UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21464
Name of Fund: Floating Rate Income Strategies Fund II, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: 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: 02/28/06
Date of reporting period: 03/01/05 - 08/31/05
Item 1 - Report to Stockholders
Floating Rate
Income Strategies
Fund II, Inc.
Semi-Annual Report
August 31, 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
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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 leveraging through
borrowings or issuance of short-term debt securities or shares of Preferred
Stock. The concept of leveraging is based on the premise that the cost of
assets to be obtained from leverage will be based on short-term interest
rates, which normally will be lower than the income earned by the Fund on its
longer-term portfolio investments. To the extent that the total assets of the
Fund (including the assets obtained from leverage) are invested in higher-
yielding portfolio investments, the Fund's Common Stock shareholders will be
the beneficiaries of the incremental yield.
Leverage creates risks for holders of Common Stock including the likelihood of
greater net asset value and market price volatility. In addition, there is the
risk that fluctuations in interest rates on borrowings (or in the dividend
rates on any Preferred Stock, if the Fund were to issue the Preferred Stock)
may reduce the Common Stock's yield and negatively impact its market price. If
the income derived from securities purchased with assets received from
leverage exceeds the cost of leverage, the Fund's net income will be greater
than if leverage had not been used. Conversely, if the income from the
securities purchased is not sufficient to cover the cost of leverage, the
Fund's net income will be less than if leverage had not been used, and
therefore the amount available for distribution to Common Stock shareholders
will be reduced.
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 2005
A Letter From the President
Dear Shareholder
Amid what we've coined a "muddle through" year for the financial markets, the
major market benchmarks managed to post positive results for the current
reporting period:
Total Returns as of August 31, 2005 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) +2.33% +12.56%
Small-cap U.S. equities (Russell 2000 Index) +5.75% +23.10%
International equities (MSCI Europe Australasia Far East Index) +1.98% +23.58%
Fixed income (Lehman Brothers Aggregate Bond Index) +2.85% + 4.15%
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) +2.85% + 5.31%
High yield bonds (Credit Suisse First Boston High Yield Index) +1.35% + 8.98%
Since June 2004, the Federal Reserve Board (the Fed) has tirelessly advanced
its interest rate-hiking program, bringing the federal funds rate to 3.5% by
August 31 (and to 3.75% on September 20). Economists and investors have
struggled to project the Fed's future moves, vacillating from expectations for
an impending end to monetary tightening to fears that the central bank may
increase interest rates more than is necessary to moderate economic growth and
keep inflation in check. Most recently, the devastation of Hurricane Katrina
added a new element of ambiguity in terms of its impact on the economy and Fed
sentiment. Many now believe the Fed will suspend its interest rate-hiking
campaign at some point this year.
Equity market returns over the past several months have reflected a degree of
investor uncertainty. After a strong finish to 2004, the S&P 500 Index posted
gains in four of the first eight months of 2005. Up to this point, strong
corporate earnings reports and low long-term bond yields have worked in favor
of equities. Factors that pose the greatest risks to stocks include record-
high oil prices, continued interest rate hikes and the possibility for
disappointing earnings for the remainder of the year.
Fixed income markets have fared relatively well in the face of monetary
tightening. As the short end of the yield curve moved in concert with Fed
interest rate hikes, long-term bond yields remained low, perpetuating the
yield curve flattening trend. Because bond prices move in the opposite
direction of yields, the result has been that longer-term bonds have
outperformed short-term bonds. At period end, the spread between two-year
and 10-year Treasury yields was just 18 basis points (.18%).
Financial markets are likely to face continued crosscurrents for the remainder
of 2005, particularly as the economy digests the impact of Hurricane Katrina.
Nevertheless, opportunities do exist and we encourage you to work with your
financial advisor to diversify your portfolio among a variety of asset types.
This can help to diffuse risk while also tapping into the potential benefits
of a broader range of investment alternatives. As always, we thank you for
trusting Merrill Lynch Investment Managers with your investment assets.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Director
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 2005
A Discussion With Your Fund's Portfolio Managers
As the period came to a close, we began to focus our investments on higher-
quality issues and those less sensitive to interest rate risk.
Describe market conditions during the past six months.
The leveraged loan market generally remained strong throughout the six-month
period ended August 31, 2005. Following a decline in May related to a downturn
in high yield bonds, the market rebounded sharply in June, and continued to
rally during the remainder of the summer months.
Spreads for new issues over three-month London InterBank Offered Rate (LIBOR)
continued to tighten during the period, reflecting strong investor demand for
leveraged loan products. According to Standard & Poor's Leveraged Commentary &
Data (LCD), the average spread for new-issue institutional tranches rated
BB/BB- was 178 basis points (1.78%) in August 2005, down from 200 basis points
in February 2005. The average new-issue spread for institutional tranches
rated B+/B, however, ended the period at 250 basis points, four basis points
lower than its level at the end of February.
Continued increases in the LIBOR during the period enabled us to increase the
Fund's dividend in July. Specifically, the three-month LIBOR stood at 3.87% at
period-end, compared to 2.92% at the beginning of the period. At this point,
it appears the Federal Reserve Board is getting close to ending its bias
toward a more restrictive monetary policy and, consequently, we do not expect
the LIBOR to rise much further.
The default rate for leveraged loans remained relatively low and stable
throughout the six-month period (including the market downturn in May) as
fundamental credit quality generally remained strong across the market. The
Standard & Poor's LCD lagging 12-month default rate, by principal amount, was
1.37% on February 28, 2005, versus 1.43% on August 31, 2005. The default rate
remained within a tight range of 1.26% - 1.54% throughout the period.
In March and April, high yield bonds, in which the Fund may invest up to 20%
of its assets, experienced price declines as investors anticipated the major
rating agencies would downgrade General Motors Corporation's debt to below
investment grade. As credit quality concerns began to stabilize in May, the
high yield market rebounded and continued to post gains through the summer.
How did the Fund perform during the period in light of the existing market
conditions?
