<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 12, 1996.
SECURITIES ACT FILE NO. 333-
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. 12
(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:
THOMAS R. SMITH, JR., ESQ.
BROWN & WOOD LLP
ONE WORLD TRADE CENTER
NEW YORK, NEW YORK 10048-0557
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, as amended (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
<TABLE>
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MAXIMUM
MAXIMUM AGGREGATE AMOUNT OF
TITLE OF SECURITIES AMOUNT BEING OFFERING PRICE OFFERING REGISTRATION
BEING REGISTERED REGISTERED PER UNIT PRICE(1) FEE(2)
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock ($.10 par value) 100,000,000 shares $9.98 $998,000,000 $302,424.24(3)
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</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457 under the Securities Act of 1933.
(2) Transmitted prior to the filing date to the designated lockbox at Mellon
Bank in Pittsburgh, PA.
(3) The amount of the registration fee does not include $358,735.76 which has
previously been paid to the Commission for registration fees relating to
103,916,330 shares registered pursuant to Securities Act File Nos. 33-64023
and 33-56391 and unissued as of October 31, 1996.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON
SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY
DETERMINE.
PURSUANT TO RULE 429 UNDER THE SECURITIES ACT, THE PROSPECTUS IN THIS
REGISTRATION STATEMENT IS A COMBINED PROSPECTUS AND RELATES TO REGISTRATION
STATEMENT NOS. 33-64023 AND 33-56391, AS AMENDED, PREVIOUSLY FILED BY THE
REGISTRANT ON FORM N-2. THIS REGISTRATION STATEMENT ALSO CONSTITUTES
POST-EFFECTIVE AMENDMENT NO. 1 TO REGISTRATION STATEMENT NO. 33-64023 AND
POST-EFFECTIVE AMENDMENT NO. 3 TO REGISTRATION STATEMENT NO. 33-56391, AND SUCH
POST-EFFECTIVE AMENDMENTS SHALL HEREAFTER BECOME EFFECTIVE CONCURRENTLY WITH THE
EFFECTIVENESS OF THIS REGISTRATION STATEMENT AND IN ACCORDANCE WITH SECTION 8(c)
OF THE SECURITIES ACT. THE REGISTRATION STATEMENT AND THE REGISTRATION
STATEMENTS 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
- ------------------------------------------------- --------------------------------------------
<S> <C>
PART A
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
PART B
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
PART C
</TABLE>
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 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 12, 1996
PROSPECTUS
DECEMBER , 1996
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 9081, Princeton, New Jersey 08543-9081 (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 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" 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 COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=========================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) FUND(3)
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<S> <C> <C> <C>
Per Share................................. $ None $
- ---------------------------------------------------------------------------------------------------------
Total(3).................................. $ None $
=========================================================================================================
</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 $1,655,000, 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, the minimum
initial purchase is $250 and minimum subsequent purchase
is $1. For plans established under Sections 401(k) and
403(b) of the Internal Revenue Code of 1986 which are
maintained through Merrill Lynch, 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 ("LIBOR"). Under normal market
conditions, at least 65% of the total
2
<PAGE> 5
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 average life of the Corporate Loans is
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 Corporate
3
<PAGE> 6
Loan. 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 are generally issued in the form of
senior syndicated loans although from time to time, the
Fund may invest in privately placed note securities or
publicly offered bonds with credit and pricing terms
which are, in the opinion of the Investment Adviser,
consistent with investments in senior collateralized
loan obligations. 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
4
<PAGE> 7
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 creditworthiness 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
5
<PAGE> 8
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 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 the 1940 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 November 30, 1996, the
Investment Adviser or its affiliate, Fund Asset
Management, L.P., had a total of approximately $
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,
6
<PAGE> 9
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 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 compa-
7
<PAGE> 10
nies, 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".
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.
The following table sets forth the average monthly
dollar-weighted market value by Moody's Investors
Service, Inc. rating category of the Corporate Loans
held by the Fund during the fiscal year ended August 31,
1996:
<TABLE>
<S> <C>
RATED OBLIGATIONS.................................... 66.2%
BA: 51.5%; B: 14.7%.
UNRATED OBLIGATIONS.................................. 33.8%
</TABLE>
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
8
<PAGE> 11
Standard & Poor's Ratings Group 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. In addition, if a Borrower experiences
unanticipated excess cash flow, principal may be
prepaid.
Certain of the Corporate Loans in which the Fund invests
may be considered to be illiquid, which may impair the
Fund's ability to realize the 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 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
Early Withdrawal Charge (as a percentage of the lesser of the
original purchase price or net asset value at the time of
repurchase)(a)................................................... 3.0% during the
first year,
decreasing 1.0%
annually
thereafter to 0.0%
after the third
year
ANNUAL EXPENSES (as a percentage of net assets attributable to common
shares)
Management Fees(b)................................................ 0.95%
Administrative Fees............................................... 0.25
Other Expenses.................................................... 0.14
----
Total Annual Expenses.................................................. 1.34%
====
</TABLE>
- ---------------
(a) See "Early Withdrawal Charge"--page 29.
(b) See "Investment Advisory and Administrative Arrangements"--page 33.
<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 1.34%, (2) a 5% annual return throughout the
periods and (3) tender at the end of the period...... $44* $52* $73 $161
An investor would pay the following expenses on a
$1,000 investment assuming no tender at the end of
the period........................................... $14 $42 $73 $161
</TABLE>
- ---------------
* Reflects the Early Withdrawal Charge.
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 current fiscal year. The example set forth
above assumes reinvestment of all dividends and distributions and utilizes a 5%
annual rate of return as mandated by Securities and Exchange Commission
regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES OR ANNUAL RATES OF RETURN, AND ACTUAL EXPENSES OR ANNUAL RATES
OF RETURN MAY BE MORE OR LESS THAN THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE.
