UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
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: Robert C. Doll, Jr., Chief
Executive Officer, 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: 02/28/05
Date of reporting period: 03/01/04 - 02/28/05
Item 1 - Report to Stockholders
Floating Rate
Income Strategies
Fund II, Inc.
Annual Report
February 28, 2005
(BULL LOGO) Merrill Lynch Investment Managers
www.mlim.ml.com
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
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
leverages 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
(GO PAPERLESS LOGO)
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Floating Rate Income Strategies Fund II, Inc.
The Benefits and Risks of Leveraging
Floating Rate Income Strategies Fund II, Inc. utilizes 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.
Proxy Results
During the six-month period ended February 28, 2005, Floating Rate
Income Strategies Fund II, Inc.'s Common Stock shareholders voted on
the following proposal. The proposal was approved at a shareholders'
meeting on January 27, 2005. A description of the proposal and
number of shares voted are as follows:
Shares Voted Shares Withheld
For From Voting
1. To elect the Fund's Board of Directors: Robert C. Doll, Jr., Ronald Forbes,
Cynthia A. Montgomery, Jean Margo Reid, Roscoe S. Suddarth,
Richard R. West and Edward D. Zinbarg 10,248,439 135,862
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
A Letter From the President
Dear Shareholder
Financial markets broadly posted positive returns over the most
recent reporting period, with international equities providing some
of the most impressive results.
Total Returns as of February 28, 2005 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) + 9.99% + 6.98%
International equities (MSCI Europe Australasia Far East Index) +21.18 +18.68
Fixed income (Lehman Brothers Aggregate Bond Index) + 1.26 + 2.43
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 2.40 + 2.96
High yield bonds (Credit Suisse First Boston High Yield Index) + 7.53 +11.21
The U.S. economy has continued to show resilience in the face of the
Federal Reserve Board's (the Fed) continued interest rate hikes and,
more recently, higher oil prices. The Fed's measured tightening
program recently brought the federal funds rate to 2.75% en route
to a more "neutral" short-term interest rate target (relative to
inflation). Since the U.S. presidential election, progress has been
monitored on many fronts in Washington, although concerns remain
about the structural problems of debt and deficits, as reflected by
a significant decline in the U.S. dollar.
U.S. equities ended 2004 in a strong rally, but remained in a fairly
narrow trading range for the first two months of 2005. Divergences
were notable among sectors, with energy emerging as a clear leader.
On the positive side, corporations have accelerated their hiring
plans, capital spending remains reasonably robust and merger-and-
acquisition activity has increased. Offsetting the positives are
slowing corporate earnings growth, renewed energy price concerns and
the potential for an economic slowdown. International equities,
particularly in Asia, have benefited from higher economic growth
rates (China recorded growth of 9.3% in 2004), stronger currencies
and relatively reasonable valuations.
The major action in the bond market has been a flattening of the
yield curve. As short-term interest rates continued to rise, yields
on the long end of the curve remained relatively stable - even
declining at certain points since the Fed's monetary tightening
program began in June 2004. This phenomenon has been largely
attributed to continued foreign interest in U.S. bonds, which has
served to absorb much of the excess supply. By period-end, many
believed long-term yields were long overdue for a rise.
Looking ahead, the environment is likely to be a challenging one for
investors, with diversification and selectivity becoming
increasingly important themes. With this in mind, we encourage you
to meet with your financial advisor to review your goals and asset
allocation and to rebalance your portfolio, as necessary, to ensure
it remains aligned with your objectives and risk tolerance. As
always, 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,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Director
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
A Discussion With Your Fund's Portfolio Managers
The Fund's performance during the period benefited from the
portfolio's attractive weighted average interest rate spread (that
is, the higher average yield of its loan securities) compared to the
London InterBank Offered Rate (LIBOR).
Describe market conditions during the period since the Fund's
inception.
Throughout the period, the leverage loan market continued to benefit
from the significant demand that it has experienced since the
beginning of 2004. This created an excess cash imbalance that was
left virtually intact through the end of February 2005, as new
inflows have continued to match the value of new issues. Demand in
the marketplace has led to higher secondary-market loan prices and
new issues with generally lower interest spreads over LIBOR, and
average new-issue allocation amounts per investor that are lower
than their historical levels.
A significant rise in LIBOR more than offset declines in the
interest rate spreads on BB-rated and B-rated new issues during the
period. Another positive development in the leveraged loan sector
was the improving default rate. As of the end of February 2005,
the lagging 12-month institutional loan default rate stood at 1.36%
by number of loans and 1.37% of principal amount, according to
Standard & Poor's Leveraged Commentary & Data. Although this is a
12-month high due to the recent default of Tower Automotive Inc.,
the default rates are still well below the recent historical
averages (since 1998) of 3.87% by number of loans and 4.18% by
principal amount.
The fixed rate high yield bond market, in which the Fund can invest
up to 20% of its assets, has been affected by some of the same
fundamentals driving the leveraged loan market. The excess cash in
the market has been the primary factor in the rally in high yield
securities. Although concern surrounding higher interest rates has
hung over the market for some time, 10-year U.S. Treasury note
yields did not begin to rise until early 2005.
How has the Fund performed since its inception in light of the
existing market conditions?
Since inception (July 30, 2004) through February 28, 2005, the
Common Stock of the Fund had net annualized yields of 4.86% and
4.94%, based on a period-end per share net asset value of $19.74 and
a per share market price of $19.44, respectively, and $.563 per
share ordinary income dividends. For the same period, the total
investment return on the Fund's Common Stock was +5.97%, based on a
change in per share net asset value from $19.10 to $19.74, and
assuming reinvestment of all distributions. For the same period, the
Fund's unmanaged benchmark, a composite comprised 80% of the Credit
Suisse First Boston (CSFB) Leveraged Loan Index and 20% of the CSFB
High Yield Index, posted a total return of +4.38%.
For the six-month period ended February 28, 2005, the total
investment return on the Fund's Common Stock was +5.58%, based on
a change in per share net asset value from $19.17 to $19.74, and
assuming reinvestment of all distributions. For the same period,
the Fund's composite benchmark had a total return of +3.91%.
For a description of the Fund's total investment return based on a
change in the per share market value of the Fund's Common Stock (as
measured by the trading price of the Fund's shares on the New York
Stock Exchange), and assuming reinvestment of dividends, please
refer to the Financial Highlights section of this report. As a
closed-end fund, the Fund's shares may trade in the secondary market
at a premium or discount to the Fund's net asset value. As a result,
total investment returns based on changes in the market value of the
Fund's Common Stock can vary significantly from total investment
returns based on changes in the Fund's net asset value.
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
What factors contributed to the Fund's performance?
The timely ramp-up phase (the process of investing the Fund's assets
beginning at its inception) of the Fund and the portfolio's
attractive weighted average rate spread over LIBOR contributed to
the strong performance relative to its composite benchmark during
the period.
A greater portion of the appreciation in the Fund's net asset
value was attributable to an increase in the market value of the
underlying securities as opposed to the earning of an excess yield.
The advance in the share price of the Fund, on the other hand, was
attributable to both the rising net asset value and an increase in
the stated dividend yield (that is, off the original $20 per share
price) from 5.25% to 5.75%. Since the Fund's inception, all of our
securities have paid interest when due. Furthermore, a combination
of all of the previously cited positive factors enabled us to employ
the available leverage in an effective manner, thereby increasing
the Fund's total return. (For a complete explanation of the benefits
and risks of leveraging, please refer to page 2 of this report to
shareholders.)
What changes were made to the portfolio during the period?
Following the closing of the Fund's initial public offering period
on July 30, 2004, we initiated and maintained the ramp-up at a pace
that was consistent with our original projections. The ramp-up
essentially concluded on schedule at the end of November 2004.
Regarding sector allocation, we are focusing on those industries
that we believe have strong asset values and stable cash-flow
characteristics. At the end of the period, the Fund's largest
absolute weightings were in utilities, cable, paper, chemicals and
housing. These sectors are among those that we have traditionally
favored and from which the Fund's performance has benefited from an
overweighting.
