MERRILL LYNCH
ADJUSTABLE
RATE SECURITIES
FUND, INC.
FUND LOGO
Semi-Annual Report
November 30, 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., November 30, 1999
DEAR SHAREHOLDER
After rising a meager 1.9% in the second quarter of 1999, US gross
domestic product (GDP) jumped 5.5% in the third quarter, well above
the Federal Reserve Board's estimated growth potential of 3.5%--
4.0%. Consequently, the Federal Reserve Board raised interest rates
for the third time this year in November by pushing both the Federal
Funds rate and the discount rate up 0.25% to 5.50% and 5.00%,
respectively. Nonetheless, despite the rise in interest rates in
1999, financial conditions still remain resilient amid persistent
demand strength. As a result, we expect fourth quarter GDP growth to
be similar to third quarter growth.
As stock market indexes moved decidedly higher, the "wealth effect"
from rising equity prices continued to fuel consumer spending and
propel GDP growth. Third quarter consumer spending rose a strong
4.6%, near its two-year average of 5.0%. Consequently, it is not
surprising that consumer confidence readings, which have had a 90%
correlation with the US stock market since 1992, are near their all-
time highs. In addition, the US labor markets continue to grind
tighter. The US unemployment rate fell once again to 4.1%, its
lowest level since 1970. However, even with tighter labor markets we
have yet to see any measurable acceleration in wages or other broad
inflation indexes. Average hourly earnings rose just 3.6% during the
12 months ended November 30, 1999. More importantly, the Employment
Cost Index, which measures changes in both wages and benefits, rose
just 3.1% during the 12-month period ended September 30, 1999 and
was stable over the past several quarters. On a broader scale, the
core consumer price index, which excludes the volatile food and
energy sectors, rose just 2.1% during the 12 months ended November
30, 1999. This compares favorably with the 2.3% rise recorded over
the same period in 1997-1998.
Although inflationary pressures have yet to emerge, we believe three
potential inflationary imbalances exist as a result of the
persistent strength of the US economy. First, as long as equity
prices continue to move upward, consumer spending will undoubtedly
remain strong. Since spending accounts for nearly two-thirds of GDP,
it is possible for higher stock market prices to indirectly push GDP
beyond its potential and threaten long-term inflation stability.
Second, the US unemployment rate has fallen steadily in 1999. As the
pool of qualified available workers shrinks, wages and benefits
could ultimately increase as employers compete against each other to
retain or hire new employees. Finally, crude oil prices have risen
in excess of 76% in 1999 to over $25 a barrel. Most consumers have
experienced this only in the form of higher gasoline prices at the
pump. However, should prices remain the same or rise even further,
it is possible for these higher costs to ultimately be passed
through to consumers in the form of higher prices for other products
and services. Although we did not forecast another Federal Reserve
Board interest rate hike this year, we believe the Federal Reserve
Board will continue to vigorously monitor all inflation risks. As
such, should any of the inflation imbalances we have outlined fail
to diminish, we believe the Federal Reserve Board could further
tighten monetary policy and raise interest rates early in 2000.
Portfolio Strategy
The quarter ended November 30, 1999 saw interest rates rise in the
wake of anticipated and actual monetary policy tightening by the
Federal Reserve Board. The one-year US Treasury bill rose 0.39% to
5.67%, while the ten-year US Treasury note rose 0.21% to 6.19%. As a
result, the US Treasury yield curve narrowed as investors took
comfort in the fact the Federal Reserve Board remains on track in
keeping inflationary pressures stable. Despite the rise in interest
rates in 1999, adjustable rate mortgage securities (ARMS) have
performed relatively well on a total rate of return basis for two
reasons. First, because of the gradual and orderly rise in interest
rates in 1999, coupon adjustments of ARMS have been able to keep
pace with the rise in interest rates while not being limited by
interest rate caps. This has helped ARMS maintain steady valuations
throughout much of 1999. Second, prepayment rates of ARMS have
slowed dramatically as higher interest rates have lowered the
incentive of homeowners to refinance into fixed-rate mortgages. As a
result, slower prepayments have improved the yield of ARMS while
increasing investor demand.
