<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 9, 1994.
SECURITIES ACT FILE NO. 33-
INVESTMENT COMPANY ACT FILE NO. 811-5870
POST-EFFECTIVE AMENDMENT TO REGISTRATION STATEMENT AS STATED BELOW
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM N-2
/X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/ / PRE-EFFECTIVE AMENDMENT NO.
/ / POST-EFFECTIVE AMENDMENT NO.
AND/OR
/X/ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/X/ AMENDMENT NO. 10
(CHECK APPROPRIATE BOX OR BOXES)
------------------------
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
(Exact name of Registrant as specified in charter)
800 SCUDDERS MILL ROAD
PLAINSBORO, NEW JERSEY 08536
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(609) 282-2800
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
ARTHUR ZEIKEL
MERRILL LYNCH SENIOR FLOATING RATE FUND, 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:
BROWN & WOOD
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
ATTENTION: THOMAS R. SMITH, JR., ESQ.
PHILIP L. KIRSTEIN, ESQ.
MERRILL LYNCH ASSET MANAGEMENT
P.O. BOX 9011
PRINCETON, NEW JERSEY 08543-9011
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, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. /X/
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
<CAPTION>
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MAXIMUM MAXIMUM
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE AGGREGATE AMOUNT OF
BEING REGISTERED REGISTERED PER UNIT OFFERING PRICE(1) REGISTRATION FEE(2)
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<S> <C> <C> <C> <C>
Common Stock ($.10 par value).......... 300,000,000 shares $10.01 $3,003,000,000 $1,035,525
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</TABLE>
(1) Estimated solely for the purposes of calculating the registration fee
pursuant to Rule 457 of the Securities Act of 1933, as amended.
(2) Transmitted prior to the filing date to the designated lockbox at Mellon
Bank in Pittsburgh, PA.
----------------------------
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 OF 1933 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 OF 1933, THE PROSPECTUS IN
THIS REGISTRATION STATEMENT IS A COMBINED PROSPECTUS AND RELATES TO REGISTRATION
STATEMENT NO. 33-42932, AS AMENDED, PREVIOUSLY FILED BY THE REGISTRANT ON FORM
N-2 AND DECLARED EFFECTIVE ON OCTOBER 24, 1989. THIS REGISTRATION STATEMENT ALSO
CONSTITUTES POST-EFFECTIVE AMENDMENT NO. 4 TO REGISTRATION STATEMENT NO.
33-42932, 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 OF 1933. THE REGISTRATION
STATEMENT AND THE REGISTRATION STATEMENT AMENDED HEREBY ARE COLLECTIVELY
REFERRED TO HEREUNDER AS THE "REGISTRATION STATEMENT".
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<PAGE> 2
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
CROSS REFERENCE SHEET
PURSUANT TO RULE 404(C)
<TABLE>
<CAPTION>
ITEM NUMBER, FORM N-2 CAPTION IN PROSPECTUS
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<S> <C>
PART A--INFORMATION REQUIRED IN A PROSPECTUS
1. Outside Front Cover Page.................... Cover Page
2. Inside Front and Outside Back Cover Pages... Cover Page
3. Fee Table and Synopsis...................... Fund Expenses
4. Financial Highlights........................ Financial Highlights
5. Plan of Distribution........................ Prospectus Summary; Purchase of Shares
6. Selling Shareholders........................ Not Applicable
7. Use of Proceeds............................. Investment Objective and Policies
8. General Description of the Registrant....... The Fund; Prospectus Summary; Investment
Objective and Policies; Special Leverage
Considerations; Investment Restrictions
9. Management.................................. Directors and Officers; Investment Advisory
and Administrative Arrangements
10. Capital Stock, Long-Term Debt, and Other
Securities................................ Description of Capital Stock
11. Defaults and Arrears on Senior Securities... Not Applicable
12. Legal Proceedings........................... Not Applicable
13. Table of Contents of the Statement of
Additional Information.................... Not Applicable
<CAPTION>
PART B--INFORMATION REQUIRED IN A STATEMENT OF ADDITIONAL INFORMATION
<S> <C>
14. Cover Page.................................. Not Applicable
15. Table of Contents........................... Not Applicable
16. General Information and History............. Not Applicable
17. Investment Objective and Policies........... Investment Objective and Policies;
Investment Restrictions
18. Management.................................. Directors and Officers; Investment Advisory
and Administrative Arrangements
19. Control Persons and Principal Holders of
Securities................................ Investment Advisory and Administrative
Arrangements
20. Investment Advisory and Other Services...... Investment Advisory and Administrative
Arrangements; Custodian; Experts
21. Brokerage Allocation and Other Practices.... Portfolio Transactions
22. Tax Status.................................. Taxes
23. Financial Statements........................ Financial Statements
</TABLE>
PART C--OTHER INFORMATION
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH AN OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES
LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 9, 1994
PROSPECTUS
NOVEMBER , 1994
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
COMMON STOCK
------------------------
Merrill Lynch Senior Floating Rate Fund, Inc. (the "Fund") is a continuously
offered non-diversified, closed-end fund. The Fund seeks as high a level of
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 in Corporate Loans made by banks and other
financial institutions. It is anticipated that the Corporate Loans will pay
interest at rates which float or reset at a margin above a generally-recognized
base lending rate such as the prime rate ("Prime Rate") of a designated U.S.
bank, the Certificate of Deposit ("CD") rate or the London InterBank Offered
Rate ("LIBOR"). There can be no assurance that the investment objective of the
Fund will be realized.
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
$ . Shares may be purchased directly from Merrill Lynch Funds Distributor,
Inc. (the "Distributor"), P.O. Box 9011, Princeton, New Jersey 08543-9011 (609)
282-2800, or from securities dealers which have entered into dealer agreements
with the Distributor, including Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"). Merrill Lynch may charge its customers a
processing fee (presently $4.85) for confirming purchases and repurchases.
Purchases directly through the Fund's transfer agent are not subject to the
processing fee. The minimum initial purchase is $1,000 and the minimum
subsequent purchase is $50, except that different minimums may be applicable to
certain retirement accounts and other retirement plans. See "Purchase of
Shares".
No market presently exists for the Fund's Common Stock and it is not
currently expected that a secondary market will develop. Since the Fund's Common
Stock may not be considered readily marketable, the Board of Directors of the
Fund presently intends to consider the making of tender offers on a quarterly
basis to purchase all or a portion of the Common Stock of the Fund from
shareholders at the net asset value per share. See "Tender Offers". Shares of
Common Stock purchased by the Fund pursuant to tender offers which have been
held for less than three years will be subject to an "Early Withdrawal Charge"
which will not exceed 3.0% of the original purchase amount for such Common
Stock, and which will be paid to the Fund's distributor. See "Early Withdrawal
Charge".
Merrill Lynch Asset Management, L.P. (the "Investment Adviser"), an
affiliate of Merrill Lynch, acts as investment adviser and administrator for the
Fund. The address of the Fund is 800 Scudders Mill Road, Plainsboro, New Jersey
08536, and its telephone number is (609) 282-2800. Investors are advised to read
this Prospectus carefully and retain it for future reference.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COM-
MISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) FUND(3)
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<S> <C> <C> <C>
Per Share............................................ $ None $
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Total(3)............................................. $ None $
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</TABLE>
(1) The Common Stock is offered on a best efforts basis at a price equal to net
asset value, which, from November 3, 1989 (commencement of operations) to
the date of this Prospectus, has ranged from $9.98 to $10.02 per share.
(2) Because Merrill Lynch Funds Distributor, Inc. will pay all offering expenses
(other than registration fees) and sales commissions to selected dealers
(primarily Merrill Lynch) from its own assets, all of the proceeds of the
offering will be available to the Fund for investment in portfolio
securities. See "Purchase of Shares".
(3) These amounts (a) do not take into account prepaid registration fees, in the
amount of approximately $ , which are being charged to income as the
related shares are issued, and (b) assume all shares currently registered
are sold pursuant to a continuous offering.
----------------------------
MERRILL LYNCH FUNDS DISTRIBUTOR, INC.--DISTRIBUTOR
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
THE FUND Merrill Lynch Senior Floating Rate Fund, Inc. (the
"Fund") is a continuously offered non-diversified,
closed-end fund. See "The Fund".
THE OFFERING Shares of Common Stock of the Fund may be offered by
Merrill Lynch Funds Distributor, Inc. (the
"Distributor") and other securities dealers which have
entered into selected dealer agreements with the
Distributor, including Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch").
The Fund will offer its Common Stock at a price equal to
the next determined net asset value per share without a
front-end sales charge. The minimum initial purchase is
$1,000 and the minimum subsequent purchase is $50,
except with respect to retirement plans. For retirement
plans, the minimum initial purchase is $250 and minimum
subsequent purchase is $1, except for plans established
under Sections 401(k) and 403(b) of the Internal Revenue
Code of 1986 which are maintained through Merrill Lynch.
For such 401(k) and 403(b) plans there are no minimum
initial or subsequent purchase requirements. The Fund
reserves the right to waive or modify the initial and
subsequent minimum investment requirements at any time.
See "Purchase of Shares".
The Fund presently intends to offer only shares of
Common Stock. Although the Fund has no present intention
to do so, it may in the future offer shares of preferred
stock, subject to the requirements of the Investment
Company Act of 1940, as amended (the "1940 Act").
INVESTMENT OBJECTIVE
AND POLICIES The investment objective of the Fund is to provide
shareholders with as high a level of current income and
such preservation of capital as is consistent with
investment in senior collateralized loans ("Corporate
Loans") made to U.S. or non-U.S. corporations
("Borrowers") that meet credit standards established by
the Investment Adviser.
The Fund invests primarily in Corporate Loans that have
interest rates which float at a margin above a
generally-recognized base lending rate such as the Prime
Rate of a designated U.S. bank, or in variable rate
Corporate Loans which provide for the adjustment of
interest rates to the base rate on set dates, typically
30 days but not to exceed one year, such as the
Certificate of Deposit ("CD") rate or the London
InterBank Offered Rate
2
<PAGE> 5
("LIBOR"). Under normal market conditions, at least 65%
of the total assets of the Fund will be invested in
floating or variable rate Corporate Loans made to
corporations.
Except during interim periods pending investment of the
net proceeds of the public offering of the Fund's
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 will invest at least 80% of its total
assets in interests in Corporate Loans and the remainder
of its total assets in senior loans made on an unsecured
basis to Borrowers that meet the credit standards
established by the Investment Adviser ("Unsecured
Corporate Loans"), in cash or in secured or unsecured
short-term debt obligations rated within the four
highest rating categories assigned by a nationally
recognized rating service, or 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. 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, the actual maturities of the Corporate Loans
are expected to be in the two to three year range.
The net asset value of the shares of Common Stock of an
investment company which invests primarily in
fixed-income securities changes as the general level of
interest rates fluctuates. The Investment Adviser
expects the Fund's net asset value to be relatively
stable during normal market conditions because the
Fund's portfolio will consist primarily of floating and
variable rate Corporate Loans and to a lesser extent
short-term instruments. For this reason, the Investment
Adviser expects the value of the Fund's portfolio to
fluctuate significantly less as a result of interest
rate changes than would a portfolio of fixed-rate
obligations. However, because the Fund's policy is to
invest primarily in floating and variable rate
obligations and variable interest rates only reset
periodically, the Fund's net asset value may fluctuate
from time to time in the event of an imperfect
correlation between the interest rates on variable rate
loans in the Fund's portfolio and prevailing interest
rates. Also, defaults on Corporate Loans could cause a
decline in the Fund's net asset value.
The Fund will invest in a Corporate Loan only if, in the
Investment Adviser's judgment, the Borrower can meet
debt service on such Loan. The Corporate Loans in which
the Fund invests currently are not rated by any
3
<PAGE> 6
nationally recognized rating service. The Investment
Adviser will perform its own credit analysis of the
Borrower. Since the minimum debt rating of a Borrower
may not have a meaningful relation 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 will only invest in Unsecured Corporate Loans made
to Borrowers that meet the credit standards established
by the Investment Adviser for 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 Borrower's business
internally or externally, or to finance a capital
restructuring. It is anticipated that a significant
portion of such Corporate Loans may include highly
leveraged loans such as leveraged buy-out loans,
leveraged recapitalization loans and other types of
acquisition loans. As noted above, the Fund may invest
in Corporate Loans which are made to 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, and any such Borrower meets the credit
standards established by the Investment Adviser for U.S.
Borrowers. The Fund similarly may invest in loans to
U.S. Borrowers with significant non-dollar-denominated
revenues provided that the loans are U.S.
dollar-denominated or otherwise provide for payment 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. See "Investment Objective
and Policies". 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.
Corporate Loans may be issued in the form of senior
syndicated loans or senior secured notes. Typically, the
Corporate Loans are structured by two or more lenders
("Co-Lenders"), one or more of which administers the
Loan on behalf of all the Co-Lenders (the "Agent Bank").
Co-Lenders may sell Corporate Loans to third parties
called "Participants". The Fund may invest in a
Corporate Loan either by participating as a Co-Lender at
the time the loan is originated or by buying an interest
from a Co-Lender or a Participant (collectively,
"Participation Interests"). All institutions interposed
between the Fund and a Borrower must meet minimum
credit-
4
<PAGE> 7
worthiness standards as discussed herein. See
"Investment Objective and Policies". For these purposes,
when the Fund invests in a Corporate Loan as a Co-Lender
it may be deemed to be making a loan to the Borrower.
In addition to fluctuations in net asset value caused by
variations in prevailing interest rates, net asset value
also may be affected by changes in the creditworthiness
of Borrowers, Co-Lenders or Participants interposed
between the Fund and the Borrowers. In the event such
institutions were to default on their obligations, the
Fund might experience a reduction of both income and the
value of its assets.
The Fund may seek to hedge against interest rate risk by
engaging in certain interest rate hedging 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. If the other party
to an interest rate hedging transaction defaults, the
Fund's risk of loss consists of the net amount of
interest payments that the Fund contractually is
entitled to receive.
LEVERAGE The Fund may borrow money in amounts up to 33 1/3% of
the value of its total assets for the purpose of
financing additional investments or to satisfy tender
offers. Although it has no present intention to do so,
the Fund also may issue one or more series of preferred
shares. The Fund will borrow to finance additional
investments or issue a class of preferred shares only
when it believes that the return that may be earned on
investments purchased with the proceeds of such
borrowings or offerings will exceed the costs, including
debt service and dividend obligations, associated
therewith. However, to the extent such costs exceed the
return on the additional investments, the return
realized by the Fund's common shareholders will be
adversely affected.
Leverage creates certain risks for holders of Common
Stock, including the risk that higher volatility of both
the net asset value and market value of the Common
Stock, and that fluctuations in the dividend rates on
the preferred shares will affect the yield to holders of
Common Stock. Additionally, changes in certain factors
could cause the relationship between the rates paid by
the Fund as dividends on the preferred shares and the
rates received by the Fund on its investment portfolio
to change so that rates on the preferred shares may
substantially increase relative to rates on the
obligations in which the Fund may be invested. Under
such conditions, the benefit of leverage to holders of
Common Stock would be reduced and the Fund's
5
<PAGE> 8
leveraged capital structure could result in a lower rate
of return to holders of Common Stock than if the Fund
were not leveraged.
Any issuance of preferred shares or any bank borrowings
by the Fund are subject to and will comply with the
requirements of the 1940 Act. Pursuant to such Act,
among other things, the Fund may not issue preferred
shares unless immediately after their issuance the Fund
is able to maintain asset coverage of at least 200%. In
the case of bank borrowings, asset coverage of at least
300% must be maintained.