How would you characterize the Fund's position at the close of the
period?
At the end of the period, the portfolio was comprised of 17.9% in
fixed rate instruments and 82.1% in floating rate instruments. The
portfolio had 101 issuers spread among 16 industries. The Fund was
underweight versus its composite benchmark in securities rated BB
or higher, and was overweight in B-rated securities, credits rated
CCC or below, and issues that are not rated.
Looking forward, we anticipate that many of the same factors that
had an impact on leveraged loan securities in the past six months
will continue to influence the fundamentals in the market. We
believe that the trend of small allocation amounts for issuances
of new loans, lower interest rate spreads and above-par secondary
market prices will continue, especially given the benign credit
environment we expect over the next six months. A further benefit to
the market would be an increase in LIBOR. Therefore, we expect to
continue purchasing assets predominately in the primary market,
while selectively participating in the secondary market.
Joseph P. Matteo
Vice President and Co-Portfolio Manager
Jaimin Patel
Vice President and Co-Portfolio Manager
March 21, 2005
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Portfolio Information
As of February 28, 2005
Percent of
Ten Largest Holdings Net Assets
KGEN Tranche A Term Loan, due 8/05/2011 3.9%
PanAmSat Corp. Tranche B Term Loan,
due 8/20/2011 3.9
Ainsworth Lumber Co. Ltd., 6.30%
due 10/01/2010 3.7
Charter Communications Operating LLC
Tranche B Term Loan, due 4/07/2011 2.9
Century Cable Holdings LLC, Discrectionary
Term Loan, due 12/31/2009 2.9
Aquila, Inc. Term Loan, due 9/14/2009 2.5
Graham Packaging Company LP Term Loan B,
due 10/07/2011 2.5
Tekni-Plex, Inc. Term Loan B, due 6/21/2008 2.4
Metaldyne Corp. Term Loan D, due 12/31/2009 2.4
Tembec Industries Inc., 8.625% due 6/30/2009 2.4
Percent of
Five Largest Industries++ Net Assets
Utilities 22.4%
Cable--U.S. 20.3
Paper 10.6
Housing 7.9
Chemicals 7.4
++ 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 27.2%
B/B 56.9
CCC/Caa 8.8
NR (Not Rated) 7.0
Other* 0.1
* Includes portfolio holdings in common stocks and short-term
investments.
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Schedule of Investments
Face
Industry++ Amount Floating Rate Loan Interests++++ Value
Aerospace & $ 1,680,729 KF Industries, Inc. Term Loan, due 11/18/2013 $ 1,711,018
Defense--5.8% 4,000,000 MRO Acquisitions Corp. Second Lien Term Loan, due 8/15/2011 4,045,000
2,076,923 Standard Aero Holdings Term Loan, due 8/24/2012 2,110,025
1,989,796 Titan Corp. Term Loan B, due 6/30/2009 2,018,089
Vought Aircraft Industries, Inc.:
1,680,000 Term Loan, due 12/22/2011 1,706,250
320,000 Tranche B L/C Deposit, due 12/22/2010 325,200
--------------
11,915,582
Automotive--3.4% 2,000,000 Goodyear Tire & Rubber Term Loan, due 9/30/2007 2,016,876
4,987,452 Metaldyne Corp. Term Loan D, due 12/31/2009 5,036,080
--------------
7,052,956
Broadcasting--1.0% 2,000,000 Entravision Communications Corp. Term Loan B, due 2/24/2012 2,030,834
Cable-- 2,000,000 NTL Investment Holdings Ltd. B2 Sub-Tranche, due 4/14/2012 2,037,500
International--1.0%
Cable--U.S.--18.7% 1,990,000 Bragg Communications, Inc. Term Loan B, due 9/01/2011 2,024,825
Century Cable Holdings LLC, Term Loan:
6,000,000 Discretionary, due 12/31/2009 5,977,500
3,000,000 due 6/30/2009 2,990,088
5,974,987 Charter Communications Operating LLC Tranche B Term Loan, due 4/07/2011 6,002,873
4,680,851 Insight Midwest Holdings, LLC Term Loan A, due 6/30/2009 4,694,018
857,143 Intelsat Ltd. Term Loan, due 7/28/2011 871,205
2,940,000 Mediacom Broadband Group Tranche A Term Loan, due 3/31/2010 2,927,137
3,200,000 Mediacom Communications, LLC Tranche B Term Loan, due 3/31/2013 3,243,715
7,939,759 PanAmSat Corp. Tranche B Term Loan, due 8/20/2011 8,074,505
2,000,000 Rainbow National Services LLC Term Loan B, due 3/31/2012 2,028,750
--------------
38,834,616
Chemicals--5.6% 1,995,955 Innophos, Inc. Tranche B Term Loan, due 8/13/2010 2,030,884
2,543,717 Kraton Polymers Term Loan, due 12/16/2010 2,587,172
Rockwood Specialties Group, Inc. Tranche D Term Loan:
1,750,000 due 9/15/2012 1,780,000
3,000,000 due 12/10/2012 3,051,429
2,000,000 Wellman, Inc. Second Lien Term Loan, due 2/10/2010 2,107,500
--------------
11,556,985
Consumer-- 1,000,000 Camelbak Products, LLC First Lien Term Loan, due 8/04/2011 1,011,875
Non-Durables--1.2% 1,500,000 Culligan International Co. Term Loan, due 9/30/2011 1,525,624
--------------
2,537,499
Diversified Media-- 4,000,000 Advertising Directory Solutions Holdings Inc. Term Loan, due 5/09/2012 4,121,668
4.8% 4,000,000 MC Communications, LLC Term Loan, due 1/28/2011 4,030,000
1,835,405 RH Donnelley Tranche D Term Loan, due 8/30/2011 1,865,335
--------------
10,017,003
Energy--2.4% 5,000,000 Ocean Rig Norway AS, Term Loan, due 6/01/2008 5,000,000
Food/Tobacco--0.7% 1,500,000 Landry's Restaurants, Inc. Term Loan, due 12/28/2010 1,523,437
Gaming--3.5% 1,000,000 Ameristar Casinos Add on Term Loan, due 12/20/2006 1,016,250
2,000,000 Herbst Gaming, Inc. Term Loan, due 10/08/2010 2,031,876
2,000,000 Marina District Finance Co., Inc. Term Loan, due 10/20/2011 2,022,500
980,870 Mississippi Band of Choctaw Indians Term Loan, due 11/04/2011 996,809
1,100,000 Pinnacle Entertainment, Inc. Term Loan, due 8/27/2010 1,116,500
--------------
7,183,935
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Schedule of Investments (continued)
Face
Industry++ Amount Floating Rate Loan Interests++++ Value
Health Care--2.4% $ 2,992,500 Ardent Health Services, Inc. Term Loan, due 8/12/2011 $ 3,034,584
1,995,000 Community Health Systems, Inc. Term Loan, due 8/19/2011 2,020,093
--------------
5,054,677
Housing--6.8% 2,750,000 Associated Materials, Inc. Term Loan, due 8/29/2010 2,794,687
2,300,000 General Growth Properties, Inc. Tranche B Term Loan, due 11/12/2008 2,338,550
Headwaters, Inc.:
1,000,000 Second Lien Term Loan, due 9/01/2012 1,039,167
4,148,438 Term Loan B, due 4/30/2011 4,208,934
2,327,083 Lake at Las Vegas Joint Venture First Lien Term Loan, due 11/01/2009 2,362,960
1,492,500 Nortek, Inc. Term Loan, due 8/27/2011 1,520,174
--------------
14,264,472
Information 2,400,000 Viasystems, Inc. Replacement Tranche B Term Loan, due 9/30/2009 2,418,000
Technology--1.2%
Leisure--2.1% 4,406,932 True Temper Sports, Inc. Term Loan B, due 3/15/2011 4,390,406
Manufacturing--3.4% 3,889,010 Amsted Industries, Inc. Term Loan B-1, due 10/15/2010 3,965,576
2,985,003 Blount, Inc. US Term Loan B, due 8/09/2010 3,035,996
--------------
7,001,572
Packaging--5.1% 427,217 Berry Plastics Corp. Term Loan, due 7/22/2010 433,893
5,000,000 Graham Packaging Company LP Term Loan B, due 10/07/2011 5,097,500
4,973,958 Tekni-Plex, Inc. Term Loan B, due 6/21/2008 5,042,350
--------------
10,573,743
Paper--1.4% 844,344 Boise Cascade Holdings, LLC Tranche B Term Loan, due 10/28/2011 860,862
Smurfit Stone Container Corp.:
