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: 02/28/06
Date of reporting period: 03/01/05 - 02/28/06
Item 1 - Report to Stockholders
Annual Report
February 28, 2006
Floating Rate
Income Strategies
Fund II, Inc.
(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 1-800-637-3863; (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.
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company that will be one of the world's largest asset management
firms with nearly $1 trillion in assets under management (based on combined
assets under management as of December 31, 2005). The transaction is expected
to close in the third quarter of 2006, at which time the new company will
operate under the BlackRock name. If approved by the Fund's Board of Directors
and Fund shareholders, the combined company that results from the transaction
is expected to become the investment adviser of the Fund.
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.
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.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
A Letter From the President
Dear Shareholder
Financial markets began 2006 with a return to volatility following a fairly
uninspiring 2005. For the six- and 12-month periods ended February 28, 2006,
most major market indexes landed in positive territory:
Total Returns as of February 28, 2006 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) + 5.93% + 8.40%
Small cap U.S. equities (Russell 2000 Index) +10.24 +16.59
International equities (MSCI Europe, Australasia, Far East Index) +15.14 +17.41
Fixed income (Lehman Brothers Aggregate Bond Index) - 0.11 + 2.74
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 0.99 + 3.87
High yield bonds (Credit Suisse High Yield Index) + 1.89 + 3.27
The Federal Reserve Board (the Fed) increased interest rates 200 basis points
(2.00%) over the past 12 months, bringing the target federal funds rate to
4.5%. Notably, Ben Bernanke replaced Alan Greenspan as Fed chairman in
January, a month after the central bank removed the critical word "measured"
from the description of its rate-hiking program. Still, most observers expect
at least one more interest rate hike before the Fed pauses in its tightening
campaign.
U.S. economic growth, which came in at 4.1% in the third quarter of 2005, fell
to 1.6% in the fourth quarter. Growth is expected to reaccelerate in the first
quarter of 2006, although the economy is likely to feel some pressure in the
quarters ahead as the consumer sector seems to be softening. Capital spending
by businesses, however, appears relatively strong. Overall corporate health,
including strong company balance sheets, helped prompt robust dividend-
distribution, share-buyback and merger-and-acquisition activity in 2005, a
trend that has continued in 2006. This, as well as reasonably good company
earnings and low core inflation, has been supportive of U.S. stocks despite
the headwinds of rising interest rates and high energy prices. Many
international equity markets have fared even better, thanks in part to higher
economic growth rates and low inflation.
In the U.S. bond market, short-term interest rates continued to move higher as
longer-term interest rates advanced more moderately. After flattening
dramatically in 2005, the Treasury curve recently has been toying with bouts
of inversion, whereby short-term yields have surpassed long-term yields. At
period-end, the six-month Treasury bill offered the highest yield on the curve
at 4.74%.
Amid the uncertainty inherent in the financial markets, we encourage you
to review your goals periodically with your financial advisor and to
make portfolio changes, as needed. For timely "food for thought" for
investors, we also invite you to visit Shareholder magazine at
www.mlim.ml.com/shareholdermagazine. As always, we thank you for trusting
Merrill Lynch Investment Managers with your investment assets, and we
look forward to continuing to serve your investment needs.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Director
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
A Discussion With Your Fund's Portfolio Managers
The Fund outperformed its composite benchmark on a total return basis for the
fiscal year and provided attractive relative yields in a largely positive
environment for leveraged loans.
Describe market conditions during the fiscal year.
During the year, the performance of the bank loan market benefited from the
rising London InterBank Offered Rate (LIBOR), decreasing spreads and
increasing demand for bank loans on the part of collateralized loan
obligations (CLOs), which kept prices close to par value. Investors earned
total returns consisting mainly of interest payments, as there were only
marginal net price changes. For the 12 months ended February 28, 2006, the
Credit Suisse Leveraged Loan Index returned +5.96%.
CLO issuance continues to drive supply and demand in the market. Approximately
$50.9 billion in new institutional leveraged loans was issued in the first two
months of 2006. A slowdown in February led to continued tightening in the
institutional loan market, although repayment activity offset the lull in loan
issuance for the month. With strong CLO issuance and relatively constrained
loan supply, prices most likely will rise and, more importantly, refinancing
activity may increase. Changes to leverage loan ratings currently under
consideration by Moody's Investors Service may allow greater leverage on new
structures. The current relatively benign credit environment also could
contribute to lower spreads.
At the end of February, Standard & Poor's Leveraged Commentary & Data reported
a default rate of 2.09% based on number of loans, a 26-month high. Despite the
increase, the rate is still below the historical average of 3.56%. Although
defaults are expected to continue to increase, we do not expect default rates
to rise significantly above 3% for 2006.
High yield bonds, in which the Fund may invest up to 20% of its assets,
returned +3.27% for the year, as measured by the Credit Suisse High Yield
Index. Most of the gain in the market occurred in the first two months of
2006, as the high yield market benefited from increasing strength in the U.S.
economy.
How did the Fund perform during the fiscal year?
For the 12-month period ended February 28, 2006, the Common Stock of Floating
Rate Income Strategies Fund II, Inc. had net annualized yields of 6.59% and
7.20%, based on a year-end per share net asset value of $19.39 and a per share
market price of $17.76, respectively, and $1.278 per share income dividends.
For the same period, the total investment return on the Fund's Common Stock
was +6.07%, based on a change in per share net asset value from $19.74 to
$19.39, and assuming reinvestment of all distributions. The Fund's benchmark,
which consists 80% of the Credit Suisse Leveraged Loan Index and 20% of the
Credit Suisse High Yield Index, returned +5.43% for the 12-month period.
For the six months ended February 28, 2006, the total investment return on the
Fund's Common Stock was +3.64%, based on a change in per share net asset value
from $19.56 to $19.39, and assuming reinvestment of all distributions. The
composite benchmark returned +2.79% for the six-month period.
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.
What factors most influenced Fund performance?
The Fund's performance for the year benefited primarily from the relatively
higher weighted average yield spread advantage of our bank loan holdings
versus three-month LIBOR and the comparatively higher average coupon of the
portfolio's high yield securities. The Fund's use of leverage also enhanced
results. Offsetting these positives somewhat was a net decline in the market
value of several securities, particularly in the troubled paper sector.
From a sector perspective, our holdings in the utility, information technology
and airlines sectors performed well, while security selection in the paper,
packaging and chemical sectors detracted from relative performance.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
The strong performance in the utility sector resulted primarily from our
positions in first- and second-lien loans of Calpine Generating Corporation,
an independent power producer. The bonds rallied following the bankruptcy
filing of the company's parent, Calpine Corporation. The filing indicated that
the loans of Calpine Generating would remain current on interest payments,
thereby reducing the likelihood of serious financial impairment.
Positive contributors in information technology included Quantum Corporation
and Cypress Semiconductor Corporation. Quantum is a manufacturer of data
storage devices. The price of the company's 4.375% convertible bonds rose
significantly during the year. Reports released during the period indicated an
increase in earnings of 50% quarter over quarter, which was 100% above
consensus expectations. We believe Quantum will continue to outperform due to
strong capital spending trends and high cash levels within its corporate
customer base. The rally in Cypress Semiconductor's 1.25% convertibles
resulted from strong new product introductions. In addition, the company's 87%
ownership position in SunPower Corp., the world's leading solar manufacturer,
benefited the performance of its debt securities as that stock rose sharply on
strong earnings fundamentals. Notably, Cypress Semiconductor's position in
SunPower virtually equals the company's entire market value, notwithstanding
the fact that SunPower accounts for only about 13% of Cypress Semiconductor's
revenue.
