1,176,584 #645073, 7.718% due 5/01/2015 1,176,821 1.5
Obligations 772,141 #607129, 6.848% due 1/01/2016 781,190 1.0
3,595,003 #840032, 7.239% due 1/01/2019 3,652,312 4.6
1,387,257 #606108, 7.625% due 9/01/2019 1,426,280 1.8
1,544,843 #755194, 7.248% due 3/01/2020 1,567,768 2.0
9,324,617 #846505, 7.64% due 6/01/2020 9,527,597 12.0
61,384 #785173, 7.464% due 8/01/2020 62,171 0.1
752,773 #845139, 7.643% due 3/01/2022 767,362 1.0
2,495,305 #845535, 7.367% due 10/01/2023 2,560,182 3.2
3,294,424 #755170, 7.633% due 8/01/2031 3,398,396 4.3
Federal National Mortgage Association:
5,680,616 #70169, 7.14% due 12/01/2018 5,773,009 7.3
1,942,330 #142069, 7.243% due 12/01/2021 1,998,172 2.5
1,600,569 #139312, 7.283% due 12/01/2021 1,653,413 2.1
670,485 #181278, 6.684% due 9/01/2022 682,167 0.9
2,043,158 #200009, 7.568% due 2/01/2023 2,132,873 2.7
1,450,185 #291252, 7.143% due 8/01/2024 1,501,623 1.9
324,630 #324905, 8.063% due 9/01/2025 333,211 0.4
Government National Mortgage Association:
4,536,707 #8089, 7.125% due 12/20/2022 4,532,940 5.7
5,953,257 #8123, 7.375% due 1/20/2023 5,954,118 7.5
2,675,000 #8217, 6.375% due 6/20/2023 2,677,514 3.4
Cost of Funds 1,226,331 DLJ Mortgage Acceptance Corp., REMIC (a),
Indexed 91-6-A1, 7.7927% due 9/25/2021 1,220,136 1.6
Obligations
London Interbank 1,168,595 Federal National Mortgage Association,
Offered Rate #305729, 8.142% due 2/01/2025 1,206,937 1.5
Indexed Resolution Trust Corporation, REMIC (a):
Obligations 1,308,495 92-C1-B, 8.61% due 8/25/2023 1,309,044 1.7
150,306 92-C8-A2, 7.495% due 12/25/2023 150,306 0.2
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 57,500,721 72.7
Derivative 18,053,700 DLJ Mortgage Acceptance Corp., REMIC (a),
Mortgage-Backed 92-6-A1, 0.6629% due 7/25/2022 317,594 0.4
Obligations**-- 26,359 Federal Home Loan Mortgage Corporation,
Interest Only (b) REMIC (a)(c), 92-1363-C, 199% due
8/15/2022 116,709 0.1
Sears Mortgage Securities Corp., REMIC (a):
1,202 91-K-A4, 6,154% due 9/25/2021 69,691 0.1
8,005,021 92-12-A3, 0.5016% due 7/25/2022 56,035 0.1
Total Investments in Derivative Mortgage-
Backed Obligations 560,029 0.7
Fixed Rate Federal National Mortgage Association:
Mortgage-Backed 4,843,983 #252703, 6.50% (d) due 9/01/2006 4,621,450 5.8
Obligations** 709,156 #201892, 8.50% due 9/01/2011 714,071 0.9
2,768,843 GMAC Commercial Mortgage Securities Inc.,
CMO (e), 97-C1-A1, 6.83% due 12/15/2003 2,758,326 3.5
Total Investments in Fixed Rate Mortgage-
Backed Obligations 8,093,847 10.2
Total Investments in Mortgage-Backed
Obligations (Cost--$67,819,530) 66,154,597 83.6
Short-Term Repurchase 12,500,000 Donaldson, Lufkin & Jenrette Securities
Securities Agreements*** Corp., purchased on 5/31/2000 to yield
6.40% to 6/01/2000 12,500,000 15.8
Total Short-Term Securities
(Cost--$12,500,000) 12,500,000 15.8
Total Investments (Cost--$80,319,530) 78,654,597 99.4
Other Assets Less Liabilities 484,077 0.6
Net Assets $ 79,138,674 100.0%
============ ======
(a)Real Estate Mortgage Investment Conduits (REMICS).
(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.
(d)Represents balloon mortgages that amortize on a 30-year schedule
and have 7-year maturities.
(e)Collateralized Mortgage Obligations (CMO).