Merrill Lynch may charge its customers a processing fee (presently $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, 1996 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 Fund's audited 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: 1996 1995 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of
period........................... $10.02 $10.02 $10.02 $ 9.99 $ 9.99 $10.00 $ 10.00
------ ------ ------ ------ ------ ------ -----------
Investment income--net............. .66 .75 .59 .53 .64 .85 .76
Realized and unrealized gain (loss)
on investments--net.............. (.03) --++ --++ .03 --++ (.01) --++
------ ------ ------ ------ ------ ------ -----------
Total from investment operations... .63 .75 .59 .56 .64 .84 .76
------ ------ ------ ------ ------ ------ -----------
Less dividends from investment
income--net...................... (.66) (.75) (.59) (.53) (.64) (.85) (.76)
------ ------ ------ ------ ------ ------ -----------
Net asset value, end of period..... $ 9.99 $10.02 $10.02 $10.02 $ 9.99 $ 9.99 $ 10.00
====== ====== ====== ====== ====== ====== ===========
TOTAL INVESTMENT RETURN:**
Based on net asset value per
share............................ 6.53% 7.68% 5.94% 5.74% 6.58% 8.79% 7.63%#
====== ====== ====== ====== ====== ====== ===========
RATIOS TO AVERAGE NET ASSETS:
Expenses, net of reimbursement..... 1.34% 1.34% 1.43% 1.47% 1.39% 1.27% .79%*
====== ====== ====== ====== ====== ====== ===========
Expenses........................... 1.34% 1.34% 1.43% 1.47% 1.41% 1.33% 1.35%*
====== ====== ====== ====== ====== ====== ===========
Investment income--net............. 6.54% 7.45% 5.75% 5.27% 6.58% 8.44% 9.06%*
====== ====== ====== ====== ====== ====== ===========
SUPPLEMENTAL DATA:
Net assets, end of period
(in millions).................... $2,946 $2,163 $ 934 $ 713 $ 834 $1,705 $ 1,728
====== ====== ====== ====== ====== ====== ===========
Portfolio turnover................. 80.20% 55.23% 61.31% 90.36% 46.48% 58.22% 29.61%
====== ====== ====== ====== ====== ====== ===========
</TABLE>
- ---------------
* Annualized.
** Total investment returns exclude the effects of the Early Withdrawal Charge,
if any. The Fund is a continuously offered closed-end fund, the shares of
which are offered at net asset value. Therefore, no separate market exists.
+ Commencement of operations.
++ Amount is less than $.01 per share.
# 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 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 Ratings Group 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 average life of the Corporate Loans will be in the two
to three year range. See "Description of Corporate Loans".
Investment in shares of Common Stock of the Fund offers several benefits.
The Fund offers investors the opportunity to receive a high level of current
income by investing in a professionally managed portfolio comprised primarily of
Corporate Loans, a type of investment typically not available to individual
investors. In managing such portfolio, 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 notional 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.
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 net asset value may
fluctuate to a greater extent than that of a diversified company as a result of
changes in the financial condition or in the market's assessment of the issuers.
13
<PAGE> 16
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 are generally issued in the form of senior
syndicated loans, but the Fund may also invest from time to time in privately
placed note securities or publicly offered bonds with credit and pricing terms
which are, in the opinion of the Investment Adviser, consistent with investments
in senior collateralized loan obligations.
The Fund may invest 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 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
14
<PAGE> 17
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 provide additional credit support in the form of
guarantees and/or pledges of 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.
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 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 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
15
<PAGE> 18
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 primary consideration in selecting such Corporate Loans for investment
by the Fund is the creditworthiness of the Borrower. 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 of other creditors of the
Borrower under applicable law.
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 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
16
<PAGE> 19
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 Ratings Group 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 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
17
<PAGE> 20
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 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 Ratings Group 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
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<PAGE> 21
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 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
Certain Corporate Loans are, at present, not readily marketable and may be
subject to restrictions on resale. Although the market for Corporate Loans has
developed significantly during recent years, certain of the Corporate Loans in
which the Fund invests do not have the liquidity of conventional debt securities
traded in the secondary market and may be considered illiquid. The Fund has no
limitation on the amount of its investments which are not readily marketable or
are subject to restrictions on resale. Such investments, which may be considered
illiquid, may affect the 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".
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<PAGE> 22
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 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 liquid securities having an aggregate value equal to the
amount of such purchase
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<PAGE> 23
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.
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
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<PAGE> 24
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 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.
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<PAGE> 25
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 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) .50% for the first 45 days that such borrowing is outstanding, (ii) 1.0% for
the next 15 days that such borrowing is outstanding and (iii) 1.5% 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 business day 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 on March 9, 1997, unless terminated earlier as provided
therein. Borrowings under the Facility, if any, may be repaid with the proceeds
of portfolio investments sold by the Fund subsequent to the expiration date of a
tender offer. The terms of the Facility may be modified by written agreement of
the parties thereto. Pursuant to the terms of the Facility the Fund is required
to maintain asset coverage of 400% of the outstanding principal balance of
borrowings under the Facility and accrued interest. The Fund also may not during
the term of the Facility issue any additional capital stock other than common
stock or incur
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<PAGE> 26
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 as long as no
default has occurred and is continuing under the Facility the Fund may make its
periodic dividend payments to shareholders in an amount not in excess of its net
investment income for 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 Code. 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
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<PAGE> 27
approval of a majority of the outstanding shares of preferred stock, voting
separately by class. The Fund may not:
1. Borrow money or issue senior securities, except as permitted by
Section 18 of the 1940 Act.
2. Make investments for the purpose of exercising control or
management.
3. Purchase securities of other investment companies, except in
connection with a merger, consolidation, acquisition or reorganization, or
by purchase in the open market of securities of closed-end investment
companies where no 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.
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<PAGE> 28
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 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 High Income Portfolio, Inc.),
if one fund buys a security that is publicly traded or privately placed,
respectively, the other fund may be deprived of the opportunity to buy a
security of the same issuer that is privately placed or publicly traded,
respectively.
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.
As to purchase orders received by securities dealers prior to the close of
business on the New York Stock Exchange (the "NYSE") (generally, 4:00 p.m., New
York time), which includes orders received after the close of business on the
previous day, the applicable offering price will be based on the net asset value
determined as of 15 minutes after the close of business on the NYSE on that day
provided the Distributor in turn receives the order from the securities dealer
prior to 30 minutes after the close of business on the NYSE on that day. If the
purchase orders are not received by the Distributor prior to 30 minutes after
the close of business on the NYSE, 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
26
<PAGE> 29
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
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, 1994, 1995 and
1996 the Distributor paid $10,310,601, $38,181,431 and $29,197,327,
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,
27
<PAGE> 30
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 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
28
<PAGE> 31
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.