For the six-month period ended August 31, 2005, the Common Stock of Floating
Rate Income Strategies Fund II, Inc. had net annualized yields of 6.13% and
6.73%, based on a period-end per share net asset value of $19.56 and a per
share market price of $17.82, respectively, and $0.604 per share income
dividends. For the same period, the total investment return on the Fund's
Common Stock was +2.35%, based on a change in per share net asset value from
$19.74 to $19.56, 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 +2.56%.
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. AUGUST 31, 2005
What factors most influenced Fund performance?
Our holdings in forest products companies detracted somewhat from the Fund's
performance relative to the benchmark. We reduced the Fund's exposure to this
sector from 12.7% of net assets to 7.3% during the period.
Conversely, Fund performance benefited from strong security selection in the
utility sector, in which the portfolio has its largest absolute weighting. We
continue to maintain our overweight position versus the benchmark in this
sector.
Notably, the Fund did not own any obligations that defaulted or entered into
bankruptcy during the past six months.
What changes were made to the portfolio during the period?
As mentioned earlier, we significantly reduced the Fund's exposure to forest
products in view of changing fundamentals within the sector. Several factors
had a negative effect on forest products companies, including a strengthening
Canadian dollar, rising energy costs, and a negative supply/demand dynamic as
capacity increased with the opening of new plants but newsprint demand
declined.
We trimmed the percentage of holdings rated Caa1 or below in an effort to move
the credit quality of the portfolio toward a more conservative stance
following the summer rally in the high yield bond market. We intend to
continue moving the Fund in this direction going forward. The portfolio's
weighting in issues rated Caa1 or below by Moody's was reduced from
approximately 6.8% on February 28, 2005 to 3.5% at the end of the period.
Finally, we also began decreasing the Fund's exposure to the utility sector in
keeping with our benchmark's reduced weighting in this sector. Despite the
decreased exposure, we still expect to maintain an overweight position in
utilities because these companies consistently generate positive cash flow and
have strong asset bases. In addition, in an effort to reduce the portfolio's
exposure to interest rate risk, we are increasing the Fund's weighting in
floating rate instruments while trimming our positions in fixed rate
securities.
How would you characterize the Fund's position at the close of the period?
The Fund's average credit quality slightly improved over the six-month period.
This resulted in part from the reduction of our holdings rated Caa1 and below,
and in the diminished weighting in the forest products sector. In addition, we
continue to trim the portfolio's exposure to fixed rate obligations, which
should lower the potential for net asset value volatility arising from
potential interest rate fluctuations.
Joseph P. Matteo
Vice President and Co-Portfolio Manager
Jaimin Patel
Vice President and Co-Portfolio Manager
September 16, 2005
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 2005
Portfolio Information
As of August 31, 2005
Percent of
Ten Largest Holdings Net Assets
PanAmSat Corp. Tranche B Term Loan 1,
5.65% due 8/20/2011 3.9%
Calpine Generating Co., LLC Term Loan, 9.26%
due 3/12/2010 3.2
Charter Communications Operating LLC
Tranche B Term Loan, 6.93% due
4/07/2011 2.9
Century Cable Holdings, LLC Discretionary
Term Loan, 8.50% due 12/31/2009 2.9
Metro-Goldwyn-Mayer Studios, Inc. Term Loan B,
5.74% due 4/30/2011 2.7
Aquila, Inc. Term Loan, 9.171% due 9/14/2009 2.5
Graham Packaging Co. LP Term Loan B,
5.938 - 6.063% due 10/07/2011 2.5
Majestic Star Casino LLC, 9.50% due
10/15/2010 2.5
KGen LLC Tranche A Term Loan, 6.115%
due 8/05/2011 2.4
Metaldyne Corp. Term Loan D, 8.016%
due 12/31/2009 2.4
Percent of
Five Largest Industries Net Assets
Utility 22.0%
Cable--U.S. 20.6
Gaming 11.3
Housing 6.5
Telecommunications 6.5
For Fund compliance purposes, the Fund's industry classifications
refer to 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 29.7%
B/B 58.0
CCC/Caa 7.1
NR (Not Rated) 5.0
Other* 0.2
* Includes portfolio holdings in common stocks and short-term
investments.