1,529,412 Tranche B, due 11/01/2011 1,555,539
470,588 Tranche C, due 11/01/2011 478,706
--------------
2,895,107
Retail--0.7% 1,373,812 General Nutrition Centers, Inc. Tranche B Term Loan, due 12/05/2009 1,394,420
Services--3.4% 350,282 URS Corp. Term Loan B, due 8/22/2008 352,362
United Rentals, Inc.:
3,002,496 Term Loan, due 2/14/2011 3,056,916
1,987,431 Term Loan, Initial, due 2/14/2011 2,023,453
604,524 Tranche B, Credit-Linked Deposit, due 2/14/2011 614,159
997,500 Weight Watchers International, Inc. Designated Term Loan, due 3/31/2010 1,009,138
--------------
7,056,028
Telecommunications-- 2,500,000 Alaska Communications Systems Holdings, Inc. Term Loan, due 2/01/2012 2,526,952
4.1% WilTel Communications, LLC, Term Loan:
4,986,842 First Lien, due 6/30/2011 4,940,090
1,000,000 Second Lien, due 12/31/2010 950,625
--------------
8,417,667
Utilities--17.0% 5,000,000 Aquila, Inc. Term Loan, due 9/14/2009 (a) 5,237,500
2,000,000 Calpine Generating Co. LLC First Priority Term Loan, due 4/01/2009 2,054,166
4,500,000 Calpine Generating Company LLC Term Loan, due 3/12/2010 4,411,125
3,000,000 Calpine Saltend Term Loan, due 7/25/2005 3,105,000
El Paso Corp.:
750,000 Deposit Account, due 11/23/2009 762,949
1,245,000 Term Loan, due 11/23/2009 1,268,344
7,980,000 KGEN Tranche A Term Loan, due 8/05/2011 8,079,750
1,000,000 Northwestern Corp. Term Loan, due 11/01/2011 1,016,250
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Schedule of Investments (continued)
Face
Industry++ Amount Floating Rate Loan Interests++++ Value
Utilities $ 1,300,000 Reliant Energy, Inc. Term Loan, due 4/30/2010 $ 1,321,473
(concluded) 4,354,153 Riverside Energy Center Term Loan, due 6/24/2011 4,463,007
Rocky Mountain Energy Center, LLC:
339,834 Credit Linked Deposit, due 6/24/2011 348,330
3,093,210 Term Loan, due 6/24/2011 3,170,540
--------------
35,238,434
Total Investments in Floating Rate Loan Interests
(Cost--$195,485,369)--95.7% 198,394,873
Corporate Debt Obligations
Aerospace & 250,000 Standard Aero Holdings, Inc., 8.25% due 9/01/2014 (a) 268,750
Defense--0.6% 1,000,000 Transdigm, Inc., 8.375% due 7/15/2011 1,062,500
--------------
1,331,250
Airlines--0.4% 1,000,000 American Airlines, Inc. Series 2001-2, 7.80% due 4/01/2008 895,218
Automotive--0.5% 250,000 Cooper Standard Auto, 8.375% due 12/15/2014 (a) 236,250
1,000,000 Metaldyne Corp., 11% due 6/15/2012 875,000
--------------
1,111,250
Cable--U.S.--1.6% 2,000,000 Charter Communications Holdings II LLC, 10.25% due 9/15/2010 2,112,500
1,000,000 Mediacom Broadband LLC, 11% due 7/15/2013 1,106,250
--------------
3,218,750
Chemicals--1.8% 1,400,000 Crompton Corp., 8.71% due 8/01/2010 (b) 1,519,000
1,789,000 GEO Speciality Chemicals, Inc., 11.064% due 12/31/2009 (c) 1,909,758
250,000 PQ Corp., 7.50% due 2/15/2013 (a) 259,063
--------------
3,687,821
Consumer-- 100,000 Riddell Bell Holdings, Inc., 8.375% due 10/01/2012 (a) 103,500
Non-Durables--0.1%
Diversified 250,000 Universal City Florida Holding Co., 7.493% due 5/01/2010 (a)(b) 261,875
Media--0.1%
Energy-- 250,000 Aventine Renewable Energy Holdings, Inc., 8.501% due 12/15/2011 (a)(b) 257,500
Other--0.3% 250,000 Inergy LP, 6.875% due 12/15/2014 (a) 253,750
--------------
511,250
Gaming--3.7% 250,000 Choctaw Resort Development Enterprise, 7.25% due 11/15/2019 (a) 257,500
2,000,000 Majestic Star Casino LLC, 9.50% due 10/15/2010 2,117,500
Pinnacle Entertainment, Inc.:
1,000,000 8.25% due 3/15/2012 1,067,500
1,000,000 8.75% due 10/01/2013 1,100,000
3,000,000 Poster Financial Group, Inc., 8.75% due 12/01/2011 3,191,250
--------------
7,733,750
Health Care--0.3% 250,000 Select Medical Corp., 7.625% due 2/01/2015 (a) 258,438
325,000 U.S. Oncology, Inc., due 8/15/2012 (a) 355,063
--------------
613,501
Housing--1.1% 2,000,000 American Real Estate Partners LP, 7.125% due 2/15/2013 (a) 2,025,000
275,000 Nortek, Inc., 8.50% due 9/01/2014 280,500
--------------
2,305,500
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Schedule of Investments (continued)
Face
Industry++ Amount Corporate Debt Obligations Value
Information $ 1,000,000 Advanced Micro Devices, Inc., 7.75% due 11/01/2012 (a) $ 1,020,000
Technology--0.6% 250,000 Telcordia Technologies, 8.875% due 3/01/2013 (a) 258,125
--------------
1,278,125
Leisure--1.0% 1,000,000 Intrawest Corp., 7.50% due 10/15/2013 1,061,250
1,000,000 True Temper Sports, Inc., 8.375% due 9/15/2011 962,500
--------------
2,023,750
Manufacturing-- 1,000,000 EaglePicher Industries, Inc., 9.75% due 9/01/2013 820,000
0.9% 1,000,000 Invensys Plc, 9.875% due 3/15/2011 (a) 1,080,000
--------------
1,900,000
Packaging--1.4% 1,000,000 Pliant Corp., 13% due 6/01/2010 977,500
1,000,000 Tekni-Plex, Inc., 12.75% due 6/15/2010 890,000
1,000,000 US Can Corp., 12.375% due 10/01/2010 975,000
--------------
2,842,500
Paper--9.2% 2,000,000 Abitibi-Consolidated, Inc., 5.99% due 6/15/2011 (b) 2,060,000
7,475,000 Ainsworth Lumber Co. Ltd., 6.30% due 10/01/2010 (a)(b) 7,699,250
250,000 Boise Cascade LLC, 5.535% due 10/15/2012 (a)(b) 258,125
2,000,000 Bowater, Inc., 5.49% due 3/15/2010 (b) 2,065,000
Tembec Industries, Inc.:
5,000,000 8.625% due 6/30/2009 5,012,500
2,000,000 8.50% due 2/01/2011 2,000,000
--------------
19,094,875
Services--1.6% 250,000 Knowledge Learning Corp., Inc., 7.75% due 2/01/2015 (a) 251,250
3,000,000 United Rentals North America, Inc., 7.75% due 11/15/2013 3,007,500
--------------
3,258,750
Telecommunications-- 1,000,000 LCI International, Inc., 7.25% due 6/15/2007 975,000
0.9% 1,000,000 Terremark Worldwide Inc., 9% due 6/15/2009 927,500
--------------
1,902,500
Utilities--5.4% 1,000,000 The AES Corporation, 7.50% due 3/25/2014 1,015,000
3,000,000 Calpine Corp., 9.625% due 9/30/2014 (a) 3,101,250
1,000,000 Edison Mission Energy, 7.73% due 6/15/2009 1,075,000
3,500,000 Electricidad de Caracas Finance BV, 10.25% due 10/15/2014 (a) 3,701,250
2,000,000 Sierra Pacific Resources, 8.625% due 3/15/2014 2,210,000
--------------
11,102,500
Wireless 850,000 Dobson Cellular Systems, 7.493% due 11/01/2011 (a)(b) 896,750
Telecommunications-- Rogers Wireless Communications, Inc.:
1.8% 250,000 5.525% due 12/15/2010 (b) 263,750
2,275,000 7.25% due 12/15/2012 2,462,688
250,000 8% due 12/15/2012 270,938
--------------
3,894,126
Total Investments in Corporate Debt Obligations
(Cost--$67,244,643)--33.3% 69,070,791
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Schedule of Investments (concluded)
Shares
Industry++ Held Common Stocks Value
Chemicals--0.1% 10,732 GEO Specialty Chemicals, Inc. (d) $ 160,980
Total Investments in Common Stocks
(Cost--$0)--0.1% 160,980
Beneficial
Interest Short-Term Securities
$ 94,347 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I* 94,347
Total Investments in Short-Term Securities
(Cost--$94,347)--0.1% 94,347
Total Investments (Cost--$262,824,359**)--129.2% 267,720,991
Liabilities in Excess of Other Assets--(29.2%) (60,465,963)
--------------
Net Assets--100.0% $ 207,255,028
==============
(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.