Our position in American Airlines, Inc. also enhanced Fund results. The
company's 7.80% enhanced equipment trust certificates appreciated
significantly as the carrier enhanced its liquidity ahead of the security's
October 2007 maturity.
The negative performance in the paper sector resulted from our holding in
Tembec Inc., a lumber products manufacturer. The performance of these bonds
deteriorated as a result of weakness in the paper and forest products sector
that was exacerbated by continued strength in the Canadian dollar and high
energy prices. In the packaging sector, our position in a security of Pliant
Corporation hindered results for the year. Pliant filed for bankruptcy
protection in the fall of 2005 as resin prices skyrocketed on the heels of the
Gulf Coast hurricanes. The company filed a pre-negotiated plan to exit
bankruptcy and hopes to emerge before mid-2006. We believe the valuation for
the bonds when Pliant emerges from bankruptcy support higher prices for the
securities.
Fund performance in the chemical sector was hindered mainly by our holdings in
the common stock and floating rate notes of GEO Specialty Chemicals, Inc.,
manufacturer of a diverse range of products for several niche markets. High
energy and raw materials prices hurt GEO's profit margins as its costs
increased faster than the prices of its products. This trend has abated in the
near-term, and we believe 2006 will be a key turnaround year for the company.
What changes were made to the portfolio during the period?
We purchased approximately $116.6 million in par assets and experienced
$63.5 million in repayments from issuers during the period. In addition, we
sold roughly $36.5 million in assets. During the year, we maintained
significant exposure to the utility, cable and gaming industries, and reduced
the Fund's exposure to the paper and forest products sector. In addition, we
continued to target an allocation to fixed rate securities of roughly 20% and
a leverage ratio of approximately 30%.
How would you characterize the Fund's position at the close of the period?
At the end of the period, the portfolio was composed of 123 issuers spread
among 25 industries. The Fund was underweight versus its composite benchmark
in securities rated Ba or higher, Caa or below and unrated issues. The Fund
was overweight in B-rated credits.
We anticipate that many of the same factors that influenced leveraged loan
securities in the past year will remain intact. In our view, the trends of
less frequent new-loan issuance, lower interest rate spreads and above-par
secondary market prices are likely to continue, especially given the benign
credit environment that we expect over the next year. A further benefit to the
market should be an increase in the three-month LIBOR. Consequently, we intend
to continue to purchase assets predominately in the primary market while
selectively participating in the secondary market.
Joseph P. Matteo
Vice President and Co-Portfolio Manager
Jaimin PatelVice
President and Co-Portfolio Manager
March 14, 2006
Effective March 31, 2006, Jaimin Patel is solely responsible for the
day-to-day management of Floating Rate Income Strategies Fund II, Inc.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
Proxy Results
During the six-month period ended February 28, 2006, 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 26,
2006. 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. 10,020,149 300,727
Ronald W. Forbes 10,020,155 300,721
Cynthia A. Montgomery 10,020,649 300,227
Jean Margo Reid 10,020,649 300,227
Roscoe S. Suddarth 10,012,981 307,895
Richard R. West 10,012,981 307,895
Edward D. Zinbarg 10,014,149 306,727
Portfolio Information as of February 28, 2006
Percent of
Ten Largest Holdings Net Assets
PanAmSat Corp. Tranche B Term Loan,
6.489% due 8/20/2011 3.9%
Calpine Generating Co., LLC Term Loan,
9.61% due 3/12/2010 3.5
Charter Communications Operating LLC
Tranche B Term Loan, 7.92%
due 4/07/2011 2.9
Century Cable Holdings LLC, Discretionary
Term Loan, 9.50% due 12/31/2009 2.9
Metro-Goldwyn-Mayer Studios, Inc. Term Loan B,
6.78% due 4/30/2011 2.7
Majestic Star Casino LLC, 9.50%
due 10/15/2010 2.6
Aquila, Inc. Term Loan, 9.991%
due 9/14/2009 2.5
Graham Packaging Co. LP Term Loan B,
6.75% - 6.938% due 10/07/2011 2.5
Resorts International First Lien Term Loan,
7.53% due 4/26/2012 2.5
Metaldyne Corp. Term Loan D, 9.044%
due 12/31/2009 2.3
Percent of
Five Largest Industries Net Assets
Utility 22.9%
Cable--U.S. 19.7
Gaming 15.5
Aerospace & Defense 6.6
Manufacturing 6.0
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
BBB/Baa 0.4%
BB/Ba 28.0
B/B 59.1
CCC/Caa 5.4
D 0.1
NR (Not Rated) 6.9
Other* 0.1
* Includes portfolio holdings in common stocks, warrants and
short-term investments.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
Schedule of Investments
Face
Amount Floating Rate Loan Interests** Value
Aerospace & Defense--6.1%
$1,600,000 IAP Worldwide Services, Inc. First Lien Term
Loan, 7.625% due 12/30/2012 $ 1,619,000
1,596,875 K&F Industries, Inc. Term Loan, 6.86% - 6.87%
due 11/18/2013 1,618,334
4,000,000 MRO Acquisitions Corp. Second Lien Term Loan,
10.23% due 8/15/2011 4,070,000
1,194,000 Spirit Aerosystems, Inc. Tranche 2, 6.85%
due 12/31/2011 1,212,284
1,923,077 Standard Aero Holdings Term Loan,
6.83% - 6.96% due 8/24/2012 1,911,660
Vought Aircraft Industries, Inc.:
1,664,188 Term Loan, 7.10% due 12/22/2011 1,685,250
320,000 Tranche B Line of Credit Deposit, 7.10%
due 12/22/2010 323,560
---------------
12,440,088
Airlines--0.9%
1,000,000 Delta Air Lines, Inc. Term Loan B, 11.01%
due 3/27/2008 1,039,750
656,250 United Air Lines Term Loan B, 8.625%
due 2/01/2012 668,391
---------------
1,708,141
Automotive--3.1%
1,000,000 Delphi Corp. Tranche B Dip Jp Pr, 7.375%
due 10/08/2007 1,017,500
Metaldyne Corp. Term Loan D:
4,619,751 9.044% due 12/31/2009 4,709,259
660,000 11.25% due 12/31/2009 668,869
---------------
6,395,628
Broadcasting--4.0%
1,995,000 Entravision Communications Term Loan B,
6.03% due 3/29/2013 2,010,587
1,745,625 NextMedia Group, Inc. First Lien Term Loan,
6.57% due 11/15/2012 1,760,899
1,750,000 Paxson Communications Corp. First Lien Term
Loan, 7.777% due 11/15/2012 1,755,469
2,487,469 Spanish Broadcasting System, Inc. Tranche 2
First Lien Term Loan B, 6.28%
due 6/10/2012 2,519,599
---------------
8,046,554
Cable--International--1.0%
2,000,000 NTL Investment Holdings, Ltd. Term Loan B2,