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 2005
Schedule of Investments (in U.S. dollars)
Face
Amount Floating Rate Loan Interests++ Value
Aerospace & Defense--5.4%
$ 1,662,500 K&F Industries, Inc. Term Loan, 6.15 - 6.17%
due 11/18/2012 $ 1,692,009
4,000,000 MRO Acquisitions Corp. Second Lien Term
Loan, 9.32% due 8/15/2011 4,070,000
1,200,000 Mid-Western Aircraft Systems, Inc. Tranche 2
Term Loan B, 5.961% due 12/31/2011 1,220,400
2,076,923 Standard Aero Holdings Term Loan,
5.72 - 5.919% due 8/24/2012 2,106,779
Vought Aircraft Industries, Inc.:
1,672,094 Term Loan, 6.17% due 12/22/2011 1,698,848
320,000 Tranche B Line of Credit Deposit, 5.02%
due 12/22/2010 325,667
--------------
11,113,703
Automotive--2.4%
4,981,179 Metaldyne Corp. Term Loan D, 8.016% due
12/31/2009 4,960,945
Broadcasting--3.5%
2,000,000 Entravision Communications Corp. Term Loan B,
5.24% due 2/24/2012 2,008,750
Spanish Broadcasting System, Inc.:
2,500,000 Tranche 2 First Lien Term Loan B, 5.49%
due 6/10/2012 2,539,063
2,500,000 Tranche 3 Second Lien Term Loan C,
7.51% due 6/10/2013 2,537,500
--------------
7,085,313
Cable--International--1.0%
2,000,000 NTL Investment Holdings, Ltd. Term Loan B2,
6.41% due 4/14/2012 2,017,166
Cable--U.S.--19.1%
Century Cable Holdings LLC:
6,000,000 Discretionary Term Loan, 8.50%
due 12/31/2009 5,963,250
3,000,000 Term Loan B, 8.50% due 6/30/2009 2,983,125
1,980,000 Bragg Communications, Inc. Term Loan B,
5.81% due 9/01/2011 2,003,512
5,937,581 Charter Communications Operating LLC
Tranche B Term Loan, 6.83 - 6.93%
due 4/07/2011 5,964,353
4,228,723 Insight Midwest Holdings LLC Term Loan A,
5.125% due 6/30/2009 4,243,114
1,990,000 Intelsat Ltd. Term Loan, 5.25% due 7/28/2011 2,009,279
2,790,000 MCC Iowa, LLC Tranche A Term Loan,
4.60 - 4.80% due 3/31/2010 2,781,281
3,184,000 Mediacom Illinois LLC Tranche A
Term Loan, 4.98 - 6.06% due 3/31/2013 3,235,243
7,939,759 PanAmSat Corp. Tranche B-1 Term Loan,
5.65% due 8/20/2011 8,041,983
1,995,000 Rainbow National Services LLC Term Loan B,
6.438% due 3/31/2012 2,013,081
--------------
39,238,221
Face
Amount Floating Rate Loan Interests++ Value
Chemicals--4.6%
$ 2,530,870 Kraton Polymers Term Loan, 6.125 - 6.50%
due 12/16/2010 $ 2,574,371
Rockwood Specialties Group, Inc., Tranche B
Term Loan:
1,726,250 5.93% due 9/15/2012 1,758,258
3,000,000 5.93% due 12/10/2012 3,055,626
2,000,000 Wellman, Inc. Second Lien Term Loan,10.46%
due 2/10/2010 2,030,000
--------------
9,418,255
Consumer--Non-Durables--1.2%
969,000 Camelbak Products LLC First Lien Term
Loan, 6.29 - 6.71% due 8/04/2011 965,972
1,500,000 Culligan International Co. Term Loan, 6.071%
due 9/30/2011 1,523,438
--------------
2,489,410
Diversified Media--3.6%
5,500,000 MGM Holdings II, Inc. Term Loan B,
5.74% due 4/08/2012 5,575,625
1,826,205 RH Donnelley Tranche D Term Loan,
5.11 - 5.30% due 8/30/2011 1,853,510
--------------
7,429,135
Energy--Other--0.5%
1,000,000 Epco Holdings, Inc. Term Loan B Tranche 3,
5.84% due 8/18/2010 1,017,656
Gaming--6.3%
1,995,000 Herbst Gaming, Inc. Term Loan, 5.38 - 5.49%
due 10/08/2010 2,025,549
3,277,273 MGM Mirage Revolving Line of Credit, 0 - 5.06%
due 4/08/2012 3,241,770
975,652 Mississippi Band of Choctaw Indians Term Loan,
5.63 - 5.91% due 11/04/2011 987,238
Pinnacle Entertainment, Inc.:
733,333 Delay Draw Term Loan, 6.67% due 8/31/2005 733,333
1,100,000 Term Loan, 6.67% due 8/27/2010 1,113,063
Trump Entertainment Resorts Holdings, LP:
287,000 Revolving Line of Credit, 6.13 - 6.21%
due 5/20/2010 279,825
1,000,000 Term Loan B-1, 5.93 - 6.14% due 5/01/2012 1,017,500
Venetian Casino Resort:
1,000,000 Term B Delayed Draw Term Loan, 5.462%
due 6/15/2011 1,012,734
2,400,000 Term Loan B, 5.24% due 6/15/2011 2,430,562
--------------
12,841,574
Health Care--3.5%
1,985,000 Community Health Systems, Inc. Term Loan,
5.42 - 5.61% due 8/19/2011 2,014,981
HealthSouth Corp.:
1,575,000 Term Loan, 6.15% due 3/08/2010 1,591,243
425,000 Tranche B Term Loan, 5.84%
due 3/08/2010 429,383
3,000,000 Psychiatric Solutions, Inc. Term Loan B, 5.73%
due 7/01/2012 3,048,750
--------------
7,084,357
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 2005
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Floating Rate Loan Interests++ Value
Housing--6.0%
$ 2,750,000 Associated Materials, Inc. Term Loan,
5.83 - 5.90% due 8/29/2010 $ 2,774,062
2,289,104 General Growth Properties, Inc. Term Loan B,
5.67% due 11/12/2008 2,318,766
Headwaters, Inc.:
3,112,541 First Lien Term Loan, 5.87 - 7.75%
due 4/30/2011 3,156,636
333,333 Second Lien Term Loan, 9.02%
due 9/01/2012 342,778
2,269,146 Lake at Las Vegas Joint Venture First Lien Term
Loan, 8% due 2/01/2010 2,302,616
1,485,000 Nortek, Inc. Term Loan, 5.91 - 7.75%
due 8/27/2011 1,504,800
--------------
12,399,658
Information Technology--1.8%
1,327,500 Fidelity National Information Solutions, Inc.