INVESTMENT ADVISER AND
ADMINISTRATOR Merrill Lynch Asset Management, L.P. (the "Investment
Adviser") is the Fund's investment adviser and is
responsible for the management of the Fund's investment
portfolio and for providing administrative services to
the Fund. For its advisory services, the Fund pays the
Investment Adviser a monthly fee at the annual rate of
0.95 of 1% of the Fund's average daily net assets. For
administrative services, the Fund pays the Investment
Adviser a monthly fee at the annual rate of 0.25 of 1%
of the Fund's average daily net assets. While the
aggregate of the advisory and administrative fees is
higher than that paid by most other investment
companies, it is similar to that paid by other
closed-end funds investing primarily in Corporate Loans
or Participation Interests in Corporate Loans. The
Investment Adviser is owned and controlled by Merrill
Lynch & Co., Inc. As of September 30, 1994, the
Investment Adviser or its affiliate, Fund Asset
Management, L.P., had a total of approximately $167
billion in investment company and other portfolio assets
under management, including accounts of certain
affiliates of the Investment Adviser. See "Investment
Advisory and Administrative Arrangements".
DISTRIBUTIONS The Fund intends to continue to declare dividends daily
and to pay dividends monthly and to distribute
substantially all of its net investment income to
holders of Common Stock. Net capital gains, if any, will
be distributed at least annually to holders of Common
Stock. See "Dividends and Distributions".
TENDER OFFERS No market presently exists for the Fund's Common Stock
and it is not currently anticipated that a secondary
market will develop. In view of this, the Board of
Directors of the Fund intends to continue to consider
the making of tender offers on a quarterly basis to
purchase Common Stock of the Fund from shareholders at a
price per share equal to the net asset value per share
of the Common Stock determined at the close of business
on the day an offer terminates. The Board of Directors
is under no obligation to authorize the making of a
tender offer and no assurance can be given that in
6
<PAGE> 9
any particular quarter a tender offer will be made. If a
tender offer is not made, shareholders may be unable to
sell their shares. Shares of Common Stock which have
been held for less than three years and which are
purchased by the Fund pursuant to tender offers will be
subject to an early withdrawal charge. See "Early
Withdrawal Charge". In addition, Merrill Lynch charges
its customers a processing fee (presently $4.85) to
confirm a repurchase of shares from such customers
pursuant to a Tender Offer. Tenders made directly
through the Fund's Transfer Agent are not subject to the
processing fee.
SPECIAL CONSIDERATIONS
AND RISK FACTORS The Fund expects that there will be no secondary market
for its Common Stock. Moreover, Merrill Lynch and other
selected dealers are prohibited under applicable law
from making a market in the Fund's Common Stock while
the Fund is making either a public offering of or a
tender offer to purchase its Common Stock. To the extent
a secondary market does develop, however, investors
should be aware that the shares of closed-end funds
frequently trade in the secondary market at a discount.
Should there be a secondary market for the Fund's shares
of Common Stock, the market price of the shares may vary
from net asset value from time to time.
Because of the lack of a secondary market and the early
withdrawal charge, the Fund is designed primarily for
long-term investors and should not be considered a
vehicle for trading purposes.
The Fund has registered as a "non-diversified"
investment company so that it will be able to invest
more than 5% of its assets in the obligations of any
single issuer, subject to the diversification
requirements of Subchapter M of the Internal Revenue
Code of 1986, as amended (the "Code"), applicable to the
Fund. Since the Fund may invest a relatively high
percentage of its assets in the obligations of a limited
number of issuers, the Fund may be more susceptible than
a more widely-diversified fund to any single economic,
political or regulatory occurrence.
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, including, among other things, changes in
governmental regulation, interest rate levels and
general economic conditions. See "Investment Objectives
and Policies--Description of Participation Interests"
and "Investment Restrictions".
7
<PAGE> 10
The debt instruments in which the Fund may invest may be
subject to the risk of nonpayment of scheduled interest
or principal payments. In such event, the Fund may
experience a decline in the value of the related debt
instruments, including Corporate Loans, and, therefore,
a decline in the net asset value of the Fund's shares of
Common Stock. There is no assurance that the liquidation
of collateral underlying Corporate Loans will satisfy
the related Borrowers' obligations in the event of
nonpayment of scheduled interest or principal, or that
the collateral could be readily resold.
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. Highly leveraged Corporate Loans also
may be less liquid than other Corporate Loans.
When the Fund is acting in the capacity of a Participant
with respect to a Corporate Loan, the financial status
of the Agent Bank and Co-Lenders and Participants
interposed between the Fund and a Borrower may affect
the ability of the Fund to receive payments of interest
and principal. For this reason, the Fund will invest in
Corporate Loans only if, at the time of investment, the
outstanding debt obligations of the Agent Bank and any
such Co-Lenders and Participants interposed between the
Fund and a Borrower are investment grade; i.e., rated
BBB or A-3 or higher by Standard & Poor's Corporation or
Baa or P-3 or higher by Moody's Investors Service, Inc.,
or determined to be of comparable quality in the
judgment of the Investment Adviser.
Generally, changes in interest rates may affect the
market value of the Fund's investments resulting in
changes in the net asset value of the shares of Common
Stock of the Fund. It is expected, however, that a
portfolio consisting primarily of floating and variable
rate Corporate Loans, Unsecured Corporate Loans and
short-term instruments will experience less significant
fluctuations in value as a result of interest rate
changes than would a portfolio of fixed rate
obligations. If interest rates decline, there is the
risk that Borrowers will prepay principal. In addition,
if a Borrower experiences unanticipated excess cash
flow, principal may be prepaid.
Some or all of the Corporate Loans in which the Fund
invests will be considered to be illiquid, which may
impair the Fund's ability to realize the
8
<PAGE> 11
full value of its assets in the event of a voluntary or
involuntary liquidation of such 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 Fund's 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.
The success of the Fund depends, to a great degree, on
the skill with which the Agent Banks administer the
terms of the Corporate Loan agreements, monitor Borrower
compliance with covenants, collect principal, interest
and fee payments from Borrowers and, where necessary,
enforce creditor remedies against Borrowers. Typically,
the Agent Bank will have broad discretion in enforcing a
Corporate Loan agreement.
The Fund's 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 holders of Common
Stock 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. See
"Description of Capital Stock--Certain Provisions of the
Articles of Incorporation".
9
<PAGE> 12
FEE TABLE
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum Sales Load (as a percentage of offering price).......................... None
Dividend Reinvestment and Cash Purchase Plan Fees............................... None
ANNUAL EXPENSES (as a percentage of net assets attributable to common shares)
Management Fees(a).............................................................. 0.95%
Administrative Fees............................................................. 0.25
Other Expenses.................................................................. 0.23
----
Total Annual Expenses................................................................ 1.43%
====
</TABLE>
<TABLE>
<CAPTION>
1 3 5 10
EXAMPLE YEAR YEARS YEARS YEARS
--- --- --- ----
<S> <C> <C> <C> <C>
An investor would pay the following expenses on a
$1,000 investment assuming (1) total annual expenses
of 1.43%, (2) a 5% annual return throughout the
periods and (3) tender at the end of the period: $15 $45 $78 $171
</TABLE>
- - - ---------------
(a) See "Investment Advisory and Administrative Arrangements" -- page 33.
The foregoing 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 Fund's fiscal year on an annualized basis. 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
future expenses or annual rate of return, and actual expenses or annual rate 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 $4.85) for
confirming purchases and repurchases. Purchases and repurchases directly through
the Transfer Agent are not subject to the processing fee.
10
<PAGE> 13
FINANCIAL HIGHLIGHTS
The financial information in the table below has been audited in
conjunction with the annual audits of the financial statements of the Fund by
Deloitte & Touche LLP, independent auditors. Financial statements for the year
ended August 31, 1994 and the independent auditors' report thereon are set forth
herein under "Financial Statements".
The following per share data and ratios have been derived from information
provided in the financial statements.
<TABLE>
<CAPTION>
FOR THE
PERIOD
FOR THE YEAR ENDED NOVEMBER 3,
AUGUST 31, 1989+ TO
------------------------------------ AUGUST 31,
INCREASE (DECREASE) IN NET ASSET VALUE: 1994 1993 1992 1991 1990
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period............................. $10.02 $ 9.99 $ 9.99 $10.00 $10.00
------ ------ ------ ------ ------
Investment income -- net............. .59 .53 .64 .85 .76
Realized and unrealized gain (loss)
on investments -- net.............. -- .03 -- (.01) --
------ ------ ------ ------ ------
Total from investment operations..... .59 .56 .64 .84 .76
------ ------ ------ ------ ------
LESS DIVIDENDS:
Investment income -- net............. (.59) (.53) (.64) (.85) (.76)
------ ------ ------ ------ ------
Net asset value, end of period....... $10.02 $10.02 $ 9.99 $ 9.99 $10.00
====== ====== ====== ====== ======
TOTAL INVESTMENT RETURN:*
Based on net asset value per share... 5.94% 5.74% 6.58% 8.79% 7.63%++
====== ====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement....... 1.43% 1.47% 1.39% 1.27% .79%**
====== ====== ====== ====== ======
Expenses............................. 1.43% 1.47% 1.41% 1.33% 1.35%**
====== ====== ====== ====== ======
Investment income -- net............. 5.75% 5.27% 6.58% 8.44% 9.06%**
====== ====== ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period
(in millions)...................... $ 934 $ 713 $ 834 $1,705 $1,728
====== ====== ====== ====== ======
Portfolio turnover................... 61.31% 90.36% 46.48% 58.22% 29.61%
====== ====== ====== ====== ======
</TABLE>
- - - ---------------
* 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; no separate market exists for such
shares.
** Annualized.
+ Commencement of Operations.
++ Aggregate total investment return.
11
<PAGE> 14
THE FUND
Merrill Lynch Senior Floating Rate Fund, Inc. (the "Fund") is a
continuously offered non-diversified, closed-end, management investment company.
The Fund was incorporated under the name "Merrill Lynch Prime Fund, Inc." under
the laws of the State of Maryland on July 27, 1989 and has registered under the
Investment Company Act of 1940, as amended (the "1940 Act"). The Fund's
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 Fund's investment objective is to provide as high a level of 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 which 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 primarily are made to
corporations (each a "Borrower") and 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 Corporate 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 Moody's Investors Service, Inc. or BBB, A-3
or higher by Standard & Poor's Corporation 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 securities or cash will not
exceed 20% of the Fund's total assets except during interim periods pending
investment of the net proceeds of public offerings of the Fund's 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 to
Borrowers that meet the credit standards established by the Investment Adviser
("Unsecured Corporate Loans"). The Fund will only invest in Unsecured Corporate
Loans made to Borrowers that meet the credit standards established by the
Investment Adviser for Corporate Loans. 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 equity securities.
12
<PAGE> 15
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 actual maturities of the Corporate Loans will be in the
two to three year range. See "Description of Corporate Loans".
The Fund will limit its investments to those which could be acquired
directly by national banks for their own portfolios, as provided in 12 U.S.
Code, Section 24, paragraph seventh and the implementing regulations and
interpretations of the Comptroller of the Currency, including in particular 12
Code of Federal Regulations, Part I. Pursuant to the cited law and regulations,
national banks may invest in "investment securities", which include debt
obligations meeting certain standards of marketability and creditworthiness and
all types of loans, including loans to corporations, such as the Corporate
Loans. The conditions and restrictions governing the purchase of Fund shares by
national banks are set forth in the U.S. Comptroller of the Currency's Banking
Circular No. 220, dated November 21, 1986. Among these conditions and
limitations, investments by a national bank in an investment company, such as
the Fund, whose portfolio contains investments and loans subject to the
investment limitations of 12 U.S. Code, Section 24, or the lending limits of 12
U.S. Code, Section 84, are limited to 10% of the bank's capital and surplus, and
the bank's investment in the Fund must be marked-to-market on a regular basis.
Subject to such conditions and restrictions, national banks may acquire Fund
shares for their own investment portfolios.
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, 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 management and administrative fees and operational
costs. See "Special Leverage Considerations".
The net asset value of the shares of Common Stock of an investment company
which 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 Fund's net asset value to be relatively stable
during normal market conditions, because the Fund's 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 Fund's
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 Fund's net asset value 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 nominal amounts in the Fund's interest rate swap transactions,
and prevailing interest rates. Also, a default on a Corporate Loan in which the
Fund has invested or a sudden and extreme increase in prevailing interest rates
may cause a decline in the Fund's net asset value. Conversely, a sudden and
extreme decline in interest rates could result in an increase in the Fund's net
asset value.
13
<PAGE> 16
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
Fund's investments will be limited so as to qualify the Fund as a "regulated
investment company" for purposes of the Internal Revenue Code of 1986, as
amended (the "Code"). 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 Fund's 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 which 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 yield may fluctuate to a
greater extent than that of a diversified company as a result of changes in the
financial condition or in the market's 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 Borrower's
business internally or externally, or to finance a capital restructuring.
Corporate Loans may also include senior obligations of a borrower issued in
connection with a restructuring pursuant to Chapter 11 of the United States
Bankruptcy Code provided that such senior obligations meet the credit standards
established by the Investment Adviser. It is anticipated that a significant
portion of such Corporate Loans may include 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 Fund's 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 Borrower's
receivables. Corporate Loans may be issued in the form of senior syndicated
loans or senior secured notes.
The Fund may invest in Corporate Loans which 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
14
<PAGE> 17
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 will, in many instances, hold
the most senior position in the capitalization structure of the Borrower, and,
in any case, will, in the judgment of the Investment Adviser, be in the category
of senior debt of the Borrower. Each Corporate Loan will be secured by
collateral which the Investment Adviser believes to have a market value, at the
time of the Fund's investment in the Corporate Loan, which equals or exceeds the
principal amount of the Corporate Loan. The value of such collateral generally
will be determined by an independent appraisal or by obtaining the market value
of such collateral (e.g., cash or securities) 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 Fund's investment in the loan. Under certain circumstances, the collateral
may be 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 would satisfy the Borrower's
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 which 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 (iv) security interests in securities of subsidiaries or
affiliates. In the case of Corporate Loans to privately held companies, the
companies' owners may pledge additional security in the form of guarantees
and/or other securities that they own. There may be temporary periods in the
course of financing a Borrower's tender offer where the collateral for the loan
consists of common stock having a value not less than 200% of the value of the
loan on the date the loan is made. Under such circumstances, the Borrower
generally proceeds with a subsequent transaction which will permit it to pledge
assets of a company as collateral for the loan, although there can be no
assurance that the Borrower will be able to effect such transaction.
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, the
London InterBank Offered Rate ("LIBOR"), the Certificate of Deposit ("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 will invest may permit the
Borrower to select an interest rate reset period of up to one year. A portion of
the Fund's 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 Fund's net asset value as a result of changes in interest rates. However,
the Fund will attempt to hedge all of its fixed rate Corporate Loans against
fluctuations in interest rates by entering into interest rate swap transactions.
The Fund also will attempt to maintain a portfolio of Corporate Loans that will
have a dollar weighted average period to the next interest rate adjustment of no
more than 90 days.
15
<PAGE> 18
Corporate Loans traditionally have been structured so that Borrowers pay
higher margins when they elect LIBOR and CD-based borrowing options, in order to
permit lenders to obtain generally consistent yields on Corporate Loans,
regardless of whether Borrowers select the LIBOR or CD-based options, or the
Prime-based option. In recent years, however, the differential between the lower
LIBOR and CD base rates and the higher Prime Rate base rates prevailing in the
commercial bank markets has widened to the point where the higher margins paid
by Borrowers for LIBOR and CD-based pricing options do not currently compensate
for the differential between the Prime Rate and the LIBOR and CD base rates.