7.57% due 4/14/2012 2,011,250
Cable--U.S.--18.0%
3,000,000 Adelphia Communications Corp. Term Loan B,
9.50% due 6/30/2009 2,948,751
1,970,000 Bragg Communications Term Loan B, 6.81%
due 8/31/2011 1,992,163
6,000,000 Century Cable Holdings LLC, Discretionary
Term Loan, 9.50% due 12/31/2009 5,880,000
5,892,599 Charter Communications Operating LLC
Tranche B Term Loan, 7.92% due 4/07/2011 5,967,123
2,000,000 Hilton Head Communications UCA Term Loan B,
8.75% due 3/31/2008 1,948,958
1,980,000 Intelsat Ltd. Term Loan, 6.313% due 7/28/2011 2,002,895
2,640,000 Mediacom Broadband Group Tranche A Term Loan,
5.54% - 6.04% due 3/31/2010 2,640,942
Face
Amount Floating Rate Loan Interests** Value
Cable--U.S. (concluded)
$3,168,000 Mediacom Communications LLC Tranche B Term
Loan, 6.18% - 7% due 3/31/2013 $ 3,215,520
7,920,000 PanAmSat Corp. Tranche B Term Loan,
6.489% due 8/20/2011 8,026,429
1,985,000 Rainbow National Services LLC Term Loan B,
7.375% - 7.563% due 3/31/2012 2,011,674
---------------
36,634,455
Chemicals--3.4%
Rockwood Specialties Group, Inc. Tranche D
Term Loan:
1,702,500 5.93% due 9/15/2012 1,726,442
3,000,000 5.93% due 12/10/2012 3,042,189
2,000,000 Wellman, Inc. Second Lien Term Loan, 11.43%
due 2/10/2010 2,052,500
---------------
6,821,131
Consumer--Non-Durables--1.1%
756,000 Camelbak Products LLC First Lien Term Loan,
8.17% due 8/04/2011 732,375
1,485,000 Culligan International Co. Term Loan, 7.07%
due 9/30/2011 1,506,347
---------------
2,238,722
Diversified Media--3.6%
5,500,000 Metro-Goldwyn-Mayer Studios, Inc. Term
Loan B, 6.78% due 4/30/2011 5,570,939
1,817,005 RH Donnelley Tranche D Term Loan,
6.25% - 6.31% due 6/30/2011 1,833,691
---------------
7,404,630
Energy--Other--2.0%
1,995,000 Cheniere Energy, Inc. Term Loan B, 9.25%
due 8/31/2012 2,021,184
1,000,000 Key Energy Services, Inc. Term Loan B,
7.52% - 7.78% due 6/30/2012 1,015,625
1,000,000 Markwest Energy Operating Co. LLC Term
Loan B, 6.82% due 12/29/2010 1,012,500
---------------
4,049,309
Food & Tobacco--0.5%
989,167 Commonwealth Brands Term Loan, 7%
due 12/22/2012 1,002,149
Gaming--10.0%
1,985,000 Herbst Gaming, Inc. Term Loan, 6.20% - 6.527%
due 10/08/2010 2,011,053
3,172,727 MGM Mirage Revolving Line of Credit,
5.871% - 6.284% due 4/25/2010 3,095,376
970,435 Mississippi Band of Choctaw Indians Term Loan,
6.45% - 6.94% due 11/04/2011 982,565
3,241,875 Penn National Gaming, Inc. Term Loan B,
6.28% - 6.46% due 10/03/2012 3,289,492
1,500,000 Pinnacle Entertainment Term Loan, 6.57%
due 12/15/2011 1,515,938
5,000,000 Resorts International First Lien Term Loan,
7.53% due 4/26/2012 4,993,750
995,000 Trump Entertainment Resorts Holdings LP
Term Loan B-1, 7.17% due 5/01/2012 1,007,437
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
Schedule of Investments (continued)
Face
Amount Floating Rate Loan Interests** Value
Gaming (concluded)
Venetian Casino Resort LLC:
$ 1,000,000 Delay Draw Term Loan, 5.462%
due 6/15/2011 $ 1,010,859
2,400,000 Term Loan B, 6.28% due 6/15/2011 2,426,062
---------------
20,332,532
Health Care--3.3%
1,975,000 Community Health Systems, Inc. Term Loan,
6.36% - 6.56% due 8/19/2011 2,002,156
912,310 Duloxetine Royalty Term Loan, 9.10%
due 10/18/2013 916,871
HealthSouth Corp.:
1,567,125 Term Loan, 7.11% due 3/08/2010 1,574,472
425,000 Tranche B Term Loan, 6.364%
due 3/08/2010 426,992
1,846,154 Psychiatric Solutions, Inc. Term Loan B,
6.26% - 6.46% due 7/01/2012 1,866,347
---------------
6,786,838
Housing--4.8%
2,388,571 Associated Materials, Inc. Term Loan,
6.26% - 7.09% due 8/29/2010 2,387,079
2,920,211 Headwaters, Inc. Term Loan B-1, 6.86%
due 4/30/2011 2,944,545
826,105 LIONS Gables Realty Term Loan B, 6.32%
due 9/30/2006 831,416
2,177,084 Lake at Las Vegas Joint Venture First Lien
Term Loan, 7.355% - 7.46%
due 11/01/2009 2,183,304
1,477,500 Nortek, Inc. Term Loan, 6.94% - 9%
due 8/27/2011 1,491,352
---------------
9,837,696
Information Technology--1.8%
1,320,000 Fidelity National Information Solutions, Inc.
Term Loan B, 6.32% due 3/09/2013 1,330,879
2,376,000 Viasystems, Inc. Replacement Tranche B Term
Loan, 8.83% due 9/30/2009 2,393,820
---------------
3,724,699
Leisure--2.9%
2,000,000 24 Hour Fitness Term Loan B, 7.54% - 7.70%
due 6/08/2012 2,032,500
3,916,023 True Temper Sports, Inc. Term Loan B,
7.45% - 7.53% due 3/15/2011 3,940,498
---------------
5,972,998
Manufacturing--5.3%
2,015,728 Amsted Industries, Inc. Term Loan B-1,
7.028% - 7.19% due 10/15/2010 2,046,804
2,165,462 Blount, Inc. US Term Loan B, 7.03% - 9%
due 8/09/2010 2,188,020
1,412,442 GenTek, Inc. First Lien Term Loan,
6.76% - 7.50% due 2/28/2011 1,424,581
1,985,000 Metokote Corp. Second Lien Term Loan,
7.53% - 7.67% due 11/27/2011 1,996,166
2,992,500 Mueller Group LLC Term Loan B,
6.466% - 7.06% due 10/03/2012 3,032,845
---------------
10,688,416
Face
Amount Floating Rate Loan Interests** Value
Packaging--3.0%
$ 995,000 Berry Plastics Corp. Term Loan, 6.447%
due 12/02/2011 $ 1,009,822
4,950,000 Graham Packaging Co. LP Term Loan B,
6.75% - 6.938% due 10/07/2011 5,021,156
---------------
6,030,978
Paper--2.3%
832,595 Boise Cascade Holdings LLC Tranche D Term
Loan, 6.281% - 6.375% due 10/28/2011 844,280
Georgia Pacific Corp.:
1,000,000 First Lien Term Loan B, 7.56%
due 2/14/2013 1,008,917
1,000,000 Second Lien Term Loan, 7.56%
due 2/14/2014 1,000,000
1,839,179 Smurfit Stone Container Corp. Term Loan C,
6.75% - 6.875% due 11/01/2011 1,865,158
---------------
4,718,355
Retail--1.2%
1,359,935 General Nutrition Centers, Inc. Tranche B
Term Loan, 7.61% - 7.80% due 12/05/2009 1,379,060
949,367 The Neiman Marcus Group, Inc. Term Loan,
6.947% due 4/06/2013 964,201
---------------
2,343,261
Service--2.6%
1,000,000 RGIS Inventory Specialists First Lien Term Loan,
7.12% due 12/31/2012 1,006,875
United Rentals, Inc.:
2,457,545 Term Loan, 6.86% due 2/14/2011 2,489,289
99,261 Tranche B Credit Linked Deposit, 4.57%
due 2/14/2011 100,543
Wastequip, Inc.:
250,000 Second Lien Term Loan, 10.527%
due 7/15/2012 253,125
497,500 Tranche 2 Term Loan B, 7.027% - 7.068%
due 7/15/2011 504,962
982,353 Weight Watchers International, Inc. First Lien
Term Loan, 6.82% - 6.85% due 11/18/2010 994,632
---------------
5,349,426
Telecommunications--2.7%
Alaska Communications Systems Holdings, Inc.:
2,500,000 Term Loan, 6.527% due 2/01/2012 2,523,750
3,000,000 Term Loan B, 6.527% due 2/01/2012 3,028,500
---------------
5,552,250
Utility--18.7%
5,000,000 Aquila, Inc. Term Loan, 9.991% due 9/14/2009 5,175,000
