UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT
COMPANIES
Investment Company Act file number 811-21464
Name of Fund: Floating Rate Income Strategies Fund II, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President,
Floating Rate Income Strategies Fund II, Inc., 800 Scudders Mill
Road, Plainsboro, NJ, 08536. Mailing address: P.O. Box 9011,
Princeton, NJ, 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 02/29/04
Date of reporting period: 03/01/04 - 08/31/04
Item 1 - Report to Stockholders
(BULL LOGO)
Merrill Lynch Investment Managers
www.mlim.ml.com
Floating Rate
Income Strategies
Fund II, Inc.
Semi-Annual Report
August 31, 2004
Floating Rate Income Strategies Fund II, Inc. seeks a high current
income and such preservation of capital as is consistent with
investment in a diversified, leveraged portfolio consisting
primarily of floating rate debt securities and instruments.
This report, including the financial information herein, is
transmitted for use only to the shareholders of Floating Rate
Income Strategies Fund II, Inc. for their information. It is not a
prospectus, circular or representation intended for use in the
purchase of shares of the Fund or any securities mentioned in this
report. Past performance results shown in this report should not be
considered a representation of future performance. The Fund has the
ability to leverage its Common Stock to provide Common Stock
shareholders with a potentially higher rate of return. Leverage
creates risk for Common Stock shareholders, including the likelihood
of greater volatility of net asset value and market price of Common
Stock shares, and the risk that fluctuations in short-term interest
rates may reduce the Common Stock's yield. Statements and other
information herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to
determine how to vote proxies relating to portfolio securities
is available (1) without charge, upon request, by calling toll-free
1-800-MER-FUND (1-800-637-3863); (2) at www.mutualfunds.ml.com;
and (3) on the Securities and Exchange Commission's Web site at
http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the
most recent 12-month period ended June 30 is available (1) at
www.mutualfunds.ml.com and (2) on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
Floating Rate Income Strategies Fund II, Inc.
Box 9011
Princeton, NJ
08543-9011
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Floating Rate Income Strategies Fund II, Inc.
The Benefits and Risks of Leveraging
Floating Rate Income Strategies Fund II, Inc. has the ability to
utilize leverage through borrowings or issuance of short-term debt
securities or shares of Preferred Stock. The concept of leveraging
is based on the premise that the cost of assets to be obtained from
leverage will be based on short-term interest rates, which normally
will be lower than the income earned by the Fund on its longer-term
portfolio investments. To the extent that the total assets of the
Fund (including the assets obtained from leverage) are invested in
higher-yielding portfolio investments, the Fund's Common Stock
shareholders will be the beneficiaries of the incremental yield.
Leverage creates risks for holders of Common Stock including the
likelihood of greater net asset value and market price volatility.
In addition, there is the risk that fluctuations in interest rates
on borrowings (or in the dividend rates on any Preferred Stock, if
the Fund were to issue the Preferred Stock) may reduce the Common
Stock's yield and negatively impact its market price. If the income
derived from securities purchased with assets received from leverage
exceeds the cost of leverage, the Fund's net income will be greater
than if leverage had not been used. Conversely, if the income from
the securities purchased is not sufficient to cover the cost of
leverage, the Fund's net income will be less than if leverage had
not been used, and therefore the amount available for distribution
to Common Stock shareholders will be reduced.
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
A Letter From the President
Dear Shareholder
In recent months, the Federal Reserve Board (the Fed) has taken
center stage as it shifts away from its long-accommodative monetary
stance. The Fed raised the Federal Funds rate 75 basis points (.75%)
in three separate moves since June, bringing the target short-term
interest rate to 1.75% - still low by historical standards. The Fed
has been deliberate in telegraphing its intention to take a
"measured" approach to interest rate increases in order to avoid
upsetting the economy or the financial markets, while still leaving
room to move more aggressively if inflation and economic growth
accelerate more than anticipated. The forward curve currently
projects further increases in short-term interest rates before
year-end. In addition to the Fed policy change, the financial
markets recently have had to grapple with a tense geopolitical
environment, higher oil prices and the worry and anticipation that
accompanies a presidential election.
The transition to higher rates can cause concern among equity
and fixed income investors alike. For bond investors, rising
interest rates means the value of older issues declines because
they bear the former lower interest rates. In addition, increasing
inflation erodes the purchasing power of fixed income securities.
Nevertheless, for the six-month and 12-month periods ended
August 31, 2004, fixed income markets provided positive results. For
example, the Lehman Brothers Aggregate Bond Index returned +1.15%
and +6.13%; the Credit Suisse First Boston High Yield Index returned
+3.42% and +14.68%; and the Citigroup Mortgage Index returned +1.79%
and +6.07% for the six-month and 12-month periods, respectively.