Consequently, Borrowers have increasingly selected the LIBOR-based pricing
option, resulting in a yield on Corporate Loans that is consistently lower than
the yield would be if Borrowers selected the Prime Rate-based pricing option.
This trend has significantly limited the ability of the Fund to achieve a net
return to shareholders that consistently approximates the average published
prime rate of leading U.S. banks. At the date of this Prospectus, the Investment
Adviser cannot predict any significant change in this market trend.
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, commissions and prepayment penalty fees.
When the Fund buys a Corporate Loan it may receive a facility fee and when it
sells a Corporate Loan may pay a facility fee. In certain circumstances, the
Fund may receive a prepayment penalty fee on the prepayment of a Corporate Loan
by a Borrower. In connection with the acquisition of Corporate Loans, the Fund
may also acquire warrants and other equity securities of the Borrower or its
affiliates. The acquisition of such equity securities will only be incidental to
the Fund's purchase of an interest in a Corporate Loan.
The Fund will invest 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 Borrower's assets and the Investment Adviser's
assessments of the general quality of the Borrower. The factors utilized have
been reviewed and approved by the Fund's Board of Directors. The Corporate Loans
in which the Fund invests are not currently rated by any nationally recognized
rating service.
The primary consideration in selecting such Corporate Loans for investment
by the Fund is the creditworthiness of the Borrower. In evaluating Corporate
Loans, the quality ratings assigned to other debt obligations of a Borrower may
not be a determining factor, since they will often be subordinated to the
Corporate Loans. Instead, the Investment Adviser will perform 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 Adviser's analysis will continue on an ongoing basis for
any Corporate Loans in which the Fund has invested. Although the Investment
Adviser will use due care in making such analysis, there can be no assurance
that such analysis will disclose factors which 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
16
<PAGE> 19
of other creditors of the Borrower under applicable law. Highly leveraged
Corporate Loans also may be less liquid than other Corporate Loans.
A Borrower also must comply with various restrictive covenants contained in
any Corporate Loan agreement between the Borrower and the lending syndicate (the
"Corporate Loan Agreement"). 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 and limits
on total debt. 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 will 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 penalty
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
which have been 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 Standard & Poor's
Corporation or Baa or P-3 or higher by Moody's Investors Service, Inc., 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 Fund's 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
17
<PAGE> 20
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 high grade liquid debt 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 Fund's 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 may invest 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 would accept
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 would assume all of the obligations of the
Intermediate Participants, including any obligations to make future advances to
the Borrower. As a result, therefore, the Fund would have the status of a
Co-Lender. As an alternative, the Fund may purchase an assignment of all or a
portion of an Intermediate Participant's interest in a Corporate Loan, in which
case the Fund may be 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 lender's 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 would
be required to rely on the Intermediate Participant that sold the participation
not only for the enforcement of the Fund's 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
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<PAGE> 21
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 will
invest in Corporate Loans only if, at the time of investment, the outstanding
debt obligations of the Agent Bank and Intermediate Participants are investment
grade, i.e., rated BBB or A-3 or higher by Standard & Poor's Corporation or Baa
or P-3 or higher by Moody's Investors Service, Inc., or determined to be of
comparable quality in the judgment of the Investment Adviser.
Because the Fund will regard the issuer of a Corporate Loan as including
the Borrower under a Corporate Loan 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 which such
institutions may make and the interest rates and fees which 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 are also
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
Corporate Loan 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 Corporate Loan
Agreement. The Fund generally will rely on the Agent Bank or an Intermediate
Participant to collect its portion of the payments on the Corporate Loan.
Furthermore, the Fund will rely on the Agent Bank to use appropriate creditor
remedies against the Borrower. Typically, under Corporate Loan Agreements, the
Agent Bank is given broad discretion in enforcing the Corporate Loan 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 Corporate Loan 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 Bank's general or secured
creditors, the Fund might incur certain costs and delays in realizing payment on
a Corporate Loan or suffer a
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loss of principal and/or interest. In situations involving Intermediate
Participants similar risks may arise, as described above.
Intermediate Participants may have certain obligations pursuant to a
Corporate Loan 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 Fund's total
assets or would cause the Fund to fail to meet the diversification requirements
described under "Investment Objective and Policies".
ILLIQUID SECURITIES
Corporate Loans are, at present, not readily marketable and may be subject
to restrictions on resale. Although Corporate Loans are transferred among
certain financial institutions, as described above, the Corporate Loans in which
the Fund invests do not have the liquidity of conventional debt securities
traded in the secondary market and may be considered illiquid. As the market for
Corporate Loans becomes more seasoned, the Investment Adviser expects that
liquidity will improve. 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
Fund's 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 Fund's
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:
Leverage. 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 "Special Leverage
Considerations".
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 Fund's 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
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<PAGE> 23
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 Fund's 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 loaned premium to
be received by the Fund for lending its portfolio securities. In either event,
the total yield on the Fund's 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 finder's, 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 may also 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 high-grade portfolio 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 Fund's portfolio consistent with the
Fund's investment objective and policies and not for the purpose of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a "when issued" or "delayed
delivery" basis.
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<PAGE> 24
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 Fund's use of hedging strategies is intended to further
the Fund's investment objective, there can be no assurance that the Fund's
interest rate hedging transactions will be effective.
Certain Federal income tax requirements may limit the Fund's ability to
engage in interest rate hedging transactions. Gains from transactions in
interest rate hedges distributed to shareholders will be 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 will attempt 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 will enter into interest rate hedging transactions will be
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 would enable 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 may also 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 will enter
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
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<PAGE> 25
be, only the net amount of the two payments. The net amount of the excess, if
any, of the Fund's 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
Fund's custodian. If the interest rate swap transaction is entered into on other
than a net basis, the full amount of the Fund's obligations will be accrued on a
daily basis, and the full amount of the Fund's 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 Fund's 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 Fund's 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
Fund's rights to receive interest on Participation Interests and its rights and
obligations to receive and pay interest pursuant to interest rate swaps.
SPECIAL LEVERAGE CONSIDERATIONS
EFFECTS OF LEVERAGE
The Fund may borrow money representing approximately 33 1/3%, or issue
shares of preferred stock representing up to approximately 50%, of the Fund's
total assets immediately after such borrowing or issuance. There can be no
assurance, however, that preferred stock representing such percentage of the
Fund's capital
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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 currently
anticipates that it may incur borrowings and issue such preferred shares for the
purpose of acquiring additional income-producing investments when it believes
that the interest or dividend payments and other costs with respect to such
borrowings and preferred shares 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.
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. The issuance of additional classes of preferred
shares involves offering expenses and other costs and may limit the Fund's
freedom to pay dividends on shares of Common Stock or to engage in other
activities. Borrowings and the
issuance of a class of preferred stock having priority over the Fund's Common
shares create an opportunity for greater income per Common share, but at the
same time such borrowing or issuance is a speculative technique in that it will
increase the Fund's 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 Fund also may borrow money to finance the purchase of shares pursuant
to tender offers, if any, or for temporary, extraordinary or emergency purposes.
The Fund has entered into an agreement with a financial institution
providing for an unsecured revolving credit facility (the "Facility"), the
proceeds of which may be used to finance, in part, the payment for Shares
tendered in a tender offer by the Fund. The Facility provides for the borrowing
by the Fund of up to $100,000,000 at a rate of interest equal to the sum of the
federal funds rate (as published by the Federal Reserve Bank of New York) plus
(i) 1% for the first 45 days that such borrowing is outstanding, (ii) 2% for the
next 15 days that such borrowing is outstanding and (iii) 3% for the next 30
days that such borrowing is outstanding. Interest on borrowings is computed on
the basis of a year of 360 days for the actual number of days elapsed and is
payable monthly in arrears. Each borrowing under the Facility is required to be
repaid on the earlier of (i) 90 days after the date of such borrowing or (ii)
the last date prior to the expiration of the next tender offer by the Fund for
its shares. As of the date of this Prospectus, the term of the Facility is
scheduled to expire in March 1995, unless terminated earlier as provided
therein. Borrowings under the Facility, if any, are required to 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. Pursuant to the terms of the Facility
the Fund is required to maintain asset coverages ranging from 500% to 650% of
the outstanding principal balance of borrowings under the Facility depending
upon the period of time a borrowing is outstanding. The Fund also may not during
the term of the Facility issue any additional capital stock other than common
stock or incur indebtedness except for indebtedness incurred under the Facility,
in hedging transactions and for purchases of securities on short-term credit as
may be necessary for the clearance of sales or purchases of portfolio
securities. Additionally, during the term of the Facility, the Fund is
restricted with respect to the payment of dividends. Pursuant to such agreement
the Fund may make its periodic dividend payments to shareholders in an amount
not in excess of its net investment income for
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<PAGE> 27
such period, and may distribute each year all of its income (including net
capital gain) so that it will not be subject to tax under the Internal Revenue
Code of 1986, as amended. Under the 1940 Act, the Fund is not permitted to incur
indebtedness unless immediately after such incurrence the Fund has an asset
coverage of 300% of the aggregate outstanding principal balance of indebtedness.
Additionally, 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.
The Fund's 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 Adviser's 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.
PORTFOLIO MANAGEMENT AND OTHER CONSIDERATIONS
In the event of an increase in short-term rates or other changed market
conditions to the point where the Fund's leverage could adversely affect holders
of Common Stock as noted above, or in anticipation of such changes, the Fund may
attempt to shorten the average maturity of its investment portfolio, which would
tend to offset the negative impact of leverage on holders of Common Stock.
Under the 1940 Act, the Fund is not permitted to issue shares of preferred
stock unless immediately after such issuance the net asset value of the Fund's
portfolio is at least 200% of the liquidation value of the outstanding preferred
stock (expected to equal original purchase price per share plus any accrued and
unpaid dividends). In addition, the Fund is not permitted to declare any cash
dividend or other distribution on its Common Stock unless, at the time of such
declaration, the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or distribution) is at least 200% of such
liquidation value. If, for example, the Fund sold shares of preferred stock
representing 35% of the Fund's capital, the net asset value of the Fund's
portfolio would be approximately 285% of the liquidation value of the Fund's
preferred stock. In the event preferred shares are issued, the Fund intends, to
the extent possible, to purchase or redeem shares of preferred stock from time
to time to maintain coverage of any preferred stock of at least 200%.
INVESTMENT RESTRICTIONS
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 Fund's 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.
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<PAGE> 28
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 underwriter's or dealer's commission or profit, other
than customary broker's commission, is involved and only if immediately
thereafter not more than 10% of the Fund's 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 Fund, 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
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<PAGE> 29
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 manager as the Fund (currently, Senior Strategic Income Fund, Inc.,
Senior High Income Portfolio, Inc. and Senior High Income Portfolio II, Inc.),
if one fund buys a security that is publicly traded or privately placed,
respectively, the other funds may be deprived of the opportunity to buy a
security of the same issuer that is privately placed or publicly traded,
respectively.
PURCHASE OF SHARES
Merrill Lynch Funds Distributor, Inc. (the "Distributor"), a wholly owned
subsidiary 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
which 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 Fund's 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
Transfer Agent. The minimum initial purchase is $1,000 ($250 in the case of
individual retirement accounts and other retirement plans except for 401(k) and
403(b) Plans maintained through Merrill Lynch, for which there is no minimum)
and the minimum subsequent purchase is $50 ($1 in the case of individual
retirement accounts and other retirement plans except that for 401(k) and 403(b)
Plans maintained through Merrill Lynch there is no minimum).
The Fund is offering 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.
If the purchase orders are not received by the Distributor prior to 4:30 P.M.,
New York time, such orders shall be 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 Fund's 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 $4.85) to confirm a purchase of shares by such customers. Purchases
directly through the Fund's 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 which 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 3.0% of amounts purchased. If the shares remain outstanding after one
year from the date of their original purchase, the Distributor will compensate
Merrill Lynch or such dealers quarterly at an annual rate equal to 0.25% of the
27
<PAGE> 30
value of Fund shares sold by Merrill Lynch or such dealers and remaining
outstanding. These amounts do not represent an expense to the Fund and its
shareholders since the foregoing payments made by the Distributor will be made
from its own assets, which may include amounts received by the Distributor as
early withdrawal charges. See "Early Withdrawal Charge". The compensation paid
to 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 in the aggregate exceed the applicable limit
(presently, 8%), as determined from time to time by the National Association of
Securities Dealers, Inc. ("NASD"). For the years ended August 31, 1992, 1993 and
1994 the Distributor paid $2,515,870, $4,156,096 and $10,310,601, respectively,
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 shareholder's name may be opened at the
Fund's transfer agent, dividend disbursing agent and shareholder servicing
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 Fund's 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.
TENDER OFFERS
In recognition of the possibility that a secondary market for the Fund's
shares will not exist, the Fund may take actions which will provide liquidity to
shareholders. The Fund may from time to time make offers to purchase its shares
of Common Stock from all beneficial holders of the Fund's Common Stock at a
price per share equal to the net asset value per share of the Common Stock
determined at the close of business on the day an offer terminates ("Tender
Offer"). Commencing with the second quarter of Fund operations, the Board of
Directors has considered the making of 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 a Tender Offer. Subject to the Fund's investment restriction with
respect to borrowings, the Fund may borrow money to finance the repurchase of
shares pursuant to any Tender Offers. See "Special Leverage Considerations" and
"Investment Restrictions".
The Fund expects that ordinarily there will be no secondary market for the
Fund's 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 Fund's Common Stock trading at a price which equals or
approximates net asset value.
Although the Board of Directors believes that the Tender Offers generally
would be beneficial to holders of the Fund's Common Stock, the acquisition of
shares of Common Stock by the Fund will decrease the total assets of the Fund
and therefore have the likely effect of increasing the Fund's expense ratio
(assuming such acquisition is not offset by the issuance of additional shares of
Common Stock). Furthermore, to the extent
28
<PAGE> 31
the Fund borrows to finance the making of Tender Offers, interest on such
borrowings reduce the Fund's net investment income.
It is the Board's 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 Fund's status as a regulated investment company under the Code (which would
make the Fund a taxable entity, causing the Fund's 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 Fund's
investment objective and policies in order to purchase Common Stock tendered
pursuant to the Tender Offer; or (3) there is, in the Board's 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 Fund's shares of Common Stock pursuant to a Tender Offer, such
purchases could significantly reduce 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 "Special Leverage
Considerations". 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 Fund's
portfolio.
The Fund has obtained an exemption from the Securities and Exchange
Commission relating to Tender Offers which includes representations by the Fund
that no secondary market for shares of the Fund's Common Stock is expected to
develop. The exemption is conditioned on the absence of a secondary market. In
the event that circumstances arise under which the Fund does not conduct the
Tender Offers regularly, the Board of Directors would consider alternative means
of providing liquidity for holders of Common Stock. Such action would include an
evaluation of any secondary market that then existed and a determination of
whether such market provided liquidity for holders of Common Stock. If the Board
of Directors determines that such market, if any, fails to provide liquidity for
the holders of Common Stock, the Board expects that it will consider all then
available alternatives to provide such liquidity. Among the alternatives which
the Board of Directors may consider is the listing of the Fund's Common shares
on a major domestic stock exchange or on the NASDAQ National Market System in
order to provide such liquidity. 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 expects that it
will cause the Fund to take whatever action it deems necessary or appropriate to
provide liquidity for the holders of Common Stock in light of the facts and
circumstances existing at such time.