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
29
<PAGE> 32
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 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>
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, 1994, 1995 and 1996 the amount paid to the
Distributor in Early Withdrawal Charges aggregated $264,686, $859,056 and
$3,171,259, respectively.
30
<PAGE> 33
DIRECTORS AND OFFICERS
The Directors and executive officers of the Fund, their ages 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 P.O. Box
9011, Princeton, New Jersey 08536-9011.
ARTHUR ZEIKEL(64)--President and Director(1)(2)--President of the
Investment Adviser (which term as used herein includes its corporate
predecessors) since 1977; President of Fund Asset Management, L.P. ("FAM")
(which term as used herein includes its corporate predecessors), since 1977;
President and Director of Princeton Services, Inc. ("Princeton Services") since
1993; Executive Vice President of Merrill Lynch & Co., Inc. ("ML&Co.") since
1990; Director of the Distributor since 1977.
RONALD W. FORBES(56)--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(44)--Director(2)--Harvard Business School, Soldiers
Field Road, Boston, Massachusetts 02163. Professor, Harvard Business School
since 1989; Associate Professor, J.L. Kellogg Graduate School of Management,
Northwestern University from 1985 to 1989; Assistant Professor, Graduate School
of Business Administration, The University of Michigan from 1979 to 1985;
Director, UNUM Corporation since 1990 and Director of Newell Co. since 1995.
CHARLES C. REILLY(65)--Director(2)--9 Hampton Harbor Road, Hampton Bays,
New York 11946. Self-employed financial consultant since 1990; President and
Chief Investment Officer of Verus Capital, Inc. from 1979 to 1990; Senior Vice
President of Arnhold and S. Bleichroeder, Inc. from 1973 to 1990; Adjunct
Professor, Columbia University Graduate School of Business, 1990; Adjunct
Professor, Wharton School, University of Pennsylvania, 1990; Partner, Small
Cities Cable Television since 1986.
KEVIN A. RYAN(64)--Director(2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder, current Director and Professor of The Boston
University Center for the Advancement of Ethics and Character; Professor of
Education at Boston University since 1982; formerly taught on the faculties of
The University of Chicago, Stanford University and Ohio State University.
RICHARD R. WEST(58)--Director(2)--Box 604, Genoa, NV 89411. Professor of
Finance since 1984, and Dean from 1984 to 1993, and currently Dean Emeritus of
New York University Leonard N. Stern School of Business Administration; Director
of Bowne & Co., Inc. (financial printers), Vornado, Inc. (real estate holding
company), Smith-Corona Corporation (manufacturer of typewriters and word
processors) and Alexander's Inc. (real estate company).
TERRY K. GLENN(56)--Executive Vice President(1)(2)--Executive Vice
President of the Investment Adviser and FAM since 1983; 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, L.P. since 1988.
N. JOHN HEWITT(61)--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(38)--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;
31
<PAGE> 34
Vice President, Corporate Finance and Banking Department, Security Pacific
Merchant Bank from 1983 to 1987.
JOHN W. FRASER(35)--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(36)--Vice President(1)(2)--Vice President and Director of
Taxation of FAM since 1990; employee of Deloitte & Touche LLP from 1982 to 1990.
GERALD M. RICHARD(47)--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.
PATRICK D. SWEENEY(42)--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 certain other investment companies for which the Investment Adviser
or FAM acts as investment adviser.
COMPENSATION OF DIRECTORS
Pursuant to the terms of its investment advisory agreement with the Fund
(the "Investment Advisory Agreement"), the Investment Adviser pays all
compensation of officers and employees of the Fund as well as the fees of all
Directors of the Fund who are affiliated persons of ML&Co. or its subsidiaries.
The Fund pays each unaffiliated Director a fee of $4,000 per year plus $800 per
meeting attended and pays all Directors' actual out-of-pocket expenses relating
to attendance at meetings. The Fund also pays members of its audit committee,
which consists of all the Directors not affiliated with the Investment Adviser,
an annual fee of $2,000; the chairman of the audit committee receives an
additional fee of $1,000. Fees and expenses paid to the unaffiliated Directors
aggregated $47,788 for the year ended August 31, 1996.
The following table sets forth for the fiscal year ended August 31, 1996
compensation paid by the Fund to the non-interested Directors and for the
calendar year ended December 31, 1995 the aggregate compensation paid by all
investment companies advised by MLAM and its affiliate, FAM ("MLAM/FAM Advised
Funds") to the non-interested Directors.
<TABLE>
<CAPTION>
AGGREGATE
FROM FUND AND
PENSION OR RETIREMENT MLAM/FAM ADVISED
COMPENSATION BENEFITS ACCRUED AS PART FUNDS PAID TO
NAME OF TRUSTEE FROM FUND OF FUND EXPENSE DIRECTORS(1)
- ------------------------------------------- ------------ ------------------------ ----------------
<S> <C> <C> <C>
Ronald W. Forbes(1)........................ $ 9,200 None $147,100
Cynthia A. Montgomery(1)................... $ 9,200 None $147,100
Charles C. Reilly(1)....................... $ 9,200 None $269,600
Kevin A. Ryan(1)........................... $ 9,200 None $147,100
Richard R. West(1)......................... $ 10,200 None $294,600
</TABLE>
32
<PAGE> 35
- ---------------
(1) The Directors serve on the board of MLAM/FAM Advised Funds as follows: Mr.
Forbes (23 registered investment companies consisting of 36 portfolios); Ms.
Montgomery (23 registered investment companies consisting of 36 portfolios);
Mr. Reilly (41 registered investment companies consisting of 54 portfolios);
Mr. Ryan (23 registered investment companies consisting of 36 portfolios);
and Mr. West (41 registered investment companies consisting of 54
portfolios).
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 130 registered investment companies. The Investment
Adviser also offers investment advisory services to individuals and
institutions. As of November 30, 1996, the Investment Adviser and FAM had a
total of approximately $ 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. and Princeton Services. The principal business
address of the Investment Adviser is 800 Scudders Mill Road, Plainsboro, New
Jersey 08536.