As always, our investment professionals are closely monitoring the
markets, the economy and the overall environment in an effort to
make well-informed decisions for the portfolios they manage. Our
goal is to provide shareholders with competitive returns, while
always keeping one eye on managing the unavoidable risk inherent in
investing.
We thank you for trusting Merrill Lynch Investment Managers with
your investment assets, and we look forward to serving you in the
months and years ahead.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
A Discussion With Your Fund's Portfolio Managers
We are pleased to present you with this first shareholder report
for Floating Rate Income Strategies Fund II. The Fund consists
principally of participations in leveraged bank loans, which are
generally floating rate investments, with a smaller allocation to
fixed rate high yield bonds.
How has the Fund performed since its inception in light of the
existing market conditions?
Since inception (July 30, 2004) through August 31, 2004, the
Common Stock of Floating Rate Income Strategies Fund II had net
annualized yields of 5.05% and 4.84%, based on a period-end per
share net asset value of $19.17 and a per share market price of
$20.01, respectively, and $0.088 per share income dividends. Over
the same period, the total investment return on the Fund's Common
Stock was +0.37%, based on a change in per share net asset value
from $19.10 to $19.17.
For the same period, the Fund's benchmark, which consists 80% of the
Credit Suisse First Boston (CSFB) Leveraged Loan Index and 20% of
the CSFB High Yield Index, returned +0.45%.
Since the beginning of 2004, flows into the leveraged loan market
have outpaced new-issue volume by $1.5 billion, exacerbating an
existing supply/demand imbalance. Further crowding the leveraged
loan space is participation on the part of hedge funds and
collateralized debt obligations. The supply/demand imbalance has
prompted decreased spreads, transaction upsizing, smaller
allocations and the near elimination of up-front fees in the primary
markets. Torrid demand also has served to bid up prices in the
secondary market. The net effect of these trends is higher net asset
values but decreased yield, although increases in the LIBOR (London
Interbank Offer Rate) this year have helped to mitigate some of the
decline in margin.
Although the loan market has proved to be somewhat challenging
recently, it does continue to offer value in certain areas.
Spreads have tightened and premiums have increased, to some extent,
following a measurable slowdown in the number of new issues brought
to market in August.
How have you managed the Fund since its inception?
The Fund's objective is to provide high current income and such
preservation of capital as is consistent with investment in a
diversified, leveraged portfolio consisting primarily of floating
rate debt securities and instruments.
We expect to invest approximately 83% of the portfolio's net assets
in loans and 17% in bonds. In seeking to accomplish this, we are
targeting the portfolio (versus LIBOR) to be comprised of loans with
a weighted average spread of 2.75% and bonds with a weighted average
coupon of 9%. Further, we have assumed a weighted average purchase
price of 100.5% for loans and 100% for bonds.
We are investing approximately 6% of the fully leveraged size of the
portfolio per week during the ramp-up phase, which we project will
conclude at the end of November. The Fund is permitted to leverage
up to 33% of its net assets. We had not made use of that ability as
of period-end. However, once the proceeds of the Fund's initial
public offering are fully invested, we intend to take advantage of
the difference between the interest rates the Fund can earn on
investments over that of the cost of borrowing under the leverage
line. (For a complete explanation of the benefits and risks of
leverage, please refer to page 2 of this report to shareholders.)
How would you characterize the Fund's position at the close of the
period?
By August 31, 2004, after approximately one month into the start-up
period, the Fund had invested about $123 million of the $191 million
in net assets gathered in the initial offering. The portfolio was
invested 71% in loans and 29% in bonds (or approximately 18% bonds
on a fully invested basis). During the month of August, the bond
market offered better value relative to a tight bank loan market
with historically high premiums. As a result, we made the conscious
decision to ramp up the bond basket early.
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
At August 31, 2004, the Fund's weighted average spread for bank
loans (versus LIBOR) was 2.91%; its weighted average coupon for
bonds was 9.20%; and its weighted average purchase price for all
securities was 99.09%. The Fund's average credit rating at
period-end was between B1 and B2.
We are pleased with these initial results, which were achieved in
a somewhat challenging market environment. For example, average
spreads over LIBOR for new loan issues were 213 basis points (2.13%)
for BB-rated names and 291 basis points for issues rated B. These
spreads held at all-time lows for most of the month. In addition,
significant excess demand is resulting in smaller overall
allocations. We are also seeing a large number of repricings, which
typically reduce the spread of existing transactions. As a result,
it has become expensive to source paper in the secondary market.
Going forward, we will aim to optimize Fund performance, maintaining
a focus on solid credit fundamentals and an appropriate balance of
risk and reward when making new investments.