Calpine Generating Co. LLC:
2,000,000 First Lien Term Loan, 7.61% due 4/01/2009 2,097,500
6,500,000 Term Loan, 9.61% due 3/12/2010 7,024,875
986,405 Cogentrix Delaware Holdings, Inc. Term Loan,
6.28% due 4/15/2012 997,605
Covanta Energy Corp.:
1,990,244 First Lien Letter of Credit, 3.36%
due 6/24/2012 2,025,073
1,342,317 First Lien Term Loan, 6.46%
due 6/24/2012 1,365,808
1,700,000 Second Lien Term Loan,
10.081% - 10.019% due 6/24/2013 1,731,875
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
Schedule of Investments (continued)
Face
Amount Floating Rate Loan Interests** Value
Utility (concluded)
El Paso Corp.:
$ 750,000 Deposit Account, 5.17% due 11/23/2009 $ 758,020
1,225,000 Term Loan, 7.313% due 11/23/2009 1,240,738
1,975,038 KGen LLC Tranche A Term Loan, 7.152%
due 8/05/2011 1,975,038
1,496,250 LSP Kendall Energy Term Loan B, 6.527%
due 10/07/2013 1,499,367
1,995,000 Primary Energy Finance LLC Term Loan, 6.527%
due 8/23/2012 2,022,431
483,861 Reliant Energy, Inc. Term Loan, 6.089%
due 4/30/2010 483,369
4,274,533 Riverside Energy Center Term Loan, 8.918%
due 6/24/2011 4,338,651
Rocky Mountain Energy Center LLC:
339,834 Credit Linked Deposit, 7.93% due 6/24/2011 344,931
2,957,488 Term Loan, 8.918% due 6/24/2011 3,001,850
Wolf Hollow I, L.P.:
500,000 First Lien Term Loan, 6.751% due 6/22/2012 505,469
400,000 Letter of Credit, 6.68% due 6/22/2012 404,375
100,000 Revolving Credit, 6.52% due 6/22/2012 100,937
1,000,000 Second Lien Term Loan, 9.001%
due 12/22/2012 1,015,000
---------------
38,107,912
Total Floating Rate Loan Interests
(Cost--$205,263,532)--102.3% 208,197,418
Corporate Bonds
Aerospace & Defense--0.5%
1,000,000 Transdigm, Inc., 8.375% due 7/15/2011 1,045,000
Airlines--1.0%
2,000,000 American Airlines, Inc. Class C, 7.80%
due 4/01/2008 1,987,116
Broadcasting--1.2%
411,429 Emmis Communications Corp.,10.366%
due 6/15/2012 (b) 411,429
2,000,000 Paxson Communications Corp.,10.777%
due 1/15/2013 (a)(b) 1,935,000
---------------
2,346,429
Cable--U.S.--1.7%
2,000,000 Charter Communications Holdings II LLC,
10.25% due 9/15/2010 1,995,000
1,000,000 Mediacom Broadband LLC,11% due 7/15/2013 1,070,000
450,000 Quebecor Media, Inc., 7.75% due 3/15/2016 (a) 461,250
---------------
3,526,250
Chemicals--1.0%
1,646,000 GEO Specialty Chemicals, Inc.,13.036%
due 12/31/2009 (c) 1,415,560
625,000 Nova Chemicals Corp., 7.561%
due 11/15/2013 (b) 637,500
---------------
2,053,060
Face
Amount Corporate Bonds Value
Diversified Media--0.5%
RH Donnelley Corp. (a):
$ 250,000 6.875% due 1/15/2013 $ 235,000
250,000 8.875% due 1/15/2016 260,937
250,000 Series A-2, 6.875% due 1/15/2013 235,000
250,000 Universal City Florida Holding Co. I, 9.43%
due 5/01/2010 (b) 253,750
---------------
984,687
Energy--Other--0.3%
700,000 Allis-Chalmers Energy, Inc., 9%
due 1/15/2014 (a) 700,000
Food & Tobacco--1.1%
250,000 AmeriQual Group LLC, 9% due 4/01/2012 (a) 262,500
2,000,000 Landry's Restaurants, Inc. Series B, 7.50%
due 12/15/2014 1,935,000
---------------
2,197,500
Gaming--5.5%
650,000 Galaxy Entertainment Finance Co. Ltd., 9.655%
due 12/15/2010 (a)(b) 671,125
1,000,000 Little Traverse Bay Bands of Odawa Indians,
10.25% due 2/15/2014 (a) 987,500
5,000,000 Majestic Star Casino LLC, 9.50%
due 10/15/2010 5,350,000
1,000,000 Pinnacle Entertainment, Inc., 8.25%
due 3/15/2012 1,040,000
3,000,000 Poster Financial Group, Inc., 8.75%
due 12/01/2011 3,150,000
---------------
11,198,625
Health Care--0.5%
1,000,000 US Oncology Holdings, Inc., 9.264%
due 3/15/2015 (b) 995,000
Information Technology--3.8%
525,000 Activant Solutions, Inc.,10.53%
due 4/01/2010 (a)(b) 538,125
1,000,000 Cypress Semiconductor Corp., 1.25%
due 6/15/2008 (c) 1,292,500
MagnaChip Semiconductor SA:
2,000,000 7.741% due 12/15/2011 (b) 2,030,000
2,000,000 8% due 12/15/2014 1,930,000
2,000,000 Quantum Corp., 4.375% due 8/01/2010 (c) 2,035,000
---------------
7,825,625
Manufacturing--0.7%
1,000,000 Invensys Plc, 9.875% due 3/15/2011 (a) 1,035,000
342,000 Medis Technologies Ltd., 6%
due 7/15/2010 (a)(c) 376,200
---------------
1,411,200
Packaging--0.1%
900,000 Pliant Corp.,13% due 6/01/2010 (f) 220,500
Paper--2.1%
2,000,000 Abitibi-Consolidated, Inc., 7.991%
due 6/15/2011 (b) 1,945,000
250,000 Boise Cascade LLC, 7.475% due 10/15/2012 (b) 248,750
2,000,000 Bowater, Inc., 7.491% due 3/15/2010 (b) 2,000,000
---------------
4,193,750
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
Schedule of Investments (concluded)
Face
Amount Corporate Bonds Value
Retail--1.0%
$2,000,000 Neiman-Marcus Group, Inc., 9%
due 10/15/2015 (a) $ 2,112,500
Telecommunications--1.6%
800,000 Qwest Corp., 7.741% due 6/15/2013 (b) 874,000
2,718,000 Terremark Worldwide, Inc., 9%
due 6/15/2009 (c) 2,419,020
---------------
3,293,020
Utility--4.2%
3,500,000 Electricidad de Caracas Finance BV,10.25%
due 10/15/2014 (a) 3,815,000
2,000,000 NRG Energy, Inc., 7.25% due 2/01/2014 2,050,000
3,000,000 Reliant Energy, Inc., 6.75% due 12/15/2014 2,711,250
---------------
8,576,250
Wireless Communications--0.9%
1,100,000 Dobson Cellular Systems, 9.43%
due 11/01/2011 (b) 1,144,000
325,000 Dobson Communications Corp., 8.85%
due 10/15/2012 321,750
250,000 Rogers Wireless Communications, Inc., 7.616%
due 12/15/2010 (b) 258,750
---------------
1,724,500
Total Corporate Bonds
(Cost--$55,827,667)--27.7% 56,391,012
Shares
Held Common Stocks Value
Chemicals--0.0%
10,732 GEO Specialty Chemicals, Inc. (d) $ 48,294
Total Common Stocks (Cost--$0)--0.0% 48,294
Warrants (g)
Utility--0.0%
14,548 Reliant Resources (expires 10/25/2008) 89,107
Total Warrants (Cost--$0)--0.0% 89,107
Beneficial
Interest Short-Term Securities
$ 161,867 Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I, 4.42% (b)(e) 161,867
Total Short-Term Securities
(Cost--$161,867)--0.1% 161,867
Total Investments (Cost--$261,253,066*)--130.1% 264,887,698
Liabilities in Excess of Other Assets--(30.1%) (61,330,521)
---------------
Net Assets--100.0% $ 203,557,177
===============
* The cost and unrealized appreciation (depreciation) of investments
as of February 28, 2006, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 261,253,066
================
Gross unrealized appreciation $ 4,938,582
Gross unrealized depreciation (1,303,950)
----------------
Net unrealized appreciation $ 3,634,632
================
** 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. The 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 security.