*Adjustable Rate Mortgage-Backed Obligations have coupon rates which
reset periodically.
**Mortgage-Backed Obligations are subject to principal paydowns as a
result of prepayments or refinancing 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>
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 2000
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
<CAPTION>
As of May 31, 2000
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$80,319,530) $ 78,654,597
Cash 44,152
Receivables:
Interest $ 546,962
Principal paydowns 317,861
Capital shares sold 59,013 923,836
------------
Prepaid registration fees and other assets 84,916
------------
Total assets 79,707,501
------------
Liabilities: Payables:
Capital shares redeemed 215,254
Dividends to shareholders 138,649
Distributor 46,001
Investment adviser 26,294 426,198
------------
Accrued expenses and other liabilities 142,629
------------
Total liabilities 568,827
------------
Net Assets: Net assets $ 79,138,674
============
Net Assets Class A Common Stock, $.10 par value, 100,000,000 shares authorized $ 12,158
Consist of: Class B Common Stock, $.10 par value, 600,000,000 shares authorized 575,481
Class C Common Stock, $.10 par value, 100,000,000 shares authorized 131,839
Class D Common Stock, $.10 par value, 200,000,000 shares authorized 121,961
Paid-in capital in excess of par 115,158,495
Accumulated realized capital losses on investments--net (35,196,327)
Unrealized depreciation on investments--net (1,664,933)
------------
Net assets $ 79,138,674
============
Net Asset Class A--Based on net assets of $1,147,243 and 121,582 shares
Value: outstanding $ 9.44
============
Class B--Based on net assets of $54,125,522 and 5,754,808
shares outstanding $ 9.41
============
Class C--Based on net assets of $12,399,966 and 1,318,391
shares outstanding $ 9.41
============
Class D--Based on net assets of $11,465,943 and 1,219,610
shares outstanding $ 9.40
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Year Ended May 31, 2000
<S> <S> <C> <C>
Investment Income: Interest and discount earned, net of premium amortization $ 5,415,724
Expenses: Account maintenance and distribution fees--Class B $ 474,902
Investment advisory fees 418,658
Accounting services 80,536
Account maintenance and distribution fees--Class C 72,843
Printing and shareholder reports 68,588
Professional fees 68,341
Transfer agent fees--Class B 66,011
Registration fees 40,590
Account maintenance fees--Class D 25,901
Directors' fees and expenses 25,790
Custodian fees 20,191
Transfer agent fees--Class D 8,381
Transfer agent fees--Class C 7,815
Pricing fees 3,130
Transfer agent fees--Class A 758
Other 12,692
------------
Total expenses 1,395,127
------------
Investment income--net 4,020,597
------------
Realized & Realized loss on investments--net (287,717)
Unrealized Loss on Change in unrealized depreciation on investments--net (468,611)
Investments--Net: ------------
Net Increase in Net Assets Resulting from Operations $ 3,264,269
============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 2000
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Year Ended May 31,
Increase (Decrease) in Net Assets: 2000 1999
<S> <S> <C> <C>
Operations: Investment income--net $ 4,020,597 $ 4,782,070
Realized gain (loss) on investments--net (287,717) 103,526
Change in unrealized appreciation/depreciation on
investments--net (468,611) (1,101,905)
------------ ------------
Net increase in net assets resulting from operations 3,264,269 3,783,691
------------ ------------
Dividends to Investment income--net:
Shareholders: Class A (52,127) (55,645)
Class B (2,994,558) (3,659,684)
Class C (429,148) (230,608)
Class D (544,764) (836,133)
------------ ------------
Net decrease in net assets resulting from dividends to
shareholders (4,020,597) (4,782,070)
------------ ------------
Capital Share Net decrease in net assets derived from capital share
Transactions: transactions (9,591,010) (19,307,279)
------------ ------------
Net Assets: Total decrease in net assets (10,347,338) (20,305,658)
Beginning of year 89,486,012 109,791,670
------------ ------------
End of year $ 79,138,674 $ 89,486,012
============ ============
See Notes to Financial Statements.