Joseph P. Matteo
Vice President and Portfolio Manager
Jaimin J. Patel
Vice President and Portfolio Manager
September 15, 2004
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
Schedule of Investments
S&P Moody's Face
Industry++ Ratings Ratings Amount Senior Secured Floating Rate Loan Interests++++ Value
Aerospace & B+ B2 $1,000,000 Standard Aero Holdings, Inc., Term, due 8/24/2012 $ 1,011,875
Defense--1.6% Ba3 B1 2,000,000 The Titan Corporation, Term B, due 6/30/2009 2,009,584
--------------
3,021,459
Automotive--1.1% B+ B1 2,000,000 The Goodyear Tire & Rubber Deposit Account, due
9/30/2007 2,023,750
Cable--U.S.--11.9% Century Cable Holdings LLC, Term:
D Caa1 3,000,000 due 6/30/2009 2,931,162
D Caa1 6,000,000 Discretionary due 12/31/2009 5,851,248
B B2 4,000,000 Charter Communications, Operating LLC, Term B, due
4/27/2011 3,952,916
BB+ Ba3 5,000,000 Insight Midwest Holdings, LLC, Term A, due 6/30/2009 5,004,375
BB Ba3 3,000,000 Mediacom Broadband Group LLC, Term, due 3/31/2010 2,994,843
B+ B1 2,000,000 Rainbow National Services LLC, Term B, due 3/31/2012 2,026,000
--------------
22,760,544
Chemicals--4.7% B+ B1 1,618,182 Innophos, Inc., Term B, due 08/13/2010 1,631,330
BB B1 2,385,004 KRATON Polymers LLC, Term, due 12/24/2010 2,387,985
B+ B1 3,000,000 Rockwood Specialties Group, Inc., Term B, due 7/30/2012 3,024,912
B- B1 2,000,000 Wellman, Inc., Second Lien Term, due 2/10/2010 1,976,666
--------------
9,020,893
Diversified Media-- B B2 4,000,000 MC Communication, Term, due 12/31/2011 3,960,000
2.1%
Health Care--1.0% BB- Ba3 2,000,000 Community Health Systems, Inc., Term, due 8/19/2011 2,002,858
Packaging--0.2% B+ B1 472,092 Berry Plastics Corporation, Term, due 7/22/2010 478,190
Services--1.0% BB- Ba3 350,282 URS Corporation, Term B, due 8/22/2008 352,143
United Rentals Inc.:
BB Ba3 1,349,094 Initial Term, due 2/14/2011 1,364,770
NR* NR* 270,495 Term B, Credit Linked Deposit, due 2/14/2011 274,663
--------------
1,991,576
Utilities--3.7% B Ba3 2,000,000 Calpine Corporation, Second Lien Term, due 7/16/2007 2,007,916
B+ Caa1 2,000,000 Calpine Generating Company LLC, First Priority Term,
due 4/1/2009 2,006,626
BB+ Ba2 3,000,000 CenterPoint Energy, Inc., Term, due 10/07/2006 3,014,625
--------------
7,029,167
Total Investments in Senior Secured Floating
Rate Loan Interests (Cost--$52,121,865)--27.3% 52,288,437
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
Schedule of Investments (continued)
S&P Moody's Face
Industry++ Ratings Ratings Amount Corporate Debt Value
Aerospace & B- Caa1 $ 250,000 Standard Aero Holdings, Inc., 8.25% due 9/01/2014 (a) $ 256,875
Defense--0.7% B- B3 1,000,000 TD Funding Corp., 8.375% due 7/15/2011 1,057,500
--------------
1,314,375
Airlines--0.4% BB B1 1,000,000 American Airlines, Inc., 7.80% due 4/01/2008 856,276
Automotive--0.5% B Caa1 1,000,000 Metaldyne Corporation, 11% due 6/15/2012 870,000
Broadcasting--1.1% CCC+ Caa1 2,000,000 Rainbow National Services LLC, 10.375% due 9/01/2014 (a) 2,070,000
Cable--U.S.--1.6% CCC+ Caa1 2,000,000 CCH II, LLC, 10.25% due 9/15/2010 2,060,000
B+ B2 1,000,000 Mediacom Broadband LLC, 11% due 7/15/2013 1,082,500
--------------
3,142,500
Chemicals--1.3% B B1 1,400,000 Crompton Corporation, 7.67% due 8/01/2010 (a)(b) 1,431,500
CCC+ Caa1 1,000,000 Huntsman International LLC, 10.125% due 7/01/2009 1,030,000
--------------
2,461,500
Diversified Media-- B B3 1,000,000 Dex Media, Inc., 8% due 11/15/2013 (a) 1,037,500
0.5%
Gaming--2.1% B B2 2,000,000 The Majestic Star Casino, LLC, 9.50% due 10/15/2010 2,045,000
Pinnacle Entertainment, Inc.:
CCC+ Caa1 1,000,000 8.25% due 3/15/2012 1,005,000
CCC+ Caa1 1,000,000 8.75% due 10/01/2013 1,030,000
--------------
4,080,000
Health Care--0.2% B- B2 325,000 US Oncology, Inc., 9% due 8/15/2012 (a) 340,438
Housing--0.2% B- B3 275,000 Nortek, Inc., 8.50% due 9/01/2014 (a) 286,688
Leisure--1.0% B+ B1 1,000,000 Intrawest Corporation, 7.50% due 10/15/2013 1,015,000