(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 $67,520 $26,374
(f) Non-income producing security; issuer filed for bankruptcy or is in
default of interest payments.
(g) Warrants entitle the Fund to purchase a predetermined number of shares
of common stock and are non-income producing. The purchase price and
number of shares are subject to adjustment under certain conditions
until the expiration date.
o 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. These
industry classifications are unaudited.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
Statement of Assets, Liabilities and Capital
As of February 28, 2006
Assets
Investments in unaffiliated securities, at value (identified cost--$261,091,199) $ 264,725,831
Investments in affiliated securities, at value (identified cost--$161,867) 161,867
Cash 2,872,109
Receivables:
Interest $ 2,931,687
Principal paydowns 29,816
Commitment fees 17,628 2,979,131
---------------
Prepaid expenses 4,527
---------------
Total assets 270,743,465
---------------
Liabilities
Loans 61,400,000
Unfunded loan commitment 257,070
Payables:
Securities purchased 4,968,182
Dividends to shareholders 290,746
Investment adviser 125,515
Interest on loans 32,371
Other affiliates 1,760 5,418,574
---------------
Accrued expenses and other liabilities 110,644
---------------
Total liabilities 67,186,288
---------------
Net Assets
Net assets $ 203,557,177
===============
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 $ 1,850,453
Accumulated realized capital losses--net (1,954,529)
Unrealized appreciation--net 3,491,627
---------------
Total accumulated earnings--net 3,387,551
---------------
Total capital--Equivalent to $19.39 net asset value per share of Common Stock
(market price--$17.76) $ 203,557,177
===============
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
Statement of Operations
For the Year Ended February 28, 2006
Investment Income
Interest (including $26,374 from affiliates) (net of $10,523 foreign withholding tax) $ 18,764,289
Facility and other fees 255,855
---------------
Total income 19,020,144
---------------
Expenses
Loan interest expense $ 2,474,295
Investment advisory fees 2,003,917
Borrowing costs 152,722
Professional fees 99,607
Accounting services 85,088
Transfer agent fees 45,894
Directors' fees and expenses 44,140
Printing and shareholder reports 40,013
Listing fees 19,117
Custodian fees 18,049
Pricing services 10,515
Other 18,777
---------------
Total expenses 5,012,134
---------------
Investment income--net 14,008,010
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss) on:
Investments--net (1,999,659)
Swaps--net 45,130 (1,954,529)
---------------
Change in unrealized appreciation/depreciation on:
Investments--net (1,262,000)
Unfunded corporate loans--net (106,145) (1,368,145)
--------------- ---------------
Total realized and unrealized loss--net (3,322,674)
---------------
Net Increase in Net Assets Resulting from Operations $ 10,685,336
===============
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
Statements of Changes in Net Assets
For the For the Period
Year Ended July 30, 2004++
February 28, to February 28,
Increase (Decrease) in Net Assets: 2006 2005
Operations
Investment income--net $ 14,008,010 $ 6,024,951
Realized gain (loss)--net (1,954,529) 1,230,145
Unrealized appreciation/depreciation--net (1,368,145) 4,859,772
--------------- ---------------
Net increase in net assets resulting from operations 10,685,336 12,114,868
--------------- ---------------
Dividends & Distributions to Shareholders
Dividends and distributions to shareholders on:
Investment income--net (13,283,655) (4,898,853)
Realized gain--net (1,099,532) (130,613)
--------------- ---------------
Net decrease from dividends and distributions to shareholders (14,383,187) (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 (3,697,851) 207,155,020
Beginning of period 207,255,028 100,008
--------------- ---------------
End of period* $ 203,557,177 $ 207,255,028
=============== ===============
* Undistributed investment income--net $ 1,850,453 $ 1,126,098
=============== ===============
++ Commencement of operations.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
Statement of Cash Flows
For the Year Ended February 28, 2006
Cash Provided by Operating Activities
Net increase in net assets resulting from operations $ 10,685,336
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided by operating activities:
Increase in receivables (148,052)
Increase in other assets (3,193)
Increase in other liabilities 43,770
Realized and unrealized loss--net 3,322,674
Amortization of premium and discount (201,521)
Proceeds from sales and paydowns of long-term securities 191,353,817
Other investment related transactions 643,428
Purchases of long-term securities (189,755,155)
Purchases of short-term investments (67,520)
---------------
Cash provided by operating activities 15,873,584
---------------
Cash Used for Financing Activities
Cash receipts from borrowings 145,500,000
Cash payments on borrowings (144,400,000)
Cash payments on offering costs (25,862)
Dividends paid to shareholders (14,391,634)
---------------
Cash used for financing activities (13,317,496)
---------------
Cash
Net increase in cash 2,556,088
Cash at beginning of year 316,021
---------------
Cash at end of year $ 2,872,109
===============
Information
Cash paid for interest $ 2,461,716
===============
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
Financial Highlights
For the For the Period
Year Ended July 30, 2004++ to
The following per share data and ratios have been derived February 28, February 28,
from information provided in the financial statements. 2006 2005
Per Share Operating Performance
Net asset value, beginning of period $ 19.74 $ 19.10
--------------- ---------------
Investment income--net*** 1.33 .58
Realized and unrealized gain (loss)--net (.31) .57
--------------- ---------------
Total from investment operations 1.02 1.15
--------------- ---------------
Less dividends and distributions from:
Investment income--net (1.27) (.47)
Realized gain--net (.10) (.01)
--------------- ---------------
Total dividends and distributions (1.37) (.48)
--------------- ---------------
Offering costs resulting from the issuance of Common Stock -- (.03)
--------------- ---------------
Net asset value, end of period $ 19.39 $ 19.74
=============== ===============
Market price per share, end of period $ 17.76 $ 19.44
=============== ===============
Total Investment Return**
Based on net asset value per share 6.07% 5.97%+++
=============== ===============
Based on market price per share (1.35%) (.34%)+++
=============== ===============
Ratios to Average Net Assets
Expenses, net of waiver and excluding interest expense 1.25% .92%*
=============== ===============
Expenses, net of waiver 2.46% 1.30%*
=============== ===============
Expenses 2.46% 1.48%*
=============== ===============
Investment income--net 6.88% 5.11%*
=============== ===============
Leverage
Amount of borrowings, end of period (in thousands) $ 61,400 $ 60,300
=============== ===============
Average amount of borrowings outstanding during the period (in thousands) $ 63,725 $ 29,072
=============== ===============
Average amount of borrowings outstanding per share during the period*** $ 6.07 $ 2.80
=============== ===============
Supplemental Data
Net assets, end of period (in thousands) $ 203,557 $ 207,255
=============== ===============
Portfolio turnover 72.49% 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, 2006
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. 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, Fund
Asset Management, L.P. ("FAM") will value the floating rate loan at fair
value, which is intended to approximate market value.