(c) Convertible security.
(d) Non-income producing security.
++ 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. These industry
classifications are unaudited.
++++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.
* 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 $94,347 $149,000
** The cost and unrealized appreciation (depreciation) of investments as
of February 28, 2005, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 262,824,359
==============
Gross unrealized appreciation $ 5,514,653
Gross unrealized depreciation (618,021)
--------------
Net unrealized appreciation $ 4,896,632
==============
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Statement of Assets, Liabilities and Capital
As of February 28, 2005
Assets
Investments in unaffiliated securities, at value (identified cost--$262,730,012) $ 267,626,644
Investments in affiliated securities, at value (identified cost--$94,347) 94,347
Cash 316,021
Receivables:
Interest (including $605 from affiliates) $ 2,787,649
Securities sold 253,750
Commitment fees 13,614 3,055,013
---------------
Other assets 1,334
---------------
Total assets 271,093,359
---------------
Liabilities
Loans 60,300,000
Unfunded loan commitment 55,420
Payables:
Securities purchased 2,931,336
Dividends to shareholders 299,193
Investment adviser 122,192
Offering costs 25,862
Interest on loans 19,792
Other affiliates 1,790 3,400,165
---------------
Accrued expenses and other liabilities 82,746
---------------
Total liabilities 63,838,331
---------------
Net Assets
Net Assets $ 207,255,028
===============
Capital
Common Stock, par value $.10 per share; 200,000,000 shares authorized
(10,496,930 shares issued and outstanding) $ 1,049,693
Paid-in capital in excess of par 199,119,933
Undistributed investment income--net $ 1,126,098
Undistributed realized capital gains--net 1,099,532
Unrealized appreciation--net 4,859,772
---------------
Total accumulated earnings--net 7,085,402
---------------
Total capital--Equivalent to $19.74 net asset value per share of
Common Stock (market price--$19.44) $ 207,255,028
===============
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Statement of Operations
For the Period July 30, 2004++ to February 28, 2005
Investment Income
Interest (including $149,000 from affiliates) $ 7,471,306
Facility and other fees 90,647
---------------
Total income 7,561,953
---------------
Expenses
Investment advisory fees $ 1,012,947
Loan interest expense 447,303
Borrowing costs 75,000
Professional fees 65,930
Accounting services 48,879
Directors' fees and expenses 30,725
Transfer agent fees 17,821
Printing and shareholder reports 16,733
Custodian fees 10,612
Pricing services 6,280
Other 8,799
---------------
Total expenses before waiver 1,741,029
Waiver of expenses (204,027)
---------------
Total expenses after waiver 1,537,002
---------------
Investment income--net 6,024,951
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain on investments--net 1,230,145
Unrealized appreciation (depreciation) on:
Investments--net 4,896,632
Unfunded corporate loans--net (36,860) 4,859,772
--------------- ---------------
Total realized and unrealized gain--net 6,089,917
---------------
Net Increase in Net Assets Resulting from Operations $ 12,114,868
===============
++ Commencement of operations.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Statement of Changes in Net Assets
For the Period
July 30, 2004++
to February 28,
Increase (Decrease) in Net Assets: 2005
Operations
Investment income--net $ 6,024,951
Realized gain--net 1,230,145
Unrealized appreciation (depreciation)--net 4,859,772
---------------
Net increase in net assets resulting from operations 12,114,868
---------------
Dividends & Distributions to Shareholders
Dividends and distributions to shareholders on:
Investment income--net (4,898,853)
Realized gain--net (130,613)
---------------
Net decrease from dividends and distributions to shareholders (5,029,466)
---------------
Common Stock Transactions
Net proceeds from issuance of Common Stock 200,072,500
Value of shares issued to Common Stock shareholders in reinvestment of dividends
and distributions 322,024
Offering costs resulting from the issuance of Common Stock (324,906)
---------------
Net increase in net assets resulting from Common Stock transactions 200,069,618
---------------
Net Assets
Total increase in net assets 207,155,020
Beginning of period 100,008
---------------
End of period* $ 207,255,028
===============
* Undistributed investment income--net $ 1,126,098
===============
++ Commencement of operations.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Statement of Cash Flows
For the Period July 30, 2004++ to February 28, 2005
Cash Used for Operating Activities
Net increase in net assets resulting from operations $ 12,114,868
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided by operating activities:
Increase in receivables (2,787,649)
Increase in other assets (14,948)
Increase in other liabilities 245,080
Realized and unrealized gain--net (6,089,917)
Amortization of premium and discount (336,618)
Proceeds from sales and paydowns of long-term securities 58,126,298
Proceeds on other investment related transactions 88,071
Purchases of long-term securities (316,945,983)
Proceeds from sales of short-term investments--net 151,604
---------------
Net cash used for investing activities (255,449,194)
---------------
Cash Provided by Financing Activities
Cash receipts from issuance of Common Stock 200,072,500
Cash receipts from borrowings 87,780,000
Cash payments on borrowings (27,480,000)
Cash payments on offering costs (299,044)
Dividends and distributions paid to shareholders (4,408,249)
---------------
Net cash provided by financing activities 255,665,207
---------------
Cash
Net increase in cash 216,013
Cash at beginning of period 100,008
---------------
Cash at end of period $ 316,021
===============
Cash Flow Information
Cash paid for interest $ 427,511
===============
Non-Cash Financing Activities
Capital shares issued in reinvestment of dividends paid to shareholders $ 322,024
===============
++ Commencement of operations.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Financial Highlights
For the Period
July 30, 2004++
The following per share data and ratios have been derived to February 28,
from information provided in the financial statements. 2005
Per Share Operating Performance
Net asset value, beginning of period $ 19.10
---------------
Investment income--net*** .58
Realized and unrealized gain--net .57
---------------
Total from investment operations 1.15
---------------
Less dividends and distributions on:
Investment income--net (.47)
Realized gain--net (.01)
---------------
Total dividends and distributions (.48)
---------------
Offering costs resulting from the issuance of Common Stock (.03)
---------------
Net asset value, end of period $ 19.74
===============
Market price per share, end of period $ 19.44
===============
Total Investment Return**
Based on net asset value per share 5.97%+++
===============
Based on market price per share (.34%)+++
===============
Ratios to Average Net Assets
Expenses, net of waiver and excluding interest expense .92%*
===============
Expenses, net of waiver 1.30%*
===============
Expenses 1.48%*
===============
Investment income--net 5.11%*
===============
Leverage
Amount of borrowings, end of period (in thousands) $ 60,300
===============
Average amount of borrowings outstanding during the period (in thousands) $ 29,072
===============
Average amount of borrowings outstanding per share during the period*** $ 2.80
===============
Supplemental Data
Net assets, end of period (in thousands) $ 207,255
===============
Portfolio turnover 29.68%
===============
* 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.