29
<PAGE> 32
To consummate a Tender Offer in order to repurchase its shares of Common
Stock, the Fund may be required to liquidate portfolio securities, and realize
gains or losses, at a time when the Investment Adviser would otherwise consider
it disadvantageous to do so. In such event gains may be realized on securities
held for less than three months. In order to qualify as a regulated investment
company under the Code, the Fund must limit such gains and, accordingly, the
amount of gain that the Fund could realize in the ordinary course of its
portfolio management from sales of other securities held for less than three
months would be reduced. This may adversely affect the Fund's yield. See
"Taxes".
Each Tender Offer will be made and shareholders 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 will contain such
information as is 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 will pay all costs and expenses associated
with the making of any Tender Offer. An Early Withdrawal Charge will be imposed
on most shares accepted for tender which have been held for less than three
years. See "Early Withdrawal Charge". In addition, Merrill Lynch charges its
customers a processing fee (presently $4.85) to confirm a repurchase of shares
from such customers pursuant to a Tender Offer. Tenders made directly through
the Fund's Transfer Agent are not subject to the processing fee.
Shareholders of the Fund have an investment option consisting of the right
to reinvest the net proceeds from a sale of shares of the Fund's Common Stock
(the "Original Shares") pursuant to a tender offer by the Fund in Class A
initial sales charge shares of certain Merrill Lynch-sponsored open-end
investment companies ("Eligible Class A Shares") at their net asset value,
without the imposition of the initial sales charge, 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 A Shares.
Second, the investment option is available only with respect to the proceeds of
shares of the Fund's Common Stock as to which no Early Withdrawal Charge is
applicable. Before taking advantage of this investment option, shareholders of
the Fund should obtain a currently effective prospectus of the mutual fund which
they intend to purchase. To exercise this investment option, shareholders should
consult their Merrill Lynch financial consultant.
EARLY WITHDRAWAL CHARGE
An Early Withdrawal Charge to recover distribution expenses incurred by the
Distributor will be charged against the shareholder's investment account and
paid to the Distributor in connection with most shares of Common Stock held for
less than three years which are accepted by the Fund for repurchase pursuant to
a Tender Offer in the manner described below. The Early Withdrawal Charge will
be imposed on those shares of Common Stock accepted for tender based on an
amount equal to the lesser of the then current net asset value of the shares of
Common Stock or the cost of the shares of Common Stock being tendered.
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 derived from reinvestments of 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 will vary depending on the length of
time
30
<PAGE> 33
the Common Stock has been owned since purchase (separate purchases shall not be
aggregated for these purposes), as set forth in the following table:
<TABLE>
<CAPTION>
EARLY
YEAR OF REPURCHASE WITHDRAWAL
AFTER PURCHASE CHARGE*
------------------------------------------------------- ----------
<S> <C>
First.................................................. 3.0%
Second................................................. 2.0%
Third.................................................. 1.0%
Fourth and following................................... 0.0%
</TABLE>
-------------------------------------
* The schedule of charges set forth in the table applies
to shares purchased on or after May 22, 1992.
In determining whether an Early Withdrawal Charge is applicable to a tender
of shares of Common Stock, the calculation will be determined in the manner that
results in the lowest possible amount being charged. Therefore, it will be
assumed that the tender is first of shares of Common Stock held for over three
years and shares of Common Stock acquired pursuant to reinvestment of dividends
or distributions and then of shares of Common Stock held longest during the
three-year period. The Early Withdrawal Charge will not be applied to dollar
amounts representing an increase in the net asset value since the time of
purchase.
Example:
Assume an investor purchased 1,000 shares of Common Stock (at a cost of
$10,000) and in the second year after purchase, the net asset value per share is
$10.15 and, during such time, the investor has acquired 100 additional shares of
Common Stock upon dividend reinvestment. If at such time the investor makes his
first redemption of 500 shares of Common Stock (proceeds of $5,075), 100 shares
will not be subject to the Early Withdrawal Charge because of dividend
reinvestment. With respect to the remaining 400 shares of Common Stock, 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 $0.15 per share. Therefore, $4,000
of the $5,075 redemption proceeds will be charged at a rate of 2.0% (the
applicable rate in the second year after purchase).
For the years ended August 31, 1992, 1993 and 1994 the amount paid to the
Distributor in Early Withdrawal Charges aggregated $2,282,748, $514,601 and
$264,686, respectively.
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund and their principal
occupations during the last five years are set forth below. Unless otherwise
noted, the address of each Director and executive officer is 800 Scudders Mill
Road, Plainsboro, New Jersey 08536.
ARTHUR ZEIKEL--President and Director(1)(2)--President of the Investment
Adviser (which term as used herein includes the Investment Adviser's corporate
predecessor) since 1977 and Director and Chief Investment Officer since 1976;
President, Director and Chief Investment Officer of Fund Asset Management, L.P.
("FAM") (which term as used herein includes FAM's corporate predecessors), since
1977; President and Director of Princeton Services, Inc. ("Princeton Services")
since 1993; an Executive Vice President of Merrill Lynch & Co., Inc. ("ML &
Co.") since 1990 and an Executive Vice President of Merrill Lynch since 1990 and
a Senior Vice President from 1985 to 1990; Director of the Distributor.
31
<PAGE> 34
RONALD W. FORBES--Director(2)--1400 Washington Avenue, Albany, New York
12222. Professor of Finance, School of Business, State University of New York at
Albany, since 1989, and Associate Professor prior thereto; Member, Task Force on
Municipal Securities Markets, Twentieth Century Fund.
CYNTHIA A. MONTGOMERY--Director(2)--Harvard Business School, Soldiers Field
Road, Boston, Massachusetts 20163. 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.
CHARLES C. REILLY--Director(2)--9 Hampton Harbor Road, Hampton Bays, New
York 11946. President and Chief Investment Officer of Verus Capital, Inc. from
1979 to 1990; Senior Vice President of Arnhold and S. Bleichroeder, Inc. from
1973 to 1990; Adjunct Professor, Columbia University Graduate School of
Business, since 1990; Adjunct Professor, Wharton School, University of
Pennsylvania, 1990; Director, Harvard Business School Alumni Association;
Director, Small Cities CableVision.
KEVIN A. RYAN--Director(2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Director and professor of The Boston
University Center for the Advancement of Ethics and Character; Professor of
Education at Boston University from 1982 to 1994; formerly taught on the
faculties of the University of Chicago, Stanford University and The Ohio State
University.
RICHARD R. WEST--Director(2)--482 Tepi Drive, Southbury, Connecticut 06488.
Professor of Finance, and Dean from 1984 to 1993, New York University Leonard N.
Stern School of Business Administration; Professor of Finance at the Amos Tuck
School of Business Administration from 1976 to 1984 and Dean from 1976 to 1983;
Director of Vornado, Inc. (real estate investment trust), Bowne & Co., Inc.
(financial printer), Smith Corona Corporation (manufacturer of typewriters and
word processors) and Alexander's Inc. (real estate company) and Re Capital Corp.
(reinsurance holding company).
TERRY K. GLENN--Executive Vice President(1)(2)--Executive Vice President of
the Investment Adviser and FAM since 1983 and Director since 1991; Executive
Vice President and Director of Princeton Services since 1993; President of the
Distributor since 1986 and Director thereof since 1991; President of Princeton
Administrators.
N. JOHN HEWITT--Senior Vice President(1)(2)--Senior Vice President of the
Investment Adviser and FAM since 1980 and Vice President from 1979 to 1980.
R. DOUGLAS HENDERSON--Vice President(1)(2)--Vice President of the
Investment Adviser since 1989; Vice President, Leveraged Finance Department,
Security Pacific Merchant Bank from 1987 to 1989; Vice President, Corporate
Finance and Banking Department, Security Pacific Merchant Bank from 1983 to
1987.
JOHN W. FRASER--Vice President(1)(2)--Vice President of the Investment
Adviser since 1991; Vice President, Corporate Bond Department, Continental Bank
from 1988 to 1991; Analyst, Drexel Burnham Lambert Commercial Paper, Inc. from
1987 to 1988; Second Vice President, Chase Manhattan Bank from 1985 to 1987.
DONALD C. BURKE--Vice President(1)(2)--Vice President of FAM since 1990;
employee of Deloitte & Touche LLP from 1982 to 1990.
32
<PAGE> 35
GERALD M. RICHARD--Treasurer(1)(2)--Senior Vice President and Treasurer of
the Investment Adviser and FAM since 1984; Vice President of the Distributor
since 1981 and Treasurer since 1984; Senior Vice President and Treasurer of
Princeton Services since 1993; Employee of the Distributor since 1978.
PATRICK D. SWEENEY--Secretary(1)(2)--Vice President of the Investment
Adviser since 1990; Vice President and Associate Counsel of Security Pacific
Merchant Bank from 1988 to 1990; Lawyer in private practice from 1981 to 1988.
- - - ------------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, officer or member of the advisory
board of one or more investment companies for which the Investment Adviser
acts as investment adviser.
The Fund pays each Director not affiliated with the Investment Adviser an
annual fee of $4,000 per year plus $800 per meeting attended, together with such
Director's actual out-of-pocket expenses relating to attendance at meetings. The
Fund also pays members of its audit committee, which consists of all of the
Directors not affiliated with the Investment Adviser, an annual fee of $2,000;
the chairman of the audit committee receives an additional annual fee of $1,000.
Fees and expenses paid to the non-affiliated Directors aggregated $54,763 for
the year ended August 31, 1994.
INVESTMENT ADVISORY
AND ADMINISTRATIVE ARRANGEMENTS
Merrill Lynch Asset Management, L.P. (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 Investment Adviser or FAM acts as the investment
adviser for more than 100 registered investment companies. The Investment
Adviser also offers investment advisory services to individuals and
institutions. As of September 30, 1994, the Investment Adviser and FAM had a
total of approximately $167 billion in investment company and other portfolio
assets under management, including accounts of certain affiliates of the
Investment Adviser. The Investment Adviser is a limited partnership, the
partners of which are ML&Co., Merrill Lynch Investment Management, Inc. and
Princeton Services. The principal business address of the Investment Adviser is
800 Scudders Mill Road, Plainsboro, New Jersey 08536.
The investment advisory agreement with the Investment Adviser (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 Fund's 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. The Portfolio Manager for the Fund is R.
Douglas Henderson.
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 1%
of the Fund's average daily net assets (i.e., the average daily value of the
total assets of the Fund, minus the sum of accrued liabilities of the Fund and
33
<PAGE> 36
accumulated dividends on the shares of 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 of the Fund connected with investment and economic
research, trading and investment management of 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 the administrative services rendered to the Fund and the facilities
furnished, the Fund pays the Investment Adviser a monthly fee at an annual rate
of 0.25 of 1% of the Fund's 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 administration fees are greater than the advisory fees
paid by most funds but are similar in amount to the fees paid by similar funds
making similar investments.
For the years ended August 31, 1992, 1993 and 1994, the fee paid by the
Fund to the Investment Adviser pursuant to the Investment Advisory Agreement was
$11,516,287, $7,202,400 and $7,145,339, respectively, and the fee paid by the
Fund pursuant to the Administration Agreement was $3,030,602, $1,895,368 and
$1,880,353, respectively (based on average daily net assets of approximately
$1.2 billion, $760 million and $752.1 million, respectively). The Investment
Adviser voluntarily reimbursed to the Fund $232,333, $0 and $0, respectively, of
the combined advisory and administration fees payable by the Fund which resulted
in an effective fee rate of 1.17%, 1.20% and 1.20%, respectively, for the years
ended August 31, 1992, 1993 and 1994.
The Fund pays all other expenses incurred in the operation of the Fund,
including, among other things, expenses for legal and auditing services, taxes,
costs of printing proxies, listing fees, if any, stock certificates and
shareholder reports, charges of the Custodian and the Transfer Agent, Dividend
Disbursing Agent and Shareholder Servicing 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 unaffiliated 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 years ended August 31, 1992, 1993 and
1994, the reimbursement for such services aggregated $77,741, $98,259 and
$51,304, respectively.
Certain states impose limitations on the expenses of the Fund. California's
limitations require that the Investment Adviser reimburse the Fund in an amount
necessary to prevent the ordinary operating expenses of the Fund (excluding
interest, taxes, distribution fees, brokerage fees and commissions and
extraordinary charges such as litigation costs) from exceeding 2.5% of the
Fund's first $30 million of average daily net assets, 2.0% of the next $70
million of average daily net assets and 1.5% of the remaining average daily net
assets. Under Ohio's limitations, the Investment Adviser must reimburse the Fund
in an amount necessary to prevent the Fund's aggregate annual expenses (subject
to the exclusions set forth above with the exception of
34
<PAGE> 37
distribution fees) from exceeding 2.0% of the Fund's average daily net assets.
The Investment Adviser's obligation to reimburse the Fund is limited to the
amount of the investment advisory fee. No fee payment will be made to the
Investment Adviser during any fiscal year which will cause such expenses to
exceed the most restrictive expense limitation applicable at the time of such
payment.
Unless earlier terminated as described below, the Investment Advisory and
Administration Agreements will remain in effect from year to year 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 affiliate act as an adviser.
Because of different objectives or other factors, a particular security may be
bought for one or more clients when one or more 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. To the extent that transactions on
behalf of more than one client of the Investment Adviser or its affiliate during
the same period may increase the demand for securities being purchased or the
supply of securities being sold, there may be an adverse effect on price.
Transfer Agency Services. Financial Data Services, Inc. (the "Transfer
Agent"), which is a wholly-owned subsidiary of Merrill Lynch & Co., Inc., acts
as the Fund's 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 Fund pays the Transfer Agent an annual fee of $14.00 per shareholder
account, and the Transfer Agent is entitled to certain nominal miscellaneous
charges and reimbursement for out-of-pocket expenses incurred by it under the
Transfer Agency Agreement. For the year ended August 31, 1994, the Fund's
payments to the Transfer Agent pursuant to the Transfer Agency Agreement,
including reimbursement for out-of-pocket expenses, aggregated $555,878. At
October 31, 1994, the Fund had 47,648 shareholder accounts. At this level of
accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $667,072, plus out-of-pocket expenses.
PORTFOLIO TRANSACTIONS
Subject to policies established by the Board of Directors of the Fund, the
Investment Adviser is primarily responsible for the execution of the Fund's
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
firm's 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.
35
<PAGE> 38
The Fund will purchase 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 Policies--
Description 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 Fund's 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 obtaining the best
price and execution, securities firms which provided supplemental investment
research to the Investment Adviser, including Merrill Lynch, may receive orders
for transactions by the Fund. Information so received will be in addition to and
not in lieu of the services required to be performed by the Investment Adviser
under the Investment Advisory Agreement and the expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information.
Other securities in which the Fund may invest are traded primarily in the
over-the-counter markets, and the Fund intends to deal directly with the 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 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 will not deal
with affiliated persons, including 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
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the 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, at present it is anticipated that the Fund's
annual portfolio turnover rate, under normal circumstances, will 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 of the 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.) For the years ended August 31, 1992, 1993 and 1994, the Fund's
portfolio turnover rate was 46.48%, 90.36% and 61.31%, respectively.
DIVIDENDS AND DISTRIBUTIONS
The Fund intends to continue 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
income tax purposes, the Fund will be required to distribute
36
<PAGE> 39
substantially all of its net investment income for each calendar year. All net
realized long- or short-term 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 (the "Facility") which contains restrictions
on the payment of dividends by the Fund. For a description of such restrictions
see "Special Leverage Considerations".