CCC+ B3 1,000,000 True Temper Sports, Inc., 8.375% due 9/15/2011 930,000
--------------
1,945,000
Manufacturing--0.5% B- B3 1,000,000 Invensys PLC, 9.875% due 3/15/2011 (a) 1,015,000
Packaging--2.0% CCC+ Caa2 1,000,000 Graham Packaging Holdings Company, 10.75% due 1/15/2009 1,038,750
B- Caa2 1,000,000 Pliant Corporation, 13% due 6/01/2010 920,000
B- B3 1,000,000 Tekni-Plex, Inc., 12.75% due 6/15/2010 965,000
CCC+ Caa2 1,000,000 U.S. Can Corporation, 12.375% due 10/01/2010 925,000
--------------
3,848,750
Paper--1.1% B Caa1 2,000,000 Caraustar Industries, Inc., 9.875% due 4/01/2011 2,115,000
Services--1.0% B+ B2 1,000,000 Allied Waste North America, Inc., 7.375% due 4/15/2014 971,250
B+ B2 1,000,000 United Rentals (North America), Inc., 7.75% due
11/15/2013 930,000
--------------
1,901,250
Telecommunications-- NR* Caa1 1,000,000 LCI International, Inc., 7.25% due 6/15/2007 885,000
0.5%
Utilities--3.5% B- B2 1,000,000 The AES Corporation, 7.75% due 3/01/2014 1,007,500
CCC+ Caa1 1,000,000 Calpine Corporation, 8.75% due 7/15/2007 730,000
B B1 1,000,000 Edison Mission Energy, 7.73% due 6/15/2009 1,047,500
CCC+ Caa1 1,000,000 El Paso Corporation, 7% due 5/15/2011 935,000
CCC+ Caa1 1,000,000 El Paso Energy Corporation, 6.75% due 5/15/2009 957,500
B- B2 2,000,000 Sierra Pacific Resources, 8.625% due 3/15/2014 (a) 2,100,000
--------------
6,777,500
Total Investments in Corporate Debt
(Cost--$34,561,547)--18.2% 34,946,777
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
Schedule of Investments (concluded)
Face
Amount Short-Term Securities Value
Commercial Paper+++ $ 3,613,000 Amsterdam Funding Corporation, 1.53% due 9/14/2004 $ 3,611,017
9,500,000 Bills Securitization Ltd., 1.27% due 9/03/2004 9,499,198
9,000,000 CDC Commercial Paper Corp., 1.50% due 9/02/2004 8,999,625
9,500,000 First Data Corporation, 1.49% due 9/01/2004 9,500,000
3,191,000 General Electric Capital Corporation, 1.57% due
9/01/2004 3,191,000
2,500,000 ING (U.S.) Funding LLC, 1.55% due 9/10/2004 2,499,031
4,472,000 Jupiter Securitization Corporation, 1.54% due 9/07/2004 4,470,852
9,500,000 Morgan Stanley, 1.52% due 9/01/2004 9,500,000
9,000,000 National Australia Funding (Delaware) Inc., 1.44% due
9/01/2004 9,000,000
PACCAR Financial Corporation:
3,048,000 1.50% due 9/01/2004 3,048,000
9,500,000 1.53% due 9/07/2004 9,497,578
5,007,000 Park Avenue Receivables Company LLC, 1.52% due 9/15/2004 5,004,040
6,512,000 Rio Tinto (Commercial Paper) Limited, 1.50% due 9/02/2004 6,511,729
5,189,000 Thunder Bay Funding LLC, 1.50% due 9/01/2004 5,189,000
--------------
89,521,070
Beneficial
Interest
$40,000,000 Merrill Lynch Liquidity Series, LLC Cash
Sweep Series I** 40,000,000
Total Investments in Short-Term Securities
(Cost--$129,521,069)--67.5% 129,521,070
Total Investments (Cost--$216,204,481***)--113.0% 216,756,284
Liabilities in Excess of Other Assets--(13.0%) (24,920,603)
--------------
Net Assets--100.0% $ 191,835,681
==============
* Not Rated.
** Investments in companies considered to be an affiliate of the
Fund (such companies are defined as "Affiliated Companies" in
Section 2(a)(3) of the Investment Company Act of 1940) were as
follows:
Net Interest
Affiliate Activity Income
Merrill Lynch Liquidity Series,
LLC Cash Sweep Series I $40,000,000 $49,880
*** The cost and unrealized appreciation/depreciation of investments
as of August 31, 2004, as computed for federal income tax purposes
were as follows:
Aggregate cost $216,204,481
============
Gross unrealized appreciation $ 825,611
Gross unrealized depreciation (273,808)
------------
Net unrealized appreciation $ 551,803
============
++ For Fund compliance purposes, "Industry" means any one or more of
the industry sub-classifications used by one or more widely recognized
market indexes or ratings group indexes, and/or as defined by Fund
management. This definition may not apply for purposes of this report,
which may combine industry sub-classifications for reporting ease.