The Investment Advisory Agreement provides that, subject to the direction
of the Board of Directors of the Fund, the Investment Adviser is responsible for
the actual management of the 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
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.
33
<PAGE> 36
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, 1994, 1995 and 1996, the fee paid by the
Fund to the Investment Adviser pursuant to the Investment Advisory Agreement was
$7,145,339, $13,654,371 and $25,872,222, respectively, and the fee paid by the
Fund pursuant to the Administration Agreement was $1,880,353, $3,593,255 and
$6,808,480, respectively (based on average daily net assets of approximately
$752.1 million, $1.4 billion and $2.7 billion, respectively).
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, 1994, 1995 and
1996, the reimbursement for such services aggregated $51,304, $197,653 and
$401,728, respectively.
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.
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act which incorporates the Code of Ethics of the Investment
Adviser (together, the "Codes"). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and
34
<PAGE> 37
associated procedures are designed to identify any substantive prohibition or
limitation applicable to the proposed investment. The substantive restrictions
applicable to all employees of the Investment Adviser include a ban on acquiring
any securities in a "hot" initial public offering and a prohibition from
profiting on short-term trading in securities. In addition, no employee may
purchase or sell any security which at the time is being purchased or sold (as
the case may be), or to the knowledge of the employee is being considered for
purchase or sale, by any fund advised by the Investment Adviser. Furthermore,
the Codes provide for trading "blackout periods" which prohibit trading by
investment personnel of the Fund within periods of trading by the Fund in the
same (or equivalent) security (15 or 30 days depending upon the transaction).
Transfer Agency Services. Merrill Lynch 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, 1996, the
Fund's payments to the Transfer Agent pursuant to the Transfer Agency Agreement,
including reimbursement for out-of-pocket expenses, aggregated $1,697,281. At
September 30, 1996, the Fund had 108,558 shareholder accounts. At this level of
accounts, the annual fee payable to the Transfer Agent would aggregate
approximately $1.5 million, 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.
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.
35
<PAGE> 38
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, should be less than
100%. (The portfolio turnover rate is calculated by dividing the lesser of
purchases or sales of portfolio securities for the particular fiscal year by the
monthly average 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, 1995 and 1996, the Fund's portfolio
turnover rate was 55.23% and 80.20%, 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 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.
36
<PAGE> 39
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 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 or from an excess of
net short-term capital gains over net long-term capital losses (together
referred to hereafter as "ordinary income dividends") are taxable to
shareholders as ordinary income. Distributions, if any, from the excess of net
long-term capital gains over net short-term capital losses derived from the sale
of securities or from certain transactions in interest rate swaps ("capital gain
dividends") are taxable as long-term capital gains, regardless of the length of
time the shareholder has owned Fund shares. 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. Not later than 60 days after the close of the
taxable year, the Fund will provide its shareholders with a written notice
designating the amounts of any ordinary income dividends or capital gain
dividends. Distributions by the Fund, whether from ordinary income or capital
gains, generally will not be eligible for the dividends received deduction
allowed to corporations under the Code. If the Fund pays a dividend in January
which was declared in the previous October, November or December to shareholders
of record on a specified date in one of such months, then such dividend 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.
37
<PAGE> 40
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. While the Fund intends to distribute its income and
capital gains in the manner necessary to minimize imposition of the 4% excise
tax, there can be no assurance that sufficient amounts of the Fund's taxable
income and capital gains will be distributed to avoid entirely the imposition of
the tax. In such event, the Fund will be liable for the tax only on the amount
by which it does not meet the foregoing distribution requirements.
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 a question as
to whether distributions on such preferred stock are "preferential" under the
Code and therefore not eligible for the dividends paid deduction. The Fund
intends to rely on the advice of its counsel 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 or the Internal Revenue Service has ruled will not
result in the payment of preferential dividends. 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 payments under certain
circumstances. Additionally, because the treatment of swaps under the RIC
38
<PAGE> 41
qualification rules is not clear, 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 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 who,
after such Tender Offer, is not considered to own any shares under attribution
rules contained in the Code will realize a taxable gain or loss depending upon
such shareholder's 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
39
<PAGE> 42
subject to taxable dividend treatment and a remote risk exists that the
remaining shareholders may be considered to have received a deemed distribution.
------------------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations are subject to change by legislative, judicial, or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund at the net asset value per share next
determined on the payable date of such dividend or distribution. A shareholder
may at any time, by request to his Merrill Lynch financial consultant or by
written notification or by telephone (1-800-MER-FUND) 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. Cash payments can also be directly deposited to the
shareholder's bank account. No Early Withdrawal Charge will be imposed upon
redemption of shares issued as a result of the automatic reinvestment of
dividends or capital gains distributions.
The 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
The net asset value per share of Common Stock is determined Monday through
Friday as of 15 minutes after the close of business on the NYSE (generally, 4:00
p.m., New York time), on each day during which the NYSE is open. The NYSE 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 liquidation value of the outstanding shares of
preferred stock is divided by the total number of shares of Common Stock
outstanding at such time. Expenses, including the fees payable to the Investment
Adviser, are accrued daily.
Corporate Loans will be valued in accordance with guidelines established by
the Board of Directors. Under the Fund's current guidelines, Corporate Loans for
which an active secondary market exists to a reliable degree in the opinion of
the Investment Adviser and for which the Investment Adviser can obtain at least
two quotations from banks or dealers in Corporate Loans will be valued by the
Investment Adviser by
40
<PAGE> 43
calculating the mean of the last available bid and asked prices in the market
for such Corporate Loans, and then using the mean of those two means. If only
one quote for a particular Corporate Loan is available, such Corporate Loan will
be valued on the basis of the mean of the last available bid and asked prices in
the market. For Corporate Loans for which an active secondary market does not
exist to a reliable degree in the opinion of the Investment Adviser, such
Corporate Loans will be valued by the Investment Adviser at fair value, which is
intended to approximate market value. In valuing a Corporate Loan at fair value,
the Investment Adviser will consider, among other factors, (i) the
creditworthiness of the Borrower and any Intermediate Participants, (ii) the
current interest rate, period until 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.