Under the 1940 Act, the Fund is not permitted to incur indebtedness unless
immediately after such incurrence the Fund has an asset coverage of 300% of the
aggregate outstanding principal balance of indebtedness. Additionally, 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.
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 Fund's 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 limitation contained in the preceding
paragraph, on the Fund's ability to 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. See "Special
Leverage Considerations" 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 will be taxable to shareholders whether they are reinvested in
shares of the Fund or received in cash.
TAXES
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 (but
not its shareholders) 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, and distributions of
the Fund's net realized short-term capital gains (together referred to hereafter
as "ordinary income dividends") are taxable to shareholders as ordinary income.
Distributions, if any, of net long-term capital gains from the sale of
securities or from certain transactions in interest rate swaps ("capital gain
dividends") are taxable as long-term capital gains,
37
<PAGE> 40
regardless of the length of time the shareholder has owned Fund shares. Any loss
upon the sale or exchange of Fund shares held for six months or less, however,
will be 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 will first reduce the adjusted tax basis of a holder's
Common Stock and, after such adjusted tax basis is reduced to zero, will
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 attributable to any dividend income
earned by the Fund will be eligible for the dividends received deduction allowed
to corporations under the Code, if certain requirements are met. Not later than
60 days after the close of its taxable year, the Fund will provide its
shareholders with a written notice designating the amounts of any dividends
eligible for the dividends received deduction (if any) or capital gain
dividends. 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 will be treated for tax purposes
as being paid by the Fund and received by its shareholders on December 31 of the
year in which the dividend was declared.
The Internal Revenue Service has taken the position in a revenue ruling
that if a RIC has two 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 net long-term capital gains. 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 will
be allocated between the holders of Common Stock and 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. The Fund anticipates that it will make sufficient
timely distributions of income so as to avoid imposition of the excise tax.
If at any time when shares of preferred stock are outstanding the Fund does
not meet the asset coverage requirements of the 1940 Act, the Fund will be
required to suspend distributions to holders of Common Stock until the asset
coverage is restored. See "Dividends and Distributions". This may prevent the
Fund from distributing at least 90% of its net income, and may therefore
jeopardize the Fund's qualification for taxation as a RIC or may subject the
Fund to the 4% Federal excise tax described above. Upon any failure to meet the
asset coverage requirement of the 1940 Act, the Fund may, in its sole
discretion, 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 such objectives.
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 an issue
whether
38
<PAGE> 41
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 and may seek a private letter ruling from the
Internal Revenue Service on the issues raised by issuance of these types of
preferred stock. Moreover, the Fund intends to issue preferred stock that
counsel advises will not result in the payment of a preferential dividend. If
the Fund ultimately relies solely on a legal opinion in the event it issues such
preferred stock, there is no assurance that the Internal Revenue Service would
agree that dividends on the preferred stock are not preferential. If the
Internal Revenue Service successfully disallowed the dividends paid deduction
for dividends on the preferred stock, the Fund could be disqualified as a RIC.
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 such payments under certain
circumstances. The Fund will limit its activity in this regard in order to
maintain its qualification as a RIC.
One of the requirements for qualification as a RIC is that less than 30% of
the Fund's gross income be derived from gains from the sale or other disposition
of securities held for less than three months. The Fund will monitor its
dispositions of securities so as to comply with this requirement.
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 Fund's 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 by the Fund 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 holder of Common Stock, who, pursuant to any Tender
Offer, tenders all shares of Common Stock owned by such shareholder and any
shares considered owned by such shareholder under attribution rules contained in
the Code will realize a taxable gain or loss depending upon such shareholder's
39
<PAGE> 42
basis in the shares. Such gain or loss will be treated as capital gain or loss
if the shares are held as capital assets and will be long-term or short-term
depending upon the shareholder's holding period for the shares. Different tax
consequences may apply to tendering and nontendering holders of Common Stock in
connection with a Tender Offer, and these consequences will be disclosed in the
related offering documents. For example, if a tendering holder of Common Stock
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
shareholder's basis in the tendered shares. Also, there is a remote risk that
non-tendering holders of Common Stock may be considered to have received a
deemed distribution which may be a taxable dividend in whole or in part. Holders
of Common Stock 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 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 advisers 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 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.
The automatic reinvestment of dividends and distributions will not relieve
participants of any Federal income tax that may be payable (or required to be
withheld) on such dividends or distributions. See "Taxes".
NET ASSET VALUE
Net asset value per share of Common Stock is determined Monday through
Friday at 4:15 P.M., New York time, on each day the New York Stock Exchange is
open. The New York Stock Exchange is not open on New Year's 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
40
<PAGE> 43
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.
The Investment Adviser, subject to guidelines adopted and periodically
reviewed by the Fund's Board of Directors, values the Corporate Loans at fair
value, which approximates market value. In valuing a Corporate Loan, the
Investment Adviser considers, among other factors, (i) the creditworthiness of
the Borrower and any Intermediate Participants, (ii) the current interest rate,
period until next interest rate reset 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 next
interest rate reset and maturity. The Investment Adviser believes that
Intermediate Participants selling Corporate Loans or otherwise involved in a
Corporate Loan transaction may tend, in valuing Corporate Loans for their own
accounts, to be less sensitive to interest rate and credit quality changes and,
accordingly, the Investment Adviser may not rely solely on such valuations in
valuing the Corporate Loans for the Fund's account. In addition, because a
secondary trading market in Corporate Loans has not yet fully developed, in
valuing Corporate Loans, the Investment Adviser may not rely solely on but may
consider prices or quotations provided by banks, dealers or pricing services
with respect to secondary market transactions in Corporate Loans. To the extent
that an active secondary market in Corporate Loans develops to a reliable
degree, or exists in respect of other loans or instruments deemed to be similar
to Corporate Loans, the Investment Adviser may rely to an increasing extent on
such market prices and quotations in valuing the Corporate Loans in the Fund's
portfolio.
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, 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 issuer's future prosperity, liquidation value
or third party transactions involving the issuer's 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
41
<PAGE> 44
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. The Fund may reclassify an amount of unissued Common Stock as preferred
stock and at that time offer shares of preferred stock representing up to
approximately 35% of the Fund's capital immediately after the issuance of such
preferred stock.
Shares of Common Stock, when issued and outstanding, will be 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.
In the event that the Fund issues preferred stock and so long as any shares
of the Fund's preferred stock are outstanding, holders of Common Stock will not
be 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 Facility, the Fund may not issue any additional capital stock other
than common stock. See "Special Leverage Considerations".
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 October 31, 1994, exclusive of that held by the Fund.
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING AS
OF OCTOBER 31,
1994 (EXCLUSIVE
AMOUNT HELD BY OF AMOUNT HELD
AMOUNT FUND FOR OWN BY FUND FOR OWN
CLASS OF SHARES AUTHORIZED ACCOUNT ACCOUNT)
- - - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common Stock.................................... 1,000,000,000 -- 109,621,568
</TABLE>
CERTAIN PROVISIONS OF THE ARTICLES OF INCORPORATION
In February 1994, the shareholders of the Fund approved the change of the
name of the Fund from "Merrill Lynch Prime Fund, Inc." to "Merrill Lynch Senior
Floating Rate Fund, Inc.".
The Fund's 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% of the Fund's 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;
42
<PAGE> 45
(ii) a sale of all or substantially all of the Fund's assets (other
than in the regular course of the Fund's 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 Fund's 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 Fund's 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 in the foregoing paragraph and under "Certain Provisions of the
Articles of Incorporation", 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.
PERFORMANCE DATA
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 year ended August 31, 1994, the Fund earned $0.574 per
share income dividends, representing a net annualized yield of 5.73%, based on a
month-end per share net asset value of $10.02.
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 year ended August 31, 1994, the annual total
return of the Fund was 5.94%, based on the constant per share net asset value of
$10.02, and assuming reinvestment of $0.570 per share income dividends. For the
period November 3, 1989 (commencement of operations) to August 31, 1994, the
aggregate total return of the Fund was 39.81%, based on the change in per share
net asset value from $10.00 to $10.02, and assuming reinvestment of $3.322 per
share income dividends.
The calculation of yield and total return does not reflect the imposition
of any Early Withdrawal Charges or the amount of any shareholder's tax
liability.
Yield and total return figures are based on the Fund's historical
performance and are not intended to indicate future performance. The Fund's
yield is expected to fluctuate, and its total return will vary depending on
market conditions, the Corporate Loans and other securities comprising the
Fund's portfolio, the Fund's 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 Certificate
43
<PAGE> 46
of Deposit ("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 Donoghue's 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(TM) 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 Donoghue's
averages and the other yield data described above to each other. As with yield
quotations, yield comparisons should not be considered representative of the
Fund's yield or relative performance for any future period.
CUSTODIAN
The Fund's 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, dividend disbursing agent and registrar for the shares
of the Fund is Financial Data Services, Inc., 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484, a wholly owned subsidiary of ML & Co.
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 shareholder's related accounts the shareholder should notify in writing:
Financial Data Services, Inc.
Attn: TAMFO
P.O. Box 45289
Jacksonville, Florida 32232-5289
The written notification should include the shareholder's 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 (904) 928-5510 or (800) 637-3863.
LEGAL OPINIONS
Certain legal matters in connection with the Common Stock offered hereby
are passed on for the Fund by Brown & Wood, One World Trade Center, New York,
New York 10048-0557.
EXPERTS
Deloitte & Touche LLP, 117 Campus Drive, Princeton, New Jersey 08540, have
been selected as the independent auditors of the Fund. The selection of
independent auditors is subject to ratification by the shareholders of the Fund.
The independent auditors are responsible for auditing the financial statements
of the Fund.
44
<PAGE> 47
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders,
Merrill Lynch Senior Floating Rate Fund, Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of Merrill Lynch Senior Floating Rate Fund, Inc. as
of August 31, 1994, the related statements of operations and cash flows for the
year then ended, the statements of changes in net assets for each of the years
in the two-year period then ended, and the financial highlights for each of the
years in the four-year period then ended and the period November 3, 1989
(commencement of operations) to August 31, 1990. These financial statements and
the financial highlights are the responsibility of the fund's management. Our
responsibility is to express an opinion on these financial statements and the
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned at August
31, 1994 by correspondence with the custodian and financial intermediaries. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements and financial highlights present
fairly, in all material respects, the financial position of Merrill Lynch Senior
Floating Rate Fund, Inc. at August 31, 1994, the results of its operations, its
cash flows, the changes in its net assets, and the financial highlights for the
respective stated periods in conformity with generally accepted accounting
principles.
As discussed in Notes 1a and 1b, the financial statements include senior secured
floating rate loan interests ("Loan Interests") valued at $792,814,431 (84.84%
of all net assets of the Fund), whose values are fair values as determined by or
under the direction of the Board of Directors in the absence of actual market
values. Determination of fair value involves subjective judgment, as the actual
market value of a particular Loan Interest can be established only by
negotiation between the parties in a sales transaction. We have reviewed the
procedures established by the Board of Directors and used by the Fund's
investment adviser in determining the fair values of such Loan Interests and
have inspected underlying documentation, and under the circumstances, we believe
that the procedures are reasonable and the documentation appropriate.
Deloitte & Touche LLP
Princeton, New Jersey
October 6, 1994
45
<PAGE> 48
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc.
Schedule of Investments as of August 31, 1994 (in Thousands)
Face Value
Industry Senior Secured Floating Rate Loan Interests* Amount (Note 1b)
<C> <S> <C> <C>
Aerospace -- 7.33% Allison Engine Co., Term Loan B, due 12/31/98, 7.25% to 9/08/94 $ 25,000 $ 25,000
Aviall Inc., Term Loan B, due 11/30/00:
7.75% to 9/07/94 3,640 3,640
7.69% to 10/07/94 4,853 4,853
8.19% to 12/07/94 12,132 12,132
Gulfstream Aerospace Corp., Revolving Credit Loan, due 3/31/98:
9.00%(1) 308 308
7.00% to 10/21/94 1,923 1,923
Gulfstream Aerospace Corp., Term Loan, due 3/31/97, 7.63% to 1/13/95 11,374 11,374
Gulfstream Aerospace Corp., Term Loan, due 3/31/98, 7.57% to 9/08/94 9,260 9,260
-------- --------
68,490 68,490
Airlines -- 1.49% Northwest Airlines, Inc., Term Loan, due 9/15/97:
7.375% to 9/12/94 217 217
7.25% to 10/20/94 6,603 6,603
7.3125% to 10/20/94 105 105
7.50% to 10/20/94 2,809 2,809
7.625% to 11/10/94 1,165 1,165
7.625% to 12/21/94 3,057 3,057
-------- --------
13,956 13,956
Analytical Elsag Bailey, Term Loan, due 8/30/02, 7.0625% to 9/19/94 14,000 14,000
Instruments -- 2.86% Waters Corp., Term Loan B, due 8/31/01, 10.125%(1) 5,644 5,644
Waters Corp., Term Loan C, due 8/31/02, 10.50%(1) 3,950 3,950
Waters Corp., Term Loan D, due 2/28/03, 10.875%(1) 3,175 3,175
-------- --------
26,769 26,769
Broadcast/ Silver King Communications, Term Loan B, due 7/31/02, 7.8125% to 11/03/94 18,000 18,000
Media -- 1.93%
Building Overhead Door Corp., Revolving Credit Loan, due 8/18/99, 9.25%(1) 205 205
Materials -- 1.29% Overhead Door Corp., Revolving Credit Loan, due 8/18/99, 7.3125% to 9/30/94 1,978 1,978
Overhead Door Corp., Term Loan, due 8/18/99, 7.3125% to 9/30/94 9,886 9,886
-------- --------
12,069 12,069
Chemicals -- 4.47% Freedom Chemical Company, Term Loan B, due 6/30/02, 8.1875% to 11/30/94 20,000 20,000
Inspec Technologies, Term Loan B, due 12/02/00, 7.4375% to 9/30/94 5,000 5,000
OSI Specialties, Inc., Term Loan, due 6/30/00:
7.34% to 9/15/94 4,773 4,773
7.57% to 9/22/94 4,512 4,512
Thoro PCR, Inc., Term Loan A, due 12/30/99:
7.57% to 9/26/94 39 39
7.57% to 10/25/94 1,166 1,166
Thoro PCR, Inc., Term Loan B, due 12/30/01, 7.82% to 10/25/94 2,431 2,431
Thoro Systems Products Inc., Term Loan A, due 12/30/99:
7.57% to 9/26/94 24 24
7.57% to 10/25/94 733 733
Thoro Systems Products, Inc., Term Loan B, due 12/30/01, 7.82% to 10/25/94 1,528 1,528
Thoro Worldwide Inc., Term Loan A, due 12/30/99:
7.57% to 9/26/94 17 17
7.57% to 10/25/94 500 500
Thoro Worldwide, Inc., Term Loan B, due 12/30/01,
7.82% to 10/25/94 1,042 1,042
-------- --------
41,765 41,765
Computing Lexmark Holdings, US, Term Loan, due 3/27/98:
Equipment -- 1.44% 7.2813% to 9/30/94 7,319 7,319
7.3125% to 10/31/94 6,106 6,106
-------- --------
13,425 13,425
</TABLE>
46
<PAGE> 49
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc.