*** Based on average shares outstanding.
++ Commencement of operations.
+++ Aggregate total investment return.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
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. 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 principally in
floating rate obligations of companies, including floating rate
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 floating rate loans
could be considered concentrated in financial institutions.
(b) Valuation of investments--Floating rate loans are valued in
accordance with guidelines established by the Fund's Board of
Directors. Floating rate 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 floating rate loans for which no reliable price quotes are
available, such floating rate loans may be valued by Loan Pricing
Corporation through the use of pricing matrixes to determine
valuations. If the pricing service does not provide a value for a
floating rate loan, the Investment Adviser will value the floating
rate 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., FEBRUARY 28, 2005
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. These periodic payments received or made by
the Fund are recorded in the accompanying Statement of Operations as
realized gains or losses, respectively. Gains or losses are also
realized upon termination of the swap agreements. Swaps are marked-
to-market daily based on dealer-supplied valuations and changes in
value are recorded as unrealized appreciation (depreciation). Risks
include changes in the returns of the underlying instruments,
failure of the counterparties to perform under the contracts' terms
and the possible lack of liquidity with respect to the swap
agreements.
(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.
(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 exdividend 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.
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Notes to Financial Statements (continued)
(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
phase, FAM elected to waive a portion of its management fee. For the
period July 30, 2004 to February 28, 2005, FAM earned fees of
$1,012,947, of which $204,027 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 February 28, 2005, MLPF&S received
gross fees from underwriting of $7,529,264 in connection with the
issuance of the Fund's Common Stock. In addition, the Fund
reimbursed MLPF&S $49,327 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 February 28, 2005, MLPF&S received
$2,500 in commissions on the execution of portfolio security
transactions for the Fund.
For the period July 30, 2004 to February 28, 2005, the Fund
reimbursed FAM $2,799 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 (including paydowns) of investments, excluding
short-term securities, for the period July 30, 2004 to February 28,
2005 were $319,877,319 and $58,380,048, respectively.
4. Common 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.
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Notes to Financial Statements (concluded)
Shares issued and outstanding during the period July 30, 2004 to
February 28, 2005, increased by 10,475,000 from shares sold and by
16,694 as a result of dividend reinvestment.
5. Short-Term Borrowings:
The Fund has entered into a revolving credit and security agreement
funded by a commercial paper asset securitization program with
Citicorp North America, Inc. ("Citicorp") as Agent, certain
secondary backstop lenders, and certain asset securitization
conduits as lenders (the "Lenders"). The credit facility has a
maximum limit of $100,000,000. Under the Citicorp program, the
conduits will fund advances to the Fund through the issuance of
highly rated commercial paper. As security for its obligations to
the Lenders under the revolving securitization facility, the Fund
has granted a security interest in substantially all of its assets
to and in favor of the Lenders. The interest rate on the Fund's
borrowings is based on the interest rate carried by the commercial
paper plus a program fee. The Fund pays additional borrowing costs
including a backstop commitment fee.
The weighted average annual interest rate was 2.62% and the average
borrowing was approximately $29,072,000 for the period July 30, 2004
to February 28, 2005.
6. Unfunded Corporate Loans:
As of February 28, 2005, the Fund had unfunded loan commitments of
approximately $6,096,000, which would be extended at the option of
the borrower pursuant to the following loan agreements:
Unfunded
Commitment
Borrower (in Thousands)
Aquila, Inc. $3,000
Intelsat Ltd. $1,143
Pinnacle Entertainment, Inc. $ 953
Vought Aircraft Industries, Inc. $1,000
7. Distributions to Shareholders:
The Fund paid an ordinary income dividend to holders of Common
Stock in the amount of $.095833 per share on March 31, 2005 to
shareholders of record on March 15, 2005.
The tax character of distributions paid during the period July 30,
2004 to February 28, 2005 was as follows:
2/28/2005
Distributions paid from:
Ordinary income $ 5,029,466
Total taxable distributions $ 5,029,466
As of February 28, 2005, the components of accumulated earnings on a
tax basis were as follows:
Undistributed ordinary income--net $ 2,225,630
Undistributed long-term capital gains--net --
-------------
Total undistributed earnings--net 2,225,630
Capital gain carryforward --
Unrealized gains--net 4,859,772
-------------
Total accumulated earnings--net $ 7,085,402
=============
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Floating Rate Income Strategies Fund II, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital, including the schedule of investments, of Floating Rate
Income Strategies Fund II, Inc. as of February 28, 2005, and the
related statements of operations, changes in net assets and cash
flows, and the financial highlights for the period July 30, 2004
(commencement of operations) to February 28, 2005. These financial
statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on
these financial statements and financial highlights based on our
audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and
financial highlights are free of material misstatement. The Fund is
not required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. An audit includes
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Fund's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. Our procedures included confirmation of securities
owned as of February 28, 2005, by correspondence with the custodian
and financial intermediaries; where replies were not received from
financial intermediaries, we performed other auditing procedures. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights
referred to above present fairly, in all material respects, the
financial position of Floating Rate Income Strategies Fund II, Inc.
as of February 28, 2005, the results of its operations, the changes
in its net assets, its cash flows, and its financial highlights for
the period July 30, 2004 through February 28, 2005, in conformity
with U.S. generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
April 22, 2005
Fund Certification (unaudited)
On February 8, 2005, the Fund filed its Chief Executive Officer
Certification for the prior year with the New York Stock Exchange
pursuant to Section 303A. 12(a) of the New York Stock Exchange
Corporate Governance Listing Standards. The Fund's Chief Executive
Officer and Chief Financial Officer Certifications pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the
Fund's Form N-CSR and are available on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Automatic Dividend Reinvestment Policy
The following description of the Fund's Automatic Dividend
Reinvestment Plan (the "Plan") is sent to you annually as required
by federal securities laws.
Pursuant to the Fund's Plan, unless a holder of Common Stock
otherwise elects, all dividend and capital gains distributions will
be automatically reinvested by EquiServe (the "Plan Agent"), as
agent for shareholders in administering the Plan, in additional
shares of Common Stock of the Fund. Holders of Common Stock who
elect not to participate in the Plan will receive all distributions
in cash paid by check mailed directly to the shareholder of record
(or, if the shares are held in street or other nominee name then
to such nominee) by EquiServe, as dividend paying agent. Such
participants may elect not to participate in the Plan and to receive
all distributions of dividends and capital gains in cash by sending
written instructions to EquiServe, as dividend paying agent, at the
address set forth below. Participation in the Plan is completely
voluntary and may be terminated or resumed at any time without
penalty by written notice if received by the Plan Agent not less
than ten days prior to any dividend record date; otherwise such
termination will be effective with respect to any subsequently
declared dividend or distribution.
Whenever the Fund declares an income dividend or capital gains
distribution (collectively referred to as "dividends") payable
either in shares or in cash, non-participants in the Plan will
receive cash and participants in the Plan will receive the
equivalent in shares of Common Stock. The shares will be acquired
by the Plan Agent for the participant's account, depending upon
the circumstances described below, either (i) through receipt of
additional unissued but authorized shares of Common Stock from the
Fund ("newly issued shares") or (ii) by purchase of outstanding
shares of Common Stock on the open market ("open-market purchases")
on the New York Stock Exchange or elsewhere. If, on the payment
date for the dividend, the net asset value per share of the Common
Stock is equal to or less than the market price per share of the
Common Stock plus estimated brokerage commissions (such conditions
being referred to herein as "market premium"), the Plan Agent will
invest the dividend amount in newly issued shares on behalf of the
participant. The number of newly issued shares of Common Stock to be
credited to the participant's account will be determined by dividing
the dollar amount of the dividend by the net asset value per share
on the date the shares are issued, provided that the maximum
discount from the then current market price per share on the date of
issuance may not exceed 5%. If, on the dividend payment date, the
net asset value per share is greater than the market value (such
condition being referred to herein as "market discount"), the Plan
Agent will invest the dividend amount in shares acquired on behalf
of the participant in open-market purchases.