Term Loan B, 5.321% due 3/09/2013 1,330,819
2,388,000 Viasystems, Inc. Replacement Tranche B Term
Loan, 7.64% due 9/30/2009 2,405,910
--------------
3,736,729
Leisure--2.9%
2,000,000 24 Hour Fitness Worldwide, Inc. Term Loan,
6.78% due 6/08/2012 2,034,376
3,997,841 True Temper Sports, Inc., Term Loan B,
6.53 - 8.50% due 3/15/2011 3,997,841
--------------
6,032,217
Manufacturing--4.9%
3,841,684 Amsted Industries, Inc. Term Loan B-1,
6 - 6.33% due 10/15/2010 3,900,911
2,634,712 Blount, Inc. US Term Loan B, 5 - 7.25%
due 8/09/2010 2,680,820
1,477,101 GenTek, Inc. First Lien Term Loan, 6.01 - 6.54%
due 2/28/2011 1,491,318
1,995,000 Metokote Corp. Second Lien Term Loan,
6.49 - 6.68% due 11/27/2011 2,007,469
--------------
10,080,518
Packaging--3.0%
Berry Plastics Corp.:
426,144 Term Loan, 5.60 - 5.766% due 12/02/2011 433,388
573,856 Tranche 2 Term Loan B, 5.39 - 5.60%
due 12/02/2011 583,612
4,975,000 Graham Packaging Term Loan B,
5.938 - 6.063% due 10/07/2011 5,061,028
--------------
6,078,028
Paper--1.5%
1,097,250 Boise Cascade Holdings LLC Tranche D Term
Loan, 5.25% due 10/28/2011 1,115,149
Smurfit Stone Container Corp.:
1,521,765 Term Loan B, 5.375 - 5.563%
due 11/01/2011 1,544,275
468,235 Tranche C, 5.375 - 5.563%
due 11/01/2011 475,161
--------------
3,134,585
Retail--0.7%
1,366,874 General Nutrition Centers, Inc. Tranche B Term
Loan, 6.51 - 6.67% due 12/05/2009 1,383,960
Face
Amount Floating Rate Loan Interests++ Value
Service--2.1%
United Rentals, Inc.:
$ 1,974,862 Initial Term Loan, 5.92% due 2/14/2011 $ 1,998,313
495,190 Term Loan, 5.92% due 2/14/2011 501,070
99,261 Tranche B Credit Linked Deposit, 5.59%
due 2/14/2011 100,440
Wastequip, Inc.:
250,000 Second Lien Term Loan, 9.67%
due 7/15/2012 253,750
500,000 Tranche 2 Term Loan B, 6.17%
due 7/15/2011 507,500
992,500 Weight Watchers International, Inc.
Designated Term Loan, 5.114%
due 3/31/2010 1,003,666
--------------
4,364,739
Telecommunications--4.9%
Alaska Communications Systems Holdings, Inc.:
2,500,000 Term Loan, 5.59% due 2/01/2012 2,536,457
3,000,000 Term Loan B, 5.59% due 2/01/2012 3,043,749
WilTel Communications LLC:
3,460,526 First Lien Term Loan, 6.99% due 6/30/2010 3,510,991
1,000,000 Second Lien Term Loan, 9.24%
due 12/31/2010 992,500
--------------
10,083,697
Utility--19.1%
5,000,000 Aquila, Inc. Term Loan, 9.171% due 9/14/2009 5,225,000
Calpine Generating Co. LLC:
2,000,000 First Priority Term Loan, 7.26%
due 4/01/2009 2,052,678
6,500,000 Term Loan, 9.26% due 3/12/2010 6,534,535
1,866,498 Cogentrix Delaware Holdings, Inc. Term Loan,
5.24% due 4/14/2012 1,890,607
Covanta Energy Corp.:
3,600,000 Funded Letter of Credit, 3.36 - 6.46%
due 6/24/2012 3,663,000
1,700,000 Second Lien Term Loan, 8.96%
due 6/24/2013 1,712,750
El Paso Corp.:
750,000 Deposit Account, 5.17% due 11/23/2009 760,052
1,235,000 Term Loan, 6.438% due 11/23/2009 1,254,897
4,980,000 Kgen LLC Tranche A Term Loan, 6.115%
due 8/05/2011 4,967,550
2,000,000 Primary Energy Tlb Lb Pr, 5.641%
due 8/23/2012 2,023,750
1,293,500 Reliant Resources, Inc. Term Loan,
6.016 - 6.089% due 4/30/2010 1,306,738
4,296,816 Riverside Energy Center Term Loan, 7.93%
due 6/24/2011 4,447,205
Rocky Mountain Energy Center LLC:
339,834 Credit Linked Deposit, 7.93% due 6/24/2011 351,728
2,973,506 Term Loan, 7.93% due 6/24/2011 3,077,579
--------------
39,268,069
Total Floating Rate Loan Interests
(Cost--$198,527,802)--98.0% 201,257,935
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 2005
Schedule of Investments (continued) (in U.S. dollars)
Face
Amount Corporate Bonds Value
Aerospace & Defense--0.5%
$ 1,000,000 Transdigm, Inc., 8.375% due 7/15/2011 $ 1,060,000
Airlines--0.9%
2,000,000 American Airlines, Inc. Class C, 7.80%
due 4/01/2008 1,932,953
Broadcasting--2.1%
1,200,000 Emmis Communications Corp., 9.314%
due 6/15/2012 (b) 1,215,000
3,000,000 Paxson Communications Corp., 6.349%
due 1/15/2010 (a)(b) 3,000,000
--------------
4,215,000
Cable--U.S.--1.5%
2,000,000 Charter Communications Holdings II LLC,
10.25% due 9/15/2010 2,065,000
1,000,000 Mediacom Broadband LLC,11%
due 7/15/2013 1,091,250
--------------
3,156,250
Chemicals--0.8%
1,646,000 GEO Specialty Chemicals, Inc.,12.016%