Schedule of Investments as of August 31, 1994 (continued) (in Thousands)
Face Value
Industry Senior Secured Floating Rate Loan Interests* Amount (Note 1b)
<C> <S> <C> <C>
Consumer Playtex Family Products Inc., Term Loan B, due 6/01/01, 7.88% to 10/11/94 $ 19,857 $ 19,857
Products -- 2.13%
Containers -- 2.90% Ivex Packaging Corp., Term Loan B, due 12/31/99:
10.00%(1) 279 279
7.75% to 9/26/94 6,000 6,000
8.19% to 9/26/94 857 857
8.82% to 2/24/95 2,714 2,714
Portola Packaging, Inc., Term Loan B, due 7/01/99, 8.25% to 9/08/94 7,250 7,250
Silgan Corp., Term Loan B, due 9/15/96:
8.188% to 12/07/94 5,000 5,000
8.125% to 12/09/94 5,000 5,000
-------- --------
27,100 27,100
Diversified American Standard, Inc., Term Loan A, due 6/01/00:
Manufacturing -- 8.00% to 12/02/94 22,222 22,222
12.05% 8.0625% to 12/02/94 2,472 2,472
Desa International Inc., Term Loan B, due 11/30/00, 7.875% to 9/27/94 10,000 10,000
InterMetro Industries, Term Loan B, due 6/30/01, 8.32% to 1/03/95 10,185 10,185
InterMetro Industries, Term Loan C, due 12/31/02, 8.82% to 1/03/95 14,815 14,815
Joy Technologies, Inc., Term Loan B, due 12/31/98:
7.8125% to 9/29/94 9,898 9,898
8.00% to 11/28/94 2,939 2,939
The Pullman Co., Inc., Term Loan, due 9/30/96:
9.00%(1) 1,139 1,139
9.25%(1) 2,709 2,709
6.8125% to 9/15/94 1,181 1,181
7.0625% to 9/15/94 2,810 2,810
7.00% to 9/29/94 1,772 1,772
7.25% to 9/29/94 4,215 4,215
7.25% to 10/14/94 603 603
7.50% to 10/14/94 1,436 1,436
TDII Company, Term Loan B, due 2/01/01:
9.00%(1) 64 64
6.9375% to 9/02/94 21,125 21,125
7.8125% to 11/03/94 3,000 3,000
-------- --------
112,585 112,585
Drug Stores -- 5.27% Duane Reade Co., Term Loan A, due 9/30/97:
7.8125% to 9/30/94 512 512
8.00% to 11/30/94 12,067 12,067
Duane Reade Co., Term Loan B, due 9/30/99, 8.50% to 11/30/94 10,000 10,000
Jack Eckerd Corp., Term Loan, Series C, due 7/31/2000, 6.00% to 9/06/94 13,383 13,383
Thrifty Payless, Term Loan B, due 9/30/01, 8.125% to 11/23/94 13,275 13,275
-------- --------
49,237 49,237
Electrical Berg Electronics Inc., Term Loan A, due 3/31/00:
Instruments -- 1.96% 7.5625% to 9/26/94 242 242
7.625% to 11/25/94 12,088 12,088
Berg Electronics Inc., Term Loan B, due 6/30/01:
9.50%(1) 25 25
7.875% to 11/25/94 5,975 5,975
-------- --------
18,330 18,330
Food & American Italian Pasta, Term Loan C, due 12/31/00, 8.25% to 9/08/94 5,000 5,000
Beverage -- 7.98% Domino's Pizza, Inc., Term Loan B, due 7/27/00, 7.50% to 9/06/94 15,000 15,000
Heileman Acquisition Company, Term Loan B, due 12/31/00, 7.5625% to 10/13/94 10,000 10,000
</TABLE>
47
<PAGE> 50
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc.
Schedule of Investments as of August 31, 1994 (continued) (in Thousands)
Face Value
Industry Senior Secured Floating Rate Loan Interests* Amount (Note 1b)
<C> <S> <C> <C>
Food & Beverage MAFCO Worldwide, Term Loan B, due 6/30/01, 7.94% to 10/07/94 $ 10,000 $ 10,000
(concluded) President Baking Co., Inc., Term Loan B, due 9/30/00, 7.5625% to 9/23/94 4,988 4,988
Specialty Foods Corp., Term Loan B, due 8/31/99, 7.69% to 10/18/94 12,400 12,400
Specialty Foods Corp., Term Loan B3, due 8/31/99:
9.75%(1) 207 207
8.19% to 10/18/94 16,936 16,936
-------- --------
74,531 74,531
Fuel Distribution -- Petrolane, Inc., Term Loan B, due 12/31/99:
3.30% 6.8125% to 9/28/94 396 396
6.9375% to 9/30/94 1,551 1,551
6.9375% to 10/28/94 28,888 28,888
-------- --------
30,835 30,835
Grocery -- Big V Supermarkets Inc., Term Loan B, due 3/15/00:
6.94% 7.625% to 10/17/94 5,200 5,200
7.75% to 11/15/94 5,200 5,200
Circle K Acquisitions Corp., Term Loan B, due 7/31/01, 6.8125% to 9/29/94 15,000 15,000
Grand Union Company, Term Loan B, due 6/30/98:
9.75%(1) 48 48
8.125% to 9/06/94 6,333 6,333
7.625% to 9/09/94 6,667 6,667
Pathmark Stores Inc., Term Loan B, due 10/31/99, 7.8125% to 9/26/94 10,000 10,000
Ralph's Grocery Company, Term Loan, due 6/30/98:
7.375% to 9/07/94 7,715 7,715
7.625% to 9/14/94 301 301
7.50% to 9/19/94 301 301
7.5625% to 9/29/94 1,959 1,959
7.4375% to 10/04/94 518 518
7.625% to 10/24/94 301 301
7.5625% to 11/09/94 5,328 5,328
-------- --------
64,871 64,871
High Technology -- Anacomp, Inc., Term Loan, due 3/31/96, 7.5625% to 10/26/94 1,238 1,238
1.25% Anacomp, Inc., Term Loan C, due 3/31/96, 7.5625% to 10/26/94 10,405 10,405
-------- --------
11,643 11,643
Medical Devices -- Deknatel Holdings Corp., Term Loan A, due 4/20/99, 7.8125% to 10/25/94 2,417 2,417
1.06% Deknatel Holdings Corp., Term Loan B, due 4/20/01, 8.3125% to 10/25/94 7,500 7,500
-------- --------
9,917 9,917
Nautical Systems -- Sperry Marine, Inc., Term Loan, due 11/15/00:
1.10% 7.4375% to 9/23/94 5,378 5,378
8.25% to 12/23/94 4,947 4,947
-------- --------
10,325 10,325
Paper -- 9.37% ++Fort Howard Corp., Senior Secured B Notes, due 9/11/98, 7.57% to 9/12/94 5,000 5,000
++Fort Howard Corp., Senior Secured D Notes, due 9/11/00, 8.00% to 9/12/94 20,000 20,000
Fort Howard Corp., Term Loan, due 12/31/96:
8.25%(1) 1 1
9.125%(1) 5 5
7.125% to 11/30/94 1,791 1,791
7.25% to 11/30/94 486 486
Jefferson Smurfit/Container Corp. of America, Term Loan B, due 4/30/02,
7.875% to 10/24/94 44,000 44,000
Stone Container, Canadian Tender Loan, due 3/01/97:
7.5625% to 9/12/94 1,160 1,160
7.75% to 9/19/94 5,905 5,905
7.8125% to 9/29/94 999 999
</TABLE>
48
<PAGE> 51
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc.
Schedule of Investments as of August 31, 1994 (concluded) (in Thousands)
Face Value
Industry Senior Secured Floating Rate Loan Interests* Amount (Note 1b)
<C> <S> <C> <C>
Paper Stone Container, Canadian Term Loan, due 3/01/97, 7.8125% to 9/29/94 $ 786 $ 786
(concluded) Stone Container, US, Term Loan, due 3/01/97:
7.75% to 9/19/94 6,519 6,519
7.8125% to 9/29/94 936 936
-------- --------
87,588 87,588
Retail -- Specialty -- Music Acquisition Corp., Term Loan B, due 8/31/01:
5.62% 7.6875% to 9/16/94 14,062 14,062
8.375% to 2/17/95 8,297 8,297
Music Acquisition Corp., Term Loan C, due 8/31/02, 8.0625% to 9/20/94 7,500 7,500
Saks & Co., Term Loan B, due 6/30/00, 7.88% to 11/09/94 22,662 22,662
-------- --------
52,521 52,521
Transportation Petro Properties, Term Loan B, due 5/24/01, 7.875% to 9/30/94 9,000 9,000
Services -- 0.96%
Warehousing Pierce Leahy Corp., Term Loan B, due 6/30/01, 7.75% to 9/01/94 20,000 20,000
& Storage -- 2.14%
Total Senior Secured Floating Rate Loan Interests
(Cost -- $792,814) -- 84.84% 792,814 792,814
<CAPTION>
Short-Term Securities
<C> <S> <C> <C>
Commercial Paper** -- ABN AMRO North American Finance, Inc., 4.33% due 9/01/94 20,000 20,000
13.40% DuPont (E.I.) de Nemours & Co., 4.46% due 9/20/94 25,000 24,941
General Electric Capital Corp., 4.75% due 9/01/94 45,333 45,333
JC Penney Funding Corp:
4.71% due 9/02/94 15,000 14,998
4.75% due 10/03/94 20,000 19,916
Total Short-Term Securities (Cost -- $125,188) -- 13.40% 125,333 125,188
<CAPTION>
Shares
Common Stock Held
<C> <S> <C> <C>
Restaurants -- 0.03% ++TW Services, Inc. (Cost -- $0) -- 0.03% 44 276
Total Common Stock (Cost -- $0) -- 0.03% 44 276
Total Investments (Cost $918,003) -- 98.27% 918,278
Other Assets Less Liabilities -- 1.73% 16,185
--------
Net Assets -- 100.00% $934,463
========
</TABLE>
*The interest rates on senior secured floating rate loan interests
are subject to change periodically based on the change in the prime
rate of a US Bank, LIBOR (London Interbank Offered Rate), or, in
some cases, another base lending rate. The interest rates shown are
those in effect at August 31, 1994.
**Commercial Paper is traded on a discount basis; the interest rates
shown are the discount rates paid at the time of purchase by the
Fund.
(1)Index is based on the prime rate of a US bank, which is subject
to change daily.
++Restricted security as to resale. The value of the Fund's invest-
ment in restricted securities was approximately $25,276,000,
representing 2.70% of net assets.
Cost Acquisition
Senior Secured Notes (In Thousands) Date
Fort Howard Corp. $ 25,000 9/11/91
Cost Acquisition
Common Stock (In Thousands) Date
TW Services, Inc. $ 0 6/03/91
The closing bid price for TW Services, Inc. Common Stock on
August 31, 1994 was $7.75 per share.
See Notes to Financial Statements.
49
<PAGE> 52
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc.
Statement of Assets and Liabilities as of August 31, 1994
<S> <C> <C>
Assets:
Investments, at value (identified cost--$918,002,800) (Note 1b) $918,278,390
Cash 210,029
Receivables:
Capital shares sold $20,081,292
Interest 6,276,867
Commitment fees 8,223 26,366,382
-----------
Deferred facility fees (Note 6) 26,677
Deferred organization expenses (Note 1e) 29,912
Prepaid registration fees and other assets (Note 1e) 79,303
------------
Total assets 944,990,693
------------
Liabilities:
Payables:
Dividends to shareholders (Note 1f) 1,419,683
Investment adviser (Note 2) 715,246
Administrator (Note 2) 188,222 2,323,151
-----------
Deferred income (Note 1d) 7,931,680
Accrued expenses and other liabilities 273,165
------------
Total liabilities 10,527,996
------------
Net assets $934,462,697
============
Net Assets Consist of:
Common Stock, par value $0.10 per share; 1,000,000,000 shares authorized $ 9,329,959
Paid-in capital in excess of par 924,897,903
Accumulated realized capital losses--net (Note 7) (40,755)
Unrealized appreciation on investments--net (Note 3) 275,590
------------
Net Assets--Equivalent to $10.02 per share based on 93,299,587 shares of beneficial
interest outstanding $934,462,697
============
See Notes to Financial Statements.
</TABLE>
50
<PAGE> 53
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc.
Statement of Operations for the Year Ended August 31, 1994
<S> <C> <C>
Investment Income (Note 1d):
Interest and discount earned $ 47,936,055
Facility and other fees 6,024,792
------------
Total income 53,960,847
Expenses:
Investment advisory fees (Note 2) $ 7,145,339
Administrative fees (Note 2) 1,880,353
Transfer agent fees (Note 2) 555,878
Borrowing costs (Note 6) 202,074
Professional fees 182,066
Amortization of organization expenses (Note 1e) 179,472
Registration fees (Note 1e) 134,054
Tender offer costs 95,134
Printing and shareholder reports 82,974
Custodian fees 72,441
Directors' fees and expenses 54,763
Accounting services (Note 2) 51,304
Other 111,583
-----------
Total expenses 10,747,435
------------
Investment income--net 43,213,412
Realized Loss on Investments--Net (Notes 1d & 3) (13,985)
Change in Unrealized Appreciation/Depreciation on Investments--Net (Note 3) (124,460)
------------
Net Increase in Net Assets Resulting from Operations $ 43,074,967
============
See Notes to Financial Statements.
</TABLE>
51
<PAGE> 54
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc. For the Year Ended August 31,
Statements of Changes in Net Assets 1994 1993
<S> <C> <C>
Increase (Decrease) in Net Assets:
Operations:
Investment income--net $ 43,213,412 $ 39,934,642
Realized gain (loss) on investments--net (13,985) 2,039
Change in unrealized appreciation/depreciation on investments--net (124,460) 2,394,855
------------ ------------
Net increase in net assets resulting from operations 43,074,967 42,331,536
------------ ------------
Dividends to Shareholders (Note 1f):
Investment income--net (43,213,412) (39,934,642)
------------ ------------
Net decrease in net assets resulting from dividends to shareholders (43,213,412) (39,934,642)
------------ ------------
Capital Shares Transactions (Note 4):
Net increase (decrease) in net assets derived from capital share transactions 221,301,485 (123,412,312)
------------ ------------
Net Assets:
Total increase (decrease) in net assets 221,163,040 (121,015,418)
Beginning of year 713,299,657 834,315,075
------------ ------------
End of year $934,462,697 $713,299,657
============ ============
</TABLE>
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc. For the Year Ended
Statement of Cash Flows August 31, 1994
<S> <C>
Cash Provided by Operating Activities:
Net increase in net assets resulting from operations $ 43,074,967
Adjustments to reconcile net increase (decrease) in net assets
resulting from operations to net cash provided by operating activities:
Increase in receivables (1,948,885)
Decrease in other assets 259,876
Increase in other liabilities 1,500,087
Realized and unrealized loss on investments--net 138,445
Amortization of discount (1,636,509)
------------
Net cash provided by operating activities 41,387,981
------------
Cash Used for Investing Activities:
Proceeds from principal payments and sales of loan interests 399,035,411
Purchases of loan interests (585,914,057)
Purchases of short-term investments--net (15,661,889)
------------
Net cash used for investing activities (202,540,535)
------------
Cash Provided by Financing Activities:
Cash receipts on capital shares sold 334,644,640
Cash payments on capital shares tendered (153,795,940)
Dividends paid to shareholders (19,486,117)
------------
Net cash provided by financing activities 161,362,583
------------
Cash:
Net increase in cash 210,029
Cash at beginning of year --
------------
Cash at end of year $ 210,029
============
Non-Cash Financing Activities:
Capital shares issued in reinvestment of dividends paid to shareholders $ 23,136,748
============
See Notes to Financial Statements.