During the November quarter, we increased our holdings of adjustable
rate securities to 80% of assets. In response to the attractiveness
of the London Interbank Offered Rate (LIBOR) curve relative to the
US Treasury curve, we invested in securities with monthly resets off
LIBOR. In doing so, we were able to take advantage of higher LIBOR
rates as well as lower the Fund's weighted average coupon reset
frequency to four months. This allowed the Fund to become interest
rate sensitive and thus benefit from upward interest rate movements.
In addition, we continued to keep the Fund defensively structured.
As of November 30, 1999, the Fund's effective duration stood at 0.92
years. (Duration is a measure of the Fund's interest rate
sensitivity to interest rate changes, and at 0.92 years the Fund's
interest rate sensitivity is similar to a one-year Treasury bill.)
Looking ahead, while we do not expect prepayments of ARMS to slow
much further from current levels, we do expect prepayments to remain
subdued. As such, we believe ARMS will continue to perform well into
the coming new year.
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
December 30, 1999
To reduce shareholders' expenses, Merrill Lynch Adjustable Rate
Securities Fund, Inc. will no longer be printing and mailing
quarterly reports to shareholders. We will continue to provide you
with reports on a semi-annual and annual basis.
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.
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1999
PERFORMANCE DATA (concluded)
<TABLE>
Recent
Performance
Results*
<CAPTION>
Since
3 Month 12 Month Inception Standardized
As of November 30, 1999 Total Return Total Return Total Return 30-Day Yield
<S> <C> <C> <C> <C>
ML Adjustable Rate Securities Fund, Inc. Class A Shares +1.12% +5.50% +35.78% 4.90%
ML Adjustable Rate Securities Fund, Inc. Class B Shares +1.03 +4.69 +41.52 4.34
ML Adjustable Rate Securities Fund, Inc. Class C Shares +0.92 +4.65 +29.87 4.27
ML Adjustable Rate Securities Fund, Inc. Class D Shares +1.06 +5.23 +47.54 4.67
<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>
Average Annual
Total Return
% Return Without % Return With
Sales Charge Sales Charge**
Class A Shares*
Year Ended 9/30/99 +5.24% +1.03%
Inception (10/21/94) through 9/30/99 +6.23 +5.36
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
% Return % Return
Without CDSC With CDSC**
Class B Shares*
Year Ended 9/30/99 +4.44% +0.45%
Five Years Ended 9/30/99 +5.34 +5.34
Inception (8/2/91) through 9/30/99 +4.27 +4.27
[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 9/30/99 +4.40% +3.40%
Inception (10/21/94) through 9/30/99 +5.31 +5.31
[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 9/30/99 +4.98% +0.78%
Five Years Ended 9/30/99 +5.89 +5.03
Inception (8/2/91) through 9/30/99 +4.81 +4.29
[FN]
*Maximum sales charge is 4%.
**Assuming maximum sales charge.
<TABLE>
SCHEDULE OF INVESTMENTS
<CAPTION>
Face Percent of
Index Amount Issue Value Net Assets
<S> <S> <C> <S> <C> <C>
Adjustable Rate* Certificate of $1,490,265 Federal National Mortgage Association,
Mortgage-Backed Deposit Indexed # 307622, 7.657% due 4/01/2023 $ 1,545,226 1.8%
Obligations** Obligations
Constant Maturity Federal Home Loan Mortgage Corporation:
Treasury Indexed 1,304,447 #645073, 7.709% due 5/01/2015 1,312,643 1.6