Other portfolio securities (other than short-term obligations but including
listed issues) may be valued on the basis of prices furnished by one or more
pricing services which determine prices for normal, institutional-size trading
units of such securities using market information, transactions for comparable
securities and various relationships between securities which are generally
recognized by institutional traders. In certain circumstances, such other
portfolio securities are valued at the last sale price on the exchange that is
the primary market for such securities, or the last quoted bid price for those
securities for which the over-the-counter market is the primary market or for
listed securities in which there were no sales during the day. The value of
interest rate swaps, caps and floors is determined in accordance with a formula
and then confirmed periodically by obtaining a bank quotation. Positions in
options are valued at the last sale price on the market where any such option is
principally traded. Obligations with remaining maturities of 60 days or less are
valued at amortized cost unless this method no longer produces fair valuations.
Repurchase agreements are valued at cost plus accrued interest. Rights or
warrants to acquire stock, or stock acquired pursuant to the exercise of a right
or warrant, may be valued taking into account various factors such as original
cost to the Fund, earnings and net worth of the issuer, market prices for
securities of similar issuers, assessment of the 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 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.
41
<PAGE> 44
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, 1996, exclusive of that held by the Fund.
<TABLE>
<CAPTION>
AMOUNT
OUTSTANDING AS
OF OCTOBER 31,
1996 (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 -- 287,792,737
</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;
(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.
42
<PAGE> 45
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, 1996, the Fund earned $0.664 per
share income dividends, representing a net annualized yield of 6.59%, based on a
month-end per share net asset value of $9.99.
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, 1996, the annual total
return of the Fund was 6.53%, based on the change in per share net asset value
from $10.02 to $9.99, and assuming reinvestment of $0.672 per share income
dividends. For the period November 3, 1989 (commencement of operations) to
August 31, 1996, the aggregate total return of the Fund was 60.36%, based on the
change in per share net asset value from $10.00 to $9.99, and assuming
reinvestment of $4.736 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 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
43
<PAGE> 46
averages and the other yield data described above to each other. As with yield
quotations, yield comparisons should not be considered indicative 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 Merrill Lynch 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:
Merrill Lynch Financial Data Services, Inc.
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 Merrill Lynch Financial Data Services, Inc. at (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 LLP, One World Trade Center, New
York, New York 10048-0557.
INDEPENDENT AUDITORS
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, 1996, 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 five-year period then ended. 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, 1996 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, 1996, 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.
Deloitte & Touche LLP
Princeton, New Jersey
October 18, 1996
45
<PAGE> 48
<TABLE>
SCHEDULE OF INVESTMENTS (in Thousands)
<CAPTION>
Face Loan Moody's Stated Value
Industries Amount Borrower Type Rating Maturity* (Note 1b)
Senior Secured Floating Rate Loan Interests*
<S> <C> <S> <S> <S> <S> <C>
Advertising-- $17,500 Eller Industries, Inc. Term A NR++ 6/30/02 $ 17,533
1.93% 14,327 Eller Industries, Inc. Term B NR++ 12/21/03 14,376
12,500 Outdoor Systems, Inc. Term B NR++ 12/31/02 12,516
9,167 Outdoor Systems, Inc. Term C NR++ 12/31/03 9,178
3,333 Outdoor Systems, Inc. Term C NR++ 12/31/03 3,338
Total Advertising (Cost--$56,069) 56,941
Aircraft & 5,000 Banner Industries, Inc. Term B NR++ 6/30/03 5,000
Parts--0.97% 4,612 Gulfstream Aerospace Corp. Term NR++ 3/31/97 4,615
9,260 Gulfstream Aerospace Corp. Term NR++ 3/31/98 9,263
4,041 Howmet Corp. Term B Ba3 11/20/02 4,056
2,237 Howmet Corp. Term C Ba3 5/20/03 2,246
3,500 Technetics Term NR++ 6/20/02 3,504
Total Aircraft & Parts (Cost--$28,540) 28,684
Amusement & 21,481 AMF Group, Inc. Axel A Ba3 3/31/03 21,629
Recreational 8,473 AMF Group, Inc. Axel B NR++ 3/31/04 8,553
Services-- 4,167 Amfac Parks, Inc. Term B NR++ 9/30/02 4,143