due 12/31/2009 (c) 1,728,300
Diversified Media--0.1%
250,000 Universal City Florida Holding Co. I, 8.443%
due 5/01/2010 (b) 261,875
Food & Tobacco--1.1%
250,000 AmeriQual Group LLC, 9% due 4/01/2012 (a) 258,750
2,000,000 Landry's Restaurants, Inc. Series B, 7.50%
due 12/15/2014 1,955,000
--------------
2,213,750
Gaming--5.0%
5,000,000 Majestic Star Casino LLC, 9.50%
due 10/15/2010 5,037,500
Pinnacle Entertainment, Inc.:
1,000,000 8.25% due 3/15/2012 1,010,000
1,000,000 8.75% due 10/01/2013 1,035,000
3,000,000 Poster Financial Group, Inc., 8.75%
due 12/01/2011 3,082,500
--------------
10,165,000
Health Care--2.2%
2,643,000 Alpharma, Inc., 3% due 6/01/2006 (c) 3,419,381
1,000,000 US Oncology Holdings, Inc., 8.62%
due 3/15/2015 (a)(b) 1,000,000
--------------
4,419,381
Housing--0.4%
1,000,000 Building Materials Corp. of America, 8%
due 12/01/2008 997,500
Face
Amount Corporate Bonds Value
Information Technology--3.7%
$ 1,000,000 Cypress Semiconductor Corp., 1.25%
due 6/15/2008 (c) $ 1,192,500
MagnaChip Semiconductor SA:
2,000,000 6.66% due 12/15/2011 (b) 2,010,000
250,000 6.875% due 12/15/2011 244,375
2,000,000 8% due 12/15/2014 1,880,000
2,000,000 Quantum Corp., 4.375% due 8/01/2010 (c) 1,945,000
250,000 Telcordia Technologies Inc.,10%
due 3/15/2013 (a) 237,500
--------------
7,509,375
Leisure--0.5%
1,000,000 True Temper Sports, Inc., 8.375%
due 9/15/2011 970,000
Manufacturing--0.7%
1,000,000 Invensys Plc, 9.875% due 3/15/2011 (a) 1,005,000
342,000 Medis Technologies Ltd., 6%
due 7/15/2010 (a)(c) 345,420
--------------
1,350,420
Packaging--0.8%
1,000,000 Pliant Corp.,13% due 6/01/2010 720,000
1,000,000 US Can Corp.,12.375% due 10/01/2010 987,500
--------------
1,707,500
Paper--4.2%
2,000,000 Abitibi-Consolidated, Inc., 6.91%
due 6/15/2011 (b) 2,000,000
2,000,000 Ainsworth Lumber Co. Ltd., 7.24%
due 10/01/2010 (b) 1,980,000
250,000 Boise Cascade LLC, 6.474%
due 10/15/2012 (b) 251,875
2,000,000 Bowater, Inc., 6.41% due 3/15/2010 (b) 2,020,000
Tembec Industries, Inc.:
2,000,000 8.625% due 6/30/2009 1,610,000
1,000,000 8.50% due 2/01/2011 767,500
--------------
8,629,375
Service--0.3%
250,000 Ahern Rentals, Inc., 9.25%
due 8/15/2013 (a) 255,625
250,000 Mac-Gray Corp., 7.625%
due 8/15/2015 (a) 258,125
--------------
513,750
Telecommunications--1.6%
800,000 Qwest Corp., 6.671% due 6/15/2013 (a)(b) 838,000
3,000,000 Terremark Worldwide Inc, 9%
due 6/15/2009 (c) 2,520,000
--------------
3,358,000
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 2005
Schedule of Investments (concluded) (in U.S. dollars)
Face
Amount Corporate Bonds Value
Utility--2.9%
$ 3,500,000 Electricidad de Caracas Finance BV, 10.25%
due 10/15/2014 (a) $ 3,718,750
2,000,000 Sierra Pacific Resources, 8.625%
due 3/15/2014 2,210,000
--------------
5,928,750
Wireless Communications--2.0%
250,000 Digicel Ltd., 9.25% due 9/01/2012 (a) 261,250
850,000 Dobson Cellular Systems, 8.443%
due 11/01/2011 (b) 884,000
Rogers Wireless Communications, Inc.:
250,000 6.535% due 12/15/2010 (b) 260,625
2,275,000 7.25% due 12/15/2012 2,439,938
250,000 8% due 12/15/2012 267,500
--------------
4,113,313
Total Corporate Bonds
(Cost--$64,155,240)--31.3% 64,230,492
Shares
Held Common Stocks Value
Chemicals--0.0%
10,732 GEO Specialty Chemicals, Inc. (d) $ 91,222
Total Common Stocks
(Cost--$0)--0.0% 91,222
Beneficial
Interest Short-Term Securities
$ 354,034 Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I (e) 354,034
Total Short-Term Securities
(Cost--$354,034)--0.2% 354,034
Total Investments (Cost--$263,037,076*)--129.5% 265,933,683
Liabilities in Excess of Other Assets--(29.5%) (60,612,486)
--------------
Net Assets--100.0% $ 205,321,197
==============
* The cost and unrealized appreciation (depreciation) of investments as of August 31,
2005, as computed for federal income tax purposes, were as follows:
Aggregate cost $ 263,099,100
=================
Gross unrealized appreciation $ 4,328,787
Gross unrealized depreciation (1,494,204)
-----------------
Net unrealized appreciation $ 2,834,583
=================
++ 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.
(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.