Obligations 887,221 #607129, 6.743% due 1/01/2016 895,543 1.1
4,099,362 #840032, 6.416% due 1/01/2019 4,189,056 5.0
1,819,669 #606108, 6.838% due 9/01/2019 1,869,419 2.2
1,572,788 #755194, 6.614% due 3/01/2020 1,597,119 1.9
62,263 #785173, 6.515% due 8/01/2020 62,730 0.1
843,443 #845139, 6.927% due 3/01/2022 854,247 1.0
2,710,554 #845535, 6.976% due 10/01/2023 2,792,295 3.3
3,709,184 #755170, 6.899% due 8/01/2031 3,796,683 4.5
Federal National Mortgage Association:
6,068,257 #70169, 6.415% due 12/01/2018 6,171,318 7.3
2,114,089 #142069, 6.493% due 12/01/2021 2,178,505 2.6
1,856,259 #139312, 6.754% due 12/01/2021 1,900,856 2.3
727,539 #181278, 6.491% due 9/01/2022 733,541 0.9
2,060,863 #200009, 6.556% due 2/01/2023 2,144,266 2.5
1,842,264 #291252, 7.158% due 8/01/2024 1,898,398 2.3
460,057 #324905, 6.715% due 9/01/2025 475,119 0.6
Government National Mortgage Association:
4,885,007 #8089, 6.125% due 12/20/2022 4,954,567 5.9
6,472,781 #8123, 6.375% due 1/20/2023 6,558,750 7.8
2,841,072 #8217, 6.375% due 6/20/2023 2,870,363 3.4
2,317,588 Prudential Home Mortgage Securities
Company, Inc., REMIC (a), 92-35-A1,
7.5445% due 11/25/2022 2,307,808 2.7
Cost of Funds 1,488,518 DLJ Mortgage Acceptance Corp., REMIC (a),
Indexed Obligations 91-6-A1, 7.7564% due 9/25/2021 1,483,524 1.8
London Interbank 1,176,265 Federal National Mortgage Association,
Offered Rate #305729, 7.454% due 2/01/2025 1,194,097 1.4
Indexed Obligations 8,000,000 Morgan Stanley Aircraft Finance Corp.,
1-A1, 5.61% due 3/15/2023 7,997,500 9.5
Resolution Trust Corporation, REMIC (a):
4,174,410 92-C1-B, 7.63% due 8/25/2023 4,174,160 5.0
1,506,745 92-C8-A2, 6.94% due 12/25/2023 1,507,875 1.8
Total Investments in Adjustable Rate
Mortgage-Backed Obligations 67,465,608 80.3
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1999
<TABLE>
SCHEDULE OF INVESTMENTS (concluded)
<CAPTION>
Face Percent of
Amount Issue Value Net Assets
<S> <S> <C> <S> <C> <C>
Derivative $20,512,229 DLJ Mortgage Acceptance Corp., REMIC (a),
Mortgage-Backed 92-6-A1, 0.6545% due 7/25/2022 $ 338,062 0.4%
Obligations**-- 29,186 Federal Home Loan Mortgage Corporation,
Interest Only (b) REMIC (a)(c), 92-1363-C, 371% due
8/15/2022 153,297 0.2
Sears Mortgage Securities Corp., REMIC (a):
1,359 91-K-A4, 6,042% due 9/25/2021 121,593 0.2
10,480,480 92-12-A3, 0.4902% due 7/25/2022 104,805 0.1
Total Investments in Derivative
Mortgage-Backed Obligations 717,757 0.9
Fixed Rate Federal National Mortgage Association:
Mortgage-Backed 4,954,759 #252703, 6.50% (d) due 9/01/2006 4,873,070 5.8
Obligations** 978,058 #201892, 8.50% due 9/01/2011 999,918 1.2
Total Investments in Fixed Rate
Mortgage-Backed Obligations 5,872,988 7.0
Total Investments in Mortgage-Backed
Obligations (Cost $75,329,330) 74,056,353 88.2
Short-Term Repurchase 8,100,000 Donaldson, Lufkin & Jenrette Securities
Securities Agreements*** Corp., purchased on 11/30/1999 to yield
5.60% to 12/01/1999 8,100,000 9.6
Total Short-Term Securities (Cost $8,100,000) 8,100,000 9.6
Total Investments (Cost $83,429,330) 82,156,353 97.8
Other Assets Less Liabilities 1,823,669 2.2
------------- ------
Net Assets $ 83,980,022 100.0%
============= ======
<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.
(d)Represents balloon mortgages that amortize on a 30-year schedule
and have 7-year maturities.