</TABLE>
52
<PAGE> 55
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc.
Financial Highlights
For the
Period
Nov. 3,
The following per share data and ratios have been derived For the Year 1989++ to
from information provided in the financial statements. Ended August 31, Aug. 31,
Increase (Decrease) in Net Asset Value: 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Per Share Operating Performance:
Net asset value, beginning of period $10.02 $ 9.99 $ 9.99 $10.00 $10.00
------ ------ ------ ------ ------
Investment income--net .59 .53 .64 .85 .76
Realized and unrealized gain (loss) on investments--net -- .03 -- (.01) --
------ ------ ------ ------ ------
Total from investment operations .59 .56 .64 .84 .76
------ ------ ------ ------ ------
Less Dividends:
Investment income--net (.59) (.53) (.64) (.85) (.76)
------ ------ ------ ------ ------
Net asset value, end of period $10.02 $10.02 $ 9.99 $ 9.99 $10.00
====== ====== ====== ====== ======
Total Investment Return:*
Based on net asset value per share 5.94% 5.74% 6.58% 8.79% 7.63%+++
====== ====== ====== ====== ======
Ratios to Average Net Assets:
Expenses, net of reimbusement 1.43% 1.47% 1.39% 1.27% .79%**
====== ====== ====== ====== ======
Expenses 1.43% 1.47% 1.41% 1.33% 1.35%**
====== ====== ====== ====== ======
Investment income--net 5.75% 5.27% 6.58% 8.44% 9.06%**
====== ====== ====== ====== ======
Supplemental Data:
Net assets, end of period (in millions) $ 934 $ 713 $ 834 $1,705 $1,728
====== ====== ====== ====== ======
Portfolio turnover 61.31% 90.36% 46.48% 58.22% 29.61%
====== ====== ====== ====== ======
</TABLE>
*Total investment returns exclude the effects of sales loads. The Fund is a
continuously offered closed-end fund, the shares of which are offered at
net asset value. Therefore, no separate market exists.
**Annualized.
++Commencement of Operations.
+++Aggregate total investment return.
See Notes to Financial Statements.
53
<PAGE> 56
Notes to Financial Statements
1. Significant Accounting Policies:
Merrill Lynch Senior Floating Rate Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940 as a
continuously offered non-diversified, closed-end management
investment company.
(a) Loan participation interests -- The Fund invests in senior
secured floating rate loan interests ("Loan Interests") with
collateral having a market value, at time of acquisition by the
Fund, which Fund management believes equals or exceeds the principal
amount of the corporate loan. The Fund may invest up to 20% of its
total assets in loans made on an unsecured basis. Depending on how
the loan was acquired, the Fund will regard the issuer as including
the corporate borrower along with an agent bank for the syndicate of
lenders and any intermediary for the Fund's investment. Because
agents and intermediaries are primarily commercial banks, the Fund's
investment in corporate loans at August 31, 1994 could be considered
to be concentrated in commercial banking.
(b) Valuation of investments -- Loan Interests and common stocks are
valued at fair value. Fair value is determined in good faith by or
under the direction of the Board of Directors of the Fund. Since
Loan Interests are purchased and sold primarily at par value, the
Fund values the Loan Interests at par, unless Merrill Lynch Asset
Management, L.P. ("MLAM") determines par does not represent fair
value. In the event such a determination is made, fair value will be
determined in accordance with guidelines approved by the Fund's
Board of Directors. Short-term securities with remaining maturities
of sixty days or less are valued at amortized cost, which
approximates market value. Securities and assets for which market
quotations are not readily available are valued at fair value as
determined in good faith by or under the direction of the Board of
Directors of the Fund.
(c) lncome taxes -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(d) Security transactions and investment income -- Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest income is recognized on the accrual
basis. Realized gains and losses on security transactions are
determined on the identified cost basis. Facility fees are accreted
into income over the term of the related loan.
(e) Deferred organization expenses and prepaid registration fees --
Deferred organization expenses are amortized on a straight-line
basis over a five year period. Prepaid registration fees are charged
to expense as the related shares are issued.
(f) Dividends and distributions -- Dividends from net investment
income are declared daily and paid monthly. Distributions of capital
gains are recorded on the ex-dividend dates.
2. Investment Advisory and Administrative Services Agreement and
Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with
MLAM. Effective January 1, 1994, the investment advisory business of
MLAM was reorganized from a corporation to a limited partnership.
Both prior to and after the reorganization, ultimate control of MLAM
was vested with Merrill Lynch & Co., Inc. ("ML & Co."). The general
partner of MLAM is Princeton Services, Inc. ("PSI"), an indirect
wholly-owned subsidiary of ML & Co. The limited partners are ML &
Co. and Merrill Lynch Investment Management, Inc. ("MLIM"), which is
also an indirect wholly-owned subsidiary of ML & Co.
54
<PAGE> 57
Notes to Financial Statements
(concluded)
MLAM is responsible for the management of the Fund's portfolio and
provides the necessary personnel, facilities, equipment and certain
other services necessary to perform this investment advisory
function.
For such services, the Fund pays a monthly fee at an annual rate of
0.95% of the Fund's average daily net assets. The Fund also has an
Administrative Services Agreement with MLAM whereby MLAM will
receive a fee equal to an annual rate of 0.25% of the Fund's average
daily net assets on a monthly basis, in return for the performance
of administrative services (other than investment advice and related
portfolio activities) necessary for the operation of the Fund. The
Investment Advisory Agreement obligates MLAM to reimburse the Fund
to the extent the Fund's expenses (excluding interest, taxes,
brokerage fees, commissions, and extraordinary items) exceed the
lesser of a) 2.0% of the Fund's average daily net assets or b) 2.5%
of the Fund's first $30 million of average daily net assets, 2.0% of
the next $70 million of average daily net assets, and 1.5% of the
average daily net assets in excess thereof. No fee payment will be
made to the Investment Adviser during any fiscal year which will
cause such expenses to exceed the most restrictive expense
limitation applicable at the time of such payment.
Financial Data Services, Inc. ("FDS"), a wholly-owned subsidiary of
ML & Co., is the Fund's transfer agent.
Accounting services are provided to the Fund by MLAM at cost.
Certain officers and/or trustees of the Fund are officers and/or
directors of MLIM, MLAM, FDS, PSI, or Merrill Lynch, Pierce, Fenner
& Smith Incorporated, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1994 were $585,914,057 and
$399,035,411, respectively.
Net realized and unrealized gains (losses) as of August 31, 1994
were as follows:
<TABLE>
<CAPTION>
Realized Unrealized
Losses Gains
<S> <C> <C>
Short-term investments $ (13,985) --
Common stock -- $ 275,590
------------ ------------
Total $ (13,985) $ 275,590
============ ============
</TABLE>
As of August 31, 1994, net unrealized appreciation for financial
reporting and Federal income tax purposes aggregated $275,590, all
of which related to appreciated securities. The aggregate cost of
investments at August 31, 1994 for Federal income tax purposes was
$918,002,800.
4. Capital Share Transaction:
Transactions in capital shares were as follows:
<TABLE>
<CAPTION>
For the Year Ended Dollar
August 31, 1994 Shares Amount
<S> <C> <C>
Shares sold 35,126,101 $ 351,960,677
Shares issued to share-
holders in reinvestment
of dividends 2,309,056 23,136,748
------------ -------------
Total issued 37,435,157 375,097,425
Shares tendered (15,348,896) (153,795,940)
------------ -------------
Net increase 22,086,261 $ 221,301,485
============ =============
</TABLE>
<TABLE>
<CAPTION>
For the Year Ended Dollar
August 31, 1993 Shares Amount
<S> <C> <C>
Shares sold 14,572,615 $ 145,750,963
Shares issued to share-
holders in reinvestment
of dividends 2,112,254 21,124,039
------------ -------------
Total issued 16,684,869 166,875,002
Shares tendered (29,022,869) (290,287,314)
------------ -------------
Net decrease (12,338,000) $(123,412,312)
============ =============
</TABLE>
55
<PAGE> 58
5. Unfunded Loan Interests:
As of August 31, 1994, the Fund had unfunded loan commitments of
$15,751,105, which would be extended at the option of the borrower,
pursuant to the following loan agreements:
Unfunded
Commitment
Borrower (in thousands)
Gulfstream Corp. $7,961
Northwest Airlines, Inc. 4,858
Overhead Door Corp. 2,932
6. Short-Term Borrowings:
On March 16, 1994, the Fund extended its loan commitment. The
commitment is for $100,000,000, bearing interest at the Federal
Funds Rate plus 1%--3% on the outstanding balance. The Fund had
no borrowings under this commitment during the year ended August
31, 1994. For the year ended August 31, 1994, facility and
commitment fees aggregated approximately $202,000.
7. Capital Loss Carryforward:
At August 31, 1994, the Fund had a net capital loss carryforward of
approximately $34,000, all of which expires in 2001. These will be
available to offset like amounts of any future taxable gains.
8. Subsequent Event:
The Fund began a quarterly tender offer on September 16, 1994.
56
<PAGE> 59
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.
AUTHORIZATION FORM
- - - --------------------------------------------------------------------------------
1. SHARE PURCHASE APPLICATION
I, being of legal age, wish to purchase .... shares of Merrill Lynch Senior
Floating Rate Fund, Inc. and establish an Investment Account as described in the
Prospectus.
Basis for establishing an Investment Account:
I enclose a check for $.... payable to Financial Data Services, Inc., as an
initial investment (minimum $1,000). (Subsequent investments $50 or more.) I
understand that this purchase will be executed at the applicable offering price
next to be determined after this Application is received by you.
Until you are notified by me in writing, the following options with respect
to dividends and distributions are elected:
<TABLE>
<S> <C> <C>
---------------------------------------- ----------------------------------------
Distribution Elect / / reinvest dividends Elect / / reinvest capital gains
Options One / / pay dividends in cash One / / pay capital gains in cash
---------------------------------------- ----------------------------------------
</TABLE>
If no election is made, dividends and capital gains will be reinvested
automatically at net asset value without a sales charge.
---------------------
<TABLE>
<S> <C>
(PLEASE PRINT)
Name......................................................... --------------------------------
First Name Initial Last Name
--------------------------------
Name of Co-Owner (if any).................................... Social Security No.
First Name Initial Last Name or Taxpayer Identification No.
Address......................................................
............................................................. ..................................
(Zip Code) Date
</TABLE>
Under penalty of perjury, I certify (1) that the number set forth above is
my correct Social Security No. or Taxpayer Identification No. and (2) that I am
not subject to backup withholding (as discussed in the Prospectus under "Taxes")
either because I have not been notified that I am subject thereto as a result of
a failure to report all interest or dividends, or the Internal Revenue Service
("IRS") has notified me that I am no longer subject thereto. INSTRUCTION: You
must strike out the language in (2) above if you have been notified that you are
subject to backup withholding due to underreporting, and if you have not
received a notice from the IRS that backup withholding has been terminated. The
undersigned authorizes the furnishing of this certification to other Merrill
Lynch-sponsored investment companies.
SIGNATURE OF OWNER .............. SIGNATURE OF CO-OWNER (IF ANY).............
In the case of co-owners, a joint tenancy with right of survivorship will be
presumed unless otherwise specified.
- - - --------------------------------------------------------------------------------
2. FOR DEALER ONLY
Branch, Office Address, Stamp
- - - ---------- ----------
- - - ---------- ----------
- - - ---------- ----------
- - - ---------- ----------
This form when completed should be mailed to:
Merrill Lynch Senior Floating Rate Fund, Inc.
c/o Financial Data Services, Inc.
P.O. Box 45289
Jacksonville, Florida 32232-5289.
We guarantee the Shareholder's Signature.
......................................................
Dealer Name and Address
By ..................................................................
Authorized Signature of Dealer
- - - ---------- --------------
...................
- - - ---------- --------------
Branch-Code F/C No. F/C Last Name
- - - ---------- -----------------
- - - ---------- -----------------
Dealer's Customer F/C No.
57
<PAGE> 60
This Page Intentionally Left Blank
58
<PAGE> 61
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING OF ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY STATE
OR JURISDICTION OF THE UNITED STATES OR ANY COUNTRY WHERE SUCH OFFER WOULD BE
UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................. 2
Fee Table.......................... 10
Financial Highlights............... 11
The Fund........................... 12
Investment Objective and
Policies......................... 12
Special Leverage Considerations.... 23
Investment Restrictions............ 25
Purchase of Shares................. 27
Tender Offers...................... 28
Early Withdrawal Charge............ 30
Directors and Officers............. 31
Investment Advisory and
Administrative Arrangements...... 33
Portfolio Transactions............. 35
Dividends and Distributions........ 36
Taxes.............................. 37
Automatic Dividend Reinvestment
Plan............................. 40
Net Asset Value.................... 40
Description of Capital Stock....... 41
Performance Data................... 43
Custodian.......................... 44
Transfer Agent, Dividend Disbursing
Agent and Shareholder Servicing
Agent; Shareholder Reports....... 44
Legal Opinions..................... 44
Experts............................ 44
Independent Auditors' Report....... 45
Financial Statements............... 46
Authorization Form................. 57
</TABLE>
Code #10938-1194
Prospectus
- - - ---------------------------------------------------
MERRILL LYNCH
SENIOR FLOATING
RATE FUND, INC.
Shares of Common Stock
November , 1994
Distributor:
Merrill Lynch Funds
Distributor, Inc.
This Prospectus should be
retained for future reference.
<PAGE> 62
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 LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- - - ---------------------- -------------------
Compass plate, circular Back cover of Prospectus
graph paper and Merrill Lynch
logo including stylized market
bull
<PAGE> 63
PART C.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) FINANCIAL STATEMENTS
Independent Auditors' Report
Schedule of Investments as of August 31, 1994.
Statement of Assets and Liabilities as of August 31, 1994.
Statement of Operations for the year ended August 31, 1994.
Statements of Changes in Net Assets for the years ended August 31, 1993 and
1994.
Statement of Cash Flows for the year ended August 31, 1994.
Financial Highlights for the period November 3, 1989 (commencement of
operations) to August 31, 1990 and for the years ended August 31, 1991,
1992, 1993 and 1994.
(2) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
--------
<C> <C> <S>
(a)(1) -- Articles of Incorporation of Registrant. (a)
(2) -- Articles of Amendment to Articles of Incorporation of Registrant.
(c)
(3) -- Articles of Amendment to Articles of Incorporation of Registrant
(name change).
(b) -- By-Laws of Registrant. (a)
(c) -- None.
(d)(1) -- Specimen certificate for shares of Common Stock of Registrant. (c)
(2) -- Portions of the Articles of Incorporation and By-Laws of the
Registrant defining the rights of holders of shares of the
Registrant. (d)
(e) -- None.
(f) -- None.
(g)(1) -- Investment Advisory Agreement between Registrant and Merrill Lynch
Asset Management. (b)
(2) -- Administration Agreement between Registrant and Merrill Lynch
Asset Management. (c)
(h)(1) -- Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc. (b)
(2) -- Selected Dealer Agreement. (b)
(i) -- None.
(j) -- Custody Agreement between Registrant and The Bank of New York. (c)
(k)(1) -- Transfer Agency, Dividend Disbursing Agency and Shareholder
Servicing Agency Agreement between Registrant and Financial Data
Services, Inc. (b)
(2) -- Form of Agreement between Merrill Lynch & Co., Inc. and Registrant
relating to use by Registrant of Merrill Lynch name. (b)
(l) -- Opinion of Brown & Wood, counsel to the Fund.
