As filed with the Securities and Exchange
Commission on November 2, 1999.
Securities Act File No. 333-
Investment Company Act File No. 811-09229
Post-Effective Amendment to Registration Statement
as stated below
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF
1933
x
Pre-Effective Amendment No.
¨
Post-Effective Amendment No.
¨
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT
COMPANY ACT OF 1940
x
Amendment No. 3
x
(Check appropriate box or boxes)
Merrill Lynch Senior Floating Rate Fund II, Inc.
(Exact name of registrant as specified in its
charter)
800 Scudders Mill Road
Plainsboro, New Jersey 08536
(Address of Principal Executive Offices) (Zip Code)
Registrants Telephone Number, Including Area
Code: (609) 282-2800
Terry K. Glenn
Merrill Lynch Senior Floating Rate Fund II, Inc.
800 Scudders Mill Road, Plainsboro, New Jersey
Mailing Address: P.O. Box 9011, Princeton, New
Jersey 08543-9011
(Name and Address of Agent for Service)
Copies to:
Frank P. Bruno,
Esq.
|
|
Bradley J.
Lucido, Esq.
|
Brown &
Wood
LLP
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|
Merrill Lynch
Asset Management, L.P.
|
One World Trade
Center
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P.O. Box 9011
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New York, New
York 10048-0557
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Princeton, New
Jersey 08543-9011
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Approximate date of Proposed Public Offering:
As soon as practicable after the
effective date of this Registration Statement.
If
any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933, as amended (the Securities Act
), other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box.
x
If
this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement
number of the earlier effective registration statement for the same
offering.
¨
If
this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list
the Securities Act registration number of the earlier effective
registration statement for the same offering.
¨
If
delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, please check the following box.
¨
CALCULATION OF REGISTRATION FEE UNDER THE
SECURITIES ACT OF 1933
Title of
Securities Being Registered
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|
Amount
Being
Registered(1)
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Proposed
Maximum
Offering Price
Per Unit
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Proposed
Maximum
Aggregate
Offering Price(1)
|
|
Amount of
Registration
Fee(2)
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|
Common Stock ($.10
par value)
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|
75,000,000 shs.
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$10.01
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|
$750,750,000
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|
$208,708.50
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|
(1)
|
Estimated solely for the purpose of calculating the filing fee.
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(2)
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Transmitted to the designated lockbox at Mellon Bank in
Pittsburgh, PA.
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The Registrant hereby amends this Registration Statement on such
date or dates as may be necessary to delay its effective date until
the Registrant shall file a further amendment which specifically
states that this Registration Statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act or
until the Registration Statement shall become effective on such date
as the Commission, acting pursuant to said Section 8(a), may
determine.
Pursuant to Rule 429 under the Securities Act, the Prospectus in
this Registration Statement is a combined prospectus and relates to
Registration Statement No. 333-72137, as amended, previously filed
by the Registrant on Form N-2. This Registration Statement also
constitutes Post-Effective Amendment No. 1 to Registration Statement
No. 333-72137, and such Post-Effective Amendment shall hereafter
become effective concurrently with the effectiveness of this
Registration Statement and in accordance with Section 8(c) of the
Securities Act. The Registration Statement and the registration
statement amended hereby are collectively referred to hereunder as
the Registration Statement.
The
information contained in this prospectus is not complete and may be
changed. we may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is
effective. This prospectus is not an offer to sell these securities
and it is not soliciting an offer to buy these securities in any
State where the offer or sale is not permitted.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 2, 1999
PROSPECTUS
December , 1999
Merrill Lynch Senior Floating Rate Fund II, Inc.
Common Stock
Merrill Lynch Senior Floating Rate Fund II, Inc. (the Fund
) is a continuously offered, non-diversified, closed-end fund.
The Fund seeks current income and such preservation of capital as is
consistent with investment in senior collateralized corporate loans
(primarily in the form of participation interests) made by banks and
other financial institutions. There can be no assurance that the
investment objective of the Fund will be realized. Currently, there
is no secondary market for the Funds common stock. To provide
liquidity, the Fund generally intends to make quarterly tender
offers for its shares. In a tender offer, the Fund repurchases
outstanding shares at the Funds net asset value on the last
day of the offer. If a tender offer is not made, shareholders may
not be able to sell their shares.
Shares of common stock of the Fund are offered on a best efforts
basis at a price equal to the next determined net asset value per
share without a front-end sales charge. As of the date of this
Prospectus, net asset value per share is $10.01. Shares may be
purchased directly from Merrill Lynch Funds Distributor, a division
of Princeton Funds Distributor, Inc., or from selected other
securities dealers, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated (Merrill Lynch).
This
Prospectus contains information you should know before investing,
including information about risks. Please read it before you invest
and keep it for future reference. The Securities and Exchange
Commission has not approved or disapproved these securities or
determined if this Prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
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Price to
Public(1)
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Underwriting
Discount(2)
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Proceeds to
Fund(3)
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Per Share..
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$10.01
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None
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$10.01
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Total(3)..
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$750,750,000
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None
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$750,750,000
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(1)
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Net
asset value ranged from $10.00 to $10.01 per share between March
26, 1999 (commencement of operations) to the date of this
Prospectus.
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(2)
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The
Distributor pays all offering expenses (other than registration
fees) and sales commissions to selected dealers (primarily Merrill
Lynch) from its own assets. Therefore, all of the proceeds of this
offering will be available to the Fund for investment in portfolio
securities. See Purchase of Shares.
|
Merrill Lynch Funds Distributor
Distributor
Merrill Lynch Asset Management
Investment Adviser
This summary is qualified in its entirety by reference to the
detailed information included in this Prospectus.
The Fund
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Merrill
Lynch Senior Floating Rate Fund II, Inc. is a continuously offered
non-diversified, closed-end fund.
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The Offering
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Shares of
common stock of the Fund are offered by the Distributor and other
securities dealers, including Merrill Lynch. Investors also may
mail a purchase order directly to Financial Data Services, Inc.,
the Funds Transfer Agent.
The Fund offers its common stock on a best efforts
basis at a price equal to the next determined net asset value per
share without a front-end sales charge. Shares are sold subject to
certain minimum purchase requirements:
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For Investments
in the Fund made
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The
Minimum
Initial
Purchase
Amount is
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The
Minimum
Subsequent
Purchase
Amount is
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Directly through
the Funds Distributor
or Transfer Agent
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$ 1,000
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$ 50
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Via a Merrill
Lynch-maintained 401(k)
or 403(b) plan
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None
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None
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Via another
retirement plan
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$ 250
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$
1
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Investment
Objective and Policies
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The Fund
seeks to provide shareholders with current income and such
preservation of capital as is consistent with investment in senior
collateralized corporate loans made to U.S. or non-U.S. borrowers
that meet the credit standards established by the Funds
investment adviser. An investment in the Fund entails certain
risks.
Corporate Loans. The
Fund invests primarily in corporate loans that are direct
obligations of a borrower undertaken to finance the growth of the
borrowers business or a capital restructuring. A significant
portion of such corporate loans are highly leveraged loans such as
leveraged buy-out loans, leveraged recapitalization loans and
other types of acquisition loans. The Fund also may invest in
privately placed notes with credit and pricing terms that are, in
the opinion of the Investment Adviser, consistent with investment
in senior collateralized corporate loans.
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Floating or Variable Rate Corporate Loans.
Under normal market conditions, the Fund will invest at
least 65% of its assets in corporate loans that have floating or
variable interest rates. Floating rate corporate loan interest
rates adjust periodically at a margin above a generally-recognized
base lending rate such as the prime rate of a designated U.S.
bank, the Certificate of Deposit rate or the London InterBank
Offered Rate.
Credit Quality. The
Fund will invest in a corporate loan only if, in the Investment
Advisers judgment, the borrower can meet debt service on
such loan. The Investment Adviser performs its own credit analysis
of each borrower. Since the minimum debt rating of a borrower may
not have a meaningful relationship to the quality of such borrower
s senior collateralized debt, the Fund does not impose any
minimum standard regarding the rating of other debt instruments of
the borrower. The Fund may invest without limitation in corporate
loans rated below investment grade (i.e., below BBB or Baa)
or which are unrated but of similar credit quality.
Unsecured Loans and Short-Term Investments.
Generally the Fund invests at least 80% of
its assets in senior collateralized corporate loans. The remainder
of the Funds assets may be invested in unsecured senior
loans. The Fund also may invest in cash or in secured or unsecured
short-term debt obligations. Short-term debt obligations in which
the Fund invests are rated investment grade (i.e., within
the four highest rating categories assigned by a nationally
recognized rating service) or, if not rated, are determined to be
of comparable quality by the Investment Adviser. Obligations rated
in the fourth highest rating category may include obligations
considered to have certain speculative characteristics.
Portfolio Maturity.
The Fund has no restrictions on portfolio maturity, but it is
anticipated that a majority of the corporate loans in which it
invests will have stated maturities ranging from three to ten
years. As a result of prepayments, however, the average life of
the corporate loans is expected to be in the two to three year
range.
Foreign and Domestic Borrowers.
The Fund may invest in corporate loans made to U.S. or
non-U.S. borrowers, provided that the loans are U.S.
dollar-denominated or otherwise provide for payment to the Fund in
U.S. dollars.
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Hedging Techniques. The Fund may engage
in certain interest rate hedging transactions, such as swaps,
caps or floors, to reduce the Fund
s exposure to interest rate movements. The Fund also may
invest in corporate loans that pay interest and principal in a
currency other than U.S. dollars if the loan arrangement also
includes a foreign currency swap that entitles the Fund to receive
payments in U.S. dollars, or if the Fund hedges the foreign
currency exposure itself utilizing forward contracts or other
methods.
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Borrowings by
the Fund
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The Fund
may borrow money in amounts up to 33
1
/
3
% of
the value of its total assets. Typically the Fund borrows to
satisfy tender offers, if necessary, but it also is authorized to
borrow to finance additional investments. The Fund will borrow to
finance additional investments only when the Investment Adviser
believes that the potential return on such additional investments
will exceed the costs incurred in connection with the borrowing.
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Investment
Adviser and Administrator
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Merrill
Lynch Asset Management, L.P., the Investment Adviser, provides
investment advisory and administrative services to the Fund. For
advisory services, the Fund pays the Investment Adviser a fee at
the annual rate of 0.95% of the Funds average daily net
assets. For its administrative services, the Fund pays the
Investment Adviser a fee at the annual rate of 0.40% of the Fund
s average daily net assets. While the combined advisory and
administrative fees are higher than that paid by most funds, they
are comparable to those paid by other continuously offered
closed-end funds investing primarily in corporate loans.
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Distributions
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The Fund
intends to declare dividends daily, pay dividends monthly and
distribute all of its net investment income. Net capital gains, if
any, will be distributed at least annually.
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Tender Offers
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Currently, there is no secondary market for the Funds common
stock, and it is not expected that a secondary market will
develop. To provide liquidity, the Board of Directors intends to
consider, on a quarterly basis, whether the Fund should make a
tender offer for its shares. In a tender offer, the Fund
repurchases outstanding shares at the Funds net asset value
on the last day of the offer. If a tender offer is not made,
shareholders may not be able to sell their shares.
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Early
Withdrawal Charge
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Tendered
shares of common stock held for less than one year at the date of
tender are subject to an early withdrawal charge in most cases. It
is based on the lesser of cost or net asset value of the tendered
shares. There is no charge when shares are tendered after more
than one year.
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RISK FACTORS AND SPECIAL CONSIDERATIONS
Liquidity of Shares. The Fund is designed
primarily for long term investors and should not be considered a
vehicle for trading purposes. Currently, there is no secondary
market for the Funds common stock, and a secondary market is
not expected to develop. To provide liquidity to shareholders, the
Board of Directors of the Fund intends to consider making quarterly
tender offers to repurchase the Funds shares at net asset
value. However, the Funds shares are less liquid than shares
of funds traded on a stock exchange, and shareholders who tender
Fund shares held for less than one year will pay an early withdrawal
charge. The Board of Directors is not obligated to authorize any
tender offer, and there may be quarters in which no tender offer is
made. If the Board of Directors does not authorize a tender offer,
shareholders may be unable to sell their shares. Merrill Lynch and
other selected dealers are prohibited from making a market in the
Funds common stock while the Fund either is offering its
shares or is making a tender offer to repurchase its shares.
Closed-end funds that do trade in a secondary market are subject to
the risk that the net asset value of the shares may be higher than
the market price, commonly referred to as trading at a
discount. As long as there is no secondary market for the Fund
s shares, the Fund is not subject to this risk.
Non-payment. The corporate loans in which
the Fund invests are subject to the risk of non-payment of interest
and principal. When a borrower fails to make scheduled interest or
principal payments on a debt instrument, the value of the
instrument, and hence the value of the Funds shares, may go
down. While collateral may provide some protection against
devaluation due to a default on a collateralized loan, losses may
not be completely covered by the liquidation or sale of collateral.
To the extent the corporate loan is secured by stock of the borrower
and/or its subsidiaries and affiliates, such stock may lose all of
its value in the event of a bankruptcy or insolvency of the borrower.
The
Fund may invest without limitation in corporate loans rated below
investment grade (i.e., below BBB or Baa) or which are
unrated but of similar credit quality. These investments have a
higher risk of non-payment than investment grade investments.
Corporate loans made in connection with highly leveraged
transactions are subject to greater risks than other corporate
loans. For example, the risks of default or bankruptcy of the
borrower or the risks that other creditors of the borrower may seek
to nullify or subordinate the Funds claims on the collateral
securing the loan are greater in highly leveraged transactions.
Intermediary. The Fund may invest in
corporate loans either by participating as a co-lender at the time
the loan is originated or by buying an interest in the loan from an
institution acting as agent, co-lender or participant. The financial
status of the institutions interposed between the Fund and a
borrower may affect the ability of the Fund to receive principal and
interest payments. For this reason, the Fund will invest in
corporate loans only if, at the time of investment, the outstanding
debt obligations of these intermediary institutions are rated
investment grade or are of comparable quality in the judgment of the
Investment Adviser.
The
success of the Fund depends, to a great degree, on the skill with
which an agent bank administers the terms of the corporate loan
agreements, monitors borrower compliance with covenants, collects
principal, interest and fee payments from borrowers and, where
necessary, enforces creditor remedies against borrowers. Agent banks
typically have broad discretion in enforcing corporate loan
agreements.
Net Asset Value; Interest Rate Sensitivity, Credit Quality and Other
Market Conditions. Generally, when
interest rates go up, the value of fixed income debt securities goes
down. Therefore, the net asset value of a
fund that invests primarily in fixed income debt securities changes as
interest rates fluctuate. Because the Fund invests primarily in
floating or variable rate debt obligations, the Investment Adviser
expects that it will be insulated to a significant degree from net
asset value fluctuations caused by movements in interest rates.
However, because floating and variable rate debt obligations only
reset periodically, the Funds net asset value may fluctuate
from time to time due to interest rate movements when there is an
imperfect correlation between the interest rates on the variable
rate loans in the Funds portfolio and prevailing interest
rates. A decline in the credit quality or financial condition of
borrowers in which the Fund invests may result in the corporate
loans held by the Fund, and hence the Funds net asset value,
going down. A serious deterioration in the credit quality or
financial condition of a borrower could cause a permanent decrease
in the Funds net asset value. Furthermore, volatility in the
capital markets and other adverse market conditions may result in a
decrease in the value of corporate loans held by the Fund. Given
that the Fund uses market prices to value many of its corporate loan
investments, any decrease in the market value of the corporate loans
held by the Fund will result in a decrease in the Funds net
asset value.
Borrowings by the Fund. If the Fund
chooses to borrow money, rather than liquidate investments, to
satisfy a tender offer, it is subject to the risk that investment
return on Fund shares will be reduced to the extent the cost of the
borrowings exceeds income on the retained investments.
Hedging. Hedging transactions subject the
Fund to the risk that, if the Investment Adviser incorrectly
forecasts market values, interest rates or other applicable factors,
the Funds performance could suffer. In addition, if the
counterparty to an interest rate hedging transaction defaults, the
Funds risk of loss consists of the net amount of interest
payments that the Fund contractually is entitled to receive. The
Fund is not required to enter into interest rate hedging
transactions and may not do so. If the counterparty to a foreign
currency swap defaults, the Fund will seek a replacement swap, which
may result in additional costs to the Fund, and will be subject to
fluctuations in the applicable exchange rate until a replacement
swap is obtained.
Concentration. The Funds
investments may be concentrated in obligations issued by financial
institutions and their holding companies, including commercial
banks, thrift institutions, insurance companies and finance
companies. As a result, the Fund is subject to certain risks
associated with such institutions, including, among other things,
changes in government regulation, interest rate levels and general
economic conditions.
Foreign Investment. Loans to non-U.S.
borrowers may involve risks not typically involved in domestic
investment, including fluctuation in foreign interest rates, future
foreign political and economic developments and the possible
imposition of exchange controls or other governmental laws or
restrictions.
Non-diversification. The Fund is
classified as a non-diversified investment company, meaning that the
Fund may invest a greater percentage of its assets in the
obligations of a single issuer than a diversified investment
company. Even as a non-diversified fund, the Fund is still subject
to the diversification requirements of the U.S. tax laws. However,
since the Fund may invest a higher percentage of its assets in
obligations of a single issuer than a diversified fund, it is more
susceptible than a diversified fund to any economic, political or
regulatory occurrence that affects an individual issuer.
Liquidity of Investments. Certain
corporate loans in which the Fund invests may be deemed to be
illiquid. Illiquid investments may impair the Funds ability to
realize the full value of those investments in the event the Fund
must sell them quickly. The Funds Board of Directors will
consider the liquidity of the Funds portfolio in determining
whether a tender offer should be made.
Shareholder
Transaction Expenses
|
|
|
|
|
Maximum Sales Load (as a
percentage of offering price)
|
|
None
|
|
|
|
Dividend Reinvestment
and Cash Purchase Plan Fees
|
|
None
|
|
|
|
Early Withdrawal Charge (as a
percentage of the lesser of the original purchase
price or net asset value at the time of
repurchase)(a)
|
|
1.0% during the first
year, 0.0% thereafter
|
Annual Expenses
(as a percentage of net assets)
|
|
|
|
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Investment Advisory
Fees(b)
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0.95
|
%
|
|
|
Interest Payments on
Borrowed Funds(c)
|
|
0.00
|
|
|
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Other Expenses(d)
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0.82
|
|
|
|
|
|
|
|
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Total Annual Expenses
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1.77
|
%
|
|
|
|
|
|
|
|
|
(a)
|
See
Early Withdrawal Chargepage 27.
|
(b)
|
See
Investment Advisory and Administrative Arrangements
page 30.
|
(c)
|
Typically the Fund will borrow only when sufficient cash is
otherwise unavailable to satisfy tender offers.
|
(d)
|
Includes administrative fees, which are payable to the Investment
Adviser by the Fund, at the annual rate of 0.40% of average daily
net assets. See Investment Advisory and Administrative
Arrangementspage 30.
|
EXAMPLE
|
|
1 Year
|
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3 Years
|
|
5 Years
|
|
10 Years
|
An investor would
pay the following expenses on a $1,000 investment
assuming (1) total annual expenses of
1.77%, (2) a 5% annual return
throughout the periods and (3) tender
at the end of the period
|
|
$28
|
*
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|
$56
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|
$96
|
|
$208
|
An investor would
pay the following expenses on a $1,000 investment
assuming no tender at the end of the
period
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|
$18
|
*
|
|
$56
|
|
$96
|
|
$208
|
*
|
Reflects the early withdrawal charge.
|
The
Fee Table is intended to assist investors in understanding the costs
and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under Other Expenses
are based on estimated amounts through the end of the Funds
current fiscal year. The Example set forth above assumes
reinvestment of all dividends and distributions and utilizes a 5%
annual rate of return as mandated by Securities and Exchange
Commission regulations. The Example should not be considered a
representation of past or future expenses or annual rates of return,
and actual expenses or annual rates of return may be more or less
than those assumed for purposes of the Example. Merrill Lynch
may charge its customers a processing fee (presently $5.35) for
confirming purchases and repurchases. Purchases and repurchases made
directly through the Transfer Agent are not subject to the
processing fee.
The
financial information in the table below was audited in conjunction
with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP
, independent auditors. Financial statements for the fiscal year ended
August 31, 1999 and the independent auditors report thereon
appear in the annual report of the Fund for the fiscal year ended
August 31, 1999, which is incorporated by reference herein. Further
information about the performance of the Fund is contained in the
annual report, which may be obtained, without charge, by writing the
Fund at the address on the inside back cover of this Prospectus or
by calling (609) 282-2800.