2.54% 10,000 Metro Goldwyn Mayer Co. Term NR++ 3/31/04 9,988
4,956 Orion Pictures Corp. Term Ba2 12/31/00 4,912
6,500 Panavision Inc. Term B NR++ 3/31/04 6,492
18,911 Six Flags Entertainment Corp. Term B Ba3 6/23/03 18,958
Total Amusement & Recreational Services (Cost--$74,176) 74,675
Apparel--0.33% 9,900 Humphreys Inc. Term B NR++ 1/15/03 9,800
Total Apparel (Cost--$9,800) 9,800
Automobile 24,683 Collins & Aikman Corp. Term B B1 12/31/02 24,667
Equipment-- 420 Johnstown America Industrial Inc. Revolving Credit B1 3/31/02 401
1.61% 3,267 Johnstown America Industrial Inc. Term A B1 3/31/02 3,177
19,667 Johnstown America Industrial Inc. Term B B1 3/31/03 19,323
Total Automobile Equipment (Cost--$47,755) 47,568
Broadcast-- 4,600 Benedek Broadcasting Corp. Axel A Ba3 5/01/01 4,640
Radio & TV-- 4,500 Benedek Broadcasting Corp. Axel B Ba3 11/01/02 4,539
1.93% 3,989 Chancellor Broadcasting Inc. Term B Ba2 9/01/03 4,009
4,837 Ellis Communications Term B NR++ 3/31/03 4,849
16,770 Silver King Communications, Inc. Term B NR++ 7/31/02 16,728
12,000 Sinclair Broadcasting Group Inc. Term B NR++ 11/30/03 12,075
10,000 Sullivan Broadcasting Term B NR++ 12/31/03 10,025
Total Broadcast--Radio & TV (Cost--$56,450) 56,865
Building 4,506 Fenway Holdings, Inc. Term B NR++ 9/15/02 4,489
Materials-- 23,094 MTF Acquisition Term B NR++ 12/31/02 23,152
2.57% 29,975 National Gypsum Co. Term B NR++ 9/20/03 30,087
8,000 RSI Home Products Term NR++ 11/30/99 7,970
9,917 Walter Industrials, Inc. Term B NR++ 2/22/03 9,929
Total Building Materials (Cost--$75,186) 75,627
Cable TV 6,000 Cablevision of Ohio Term NR++ 12/31/05 5,996
Services-- 24,375 Chelsea Communications Term B NR++ 9/30/04 24,322
6.79% 20,000 Classic Cable Inc. Term B B1 6/30/05 19,900
18,810 Coaxial Communications Term B NR++ 12/31/99 18,763
5,000 Frontier Vision Term B NR++ 6/30/05 4,981
10,000 Intermedia Communications, Inc. Term Ba3 1/1/05 10,025
</TABLE>
46
<PAGE> 49
<TABLE>
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
<CAPTION>
Face Loan Moody's Stated Value
Industries Amount Borrower Type Rating Maturity* (Note 1b)
Senior Secured Floating Rate Loan Interests*
<S> <C> <S> <S> <S> <S> <C>
Cable TV $ 3,937 Marcus Cable Operating Co. Revolving Credit NR++ 4/30/14 $ 3,908
Services 33,937 Marcus Cable Operating Co. Term A NR++ 12/31/02 33,895
(concluded) 43,000 Marcus Cable Operating Co. Term B NR++ 4/30/04 43,242
10,000 Triax Midwest Term B NR++ 6/30/05 9,950
25,000 Viacom, Inc. Term Ba2 7/1/02 24,992
Total Cable TV Services (Cost--$199,083) 199,974
Chemicals-- 9,250 Cedar Chemical Term B NR++ 10/31/03 9,256
3.79% 26,662 Freedom Chemical Company Term B Ba3 6/30/02 26,596
5,071 Harris Specialty Chemicals Revolving Credit NR++ 12/30/01 4,691
229 Harris Specialty Chemicals Term A NR++ 12/30/01 212
366 Harris Specialty Chemicals Term A NR++ 12/30/01 339
1,035 Harris Specialty Chemicals Term B NR++ 12/30/99 957
4,902 Harris Specialty Chemicals Term B NR++ 12/30/01 4,534
1,508 Huntsman Corp. Revolving Credit NR++ 12/31/02 1,498
22,180 Huntsman Corp. Term NR++ 12/31/02 22,111
5,000 Hydrochem Term B NR++ 7/01/02 4,941
2,908 Inspec Chemical Corp. Term B NR++ 12/02/00 2,918
20,000 Sterling Chemicals, Inc. Term B B3 9/30/04 20,000
7,000 Texas Petrochemicals Term B Ba3 6/30/04 6,974
2,175 Thoro World Systems, Inc. Term A NR++ 12/31/00 2,012
4,849 Thoro World Systems, Inc. Term B NR++ 12/31/02 4,485
Total Chemicals (Cost--$112,516) 111,524
Consumer 3,212 Playtex Family Products Inc. Term A Ba2 6/30/02 3,190
Products-- 29,981 Playtex Family Products Inc. Term B Ba2 6/30/02 29,775
2.12% 7,246 RTI Funding Corp. Term B NR++ 2/07/03 7,255
7,246 RTI Funding Corp. Term C NR++ 2/07/04 7,255
15,000 Revlon Consumer Products Corp. Term Ba3 9/30/00 15,009
Total Consumer Products (Cost--$62,268) 62,484
Diversified 2,740 IMO Industries, Inc. Term A Ba3 4/30/01 2,740
Manufacturing-- 3,822 IMO Industries, Inc. Term B Ba3 4/30/01 3,829
0.93% 8,437 InterMetro Industries Term B NR++ 6/30/03 8,453
6,562 InterMetro Industries Term C NR++ 6/30/04 6,581
5,940 Thermadyne Industries, Inc. Revolving Credit B2 6/30/01 5,920
Total Diversified Manufacturing (Cost--$27,465) 27,523
Drug/ 6,526 Duane Reade Co. Term A NR++ 9/30/97 6,323
Proprietary 10,000 Duane Reade Co. Term B NR++ 9/30/99 9,688
Stores-- 8,312 Smith's Food & Drug Centers, Inc. Term B Ba3 11/30/03 8,375
2.25% 8,312 Smith's Food & Drug Centers, Inc. Term C Ba3 11/30/04 8,380
8,312 Smith's Food & Drug Centers, Inc. Term D Ba3 8/31/05 8,385
15,480 Thrifty Payless Holdings, Inc. Revolving Credit B1 12/31/02 15,228
10,000 Thrifty Payless Holdings, Inc. Term A B1 12/31/02 9,922
Total Drug/Proprietary Stores (Cost--$66,439) 66,301
Electronics/ 21,450 Berg Electronics Inc. Term Ba3 12/31/02 21,423
Electrical 5,617 Communications & Power Industries Inc. Term B NR++ 8/11/02 5,610
Components-- 4,831 Details, Inc. Term A NR++ 1/31/01 4,831