In the event of a market discount on the dividend payment date, the
Plan Agent will have until the last business day before the next
date on which the shares trade on an "ex-dividend" basis or in no
event more than 30 days after the dividend payment date (the "last
purchase date") to invest the dividend amount in shares acquired in
open-market purchases. It is contemplated that the Fund will pay
monthly income dividends. Therefore, the period during which open-
market purchases can be made will exist only from the payment date
on the dividend through the date before the next "ex-dividend"
date, which typically will be approximately ten days. If, before
the Plan Agent has completed its open-market purchases, the market
price of a share of Common Stock exceeds the net asset value per
share, the average per share purchase price paid by the Plan Agent
may exceed the net asset value of the Fund's shares, resulting in
the acquisitions of fewer shares than if the dividend had been paid
in newly issued shares on the dividend payment date. Because of the
foregoing difficulty with respect to open-market purchases, the
Plan provides that if the Plan Agent is unable to invest the full
dividend amount in open-market purchases during the purchase period
or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will cease making open-market
purchases and will invest the uninvested portion of the dividend
amount in newly issued shares at the close of business on the last
purchase date determined by dividing the uninvested portion of the
dividend by the net asset value per share.
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account,
including information needed by shareholders for tax records. Shares
in the account of each Plan participant will be held by the Plan
Agent in non-certificated form in the name of the participant, and
each shareholder's proxy will include those shares purchased or
received pursuant to the Plan. The Plan Agent will forward all proxy
solicitation materials to participants and vote proxies for shares
held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of shareholders such as banks, brokers or nominees
which hold shares of others who are the beneficial owners, the
Plan Agent will administer the Plan on the basis of the number of
shares certified from time to time by the record shareholders as
representing the total amount registered in the record shareholder's
name and held for the account of beneficial owners who are to
participate in the Plan.
There will be no brokerage charges with respect to shares issued
directly by the Fund as a result of dividends or capital gains
distributions payable either in shares or in cash. However, each
participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open-market purchases in
connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not
relieve participants of any federal, state or local income tax that
may be payable (or required to be withheld) on such dividends.
Shareholders participating in the Plan may receive benefits not
available to shareholders not participating in the Plan. If the
market price plus commissions of the Fund's shares is above the net
asset value, participants in the Plan will receive shares of the
Fund at less than they could otherwise purchase them and will have
shares with a cash value greater than the value of any cash
distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants
will receive distributions in shares with a net asset value greater
than the value of any cash distribution they would have received on
their shares. However, there may be insufficient shares available in
the market to make distributions in shares at prices below the net
asset value. Also, since the Fund does not redeem shares, the price
on resale may be more or less than the net asset value.
The value of shares acquired pursuant to the Plan will generally be
excluded from gross income to the extent that the cash amount
reinvested would be excluded from gross income. If, when the Fund's
shares are trading at a premium over net asset value, the Fund
issues shares pursuant to the Plan that have a greater fair market
value than the amount of cash reinvested, it is possible that all or
a portion of such discount (which may not exceed 5% of the fair
market value of the Fund's shares) could be viewed as a taxable
distribution. If the discount is viewed as a taxable distribution,
it is also possible that the taxable character of this discount
would be allocable to all the shareholders, including shareholders
who do not participate in the Plan. Thus, shareholders who do not
participate in the Plan might be required to report as ordinary
income a portion of their distributions equal to their allocable
share of the discount.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the
Plan. There is no direct service charge to participants in the Plan;
however, the Fund reserves the right to amend the Plan to include a
service charge payable by the participants.
All correspondence concerning the Plan should be directed to the
Plan Agent at EquiServe, P.O. Box 43010, Providence, RI 02940-3010,
Telephone: 800-426-5523.
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Officers and Directors
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
Interested Director
Robert C. Doll, Jr.* President 2005 to President of MLIM/FAM-advised funds since 114 Funds None
P.O. Box 9011 and present 2005; President of MLIM and FAM since 2001; 150 Portfolios
Princeton, Director Co-Head (Americas Region) thereof from 2000
NJ 08543-9011 to 2001 and Senior Vice President from 1999
Age: 50 to 2001; President and Director of Princeton
Services, Inc. (Princeton Services) since 2001;
President of Princeton Administrators, L.P.
(Princeton Administrators) since 2001; Chief
Investment Officer of Oppenheimer Funds, Inc.
in 1999 and Executive Vice President thereof
from 1991 to 1999.
* Mr. Doll is a director, trustee or member of an advisory board of
certain other investment companies for which MLIM or FAM acts as
investment adviser. Mr. Doll is an "interested person," as described
in the Investment Company Act, of the Fund based on his current
positions with MLIM, FAM, Princeton Services and Princeton
Administrators, L.P. The Director's term is unlimited. Directors
serve until their resignation, removal or death, or until December
31 of the year in which they turn 72. As Fund President, Mr. Doll
serves at the pleasure of the Board of Directors.
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Officers and Directors (continued)
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director
Independent Directors*
Ronald W. Forbes Director 2004 to Professor Emeritus of Finance, School of 48 Funds None
P.O. Box 9095 present Business, State University of New York at 48 Portfolios
Princeton, Albany since 2000 and Professor thereof
NJ 08543-9095 from 1989 to 2000; International Consultant,
Age: 64 Urban Institute from 1995 to 1999.
Cynthia A. Montgomery Director 2004 to Professor, Harvard Business School since 48 Funds Newell
P.O. Box 9095 present 1989; Associate Professor, J.L. Kellogg 48 Portfolios Rubbermaid,
Princeton, Graduate School of Management, Northwestern Inc.
NJ 08543-9095 University from 1985 to 1989; Associate (manufacturing).
Age: 52 Professor, Graduate School of Business
Administration, University of Michigan from
1979 to 1985; Director, Harvard Business
School of Publishing since 2005.
Jean Margo Reid Director 2004 to Self-employed consultant since 2001; Counsel 48 Funds None
P.O. Box 9095 present of Alliance Capital Management (investment 48 Portfolios
Princeton, adviser) in 2000; General Counsel, Director
NJ 08543-9095 and Secretary of Sanford C. Bernstein & Co.,
Age: 59 Inc. (investment adviser/broker-dealer) from
1997 to 2000; Secretary, Sanford C. Bernstein
Fund, Inc. from 1994 to 2000; Director and
Secretary of SCB, Inc. since 1998; Director
and Secretary of SCB Partners, Inc. since
2000; Director of Covenant House from 2001
to 2004.
Roscoe S. Suddarth Director 2004 to President, Middle East Institute from 1995 48 Funds None
P.O. Box 9095 present to 2001; Foreign Service Officer, United 48 Portfolios
Princeton, States Foreign Service from 1961 to 1995;
NJ 08543-9095 Career Minister from 1989 to 1995; Deputy
Age: 69 Inspector General, U.S. Department of State
from 1991 to 1994; U.S. Ambassador to The
Hashemite Kingdom of Jordan from 1987 to 1990.
Richard R. West Director 2004 to Professor of Finance from 1984 to 1995, 48 Funds Bowne & Co.,
P.O. Box 9095 present Dean from 1984 to 1993 and since 1995 48 Portfolios Inc. (financial
Princeton, Dean Emeritus of New York University printers);
NJ 08543-9095 Leonard N. Stern School of Business Vornado
Age: 67 Administration. Realty Trust
(real estate
company);
Alexander's, Inc.
(real estate
company).
Edward D. Zinbarg Director 2004 to Self-employed financial consultant since 48 Funds None
P.O. Box 9095 present 1994; Executive Vice President of The 48 Portfolios
Princeton, Prudential Insurance Company of America
NJ 08543-9095 from 1988 to 1994; former Director of
Age: 70 Prudential Reinsurance Company and former
Trustee of the Prudential Foundation.