Industries are shown as a percent of net assets.
++++ Senior secured floating rate loan interests in which the Fund invests
generally pay interest at rates that are periodically redetermined by
reference to a base lending rate plus a premium. These base lending
rates are generally (i) the lending rate offered by one or more major
European banks, such as LIBOR (London InterBank Offered Rate),
(ii) the prime rate offered by one or more major U.S. banks or
(iii) the certificate of deposit rate.
+++ Commercial Paper is traded on a discount basis; the interest rates
shown reflect the discount rates paid at the time of purchase by
the Fund.
(a) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(b) Floating rate note.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
Statement of Assets, Liabilities and Capital
As of August 31, 2004
Assets
Investments in unaffiliated securities, at value (identified cost--$176,204,481) $ 176,756,284
Investments in affiliated securities, at value (identified cost--$40,000,000) 40,000,000
Cash 1,980,833
Receivables:
Securities sold $ 2,095,597
Interest (including $49,880 from affiliates) 1,053,379 3,148,976
---------------
Deferred facility fees 68
---------------
Total assets 221,886,161
---------------
Liabilities
Payables:
Securities purchased 29,678,710
Offering costs 325,470
Investment adviser 23,558
Other affiliates 1,834 30,029,572
---------------
Accrued expenses 20,908
---------------
Total liabilities 30,050,480
---------------
Net Assets
Net assets $ 191,835,681
===============
Capital
Common Stock, par value $.10 per share; 200,000,000 shares authorized
(10,005,236 shares issued and outstanding) $ 1,000,524
Paid-in capital in excess of par 189,707,314
Undistributed investment income--net $ 450,103
Undistributed realized capital gains--net 125,937
Unrealized appreciation--net 551,803
---------------
Total accumulated earnings--net 1,127,843
---------------
Total capital--Equivalent to $19.17 net asset value per share of Common Stock
(market price--$20.01) $ 191,835,681
===============
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
Statement of Operations
For the Period July 30, 2004++ to August 31, 2004
Investment Income
Interest (including $49,880 from affiliates) $ 503,602
Facility and other fees 68
---------------
Total income 503,670
---------------
Expenses
Investment advisory fees $ 129,564
Professional fees 10,966
Accounting services 5,905
Printing and shareholder reports 2,924
Directors' fees and expenses 2,832
Transfer agent fees 2,465
Custodian fees 1,231
Pricing services 684
Other 647
---------------
Total expenses before waiver 157,218
Waiver of expenses (103,651)
---------------
Total expenses after waiver 53,567
---------------
Investment income--net 450,103
---------------
Realized & Unrealized Gain--Net
Realized gain on investments--net 125,937
Unrealized appreciation on investments--net 551,803
---------------
Total realized and unrealized gain--net 677,740
---------------
Net Increase in Net Assets Resulting from Operations $ 1,127,843
===============
++ Commencement of operations.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
Statement of Changes in Net Assets
For the Period
July 30, 2004++
to August 31,
Increase (Decrease) in Net Assets: 2004
Operations
Investment income--net $ 450,103
Realized gain--net 125,937
Unrealized appreciation--net 551,803
---------------
Net increase in net assets resulting from operations 1,127,843
---------------
Stock Transactions
Net proceeds from issuance of Common Stock 191,000,000
Offering costs resulting from the issuance of Common Stock (392,170)
---------------
Net increase in net assets resulting from stock transactions 190,607,830
---------------
Net Assets
Total increase in net assets 191,735,673
Beginning of period 100,008
---------------
End of period* $ 191,835,681
===============
* Undistributed investment income--net $ 450,103
===============
++ Commencement of operations.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
Financial Highlights
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. July 30, 2004++
to August 31,
Increase (Decrease) in Net Asset Value: 2004
Per Share Operating Performance
Net asset value, beginning of period $ 19.10
---------------
Investment income--net .04
Realized and unrealized gain--net .07
---------------
Total from investment operations .11
---------------
Offering costs resulting from issuance of Common Stock (.04)
---------------
Net asset value, end of period $ 19.17
===============
Market price per share, end of period $ 20.01
===============
Total Investment Return**
Based on net asset value per share .37%+++
===============
Based on market price per share .05%+++
===============
Ratios to Average Net Assets
Expenses, net of waiver .31%*
===============
Expenses .91%*
===============
Investment income--net 2.61%*
===============
Supplemental Data
Net assets, end of period (in thousands) $ 191,836
===============
Portfolio turnover 7.86%
===============
* Annualized.