The
following per share data and ratios are derived from information
provided in the Funds audited financial statements.
|
|
For the Period
March 26, 1999
to August 31,
1999
|
Increase
(Decrease) in Net Asset Value:
|
|
|
|
Per Share
Operating Performance:
|
|
|
|
Net asset value,
beginning of period..
|
|
$10.00
|
|
|
|
|
|
Investment income
net..
|
|
.27
|
|
Realized and unrealized
gain (loss)
|
|
|
|
on investmentsnet..
|
|
.01
|
|
|
|
|
|
Total from
investment operations..
|
|
.28
|
|
|
|
|
|
Less dividends
from investment
|
|
|
|
incomenet..
|
|
(.27
|
)
|
|
|
|
|
Net asset value,
end of period..
|
|
$10.01
|
|
|
|
|
|
Total
Investment Return:**
|
|
|
|
Based on net asset value
per share..
|
|
3.02
|
%#
|
|
|
|
|
Ratios to
Average Net Assets:
|
|
|
|
Expenses, net of
reimbursement..
|
|
.55
|
%*
|
|
|
|
|
Expenses..
|
|
1.77
|
%*
|
|
|
|
|
Investment income
net..
|
|
6.77
|
%*
|
|
|
|
|
Leverage:
|
|
|
|
Average amount of
borrowings outstanding during the period (in thousands)..
|
|
|
|
|
|
|
|
Average amount of
borrowings outstanding per share during the period..
|
|
|
|
|
|
|
|
Supplemental
Data:
|
|
|
|
Net assets, end of
period (in millions)..
|
|
$229
|
|
|
|
|
|
Portfolio turnover..
|
|
28.49
|
%
|
|
|
|
|
**
|
Total investment returns exclude the effects of the early
withdrawal charge, if any. The Fund is a continuously offered
closed-end fund, the shares of which are offered at net asset
value. Therefore, no separate market exists.
|
|
Commencement of operations.
|
#
|
Aggregate total investment return.
|
Merrill Lynch Senior Floating Rate Fund II, Inc. is a continuously
offered, non-diversified, closed-end management investment company.
The Fund was incorporated under the laws of the State of Maryland on
February 9, 1999 and has registered under the Investment Company Act
of 1940 (the 1940 Act). The Funds principal office
is located at 800 Scudders Mill Road, Plainsboro, New Jersey 08536
and its telephone number is (609) 282-2800.
INVESTMENT OBJECTIVE AND POLICIES
The
Funds investment objective is to provide current income and
such preservation of capital as is consistent with investment in
senior collateralized corporate loans (corporate loans)
primarily in the form of Participation Interests, as defined below,
in corporate loans made by banks or other financial institutions. It
is anticipated that the corporate loans will pay interest at rates
that float at a margin above a generally recognized base lending
rate such as the prime rate of a designated U.S. bank, or which
adjust periodically at a margin above the Certificate of Deposit (
CD) rate or the London InterBank Offered Rate (
LIBOR). This is a fundamental policy of the Fund and may not
be changed without a vote of a majority of the outstanding shares of
the Fund. There can be no assurance that the investment objective of
the Fund will be realized.
Under
normal market conditions the Fund will invest at least 80% of its
total assets in interests in corporate loans that have floating or
variable interest rates. Under normal market conditions, at least
65% of the total assets of the Fund will be invested in floating or
variable rate loans made to corporations. The Fund may invest up to
20% of its total assets in cash or in short-term debt obligations
including, but not limited to, U.S. Government and Government agency
securities (some of which may not be backed by the full faith and
credit of the United States), bank money instruments (such as
certificates of deposit and bankers acceptances), corporate
and commercial obligations (such as commercial paper and medium-term
notes) and repurchase agreements. Such short-term debt obligations,
which need not be secured, will all be investment grade (rated Baa,
P-3 or higher by Moodys Investors Service, Inc. (Moody
s) or BBB, A-3 or higher by Standard & Poors (
S&P) or, if unrated, determined to be of comparable
quality in the judgment of the Investment Adviser). Securities rated
Baa, BBB, P-3 or A-3 are considered to have adequate capacity for
payment of principal and interest, but are more susceptible to
adverse economic conditions and, in the case of securities rated BBB
or Baa (or comparable unrated securities), have speculative
characteristics. Such short term debt securities or cash will not
exceed 20% of the Funds total assets except during interim
periods pending investment of the net proceeds of public offerings
of the Funds securities and during temporary defensive periods
when, in the opinion of the Investment Adviser, suitable corporate
loans are not available for investment by the Fund or prevailing
market or economic conditions warrant. The Fund also may invest up
to 20% of its total assets in senior loans made on an unsecured
basis. Investments in unsecured corporate loans will be made on the
same basis as investments in corporate loans as described herein,
except with respect to collateral requirements. To a limited extent,
incidental to and in connection with its lending activities, the
Fund also may acquire warrants and other debt and equity securities.
The
Fund has no restrictions on portfolio maturity, but it is
anticipated that a majority of the corporate loans in which it will
invest will have stated maturities ranging from three to ten years.
As a result of prepayments, however, it is expected that the average
life of the corporate loans will be in the two to three year range.
See Description of Corporate Loans.
Investment in shares of common stock of the Fund offers several
benefits. The Fund offers investors the opportunity to receive a
high level of current income by investing in a professionally
managed portfolio comprised primarily of corporate loans, a type of
investment typically not available to individual investors. In
managing such portfolio, Merrill Lynch Asset Management, L.P., the
investment adviser (the Investment Adviser), provides
the Fund and its shareholders with professional credit analysis and
portfolio diversification. The Fund also relieves the investor of
the burdensome administrative details involved in managing a
portfolio of such investments, if available to individual investors.
The benefits are at least partially offset by the expenses involved
in operating an investment company. Such expenses primarily consist
of the investment advisory and administrative fees and operational
costs.
The
net asset value of the shares of common stock of an investment
company that invests primarily in fixed-income securities changes as
the general levels of interest rates fluctuate. When interest rates
decline, the value of a fixed-income portfolio can be expected to
rise. Conversely, when interest rates rise, the value of a
fixed-income portfolio can be expected to decline. The Investment
Adviser expects the Funds net asset value to be relatively
stable during normal periods of rising or falling interest rates,
because the Funds portfolio will consist primarily of floating
and variable rate corporate loans, of fixed rate corporate loans
hedged by interest rate swap transactions and of short term
instruments. For these reasons, the Investment Adviser expects the
value of the Funds portfolio to fluctuate significantly less
as a result of interest rate changes than would a portfolio of fixed
rate obligations. However, because variable interest rates only
reset periodically, the value of the Funds portfolio may
fluctuate from time to time in the event of an imperfect correlation
between either the interest rates on variable rate loans in the Fund
s portfolio or the variable interest rates on notional amounts
in interest rate swap transactions, and prevailing interest rates.
Also, a sudden and extreme increase in prevailing interest rates may
cause a decline in the value of the Funds portfolio.
Conversely, a sudden and extreme decline in interest rates could
result in an increase in the value of the Funds portfolio.
Most importantly, a decline in the credit quality or financial
condition of the borrowers in which the Fund has invested may result
in a decrease in the value of the Funds portfolio. A decline
in the credit quality or financial condition of a borrower may lead
to a default on the corporate loan held by the Fund. A serious
deterioration in the credit quality or financial condition of a
borrower could cause a permanent decrease in the value of the Fund
s portfolio. Furthermore, volatility in the capital markets
and other adverse market conditions may cause a decline in the value
of the Funds portfolio. Given that the Fund uses market prices
to value many of its corporate loan investments, any decrease in the
value of the corporate loans held by the Fund (permanent or
otherwise) will result in a decrease in the Funds net asset
value.
The
Fund is classified as non-diversified within the meaning of the 1940
Act, which means that the Fund is not limited by such Act in the
proportion of its assets that it may invest in securities of a
single issuer. However, the Funds investments will be limited
so as to qualify the Fund as a regulated investment company
for purposes of the Federal tax laws. See Taxes.
To qualify, among other requirements, the Fund will limit its
investments so that, at the close of each quarter of the taxable
year, (i) not more than 25% of the market value of the Funds
total assets will be invested in the securities (other than U.S.
Government securities) of a single issuer and (ii) with respect to
50% of the market value of its total assets, not more than 5% of the
market value of its total assets will be invested in the securities
(other than U.S. Government securities) of a single issuer. A fund
that elects to be classified as diversified under the
1940 Act must satisfy the foregoing 5% requirement with respect to
75% of its total assets. To the extent that the Fund assumes large
positions in the securities of a small number of issuers, the Fund
s net asset value may fluctuate to a greater extent than that
of a diversified company as a result of changes in the financial
condition or in the markets assessment of the issuers.
Description of Corporate Loans
The
corporate loans in which the Fund invests primarily consist of
direct obligations of a borrower undertaken to finance the growth of
the borrowers business, internally or externally, or to
finance a capital restructuring. Corporate loans may also include
debtor in possession financings pursuant to Chapter 11 of the U.S.
Bankruptcy Code and obligations of a borrower issued in connection
with a restructuring pursuant to Chapter 11 of the U.S. Bankruptcy
Code. A significant portion of such corporate loans are highly
leveraged loans such as leveraged buy-out loans, leveraged
recapitalization loans and other types of acquisition loans. Such
corporate loans may be structured to include both term loans, which
are generally fully funded at the time of the Funds
investment, and revolving credit facilities, which would require the
Fund to make additional investments in the corporate loans as
required under the terms of the credit facility. Such corporate
loans may also include receivables purchase facilities, which are
similar to revolving credit facilities secured by a borrowers
receivables. Corporate loans generally are issued in the form of
senior syndicated loans, but the Fund also may invest from time to
time in privately placed notes with credit and pricing terms which
are, in the opinion of the Investment Adviser, consistent with
investments in senior collateralized loan obligations. The Fund may
invest without limitation in highly leveraged corporate loans that
are rated below investment grade or that are unrated but of similar
credit quality. See Risk Factors and Special Considerations.
The
Fund may invest in corporate loans that are made to non-U.S.
borrowers, provided that the loans are U.S. dollar-denominated or
otherwise provide for payment in U.S. dollars, and any such borrower
meets the credit standards established by the Investment Adviser for
U.S. borrowers. The Fund similarly may invest in corporate loans
made to U.S. borrowers with significant non-dollar denominated
revenues, provided that the loans are U.S. dollar-denominated or
otherwise provide for payment to the Fund in U.S. dollars. In all
cases where the corporate loans are not denominated in U.S. dollars,
the corporate loan facility will provide for payments to the
lenders, including the Fund, in U.S. dollars pursuant to foreign
currency swap arrangements. Loans to such non-U.S. borrowers or U.S.
borrowers may involve risks not typically involved in domestic
investment, including fluctuation in foreign exchange rates, future
foreign political and economic developments, and the possible
imposition of exchange controls or other foreign or U.S.
governmental laws or restrictions applicable to such loans. With
respect to certain foreign countries, there is the possibility of
expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect the Fund
s investments in those countries. Moreover, individual foreign
economies may differ favorably or unfavorably from the U.S. economy
in such respects as growth of gross national product, rate of
inflation, capital reinvestment, resource self-sufficiency and
balance of payment position. In addition, information with respect
to non-U.S. borrowers may differ from that available with respect to
U.S. borrowers, since foreign companies are not generally subject to
uniform accounting, auditing and financial reporting standards,
practices and requirements comparable to those applicable to U.S.
borrowers.
The
corporate loans in which the Fund invests, in many instances, hold
the most senior position in the capitalization structure of the
borrower, and, in any case, in the judgment of the Investment
Adviser, are in the category of senior debt of the borrower. Each
corporate loan is secured by collateral that the Investment Adviser
believes to have a market value, at the time of the Funds
investment in the corporate loan, which equals or exceeds the
principal amount of the corporate loan. The Investment Adviser will
value the collateral by methods that may include reference to a
borrowers financial statements, an independent appraiser,
comparison to market comparables or by obtaining the market value of
such collateral if it is readily ascertainable. In the event of a
default, however, the ability of the lender to have access to the
collateral may be limited by bankruptcy and other insolvency laws.
The value of the collateral may decline below the amount
of the corporate loan subsequent to the Funds investment in the
loan. Under certain circumstances, the collateral is released with
the consent of the agent bank and co-lenders or pursuant to the
terms of the underlying credit agreement with the borrower. There is
no assurance that the liquidation of the collateral will satisfy the
borrowers obligation in the event of nonpayment of scheduled
interest or principal, or that the collateral could be readily
liquidated. As a result, the Fund might not receive payments to
which it is entitled and thereby may experience a decline in the
value of the investment and, possibly, its net asset value.
In
the case of highly leveraged loans, a borrower generally is required
to pledge collateral that may include (i) working capital assets,
such as accounts receivable and inventory, (ii) tangible fixed
assets, such as real property, buildings and equipment, (iii)
intangible assets, such as trademarks, copyrights and patent rights
and/or (iv) security interests in securities of subsidiaries or
affiliates. Collateral also may include guarantees or other credit
support by subsidiaries or affiliates. In some cases, the only
collateral for the corporate loan is the stock of the borrower
and/or its subsidiaries and affiliates. To the extent such a
corporate loan is secured by stock of the borrower and/or its
subsidiaries and affiliates, such stock may lose all of its value in
the event of a bankruptcy or insolvency of the borrower. In the case
of corporate loans to privately held companies, the companies
owners may provide additional credit support in the form of
guarantees and/or pledges of other securities that they own.
In
the case of project finance loans, the borrower is generally a
special purpose entity that pledges undeveloped land and other
non-income producing assets as collateral and obtains construction
completion guaranties from third parties, such as the project
sponsor. Project finance credit facilities typically provide for
payment of interest from escrowed funds during a scheduled
construction period, and for the pledge of current and fixed assets
after the project is constructed and becomes operational. During the
construction period, however, the lenders bear the risk that the
project will not be constructed in a timely manner, or will exhaust
project funds prior to completion. In such an event, the lenders may
need to take legal action to enforce the completion guaranties, or
may need to lend more money to the project on less favorable
financing terms, or may need to liquidate the undeveloped project
assets. There can be no assurance in any of such cases that the
lenders will recover all of their invested capital.
The
rate of interest payable on floating or variable rate corporate
loans is established as the sum of a base lending rate plus a
specified margin. These base lending rates generally are the Prime
Rate of a designated U.S. bank, LIBOR, the CD rate or another base
lending rate used by commercial lenders. The interest rate on Prime
Rate-based corporate loans floats daily as the Prime Rate changes,
while the interest rate on LIBOR-based and CD-based corporate loans
is reset periodically, typically every 30 days to one year. Certain
of the floating or variable rate corporate loans in which the Fund
invests permit the borrower to select an interest rate reset period
of up to one year. A portion of the Funds portfolio may be
invested in corporate loans with interest rates that are fixed for
the term of the loan. Investment in corporate loans with longer
interest rate reset periods or fixed interest rates may increase
fluctuations in the Funds net asset value as a result of
changes in interest rates. However, the Fund attempts to hedge all
of its fixed rate corporate loans against fluctuations in interest
rates by entering into interest rate swap transactions. The Fund has
historically attempted to maintain a portfolio of corporate loans
that have a dollar weighted average period to the next interest rate
adjustment of no more than 90 days.
The
Fund may receive and/or pay certain fees in connection with its
lending activities. These fees are in addition to interest payments
received and may include facility fees, commitment fees, amendment
and waiver
fees, commissions and prepayment fees. When the Fund buys a corporate
loan it may receive a facility fee, and when it sells a corporate
loan, it may pay a facility fee. In certain circumstances, the Fund
may receive a prepayment fee on the prepayment of a corporate loan
by a borrower. In connection with the acquisition of corporate
loans, the Fund also may acquire warrants and other debt and equity
securities of the borrower or its affiliates. The acquisition of
such debt and equity securities will only be incidental to the Fund
s purchase of an interest in a corporate loan.
The
Fund invests in a corporate loan only if, in the Investment Adviser
s judgment, the borrower can meet debt service on such loan.
In addition, the Investment Adviser will consider other factors
deemed by it to be appropriate to the analysis of the borrower and
the corporate loan. Such factors include financial ratios of the
borrower such as pre-tax interest coverage, leverage ratios, the
ratio of cash flows to total debt and the ratio of tangible assets
to debt. In its analysis of these factors, the Investment Adviser
also will be influenced by the nature of the industry in which the
borrower is engaged, the nature of the borrowers assets and
the Investment Advisers assessments of the general quality of
the borrower.
The
primary consideration in selecting such corporate loans for
investment by the Fund is the creditworthiness of the borrower. The
Investment Adviser performs its own independent credit analysis of
the borrower in addition to utilizing information prepared and
supplied by the agent bank, co-lender or participant (each defined
below) from whom the Fund purchases its participation interest in a
corporate loan. The Investment Advisers analysis continues on
an ongoing basis for any corporate loans in which the Fund has
invested. Although the Investment Adviser uses due care in making
such analysis, there can be no assurance that such analysis will
disclose factors that may impair the value of the corporate loan.
Corporate loans made in connection with highly leveraged
transactions are subject to greater credit risks than other
corporate loans in which the Fund may invest. These credit risks
include a greater possibility of default or bankruptcy of the
borrower and the assertion that the pledging of collateral to secure
the loan constituted a fraudulent conveyance or preferential
transfer which can be nullified or subordinated to the rights of
other creditors of the borrower under applicable law.
The
Fund may invest in a corporate loan that has a market value less
than the principal amount of the loan. A corporate loan may have a
market value less than its principal amount due to a number of
factors, including concerns about the credit quality or financial
condition of the borrower or more general concerns about the
industry in which the borrower operates. Also, volatility in the
capital markets or other adverse market conditions may result in a
corporate loan trading at a discount to its principal amount. The
Investment Adviser may determine that such a corporate loan presents
an attractive investment opportunity. Investment by the Fund in
corporate loans that trade at a discount to principal is a
permissible investment strategy; provided that, at the time of
investment, in the Investment Advisers judgment, the borrower
can meet debt service on such loan, the loan is secured by
collateral that the Investment Adviser believes to have a market
value that equals or exceeds the principal amount of the loan, and
the investment is otherwise consistent with the investment
objectives of the Fund. Investment in corporate loans that trade at
a discount to principal may present additional risks, including a
greater likelihood of default or loss of principal.
The
Fund does not have a policy with regard to minimum ratings for
corporate loans in which it may invest. Investments in corporate
loans are based primarily on the Investment Advisers
independent credit analyses of a particular borrower. Moreover, the
Investment Adviser does not regard the ratings of other publicly
held securities of a borrower to be relevant to its investment
considerations. See AppendixRatings
of Securities. The following table sets forth the percentage of
market value, by Moodys rating category, of the corporate
loans held by the Fund as of August 31, 1999:
Rated
Obligations
|
|
77.7%
|
(Ba: 44.9%; B: 32.8%)
|
|
|
Unrated
Obligations
|
|
22.3%
|
A
borrower also must comply with various restrictive covenants
contained in any credit agreement between the borrower and the
lending syndicate. Such covenants, in addition to requiring the
scheduled payment of interest and principal, may include
restrictions on dividend payments and other distributions to
stockholders, provisions requiring the borrower to maintain specific
financial ratios or relationships, limits on total debt and
restrictions on the borrowers ability to pledge its assets. In
addition, the corporate loan agreement may contain a covenant
requiring the borrower to prepay the corporate loan with any excess
cash flow. Excess cash flow generally includes net cash flow after
scheduled debt service payments and permitted capital expenditures,
among other things, as well as the proceeds from asset dispositions
or sales of securities. A breach of a covenant (after giving effect
to any cure period) which is not waived by the agent bank and the
lending syndicate normally is an event of acceleration (i.e.,
the agent bank has the right to call the outstanding corporate loan).
It is
expected that a majority of the corporate loans will have stated
maturities ranging from three to ten years. However, such corporate
loans usually require, in addition to scheduled payments of interest
and principal, the prepayment of the corporate loan from excess cash
flow, as discussed above, and may permit the borrower to prepay at
its election. The degree to which borrowers prepay corporate loans,
whether as a contractual requirement or at their election, may be
affected by general business conditions, the financial condition of
the borrower and competitive conditions among lenders, among other
factors. Accordingly, prepayments cannot be predicted with accuracy.
Upon a prepayment, the Fund may receive both a prepayment fee from
the prepaying borrower and a facility fee on the purchase of a new
corporate loan with the proceeds from the prepayment of the former.
Such fees may mitigate any adverse impact on the yield on the Fund
s portfolio which may arise as a result of prepayments and the
reinvestment of such proceeds in corporate loans bearing lower
interest rates.