(e) Investments in companies considered to be an affiliate of the Fund, for purposes
of 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 $259,687 $9,274
For Fund compliance purposes, the Fund's industry classifications refer to 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.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 2005
Statement of Assets, Liabilities and Capital
As of August 31, 2005
Assets
Investments in unaffiliated securities, at value (identified cost--$262,683,042) $ 265,579,649
Investments in affiliated securities, at value (identified cost--$354,034) 354,034
Cash 6,302,864
Receivables:
Interest (including $1,733 from affiliates) $ 3,229,162
Securities sold 3,033,882
Commitment fees 15,361
Principal paydowns 5,000 6,283,405
---------------
Other assets 652
---------------
Total assets 278,520,604
---------------
Liabilities
Loans 70,300,000
Unfunded loan commitment 192,569
Payables:
Securities purchased 2,245,000
Dividends to shareholders 271,490
Investment adviser 134,336
Interest on loans 49,456
Offering costs 4,749
Other affiliates 1,807 2,706,838
--------------- ---------------
Total liabilities 73,199,407
---------------
Net Assets
Net assets $ 205,321,197
===============
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 $ 1,960,125
Undistributed realized capital gains--net 360,210
Unrealized appreciation--net 2,831,236
---------------
Total accumulated earnings--net 5,151,571
---------------
Total capital--Equivalent to $19.56 net asset value per share of Common Stock
(market price--$17.82) $ 205,321,197
===============
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 2005
Statement of Operations
For the Six Months Ended August 31, 2005
Investment Income
Interest (including $9,274 from affiliates) (net of $10,523 foreign withholding tax) $ 9,275,215
Facility and other fees 121,304
---------------
Total income 9,396,519
---------------
Expenses
Loan interest expense $ 1,075,021
Investment advisory fees 1,010,390
Borrowing costs 74,234
Professional fees 57,987
Accounting services 41,628
Directors' fees and expenses 21,443
Printing and shareholder reports 21,411
Transfer agent fees 20,948
Listing fees 9,378
Custodian fees 8,592
Pricing services 4,324
Other 6,460
---------------
Total expenses 2,351,816
---------------
Investment income--net 7,044,703
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss) on:
Investments--net (784,452)
Swaps--net 45,130 (739,322)
---------------
Change in unrealized appreciation/depreciation on:
Investments--net (2,000,025)
Unfunded corporate loans--net (28,511) (2,028,536)
--------------- ---------------
Total realized and unrealized loss--net (2,767,858)
---------------
Net Increase in Net Assets Resulting from Operations $ 4,276,845
===============
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 2005
Statement of Changes in Net Assets
For the Six For the Period
Months Ended July 30, 2004++
August 31, to February 28,
Increase (Decrease) in Net Assets: 2005 2005
Operations
Investment income--net $ 7,044,703 $ 6,024,951
Realized gain (loss)--net (739,322) 1,230,145
Unrealized appreciation/depreciation--net (2,028,536) 4,859,772
--------------- ---------------
Net increase in net assets resulting from operations 4,276,845 12,114,868
--------------- ---------------
Dividends & Distributions to Shareholders
Dividends and distributions to shareholders on:
Investment income--net (6,210,676) (4,898,853)
Realized gain--net -- (130,613)
--------------- ---------------
Net decrease from dividends and distributions to shareholders (6,210,676) (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 (decrease) in net assets (1,933,831) 207,155,020
Beginning of period 207,255,028 100,008
--------------- ---------------
End of period* $ 205,321,197 $ 207,255,028
=============== ===============
* Undistributed investment income--net $ 1,960,125 $ 1,126,098
=============== ===============
++ Commencement of operations.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 2005
Statement of Cash Flows
For the Six Months Ended August 31, 2005
Cash Provided by Operating Activities
Net increase in net assets resulting from operations $ 4,276,845
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided by operating activities:
Increase in receivables (443,260)
Decrease in other assets 682
Decrease in other liabilities (40,921)
Realized and unrealized loss--net 2,767,858
Realized gain on swaps--net 45,130
Amortization of premium and discount (90,059)
Proceeds from sales and paydowns of long-term securities 121,674,377
Proceeds on other investment related transactions 605,910
Purchases of long-term securities (126,290,540)
Purchases of short-term investments--net (259,687)
---------------
Net cash provided by investing activities 2,246,335
---------------
Cash Provided by Financing Activities
Cash receipts from borrowings 92,700,000
Cash payments on borrowings (82,700,000)
Cash payments on offering costs (21,113)
Dividends paid to shareholders (6,238,379)
---------------
Net cash provided by financing activities 3,740,508
---------------
Cash
Net increase in cash 5,986,843
Cash at beginning of period 316,021
---------------
Cash at end of period $ 6,302,864
===============
Cash Flow Information
Cash paid for interest $ 1,045,357
===============
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 2005
Financial Highlights
For the Six For the Period
Months Ended July 30, 2004++
The following per share data and ratios have been derived August 31, to February 28,
from information provided in the financial statements. 2005 2005
Per Share Operating Performance
Net asset value, beginning of period $ 19.74 $ 19.10
--------------- ---------------
Investment income--net*** .67 .58
Realized and unrealized gain (loss)--net (.26) .57
--------------- ---------------
Total from investment operations .41 1.15
--------------- ---------------
Less dividends and distributions from:
Investment income--net (.59) (.47)
Realized gain--net -- (.01)
--------------- ---------------
Total dividends and distributions (.59) (.48)
--------------- ---------------
Offering costs resulting from the issuance of Common Stock -- (.03)
--------------- ---------------
Net asset value, end of period $ 19.56 $ 19.74
=============== ===============
Market price per share, end of period $ 17.82 $ 19.44
=============== ===============
Total Investment Return**
Based on net asset value per share 2.35%+++ 5.97%+++
=============== ===============
Based on market price per share (5.32%)+++ (.34%)+++
=============== ===============
Ratios to Average Net Assets
Expenses, net of waiver and excluding interest expense 1.24%* .92%*
=============== ===============
Expenses, net of waiver 2.28%* 1.30%*
=============== ===============
Expenses 2.28%* 1.48%*
=============== ===============
Investment income--net 6.84%* 5.11%*
=============== ===============
Leverage
Amount of borrowings, end of period (in thousands) $ 70,300 $ 60,300
=============== ===============
Average amount of borrowings outstanding during the period (in thousands) $ 62,972 $ 29,072
=============== ===============
Average amount of borrowings outstanding per share during the period*** $ 6.00 $ 2.80
=============== ===============
Supplemental Data
Net assets, end of period (in thousands) $ 205,321 $ 207,255
=============== ===============
Portfolio turnover 47.66% 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. AUGUST 31, 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. The Fund's financial statements are prepared in
conformity with U.S. generally accepted accounting principles, which may
require the use of management accruals and estimates. Actual results may
differ from these estimates. These unaudited financial statements reflect all
adjustments, which are, in the opinion of management, necessary to present a
fair statement of the results for the interim period. All such adjustments are
of a normal, recurring nature. The Fund determines and makes available for
publication the net asset value of its Common Stock on a daily basis. The
Fund's Common Stock shares are 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
asked 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 asked 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
asked 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. Swap agreements are valued based upon
quoted fair valuations received daily by the Fund from a pricing service or
counterparty. Other investments, including futures contracts and related
options, are stated at market value. Obligations with remaining maturities of
60 days or less are valued at amortized cost unless the Investment Adviser
believes that this method no longer produces fair valuations. Repurchase
agreements will be valued at cost plus accrued interest. The Fund employs
certain pricing services to provide securities prices for the Fund. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board
of Directors of the Fund, including valuations furnished by the pricing
services retained by the Fund, which may use a matrix system for valuations.