** Total investment returns based on market price, which can be significantly greater or
lesser than the net asset value, may result in substantially different returns. Total
investment returns exclude the effects of sales charges.
++ Commencement of operations.
+++ Aggregate total investment return.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
Notes to Financial Statements
1. Significant Accounting Policies:
Floating Rate Income Strategies Fund II, Inc. (the "Fund") is
registered under the Investment Company Act of 1940, as amended, as
a diversified, closed-end management investment company. Prior to
commencement of operations on July 30, 2004, the Fund had no
operations other than those relating to organizational matters and
the sale of 5,236 shares of Common Stock on July 9, 2004 to Fund
Asset Management, L.P. ("FAM") for $100,008. The Fund's financial
statements are prepared in conformity with U.S. generally accepted
accounting principles, which may require the use of management
accruals and estimates. Actual results may differ from these
estimates.These unaudited financial statements reflect all
adjustments, which are, in the opinion of management, necessary to
present a fair statement of the results for the interim period. All
such adjustments are of a normal, recurring nature. The Fund
determines and makes available for publication the net asset value
of its Common Stock on a daily basis. The Fund's Common Stock is
listed on the New York Stock Exchange ("NYSE") under the symbol FRB.
(a) Corporate debt obligations--The Fund invests in floating rate
obligations of companies, including Corporate Loans made by banks
and other financial institutions and both privately and publicly
offered corporate bonds and notes. Because agents and intermediaries
are primarily commercial banks or other financial institutions, the
Fund's investment in Corporate Loans could be considered
concentrated in financial institutions.
(b) Valuation of investments--Corporate Loans are valued in
accordance with guidelines established by the Fund's Board of
Directors. Corporate Loans are valued at the mean between the last
available bid and asked prices from one or more brokers or dealers
as obtained from Loan Pricing Corporation. For the limited number of
Corporate Loans for which no reliable price quotes are available,
such Corporate Loans will be valued by Loan Pricing Corporation
through the use of pricing matrices to determine valuations. If the
pricing service does not provide a value for a Corporate Loan, the
Investment Adviser will value the Corporate Loan at fair value,
which is intended to approximate market value.
Securities that are held by the Fund that are traded on stock
exchanges or the Nasdaq National Market are valued at the last
sale price or official close price on the exchange on which such
securities are traded, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last
available bid price for long positions, and at the last available
ask price for short positions. In cases where securities are traded
on more than one exchange, the securities are valued on the exchange
designated as the primary market by or under the authority of the
Board of Directors of the Fund. Long positions in securities traded
in the over-the-counter ("OTC") market, Nasdaq Small Cap or Bulletin
Board are valued at the last available bid price or yield equivalent
obtained from one or more dealers or pricing services approved by
the Board of Directors of the Fund. Short positions traded in the
OTC market are valued at the last available ask price. Portfolio
securities that are traded both in the OTC market and on a
stock exchange are valued according to the broadest and most
representative market. When the Fund writes an option, the amount
of the premium received is recorded on the books of the Fund as an
asset and an equivalent liability. The amount of the liability is
subsequently valued to reflect the current market value of the
option written, based on the last sale price in the case of exchange-
traded options or, in the case of options traded in the OTC market,
the last ask price. Options purchased by the Fund are valued at
their last sale price in the case of exchange traded options or, in
the case of options traded in the OTC market, the last bid price.
The value of swaps, including interest rate swaps, caps and floors,
will be determined by obtaining dealer quotations. Other
investments, including futures contracts and related options, are
stated at market value. Obligations with remaining maturities of
60 days or less are valued at amortized cost unless the Investment
Adviser believes that this method no longer produces fair
valuations. Repurchase agreements will be valued at cost plus
accrued interest. The Fund employs certain pricing services to
provide securities prices for the Fund. Securities and assets 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, including valuations furnished by
the pricing services retained by the Fund, which may use a matrix
system for valuations. The procedures of a pricing service and its
valuations are reviewed by the officers of the Fund under the
general supervision of the Fund's Board of Directors. Such
valuations and procedures will be reviewed periodically by the
Fund's Board of Directors.
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
Notes to Financial Statements (continued)
Generally, trading in foreign securities, as well as U.S. government
securities and money market instruments, is substantially completed
each day at various times prior to the close of business on the
NYSE. The values of such securities used in computing the net asset
value of the Fund's shares are determined as of such times. Foreign
currency exchange rates also are generally determined prior to the
close of business on the NYSE. Occasionally, events affecting the
values of such securities and such exchange rates may occur between
the times at which they are determined and the close of business on
the NYSE that may not be reflected in the computation of the Fund's
net asset value. If events (for example, a company announcement,
market volatility or a natural disaster) occur during such periods
that are expected to materially affect the value of such securities,
those securities may be valued at their fair value as determined in
good faith by the Fund's Board of Directors or by the Investment
Adviser using a pricing service and/or procedures approved by the
Fund's Board of Directors.