Loans
to non-U.S. borrowers or to U.S. borrowers with significant non-U.S.
dollar-denominated revenues may provide for conversion of all or
part of the loan from a U.S. dollar-denominated obligation into a
foreign currency obligation at the option of the borrower. The Fund
may invest in corporate loans that were converted into non-U.S.
dollar-denominated obligations only when the corporate loan facility
provides for payments to the lenders in U.S. dollars pursuant to
foreign currency swap arrangements. Foreign currency swaps involve
the exchange by the lenders, including the Fund, with another party
(the counterparty) of the right to receive the currency
in which the loan is denominated for the right to receive U.S.
dollars. The Fund will enter into a transaction subject to a foreign
currency swap only if, at the time of entering into such swap, the
outstanding debt obligations of the counterparty are investment
grade (i.e., rated BBB or A-3 or higher by S&P or Baa or
P-3 or higher by Moodys, or determined to be of comparable
quality in the judgment of the Investment Adviser). The amounts of
U.S. dollar payments to be received by the lenders and the foreign
currency payments to be received by the counterparty are fixed at
the time the swap arrangement is entered into. Accordingly, the swap
protects the Fund from fluctuations in exchange rates and locks in
the right to receive payments under the loan in a predetermined
amount of U.S. dollars. If there is a default by the counterparty,
the Fund will have contractual remedies pursuant to the swap
arrangements; however, the U.S. dollar value of the Funds
right to foreign currency payments under the loan will be subject to
fluctuations in the applicable exchange rate to the extent that a
replacement swap arrangement is unavailable or the Fund is unable to
recover damages from the defaulting counterparty. If the borrower
defaults on or prepays the underlying corporate loan, the Fund may
be required pursuant to the swap arrangements to compensate the
counterparty to the extent of fluctuations in exchange rates adverse
to the counterparty. In the event of such a default or prepayment,
an amount of cash or liquid securities having an aggregate net asset
value at least equal to the amount of compensation that must be paid
to the counterparty pursuant to the swap arrangements will be
maintained in a segregated account by the Funds custodian.
Description of Participation Interests
A
corporate loan in which the Fund may invest typically is originated,
negotiated and structured by a syndicate of lenders (co-lenders
) consisting of commercial banks, thrift institutions,
insurance companies, finance companies or other financial
institutions one or more of which administers the Loan on behalf of
the syndicate (the agent bank). Co-lenders may sell
corporate loans to third parties called participants.
The Fund invests in a corporate loan either by participating as a
co-lender at the time the loan is originated or by buying an
interest in the corporate loan from a co-lender or a participant.
Co-lenders and participants interposed between the Fund and a
borrower, together with agent banks, are referred to herein as
intermediate participants.
The
Fund may invest in a corporate loan at origination as a co-lender or
by acquiring participations in, assignments of or novations of a
corporate loan (collectively, participation interests).
In a novation, the Fund accepts all of the rights of the
intermediate participants in a corporate loan, including the right
to receive payments of principal and interest and other amounts
directly from the borrower and to enforce its rights as a lender
directly against the borrower and assumes all of the obligations of
the intermediate participants, including any obligations to make
future advances to the borrower. As a result, therefore, the Fund
has the status of a co-lender. As an alternative, the Fund may
purchase an assignment of all or a portion of an intermediate
participants interest in a corporate loan, in which case the
Fund is required generally to rely on the assigning lender to demand
payment and enforce its rights against the borrower but would
otherwise be entitled to all of such lenders rights in the
corporate loan. The Fund also may purchase a participation in a
portion of the rights of an intermediate participant in a corporate
loan by means of a participation agreement with such intermediate
participant. A participation in the rights of an intermediate
participant is similar to an assignment in that the intermediate
participant transfers to the Fund all or a portion of an interest in
a corporate loan. Unlike an assignment, however, a participation
does not establish any direct relationship between the Fund and the
borrower. In such a case, the Fund is required to rely on the
intermediate participant that sold the participation not only for
the enforcement of the Funds rights against the borrower but
also for the receipt and processing of payments due to the Fund
under the corporate loans. The Fund will not act as an agent bank,
guarantor, sole negotiator or sole structuror with respect to a
corporate loan.
Because it may be necessary to assert through an intermediate
participant such rights as may exist against the borrower, in the
event the borrower fails to pay principal and interest when due, the
Fund may be subject to delays, expenses and risks that are greater
than those that would be involved if the Fund could enforce its
rights directly against the borrower. Moreover, under the terms of a
participation, the Fund may be regarded as a creditor of the
intermediate participant (rather than of the borrower), so that the
Fund may also be subject to the risk that the intermediate
participant may become insolvent. Similar risks may arise with
respect to the
agent bank, as described below. Further, in the event of the
bankruptcy or insolvency of the borrower, the obligation of the
borrower to repay the corporate loan may be subject to certain
defenses that can be asserted by such borrower as a result of
improper conduct by the agent bank or intermediate participant. The
Fund invests in corporate loans only if, at the time of investment,
the outstanding debt obligations of the agent bank and any
intermediate participant from whom the Fund purchases a
participation interest are investment grade (i.e., rated BBB
or A-3 or higher by S&P or Baa or P-3 or higher by Moodys,
or determined to be of comparable quality in the judgment of the
Investment Adviser).
Because the Fund regards the issuer of a corporate loan as including
the borrower under a credit agreement, the agent bank and any
intermediate participant, the Fund may be deemed to be concentrated
in securities of issuers in the industry group consisting of
financial institutions and their holding companies, including
commercial banks, thrift institutions, insurance companies and
finance companies. As a result, the Fund is subject to certain risks
associated with such institutions. Banking and thrift institutions
are subject to extensive governmental regulations which may limit
both the amounts and types of loans and other financial commitments
that such institutions may make and the interest rates and fees that
such institutions may charge. The profitability of these
institutions is largely dependent on the availability and cost of
capital funds, and has shown significant recent fluctuation as a
result of volatile interest rate levels. In addition, general
economic conditions are important to the operations of these
institutions, with exposure to credit losses resulting from possible
financial difficulties of borrowers potentially having an adverse
effect. Insurance companies also are affected by economic and
financial conditions and are subject to extensive government
regulation, including rate regulation. The property and casualty
industry is cyclical, being subject to dramatic swings in
profitability which can be affected by natural catastrophes and
other disasters. Individual companies may be exposed to material
risks, including reserve inadequacy, latent health exposure and
inability to collect from their reinsurance carriers. The financial
services area is currently undergoing relatively rapid change as
existing distinctions between financial service segments become less
clear. In this regard, recent business combinations have included
insurance, finance and securities brokerage under single ownership.
Moreover, the Federal laws generally separating commercial and
investment banking are currently being studied by Congress.
In a
typical corporate loan, the agent bank administers the terms of the
credit agreement and is responsible for the collection of principal
and interest and fee payments from the borrower and the
apportionment of these payments to the credit of all lenders which
are parties to the credit agreement. The Fund generally relies on
the agent bank or an intermediate participant to collect its portion
of the payments on the corporate loan. Furthermore, the Fund
generally relies on the agent bank to use appropriate creditor
remedies against the borrower. Typically, under credit agreements,
the agent bank is given broad discretion in enforcing the credit
agreement, and is obligated to use only the same care it would use
in the management of its own property. The borrower compensates the
agent bank for these services. Such compensation may include special
fees paid on structuring and funding the corporate loan and other
fees paid on a continuing basis.
In
the event that an agent bank becomes insolvent, or has a receiver,
conservator, or similar official appointed for it by the appropriate
bank regulatory authority or becomes a debtor in a bankruptcy
proceeding, assets held by the agent bank under the credit agreement
should remain available to holders of corporate loans. If, however,
assets held by the agent bank for the benefit of the Fund were
determined by an appropriate regulatory authority or court to be
subject to the claims of the agent banks general or secured
creditors, the Fund might incur certain costs and delays in
realizing payment on a corporate loan or suffer a loss of principal
and/or interest. In situations involving intermediate participants
similar risks may arise, as described above.
The
Fund may have certain obligations pursuant to a agreement, which may
include the obligation to make future advances to the borrower in
connection with revolving credit facilities in certain
circumstances. The Fund currently intends to reserve against such
contingent obligations by segregating sufficient investments in high
quality, short-term, liquid instruments. The Fund will not invest in
corporate loans that would require the Fund to make any additional
investments in connection with such future advances if such
commitments would exceed 20% of the Funds total assets or
would cause the Fund to fail to meet the diversification
requirements described under Investment Objective and Policies.
Illiquid Securities
Certain corporate loans may not be readily marketable and may be
subject to restrictions on resale. Although the market for corporate
loans has developed significantly during recent years, certain of
the corporate loans in which the Fund invests may not have the
liquidity of conventional debt securities traded in the secondary
market and may be considered illiquid. The Fund has no limitation on
the amount of its investments which are not readily marketable or
are subject to restrictions on resale. Such investments, which may
be considered illiquid, may affect the Funds ability to
realize the net asset value in the event of a voluntary or
involuntary liquidation of its assets. To the extent that such
investments are illiquid, the Fund may have difficulty disposing of
portfolio securities in order to purchase shares of its common stock
pursuant to tender offers, if any. The Board of Directors of the
Fund will consider the liquidity of the Funds portfolio
securities in determining whether a tender offer should be made by
the Fund. See Net Asset Value for information with
respect to valuation of illiquid corporate loans.
Other Investment Policies
The
Fund has adopted certain other policies as set forth below:
Borrowing. The Fund is authorized to
borrow money in amounts of up to 33
1
/
3
% of
the value of its total assets at the time of such borrowings.
Borrowings by the Fund (commonly known as leveraging)
create an opportunity for greater total return but, at the same
time, increase exposure to capital risk. In addition, borrowed funds
are subject to interest costs that may offset or exceed the return
earned on the borrowed funds. See Borrowings by the Fund.
Repurchase Agreements. The Fund may enter
into repurchase agreements with respect to its permitted investments
but currently intends to do so only with member banks of the Federal
Reserve System or with primary dealers in U.S. Government
securities. Under a repurchase agreement the Fund buys a security at
one price and simultaneously promises to sell that same security
back to the seller at a higher price. The Funds repurchase
agreements will provide that the value of the collateral underlying
the repurchase agreement will always be at least equal to the
repurchase price, including any accrued interest earned on the
repurchase agreement, and will be marked to market daily. The
repurchase date usually is within seven days of the original
purchase date. Repurchase agreements are deemed to be loans under
the 1940 Act. In all cases, the Investment Adviser must be satisfied
with the creditworthiness of the other party to the agreement before
entering into a repurchase agreement. In the event of the bankruptcy
(or other insolvency proceeding) of the other party to a repurchase
agreement, the Fund might experience delays in recovering its cash.
To the extent that, in the meantime, the value of the securities the
Fund purchases may have declined, the Fund could experience a loss.
Lending of Portfolio Securities. The Fund
may from time to time lend securities from its portfolio with a
value not exceeding 33
1
/
3
% of
its total assets to banks, brokers and other financial institutions
and receive
collateral in cash or securities issued or guaranteed by the United
States Government. Such collateral will be maintained at all times
in an amount equal to at least 100% of the current market value of
the loaned securities. This limitation is a fundamental policy, and
it may not be changed without the approval of the holders of a
majority of the Funds outstanding voting securities, as
defined in the 1940 Act. The purpose of such loans is to permit the
borrower to use such securities for delivery to purchasers when such
borrower has sold short. If cash collateral is received by the Fund,
it is invested in short-term money market securities, and a portion
of the yield received in respect of such investment is retained by
the Fund. Alternatively, if securities are delivered to the Fund as
collateral, the Fund and the borrower negotiate a rate for the loan
premium to be received by the Fund for lending its portfolio
securities. In either event, the total yield on the Funds
portfolio is increased by loans of its portfolio securities. The
Fund will have the right to regain record ownership of loaned
securities to exercise beneficial rights such as voting rights,
subscription rights and rights to dividends, interest or other
distributions. Such loans are terminable at any time. The Fund may
pay reasonable finders, administrative and custodial fees in
connection with such loans. In the event that the borrower defaults
on its obligation to return borrowed securities, because of
insolvency or otherwise, the Fund could experience delays and costs
in gaining access to the collateral and could suffer a loss to the
extent that the value of the collateral falls below the market value
of the borrowed securities.
When Issued and Delayed Delivery
Transactions
The
Fund also may purchase and sell interests in corporate loans and
other portfolio securities on a when issued and
delayed delivery basis. No income accrues to the Fund on such
interests or securities in connection with such transactions prior
to the date the Fund actually takes delivery of such interests or
securities. These transactions are subject to market fluctuation;
the value of the interests in corporate loans and other portfolio
debt securities at delivery may be more or less than their purchase
price, and yields generally available on such interests or
securities when delivery occurs may be higher than yields on the
interests or securities obtained pursuant to such transactions.
Because the Fund relies on the buyer or seller, as the case may be,
to consummate the transaction, failure by the other party to
complete the transaction may result in the Fund missing the
opportunity of obtaining a price or yield considered to be
advantageous. When the Fund is the buyer in such a transaction,
however, it will maintain, in a segregated account with its
custodian, cash or liquid securities having an aggregate value equal
to the amount of such purchase commitments until payment is made.
The Fund will make commitments to purchase such interest or
securities on such basis only with the intention of actually
acquiring these interests or securities, but the Fund may sell such
interests or securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in
when issued and delayed delivery transactions, it
will do so for the purpose of acquiring interests or securities for
the Funds portfolio consistent with the Funds investment
objective and policies and not for the purpose of investment
leverage. No specific limitation exists as to the percentage of the
Funds assets which may be used to acquire securities on a
when issued or delayed delivery basis.
Interest Rate Hedging Transactions
The
Fund may hedge all or a portion of its portfolio investments against
fluctuations in interest rates by entering into interest rate
hedging transactions. While the Funds use of hedging
strategies is intended to further the Funds investment
objective, there can be no assurance that the Funds interest
rate hedging transactions will be effective. Suitable hedging
instruments may not be available on a timely basis and on acceptable
terms. Furthermore, the Fund has no obligation to enter into
interest rate hedging transactions and may only be engaged in
interest rate hedging transactions from time to time and may not
necessarily engage in hedging transactions when moves in interest
rates occur.
Certain Federal income tax requirements may limit the Funds
ability to engage in interest rate hedging transactions. Gains from
transactions in interest rate hedges distributed to shareholders are
taxable as ordinary income or, in certain circumstances, as
long-term capital gains to shareholders. See Taxes.
The
Fund expects to enter into interest rate hedging transactions
primarily to preserve a return or spread on a particular investment
or portion of its portfolio or to protect against any increase in
the price of securities the Fund anticipates purchasing at a later
date. The Fund also attempts to enter into interest rate hedging
transactions to hedge all of its fixed rate corporate loans against
fluctuations in interest rates. The Fund may enter into interest
rate hedges on either an asset-based or liability-based basis,
depending on whether it is hedging its assets or its liabilities.
Typically, the parties with which the Fund enters into interest rate
hedging transactions are broker-dealers and other financial
institutions.
The
interest rate hedging transactions in which the Fund may engage
include interest rate swaps involving the exchange by the Fund with
another party of their respective commitments to pay or receive
interest, such as an exchange of fixed rate payments for floating
rate payments. For example, if the Fund holds a corporate loan with
an interest rate that is reset only once each year, it may swap the
right to receive interest at this fixed rate for the right to
receive interest at a rate that is reset every week. This enables
the Fund to offset a decline in the value of the corporate loan due
to rising interest rates, but would also limit its ability to
benefit from falling interest rates. Conversely, if the Fund holds a
corporate loan with an interest rate that is reset every week and it
would like to lock in what it believes to be a high interest rate
for one year, it may swap the right to receive interest at this
variable weekly rate for the right to receive interest at a rate
that is fixed for one year. Such a swap would protect the Fund from
a reduction in yield due to falling interest rates, but would
preclude it from taking full advantage of rising interest rates.
The
Fund also may engage in interest rate hedging transactions in the
form of purchasing or selling interest rate caps or floors. The Fund
will not sell interest rate caps or floors that it does not own. The
purchase of an interest rate cap entitles the purchaser, to the
extent that a specified index exceeds a predetermined interest rate,
to receive payments of interest equal to the difference of the index
and the predetermined rate on a notional principal amount (the
reference amount with respect to which interest obligations are
determined although no actual exchange of principal occurs) from the
party selling such interest rate cap. The purchase of an interest
rate floor entitles the purchaser, to the extent that a specified
index falls below a predetermined interest rate, to receive payments
of interest at the difference of the index and the predetermined
rate on a notional principal amount from the party selling such
interest rate floor. The Fund will not enter into caps or floors if,
on a net basis, the aggregate notional principal amount with respect
to such agreements exceeds the net assets of the Fund.
Inasmuch as these interest rate hedging transactions are entered
into for good faith hedging purposes, the Investment Adviser
believes that such obligations do not constitute senior securities
and, accordingly, will not treat them as being subject to its
borrowing restrictions. The Fund usually enters into interest rate
swaps on a net basis, i.e., the two payment streams are netted out,
with the Fund receiving or paying, as the case may be, only the net
amount of the two payments. The net amount of the excess, if any, of
the Funds obligations over its entitlements with respect to
each interest rate swap will be accrued on a daily basis, and an
amount of cash or high grade liquid debt securities having an
aggregate net asset value at least equal to the accrued excess will
be maintained in a segregated account by the Funds custodian.
If the interest rate swap transaction is entered into on other than
a net basis, the full amount of the Funds obligations will be
accrued on a daily basis, and the full amount of the Funds
obligations will be maintained in a segregated account by the Fund
s custodian.
The Fund will not enter into any interest rate hedging transaction
unless the Investment Adviser considers the credit quality of the
unsecured senior debt or the claims-paying ability of the other
party thereto to be investment grade. If there is a default by the
other party to such a transaction, the Fund will have contractual
remedies pursuant to the agreements related to the transaction but
such remedies may be subject to bankruptcy and insolvency laws which
could affect the Funds rights as a creditor. The swap market
has grown substantially in recent years with a large number of banks
and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap
market has become relatively liquid in comparison with other similar
instruments traded in the interbank market. Interest rate caps and
floors are more recent innovations and they are less liquid than
swaps. There can be no assurance, however, that the Fund will be
able to enter into interest rate swaps or to purchase interest rate
caps or floors at prices or on terms the Investment Adviser believes
are advantageous to the Fund. In addition, although the terms of
interest rate swaps, caps and floors may provide for termination,
there can be no assurance the Fund will be able to terminate an
interest rate swap or to sell or offset interest rate caps or floors
that it has purchased.
The
use of interest rate hedges is a highly specialized activity which
involves investment techniques and risks different from those
associated with ordinary portfolio securities transactions. If the
Investment Adviser is incorrect in its forecasts of market values,
interest rates and other applicable factors, the investment
performance of the Fund would diminish compared with what it would
have been if these investment techniques were not used.
There
is no limit on the amount of interest rate hedging transactions that
may be entered into by the Fund. These transactions do not involve
the delivery of securities or other underlying assets or principal.
Accordingly, the risk of loss with respect to interest rate hedges
is limited to the net amount of interest payments that the Fund is
contractually obligated to make. If the corporate loan underlying an
interest rate swap is prepaid and the Fund continues to be obligated
to make payments to the other party to the swap, the Fund would have
to make such payments from another source. If the other party to an
interest rate swap defaults, the Funds risk of loss consists
of the net amount of interest payments that the Fund contractually
is entitled to receive. Since interest rate transactions are
individually negotiated, the Investment Adviser expects to achieve
an acceptable degree of correlation between the Funds rights
to receive interest on participation interests and its rights and
obligations to receive and pay interest pursuant to interest rate
swaps.
The
Fund may borrow money representing up to approximately 33
1
/
3
%, or
issue shares of preferred stock representing up to approximately
50%, of the Funds total assets immediately after such
borrowing or issuance. There can be no assurance, however, that
money will actually be borrowed or that preferred stock representing
such percentage of the Funds capital will actually be issued.
Borrowings by the Fund or the issuance of the preferred stock will
result in leveraging of the common stock. The Fund at times may
borrow from affiliates of the Investment Adviser, provided that the
terms of such borrowings are no less favorable than those available
from comparable sources of funds in the marketplace. Borrowings from
an affiliate of the Investment Adviser will result in the payment of
fees and interest on borrowed funds to the affiliate by the Fund.