The procedures of a pricing service and its valuations are reviewed by the
officers of the Fund under the general supervision of the Fund's Board of
Directors. Such valuations and procedures will be reviewed periodically by the
Fund's Board of Directors.
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 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 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.
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 2005
Notes to Financial Statements (continued)
(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
ex-dividend dates. The Fund may at times pay out less than the entire amount
of net investment income earned in any particular period and may at times pay
out such accumulated undistributed income in other periods to permit the Fund
to maintain a more stable level of dividends.
(h) Securities lending--The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. The market
value of the loaned securities is determined at the close of business of the
Fund and any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral for the
loaned securities, it collects a fee from the borrower. The Fund typically
receives the income on the loaned securities but does not receive the income
on the collateral. Where the Fund receives cash collateral, it may invest such
collateral and retain the amount earned on such investment, net of any amount
rebated to the borrower. Loans of securities are terminable at any time and
the borrower, after notice, is required to return borrowed securities within
five business days. The Fund may pay reasonable finder's, lending agent,
administrative and custodial fees in connection with its loans. In the event
that the borrower defaults on its obligation to return borrowed securities
because of insolvency or for any other reason, the Fund could experience
delays and costs in gaining access to the collateral. The Fund also could
suffer a loss where the value of the collateral falls below the market value
of the borrowed securities, in the event of borrower default or in the event
of losses on investments made with cash collateral.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("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.
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 six months ended August 31, 2005, the Fund reimbursed FAM $2,310 for
certain accounting services.
In addition, MLPF&S received $1,250 in commissions on the execution of
portfolio security transactions for the Fund for the six months ended August
31, 2005.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, ML & Co., and/or MLIM, LLC.
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 2005
Notes to Financial Statements (concluded)
3. Investments:
Purchases and sales (including paydowns) of investments, excluding short-term
securities, for the six months ended August 31, 2005 were $125,604,204 and
$124,459,509, respectively.
4. Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock par value
$.10, all of which are initially classified as Common Stock. The Board of
Directors is authorized, however, to classify and reclassify any unissued
shares of capital stock without approval of the holders of Common Stock.
Shares issued and outstanding during the six months ended August 31, 2005
remained constant. 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:
On May 24, 2005, the Fund renewed its 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
agreement was renewed for one year and 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 3.39% and the average borrowing
was approximately $62,972,000 for the six months ended August 31, 2005.
6. Unfunded Corporate Loans:
As of August 31, 2005, the Fund had unfunded loan commitments of approximately
$12,047,000, 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
Key Energy $1,000
MGM Mirage Resorts $1,614
Pinnacle Entertainment $ 220
Spanish Broadcasting System $2,500
Trump Entertainment Delayed Draw $1,000
Trump Entertainment Resorts $1,713
Vought Aircraft $1,000
7. Subsequent Event:
The Fund paid an ordinary income dividend to holders of Common Stock in the
amount of $.108333 per share on September 30, 2005 to shareholders of record
on September 14, 2005.
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 2005
Disclosure of Investment Advisory Agreement
Activities of and Composition of the Board of Directors
All but one member of the Board of Directors is an independent director whose
only affiliation with Fund Asset Management, L.P. (the "Investment Adviser")
or other Merrill Lynch affiliates is as a director of the Fund and certain
other funds advised by the Investment Adviser or its affiliates. The Chairman
of the Board is also an independent director. New director nominees are chosen
as nominees by a Nominating Committee comprised of independent directors. All
independent directors also are members of the Board's Audit Committee and the
independent directors meet in executive session at each in-person Board
meeting. The Board and the Audit Committee meet in person for at least two
days each quarter and conduct other in-person and telephone meetings
throughout the year, some of which are formal board meetings, and some of
which are informational meetings. The independent counsel to the independent
directors attends all in-person Board and Audit Committee meetings and other
meetings at the independent directors' request.
Investment Advisory Agreement--Matters Considered by the Board
Every year, the Board considers approval of the Fund's investment advisory
agreement (the "Investment Advisory Agreement"). The Board assesses the
nature, scope and quality of the services provided to the Fund by the
personnel of the Investment Adviser and its affiliates, including
administrative services, shareholder services, oversight of fund accounting,
marketing services and assistance in meeting legal and regulatory
requirements. The Board also receives and assesses information regarding the
services provided to the Fund by certain unaffiliated service providers.
At various times throughout the year, the Board also considers a range of
information in connection with its oversight of the services provided by the
Investment Adviser and its affiliates. Among the matters considered are:
(a) fees (in addition to management fees) paid to the Investment Adviser and
its affiliates by the Fund, such as transfer agency fees; (b) Fund operating
expenses paid to third parties; (c) the resources devoted to and compliance
reports relating to the Fund's investment objective, policies and restrictions,
and its compliance with its Code of Ethics and the Investment Adviser's
compliance policies and procedures; and (d) the nature, cost and character
of non-investment management services provided by the Investment Adviser
and its affiliates.
The Board believes that the Investment Adviser is one of the most experienced
global asset management firms and considers the overall services provided by
the Investment Adviser to be generally of high quality. The Board also
believes that the Investment Adviser is financially sound and well managed and
notes that the Investment Adviser is affiliated with one of America's largest
financial firms. The Board works closely with the Investment Adviser in
overseeing the Investment Adviser's efforts to achieve good performance. As
part of this effort, the Board discusses portfolio manager effectiveness and,
when performance is not satisfactory, discusses with the Investment Adviser
taking steps such as changing investment personnel.