*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 ANDLIABILITIES
<CAPTION>
As of November 30, 1999
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$83,429,330) $ 82,156,353
Cash 7,986,442
Receivables:
Principal paydowns $ 1,611,439
Interest 596,564
Capital shares sold 210,333 2,418,336
------------
Prepaid registration fees and other assets 76,529
------------
Total assets 92,637,660
------------
Liabilities: Payables:
Securities purchased 8,016,200
Capital shares redeemed 336,406
Dividends to shareholders 125,525
Distributor 46,132
Investment adviser 2,298 8,526,561
------------
Accrued expenses and other liabilities 131,077
------------
Total liabilities 8,657,638
------------
Net Assets: Net assets $ 83,980,022
============
Net Assets Class A Common Stock, $.10 par value, 100,000,000
Consist of: shares authorized $ 8,376
Class B Common Stock, $.10 par value, 600,000,000
shares authorized 679,515
Class C Common Stock, $.10 par value, 100,000,000
shares authorized 101,082
Class D Common Stock, $.10 par value, 200,000,000
shares authorized 99,155
Paid-in capital in excess of par 119,511,603
Accumulated realized capital losses on investments--net (35,146,732)
Unrealized depreciation on investments--net (1,272,977)
------------
Net assets $ 83,980,022
============
Net Asset Class A--Based on net assets of $794,685 and 83,761
Value: shares outstanding $ 9.49
============
Class B--Based on net assets of $64,253,678 and 6,795,154
shares outstanding $ 9.46
============
Class C--Based on net assets of $9,559,042 and 1,010,822
shares outstanding $ 9.46
============
Class D--Based on net assets of $9,372,617 and 991,553
shares outstanding $ 9.45
============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1999
<TABLE>
STATEMENT OF OPERATIONS
<CAPTION>
For the Six Months Ended November 30, 1999
<S> <S> <C> <C>
Investment Income: Interest and discount earned, net of premium amortization $ 2,740,546
Expenses: Account maintenance and distribution fees--Class B $ 253,698
Investment advisory fees 211,675
Accounting services 39,980
Transfer agent fees--Class B 37,599
Professional fees 34,898
Printing and shareholder reports 32,536
Registration fees 31,509
Account maintenance and distribution fees--Class C 23,846
Directors' fees and expenses 12,928
Account maintenance fees--Class D 12,691
Custodian fees 10,919
Transfer agent fees--Class D 4,524
Transfer agent fees--Class C 2,954
Pricing fees 1,395
Transfer agent fees--Class A 402
Other 6,607
------------
Total expenses 718,161
------------
Investment income--net 2,022,385
------------
Realized & Realized loss on investments--net (238,123)
Unrealized Loss on Change in unrealized depreciation on investments--net (76,655)
Investments--Net: ------------
Net Increase in Net Assets Resulting from Operations $ 1,707,607
============
See Notes to Financial Statements.
</TABLE>
<TABLE>
STATEMENTS OF CHANGES IN NET ASSETS
<CAPTION>
For the Six For the Year
Months Ended Ended
Increase (Decrease) in Net Assets: Nov. 30, 1999 May 31, 1999
<S> <S> <C> <C>
Operations: Investment income--net $ 2,022,385 $ 4,782,070
Realized gain (loss) on investments--net (238,123) 103,526
Change in unrealized appreciation/depreciation
on investments--net (76,655) (1,101,905)
------------ ------------
Net increase in net assets resulting from operations 1,707,607 3,783,691
------------ ------------
Dividends to Investment income--net:
Shareholders: Class A (24,782) (55,645)
Class B (1,593,248) (3,659,684)
Class C (138,938) (230,608)
Class D (265,417) (836,133)
------------ ------------
Net decrease in net assets resulting from dividends
to shareholders (2,022,385) (4,782,070)
------------ ------------
Capital Share Net decrease in net assets derived from capital share
Transactions: transactions (5,191,212) (19,307,279)
------------ ------------
Net Assets: Total decrease in net assets (5,505,990) (20,305,658)
Beginning of period 89,486,012 109,791,670
------------ ------------
End of period $ 83,980,022 $ 89,486,012
============ ============
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1999
<TABLE>
FINANCIAL HIGHLIGHTS
<CAPTION>
Class A
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
Nov. 30, For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 1999 1999 1998 1997++ 1996++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.52 $ 9.61 $ 9.65 $ 9.54 $ 9.55
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .26 .53 .57 .59 .56
Realized and unrealized gain
(loss) on investments--net (.03) (.09) (.04) .10 .03
--------- --------- --------- --------- ---------
Total from investment operations .23 .44 .53 .69 .59
--------- --------- --------- --------- ---------
Less dividends from investment
income--net (.26) (.53) (.57) (.58) (.60)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 9.49 $ 9.52 $ 9.61 $ 9.65 $ 9.54