Borrowings to Finance Tender Offers
The
Fund entered into an agreement with The Bank of New York (BONY
), providing for an unsecured revolving credit facility (the
Facility). Unless otherwise extended, the Facility will
terminate on June 19,
2000. The proceeds of the Facility may be used to finance the payment
for Shares tendered in a tender offer by the Fund and to pay fees
and expenses incurred in connection with the Facility. The Facility
enables the Fund to borrow up to $25,000,000 at a rate of interest
equal to, at the Funds option, the sum of the Federal funds
rate (i.e., the rate at which BONY is offered overnight Federal
funds by a Federal funds broker selected by BONY) plus the
applicable margin (as defined below) or the sum of the Eurodollar
rate (based on the rates quoted by BONY to leading banks in the
London interbank eurodollar market as the rate at which BONY is
offering dollar deposits) plus the applicable margin. The applicable
margin means 0.50% per annum. Interest on borrowings is calculated
on the basis of a year of 360 days for the actual number of days
elapsed and is payable in arrears on the last day of each month in
the case of borrowings that bear interest at the Federal funds rate,
and at the end of the interest period selected by the Fund in the
case of borrowings that bear interest at the Eurodollar rate. The
Fund agrees to pay to BONY a fee (the commitment fee)
for the period from and including the effective date to but
excluding the date of the expiration or other termination of the
commitment, equal to 0.08% per annum of the unused portion of the
commitment, payable quarterly in arrears on the last day of each
June, September, December and March of each year and on the date of
the expiration or other termination of the commitment. The
commitment fee shall be calculated on the basis of a 360-day year
for the actual number of days elapsed. Each loan must be repaid at
the earlier of (i) 90 days from the borrowing date of such loan or
(ii) one business day prior to the date on which the Funds
next tender offer expires. Borrowings under the Facility, if any,
may be repaid with the proceeds of portfolio investments sold by the
Fund subsequent to the expiration date of a tender offer.
The
terms of the Facility may be modified by written agreement of the
parties thereto. The Facility requires the Fund to maintain a
borrowing base (defined as the sum of the value of all securities
held by the Fund (less liabilities) plus the debt outstanding under
the Facility, less non-performing assets) of not less than 300% of
the outstanding principal balance of borrowings under the Facility
and accrued interest. During the term of the Facility, the Fund may
not incur indebtedness except for indebtedness incurred under the
Facility, in hedging transactions, for purchases of securities on
short-term credit as may be necessary for the clearance of sales or
purchases of portfolio securities and for overdrafts extended by the
custodian. Additionally, during the term of the Facility, the Fund
is restricted with respect to the declaration or payment of
dividends and the repurchase of shares pursuant to tender offers.
Pursuant to such agreement, as long as certain defaults have not
occurred and are not continuing under the Facility, the Fund may (i)
make its periodic dividend payments to
shareholders in an amount not in excess of its net
investment income (and net realized capital gains not previously
distributed to shareholders) for such period, (ii) distribute each
year all of its net investment income (including net realized
capital gains) so that it will not be subject to tax under the
Federal tax laws and (iii) repurchase its shares pursuant to tender
offers.
Other Borrowings
The
Fund also may borrow money to finance the purchase of shares of its
common stock pursuant to tender offers. The Fund also may incur
borrowings and/or issue preferred stock for the purpose of acquiring
additional income-producing investments when the Investment Adviser
believes that the interest or dividend payments and other costs with
respect to such borrowings and/or preferred stock issuance will be
exceeded by the anticipated return on such investments. The amount
of any such borrowing or issuance will depend on market or economic
conditions existing at that time. Although the Fund is authorized to
borrow money and/or issue preferred stock to finance the purchase of
investments, it does not currently anticipate doing so.
Capital raised through leverage will be subject to interest costs or
dividend payments which may or may not exceed the interest on the
assets purchased. The Fund also may be required to maintain minimum
average
balances in connection with borrowings or to pay a commitment or other
fee to maintain a line of credit; either of these requirements will
increase the cost of borrowing over the stated interest rate.
Certain types of borrowings may result in the Fund being subject to
covenants in credit agreements, including those relating to asset
coverage and portfolio composition requirements and those
restricting the Funds payment of dividends and distributions
on the common stock in certain instances. The issuance of preferred
stock involves offering expenses and other costs and may limit the
Funds freedom to pay dividends on shares of common stock or to
engage in other activities. Borrowings and the issuance of preferred
stock having priority over the Funds common stock create an
opportunity for greater income per share of common stock, but at the
same time such borrowing or issuance is a speculative technique in
that it will increase the Funds exposure to capital risk. Such
risks may be reduced through the use of borrowings and preferred
stock that have floating rates of interest. Unless the income and
appreciation, if any, on assets acquired with borrowed funds or
offering proceeds exceeds the cost of borrowing or issuing
additional classes of securities, the use of leverage will diminish
the investment performance of the Fund compared with what it would
have been without leverage.
The
Funds willingness to borrow money and issue new securities for
investment purposes, and the amount it will borrow, will depend on
many factors, the most important of which are investment outlook,
market conditions and interest rates. Successful use of a leveraging
strategy depends on the Investment Advisers ability to predict
correctly interest rates and market movements, and there is no
assurance that a leveraging strategy will be successful during any
period in which it is employed.
The
following are fundamental investment restrictions of the Fund and,
prior to issuance of any preferred stock, may not be changed without
the approval of the holders of a majority of the Funds
outstanding shares of common stock (which for this purpose and under
the 1940 Act means the lesser of (i) 67% of the shares of common
stock represented at a meeting at which more than 50% of the
outstanding shares of common stock are represented or (ii) more than
50% of the outstanding shares). Subsequent to the issuance of a
class of preferred stock, the following investment restrictions may
not be changed without the approval of a majority of the outstanding
shares of common stock and of the preferred stock, voting together
as a class, and the approval of a majority of the outstanding shares
of preferred stock, voting separately by class. The Fund may not:
|
1.
Borrow money or issue senior securities, except as
permitted by Section 18 of the 1940 Act.
|
|
2.
Make investments for the purpose of exercising control
or management.
|
|
3.
Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or
reorganization, or by purchase in the open market of securities of
closed-end investment companies where no underwriters or
dealers commission or profit, other than customary broker
s commission, is involved and only if immediately thereafter
not more than 10% of the Funds total assets would be
invested in such securities.
|
|
4.
Purchase or sell real estate; provided that the Fund may
invest in securities secured by real estate or interests therein
or issued by companies which invest in real estate or interests
therein.
|
|
5.
Underwrite securities of other issuers except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933
in selling portfolio securities.
|
|
6.
Make loans to other persons, except (i) to the extent that
the Fund may be deemed to be making loans by purchasing corporate
loans, as a co-lender or otherwise, and other debt securities and
entering into repurchase agreements in accordance with its
investment objective, policies and limitations and (ii) the Fund
may lend its portfolio securities in an amount not in excess of 33
1
/
3
% of
its total assets, taken at market value, provided that such loans
shall be made in accordance with the guidelines set forth in this
Prospectus.
|
|
7.
Invest more than 25% of its total assets in the securities
of issuers in any one industry; provided that this limitation
shall not apply with respect to obligations issued or guaranteed
by the U.S. Government or by its agencies or instrumentalities;
and provided further that the Fund may invest more than 25% and
may invest up to 100% of its assets in securities of issuers in
the industry group consisting of financial institutions and their
holding companies, including commercial banks, thrift
institutions, insurance companies and finance companies. For
purposes of this restriction, the term issuer includes
the borrower, the agent bank and any intermediate participant (as
defined under Investment Objective and Policies
Description of Participation Interests).
|
|
8.
Purchase any securities on margin, except that the Fund may
obtain such short-term credit as may be necessary for the
clearance of purchases and sales of portfolio securities.
|
|
9.
Make short sales of securities or maintain a short position
or invest in put, call, straddle or spread options.
|
An
additional investment restriction adopted by the Fund, which may be
changed by the Board of Directors, provides that the Fund may not
mortgage, pledge, hypothecate or in any manner transfer, as security
for indebtedness, any securities owned or held by the Fund except as
may be necessary in connection with hedging techniques involving
interest rate transactions, foreign currency swap transactions
relating to non-U.S. dollar-denominated loans and permitted
borrowings by the Fund.
If a
percentage restriction on investment policies or the investment or
use of assets set forth above is adhered to at the time a
transaction is effected, later changes in percentage resulting from
changing values will not be considered a violation.
Because of the affiliation of Merrill Lynch with the Investment
Adviser, the Fund is prohibited from engaging in certain
transactions involving Merrill Lynch except pursuant to an exemptive
order or otherwise in compliance with the provisions of the 1940 Act
and the rules and regulations thereunder. Included among such
restricted transactions will be purchases from or sales to Merrill
Lynch of securities in transactions in which it acts as principal.
See Portfolio Transactions.
The
Fund has established procedures for blocking the use of inside
information in securities transactions (commonly referred to as
Chinese Wall procedures). As a result, in relation to
other funds managed by the same portfolio managers as the Fund, if
one fund buys a security that is publicly traded or privately
placed, respectively, the other fund may be deprived of the
opportunity to buy a security of the same issuer that is privately
placed or publicly traded, respectively.
The
Distributor, an affiliate of the Investment Adviser, acts as the
distributor of shares of common stock of the Fund. The Fund is
engaged in a continuous offering of its shares of common stock
through the Distributor and other securities dealers that have
entered into selected dealer agreements with the Distributor,
including Merrill Lynch. The Fund may, from time to time, suspend
the sale of its shares of common stock. During any continuous
offering of the Funds common stock, shares of the Fund may be
purchased from the Distributor or selected dealers, including
Merrill Lynch, or by mailing a purchase order directly to the Fund
s Transfer Agent. Minimum initial and subsequent purchase
requirements are:
For Investments
in the Fund Made
|
|
The Minimum
Initial
Purchase
Amount Is
|
|
The
Minimum
Subsequent
Purchase
Amount Is
|
Directly through
the Funds Distributor or Transfer Agent..
|
|
$1,000
|
|
$50
|
Via 401(k) or
403(b) plans maintained through Merrill Lynch..
|
|
None
|
|
None
|
Via other
individual retirement accounts or other retirement plans
that are not maintained through Merrill Lynch..
|
|
$
250
|
|
$ 1
|
The
Fund offers its shares at a public offering price equal to the next
determined net asset value per share without a front-end sales
charge. The applicable offering price for purchase orders is based
on the net asset value of the Fund next determined after receipt of
the purchase order by the Distributor. As to purchase orders
received by securities dealers prior to the close of business on the
New York Stock Exchange (generally, the NYSE closes at 4:00 p.m.,
Eastern time), which includes orders received after the close of
business on the previous day, the applicable offering price is based
on the net asset value determined after the close of business on the
NYSE on that day, provided the Distributor in turn receives the
order from the securities dealer prior to 30 minutes after the close
of business on the NYSE on that day. If the purchase orders are not
received by the Distributor prior to 30 minutes after the close of
business on the NYSE on that day, such orders are deemed received on
the next business day. Any order may be rejected by the Distributor
or the Fund. The Fund or the Distributor may suspend the continuous
offering of the Funds shares at any time in response to
conditions in the securities markets or otherwise and may thereafter
resume such offering from time to time. Neither the Distributor nor
the dealers are permitted to withhold placing orders to benefit
themselves by a price change. The Distributor is required to advise
the Fund promptly of all purchase orders and cause payments for
shares of common stock to be delivered promptly to the Fund. Merrill
Lynch charges its customers a processing fee (presently $5.35) to
confirm a purchase of shares by such customers. Purchases made
directly through the Funds Transfer Agent are not subject to
the processing fee.
Due
to the administrative complexities associated with a continuous
offering, administrative errors may result in the Distributor or an
affiliate inadvertently acquiring nominal numbers (in no event in
excess of 5% of the shares of common stock) of shares of common
stock that it may wish to resell. Such shares of common stock will
not be subject to any investment restriction and may be resold
pursuant to this Prospectus.
The
Distributor compensates Merrill Lynch or other selected dealers at a
rate of 1.0% of amounts purchased. In addition, the Distributor
compensates Merrill Lynch or such dealers quarterly at an annual
rate equal to 0.75% of the value of Fund shares that remain
outstanding after one year from the date of their original purchase
sold by Merrill Lynch or such dealers. The foregoing payments made
by the Distributor will be made from its own assets or an affiliate
s and will not be an expense borne by the Fund. Total
compensation
paid to Merrill Lynch, selected dealers and the Distributor, including
the compensation paid at the time of purchase, the quarterly
payments mentioned above and the early withdrawal charge, if any,
will not exceed the applicable limit (presently, 8%), as determined
from time to time by the National Association of Securities Dealers,
Inc. For the period March 26, 1999 (commencement of operations) to
August 31, 1999, the Distributor paid $1,565,514 to Merrill Lynch in
connection with the sale of shares of common stock of the Fund.
Upon
the transfer of shares out of a Merrill Lynch brokerage account, an
investment account in the transferring shareholders name may
be opened at the Transfer Agent. Shareholders should be aware that
it will not be possible to transfer their shares from Merrill Lynch
to another brokerage firm or financial institution. Shareholders
interested in transferring their brokerage accounts from Merrill
Lynch and who do not wish to have an account maintained for such
shares at the Funds transfer agent must tender the shares for
repurchase by the Fund as described under Tender Offers
so that the cash proceeds can be transferred to the account at the
new firm.
In
recognition of the possibility that a secondary market for the Fund
s shares will not exist, the Fund intends to take certain
actions that provide liquidity to shareholders. The Fund intends
from time to time to make offers to purchase its shares of common
stock from all beneficial holders at a price per share equal to the
net asset value per share determined at the close of business on the
day tender offer terminates. Commencing with the second quarter of
Fund operations, the Board of Directors has considered making tender
offers on a quarterly basis and the Board of Directors intends to
continue this practice. There can be no assurance, however, that the
Board of Directors will decide to undertake the making of any tender
offer. Subject to the Funds investment restriction with
respect to borrowings, the Fund may borrow money to finance the
repurchase of shares pursuant to any tender offers. See
Borrowings by the Fund and Investment Restrictions.
The
Fund expects that ordinarily there will be no secondary market for
the Funds common stock and that periodic tenders will be the
only source of liquidity for Fund shareholders. Nevertheless, if a
secondary market develops for the common stock of the Fund, the
market price of the shares may vary from net asset value from time
to time. Such variance may be affected by, among other factors,
relative demand and supply of shares and the performance of the
Fund, especially as it affects the yield on and net asset value of
the common stock of the Fund. A tender offer for shares of common
stock of the Fund at net asset value is expected to reduce any
spread between net asset value and market price that may otherwise
develop. However, there can be no assurance that such action would
result in the Funds common stock trading at a price which
equals or approximates net asset value.
Although the Board of Directors believes that the tender offers
generally are beneficial to shareholders, the acquisition of shares
of common stock by the Fund will decrease the total assets of the
Fund. Tender offers are therefore likely to increase the Funds
expense ratio (assuming such acquisition is not offset by the
issuance of additional shares of common stock). Furthermore, to the
extent the Fund borrows to finance the making of tender offers,
interest on such borrowings reduce the Funds net investment
income.
It is
the Boards announced policy, which may be changed by the
Board, not to purchase shares pursuant to a tender offer if (1) such
purchases would impair the Funds status as a regulated
investment company under
the Federal tax laws (which would cause the Funds income to be
taxed at the corporate level in addition to the taxation of
shareholders who receive dividends from the Fund); (2) the Fund
would not be able to liquidate portfolio securities in a manner
which is orderly and consistent with the Funds investment
objective and policies in order to purchase common stock tendered
pursuant to the tender offer; or (3) there is, in the Boards
judgment, any (a) legal action or proceeding instituted or
threatened challenging the tender offer or otherwise materially
adversely affecting the Fund, (b) declaration of a banking
moratorium by Federal or state authorities or any suspension of
payment by banks in the United States or New York State, which is
material to the Fund, (c) limitation imposed by Federal or state
authorities on the extension of credit by lending institutions, (d)
commencement of war, armed hostilities or other international or
national calamity directly or indirectly involving the United States
which is material to the Fund, or (e) other event or condition which
would have a material adverse effect on the Fund or its shareholders
if shares of common stock tendered pursuant to the tender offer were
purchased. Thus, there can be no assurance that the Board will
proceed with any tender offer. The Board of Directors may modify
these conditions in light of circumstances existing at the time. If
the Board of Directors determines to purchase the Funds shares
of common stock pursuant to a tender offer, such purchases could
reduce significantly the asset coverage of any borrowing or
outstanding senior securities. The Fund may not purchase shares of
common stock to the extent such purchases would result in the asset
coverage with respect to such borrowing or senior securities being
reduced below the asset coverage requirement set forth in the 1940
Act. Accordingly, in order to purchase all shares of common stock
tendered, the Fund may have to repay all or part of any then
outstanding borrowing or redeem all or part of any then outstanding
senior securities to maintain the required asset coverage. See
Borrowings by the Fund. In addition, the amount of shares of
common stock for which the Fund makes any particular tender offer
may be limited for the reasons set forth above or in respect of
other concerns related to liquidity of the Funds portfolio.
In
the event that circumstances arise under which the Fund does not
conduct the tender offers regularly, the Board of Directors will
consider alternative means of providing liquidity for holders of
common stock. Such action would include evaluating any secondary
market that then exists and determining whether such market provides
liquidity for shareholders. If the Board of Directors determines
that such market, if any, fails to provide liquidity for the holders
of common stock, the Board plans to consider alternatives to
providing such liquidity. Among the alternatives that the Board of
Directors may consider is the listing of the Funds common
shares on a major domestic stock exchange or on the Nasdaq National
Market. The Board of Directors also may consider causing the Fund to
repurchase its shares from time to time in open-market or private
transactions when it can do so on terms that represent a favorable
investment opportunity. In any event, the Board of Directors will
cause the Fund to take whatever action it deems necessary or
appropriate to provide liquidity for the shareholders in light of
the facts and circumstances existing at such time.
Consummating a tender offer may require the Fund to liquidate
portfolio securities, and realize gains or losses, at a time when
the Investment Adviser would otherwise consider it disadvantageous
to do so.
Each
tender offer is made and shareholders are notified in accordance
with the requirements of the Securities Exchange Act of 1934 and the
1940 Act, either by publication or mailing or both. The offering
documents contain information prescribed by such laws and the rules
and regulations promulgated thereunder. The repurchase of tendered
shares by the Fund is a taxable event. See Taxes. The
Fund pays all costs and expenses associated with the making of any
tender offer. An early withdrawal charge is imposed on most shares
accepted for tender that have been held for less than one year. See
Early Withdrawal Charge. In addition, Merrill Lynch
charges its customers a processing fee (presently $5.35) to confirm
a repurchase of
shares from such customers pursuant to a tender offer. Tenders made
directly through the Funds Transfer Agent are not subject to
the processing fee.
Shareholders have an investment option consisting of the right to
reinvest the net proceeds from a sale of shares (the Original
Shares) in a tender offer by the Fund in Class C shares of
certain Merrill Lynch-sponsored open-end funds (Eligible Class
C Shares) at their net asset value, without the imposition of
any contingent deferred sales charge upon any subsequent redemption
of Eligible Class C Shares, if the conditions set forth below are
satisfied. First, net proceeds from the sale of the Original Shares
in the tender offer must be immediately reinvested in Eligible Class
C Shares. Second, the investment option is available only with
respect to the proceeds of shares as to which no early withdrawal
charge is applicable. Eligible Class C Shares are subject to an
ongoing account maintenance fee and an ongoing distribution fee.
Before taking advantage of this investment option, shareholders
should obtain a currently effective prospectus of the fund in which
they intend to invest and should consult their Merrill Lynch
Financial Consultant.
An
early withdrawal charge to recover distribution expenses incurred by
the Distributor is charged against the shareholders investment
account and paid to the Distributor in connection with most shares
of common stock held for less than one year which are repurchased
pursuant to a tender offer. The early withdrawal charge is imposed
on those shares accepted for tender based on an amount equal to the
lesser of the then current net asset value or the cost of the
shares. Accordingly, the early withdrawal charge is not imposed on
increases in the net asset value above the initial purchase price.
In addition, the early withdrawal charge is not imposed on shares
acquired by reinvesting dividends or capital gains distributions. In
determining whether an early withdrawal charge is payable, it is
assumed that the acceptance of an offer to repurchase pursuant to a
tender offer would be made from the earliest purchase of shares of
common stock. The early withdrawal charge imposed, if any, varies
depending on the length of time the common stock has been owned
since purchase (separate purchases shall not be aggregated for these
purposes), as set forth in the following table:
Year of
Repurchase After Purchase
|
|
Early
Withdrawal
Charge
|
First..
|
|
1.0%
|
Second and
following..
|
|
0.0%
|
In
determining whether an early withdrawal charge is applicable to a
tender of shares of common stock, the calculation is determined in
the manner that results in the lowest possible amount being charged.