Annual Consideration of Approval by the Board of Directors
In the period prior to the Board meeting to consider renewal of the Investment
Advisory Agreement, the Board requested and received materials specifically
relating to the Fund's Investment Advisory Agreement. These materials included
(a) information compiled by Lipper Inc. ("Lipper") on the fees and expenses
and the investment performance of the Fund as compared to a comparable group
of funds as classified by Lipper; (b) information comparing the Fund's market
price with its net asset value per share; (c) a discussion by the Fund's
portfolio management team of investment strategies used by the Fund during its
most recent fiscal year; (d) information on the profitability to the
Investment Adviser and its affiliates of the Investment Advisory Agreement and
other relationships with the Fund; and (e) information provided by the
Investment Adviser concerning investment advisory fees charged to other
clients, such as offshore funds under similar investment mandates and
generally to institutional clients. The Board also considers other matters it
deems important to the approval process such as services related to the
valuation and pricing of Fund portfolio holdings, allocation of Fund brokerage
fees (including the related benefits to the Investment Adviser of "soft
dollars"), the Fund's portfolio turnover statistics, and direct and indirect
benefits to the Investment Adviser and its affiliates from their relationship
with the Fund.
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's Investment Advisory
Agreement in August 2005, the independent directors' and Board's review
included the following:
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 2005
Services Provided by the Investment Adviser--The Board reviewed the nature,
extent and quality of services provided by the Investment Adviser, including
the investment advisory services and the resulting performance of the Fund.
The Board focused primarily on the Investment Adviser's investment advisory
services and the Fund's investment performance, having concluded that
the other services provided to the Fund by the Investment Adviser were
satisfactory. The Board compared Fund performance - both including and
excluding the effects of the Fund's fees and expenses - to the performance of a
comparable group of mutual funds, and the performance of a relevant index or
combination of indexes. The Board reviews performance data at least quarterly,
and noted that the Fund's performance, after fees and expenses, ranked in the
first quintile for the period from inception through May 31, 2005. Considering
these factors, the Board concluded that the Fund's performance supported the
continuation of the Investment Advisory Agreement.
The Investment Adviser's Personnel and Investment Process--The Board reviewed
the Fund's investment objectives and strategies. The Board discussed with
senior management of the Investment Adviser responsible for investment
operations and the senior management of the Investment Adviser's taxable
fixed-income investing group the strategies being used to achieve the stated
objectives. Among other things, the Board considered the size, education and
experience of the Investment Adviser's investment staff, its use of technology,
and the Investment Adviser's approach to training and retaining portfolio
managers and other research, advisory and management personnel. The Board also
reviewed the Investment Adviser's compensation policies and practices with
respect to the Fund's portfolio managers. The Board also considered the
experience of the Fund's portfolio managers and noted that Mr. Matteo and
Mr. Patel each have more than fifteen years experience in the financial
industry. The Board noted that the Investment Adviser and its investment
staff have extensive experience in analyzing and managing the types of
investments used by the Fund. The Board concluded that the Fund benefits
from that expertise.
Management Fees and Other Expenses--The Board reviewed the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels - the actual rate includes advisory and
administrative service fees and the effects of any fee waivers - compared to
the other funds in its Lipper category. It also compared the Fund's total
expenses to those of other comparable funds. The Board considered the services
provided to and the fees charged by the Investment Adviser to other types of
clients, such as offshore funds, with similar investment mandates and noted
that the fees charged by the Investment Adviser in those cases typically
exceeded those being charged to the Fund. The Board also noted that, as a
general matter, fees charged to institutional clients were lower than the fees
charged to the Fund, but believed that less extensive services were being
provided to such clients. The Fund's contractual and actual management fee
rates were lower than the median fees charged by comparable funds, as
determined by Lipper. The Board has concluded that the Fund's management fee
and fee rate and overall expense ratio are acceptable compared to those of
other comparable funds.
Profitability--The Board considered the cost of the services provided to
the Fund by the Investment Adviser, and the Investment Adviser's and its
affiliates' profits in relation to the management of the Fund and the MLIM/
FAM-advised funds. As part of its analysis, the Board reviewed the Investment
Adviser's methodology in allocating its costs to the management of the Fund
and concluded that there was a reasonable basis for the allocation. The Board
believes the Investment Adviser's profits are acceptable in relation to the
nature and quality of services provided and given the level of fees and
expenses overall.
Economies of Scale--The Board considered whether there have been economies of
scale in respect of the management of MLIM/FAM-advised funds, whether the
MLIM/FAM-advised funds (including the Fund) have appropriately benefited from
any economies of scale, and whether there is potential for realization of any
further economies of scale. The Board considered economies of scale to the
extent applicable to the Fund's closed-end structure and determined that no
changes were currently necessary.
Conclusion
After the independent directors deliberated in executive session, the entire
Board, including all of the independent directors, approved the renewal of the
existing Investment Advisory Agreement, concluding that the advisory fee was
reasonable in relation to the services provided and that a contract renewal
was in the best interests of the shareholders.
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 2005
Officers and Directors
Robert C. Doll,Jr., President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Jean Margo Reid, Director
Roscoe S. Suddarth, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Donald C. Burke, Vice President and Treasurer
Joseph P. Matteo, Vice President
Jaimin J. Patel, Vice President
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
Equiserve Trust Company N.A.
(c/o Computershare Investor Services)
P.O. Box 43010
Providence, RI 02940-3010
800-426-5523
NYSE Symbol
FRB
FLOATING RATE INCOME STRATEGIES FUND II, INC. AUGUST 31, 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. AUGUST 31, 2005
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-
annual report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this semi-
annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to this semi-
annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable to this semi-annual
report
Item 8 - Portfolio Managers of Closed-End Management Investment Companies -
Not Applicable to this semi-annual report
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 last fiscal half-
year of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
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: October 19, 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: October 19, 2005
By: /s/ Donald C. Burke
-------------------------------
Donald C. Burke,
Chief Financial Officer of
Floating Rate Income Strategies Fund II, Inc.
Date: October 19, 2005