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 2.45%+++ 4.59% 5.66% 7.48% 6.41%
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses .99%* .92% .92% .89% .81%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 5.48%* 5.43% 5.93% 6.13% 6.20%
========= ========= ========= ========= =========
Supplemental Net assets, end of period
Data: (in thousands) $ 795 $ 947 $ 1,071 $ 265 $ 281
========= ========= ========= ========= =========
Portfolio turnover 23.43% 48.76% 47.55% 18.48% 25.30%
========= ========= ========= ========= =========
<CAPTION>
Class B
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
Nov. 30, For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 1999 1999 1998 1997++ 1996++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.49 $ 9.58 $ 9.62 $ 9.53 $ 9.56
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .22 .46 .50 .51 .52
Realized and unrealized gain
(loss) on investments--net (.03) (.09) (.04) .09 (.02)
--------- --------- --------- --------- ---------
Total from investment operations .19 .37 .46 .60 .50
--------- --------- --------- --------- ---------
Less dividends from investment
income--net (.22) (.46) (.50) (.51) (.53)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 9.46 $ 9.49 $ 9.58 $ 9.62 $ 9.53
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 2.06%+++ 3.78% 4.85% 6.44% 5.34%
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses 1.76%* 1.70% 1.70% 1.65% 1.59%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 4.70%* 4.66% 5.19% 5.35% 5.45%
========= ========= ========= ========= =========
Supplemental Net assets, end of period
Data: (in thousands) $ 64,254 $ 72,875 $ 85,094 $ 106,061 $ 137,387
========= ========= ========= ========= =========
Portfolio turnover 23.43% 48.76% 47.55% 18.48% 25.30%
========= ========= ========= ========= =========
<CAPTION>
Class C
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
Nov. 30, For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 1999 1999 1998 1997++ 1996++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.49 $ 9.58 $ 9.63 $ 9.53 $ 9.56
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .22 .45 .49 .50 .48
Realized and unrealized gain
(loss) on investments--net (.03) (.09) (.05) .11 .01
--------- --------- --------- --------- ---------
Total from investment operations .19 .36 .44 .61 .49
--------- --------- --------- --------- ---------
Less dividends from investment
income--net (.22) (.45) (.49) (.51) (.52)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 9.46 $ 9.49 $ 9.58 $ 9.63 $ 9.53
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 2.04%+++ 3.74% 4.71% 6.51% 5.30%
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses 1.80%* 1.73% 1.74% 1.70% 1.57%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 4.65%* 4.62% 5.15% 5.34% 5.40%
========= ========= ========= ========= =========
Supplemental Net assets, end of period
Data: (in thousands) $ 9,559 $ 6,256 $ 4,434 $ 5,315 $ 3,078
========= ========= ========= ========= =========
Portfolio turnover 23.43% 48.76% 47.55% 18.48% 25.30%
========= ========= ========= ========= =========
<CAPTION>
Class D
The following per share data and ratios have been derived For the Six
from information provided in the financial statements. Months Ended
Nov. 30, For the Year Ended May 31,
Increase (Decrease) in Net Asset Value: 1999 1999 1998 1997++ 1996++
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of period $ 9.49 $ 9.58 $ 9.62 $ 9.52 $ 9.55
Operating --------- --------- --------- --------- ---------
Performance: Investment income--net .25 .51 .55 .57 .56
Realized and unrealized gain
(loss) on investments--net (.04) (.09) (.04) .09 (.01)
--------- --------- --------- --------- ---------
Total from investment operations .21 .42 .51 .66 .55
--------- --------- --------- --------- ---------
Less dividends from investment
income--net (.25) (.51) (.55) (.56) (.58)
--------- --------- --------- --------- ---------
Net asset value, end of period $ 9.45 $ 9.49 $ 9.58 $ 9.62 $ 9.52
========= ========= ========= ========= =========
Total Investment Based on net asset value per share 2.22%+++ 4.32% 5.40% 7.11% 5.91%
Return:** ========= ========= ========= ========= =========
Ratios to Average Expenses 1.24%* 1.17% 1.18% 1.13% 1.06%
Net Assets: ========= ========= ========= ========= =========
Investment income--net 5.21%* 5.18% 5.70% 5.87% 5.98%
========= ========= ========= ========= =========
Supplemental Net assets, end of period
Data: (in thousands) $ 9,372 $ 9,408 $ 19,193 $ 13,267 $ 12,800
========= ========= ========= ========= =========
Portfolio turnover 23.43% 48.76% 47.55% 18.48% 25.30%
========= ========= ========= ========= =========
<FN>
*Annualized.