Therefore, it is assumed that the shareholder first tenders shares
held for over one year and shares acquired by reinvesting dividends
or distributions. The Fund waives the early withdrawal charge on
shares tendered following the death of all beneficial owners of such
shares, provided the shares are tendered within one year of death (a
death certificate and other applicable documents may be required).
At the time of tender, the record or succeeding beneficial owner
must notify the Transfer Agent either directly or indirectly through
the Distributor that the early withdrawal charge should be waived.
Upon confirmation of the owners entitlement, the waiver will
be granted; otherwise, the waiver will be lost.
Example:
Assume an investor purchased 1,000 shares of common stock (at a cost
of $10,000) and six months after purchase, the net asset value per
share is $10.05 and, during the six months period, the investor has
acquired 30
additional shares of common stock upon dividend reinvestment. If the
investor first tenders 500 shares at this time (proceeds of $5,025),
30 shares will not be subject to the early withdrawal charge because
they were acquired by dividend reinvestment. With respect to the
remaining 470 shares, the early withdrawal charge is applied only to
the original cost of $10 per share (and not to the increase in net
asset value of $0.05 per share). Therefore, $4,700 of the $5,025
repurchase proceeds will be charged at a rate of 1.0%. For the
period March 26, 1999 (commencement of operations) to August 31,
1999, the amount of early withdrawal charge paid to the Distributor
aggregated $30,209.67.
Information about the Directors, executive officers and portfolio
manager of the Fund, including their ages and their principal
occupations for at least the last five years, is set forth below.
Unless otherwise noted, the address of the portfolio managers and
each Director and executive officer is P.O. Box 9011, Princeton, New
Jersey 08536-9011.
T
ERRY
K. GLENN
(59)President and Director(1)(2)Executive Vice
President of the Investment Adviser and its affiliate, Fund Asset
Management, L.P. (FAM) (which terms as used herein
include their corporate predecessors), since 1983; President of
Princeton Funds Distributor, Inc. (PFD) since 1986 and
Director thereof since 1991; Executive Vice President and Director
of Princeton Services, Inc. (Princeton Services) since
1993; President of Princeton Administrators, L.P. since 1988.
R
ONALD
W. FORBES
(59)Director(2)1400 Washington Avenue, Albany, New
York 12222. Professor of Finance, School of Business, State
University of New York at Albany since 1989; Consultant, Urban
Institute, Washington, D.C. since 1995.
C
YNTHIA
A. MONTGOMERY
(47)Director(2)Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163. Professor, Harvard Business
School since 1989; Associate Professor, J.L. Kellogg Graduate School
of Management, Northwestern University from 1985 to 1989; Assistant
Professor, Graduate School of Business Administration, The
University of Michigan from 1979 to 1985; Director, UNUM Corporation
since 1990 and Director of Newell Co. since 1995.
C
HARLES
C. REILLY
(68)Director(2)9 Hampton Harbor Road, Hampton Bays,
New York 11946. Self-employed financial consultant since 1990;
President and Chief Investment Officer of Verus Capital, Inc. from
1979 to 1990; Senior Vice President of Arnold and S. Bleichroeder,
Inc. from 1973 to 1990; Adjunct Professor, Columbia University
Graduate School of Business from 1990 to 1991; Adjunct Professor,
Wharton School, The University of Pennsylvania from 1989 to 1990.
K
EVIN
A. RYAN
(67)Director(2)127 Commonwealth Avenue, Chestnut
Hill, Massachusetts 02167. Founder and Director Emeritus of The
Boston University Center for the Advancement of Ethics and Character
and Director thereof until 1999; Professor until 1999 and currently
Professor Emeritus of Education at Boston University since 1982;
Formerly taught on the faculties of The University of Chicago,
Stanford University and Ohio State University.
R
ICHARD
R. WEST
(61)Director(2)Box 604, Genoa, Nevada 89411.
Professor of Finance since 1984, and Dean from 1984 to 1993, and
currently Dean Emeritus of New York University, Leonard N. Stern
School of Business Administration; Director of Bowne & Co.,
Inc., Vornado Realty Trust, Inc., Vornado Operating Company and
Alexanders Inc.
A
RTHUR
ZEIKEL
(67)Director(1)(2)300 Woodland Avenue, Westfield,
New Jersey 07090. Chairman of the Investment Adviser and FAM from
1997 to 1999 and President thereof from 1977 to 1997; Chairman of
Princeton Services from 1997 to 1999, Director from 1997 to 1999 and
President thereof from 1993 to 1997; Executive Vice President of
Merrill Lynch & Co., Inc. (ML & Co.) from 1990
to 1999.
J
OSEPH
T. MONAGLE
, JR
. (51)Senior Vice President(1)(2)Senior Vice
President of the Investment Adviser and FAM since 1990; Department
Head of the Global Fixed Income Division of the Investment Adviser
and FAM since 1997; Senior Vice President of Princeton Services
since 1993.
R
ICHARD
C. KILBRIDE
(43)Vice President and Portfolio Manager(1)(2)First
Vice President of the Investment Adviser since 1999; Managing
Director of Merrill Lynch Mercury Asset Management and Hotchkis and
Wiley from 1997 to 1999; Managing Director of Global Fixed Income at
Merrill Lynch Global Asset Management, Ltd., from 1995 to 1997; Vice
President of the Investment Adviser from 1990 to 1995.
G
ILLES
MARCHAND
(34)Vice President and Portfolio Manager(1)(2)Vice
President of the Investment Adviser since 1997; Credit Analyst at
the Investment Adviser from 1996 to 1997; Security Analyst at
Massachusetts Mutual Insurance Company from 1990 to 1996.
P
AUL
TRAVERS
(39)Vice President and Portfolio Manager(1)(2)
Director of the Investment Adviser since 1999; Vice President of the
Investment Adviser from 1998 to 1999; Head of U.S. Corporate Banking
at BHF-BANK New York Branch from 1993 to 1998.
D
ONALD
C. BURKE
(39)Vice President and Treasurer(1)(2)Senior Vice
President and Treasurer of the Investment Adviser and FAM since 1999;
Senior Vice President and Treasurer of Princeton Services since 1997;
Vice President of PFD since 1999; First Vice President of the
Investment Adviser from 1997 to 1999 and Vice President of the
Investment Adviser from 1990 to 1997; Director of Taxation of the
Investment Adviser since 1990.
B
RADLEY
J. LUCIDO
(34)Secretary(1)(2)Vice President of MLAM since
1999; attorney with MLAM since 1995; attorney in private practice
from 1991-1995.
(1)
|
Interested person, as defined in the 1940 Act, of the Fund.
|
(2)
|
Such Director or officer is a director, trustee, officer or member
of the advisory board of certain other investment companies for
which the Investment Adviser or FAM acts as investment adviser.
|
As of
September 30, 1999, the Directors and Officers of the Fund as a
group (12 persons) owned an aggregate of less than 1% of the
outstanding common stock of the Fund. As of such date, Mr. Glenn, an
officer and Director of the Fund, and the other officers of the
Fund, owned less than 1% of the outstanding stock of ML & Co.
Compensation of Directors
Pursuant to its investment advisory agreement with the Fund (the
Investment Advisory Agreement), the Investment Adviser
pays all compensation of officers and employees of the Fund as well
as the fees of all Directors of the Fund who are affiliated persons
of ML & Co. or its subsidiaries. The Fund pays each Director not
interested with the Investment Adviser (each a non-interested
Director) a fee of $3,000 per year plus $300 per meeting
attended and pays all Directors actual out-of-pocket expenses
relating to attendance at meetings. The Fund also pays members of
the Boards Audit and Nominating Committee (the Committee
), which consists of all of the non-affiliated Directors, an
annual fee of $900. The Chairman of the Committee receives an
additional annual fee of $1,000. For the period March 26, 1999
(commencement of operations) to August 31, 1999, fees and expenses
paid to the non-interested Directors that were allocated to the Fund
aggregated $23,639.
The
following table sets forth the compensation earned by the
non-interested Directors for the Fund for the period March 26, 1999
to August 31, 1999, and the aggregate compensation paid to
non-interested Directors from all registered investment companies
advised by the Investment Adviser and its affiliate FAM (
MLAM/FAM Advised Funds) for the calendar year ended December
31, 1998.
Name of Director
|
|
Compensation
from Fund
|
|
Pension or
Retirement
Benefits Accrued as Part
of Fund Expense
|
|
Aggregate
from Fund and
MLAM/FAM Advised
Funds Paid to
Directors(1)
|
Ronald W. Forbes..
|
|
$4,800
|
|
None
|
|
$192,567
|
Cynthia A.
Montgomery..
|
|
$4,800
|
|
None
|
|
$192,567
|
Charles C. Reilly..
|
|
$5,800
|
|
None
|
|
$362,852
|
Kevin A. Ryan..
|
|
$4,800
|
|
None
|
|
$192,567
|
Richard R. West..
|
|
$4,800
|
|
None
|
|
$346,125
|
(1)
|
The
Directors serve on the Boards of other MLAM/FAM Advised Funds as
follows: Mr. Forbes (42 registered investment companies consisting
of 55 portfolios); Ms. Montgomery (42 registered investment
companies consisting of 55 portfolios); Mr. Reilly (60 registered
investment companies consisting of 73 portfolios); Mr. Ryan (42
registered investment companies consisting of 55 portfolios); and
Mr. West (62 registered investment companies consisting of 86
portfolios).
|
AND ADMINISTRATIVE ARRANGEMENTS
The
Investment Adviser, which is owned and controlled by ML & Co., a
financial services holding company and the parent of Merrill Lynch,
provides the Fund with investment advisory and administrative
services. The Merrill Lynch Asset Management Group (which includes
the Investment Adviser) acts as the investment adviser to more than
100 registered investment companies and offers investment advisory
services to individuals and institutional accounts. As of September
1999, the Merrill Lynch Asset Management Group had a total of
approximately $514 billion in investment company and other portfolio
assets under management. This amount includes assets managed for
certain affiliates of the Investment Adviser. The Investment Adviser
is a limited partnership, the partners of which are ML & Co. and
Princeton Services, Inc. The principal business address of the
Investment Adviser is 800 Scudders Mill Road, Plainsboro, New Jersey
08536.
The
Investment Advisory Agreement provides that, subject to the
direction of the Board of Directors of the Fund, the Investment
Adviser is responsible for the actual management of the Funds
portfolio. The responsibility for making decisions to buy, sell or
hold a particular security rests with the Investment Adviser,
subject to review by the Board of Directors.
The
Investment Adviser provides the portfolio management for the Fund.
Such portfolio management will consider analyses from various
sources, make the necessary investment decisions, and place orders
for transactions accordingly. The Investment Adviser also will be
responsible for the performance of certain management services for
the Fund. Richard Kilbride, Gilles Marchand and Paul Travers are the
portfolio managers of the Fund and are primarily responsible for the
Funds day-to-day management.
For
the services provided by the Investment Adviser under the Investment
Advisory Agreement, the Fund pays a monthly fee at an annual rate of
0.95% of the Funds average daily net assets (i.e., the
average daily value of the total assets of the Fund, including
proceeds from the issuance of any shares of preferred stock,
minus the sum of accrued liabilities of the Fund and accumulated
dividends on shares of outstanding preferred stock, if any). For
purposes of this calculation, average daily net assets is determined
at the end of each month on the basis of the average net assets of
the Fund for each day during the month.
Under
the terms of an administration agreement with the Fund (the
Administration Agreement), the Investment Adviser also
performs or arranges for the performance of the administrative
services (i.e., services other than investment advice and
related portfolio activities) necessary for the operation of the
Fund, including paying all compensation of and furnishing office
space for officers and employees performing investment and economic
research, trading and investment management for the Fund, as well as
the compensation of all Directors of the Fund who are affiliated
persons of the Investment Adviser or any of its affiliates.
For
administrative services, the Fund pays the Investment Adviser a
monthly fee at an annual rate of 0.40% of the Funds average
daily net assets determined in the same manner as the fee payable by
the Fund under the Investment Advisory Agreement. The combined
advisory and administrative fees are greater than those paid by most
funds, but are comparable to those paid by other continuously
offered, closed-end funds investing primarily in corporate loans.
For
the period March 26, 1999 (commencement of operations) to August 31,
1999, the fee paid to the Investment Adviser pursuant to the
Investment Advisory Agreement was $625,622, and the fee paid
pursuant to the Administration Agreement was $263,423 (based on
average daily net assets of approximately $151.1 million).
The
Investment Adviser has entered into a sub-advisory agreement with
Merrill Lynch Asset Management U.K. Limited (MLAM U.K.),
an indirect, wholly-owned subsidiary of ML & Co. and an
affiliate of the Investment Adviser, pursuant to which the
Investment Adviser pays MLAM U.K. a fee for providing investment
advisory services to the Investment Adviser with respect to the Fund
in an amount to be determined from time to time by the Investment
Adviser and MLAM U.K. but in no event in excess of the amount that
the Investment Adviser actually receives for providing services to
the Fund pursuant to the Investment Advisory Agreement. MLAM U.K.
has offices at 33 King William Street, London EC4 9AS, England. For
the period March 26, 1999 (commencement of operations) to August 31,
1999, the Fund paid no fee to MLAM UK.
The
Fund pays all other expenses incurred in its operations, including,
among other things, legal and auditing expenses, taxes, costs of
printing proxies, stock certificates and shareholder reports,
charges of the Custodian and Transfer Agent, expenses of registering
the shares under Federal and state securities laws, fees and
expenses with respect to the issuance of preferred shares or any
borrowing, Securities and Exchange Commission fees, fees and
expenses of non-affiliated Directors, accounting and pricing costs,
insurance, interest, brokerage costs, litigation and other
extraordinary or non-recurring expenses, mailing and other expenses
properly payable by the Fund. Accounting services are provided to
the Fund by the Investment Adviser, and the Fund reimburses the
Investment Adviser for its costs in connection with such services.
For the period March 26, 1999 (commencement of operations) to August
31, 1999, the reimbursement for such services aggregated $802,357.
The
Investment Adviser is a limited partnership, the partners of which
are ML & Co. and Princeton Services. ML & Co. and Princeton
Services are controlling persons of the Investment
Adviser as defined under the 1940 Act because of their ownership of
its voting securities and their power to exercise a controlling
influence over its management or policies. Similarly, the following
entities may be considered controlling
persons of MLAM U.K.: Merrill Lynch Europe PLC (MLAM U.K.s
parent), a subsidiary of Merrill Lynch International Holdings, Inc.,
a subsidiary of Merrill Lynch International, Inc., a subsidiary of
ML & Co.
Unless earlier terminated as described below, the Investment
Advisory and Administration Agreements will remain in effect for a
period of two years from the date of execution and will remain in
effect from year to year thereafter if approved annually (a) by the
Board of Directors of the Fund or by a majority of the outstanding
shares of the Fund and (b) by a majority of the Directors who are
not parties to such contract or interested persons (as defined in
the 1940 Act) of any such party. Such contracts are not assignable
and may be terminated without penalty on 60 days written
notice at the option of either party thereto or by the vote of the
shareholders of the Fund.
Securities held by the Fund, including corporate loans, may also be
held by, or be appropriate investments for, other funds or
investment advisory clients for which the Investment Adviser or its
affiliates act as an adviser. Because of different objectives or
other factors, a particular security may be bought for an advisory
client when other clients are selling the same security. If
purchases or sales of securities by the Investment Adviser for the
Fund or other funds for which it acts as investment adviser or for
advisory clients arise for consideration at or about the same time,
transactions in such securities will be made, insofar as feasible,
for the respective funds and clients in a manner deemed equitable to
all. Transactions effected by the Investment Adviser (or its
affiliate) on behalf of more than one of its clients during the same
period may increase the demand for securities being purchased or the
supply of securities being sold, causing an adverse effect on price.
Code of Ethics
The
Board of Directors of the Fund has adopted a Code of Ethics under
Rule 17j-1 of the 1940 Act which incorporates the Code of Ethics of
the Investment Adviser (together, the Codes). The Codes
significantly
restrict the personal investing activities of all employees of the
Investment Adviser and, as described below, impose additional, more
onerous, restrictions on Fund investment personnel.
The
Codes require that all employees of the Investment Adviser preclear
any personal securities investment (with limited exceptions, such as
government securities). The preclearance requirement and associated
procedures are designed to identify any substantive prohibition or
limitation applicable to the proposed investment. The substantive
restrictions applicable to all employees of the Investment Adviser
include a ban on acquiring any securities in a hot
initial public offering and a prohibition from profiting on
short-term trading in securities. In addition, no employee may
purchase or sell any security which at the time is being purchased
or sold (as the case may be), or to the knowledge of the employee is
being considered for purchase or sale, by any fund advised by the
Investment Adviser. Furthermore, the Codes provide for trading
blackout periods which prohibit trading by investment
personnel of the Fund within periods of trading by the Fund in the
same (or equivalent) security (15 or 30 days depending upon the
transaction).
Subject to policies established by the Board of Directors of the
Fund, the Investment Adviser is primarily responsible for the
execution of the Funds portfolio transactions. In executing
such transactions, the Investment Adviser seeks to obtain the best
results for the Fund, taking into account such factors as price
(including the applicable fee, commission or spread), size of order,
difficulty of execution and operational facilities of the firm
involved and the firms risk in positioning a block of
securities. While the Investment Adviser generally seeks reasonably
competitive fee or commission rates, the Fund does not necessarily
pay the lowest commission or spread available.
The
Fund purchases corporate loans in individually negotiated
transactions with commercial banks, thrifts, insurance companies,
finance companies and other financial institutions. In selecting
such financial institutions, the Investment Adviser may consider,
among other factors, the financial strength, professional ability,
level of service and research capability of the institution. See
Investment Objective and PoliciesDescription of
Participation Interests. While such financial institutions
generally are not required to repurchase Participation Interests in
corporate loans which they have sold, they may act as principal or
on an agency basis in connection with the Funds disposition of
corporate loans.
The
Fund has no obligation to deal with any bank, broker or dealer in
execution of transactions in portfolio securities. Subject to
providing the best price and execution, securities firms that
provide investment research to the Investment Adviser, including
Merrill Lynch, may receive orders for transactions by the Fund.
Research information provided to the Investment Adviser by
securities firms is supplemental. It does not replace or reduce the
level of services performed by the Investment Adviser and the
expenses of the Investment Adviser will not be reduced.
The
Fund invests in securities traded primarily in the over-the-counter
markets, and the Fund intends to deal directly with dealers who make
markets in the securities involved, except in those circumstances
where better prices and execution are available elsewhere. Under the
1940 Act, except as permitted by exemptive order, persons affiliated
with the Fund, including Merrill Lynch, are prohibited from dealing
with the Fund as principal in the purchase and sale of securities.
Since transactions in the over-the-counter market usually involve
transactions with dealers acting as principal for their own account,
the Fund does not deal with Merrill Lynch and its affiliates in
connection with such transactions. See Investment Restrictions.
An affiliated person of the Fund may serve as its broker in
over-the-counter transactions conducted on an agency basis.
Portfolio Turnover
The
Fund may dispose of securities without regard to the length of time
they have been held when such actions, for defensive or other
reasons, appear advisable to the Investment Adviser. While it is not
possible to predict turnover rates with any certainty, presently it
is anticipated that the Funds annual portfolio turnover rate,
under normal circumstances, should be less than 100%. (The portfolio
turnover rate is calculated by dividing the lesser of purchases or
sales of portfolio securities for the particular fiscal year by the
monthly average value of the portfolio securities owned by the Fund
during the particular fiscal year. For purposes of determining this
rate, all securities whose maturities at the time of acquisition are
one year or less are excluded.) A high portfolio turnover rate bears
certain tax consequences and results in greater transaction costs,
which are borne directly by the Fund.
DIVIDENDS AND DISTRIBUTIONS
The
Fund intends to distribute all its net investment income. Dividends
from such net investment income are declared daily and paid monthly
to holders of common stock. Monthly distributions to holders of
common
stock consist of substantially all net investment income remaining
after the payment of interest on any borrowing or dividends or
interest on any senior securities from and after any borrowing or
issuance of senior securities. For Federal tax purposes, the Fund is
required to distribute substantially all of its net investment
income for each calendar year. All net realized capital gains, if
any, are distributed at least annually to holders of common stock.
Shares of common stock accrue dividends as long as they are issued
and outstanding. Shares of common stock are issued and outstanding
from the settlement date of a purchase order to the settlement date
of a tender offer. The Fund has entered into an agreement providing
for an unsecured revolving credit facility that contains
restrictions on the payment of dividends by the Fund. For a
description of such restrictions see Borrowings by the Fund.