Debt securities are traded primarily in over-the-counter ("OTC") markets and
are valued at the last available bid price in the OTC market or on the basis
of values obtained by a pricing service. Pricing services use valuation
matrixes that incorporate both dealer-supplied valuations and valuation
models. The procedures of the pricing service and its valuations are reviewed
by the officers of the Fund under the general direction of the Board of
Directors. Such valuations and procedures will be reviewed periodically by the
Board of Directors of the Fund.
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 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 FAM believes that this method no longer produces fair
valuations. Repurchase agreements will be valued at cost plus accrued
interest.
Generally, trading in foreign securities, as well as U.S. government
securities, money market instruments and certain fixed income securities, 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 FAM using a pricing
service and/or procedures approved by the Fund's Board of Directors.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
Notes to Financial Statements (continued)
(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 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. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(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.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
Notes to Financial Statements (continued)
(g) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates. The Fund may at times pay out less than the entire amount
of net investment income earned in any particular period and may at times pay
out such accumulated undistributed income in other periods to permit the Fund
to maintain a more stable level of dividends.
(h) Securities lending--The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. The market
value of the loaned securities is determined at the close of business of the
Fund and any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral for the
loaned securities, it collects a fee from the borrower. The Fund typically
receives the income on the loaned securities but does not receive the income
on the collateral. Where the Fund receives cash collateral, it may invest such
collateral and retain the amount earned on such investment, net of any amount
rebated to the borrower. Loans of securities are terminable at any time and
the borrower, after notice, is required to return borrowed securities within
five business days. The Fund may pay reasonable finder's, lending agent,
administrative and custodial fees in connection with its loans. In the event
that the borrower defaults on its obligation to return borrowed securities
because of insolvency or for any other reason, the Fund could experience
delays and costs in gaining access to the collateral. The Fund also could
suffer a loss where the value of the collateral falls below the market value
of the borrowed securities, in the event of borrower default or in the event
of losses on investments made with cash collateral.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM. The
general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect,
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of .75% of the Fund's average daily net assets
plus the proceeds of any outstanding borrowings used for leverage.
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 year ended February 28, 2006, the Fund reimbursed FAM $4,881 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 year ended February 28,
2006.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, ML & Co., and/or MLIM, LLC.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
merge ML & Co.'s investment management business, including FAM, with the
investment management business of BlackRock, Inc. The transaction is expected
to close in the third quarter of 2006.
3. Investments:
Purchases and sales (including paydowns) of investments, excluding short-term
securities, for the year ended February 28, 2006 were $191,792,001 and
$191,129,883, 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.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
Notes to Financial Statements (concluded)
Shares issued and outstanding during the year ended February 28, 2006 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 3.88% and the average borrowing
was approximately $63,725,000 for the year ended February 28, 2006.
6. Unfunded Corporate Loans:
As of February 28, 2006, the Fund had unfunded loan commitments of
approximately $11,434,000, which would be extended at the option of the
borrower pursuant to the following loan agreements:
(in Thousands)
Unfunded
Borrower Commitment Value
Aquila, Inc. $3,000 $2,940
MGM Mirage Revolving Line
of Credit $1,845 $1,795
Spanish Broadcasting System, Inc. $2,500 $2,431
Trump Entertainment Delayed Draw $ 995 $1,007
Trump Entertainment Resorts
Holdings LP $2,000 $1,950
United Airlines $ 94 $ 94
Vought Aircraft Industries, Inc. $1,000 $ 960
7. Distributions to Shareholders:
The Fund paid an ordinary income dividend to holders of Common Stock in the
amount of $0.108333 per share on March 31, 2006 to shareholders of record on
March 14, 2006.
The tax character of distributions paid during the fiscal year ended February
28, 2006 and the period July 30, 2004 to February 28, 2005 was as follows:
7/30/2004++ -
2/28/2006 2/28/2005
Distributions paid from:
Ordinary income $ 14,383,187 $ 5,029,466
--------------- ---------------
Total taxable distributions $ 14,383,187 $ 5,029,466
=============== ===============
++ Commencement of operations.
As of February 28, 2006, the components of accumulated earnings on a
tax basis were as follows:
Undistributed ordinary income--net $ 1,850,453
Undistributed long-term capital gains--net --
---------------
Total undistributed earnings--net 1,850,453
Capital loss carryforward (467,774)*
Unrealized gains--net 2,004,872**
---------------
Total accumulated earnings--net $ 3,387,551
===============
* On February 28, 2006, the Fund had a net capital loss carryforward
of $467,774, all of which expires in 2014. This amount will be
available to offset like amounts of any future taxable gains.
** The difference between book-basis and tax-basis net unrealized
gains is attributable primarily to the deferral of post-October
capital losses for tax purposes.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
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, 2006, and the related statements of operations and
cash flows for the year then ended, and the statements of changes in net
assets, and the financial highlights for the year then ended and for the
period July 30, 2004 (commencement of operations) through 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 audits.
We conducted our audits 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. Our audits
included 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, 2006,
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 audits provide 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, 2006, the
results of its operations and its cash flows for the year then ended and the
changes in its net assets, and its financial highlights for the year then
ended and 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 24, 2006
Fund Certification (unaudited)
In February 2006, 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.
Important Tax Information (unaudited)
The following information is provided with respect to the ordinary income
distributions paid by Floating Rate Income Strategies II, Inc. for the fiscal
year ended February 28, 2006:
Interest-Related Dividends for Non-U.S. Residents
Month Paid: March 2005 0.00%*
April 2005 76.70%*
May 2005 - December 2005 87.10%*
January 2006 48.59%*
February 2006 82.16%*
* Represents the portion of the taxable ordinary income dividends
eligible for exemption from U.S. withholding tax for nonresident
aliens and foreign corporations.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
Automatic Dividend Reinvestment Plan
How the Plan Works--The Fund offers a Dividend Reinvestment Plan (the "Plan")
under which income and capital gains dividends paid by the Fund are
automatically reinvested in additional shares of Common Stock of the Fund. The
Plan is administered on behalf of the shareholders by Computershare Trust
Company, N.A. (the "Plan Agent"). Under the Plan, whenever the Fund declares a
dividend, participants in the Plan will receive the equivalent in shares of
Common Stock of the Fund. The Plan Agent will acquire the shares for the
participant's account either (i) through receipt of additional unissued but
authorized shares of the Fund ("newly issued shares") or (ii) by purchase of
outstanding shares of Common Stock on the open market on the New York Stock
Exchange or elsewhere. If, on the dividend payment date, the Fund's net asset
value per share is equal to or less than the market price per share plus
estimated brokerage commissions (a condition often referred to as a "market
premium"), the Plan Agent will invest the dividend amount in newly issued
shares. If the Fund's net asset value per share is greater than the market
price per share (a condition often referred to as a "market discount"), the
Plan Agent will invest the dividend amount by purchasing on the open market
additional shares. If the Plan Agent is unable to invest the full dividend
amount in open market purchases, or if the market discount shifts to a market
premium during the purchase period, the Plan Agent will invest any uninvested
portion in newly issued shares. The shares acquired are credited to each
shareholder's account. The amount credited is determined by dividing the
dollar amount of the dividend by either (i) when the shares are newly issued,
the net asset value per share on the date the shares are issued or (ii) when
shares are purchased in the open market, the average purchase price per share.