* The Director's term is unlimited. Directors serve until their
resignation, removal or death, or until December 31 of the year in
which they turn 72.
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
Officers and Directors (concluded)
Position(s) Length of
Held with Time
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years
Fund Officers*
Donald C. Burke Vice 2004 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof
P.O. Box 9011 President present since 1999; Senior Vice President and Treasurer of Princeton Services
Princeton, and since 1999 and Director since 2004; Vice President of FAMD since 1999;
NJ 08543-9011 Treasurer Vice President of MLIM and FAM from 1990 to 1997; Director of Taxation
Age: 44 of MLIM from 1990 to 2001; Vice President, Treasurer and Secretary of
the IQ Funds since 2004.
Joseph P. Matteo Vice 2004 to Director (Global Fixed Income) of MLIM since 2001; Vice President of MLIM
P.O. Box 9011 President present from 1997 to 2001.
Princeton,
NJ 08543-9011
Age: 41
Jaimin J. Patel Vice 2004 to Director (Global Fixed Income) of MLIM since 2005; Vice President of MLIM
P.O. Box 9011 President present from 2000 to 2005; Vice President at Chase Securities, Inc. from 1993 to
Princeton, 2000.
NJ 08543-9011
Age: 46
Jeffrey Hiller Chief 2004 to Chief Compliance Officer of the IQ Funds since 2004; Chief Compliance Officer
P.O. Box 9011 Compliance present of the MLIM/FAM-advised funds and First Vice President and Chief Compliance
Princeton, Officer Officer of MLIM (Americas Region) since 2004; Global Director of Compliance at
NJ 08543-9011 Morgan Stanley Investment Management from 2002 to 2004; Managing Director and
Age: 53 Global Director of Compliance at Citigroup Asset Management from 2000 to 2002;
Chief Compliance Officer at Soros Fund Management in 2000; Chief Compliance
Officer at Prudential Financial from 1995 to 2000; Senior Counsel in the
Commission's Division of Enforcement in Washington, D.C. from 1990 to 1995.
Alice A. Pellegrino Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from
P.O. Box 9011 present 1999 to 2002; Attorney associated with MLIM since 1997; Secretary of MLIM,
Princeton, FAM, FAMD and Princeton Services since 2004.
NJ 08543-9011
Age: 44
* Officers of the Fund serve at the pleasure of the Board of Directors.
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
Effective January 1, 2005, Terry K. Glenn, President and Director
and Kevin A. Ryan, Director of Floating Rate Income Strategies Fund
II, Inc. retired. The Fund's Board of Directors wishes Messrs. Glenn
and Ryan well in their retirements.
Effective January 1, 2005, Robert C. Doll, Jr. became President and
Director of the Fund.
FLOATING RATE INCOME STRATEGIES FUND II, INC., FEBRUARY 28, 2005
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 at
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., FEBRUARY 28, 2005
Item 2 - Code of Ethics - The registrant has adopted a code of
ethics, as of the end of the period covered by this report, that
applies to the registrant's principal executive officer, principal
financial officer and principal accounting officer, or persons
performing similar functions. A copy of the code of ethics
is available without charge upon request by calling toll-free
1-800-MER-FUND (1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's
board of directors has determined that (i) the registrant has
the following audit committee financial experts serving on its
audit committee and (ii) each audit committee financial expert
is independent: (1) Ronald W. Forbes, (2) Richard R. West, and
(3) Edward D. Zinbarg.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending February 28, 2005 - $42,000
Fiscal Year Ending February 29, 2004 - $0
(b) Audit-Related Fees -
Fiscal Year Ending February 28, 2005 - $9,600
Fiscal Year Ending February 29, 2004 - $0
The nature of the services include assurance and related services
reasonably related to the performance of the audit of financial
statements not included in Audit Fees.
(c) Tax Fees - Fiscal Year Ending February 28, 2005 - $5,700
Fiscal Year Ending February 29, 2004 - $0
The nature of the services include tax compliance, tax advice and
tax planning.
(d) All Other Fees - Fiscal Year Ending February 28, 2005 - $0
Fiscal Year Ending February 29, 2004 - $0
(e)(1) The registrant's audit committee (the "Committee") has
adopted policies and procedures with regard to the pre-approval of
services. Audit, audit-related and tax compliance services provided
to the registrant on an annual basis require specific pre-approval
by the Committee. The Committee also must approve other non-audit
services provided to the registrant and those non-audit services
provided to the registrant's affiliated service providers that
relate directly to the operations and the financial reporting of the
registrant. Certain of these non-audit services that the Committee
believes are a) consistent with the SEC's auditor independence rules
and b) routine and recurring services that will not impair the
independence of the independent accountants may be approved by the
Committee without consideration on a specific case-by-case basis
("general pre-approval"). However, such services will only be
deemed pre-approved provided that any individual project does not
exceed $5,000 attributable to the registrant or $50,000 for all of
the registrants the Committee oversees. Any proposed services
exceeding the pre-approved cost levels will require specific pre-
approval by the Committee, as will any other services not subject to
general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to
general pre-approval at the next regularly scheduled in-person board
meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending February 28, 2005 - $11,046,527
Fiscal Year Ending February 29, 2004 - Not Applicable
(h) The registrant's audit committee has considered and determined
that the provision of non-audit services that were rendered to
the registrant's investment adviser and any entity controlling,
controlled by, or under common control with the investment adviser
that provides ongoing services to the registrant that were not pre-
approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation
S-X is compatible with maintaining the principal accountant's
independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $945,000, 0%
Item 5 - Audit Committee of Listed Registrants - The following
individuals are members of the registrant's separately-designated
standing audit committee established in accordance with Section
3(a)(58)(A) of the Exchange Act (15 U.S.C. 78c(a)(58)(A)):
Ronald W. Forbes
Cynthia A. Montgomery
Jean Margo Reid (as of August 20, 2004)
Kevin A. Ryan (retired as of December 31, 2004)
Roscoe S. Suddarth
Richard R. West
Edward D. Zinbarg
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for
Closed-End Management Investment Companies -
Proxy Voting Policies and Procedures
Each Fund's Board of Directors/Trustees has delegated to Merrill
Lynch Investment Managers, L.P. and/or Fund Asset Management, L.P.
(the "Investment Adviser") authority to vote all proxies relating to
the Fund's portfolio securities. The Investment Adviser has adopted
policies and procedures ("Proxy Voting Procedures") with respect to
the voting of proxies related to the portfolio securities held in
the account of one or more of its clients, including a Fund.
Pursuant to these Proxy Voting Procedures, the Investment Adviser's
primary objective when voting proxies is to make proxy voting
decisions solely in the best interests of each Fund and its
shareholders, and to act in a manner that the Investment Adviser
believes is most likely to enhance the economic value of the
securities held by the Fund. The Proxy Voting Procedures are
designed to ensure that that the Investment Adviser considers the
interests of its clients, including the Funds, and not the interests
of the Investment Adviser, when voting proxies and that real (or
perceived) material conflicts that may arise between the Investment
Adviser's interest and those of the Investment Adviser's clients are
properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The
Committee is comprised of the Investment Adviser's Chief Investment
Officer (the "CIO"), one or more other senior investment
professionals appointed by the CIO, portfolio managers and
investment analysts appointed by the CIO and any other personnel the
CIO deems appropriate. The Committee will also include two non-
voting representatives from the Investment Adviser's Legal
department appointed by the Investment Adviser's General Counsel.