Under
the 1940 Act, the Fund may not declare any dividend or other
distribution upon any class of its capital stock, or purchase any
such capital stock, unless the aggregate indebtedness of the Fund
has at the time of the declaration of any such dividend or
distribution or at the time of any such purchase an asset coverage
of at least 300% after deducting the amount of such dividend,
distribution, or purchase price, as the case may be. Also, certain
types of borrowings may result in the Fund being subject to
covenants in credit agreements, including those relating to asset
coverage and portfolio composition requirements and those
restricting the Funds payment of dividends and distributions.
While
any shares of preferred stock are outstanding, the Fund may not
declare any cash dividend or other distribution on its common stock,
unless at the time of such declaration, (1) all accumulated
preferred stock dividends have been paid and (2) the net asset value
of the Funds portfolio (determined after deducting the amount
of such dividend or other distribution) is at least 200% of the
liquidation value of the outstanding preferred stock (expected to be
equal to original purchase price per share plus any accumulated and
unpaid dividends thereon). This limitation, and the limitations
contained in the preceding paragraph, on the Funds ability to
pay dividends or make distributions on its common stock could under
certain circumstances impair the ability of the Fund to maintain its
qualification for taxation as a regulated investment company, which
would have an adverse impact on shareholders. See Borrowings
by the Fund and Taxes.
See
Automatic Dividend Reinvestment Plan for information
concerning the manner in which dividends and distributions to
holders of common stock may be automatically reinvested in shares of
common stock of the Fund. Dividends and distributions are taxable to
shareholders whether they are reinvested in shares of the Fund or
received in cash (provided that, in the event that a payment on an
account maintained at the Transfer Agent would amount to $10 or
less, a shareholder will not receive such payment in cash and such
payment will be automatically invested in additional shares).
General
The
Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies (RICs) under the
Internal Revenue Code of 1986, as amended (the Code). If
it so qualifies, in any taxable year in which it distributes at
least 90% of its net income (see below), the Fund will not be
subject to Federal income tax to the extent that it distributes its
net investment income and net realized capital gains. The Fund
intends to distribute substantially all of its net investment income
and net capital gains.
Dividends paid by the Fund from its ordinary income or from an
excess of net short-term capital gains over net long-term capital
losses (together referred to hereafter as ordinary income
dividends) are taxable to shareholders as ordinary income.
Distributions, if any, from the excess of net long-term capital
gains over net short-term capital losses derived from the sale of
securities or from certain transactions in interest rate swaps (
capital gain dividends) are taxable as long-term capital
gains, regardless of the length of time the shareholder has owned
Fund shares. Certain categories of capital gains are taxable at
different rates. Generally not later than 60 days after the close of
its taxable year, the Fund will provide its shareholders with a
written notice designating the amount of any capital gain dividends
as well as any amounts of capital gain dividends in the different
categories of capital gain referred to above. Any loss upon the sale
or exchange of Fund shares held for six months or less is treated as
long-term capital loss to the extent of any capital gain dividends
received by the shareholder. Distributions in excess of the Fund
s earnings and profits first reduce the adjusted tax basis of
a holders common stock and, after such adjusted tax basis is
reduced to zero, constitute capital gains to such holder (assuming
such common stock is held as a capital asset).
Dividends are taxable to shareholders even though they are
reinvested in additional shares of the Fund. Distributions by the
Fund, whether from ordinary income or capital gains, generally will
not be eligible for the dividends received deduction allowed to
corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to
shareholders of record on a specified date in one of such months,
then such dividend is treated for tax purposes as being paid and
received on December 31 of the year in which the dividend was
declared.
The
IRS has taken the position in a revenue ruling that if a RIC has two
or more classes of shares, it may designate distributions made to
each class in any year as consisting of no more than such class
s proportionate share of particular types of income, including the
different categories of capital gains, discussed above. A class
s proportionate share of a particular type of income is determined
according to the percentage of total dividends paid by the RIC
during the year that was paid to such class. Consequently, if both
common stock and preferred stock are outstanding, the Fund intends
to designate distributions made to the classes as consisting of
particular types of income in accordance with the classes
proportionate shares of such income. Thus, capital gain dividends as
discussed above, will be allocated among the holders of common stock
and any series of preferred stock in proportion to the total
dividends paid to each class during the taxable year, or otherwise
as required by applicable law.
The
Code requires a RIC to pay a nondeductible 4% excise tax to the
extent the RIC does not distribute during each calendar year 98% of
its ordinary income, determined on a calendar year basis, and 98% of
its capital gains, determined, in general, on an October 31 year
end, plus certain undistributed amounts from previous years. While
the Fund intends to distribute its income and capital gains in the
manner necessary to minimize imposition of the 4% excise tax, there
can be no assurance that sufficient amounts of the Funds
taxable income and capital gains will be distributed to avoid
entirely the imposition of the tax. In such event, the Fund will be
liable for the tax only on the amount by which it does not meet the
foregoing distribution requirements.
Under
the terms of the revolving credit facility, the Fund may be
restricted with respect to the declaration and payment of dividends
in certain circumstances. See Borrowings by the Fund.
Additionally, if at any time when borrowings or shares of preferred
stock are outstanding the Fund does not meet the asset coverage
requirements of the 1940 Act or applicable credit agreements, the
Fund will be required to suspend distributions to holders of common
stock until the asset coverage is restored. See Dividends and
Distributions. Limits on the Funds payment of dividends
may prevent the Fund from distributing at least 90% of its net
income and may therefore jeopardize the Funds qualification
for taxation as a RIC and/or may subject the Fund to the 4% Federal
excise tax described above as well as income tax on any retained
ordinary income or capital gains. Upon any failure to meet the asset
coverage requirement of the 1940 Act or applicable credit
agreements, the Fund may, in its sole discretion, repay borrowings
or redeem shares of preferred stock in order to maintain or restore
the requisite asset coverage and avoid the adverse consequences to
the Fund and its shareholders of failing to qualify as a RIC. There
can be no assurance, however, that any such action would achieve
these objectives. The Fund will endeavor to avoid restriction of its
dividend payments under the Facility.
As
noted above, the Fund must distribute annually at least 90% of its
net investment income. A distribution will only be counted for this
purpose if it qualifies for the dividends paid deduction under the
Code. Some types of preferred stock that the Fund has the authority
to issue may raise a question as to whether distributions on such
preferred stock are preferential under the Code and
therefore not eligible for the dividends paid deduction. The Fund
intends to rely on the advice of its counsel on questions raised by
issuance of these types of preferred stock. Moreover, the Fund
intends to issue preferred stock that counsel advises or the IRS has
ruled will not result in the payment of preferential dividends. If
the Fund ultimately relies solely on a legal opinion on issuance of
such preferred stock, there is no assurance that the IRS would agree
that dividends on the preferred stock are not preferential. If the
IRS successfully disallowed the dividends paid deduction for
dividends on the preferred stock, the Fund could lose the benefit of
the special treatment afforded RICs under the Code.
The
Federal income tax rules governing the taxation of interest rate
swaps are not entirely clear and may require the Fund to treat
payments received under such arrangements as ordinary income and to
amortize payments under certain circumstances. Additionally, because
the treatment of swaps under the RIC qualification rules is also not
clear, the Fund will limit its activity in this regard in order to
maintain its qualification as a RIC.
Under
certain Code provisions, some shareholders may be subject to a 31%
withholding tax on ordinary income dividends, capital gain dividends
and redemption payments (backup withholding). Generally,
shareholders subject to backup withholding will be those for whom no
certified taxpayer identification number is on file with the Fund or
who, to the Funds knowledge, have furnished an incorrect
number. When establishing an account, an investor must certify under
penalty of perjury that such number is correct and that such
investor is not otherwise subject to backup withholding tax.
Ordinary income dividends paid to shareholders who are nonresident
aliens or foreign entities will be subject to a 30% United States
withholding tax under existing provisions of the Code applicable to
foreign individuals and entities unless a reduced rate of
withholding or a withholding exemption is provided under applicable
treaty law. Nonresident shareholders are urged to consult their own
tax advisers concerning the applicability of the United States
withholding tax.
Interest income from non-U.S. securities may be subject to
withholding and other taxes imposed by the country in which the
issuer is located. Tax conventions between certain countries and the
United States may reduce or eliminate such taxes.
A
loss realized on a sale or exchange of shares of the Fund will be
disallowed if other Fund shares are acquired (whether through the
automatic reinvestment of dividends or otherwise) within a 61-day
period beginning 30 days before and ending 30 days after the date
that the shares are disposed of. In such a case, the basis of the
shares acquired will be adjusted to reflect the disallowed loss.
Offers to Purchase Shares
Under
current law, a shareholder who, pursuant to any tender offer,
tenders all of his or her shares and who, after such tender offer,
is not considered to own any shares under attribution rules
contained in the Code will realize a taxable gain or loss depending
upon such shareholders basis in the shares. Such gain or loss
will be treated as capital gain or loss if the shares are held as
capital assets. Different tax consequences may apply to tendering
and nontendering shareholders in connection with a tender offer, and
these consequences will be disclosed in the related offering
documents. For example, if a shareholder tenders less than all
shares owned by or attributed to such shareholder, and if the
distribution to such shareholder does not otherwise qualify as a
sale or exchange, the proceeds received will be treated as a taxable
dividend, a return of capital or capital gain depending on the Fund
s earnings and profits and the shareholders basis in the
tendered shares. Also, there is a remote risk that non-tendering
shareholders may be considered to have received a deemed
distribution which may be a taxable dividend in whole or in part.
Shareholders may wish to consult their tax advisers prior to
tendering. If holders of common stock whose shares are acquired by
the Fund in the open market sell less than all shares owned by or
attributed to them, a risk exists that these shareholders will be
subject to taxable dividend treatment and a remote risk exists that
the remaining shareholders may be considered to have received a
deemed distribution.
The
foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect.
For the complete provisions, reference should be made to the
pertinent Code sections and the Treasury Regulations promulgated
thereunder. The Code and the Treasury Regulations are subject to
change by legislative, judicial, or administrative action either
prospectively or retroactively. Ordinary income and capital gain
dividends may also be subject to state and local taxes.
Shareholders are urged to consult their tax advisors regarding
specific questions as to Federal, foreign, state or local taxes.
Foreign investors should consider applicable foreign taxes in their
evaluation of an investment in the Fund.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
All
dividends and capital gains distributions are reinvested
automatically in full and fractional shares of the Fund at the net
asset value per share next determined on the payable date of such
dividend or distribution. A shareholder may at any time, by request
to his Merrill Lynch financial consultant or by written notification
to Merrill Lynch if the shareholders account is maintained
with Merrill Lynch or by written notification or by telephone
(1-800-MER-FUND) to the Transfer Agent if the shareholders
account is maintained with the Transfer Agent, elect to have
subsequent dividends or capital gains distributions, or both, paid
in cash, rather than reinvested, in which event payment will be
mailed on or about the payment date (provided that, in the event
that a payment on an account maintained at the Transfer Agent would
amount to $10 or less, a
shareholder will not receive such payment in cash and such payment
will be automatically reinvested in additional shares). Cash
payments can also be directly deposited to the shareholders
bank account. No early withdrawal charge will be imposed upon
redemption of shares issued as a result of the automatic
reinvestment of dividends or capital gains distributions. The Fund
is not responsible for any failure of delivery to the shareholder
s address of record and no interest will accrue on amounts
represented by uncashed distribution or redemption checks.
The
automatic reinvestment of dividends and distributions does not
relieve participants of any Federal income tax that may be payable
(or required to be withheld) on such dividends or distributions. See
Taxes.
The
net asset value per share of common stock is determined Monday
through Friday after the close of business on the NYSE (generally,
the NYSE closes at 4:00 p.m., Eastern time), on each business day
during which the NYSE is open. The NYSE is not open on New Year
s Day, Martin Luther King, Jr. Day, Presidents Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. For purposes of determining the net asset value
of a share of common stock, the value of the securities held by the
Fund plus any cash or other assets (including interest and dividends
accumulated but not yet received) minus all liabilities (including
accrued expenses) and the aggregate liquidation value of the
outstanding shares of preferred stock is divided by the total number
of shares of common stock outstanding at such time. Expenses,
including the fees payable to the Investment Adviser, are accrued
daily.
Corporate loans will be valued in accordance with guidelines
established by the Board of Directors. Under the Funds current
guidelines, the Fund will utilize the valuations of corporate loans
furnished by an independent third-party pricing service approved by
the Board of Directors. The pricing service typically values
corporate loans for which the pricing service can obtain at least
two quotations from banks or dealers in corporate loans by
calculating the mean of the last available bid and asked prices in
the market for such corporate loans, and then using the mean of
those two means. For the limited number of corporate loans for which
no reliable quotes are available, such corporate loans will be
valued by the Investment Adviser at fair value as determined by the
pricing service through the use of pricing matrices to determine
valuations. If the pricing service does not provide a value for a
corporate loan, the Investment Adviser will value the corporate loan
at fair value, which is intended to be market value. In valuing a
corporate loan at fair value, the Investment Adviser will consider,
among other factors (i) the creditworthiness of the borrower and any
intermediate participants, (ii) the current interest rate period
until the next interest rate resets and maturity of the corporate
loan (iii) recent prices in the market for similar corporate loans,
if any and (iv) recent prices in the market for instruments of
similar quality, rate period until the next interest rate reset and
maturity.
Other
portfolio securities (other than short-term obligations but
including listed issues) may be valued on the basis of prices
furnished by one or more pricing services which determine prices for
normal, institutional-size trading units of such securities using
market information, transactions for comparable securities and
various relationships between securities which are generally
recognized by institutional traders. In certain circumstances, such
other portfolio securities are valued at the last sale price on the
exchange that is the primary market for such securities, or the last
quoted bid price for those securities for which the over-the-counter
market is the primary market or for listed securities in which there
were no sales during the day. The value of interest rate swaps, caps
and floors is determined in accordance with a formula and then
confirmed
periodically by obtaining a bank quotation. Positions in options are
valued at the last sale price on the market where any such option is
principally traded. Obligations with remaining maturities of 60 days
or less are valued at amortized cost unless this method no longer
produces fair valuations. Repurchase agreements are valued at cost
plus accrued interest. Rights or warrants to acquire stock, or stock
acquired pursuant to the exercise of a right or warrant, may be
valued taking into account various factors such as original cost to
the Fund, earnings and net worth of the issuer, market prices for
securities of similar issuers, assessment of the issuers
future prosperity, liquidation value or third party transactions
involving the issuers securities. Securities for which there
exist no price quotations or valuations and all other assets are
valued at fair value as determined in good faith by or on behalf of
the Board of Directors of the Fund.
DESCRIPTION OF CAPITAL STOCK
The
Fund is authorized to issue 1,000,000,000 shares of capital stock,
par value $.10 per share, all of which shares are initially
classified as common stock. The Board of Directors is authorized,
however, to classify and reclassify any unissued shares of capital
stock by setting or changing in any one or more respects the
designation and number of shares of any such class or series, and
the nature, rates, amounts and times at which and the conditions
under which dividends shall be payable on, and the voting,
conversion, redemption and liquidation rights of, such class or
series and any other preferences, rights, restrictions and
qualifications applicable thereto.
Shares of common stock, when issued and outstanding, are fully paid
and non-assessable. Shareholders are entitled to share pro rata in
the net assets of the Fund available for distribution to
shareholders upon liquidation of the Fund. Shareholders are entitled
to one vote for each share held.
The
Fund does not currently anticipate issuing preferred stock. However,
in the event the Fund issues preferred stock and so long as any
shares of the Funds preferred stock are outstanding, holders
of common stock are not entitled to receive any net income of or
other distributions from the Fund unless all accumulated dividends
on preferred stock have been paid, and unless asset coverage (as
defined in the 1940 Act) with respect to preferred stock would be at
least 200% after giving effect to such distributions. During the
term of the Funds revolving credit facility, the Fund may not
issue any additional capital stock other than common stock. See
Borrowings by the Fund.
The
Fund will send unaudited reports at least semi-annually and audited
annual financial statements to all of its shareholders of record.
The
following table sets forth the authorized shares of the Fund, the
number of shares held by the Fund for its own account and the total
number of shares outstanding as of August 31, 1999, exclusive of
that held by the Fund.
Class of Shares
|
|
Amount
Authorized
|
|
Amount Held by
Fund for Own
Account
|
|
Amount
Outstanding
August 31, 1999
(Exclusive of
Amount Held by
Fund for Own
Account)
|
Common Stock..
|
|
1,000,000,000
|
|
|
|
22,924,759
|
Certain Provisions of the Articles of Incorporation
The
Funds Articles of Incorporation include provisions that could
have the effect of limiting the ability of other entities or persons
to acquire control of the Fund or to change the composition of its
Board of Directors and could have the effect of depriving
shareholders of an opportunity to sell their shares at a premium
over prevailing market prices by discouraging a third party from
seeking to obtain control of the Fund. A Director elected by all
holders of capital stock or by the holders of preferred stock may be
removed from office only for cause by vote of the holders of at
least 66
2
/
3
% of
the shares of capital stock or preferred stock, as the case may be,
of the Fund entitled to be voted on the matter.
In
addition, the Articles of Incorporation require the favorable vote
of the holders of at least 66
2
/
3
% of
the Funds shares of capital stock, then entitled to be voted,
voting as a single class, to approve, adopt or authorize the
following:
|
(i) a merger or
consolidation or statutory share exchange of the Fund with other
corporations;
|
|
(ii) a
sale of all or substantially all of the Funds assets (other
than in the regular course of the Funds investment
activities); or
|
|
(iii) a
liquidation or dissolution of the Fund,
|
unless such action has been approved, adopted or
authorized by the affirmative vote of two-thirds of the total number
of Directors fixed in accordance with the by-laws, in which case the
affirmative vote of a majority of the Funds shares of capital
stock is required. Following any issuance of preferred stock, it is
anticipated that the approval, adoption or authorization of the
foregoing would also require the favorable vote of a majority of the
Funds shares of preferred stock then entitled to be voted,
voting as a separate class.
The
Board of Directors has determined that the 66
2
/
3
%
voting requirements described above, which are greater than the
minimum requirements under Maryland law or the 1940 Act, are in the
best interests of shareholders generally. Reference should be made
to the Articles of Incorporation on file with the Securities and
Exchange Commission for the full text of these provisions.
From
time to time the Fund may include its yield and/or total return for
various specified time periods in advertisements or information
furnished to present or prospective shareholders.
The
yield of the Fund refers to the income generated by an investment in
the Fund over a stated period. Yield is calculated by annualizing
the most recent monthly distribution and dividing the product by the
average maximum offering price. For the period March 26, 1999
(commencement of operations) to August 31, 1999, the Fund earned
$0.289 per share income dividends, representing a net annualized
yield of 6.62%, based on a month-end per share net asset value of
$10.01.
The
Fund also may quote annual total return and aggregate total return
performance data. Total return quotations for the specified periods
will be computed by finding the rate of return (based on net
investment income and any capital gains or losses on portfolio
investments over such periods) that would equate the initial amount
invested to the redeemable value of such investment at the end of
the period.
For
the period March 26, 1999 (commencement of operations) to August 31,
1999, the aggregate total return of the Fund was 3.02%, based on the
change in per share net asset value from $10.00 to $10.01, and
assuming reinvestment of $0.272 per share income dividends.
The
calculation of yield and total return does not reflect the
imposition of any early withdrawal charges.
Yield
and total return figures are based on the Funds historical
performance and are not intended to indicate future performance. The
Funds yield is expected to fluctuate, and its total return
varies depending on market conditions, the Corporate Loans and other
securities comprising the Funds portfolio, the Funds
operating expenses and the amount of net realized and unrealized
capital gains or losses during the period.
On
occasion, the Fund may compare its yield to (1) the Prime Rate,
quoted daily in The Wall Street Journal as the base rate on
corporate loans at large U.S. money center commercial banks, (2) the
CD rate, quoted daily in The Wall Street Journal as the
average of top rates paid by major New York banks on primary new
issues of negotiable CDs, usually on amounts of $1 million and more,
(3) one or more averages compiled by Donoghues Money Fund
Report, a widely recognized independent publication that
monitors the performance of money market mutual funds, (4) the
average yield reported by the Bank Rate Monitor National Index
for money market deposit accounts offered by the 100 leading
banks and thrift institutions in the ten largest standard
metropolitan statistical areas, (5) yield data published by Lipper
Analytical Services, Inc., or (6) the yield on an investment in
90-day Treasury bills on a rolling basis, assuming quarterly
compounding. In addition, the Fund may compare the Prime Rate, the
CD rate, the Donoghues averages and the other yield
data described above to each other. As with yield quotations, yield
comparisons should not be considered indicative of the Funds
yield or relative performance for any future period.