Participation in the Plan--Participation in the Plan is automatic, that is, a
shareholder is automatically enrolled in the Plan when he or she purchases
shares of Common Stock of the Fund unless the shareholder specifically elects
not to participate in the Plan. Shareholders who elect not to participate will
receive all dividend distributions in cash. Shareholders who do not wish to
participate in the Plan must advise the Plan Agent in writing (at the address
set forth below) that they elect not to participate in the Plan. Participation
in the Plan is completely voluntary and may be terminated or resumed at any
time without penalty by writing to the Plan Agent.
Benefits of the Plan--The Plan provides an easy, convenient way for
shareholders to make additional, regular investments in the Fund. The Plan
promotes a long-term strategy of investing at a lower cost. All shares
acquired pursuant to the Plan receive voting rights. In addition, 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 for less than
they could otherwise purchase them and with a cash value greater than the
value of any cash distribution they would have received. However, there may
not be enough 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.
Plan Fees--There are no enrollment fees or brokerage fees for participating in
the Plan. The Plan Agent's service fees for handling the reinvestment of
distributions are paid for by the Fund. However, brokerage commissions may be
incurred when the Fund purchases shares on the open market and shareholders
will pay a pro rata share of any such commissions.
Tax Implications--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. Therefore,
income and capital gains may still be realized even though shareholders do not
receive cash. 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 market premium, 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 the discount from the market value (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.
Contact Information--All correspondence concerning the Plan, including
any questions about the Plan, should be directed to the Plan Agent at
Computershare Trust Company, N.A., P.O. Box 43010, Providence, RI 02940-3010,
Telephone: 800-426-5523.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
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 the MLIM/FAM-advised funds since 131 Funds None
P.O. Box 9011 and present 2005; President of MLIM and FAM since 2001; 177 Portfolios
Princeton, Director Co-Head (Americas Region) thereof from 2000
NJ 08543-9011 to 2001 and Senior Vice President from 1999
Age: 51 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 OppenheimerFunds, 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 defined in the Investment Company Act, of the Fund based on his
positions with MLIM, FAM, Princeton Services and Princeton Administrators. 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.
Independent Directors*
Ronald W. Forbes** Director 2004 to Professor Emeritus of Finance, School of 49 Funds None
P.O. Box 9095 present Business, State University of New York at 50 Portfolios
Princeton, Albany since 2000 and Professor thereof from
NJ 08543-9095 1989 to 2000; International Consultant,
Age: 65 Urban Institute, Washington, D.C. from 1995
to 1999.
Cynthia A. Montgomery Director 2004 to Professor, Harvard Business School since 1989; 49 Funds Newell
P.O. Box 9095 present Associate Professor, J.L. Kellogg Graduate 50 Portfolios Rubbermaid,
Princeton, School of Management, Northwestern University Inc.
NJ 08543-9095 from 1985 to 1989; Associate Professor, Graduate (manufacturing).
Age: 53 School of Business Administration, University of
Michigan from 1979 to 1985; Director, Harvard
Business School Publishing since 2005; Director,
McLean Hospital since 2005.
Jean Margo Reid Director 2004 to Self-employed consultant since 2001; Counsel 49 Funds None
P.O. Box 9095 present of Alliance Capital Management (investment 50 Portfolios
Princeton, adviser) in 2000; General Counsel, Director and
NJ 08543-9095 Secretary of Sanford C. Bernstein & Co., Inc.
Age: 60 (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; and Director of
Covenant House from 2001 to 2004.
Roscoe S. Suddarth Director 2004 to President, Middle East Institute, from 1995 to 49 Funds None
P.O. Box 9095 present 2001; Foreign Service Officer, United States 50 Portfolios
Princeton, Foreign Service, from 1961 to 1995 and Career
NJ 08543-9095 Minister from 1989 to 1995; Deputy Inspector
Age: 70 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, 49 Funds Bowne & Co.,
P.O. Box 9095 present Dean from 1984 to 1993 and since 1995 50 Portfolios Inc. (financial
Princeton, Dean Emeritus of New York University's Leonard printers);
NJ 08543-9095 N. Stern School of Business Administration. Vornado Realty
Age: 68 Trust (real estate
company);
Alexander's, Inc.
(real estate
company).
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
Officers and Directors (concluded)
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 (concluded)*
Edward D. Zinbarg Director 2004 to Self-employed financial consultant since 1994; 49 Funds None
P.O. Box 9095 present Executive Vice President of the Prudential 50 Portfolios
Princeton, Insurance Company of America from 1988 to
NJ 08543-9095 1994; Former Director of Prudential Reinsurance
Age: 71 Company and former Trustee of the Prudential
Foundation.
* Directors serve until their resignation, removal or death, or until December 31
of the year in which they turn 72.
** Chairman of the Board of Directors and the Audit Committee.
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 since 1999;
P.O. Box 9011 President present Senior Vice President and Treasurer of Princeton Services since 1999 and Director
Princeton, and since 2004; Vice President of FAM Distributors, Inc. ("FAMD") since 1999 and
NJ 08543-9011 Treasurer Director since 2004; Vice President of MLIM and FAM from 1990 to 1997; Director of
Age: 45 Taxation of MLIM from 1990 to 2001; Vice President, Treasurer and Secretary of the
IQ Funds since 2004.
Jaimin J. Patel Vice 2004 to Director (Global Fixed Income) of MLIM since 2005; Vice President of MLIM from
P.O. Box 9011 President present 2000 to 2005; Vice President at Chase Securities, Inc. from 1993 to 2000.
Princeton,
NJ 08543-9011
Age: 47
Jeffrey Hiller Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President and
P.O. Box 9011 Compliance present Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief Compliance
Princeton, Officer Officer of the IQ Funds since 2004; Global Director of Compliance at Morgan Stanley
NJ 08543-9011 Investment Management from 2002 to 2004; Managing Director and Global Director
Age: 54 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 Securities and
Exchange 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 1999 to
P.O. Box 9011 present 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD
Princeton, and Princeton Services since 2004.
NJ 08543-9011
Age: 45
* 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
Computershare Trust Company, N.A.
P.O. Box 43010
Providence, RI 02940-3010
NYSE Symbol
FRB
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006
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, 2006 - $40,200
Fiscal Year Ending February 28, 2005 - $42,000
(b) Audit-Related Fees -
Fiscal Year Ending February 28, 2006 - $8,000
Fiscal Year Ending February 28, 2005 - $9,600
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, 2006 - $6,000
Fiscal Year Ending February 28, 2005 - $5,700
The nature of the services include tax compliance, tax advice and
tax planning.