**Total investment returns exclude the effects of sales charges.
++Based on average shares outstanding.
+++Aggregate total investment return.
See Notes to Financial Statements.
</TABLE>
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1999
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 accountmaintenance 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 seller 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 strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
* Options--The Fund is authorized to purchase and write covered call
and put options. When the Fund writes an option, an amount equal to
the premium received by the Fund is reflected as an asset and an
equivalent liability. The amount of the liability is subsequently
marked to market to reflect the current market value of the option
written.
When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or
deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option
expires (or the Fund enters into a closing transaction), the Fund
realizes a gain or loss on the option to the extent of the premiums
received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and related options on such futures
contracts for the purpose of hedging the market risk on existing
securities or the intended purchase of securities. Futures contracts
are contracts for delayed delivery of securities at a specific
future date and at a specific price or yield. Upon entering into a
contract, the Fund deposits and maintains as collateral such initial
margin as required by the exchange on which the transaction is
effected.
Pursuant to the contract, the Fund agrees to receive from or pay to
the broker an amount of cash equal to the daily fluctuation in value
of the contract. Such receipts or payments are known as variation
margins and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or
loss equal to the difference between the value of the contract at
the time it was opened and the value at the time it was closed.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(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 six months ended November 30, 1999, 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 $21 $411
For the six months ended November 30, 1999, MLPF&S received
contingent deferred sales charges of $45,390 and $459 relating to
transactions in Class B and Class C Shares, respectively.
For the six months ended November 30, 1999, the Fund paid Merrill
Lynch Security Pricing Service, an affiliate of MLPF&S, $1,060 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, 1999 were $17,915,830 and
$25,220,836, respectively.
Net realized losses for the six months ended November 30, 1999 and
net unrealized losses as of November 30, 1999 were as follows:
Realized Unrealized
Losses Losses
Long-term investments $ (238,123) $ (1,272,977)
------------ -------------
Total $ (238,123) $ (1,272,977)
============ =============
As of November 30, 1999, net unrealized depreciation for Federal
income tax purposes aggregated $1,272,977, of which $253,306 related
to appreciated securities and $1,526,283 related to depreciated
securities. The aggregate cost of investments at November 30, 1999
for Federal income tax purposes was $83,429,330.
4. Capital Share Transactions:
Net decrease in net assets derived from capital share transactions
was $5,191,212 and $19,307,279 for the six months ended November
30, 1999 and for the year ended May 31, 1999, respectively.
Merrill Lynch Adjustable Rate Securities Fund, Inc., November 30, 1999
NOTES TO FINANCIAL STATEMENTS (concluded)
Transactions in capital shares for each class were as follows:
Class A Shares for the Six Months Dollar
Ended November 30, 1999 Shares Amount
Shares sold 15,549 $ 148,129
Shares issued to shareholders
in reinvestment of dividends 1,454 13,836
---------- ------------
Total issued 17,003 161,965
Shares redeemed (32,729) (311,232)
---------- ------------
Net decrease (15,726) $ (149,267)
========== ============
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 Six Months Dollar
Ended November 30, 1999 Shares Amount
Shares sold 901,954 $ 8,548,487
Shares issued to shareholders
in reinvestment of dividends 94,765 898,539
---------- ------------
Total issued 996,719 9,447,026
Automatic conversion of shares (7,893) (74,842)
Shares redeemed (1,871,584) (17,742,637)
---------- ------------
Net decrease (882,758) $ (8,370,453)
========== ============
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 Six Months Dollar
Ended November 30, 1999 Shares Amount
Shares sold 591,662 $ 5,599,224
Shares issued to shareholders
in reinvestment of dividends 10,159 96,364
---------- ------------
Total issued 601,821 5,695,588
Shares redeemed (249,893) (2,368,696)
---------- ------------
Net increase 351,928 $ 3,326,892
========== ============
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 Six Months Dollar
Ended November 30, 1999 Shares Amount
Shares sold 259,150 $ 2,458,440
Automatic conversion of shares 7,900 74,842
Shares issued to shareholders
in reinvestment of dividends 16,863 159,844
---------- ------------
Total issued 283,913 2,693,126
Shares redeemed (283,904) (2,691,510)
---------- ------------
Net increase 9 $ 1,616
========== ============
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, 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.