The
Funds securities and cash are held under a custodial agreement
with The Bank of New York, 90 Washington Street, New York, New York
10286.
TRANSFER AGENT, DIVIDEND DISBURSING AGENT
AND SHAREHOLDER SERVICING AGENT; SHAREHOLDER REPORTS
The
Transfer Agent for the shares of the Fund is Financial Data
Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484, a subsidiary of ML & Co.
The
Transfer Agent, which is a subsidiary of ML & Co., acts as the
Funds transfer agent pursuant to a Transfer Agency, Dividend
Disbursing Agency and Shareholder Servicing Agency Agreement (the
Transfer Agency Agreement). Pursuant to the Transfer
Agency Agreement, the Transfer Agent is responsible for the
issuance, transfer and tender of shares and the opening and
maintenance of shareholder accounts. Pursuant to the Transfer Agency
Agreement, the Transfer Agent receives an annual fee of up to $14.00
per shareholder account, and is entitled to reimbursement for
certain transaction charges and out-of-pocket expenses incurred by
it under the Agreement. Additionally, a $.20 monthly closed account
charge is assessed on all accounts that close during the calendar
year. Application of this fee commences the month following the
month the account is closed and terminates at the end of the
calendar year. For purposes of the Transfer Agency Agreement, the
term account includes a shareholder account maintained
directly by the Transfer Agent and any other
account representing the beneficial interest of a person in the
relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML & Co.
For the period March 26,1999 (commencement of operations) to August
31, 1999, the total fee paid by the Fund to the Transfer Agent was
$21,329.
Shareholder Reports. Only one copy of
each shareholder report and certain shareholder communications will
be mailed to each identified shareholder regardless of the number of
accounts such shareholder has. If a shareholder wishes to receive
separate copies of each report and communication for each of the
shareholders related accounts the shareholder should notify in
writing:
|
Financial Data
Services, Inc.
|
|
Jacksonville,
Florida 32232-5289
|
The
written notification should include the shareholders name,
address, tax identification number and Merrill Lynch and/or mutual
fund account numbers. If you have any questions regarding this
please call your Merrill Lynch financial consultant or Financial
Data Services, Inc. at (800) 637-3863.
Many
computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the Year 2000
from the Year 1900 (commonly known as the Year 2000 Problem
). The Fund could be adversely affected if the computer
systems used by Fund management or other Fund service providers do
not properly address this problem before January 1, 2000. Fund
management expects to have addressed this problem before then, and
does not anticipate that the services it provides will be adversely
affected. The Funds other service providers have told Fund
management that they also expect to resolve the Year 2000 Problem,
and Fund management will continue to monitor the situation as the
Year 2000 approaches. However, if the problem has not been fully
addressed, the Fund could be negatively affected. The Year 2000
Problem could also have a negative impact on the issuers of
securities in which the Fund invests, and this could hurt the Fund
s investment returns.
Certain legal matters in connection with the common stock offered
hereby are passed on for the Fund by Brown & Wood LLP
, One World Trade Center, New York, New York 10048-0557.
The
Funds audited financial statements are included in its 1999
annual report to shareholders, which is incorporated by reference in
this Prospectus. You may request a copy of the annual report at no
charge by calling 1-800-456-4587 ext. 789 between 8:00 a.m. and 8:00
p.m. on any business day.
Deloitte & Touche LLP
, 117 Campus Drive, Princeton, N.J. 08540 have been selected as the
independent auditors of the Fund. The selection of independent
auditors is subject to ratification by shareholders of the Fund. The
independent auditors are responsible for auditing the financial
statements of the Fund.
RATINGS OF SECURITIES
Description of Moodys Investors Service, Inc.
s (Moodys) Security Ratings
Aaa
|
|
Securities which are rated Aaa are
judged to be of the best quality. They carry the smallest degree
of investment risk and are generally referred to as gilt edge.
Interest payments are protected by a
large or by an exceptionally stable margin and principal is secure.
While the various protective
elements are likely to change, such changes as can be visualized are
most unlikely to impair the
fundamentally strong position of such issues.
|
|
Aa
|
|
Securities which are rated Aa are
judged to be of high quality by all standards. Together with the
Aaa group they comprise what are generally known as high grade
securities. They are rated lower
than the best securities because margins of protection may not be as
large as in Aaa securities or
fluctuation of protective elements may be of greater amplitude or
there may be other elements
present which make the long-term risks appear somewhat larger than
in Aaa securities.
|
|
A
|
|
Securities which are rated A
possess many favorable investment attributes and are to be
considered
as upper medium grade obligations. Factors giving security to
principal and interest are considered
adequate, but elements may be present which suggest a susceptibility
to impairment sometime in
the future.
|
|
Baa
|
|
Securities which are rated Baa are
considered as medium grade obligation, i.e., they are
neither
highly protected nor poorly secured. Interest payments and principal
security appear adequate for
the present but certain protective elements may be lacking or may be
characteristically unreliable
over any great length of time. Such securities lack outstanding
investment characteristics and in fact
have speculative characteristics as well.
|
|
Ba
|
|
Securities which are rated Ba are
judged to have speculative elements; their future cannot be
considered as well assured. Often the protection of interest and
principal payments may be very
moderate and thereby not well safeguarded during both good and bad
times over the future.
Uncertainty of position characterizes securities in this class.
|
|
B
|
|
Securities which are rated B
generally lack characteristics of the desirable investment.
Assurance of
interest and principal payment or of maintenance of other terms of
the contract over any long
period of time may be small.
|
|
Caa
|
|
Securities which are rated Caa are
of poor standing. Such issues may be in default or there may be
present elements of danger with respect to principal or interest.
|
|
Ca
|
|
Securities which are rated Ca
represent obligations which are speculative in a high degree. Such
issues are often in default or have other marked shortcomings.
|
|
C
|
|
Securities which are rated C are
the lowest rated class of securities and issues so rated can be
regarded as having extremely poor prospects of ever attaining any
real investment standing.
|
Note: Those securities in the Aa, A, Baa, Ba and B
groups which Moodys believes possess the strongest investment
attributes are designated by the symbols Aa1, A1, Baa1, Ba1 and B1.
Short-term Notes: The three ratings of Moodys
for short-term notes are MIG 1/VMIG 1, MIG 2/VMIG 2 and MIG 3/VMIG 3;
MIG 1/VMIG 1 denotes best quality, strong protection from
established cash flows; MIG 2/VMIG 2 denotes high quality
with ample margins of protection; MIG 3/VMIG 3 notes are of
favorable quality but lacking the undeniable strength of the
preceding grades.
Description of Moodys Commercial Paper
Ratings
Moody
s Commercial Paper ratings are opinions of the ability of
issuers to repay punctually promissory obligations not having an
original maturity in excess of nine months. Moodys employs the
following three designations, all judged to be investment grade, to
indicate the relative repayment capacity of rated issuers:
Issuers rated Prime-1 (or supporting institutions) have a superior
capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will often be evidenced by many of the following
characteristics: leading market positions in well established
industries; high rates of return on funds employed; conservative
capitalization structures with moderate reliance on debt and ample
asset protection; broad margins in earnings coverage of fixed
financial charges and high internal cash generation; and well
established access to a range of financial markets and assured
sources of alternate liquidity.
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of short-term promissory obligations. This
will normally be evidenced by many of the characteristics cited
above but to a lesser degree. Earnings trends and coverage ratios,
while sound, will be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by
external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an
acceptable ability for repayment of short-term promissory
obligations. The effects of industry characteristics and market
composition may be more pronounced. Variability in earnings and
profitability may result in changes in the level of debt protection
measurements and the requirement for relatively high financial
leverage. Adequate alternate liquidity is maintained.
Issuers rated Not Prime do not fall within any of the
Prime rating categories.
Description of Standard & Poors, a
Division of The McGraw-Hill Companies, Inc. (Standard &
Poors), Corporate Debt Ratings
AAA
|
|
Debt rated AAA has the highest
rating assigned by Standard & Poors. Capacity to pay
interest and
repay principal is extremely strong.
|
|
AA
|
|
Debt rated AA has a very strong
capacity to pay interest and repay principal and differs from the
higher rated issues only in small degree.
|
|
A
|
|
Debt rated A has a strong capacity
to pay interest and repay principal although it is somewhat more
susceptible to the adverse effects of changes in circumstances and
economic conditions than debt in
higher rated categories.
|
BBB
|
|
Debt rated BBB is regarded as
having an adequate capacity to pay interest and repay principal.
Whereas it normally exhibits adequate protection parameters, adverse
economic conditions or
changing circumstances are more likely to lead to a weakened
capacity to pay interest and repay
principal for debt in this category than for debt in higher rated
categories.
|
Debt
rated BB, B, CCC, CC and C is regarded, on balance, as having
predominantly speculative characteristics with respect to capacity
to pay interest and repay principal in accordance with the terms of
the obligation. BB indicates the lowest degree of speculation and C
the highest degree of speculation. While such debt will likely have
some quality and protective characteristics, these are outweighed by
large uncertainties or major risk exposures to adverse conditions.
BB
|
|
Debt rated BB has less near-term
vulnerability to default than other speculative issues. However, it
faces major ongoing uncertainties or exposure to adverse business,
financial or economic conditions
which could lead to inadequate capacity to meet timely interest and
principal payments. The BB
rating category is also used for debt subordinated to senior debt
that is assigned an actual or
implied BBB- rating.
|
|
B
|
|
Debt rated B has a greater
vulnerability to default but presently has the capacity to meet
interest
payments and principal repayments. Adverse business, financial or
economic conditions would
likely impair capacity or willingness to pay interest and repay
principal. The B rating category is
also used for debt subordinated to senior debt that is assigned an
actual or implied BB or BB-
rating.
|
|
CCC
|
|
Debt rated CCC has a current
identifiable vulnerability to default, and is dependent upon
favorable
business, financial and economic conditions to meet timely payments
of interest and repayment of
principal. In the event of adverse business, financial or economic
conditions, it is not likely to have
the capacity to pay interest and repay principal. The CCC rating
category is also used for debt
subordinated to senior debt that is assigned an actual or implied B
or B- rating.
|
|
CC
|
|
The rating CC is typically applied
to debt subordinated to senior debt which is assigned an actual or
implied CCC rating.
|
|
C
|
|
The rating C is typically applied
to debt subordinated to senior debt which is assigned an actual or
implied CCC- debt rating. The C rating may be used to cover a
situation where a bankruptcy
petition has been filed but debt service payments are continued.
|
|
CI
|
|
The rating CI is reserved for
income bonds on which no interest is being paid.
|
|
D
|
|
Debt rated D is in payment
default. The D rating category is also used when interest payments
or
principal repayments are not made on the date due even if the
applicable grace period has not
expired, unless Standard & Poors believes that such
payments will be made during such grace
period. The D rating also will be used upon the filing of a
bankruptcy petition if debt service
payments are jeopardized.
|
Plus(+) or Minus (-): The ratings from AA to CCC may be
modified by the addition of a plus or minus sign to show relative
standing with the major rating categories.
NR
indicates that no public rating has been requested,
that there is insufficient information on which to base a rating, or
that Standard & Poors does not rate a particular type of
obligation as a matter of policy.
Description of Standard & Poors
Commercial Paper Ratings
A
Standard & Poors commercial paper rating is a current
assessment of the likelihood of timely payment of debt having an
original maturity of no more than 365 days. Ratings are graded into
four categories, ranging form A-1 for the highest
quality obligations to D for the lowest. These
categories are as follows:
A-1
|
|
This highest category indicates
that the degree of safety regarding timely payment is strong. Those
issues determined to possess extremely strong safety characteristics
are denoted with a plus (+) sign
designation.
|
|
A-2
|
|
Capacity for timely payment on
issues with this designation is satisfactory. However, the relative
degree of safety is not as high as for issues designated A-1.
|
|
A-3
|
|
Issues carrying this designation
have a satisfactory capacity for timely payment. They are, however,
somewhat more vulnerable to the adverse effects of changes in
circumstances than obligations
carrying the higher designations.
|
|
B
|
|
Issues rated B are
regarded as having only speculative capacity for timely payment.
|
|
C
|
|
This rating is assigned to
short-term debt obligations with a doubtful capacity for payment.
|
|
D
|
|
Debt rated D is in
payment default. The D rating category is used when
interest payments or
principal payments are not made on the date due, even if the
applicable grace period has not
expired, unless Standard & Poors believes that such
payments will be made during such grace
period.
|
A
commercial paper rating is not a recommendation to purchase or sell
a security. The ratings are based on current information furnished
to Standard & Poors by the issuer or obtained from other
sources it considers reliable. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability
of such information.
[This page intentionally left blank]
[This page intentionally left blank]
POTENTIAL
INVESTORS
Open an account (two options).
MERRILL LYNCH
FINANCIAL CONSULTANT TRANSFER AGENT
or SECURITIES DEALER --------------------------
---------------------------------------------- Financial Data Services, Inc.
Advises shareholders on their Fund investments. P.O. Box 45289
---------------------------------------------- Jacksonville, Florida 32232-5289
Performs recordkeeping and
reporting services.
--------------------------
DISTRIBUTOR
-----------------------------------------------
Merrill Lynch Funds Distributor,
a division of Princeton Funds Distributor, Inc.
P.O. Box 9081
Princeton, New Jersey 08543-9081
Arranges for the sale of Fund shares.
-----------------------------------------------
COUNSEL CUSTODIAN
---------------------------------- ---------------------------
Brown & Wood LLP The Bank of New York
One World Trade Center THE FUND 90 Washington Street
New York, New York 10048-0557 The Board of Directors 12th Floor
oversees the Fund. New York, New York 10286
Provides legal advice to the Fund.
Holds the Fund's assets for
---------------------------------- safekeeping.
---------------------------
INDEPENDENT AUDITORS INVESTMENT ADVISER
----------------------------------- ---------------------------------
Deloitte & Touche LLP Merrill Lynch Asset Management, L.P.
117 Campus Drive
Princeton, New Jersey 08540-6400 ADMINISTRATIVE OFFICES
800 Scudders Mill Road
Audits the financial Plainsboro, New Jersey 08536
statements of the Fund on behalf of
the shareholders. MAILING ADDRESS
P.O. Box 9011
Princeton, New Jersey 08543-9011
TELEPHONE NUMBER
1-800-MER-FUND
Manages the Fund's day-to-day
activities.
----------------------------------- ---------------------------------
MERRILL LYNCH SENIOR FLOATING RATE FUND II, INC.
-----------------------------------------------
Information about the Fund can be reviewed and copied at the
SECs Public Reference Room in Washington, D.C. Call
1-800-SEC-0330 for information on the operation of the public
reference room. This information is also available on the SECs
Internet site at http://www.sec.gov and copies may be obtained upon
payment of a duplicating fee by writing the Public Reference Section
of the SEC, Washington, D.C. 20549-6009.
You should rely only on the information contained in this
prospectus. No one is authorized to provide you with information
that is different.
TABLE OF CONTENTS
Code # 19056-12199
[LOGO] Merrill Lynch
Merrill Lynch
Senior Floating
Rate Fund II, Inc.
[GRAPHIC]
Prospectus
December , 1999
Distributor:
Merrill Lynch
Funds Distributor,
a division of
Princeton Funds
Distributor, Inc.
This prospectus should be
retained for future reference.
PART C. OTHER INFORMATION
Item 24. Financial
Statements and Exhibits.
(1)
Financial Statements:
Part A:
Financial Highlights for March 26, 1999 (commencement of
operations) to August 31, 1999.
Part B:
Schedule of Investments as of August 31, 1999*.
Statement of Assets and Liabilities as of August 31, 1999*.
Statement of Operations for the period March 26, 1999
(commencement of operations) to August 31, 1999*.
Statement of Cash Flows for the period March 26, 1999
(commencement of operations) to August 31, 1999*.
Financial Highlights for the period March 26, 1999
(commencement of operations) to August 31, 1999*.
*
|
Incorporated by reference to the Registrants 1999 Annual
Report to Shareholders filed with the Securities and Exchange
Commission for the year ended August 31, 1999 pursuant to Rule
30b2-1 under the Investment Company Act of 1940, as amended (
1940 Act).
|
(2)
Exhibits:
Exhibit
Number
|
|
Description
|
(a)
|
|
Articles of Incorporation of Registrant.(a)
|
(b)
|
|
By-Laws of Registrant.(a)
|
(c)
|
|
None.
|
(d) (1)
|
|
Portions of the
Articles of Incorporation and By-Laws of the Registrant defining
the rights of
holders of shares of the Registrant.(b)
|
(2)
|
|
Form of specimen
certificate for common stock.(a)
|
(e)
|
|
None.
|
(f)
|
|
None.
|
(g) (1)
|
|
Form of Investment
Advisory Agreement between Registrant and Merrill Lynch Asset
Management, L.P.(a)
|
(2)
|
|
Form of Sub-Advisory
Agreement between Merrill Lynch Asset Management, L.P. and
Merrill Lynch Asset Management U.K. Limited.(a)
|
(3)
|
|
Form of Administration
Agreement between Registrant and Merrill Lynch Asset
Management, L.P.(a)
|
(h) (1)
|
|
Form of Distribution
Agreement between Registrant and Merrill Lynch Funds Distributor, a
division of Princeton Funds Distributor, Inc.(a)
|
(2)
|
|
Form of Selected
Dealer Agreement.(a)
|
(i)
|
|
None.
|
(j)
|
|
Form of Custody
Agreement between Registrant and The Bank of New York.(c)
|
(k) (1)
|
|
Form of Transfer
Agency, Dividend Disbursing Agency and Shareholder Servicing Agency
Agreement between Registrant and Financial Data Services, Inc.(a)
|
(2)
|
|
Form of Agreement
between Merrill Lynch & Co., Inc. and Registrant relating to
use by
Registrant of Merrill Lynch name.(a)
|
(l)
|
|
Opinion and Consent of
Brown & Wood LLP
.
|
(m)
|
|
None.
|
(n)
|
|
Consent of Deloitte
& Touche LLP
, independent auditors for Registrant.
|
(o)
|
|
None.
|
(p)
|
|
Certificate of Merrill
Lynch Asset Management, L.P.(c)
|
(q)
|
|
None.
|
(r)
|
|
Financial Data
Schedule.(c)
|
(a)
|
Filed on February 11, 1999 as an exhibit to the Registrants
Registration Statement on Form N-2 (File No. 333-72137).
|
(b)
|
Reference is made to Article V, Article VI (Sections 2, 3, 4, 5
and 6), Article VII, Article VIII, Article X, Article XI, Article
XII and Article XIII of the Registrants Articles of
Incorporation, filed herewith as Exhibit (a) to the Registration
Statement; and to Article II, Article III (Sections 1, 3, 5 and
17), Article VI, Article VII, Article XII, Article XIII and
Article XIV of the Registrants By-Laws, previously filed as
Exhibit (b) to the Registration Statement.
|
(c)
|
Filed on March 22, 1999 as an Exhibit to Registrants
Registration Statement on Form N-2 (File Number 333-72137).
|
Item 25. Marketing
Arrangements.
See
Exhibits (h)(1) and (h)(2).
Item 26. Other Expenses
of Issuance and Distribution.
The
following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration
Statement:
Registration fees
|
|
$208,709
|
Printing (other
than stock certificates)
|
|
$ 60,000
|
Engraving and
printing stock certificates
|
|
$ 20,000
|
Legal fees and
expenses
|
|
$ 32,500
|
NASD fees
|
|
$ 75,575
|
Miscellaneous
|
|
$
3,216
|
|
|
|
Total
|
|
$400,000
|
|
|
|
Item 27. Persons
Controlled by or under Common Control with Registrant.
None.
Item 28. Number of
Holders of Securities.
|
|
Number of
Holders
September 30, 1999
|
Shares of Common
Stock, par value $0.10 per share
|
|
5,337
|
Note: The number of holders shown above
includes holders of record plus beneficial owners whose shares are
held of record by Merrill Lynch, Pierce Fenner & Smith
Incorporated (Merrill Lynch).
Item 29. Indemnification.
Reference is made to Article IV of the Registrants Articles of
Incorporation, Article VI of the Registrants By-Laws, Section
2-418 of the Maryland General Corporation Law and Section 9 of the
Distribution Agreement.