3.84% 9,955 International Wire Corp. Term B NR++ 9/30/02 9,970
9,974 International Wire Corp. Term C NR++ 9/30/03 10,005
16,344 Northrop Grumman Corp. Term II NR++ 3/01/02 16,318
565 Reliance Communications Technology Revolving Credit NR++ 9/11/01 564
4,500 Reliance Communications Technology Term A NR++ 9/11/01 4,494
</TABLE>
47
<PAGE> 50
<TABLE>
SCHEDULE OF INVESTMENTS (continued)) (in Thousands)
<CAPTION>
Face Loan Moody's Stated Value
Industries Amount Borrower Type Rating Maturity* (Note 1b)
Senior Secured Floating Rate Loan Interests*
<S> <C> <S> <S> <S> <S> <C>
Electronics/ $12,893 Reliance Communications Technology Term B NR++ 3/11/04 $ 12,905
Electrical 11,903 Reliance Communications Technology Term C NR++ 3/11/03 11,914
Components 7,460 Tracor Inc. Term B Ba3 10/31/00 7,483
(concluded) 7,461 Tracor Inc. Term C Ba3 4/30/01 7,484
Total Electronics/Electrical Components (Cost--$112,613) 113,001
Food & 7,481 American Italian Pasta Term C NR++ 2/28/04 7,416
Kindred 7,500 Amerifoods Term B NR++ 6/30/01 5,625
Products-- 7,500 Amerifoods Term C NR++ 6/30/02 5,625
5.53% 3,990 Ameriking Inc. Term B NR++ 1/31/04 3,992
8,611 MAFCO Worldwide Corp. Term B NR++ 6/30/01 8,589
4,907 President Baking Co., Inc. Term B NR++ 9/30/00 4,895
13,600 SC International Corp., Inc. Caterair 'A' B2 9/15/00 13,583
8,791 SC International Corp., Inc. Caterair 'B' B2 9/15/01 8,835
14,356 SC International Corp., Inc. SCI 'A' B2 9/15/00 14,335
1,027 SC International Corp., Inc. SCI 'A2' B2 9/15/00 1,024
10,962 SC International Corp., Inc. SCI 'B' B2 9/15/02 11,016
3,024 SC International Corp., Inc. SCI 'C' B2 9/15/03 3,040
2,000 Select Beverages Inc. Term B NR++ 6/30/01 2,000
2,970 Select Beverages Inc. Term C NR++ 6/30/01 2,977
43,159 Specialty Foods Corp. Term B B3 4/30/01 43,048
7,385 Van De Kamps Inc. Term B Ba3 4/30/03 7,403
4,615 Van De Kamps Inc. Term C Ba3 9/30/03 4,627
6,652 Volume Services Term B NR++ 12/31/02 6,636
3,326 Volume Services Term C NR++ 12/31/03 3,326
4,969 Windsor Quality Food Term B NR++ 12/31/02 4,944
Total Food & Kindred Products (Cost--$165,634) 162,936
Funeral Homes 7,980 Loewen Group Inc. Revolving Credit Ba1 5/29/01 7,955
& Parlors-- 15,000 Prime Succession International Group Axel NR++ 7/25/01 15,187
0.79%
Total Funeral Homes & Parlors (Cost--$22,924) 23,142
Furniture & 4,945 Furniture Brands International Term B Ba3 3/29/03 4,966
Fixtures-- 11,370 Knoll, Inc. Term B B1 8/31/03 11,413
1.07% 15,000 Lifestyle Furnishings International Term B NR++ 8/31/04 15,038
Total Furniture & Fixtures (Cost--$31,153) 31,417
General 11,719 Federated Department Stores Inc. Revolving Credit Ba1 3/31/00 11,528
Merchandise 26,677 Federated Department Stores Inc. Term Ba1 3/31/00 26,611
Stores--3.14% 2,614 Federated Department Stores Inc. Term B Ba1 3/31/00 2,607
35,000 Kmart Corp. Term A Ba1 6/17/99 35,011
4,485 Music Acquisition Term B NR++ 8/31/01 1,615
4,952 Music Acquisition Term C NR++ 8/31/02 1,783
1,902 Saks & Co. Term A NR++ 6/30/98 1,897
11,320 Saks & Co. Term B NR++ 6/30/00 11,292
Total General Merchandise Stores (Cost--$97,699) 92,344
Grocery 10,400 Big V Supermarkets Inc. Term B NR++ 3/15/00 10,244
Stores--2.28% 4,863 Bruno's, Inc. Term B B1 2/18/02 4,887
4,863 Bruno's, Inc. Term C B1 2/18/03 4,887
4,294 Dominick's Finer Foods Inc. Term B Ba2 3/31/02 4,315
4,652 Dominick's Finer Foods Inc. Term C Ba2 3/31/03 4,675
4,652 Dominick's Finer Foods Inc. Term D Ba2 9/30/03 4,675
4,530 Pathmark Stores Inc. Term B Ba3 10/31/99 4,532
3,700 Ralph's Grocery Company Revolving Credit Ba3 6/15/01 3,628
3,316 Ralph's Grocery Company Term A Ba3 6/15/01 3,318
4,860 Ralph's Grocery Company Term B Ba3 6/15/02 4,884
</TABLE>
48
<PAGE> 51
<TABLE>
SCHEDULE OF INVESTMENTS (continued)) (in Thousands)
<CAPTION>
Face Loan Moody's Stated Value
Industries Amount Borrower Type Rating Maturity* (Note 1b)
Senior Secured Floating Rate Loan Interests*
<S> <C> <S> <S> <S> <S> <C>
Grocery $ 4,859 Ralph's Grocery Company Term C Ba3 6/15/03 $ 4,879
Stores 4,859 Ralph's Grocery Company Term D Ba3 2/15/04 4,909
(concluded) 4,197 Star Markets Co., Inc. Term B Ba3 12/31/01 4,182
3,145 Star Markets Co., Inc. Term C Ba3 12/31/02 3,133
Total Grocery Stores (Cost--$66,624) 67,148
Health 16,336 Community Health Systems, Inc. Term B NR++ 12/31/03 16,376
Services-- 16,336 Community Health Systems, Inc. Term C NR++ 12/31/04 16,376
3.50% 12,329 Community Health Systems, Inc. Term D NR++ 12/31/05 12,360
3,273 Dade International, Inc. Term B B1 12/31/02 3,293
3,273 Dade International, Inc. Term C B1 12/31/03 3,297
3,455 Dade International, Inc. Term D B1 12/31/04 3,487
4,909 Medical Specialties Term NR++ 6/30/01 4,894
13,091 Medical Specialties Axel NR++ 6/30/01 13,050
6,491 Merit Behavioral Care Corp. Term A B2 4/06/02 6,465
16,009 Merit Behavioral Care Corp. Term B B2 10/06/03 16,019
3,088 OrNda Healthcare Corp. Revolving Credit NR++ 10/30/01 3,086
4,534 OrNda Healthcare Corp. Term A NR++ 10/30/01 4,536