(c) Derivative financial instruments--The Fund may engage in various
portfolio investment strategies both to increase the return of the
Fund and to hedge, or protect, its exposure to interest rate
movements and movements in the securities markets. Losses may arise
due to changes in the value of the contract or if the counterparty
does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell
financial futures contracts and options on such futures contracts.
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 margin 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.
* Options--The Fund may write and purchase 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 is less than or exceeds the premiums paid or
received).
Written and purchased options are non-income producing investments.
* Swaps--The Fund may enter into swap agreements, which are over-the-
counter contracts in which the Fund and a counterparty agree to make
periodic net payments on a specified notional amount. The net
payments can be made for a set period of time or may be triggered by
a predetermined credit event. The net periodic payments may be based
on a fixed or variable interest rate; the change in market value of
a specified security, basket of securities, or index; or the return
generated by a security.
(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). Realized gains and losses on security
transactions are determined on the identified cost basis. Interest
income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
Notes to Financial Statements (continued)
(f) Offering costs--Direct expenses relating to the public offering
of the Fund's Common Stock were charged to capital at the time of
issuance of the shares.
(g) Dividends and distributions--Dividends from net investment
income are declared and paid monthly. Distributions of capital gains
are recorded on the ex-dividend dates. The Fund may at times pay out
less than the entire amount of net investment income earned in any
particular period and may at times pay out such accumulated
undistributed income in other periods to permit the Fund to maintain
a more stable level of dividends.
(h) Securities lending--The Fund may lend securities to financial
institutions that provide cash or securities issued or guaranteed by
the U.S. government as collateral, which will be maintained at all
times in an amount equal to at least 100% of the current market
value of the loaned securities. The market value of the loaned
securities is determined at the close of business of the Fund and
any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral
for the loaned securities, it collects a fee from the borrower. The
Fund typically receives the income on the loaned securities but does
not receive the income on the collateral. Where the Fund receives
cash collateral, it may invest such collateral and retain the amount
earned on such investment, net of any amount rebated to the
borrower. Loans of securities are terminable at any time and the
borrower, after notice, is required to return borrowed securities
within five business days. The Fund may pay reasonable finder's,
lending agent, administrative and custodial fees in connection with
its loans. In the event that the borrower defaults on its obligation
to return borrowed securities because of insolvency or for any other
reason, the Fund could experience delays and costs in gaining access
to the collateral. The Fund also could suffer a loss where the value
of the collateral falls below the market value of the borrowed
securities, in the event of borrower default or in the event of
losses on investments made with cash collateral.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM.
The general partner of FAM is Princeton Services, Inc. ("PSI"),
an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc.
("ML & Co."), which is the limited partner.
FAM 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 at an annual rate of .75%
of the Fund's average daily net assets plus the proceeds of any
outstanding borrowings used for leverage. During the Fund's start-up
period, FAM elected to waive a portion of its management fee. For
the period July 30, 2004 to August 31, 2004, FAM earned fees of
$129,564, of which $103,651 was waived.
The Fund has received an exemptive order from the Securities and
Exchange Commission permitting it to lend portfolio securities to
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), an
affiliate of FAM, or its affiliates. Pursuant to that order, the
Fund also has retained Merrill Lynch Investment Managers, LLC
("MLIM, LLC"), an affiliate of FAM, as the securities lending agent
for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Fund, invest cash
collateral received by the Fund for such loans, among other things,
in a private investment company managed by MLIM, LLC or in
registered money market funds advised by FAM or its affiliates.
For the period July 30, 2004 to August 31, 2004, MLPF&S received
underwriting fees of $6,354,000 in connection with the issuance of
the Fund's Common Stock. In addition, the Fund reimbursed MLPF&S
$47,090 as a partial reimbursement of expenses incurred in
connection with the issuance of the Fund's Common Stock.
For the period July 30, 2004 to August 31, 2004, MLPF&S received
$2,500 in commissions on the execution of portfolio security
transactions for the Fund.
For the period July 30, 2004 to August 31, 2004, the Fund reimbursed
FAM $283 for certain accounting services.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period July 30, 2004 to August 31, 2004 were $91,541,012 and
$5,000,938, respectively.
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
Notes to Financial Statements (concluded)
4. Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock
par value $.10, all of which are initially classified as Common
Stock. The Board of Directors is authorized, however, to classify
and reclassify any unissued shares of capital stock without approval
of the holders of Common Stock.
Shares issued and outstanding during the period July 30, 2004 to
August 31, 2004, increased by 10,000,000 from shares sold.