The Committee's membership shall be limited to full-time employees
of the Investment Adviser. No person with any investment banking,
trading, retail brokerage or research responsibilities for the
Investment Adviser's affiliates may serve as a member of the
Committee or participate in its decision making (except to the
extent such person is asked by the Committee to present information
to the Committee, on the same basis as other interested
knowledgeable parties not affiliated with the Investment Adviser
might be asked to do so). The Committee determines how to vote the
proxies of all clients, including a Fund, that have delegated proxy
voting authority to the Investment Adviser and seeks to ensure that
all votes are consistent with the best interests of those clients
and are free from unwarranted and inappropriate influences. The
Committee establishes general proxy voting policies for the
Investment Adviser and is responsible for determining how those
policies are applied to specific proxy votes, in light of each
issuer's unique structure, management, strategic options and, in
certain circumstances, probable economic and other anticipated
consequences of alternate actions. In so doing, the Committee may
determine to vote a particular proxy in a manner contrary to its
generally stated policies. In addition, the Committee will be
responsible for ensuring that all reporting and recordkeeping
requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires
a case-by-case determination. In such cases, the Committee may
elect not to adopt a specific voting policy applicable to that
issue. The Investment Adviser believes that certain proxy voting
issues require investment analysis - such as approval of mergers and
other significant corporate transactions - akin to investment
decisions, and are, therefore, not suitable for general guidelines.
The Committee may elect to adopt a common position for the
Investment Adviser on certain proxy votes that are akin to
investment decisions, or determine to permit the portfolio manager
to make individual decisions on how best to maximize economic value
for a Fund (similar to normal buy/sell investment decisions made by
such portfolio managers). While it is expected that the Investment
Adviser will generally seek to vote proxies over which the
Investment Adviser exercises voting authority in a uniform manner
for all the Investment Adviser's clients, the Committee, in
conjunction with a Fund's portfolio manager, may determine that the
Fund's specific circumstances require that its proxies be voted
differently.
To assist the Investment Adviser in voting proxies, the Committee
has retained Institutional Shareholder Services ("ISS"). ISS is an
independent adviser that specializes in providing a variety of
fiduciary-level proxy-related services to institutional investment
managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to the Investment
Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also
assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address
special circumstances that can arise in connection with proxy
voting. For instance, under the Proxy Voting Procedures, the
Investment Adviser generally will not seek to vote proxies related
to portfolio securities that are on loan, although it may do so
under certain circumstances. In addition, the Investment Adviser
will vote proxies related to securities of foreign issuers only on a
best efforts basis and may elect not to vote at all in certain
countries where the Committee determines that the costs associated
with voting generally outweigh the benefits. The Committee may at
any time override these general policies if it determines that such
action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote
proxies in respect of an issuer where an affiliate of the Investment
Adviser (each, an "Affiliate"), or a money management or other
client of the Investment Adviser (each, a "Client") is involved.
The Proxy Voting Procedures and the Investment Adviser's adherence
to those procedures are designed to address such conflicts of
interest. The Committee intends to strictly adhere to the Proxy
Voting Procedures in all proxy matters, including matters involving
Affiliates and Clients. If, however, an issue representing a non-
routine matter that is material to an Affiliate or a widely known
Client is involved such that the Committee does not reasonably
believe it is able to follow its guidelines (or if the particular
proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes
of ensuring that an independent determination is reached, retain an
independent fiduciary to advise the Committee on how to vote or to
cast votes on behalf of the Investment Adviser's clients.
In the event that the Committee determines not to retain an
independent fiduciary, or it does not follow the advice of such an
independent fiduciary, the powers of the Committee shall pass to a
subcommittee, appointed by the CIO (with advice from the Secretary
of the Committee), consisting solely of Committee members selected
by the CIO. The CIO shall appoint to the subcommittee, where
appropriate, only persons whose job responsibilities do not include
contact with the Client and whose job evaluations would not be
affected by the Investment Adviser's relationship with the Client
(or failure to retain such relationship). The subcommittee shall
determine whether and how to vote all proxies on behalf of the
Investment Adviser's clients or, if the proxy matter is, in their
judgment, akin to an investment decision, to defer to the applicable
portfolio managers, provided that, if the subcommittee determines to
alter the Investment Adviser's normal voting guidelines or, on
matters where the Investment Adviser's policy is case-by-case, does
not follow the voting recommendation of any proxy voting service or
other independent fiduciary that may be retained to provide research
or advice to the Investment Adviser on that matter, no proxies
relating to the Client may be voted unless the Secretary, or in the
Secretary's absence, the Assistant Secretary of the Committee
concurs that the subcommittee's determination is consistent with the
Investment Adviser's fiduciary duties
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain
recurring proxy issues that are not expected to involve unusual
circumstances. These policies are guidelines only, and the
Investment Adviser may elect to vote differently from the
recommendation set forth in a voting guideline if the Committee
determines that it is in a Fund's best interest to do so. In
addition, the guidelines may be reviewed at any time upon the
request of a Committee member and may be amended or deleted upon the
vote of a majority of Committee members present at a Committee
meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
* Proposals related to the composition of the Board of Directors of
issuers other than investment companies. As a general matter, the
Committee believes that a company's Board of Directors (rather than
shareholders) is most likely to have access to important, nonpublic
information regarding a company's business and prospects, and is
therefore best-positioned to set corporate policy and oversee
management. The Committee, therefore, believes that the foundation
of good corporate governance is the election of qualified,
independent corporate directors who are likely to diligently
represent the interests of shareholders and oversee management of
the corporation in a manner that will seek to maximize shareholder
value over time. In individual cases, the Committee may look at a
nominee's history of representing shareholder interests as a
director of other companies or other factors, to the extent the
Committee deems relevant.
* Proposals related to the selection of an issuer's independent
auditors. As a general matter, the Committee believes that
corporate auditors have a responsibility to represent the interests
of shareholders and provide an independent view on the propriety of
financial reporting decisions of corporate management. While the
Committee will generally defer to a corporation's choice of auditor,
in individual cases, the Committee may look at an auditors' history
of representing shareholder interests as auditor of other companies,
to the extent the Committee deems relevant.
* Proposals related to management compensation and employee
benefits. As a general matter, the Committee favors disclosure of
an issuer's compensation and benefit policies and opposes excessive
compensation, but believes that compensation matters are normally
best determined by an issuer's board of directors, rather than
shareholders. Proposals to "micro-manage" an issuer's compensation
practices or to set arbitrary restrictions on compensation or
benefits will, therefore, generally not be supported.
* Proposals related to requests, principally from management, for
approval of amendments that would alter an issuer's capital
structure. As a general matter, the Committee will support requests
that enhance the rights of common shareholders and oppose requests
that appear to be unreasonably dilutive.
* Proposals related to requests for approval of amendments to an
issuer's charter or by-laws. As a general matter, the Committee
opposes poison pill provisions.
* Routine proposals related to requests regarding the formalities of
corporate meetings.
* Proposals related to proxy issues associated solely with holdings
of investment company shares. As with other types of companies, the
Committee believes that a fund's Board of Directors (rather than its
shareholders) is best-positioned to set fund policy and oversee
management. However, the Committee opposes granting Boards of
Directors authority over certain matters, such as changes to a
fund's investment objective, that the Investment Company Act
envisions will be approved directly by shareholders.
* Proposals related to limiting corporate conduct in some manner
that relates to the shareholder's environmental or social concerns.
The Committee generally believes that annual shareholder meetings
are inappropriate forums for discussion of larger social issues, and
opposes shareholder resolutions "micromanaging" corporate conduct or
requesting release of information that would not help a shareholder
evaluate an investment in the corporation as an economic matter.
While the Committee is generally supportive of proposals to require
corporate disclosure of matters that seem relevant and material to
the economic interests of shareholders, the Committee is generally
not supportive of proposals to require disclosure of corporate
matters for other purposes.
Item 8 - Portfolio Managers of Closed-End Management Investment
Companies - Not Applicable at this time
Item 9 - Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 11 - Controls and Procedures
11(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.
11(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 second 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 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(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/ Robert C. Doll, Jr._______
Robert C. Doll, Jr.,
Chief Executive Officer of
Floating Rate Income Strategies Fund II, Inc.
Date: April 22, 2005
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/ Robert C. Doll, Jr.________
Robert C. Doll, Jr.,
Chief Executive Officer of
Floating Rate Income Strategies Fund II, Inc.
Date: April 22, 2005
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
Floating Rate Income Strategies Fund II, Inc.
Date: April 22, 2005