</TABLE>
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
The following per share data and ratios have been derived Class A
from information provided in the financial statements. For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997++ 1996++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.52 $ 9.61 $ 9.65 $ 9.54 $ 9.55
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .52 .53 .57 .59 .56
Realized and unrealized gain (loss)
on investments--net (.08) (.09) (.04) .10 .03
--------- --------- --------- --------- ---------
Total from investment operations .44 .44 .53 .69 .59
--------- --------- --------- --------- ---------
Less dividends from investment
income--net (.52) (.53) (.57) (.58) (.60)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 9.44 $ 9.52 $ 9.61 $ 9.65 $ 9.54
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 4.76% 4.59% 5.66% 7.48% 6.41%
Return:* ========= ========= ========= ========= =========
Ratios to Average Expenses .95% .92% .92% .89% .81%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 5.50% 5.43% 5.93% 6.13% 6.20%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $ 1,147 $ 947 $ 1,071 $ 265 $ 281
Data: ========= ========= ========= ========= =========
Portfolio turnover 41.63% 48.76% 47.55% 18.48% 25.30%
========= ========= ========= ========= =========
*Total investment returns exclude the effects of sales charges.
++Based on average shares outstanding.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 2000
<TABLE>
FINANCIAL HIGHLIGHTS (concluded)
<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: 2000 1999 1998 1997++ 1996++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.49 $ 9.58 $ 9.62 $ 9.53 $ 9.56
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .45 .46 .50 .51 .52
Realized and unrealized gain (loss)
on investments--net (.08) (.09) (.04) .09 (.02)
--------- --------- --------- --------- ---------
Total from investment operations .37 .37 .46 .60 .50
--------- --------- --------- --------- ---------
Less dividends from investment income--net (.45) (.46) (.50) (.51) (.53)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 9.41 $ 9.49 $ 9.58 $ 9.62 $ 9.53
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 3.96% 3.78% 4.85% 6.44% 5.34%
Return:* ========= ========= ========= ========= =========
Ratios to Average Expenses 1.73% 1.70% 1.70% 1.65% 1.59%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 4.72% 4.66% 5.19% 5.35% 5.45%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $ 54,126 $ 72,875 $ 85,094 $ 106,061 $ 137,387
Data: ========= ========= ========= ========= =========
Portfolio turnover 41.63% 48.76% 47.55% 18.48% 25.30%
========= ========= ========= ========= =========
<CAPTION>
The following per share data and ratios have been derived Class C
from information provided in the financial statements. For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 2000 1999 1998 1997++ 1996++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.49 $ 9.58 $ 9.63 $ 9.53 $ 9.56
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .44 .45 .49 .50 .48
Realized and unrealized gain (loss)
on investments--net (.08) (.09) (.05) .11 .01
--------- --------- --------- --------- ---------
Total from investment operations .36 .36 .44 .61 .49
--------- --------- --------- --------- ---------
Less dividends from investment income--net (.44) (.45) (.49) (.51) (.52)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 9.41 $ 9.49 $ 9.58 $ 9.63 $ 9.53
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 3.92% 3.74% 4.71% 6.51% 5.30%
Return:* ========= ========= ========= ========= =========
Ratios to Average Expenses 1.75% 1.73% 1.74% 1.70% 1.57%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 4.70% 4.62% 5.15% 5.34% 5.40%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $ 12,400 $ 6,256 $ 4,434 $ 5,315 $ 3,078
Data: ========= ========= ========= ========= =========
Portfolio turnover 41.63% 48.76% 47.55% 18.48% 25.30%
========= ========= ========= ========= =========
<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: 2000 1999 1998 1997++ 1996++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 9.49 $ 9.58 $ 9.62 $ 9.52 $ 9.55
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .50 .51 .55 .57 .56
Realized and unrealized gain (loss) on
investments--net (.09) (.09) (.04) .09 (.01)
--------- --------- --------- --------- ---------
Total from investment operations .41 .42 .51 .66 .55
--------- --------- --------- --------- ---------
Less dividends from investment
income--net (.50) (.51) (.55) (.56) (.58)
--------- --------- --------- --------- ---------
Net asset value, end of year $ 9.40 $ 9.49 $ 9.58 $ 9.62 $ 9.52
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 4.39% 4.32% 5.40% 7.11% 5.91%
Return:* ========= ========= ========= ========= =========
Ratios to Average Expenses 1.21% 1.17% 1.18% 1.13% 1.06%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 5.24% 5.18% 5.70% 5.87% 5.98%
========= ========= ========= ========= =========
Supplemental Net assets, end of year (in thousands) $ 11,466 $ 9,408 $ 19,193 $ 13,267 $ 12,800
Data: ========= ========= ========= ========= =========
Portfolio turnover 41.63% 48.76% 47.55% 18.48% 25.30%
========= ========= ========= ========= =========
*Total investment returns exclude the effects of sales charges.