Article VI of the By-Laws provides that each officer and director of
the Registrant shall be indemnified by the Registrant to the full
extent permitted under the General Laws of the State of Maryland,
except that such indemnity shall not protect any such person against
any liability to the Registrant or any stockholder thereof to which
such person would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of his office. Absent a court
determination that an officer or director seeking indemnification
was not liable on the merits or guilty of willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved
in the conduct of his office, the decision by the Registrant to
indemnify such person must be based upon the reasonable
determination of independent counsel or non-party independent
directors, after review of the facts, that such officer or director
is not guilty of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his
office.
The
Registrant may purchase insurance on behalf of an officer or
director protecting such person to the full extent permitted under
the General Laws of the State of Maryland from liability arising
from his activities as officer or director of the Registrant. The
Registrant, however, may not purchase insurance on behalf of any
officer or director of the Registrant that protects or purports to
protect such person from liability to the Registrant or to its
stockholders to which such officer or director would otherwise be
subject by reason of willful misfeasance, bad faith, gross
negligence, or reckless disregard of the duties involved in the
conduct of his office.
Insofar as the conditional advancing of indemnification moneys for
actions based upon the Investment Company Act of 1940, as amended
(the 1940 Act), may be concerned, such payments will be
made only on the following conditions: (i) the advances must be
limited to amounts used, or to be used, for the preparation or
presentation of a defense to the action, including costs connected
with the preparation of a settlement; (ii) advances may be made only
upon receipt of a written promise by, or on behalf of, the recipient
to repay that amount of the advance which exceeds the amount to
which it is ultimately determined that he is entitled to receive
from the Registrant by reason of indemnification; and (iii)(a) such
promise must be secured by a surety bond, other suitable insurance
or an equivalent form of security which assures that any repayments
may be obtained by the Registrant without delay or litigation, which
bond, insurance or other form of security must be provided by the
recipient of the advance, of (b) a majority of a quorum of the
Registrants disinterested, non-party Directors, or an
independent legal counsel in a written opinion, shall determine,
based upon a review of readily available facts, that the recipient
of the advance ultimately will be found entitled to indemnification.
In
Section 9 of the Distribution Agreement relating to the securities
being offered hereby, the Registrant agrees to indemnify the
Distributor and each person, if any, who controls the Distributor
within the meaning of the 1933 Act, against certain types of civil
liabilities arising in connection with the Registration Statement or
Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933
Act may be permitted to Directors, officers and controlling persons
of the Registrant and the principal underwriter pursuant to the
foregoing provisions or otherwise, the Registrant has been advised
that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the 1933
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a Director, officer,
or controlling person of the Registrant and the principal
underwriter in connection with the successful defense of any action,
suit or proceeding) is asserted by such Director, officer or
controlling person or the principal underwriter in connection with
the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the
question whether such indemnification by it is against public policy
as expressed in the 1933 Act and will be governed by the final
adjudication of such issue.
Item 30. Business and
Other Connections of Investment Adviser.
(a)
Merrill Lynch Asset Management, L.P. (the
Investment Adviser or MLAM) acts as the investment
adviser for the following open-end registered investment companies:
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch
Americas Income Fund, Inc., Merrill Lynch Asset Builder Program,
Inc., Merrill Lynch Asset Growth Fund, Inc., Merrill Lynch Asset
Income Fund, Inc., Merrill Lynch Capital Fund, Inc., Merrill Lynch
Convertible Fund, Inc., Merrill Lynch Developing Capital Markets
Fund, Inc., Merrill Lynch Disciplined Equity Fund, Inc., Merrill
Lynch Dragon Fund, Inc., Merrill Lynch EuroFund, Merrill Lynch
Fundamental Growth Fund, Inc., Merrill Lynch Global Allocation Fund,
Inc., Merrill Lynch Global Bond Fund for Investment and Retirement,
Merrill Lynch Global Growth Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Inc., Merrill
Lynch Global SmallCap Fund, Inc., Merrill Lynch Global Technology
Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch
Healthcare Fund, Inc., Merrill Lynch Intermediate Government Bond
Fund, Merrill Lynch International Equity Fund, Merrill Lynch Latin
America Fund, Inc., Merrill Lynch Middle East/Africa Fund, Inc.,
Merrill Lynch Municipal Series Trust, Merrill Lynch Pacific Fund,
Inc., Merrill Lynch Real Estate Fund, Inc., Merrill Lynch Ready
Assets Trust, Merrill Lynch Retirement Series Trust, Merrill Lynch
Series Fund, Inc., Merrill Lynch Short-Term Global Income Fund,
Inc., Merrill Lynch Strategic Dividend Fund, Merrill Lynch
Technology Fund, Inc., Merrill Lynch U.S.A. Government Reserves,
Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch Utility Income
Fund, Inc., Merrill Lynch Variable Series Fund, Inc. and Hotchkis
and Wiley Funds (advised by Hotchkis and Wiley, a division of MLAM)
and for the following closed-end registered investment companies:
Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Senior Floating Rate Fund, Inc. and MLAM also acts as sub-adviser to
Merrill Lynch World Strategy Portfolio and Merrill Lynch Basic Value
Equity Portfolio, two investment portfolios of EQ Advisors Trust.
(b)
Fund Asset Management, L.P. (FAM), an
affiliate of the Investment Adviser, acts as the investment adviser
for the following open-end registered investment companies: CBA
Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA
Treasury Fund, The Corporate Fund Accumulation Program, Inc.,
Financial Institutions Series Trust, Merrill Lynch Basic Value Fund,
Inc., Merrill Lynch California Municipal Series Trust, Merrill Lynch
Corporate Bond Fund, Inc., Merrill Lynch Corporate High Yield Fund,
Inc., Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch
Federal Securities Trust, Merrill Lynch Funds for Institutions
Series, Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill
Lynch Municipal Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc.,
Merrill Lynch Puerto Rico Tax Exempt Fund, Inc., Merrill Lynch
Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc. and
The Municipal Fund Accumulation Program, Inc.; and for the following
closed-end registered investment companies: Apex Municipal Fund
Inc., Corporate High Yield Fund, Inc., Corporate High Yield Fund II,
Inc., Corporate High Yield Fund III, Inc., Debt Strategies Fund,
Inc., Debt Strategies Fund II, Inc., Debt Strategies Fund III, Inc.,
Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., Merrill Lynch Municipal Strategy Fund, Inc., MuniAssets
Fund, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniHoldings California Insured Fund, Inc., MuniHoldings California
Insured Fund II, Inc., MuniHoldings California Insured Fund III,
Inc., MuniHoldings California Insured Fund IV, Inc., MuniHoldings
California Insured Fund V, Inc., MuniHoldings Florida Insured Fund,
MuniHoldings Florida Insured Fund II, MuniHoldings Florida Insured
Fund III, MuniHoldings Florida Insured Fund IV, MuniHoldings Florida
Insured Fund V, MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc.,
MuniHoldings Insured Fund, Inc., MuniHoldings Insured Fund IV, Inc.,
MuniHoldings Michigan Insured Fund, Inc., MuniHoldings Michigan
Insured Fund II, Inc., MuniHoldings New Jersey Insured Fund, Inc.,
MuniHoldings New Jersey Insured Fund II, Inc., MuniHoldings New
Jersey Insured Fund III, Inc., MuniHoldings New Jersey Insured Fund
IV, Inc., MuniHoldings New York Fund, Inc., MuniHoldings New York
Insured Fund, Inc., MuniHoldings New York Insured Fund II, Inc.,
MuniHoldings New York Insured Fund III, Inc., MuniHoldings New York
Insured Fund IV, Inc., MuniHoldings Pennsylvania Insured Fund,
MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc.,
MuniVest New Jersey Fund, Inc., MuniVest Pennsylvania Insured Fund,
MuniYield Arizona Fund, Inc., MuniYield California Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniYield California
Insured Fund, Inc., MuniYield California Insured Fund II, Inc.,
MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield
Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund,
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey
Fund, Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New
York Insured Fund, Inc., MuniYield New York Insured Fund II, Inc.,
MuniYield Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield
Quality Fund II, Senior High Income Portfolio, Inc. and WorldWide
DollarVest Fund, Inc.
The
address of each of these registered investment companies is P.O. Box
9011, Princeton, New Jersey 08543-9011. The address of Merrill Lynch
Funds for Institutions Series and Merrill Lynch Intermediate
Government Bond Fund is One Financial Center, 23rd Floor, Boston,
Massachusetts 02110-2665. The address of the Investment Adviser,
FAM, Princeton Services, Inc. (Princeton Services) and
Princeton Administrators, L.P. is also P.O. Box 9011, Princeton, New
Jersey 08543-9011. The address of Princeton Funds Distributor, Inc. (
PFD) and of Merrill Lynch Funds Distributor (MLFD
) is P.O. Box 9081, Princeton, New Jersey 08543-9081. The
address of Merrill Lynch and Merrill Lynch & Co., Inc.
(ML & Co.) is North Tower, World Financial Center, 250
Vesey Street, New York, New York 10281-1201. The address of
Financial Data Services, Inc. (FDS) is 4800 Deer Lake
Drive East, Jacksonville, Florida 32246-6484.
Set
forth below is a list of each executive officer and director of the
Investment Adviser indicating each business, profession, vocation or
employment of a substantial nature in which each such person has
been engaged since May 1, 1997 for his, her or its own account or in
the capacity of director, officer, employee,
partner or trustee. In addition, Mr. Glenn is President and Mr. Burke
is Vice President and Treasurer of all or substantially all of the
investment companies listed in the first two paragraphs of this Item
30 and Messrs. Doll, Giordano and Monagle are officers of one or
more of such companies.
Name
|
|
Position with
Investment Advisor
|
|
Other
Substantial Business,
Profession, Vocation or Employment
|
ML & Co
|
|
Limited Partner
|
|
Financial Services Holding Company;
Limited Partner of FAM
|
|
Princeton Services
|
|
General Partner
|
|
General Partner of FAM
|
|
Jeffrey M. Peek
|
|
President
|
|
President of FAM; President and
Director
of Princeton Services; Executive Vice
President of ML & Co.; Managing
Director and Co-Head of the
Investment Banking Division of Merrill
Lynch in 1997; Senior Vice President
and Director of the Global Securities
and Economic Division of Merrill
Lynch from 1995 to 1997
|
|
Terry K. Glenn
|
|
Executive Vice President
|
|
Executive Vice President of FAM;
Executive Vice President and Director
of Princeton Services; President of
Princeton Funds Distributors, Inc. since
1986 and Director thereof since 1991;
Director of FDS; President of Princeton
Administrators, L.P.
|
|
Gregory A. Bundy
|
|
Chief Operating Officer and
Managing Director
|
|
Chief Operating Officer and
Managing
Director of MLAM; Chief Operating
Officer and Managing Director of
Princeton Services; Co-CEO of Merrill
Lynch Australia from 1997 to 1999
|
|
Donald C. Burke
|
|
Senior Vice President and
Treasurer
|
|
Senior Vice President and
Treasurer of
FAM; Senior Vice President and
Treasurer of Princeton Services
|
|
Michael G. Clark
|
|
Senior Vice President
|
|
Senior Vice President of FAM;
Senior
Vice President of Princeton Services;
Treasurer and Director of PFD; First
Vice President of FAM from 1997 to
1999; Vice President of FAM from
1996 to 1997
|
Name
|
|
Position with
Investment Advisor
|
|
Other
Substantial Business,
Profession, Vocation or Employment
|
Robert C. Doll
|
|
Senior Vice President
|
|
Senior Vice President of FAM;
Senior
Vice President of Princeton Services;
Chief Investment Officer of
Oppenheimer Funds, Inc. in 1999 and
Executive Vice President thereof from
1991 to 1999
|
|
Linda L. Federici
|
|
Senior Vice President
|
|
Senior Vice President of FAM;
Senior
Vice President of Princeton Services
|
|
Vincent R. Giordano
|
|
Senior Vice President
|
|
Senior Vice President of FAM;
Senior
Vice President of Princeton Services
|
|
Michael J. Hennewinkel
|
|
Senior Vice President,
General Counsel and
Secretary
|
|
Senior Vice President, General
Counsel
and Secretary of FAM; Senior Vice
President of Princeton Services
|
|
Philip L. Kirstein
|
|
Senior Vice President
|
|
Senior Vice President; Senior Vice
President, Secretary, General Counsel
and Director of Princeton Services
|
|
Debra W. Landsman-Yaros
|
|
Senior Vice President
|
|
Senior Vice President of FAM;
Senior
Vice President of Princeton Services;
Senior Vice President of PFD
|
|
Stephen M. M. Miller
|
|
Senior Vice President
|
|
Executive Vice President of
Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
|
|
Joseph T. Monagle, Jr.
|
|
Senior Vice President
|
|
Senior Vice President of FAM;
Senior
Vice President of Princeton Services
|
|
Brian A. Murdock
|
|
Senior Vice President
|
|
Senior Vice President of FAM;
Senior
Vice President of Princeton Services;
Director of PFD
|
|
Gregory Upah
|
|
Senior Vice President
|
|
Senior Vice President of FAM;
Senior
Vice President of Princeton Services
|
(c)
Merrill Lynch Asset Management U.K. Limited (MLAM
U.K.) acts as sub-adviser for the following registered
investment companies: The Corporate Fund Accumulation Program, Inc.,
Corporate High Yield Fund, Inc., Corporate High Yield Fund II, Inc.,
Debt Strategies Fund, Inc., Debt Strategies Fund II, Inc., Debt
Strategies Fund III, Inc., Income Opportunities Fund 1999, Inc.,
Income Opportunities Fund 2000, Inc., Merrill Lynch Americas Income
Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc.,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch Capital Fund,
Inc., Merrill Lynch Consults International Portfolio, Merrill Lynch
Convertible Fund, Inc., Merrill Lynch Corporate Bond Fund, Inc.,
Merrill Lynch Developing Capital Markets, Inc., Merrill Lynch
Disciplined Equity Fund, Inc., Merrill Lynch Dragon Fund, Inc.,
Merrill Lynch Emerging Tigers Fund, Inc., Merrill Lynch EuroFund,
Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Global
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment
and Retirement, Merrill Lynch Global Growth
Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch Global
Resources Trust, Merrill Lynch Global SmallCap Fund, Inc., Merrill
Lynch Global Technology Fund, Inc., Merrill Lynch Global Utility
Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill Lynch
Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc.,
Merrill Lynch Middle East/Africa Fund, Inc., Merrill Lynch Pacific
Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Real
Estate Fund, Inc., Merrill Lynch Series Fund, Inc., Merrill Lynch
Senior Floating Rate Fund, Inc., Merrill Lynch Short-Term Global
Income Fund, Inc., Merrill Lynch Special Value Fund, Inc., Merrill
Lynch Strategic Dividend Fund, Merrill Lynch Technology Fund, Inc.,
Merrill Lynch Utility Income Fund, Inc., Merrill Lynch Variable
Series Funds, Inc., Merrill Lynch World Income Fund, Inc., The
Municipal Fund Accumulation Program, Inc. and WorldWide DollarVest
Fund, Inc. The address of each of these registered investment
companies is P.O. Box 9011, Princeton, New Jersey 08543-9011. The
address of MLAM U.K. is 33 King William Street, London 9AS, England.
Set
forth below is a list of each executive officer and director of MLAM
U.K. indicating each business, profession, vocation or employment of
a substantial nature in which each such person has been engaged
since May 1, 1997, for his or her own account or in the capacity of
director, officer, partner or trustee. In addition, Messrs. Glenn,
Albert and Burke are officers of one or more of the registered
investment companies listed in the preceding paragraphs:
Name
|
|
Position with
MLAM U.K.
|
|
Other
Substantial Business,
Profession, Vocation or Employment
|
Terry K. Glenn
|
|
Director and Chairman
|
|
President of MLAM and FAM;
Executive Vice President and
Director of Princeton Services;
President and Director of PFD;
President of Princeton
Administrators, L.P.
|
|
Alan J. Albert
|
|
Senior Managing Director
|
|
Vice President of MLAM
|
|
Nicholas C.D. Hall
|
|
President
|
|
Director of Merrill Lynch Europe
PLC; General Counsel of Merrill
Lynch International Private
Banking Group
|
|
Donald C. Burke
|
|
Treasurer
|
|
Senior Vice President and Treasurer
of MLAM and FAM; Director of
Taxation of MLAM; Senior Vice
President and Treasurer of
Princeton Services; Vice
President of PFD; First Vice
President of MLAM from 1997
to 1999; Vice President of
MLAM from 1990 to 1997.
|
|
Carol Ann Langham
|
|
Company Secretary
|
|
None
|
|
Debra Anne Searle
|
|
Assistant Company Secretary
|
|
None
|
Item 31.
Location of Accounts and Records.
All
accounts, books and other documents required to be maintained by
Section 31(a) of the 1940 Act and the Rules thereunder will be
maintained at the offices of the Registrant, 800 Scudders Mill Road,
Plainsboro, New Jersey 08536 and FDS, 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Item 32. Management
Services.
Not Applicable.
Item 33. Undertakings.
(a)
Registrant undertakes to suspend offerings of the shares
of Common Stock covered hereby until it amends its Prospectus
contained herein if (1) subsequent to the effective date of this
Registration Statement, its net asset value per share of Common
Stock declines more than 10 percent from its net asset value per
share of Common Stock as of the effective date of this Registration
Statement, or (2) its net asset value per share of Common Stock
increases to an amount greater than its net proceeds as stated in
the Prospectus contained herein.
(b)
The undersigned registrant hereby undertakes:
|
(1) To
file during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement.
|
|
(i) To
include any prospectus required by section 10(a)(3) of the 1933
Act;
|
|
(ii) To
reflect in the prospectus any facts or events arising after the
effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which individually or in the
aggregate represent a fundamental change in the information set
forth in the Registration Statement; and
|
|
(iii)
To include any material information with respect to the plan of
distribution not previously disclosed in the Registration
Statement or any material change to such information in the
Registration Statement.
|
|
(2)
That, for the purpose of determining any liability under the 1933
Act, each such post-effective amendment shall be deemed to be a
new Registration Statement relating to the securities offered
therein and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
|
|
(3) To
remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
|
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused this
Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the Township of
Plainsboro, and State of New Jersey, on the 2nd day of November,
1999.
|
M
ERRILL
LYNCH
SENIOR
FLOATING
RATE
FUND
II, INC
.
|
|
(Terry
K. Glenn, President)
|
Each
person whose signature appears below hereby authorizes Terry K.
Glenn, Donald C. Burke or Bradley J. Lucido, or any of them, as
attorney-in-fact, to sign on his or her behalf, individually and in
each capacity stated below, any amendment to this Registration
Statement (including post-effective amendments) and to file the
same, with all exhibits thereto, with the Securities and Exchange
Commission.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following
persons in the capacities and on the date indicated.
Signature
|
|
Title
|
|
Date
|
|
|
/S
/ TERRY
K. GLENN
(Terry K. Glenn)
|
|
President (Principal Executive
Officer) and Director
|
|
November 2, 1999
|
|
|
/S
/ DONALD
C. BURKE
(Donald C. Burke)
|
|
Treasurer (Principal Financial
and Accounting Officer)
|
|
November 2, 1999
|
|
|
/S
/ RONALD
W. FORBES
(Ronald W. Forbes)
|
|
Director
|
|
November 2, 1999
|
|
|
/S
/ CYNTHIA
A. MONTGOMERY
(Cynthia A. Montgomery)
|
|
Director
|
|
November 2, 1999
|
|
|
/S
/ CHARLES
C. REILLY
(Charles C. Reilly)
|
|
Director
|
|
November 2, 1999
|
|
|
/S
/ KEVIN
A. RYAN
(Kevin A. Ryan)
|
|
Director
|
|
November 2, 1999
|
|
|
/S
/ RICHARD
R. WEST
(Richard R. West)
|
|
Director
|
|
November 2, 1999
|
|
|
/S
/ ARTHUR
ZEIKEL
(Arthur Zeikel)
|
|
Director
|
|
November 2, 1999
|
|
EXHIBIT INDEX
Exhibit
Letter
|
|
Description
|
(1)
|
|
Opinion and
consent of Brown & Wood LLP
.
|
(n)
|
|
Consent of
Deloitte & Touche LLP
, independent auditors for the Registrant
|
APPENDIX FOR
GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the
following table presents fair and accurate narrative descriptions of
graphic and image material omitted from this EDGAR
Submission file
due to ASCII-incompatibility and cross-references this material to
the location of each occurrence in the text.
DESCRIPTION OF
OMITTED
GRAPHIC OR IMAGE
|
LOCATION OF GRAPHIC
OR IMAGE IN TEXT
|
Compass plate, circular
graph paper and Merrill Lynch
logo including stylized market
bull
|
Back cover of Prospectus
|
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