(d) All Other Fees - Fiscal Year Ending February 28, 2006 - $0
Fiscal Year Ending February 28, 2005 - $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, 2006 - $4,944,454
Fiscal Year Ending February 28, 2005 - $11,046,527
(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) - $1,227,000, 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
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 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:
o 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.
o 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.
o 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.
o 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.
o 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.
o Routine proposals related to requests regarding the formalities of
corporate meetings.
o 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.
o 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 -
as of March 31, 2006.
(a)(1) Mr. Jaimin J. Patel is primarily responsible for the day-to-
day management of the registrant's portfolio ("Portfolio
Manager"). Mr. Patel has been a Director of the Investment
Adviser since 2005 and was previously a Vice President at
the Investment Adviser since 2000. He has been a portfolio
manager and Vice President of the Fund since 2004. His
investment experience includes the analysis and management
of senior floating rate loans and the use of leverage
techniques to manage portfolios.
(a)(2) As of March 31, 2006*:
(iii) Number of Other Accounts and
(ii) Number of Other Accounts Managed Assets for Which Advisory Fee is
and Assets by Account Type Performance-Based
Other Other
(i) Name of Registered Other Pooled Registered Other Pooled
Portfolio Investment Investment Other Investment Investment Other
Manager Companies Vehicles Accounts Companies Vehicles Accounts
Jaimin J.
Patel 1 3 1 0 0 0
$ 355,068,398 $ 629,062,198 $ 301,970,712 $ 0 $ 0 $ 0
* As of April 3, 2006, Mr. Patel took on additional asset management responsibilities.
The data represents Mr. Patel's assets under management as of that date.
(iv) Potential Material Conflicts of Interest
Real, potential or apparent conflicts of interest may arise when a
portfolio manager has day-to-day portfolio management responsibilities with
respect to more than one fund or account, including the following:
Certain investments may be appropriate for the Fund and also for other
clients advised by the Investment. Adviser and its affiliates, including other
client accounts managed by the Fund's portfolio management team. Investment
decisions for the Fund and other clients are made with a view to achieving
their respective investment objectives and after consideration of such factors
as their current holdings, availability of cash for investment and the size of
their investments generally. Frequently, a particular security may be bought or
sold for only one client or in different amounts and at different times for
more than one but less than all clients. Likewise, because clients of the
Investment Adviser and its affiliates may have differing investment strategies,
a particular security may be bought for one or more clients when one or more
other clients are selling the security. The investment results for the Fund may
differ from the results achieved by other clients of the Investment Adviser and
its affiliates and results among clients may differ. In addition, purchases or
sales of the same security may be made for two or more clients on the same day.
In such event, such transactions will be allocated among the clients in a
manner believed by the Investment Adviser and its affiliates to be equitable to
each. The Investment Adviser will not determine allocations based on whether it
receives a performance based fee from the client. In some cases, the allocation
procedure could have an adverse effect on the price or amount of the securities
purchased or sold by the Fund. Purchase and sale orders for the Fund may be
combined with those of other clients of the Investment Adviser and its
affiliates in the interest of achieving the most favorable net results to the
Fund.
To the extent that the Fund's portfolio management team has
responsibilities for managing accounts in addition to the Fund, a portfolio
manager will need to divide his time and attention among relevant accounts.
In some cases, a real, potential or apparent conflict may also arise
where (i) the Investment Adviser may have an incentive, such as a performance
based fee, in managing one account and not with respect to other accounts it
manages or (ii) where a member of the Fund's portfolio management team owns an
interest in one fund or account he or she manages and not another.
(a)(3) As of March 31, 2006:
Portfolio Manager Compensation
The Portfolio Manager Compensation Program of MLIM and its affiliates,
including the Investment Adviser (collectively, "MLIM"), is critical to MLIM's
ability to attract and retain the most talented asset management professionals.
This program ensures that compensation is aligned with maximizing investment
returns and it provides a competitive pay opportunity for competitive
performance.
Compensation Program
The elements of total compensation for MLIM portfolio managers are a
fixed base salary, annual performance-based cash and stock compensation (cash
and stock bonus) and other benefits. MLIM has balanced these components of pay
to provide portfolio managers with a powerful incentive to achieve consistently
superior investment performance. By design, portfolio manager compensation
levels fluctuate--both up and down--with the relative investment performance of
the portfolios that they manage.
Base Salary
Under the MLIM approach, like that of many asset management firms, base
salaries that are fixed on an annual basis represent a relatively small portion
of a portfolio manager's total compensation. This approach serves to enhance
the motivational value of the performance-based (and therefore variable)
compensation elements of the compensation program.
Performance-Based Compensation
MLIM believes that the best interests of investors are served by
recruiting and retaining exceptional asset management talent and managing their
compensation within a consistent and disciplined framework that emphasizes pay
for performance in the context of an intensely competitive market for talent.
To that end, portfolio manager incentive compensation for MLIM and its
affiliates is based on a formulaic compensation program. MLIM's formulaic
portfolio manager compensation program includes: investment performance
relative to general closed-end, non-leveraged, fixed income funds over 1-, 3-,
and 5-year performance periods and a measure of operational efficiency.
Portfolio managers are compensated based on the pre-tax performance of the
products they manage. A discretionary element of portfolio manager compensation
may include consideration of: financial results of MLIM, expense control,
profit margins, strategic planning and implementation, quality of client
service, market share, corporate reputation, capital allocation, compliance and
risk control, leadership, workforce diversity, technology and innovation. MLIM
and its affiliates also consider the extent to which individuals exemplify and
foster Merrill Lynch's principles of client focus, respect for the individual,
teamwork, responsible citizenship and integrity. All factors are considered
collectively by MLIM management.
Cash Bonus
Performance-based compensation is distributed to portfolio managers in
a combination of cash and stock. Typically, the cash bonus, when combined with
base salary, represents more than 60% of total compensation for portfolio
managers.
Stock Bonus
A portion of the dollar value of the total annual performance-based
bonus is paid in restricted shares of Merrill Lynch & Co., Inc. (herein, the
"Company") stock. Paying a portion of annual bonuses in stock puts compensation
earned by a portfolio manager for a given year "at risk" based on the Company's
ability to sustain and improve its performance over future periods. The
ultimate value of stock bonuses is dependent on future Company stock price
performance. As such, the stock bonus aligns each portfolio manager's financial
interests with those of the Company shareholders and encourages a balance
between short-term goals and long-term strategic objectives. Management
strongly believes that providing a significant portion of competitive
performance-based compensation in stock is in the best interests of investors
and shareholders. This approach ensures that portfolio managers participate as
shareholders in both the "downside risk" and "upside opportunity" of the
Company's performance. Portfolio managers therefore have a direct incentive to
protect the Company's reputation for integrity.
Other Compensation Programs
Portfolio managers who meet relative investment performance and
financial management objectives during a performance year are eligible to
participate in a deferred cash program. Awards under this program are in the
form of deferred cash that may be benchmarked to a menu of MLIM mutual funds
(including their own fund) during a five-year vesting period. The deferred cash
program aligns the interests of participating portfolio managers with the
investment results of MLIM products and promotes continuity of successful
portfolio management teams.
Other Benefits
Portfolio managers are also eligible to participate in broad-based
plans offered generally to the Company's employees, including broad-based
retirement, 401(k), health, and other employee benefit plans.
(a)(4) Beneficial Ownership of Securities. As of March 31, 2006,
Mr. Booth beneficially owns stock issued by the Fund in the
range of $100,001-$500,000.
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 20, 2006
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 20, 2006
By: /s/ Donald C. Burke
----------------------------
Donald C. Burke,
Chief Financial Officer of
Floating Rate Income Strategies Fund II, Inc.
Date: April 20, 2006