++Based on average shares outstanding.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 2000
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 accounting
principles generally accepted in the United States of America, 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 that 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, that 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. If the counterparty defaults and
the fair value of the collateral declines, liquidation of the
collateral by the Fund may be delayed or limited.
(c) Derivative financial instruments--The Fund may engage in various
portfolio investment strategies to increase or decrease the level of
risk to which the Fund is exposed more quickly and efficiently than
transactions in other types of instruments. 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.
(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 .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 .25% .50%
Class C .25% .55%
Class D .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, 2000, 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 $636 $4,341
For the year ended May 31, 2000, MLPF&S received contingent deferred
sales charges of $88,952 and $2,039 relating to transactions in
Class B and Class C Shares, respectively.
For the year ended May 31, 2000, the Fund paid Merrill Lynch
Security Pricing Service, an affiliate of MLPF&S, $1,934 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.
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 2000
NOTES TO FINANCIAL STATEMENTS (concluded)
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended May 31, 2000 were $30,370,330 and $45,106,037,
respectively.
Net realized losses for the year ended May 31, 2000 and net
unrealized losses as of May 31, 2000 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $ (287,717) $ (1,664,933)
------------ -------------
Total $ (287,717) $ (1,664,933)
============ =============
As of May 31, 2000, net unrealized depreciation for Federal income
tax purposes aggregated $1,664,933, of which $234,205 related to
appreciated securities and $1,899,138 related to depreciated
securities. The aggregate cost of investments at May 31, 2000 for
Federal income tax purposes was $80,319,530.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $9,591,010 and $19,307,279 for the years ended May 31, 2000 and
May 31, 1999, respectively.
Transactions in capital shares for each class were as follows:
Class A Shares for the Year Dollar
Ended May 31, 2000 Shares Amount
Shares sold 113,133 $ 1,072,585
Shares issued to shareholders
in reinvestment of dividends 3,332 31,611
----------- ------------
Total issued 116,465 1,104,196
Shares redeemed (94,370) (895,372)
----------- ------------
Net increase 22,095 $ 208,824
=========== ============
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 B Shares for the Year Dollar
Ended May 31, 2000 Shares Amount
Shares sold 1,921,184 $ 18,171,603
Shares issued to shareholders
in reinvestment of dividends 172,472 1,631,722
----------- ------------
Total issued 2,093,656 19,803,325
Automatic conversion of shares (11,515) (109,033)
Shares redeemed (4,005,245) (37,879,931)
----------- ------------
Net decrease (1,923,104) $(18,185,639)
=========== ============
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 C Shares for the Year Dollar
Ended May 31, 2000 Shares Amount
Shares sold 1,061,147 $ 10,031,362
Shares issued to shareholders
in reinvestment of dividends 16,842 159,415
----------- ------------
Total issued 1,077,989 10,190,777
Shares redeemed (418,492) (3,959,435)
----------- ------------
Net increase 659,497 $ 6,231,342
=========== ============
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 D Shares for the Year Dollar
Ended May 31, 2000 Shares Amount
Shares sold 664,766 $ 6,285,169
Automatic conversion of shares 11,524 109,033
Shares issued to shareholders
in reinvestment of dividends 33,022 312,238
----------- ------------
Total issued 709,312 6,706,440
Shares redeemed (481,246) (4,551,977)
----------- ------------
Net increase 228,066 $ 2,154,463
=========== ============
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)
=========== ============
5. Capital Loss Carryforward:
At May 31, 2000, the Fund had a net capital loss carryforward of
approximately $34,992,000, 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, $298,000 expires in
2007 and $116,000 expires in 2008. This amount will be available to
offset like amounts of any future taxable gains.
6. Reorganization Plan:
On June 6, 2000, the Fund's Board of Directors approved a plan of
reorganization, subject to shareholder approval and certain other
conditions, whereby the Fund would acquire substantially all of the
assets and liabilities of Merrill Lynch Intermediate Government Bond
Fund in exchange for newly issued shares of the Fund. Both Funds are
registered, open-end management investment companies that have a
similar investment objective and are managed by MLAM.
Merrill Lynch Adjustable Rate Securities Fund, Inc., May 31, 2000
<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, 2000, 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 auditing standards
generally accepted in the United States of America. 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, 2000 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,
2000, the results of its operations, the changes in its net assets,
and the financial highlights for the respective stated periods in
accordance with accounting principles generally accepted in the
United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
July 3, 2000
</AUDIT-REPORT>