5. Short-Term Borrowings:
Effective September 24, 2004, the Fund entered into a $100,000,000
revolving credit and security agreement with Citibank, N.A. and
other lenders (the "Lenders"). The Fund may borrow money through
(i) a line of credit from certain Lenders at the eurodollar rate
plus .75%, or the highest of the Federal Funds rate plus .50%, a
base rate as determined by Citibank, N.A. and the latest 3-week
moving average of secondary market morning offering rates in the
United States for 3-month certificates of deposit of major U.S.
money market banks plus .50%, or (ii) the issuance of commercial
paper notes by certain Lenders at rates of interest derived from the
weighted average of the per annum rates paid or payable by such
Lenders in respect of those commercial notes. As security for its
obligations to the Lenders under the learning credit and security
agreement, the Fund has granted a security interest in substantially
all of its assets to and in favor of the Lender. The Fund also pays
additional borrowing costs which include a commitment fee for this
facility fee at the annual rate of .10% and a program fee of .24% on
the borrowings outstanding.
6. Unfunded Corporate Loans:
As of August 31, 2004, the Fund had unfunded loan commitments of
$381,818, which would be extended at the option of the borrower
pursuant to the following loan agreements:
Unfunded
Commitment
Borrower (in Thousands)
Innophos, Inc. $382
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
Portfolio Information
As of August 31, 2004
Percent of
Ten Largest Holdings Net Assets
Century Cable Holdings LLC, Term, due
12/31/2009 3.1%
Insight Midwest Holdings, LLC, Term A,
due 6/30/2009 2.6
MC Communication, Term, due 12/31/2011 2.1
Charter Communications, Term B,
due 4/27/2011 2.1
Rockwood Specialties Group, Inc., Term B,
due 7/30/2012 1.6
CenterPoint Energy, Inc., Term, due 10/07/2006 1.6
Mediacom Broadband LLC, Term, due 3/31/2010 1.6
Century Cable Holdings LLC, Term,
due 6/30/2009 1.5
KRATON Polymers LLC, Revolving Term,
due 12/24/2010 1.2
Caraustar Industries, Inc., 9.875% due 4/01/2011 1.1
Percent of
Five Largest Industries++ Net Assets
Cable--U.S. 13.5%
Utilities 7.2
Chemicals 6.0
Diversified Media 2.6
Aerospace & Defense 2.3
++ For Fund compliance purposes, "Industries" means any one or
more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes,
and/or as defined by Fund management. This definition may not
apply for purposes of this report, which may combine industry
sub-classifications for reporting ease.
Percent of
Total
Quality Ratings by S&P/Moody's Investments
BB/Ba 10.1%
B/B 20.1
CCC/Caa 9.9
NR (Not Rated) 0.1
Other* 59.8
* Includes portfolio holdings in short-term investments.
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
Officers and Directors
Terry K. Glenn, President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Jean Margo Reid, Director
Kevin A. Ryan, Director
Roscoe S. Suddarth, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Joseph P. Matteo, Vice President
Jaiman J. Patel, Vice President
Donald C. Burke, Vice President and Treasurer
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
EquiServe
P.O. Box 43010
Providence, RI 02940-3010
NYSE Symbol
FRB
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third
quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are
available on the SEC's Web site at http://www.sec.gov. The Fund's
Forms N-Q may also be reviewed and copied at the SEC's Public
Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its
shareholders. In order to receive this service, you must
register your account and provide us with e-mail information.
To sign up for this service, simply access this Web site
http://www.icsdelivery.com/live and follow the instructions.
When you visit this site, you will obtain a personal identification
number (PIN). You will need this PIN should you wish to update your
e-mail address, choose to discontinue this service and/or make any
other changes to the service. This service is not available for
certain retirement accounts at this time.
FLOATING RATE INCOME STRATEGIES FUND II, INC., AUGUST 31, 2004
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this
semi-annual report
Item 4 - Principal Accountant Fees and Services - Not Applicable to
this semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to
this semi-annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for
Closed-End Management Investment Companies - Not Applicable to this
semi-annual report
Item 8 - Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers - Not Applicable
Item 9 - Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 10 - Controls and Procedures
10(a) - The registrant's certifying officers have reasonably
designed such disclosure controls and procedures to ensure material
information relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined that
the registrant's disclosure controls and procedures are effective
based on our evaluation of these controls and procedures as of a
date within 90 days prior to the filing date of this report.
10(b) - There were no changes in the registrant's internal control
over financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the last fiscal half-year
of the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
Item 11 - Exhibits attached hereto
11(a)(1) - Code of Ethics - Not Applicable to this semi-annual
report
11(a)(2) - Certifications - Attached hereto
11(a)(3) - Not Applicable
11(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Floating Rate Income Strategies Fund II, Inc.
By: _/s/ Terry K. Glenn_______
Terry K. Glenn,
President of
Floating Rate Income Strategies Fund II, Inc.
Date: October 18, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By: _/s/ Terry K. Glenn________
Terry K. Glenn,
President of
Floating Rate Income Strategies Fund II, Inc.
Date: October 18, 2004
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
Floating Rate Income Strategies Fund II, Inc.
Date: October 18, 2004