(m) -- None.
(n) -- Consent of Deloitte & Touche LLP, independent auditors for
Registrant.
</TABLE>
C-1
<PAGE> 64
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
--------
<C> <C> <S>
(o) -- None.
(p) -- Certificate of Merrill Lynch Asset Management. (c)
(q) -- None.
(r) -- Financial data schedule.
</TABLE>
- - - ------------------
(a) Filed as an exhibit to Registrant's Registration Statement on Form N-2 under
the Securities Act of 1933, Securities Act File No. 33-30326.
(b) Filed as an exhibit to Pre-Effective Amendment No. 2 to Registrant's
Registration Statement on Form N-2 under the Securities Act of 1933,
Securities Act File No. 33-30326.
(c) Filed as an exhibit to Pre-Effective Amendment No. 3 to Registrant's
Registration Statement on Form N-2 under the Securities Act of 1933,
Securities Act File No. 33-30326.
(d) 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 Registrant's 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 Registrant's By-Laws, previously filed as
Exhibit (b) to the Registration Statement.
ITEM 25. MARKETING ARRANGEMENTS.
See Exhibits (h)(1) and (h)(2).
ITEM 26. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
Previously provided in connection with Pre-Effective Amendment No. 3 to
Registrant's Registration Statement on Form N-2 under the Securities Act of
1933, Securities Act File No. 33-30326.
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
RECORD HOLDERS
OCTOBER 31,
TITLE OF CLASS 1994
--------------------------------------------------------------------- --------------
<S> <C>
Shares of Common Stock, par value $0.10 per share 1,546
</TABLE>
ITEM 29. INDEMNIFICATION.
Reference is made to Article IV of Registrant's Articles of Incorporation,
Article VI of Registrant's 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
C-2
<PAGE> 65
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 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 Registrant's 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
Securities Act of 1933 (the "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 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 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 Act and will be goverened by the final adjudication
of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF MANAGER.
Merrill Lynch Asset Management (the "Investment Adviser") acts as
investment adviser for the following registered investment companies:
Convertible Holdings, Inc., Merrill Lynch Adjustable Rate Securities Fund, Inc.,
Merrill Lynch Americas Income Fund, Inc., Merrill Lynch Asset Growth Fund, Inc.,
Merrill Lynch Asset Income Fund, Inc., Merrill Lynch Balanced Fund for
Investment and Retirement, Merrill Lynch Capital Fund, Inc., Merrill Lynch
Developing Capital Markets Fund, Inc., Merrill Lynch Dragon Fund, Inc., Merrill
Lynch EuroFund, Merrill Lynch Fundamental Growth Fund, Inc., Merrill Lynch Fund
for Tomorrow, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Allocation Fund, Inc., Merrill Lynch Global
Convertible Fund, Inc., Merrill Lynch Global Holdings, Inc., Merrill Lynch
Global SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill
Lynch Growth Fund for Investment and Retirement, Merrill Lynch Healthcare Fund,
Inc., Merrill Lynch High Income Municipal Bond Fund, Inc., Merrill Lynch
Institutional Intermediate Fund, Merrill Lynch Interna-
C-3
<PAGE> 66
tional Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch
Municipal Series Trust, Merrill Lynch Global Resources Trust, Merrill Lynch
Pacific 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. Treasury Money Fund, Merrill Lynch
U.S.A. Government Reserves, Merrill Lynch Utility Income Fund, Inc. and Merrill
Lynch Variable Series Funds, Inc. Fund Asset Management, L.P. ("FAM"), an
affiliate of the Investment Adviser, acts as the investment adviser for the
following registered investment companies: Apex Municipal Fund, Inc., 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., Corporate High Yield Fund, Inc., Corporate High
Yield Fund II, Inc., Emerging Tigers Fund, Inc., Financial Institutions Series
Trust, Income Opportunities Fund 1999, Inc., Income Opportunities Fund 2000,
Inc., Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal
Series Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Federal
Securities Trust, Merrill Lynch Funds for Institutions Series, Merrill Lynch
Institutional Tax-Exempt Fund, 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 Special Value Fund, Inc., Merrill Lynch World Income Fund, Inc.,
Muni Assets Fund, Inc., MuniBond Income Fund, Inc., The Municipal Fund
Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniInsured Fund, Inc.,
MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniVest California Insured Fund,
Inc., MuniVest Florida Fund, MuniVest Michigan Insured Fund, Inc., MuniVest New
Jersey Fund, Inc., MuniVest New York Insured Fund, Inc., MuniVest Pennsylvania
Insured Fund, MuniYield Arizona Fund, Inc., MuniYield Arizona Fund II, Inc.,
MuniYield California Fund, 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 Insured Fund II, 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 New York Insured Fund III, Inc., MuniYield
Pennsylvania Fund, MuniYield Quality Fund, Inc., MuniYield Quality Fund II,
Senior High Income Portfolio, Inc., Senior High Income Portfolio II, Inc.,
Senior Strategic Income Fund, Inc., Taurus MuniCalifornia Holdings, Inc., Taurus
MuniNewYork Holdings, Inc. and WorldWide DollarVest Fund, Inc. The address of
each of these investment companies is P.O. Box 9011, Princeton, New Jersey
08543-9011, except that the address of Merrill Lynch Funds For Institutions
Series, Merrill Lynch Institutional Tax-Exempt Fund and Merrill Lynch
Institutional Intermediate Fund is One Financial Center, Boston, Massachusetts
02110-2646. The address of the Investment Adviser and FAM is also P.O. Box 9011,
Princeton, New Jersey 08543-9011. The address of Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and Merrill Lynch & Co., Inc. ("ML&Co.") is
North Tower, World Financial Center, 250 Vesey Street, New York, New York 10281.
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
September 1, 1992 for his own account or in the capacity of director, officer,
partner or trustee. In addition, Mr. Zeikel is President, Mr. Glenn is Executive
Vice President and Mr. Richard is Treasurer of all or substantially all of the
investment companies described in the preceding paragraph and Mr. Zeikel is a
director of substantially all such companies and Mr. Glenn is a director of
certain of such companies. Messrs. Giordano, Durnin, Harvey, Hewitt, and Monagle
are directors or officers of one or more of such companies.
<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- - - ------------------------- -------------------------- ----------------------------------------
<S> <C> <C>
Merrill Lynch & Co., Inc. Limited Partner Financial Services Holding Company
("ML & Co.")...........
Merrill Lynch Investment Limited Partner Investment Advisory Services; Limited
Management, Inc. ...... Partner of FAM
</TABLE>
C-4
<PAGE> 67
<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- - - ------------------------- -------------------------- ----------------------------------------
<S> <C> <C>
Princeton Services, Inc. General Partner General Partner of FAM
("Princeton
Services").............
Arthur Zeikel............ President and Director President of FAM; President and Director
of Princeton Services; Director of
Merrill Lynch Funds Distributor, Inc.
("MLFD"); Executive Vice President of
ML & Co.; Executive Vice President of
Merrill Lynch
Terry K. Glenn........... Executive Vice President Executive Vice President of FAM;
Executive Vice President and Director of
Princeton Services; President and
Director of MLFD; Director of
Financial Data Services, Inc.;
President of Princeton Administrators
Bernard J. Durnin........ 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
Elizabeth Griffin........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Norman R. Harvey......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
N. John Hewitt........... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Philip L. Kirstein....... Senior Vice President, Senior Vice President, General Counsel
General Counsel and and Secretary of FAM; Senior Vice
Secretary President, General Counsel, Director
and Secretary of Princeton Services;
Director of MLFD
Ronald M. Kloss.......... Senior Vice President and Senior Vice President and Controller of
Controller FAM; Senior Vice President and
Controller of Princeton Services
Stephen M. M. Miller..... Senior Vice President Executive Vice President of Princeton
Administrators
Joseph T. Monagle,
Jr. ................... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
Gerald M. Richard........ Senior Vice President and Senior Vice President and Treasurer of
Treasurer FAM; Senior Vice President and Treasurer
of Princeton Services; Vice President
and Treasurer of MLFD
Richard L. Rufener....... Senior Vice President Senior Vice President of FAM; Vice
President of MLFD; Senior Vice
President of Princeton Services
Ronald L. Welburn........ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
C-5
<PAGE> 68
<TABLE>
<CAPTION>
POSITION(S) WITH THE OTHER SUBSTANTIAL BUSINESS,
NAME MANAGER PROFESSION, VOCATION OR EMPLOYMENT
- - - ------------------------- -------------------------- ----------------------------------------
<S> <C> <C>
Anthony Wiseman.......... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton Services
</TABLE>
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS.
All accounts, books and other documents required to be maintained by
Section 31(a) of the Investment Company Act of 1940 and the Rules thereunder
will be maintained at the offices of the Registrant and its Transfer Agent.
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
Securities Act of 1933;
(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
Securities Act of 1933, 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.
C-6
<PAGE> 69
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 8th
day of November, 1994.
MERRILL LYNCH SENIOR FLOATING RATE FUND,
INC.
(Registrant)
By /S/ ARTHUR ZEIKEL
------------------------------------
(Arthur Zeikel, President)
Each person whose signature appears below hereby authorizes Arthur Zeikel,
Terry K. Glenn or Gerald M. Richard, or any of them, as attorney-in-fact, to
sign on his or her behalf, individually and in each capacity stated below, any
amendments 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 dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- - - ------------------------------------- ------------------------------------ ------------------
<S> <C> <C>
/S/ ARTHUR ZEIKEL President (Principal Executive November 8, 1994
- - - ------------------------------------- Officer) and Director
(Arthur Zeikel)
/S/ GERALD M. RICHARD Treasurer (Principal Financial and November 8, 1994
- - - ------------------------------------- Accounting Officer)
(Gerald M. Richard)
/S/ RONALD W. FORBES Director November 8, 1994
- - - -------------------------------------
(Ronald W. Forbes)
/S/ CYNTHIA MONTGOMERY Director November 8, 1994
- - - -------------------------------------
(Cynthia Montgomery)
/S/ CHARLES C. REILLY Director November 8, 1994
- - - -------------------------------------
(Charles C. Reilly)
/S/ KEVIN A. RYAN Director November 8, 1994
- - - -------------------------------------
(Kevin A. Ryan)
/S/ RICHARD R. WEST Director November 8, 1994
- - - -------------------------------------
(Richard R. West)
</TABLE>
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<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION NUMBER
- - - ------- --------------------------------------------------------------------- -------
<S> <C> <C> <C>
(a)(3) -- Articles of Amendment to Articles of Incorporation of Registrant.....
(l) -- Opinion of Brown & Wood, counsel to the Fund.........................
(n) -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant...........................................................
(r) -- Financial data schedule..............................................
</TABLE>
<PAGE> 1
Exhibit (a)(3)
MERRILL LYNCH PRIME FUND, INC.
ARTICLES OF AMENDMENT
TO THE ARTICLES OF INCORPORATION
Merrill Lynch Prime Fund, Inc. (the "Corporation"), a Maryland
corporation having its principal office c/o The Corporation Trust Incorporated,
32 South Street, Baltimore, Maryland 21202, does hereby certify to the
Department of Assessments and Taxation of the State of Maryland as follows:
FIRST: The charter of the Corporation is hereby amended by striking
out the entire Article II of the Articles of Incorporation and inserting in
lieu thereof the following:
"ARTICLE II
NAME
The name of the Corporation is MERRILL LYNCH SENIOR FLOATING RATE
FUND, INC. (the "Corporation")."
SECOND: The Board of Directors of the Corporation, at a meeting held
on December 8, 1993, duly adopted a resolution advising the foregoing amendment
to the charter.
THIRD: The holders of a majority of the outstanding shares of capital
stock of the Corporation entitled to vote on the matter, at a meeting held on
February 25, 1994, duly approved and adopted the amendment of the charter of
the Corporation as hereinabove set forth.
<PAGE> 2
FOURTH: The remaining Articles of the charter of the Corporation shall
remain in full force and effect.
FIFTH: The authorized capital stock of the Corporation has not been
increased by these Articles of Amendment.
SIXTH: These Articles of Amendment shall be effective on the date of
acceptance for record by the Department of Assessments and Taxation of the
State of Maryland.
IN WITNESS WHEREOF, the officers of the Corporation who hereby execute
on behalf of the Corporation these Articles of Amendment hereby acknowledge, in
the name and on behalf of said Corporation, these Articles of Amendment to be
the corporate act of said Corporation and further certify, under the penalties
of perjury, that, to the best of their knowledge, information and belief, the
matters and facts set forth herein with respect to the approval thereof are
true in all material respects, all on this day of March, 1994.
MERRILL LYNCH PRIME FUND, INC.
By:
--------------------------
Name:
Title:
Attest:
- - - ------------------------
Patrick D. Sweeney
Secretary
2
<PAGE> 1
Exhibit L
Brown & Wood
One World Trade Center
New York, New York 10048-0557
Telephone: 212-839-5300
Facsimile: 212-839-5399
November 8, 1994
Merrill Lynch Senior Floating Rate
Fund, Inc.
800 Scudders Mill Road
Plainsboro, NJ 08536
Gentlemen:
We have acted as counsel for Merrill Lynch Senior Floating Rate Fund,
Inc., a corporation organized under the laws of the State of Maryland (the
"Fund"), in connection with the registration of 300,000,000 shares of common
stock, par value $0.10 per share (the "Shares"), under the Securities Act of
1933, as amended, pursuant to a registration statement on Form N-2 to be filed
with the Securities and Exchange Commission on the date hereof (the
"Registration Statement").
As counsel for the Fund, we are familiar with the proceedings taken by
it in connection with the authorization, issuance and sale of the Shares. In
addition, we have examined and are familiar with the Articles of Incorporation
of the Fund, as amended, the By-Laws of the Fund and such other documents as we
have deemed relevant to the matters referred to in this opinion.
Based upon the foregoing, we are of the opinion that the Shares, upon
issuance and sale in the manner referred to in the Registration Statement for
consideration not less than the par value thereof, will be legally issued,
fully paid and non-assessable shares of common stock of the Fund.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the prospectus
constituting a part thereof.
Very truly yours,
/s/ Brown & Wood
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.:
We consent to the use in this Registration Statement on Form N-2 of our report
dated October 6, 1994 and to the references to us under the captions "Experts"
and "Financial Highlights" both of which appear in the Prospectus, which is a
part of such Registration Statement.
Deloitte & Touche LLP
Princeton, New Jersey
November 8, 1994
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<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> AUG-31-1994
<PERIOD-START> SEP-01-1993
<PERIOD-END> AUG-31-1994
<INVESTMENTS-AT-COST> 918002800
<INVESTMENTS-AT-VALUE> 918278390
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<PAID-IN-CAPITAL-COMMON> 934227862
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<REALIZED-GAINS-CURRENT> (13985)
<APPREC-INCREASE-CURRENT> (124460)
<NET-CHANGE-FROM-OPS> 43074967
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 43213412
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 35126101
<NUMBER-OF-SHARES-REDEEMED> 15348896
<SHARES-REINVESTED> 2309056
<NET-CHANGE-IN-ASSETS> 221163040
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> (26770)
<OVERDISTRIB-NII-PRIOR> 0
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<AVERAGE-NET-ASSETS> 752140916
<PER-SHARE-NAV-BEGIN> 10.02
<PER-SHARE-NII> .59
<PER-SHARE-GAIN-APPREC> 0
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<PER-SHARE-DISTRIBUTIONS> 0
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<PER-SHARE-NAV-END> 10.02
<EXPENSE-RATIO> 1.43
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
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