Total Health Services (Cost--$102,597) 103,239
Leasing & 19,760 Prime Acquisition Term B1 12/31/00 19,772
Rental
Services--
0.67%
Total Leasing & Rental Services (Cost--$19,675) 19,772
Manufacturing-- 10,492 Calmar Inc. Axel A B1 9/15/03 10,433
1.12% 7,869 Calmar Inc. Axel B B1 3/15/04 7,840
14,700 Trans Technology Corp. Term B NR++ 6/30/02 14,663
Total Manufacturing (Cost--$32,838) 32,936
Measuring, 9,331 CHF/Ebel USA Inc. Term B NR++ 9/30/01 9,184
Analyzing & 10,956 Graphic Controls Corp. Term B B1 9/28/03 10,976
Controlling
Instruments--
0.68%
Total Measuring, Analyzing & Controlling Instruments (Cost--$20,088) 20,160
Message 5,000 Dictaphone Co. Term B B1 6/30/02 4,800
Communications--
0.16%
Total Message Communications (Cost--$4,967) 4,800
Metals & 5,000 Anker Coal Term B NR++ 6/30/04 4,988
Mining-- 220 UCAR International Inc. Revolving Credit Ba3 12/31/01 220
0.61% 1,319 UCAR International Inc. Term A Ba3 12/31/01 1,320
11,571 UCAR International Inc. Term B Ba3 12/31/03 11,586
Total Metals & Mining (Cost--$18,076) 18,114
Packaging-- 8,625 IPC, Inc. Term B1 9/30/01 8,636
1.64% 5,800 Mail-Well, Inc./Supremex Revolving Credit Ba2 7/31/03 5,811
9,541 Mail-Well, Inc./Supremex Term B Ba2 7/31/03 9,560
7,170 Silgan Corp. Revolving Credit Ba3 12/31/00 7,166
16,794 Silgan Corp. Term B Ba3 3/15/02 16,999
Total Packaging (Cost--$47,744) 48,172
Paper-- 19,850 Crown Paper Co. Term B Ba3 8/22/03 19,949
11.70% 21,919 Fort Howard Corp. Term A Ba3 3/08/02 21,947
16,760 Fort Howard Corp. Term B Ba3 12/31/02 16,864
274 Jefferson Smurfit Company/Container
Corp. of America Revolving Credit Ba3 4/30/01 270
25,012 Jefferson Smurfit Company/Container
Corp. of America Term A Ba3 4/30/01 24,942
</TABLE>
49
<PAGE> 52
<TABLE>
SCHEDULE OF INVESTMENTS (continued)) (in Thousands)
<CAPTION>
Face Loan Moody's Stated Value
Industries Amount Borrower Type Rating Maturity* (Note 1b)
Senior Secured Floating Rate Loan Interests*
<S> <C> <S> <S> <S> <S> <C>
Paper $ 6,786 Jefferson Smurfit Company/Container
(concluded) Corp. of America Term B Ba3 4/30/01 $ 6,829
49,530 Jefferson Smurfit Company/Container
Corp. of America Term B Ba3 4/30/02 49,839
13,210 Jefferson Smurfit Company/Container
Corp. of America Term C Ba2 10/31/02 13,292
63,571 Riverwood International Corp. Term B Ba3 2/28/04 63,850
24,429 Riverwood International Corp. Term C Ba3 8/28/04 24,535
29,744 S.D. Warren Co. Term B Ba2 6/30/02 29,847
36,820 Stone Container Corp. Term B Ba3 4/01/00 36,981
25,372 Stone Container Corp. Term C Ba3 4/01/00 25,499
10,000 Stone Container Corp. Term D Ba3 10/01/03 10,050
Total Paper (Cost--$340,762) 344,694
Printing & 7,500 Advanstar Communications Term B NR++ 12/21/03 7,467
Publishing-- 21,358 American Media Term B Ba2 9/30/02 21,251
3.17% 9,312 Journal News Co. Term NR++ 12/31/01 9,289
7,000 Marvel Entertainment Group, Inc. Term B NR++ 2/28/02 6,921
3,452 Print Tech International PLC Term B NR++ 12/29/01 3,424
10,000 Treasure Chest Term NR++ 12/31/02 10,025
35,000 World Color Press, Inc. Term C B1 12/29/02 34,891
Total Printing & Publishing (Cost--$93,381) 93,268
Rendering-- 4,990 CBP Resources Inc. Term B NR++ 9/30/03 4,993
0.17%
Total Rendering (Cost--$4,954) 4,993
Security 9,920 Borg Warner Corp. Term B3 12/31/98 9,901
Systems
Services--
0.34%
Total Security Systems Services (Cost--$9,842) 9,901
Telephone 8,000 Arch Communications Group, Inc. Term B B1 12/31/03 8,027
Communica- 18,316 Comcast Corp. Term Ba3 9/30/04 18,219
tions--3.14% 808 MobileMedia Corp. Revolving Credit B1 6/30/02 801
13,034 MobileMedia Corp. Term A B1 6/30/02 13,052
1,667 MobileMedia Corp. Term B1 B1 6/30/02 1,672
9,667 MobileMedia Corp. Term B B1 6/30/03 9,637
3,333 MobileMedia Corp. Term B2 B1 6/30/03 3,343
12,712 Paging Network Inc. Revolving Credit Ba2 12/31/04 12,688
4,964 Shared Technologies Cellular, Inc. Term B B1 3/31/03 4,946
20,000 Western Wireless Corp. Term B B1 3/31/05 20,144
Total Telephone Communications (Cost--$92,096) 92,529
Textiles/Mill 10,000 Polymer Group, Inc. Term A Ba3 3/31/02 9,975
Products--
0.34%
Total Textiles/Mill Products (Cost--$9,966) 9,975
Transportation 7,546 Atlas Air, Inc. Revolving Credit NR++ 6/30/98 7,532
Services-- 25,000 Continental Micronesia Axel NR++ 7/31/03 25,016
1.39% 8,373 Petro PSC Properties L.P. Term B NR++ 5/24/01 8,315
Total Transportation Services (Cost--$40,702) 40,863
Waste Manage- 5,000 American Disposal Services, Inc. Term NR++ 6/30/03 4,969
ment--0.17%
Total Waste Management (Cost--$4,969) 4,969
Total Senior Secured Floating Rate Loan Interests (Cost--$2,155,051)--73.21% 2,156,339
</TABLE>
50
<PAGE> 53
<TABLE>
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
<CAPTION>
Shares Value
Industries Held Equity Investments (Note 1b)
<S> <C> <S> <C>
Broadcast/ 1 Classic Cable, Inc. (Warrants) (a) $ --
Media--0.00%
Restaurants-- 44 Flagstar Companies, Inc. 93
0.00%
Total Equity Investments (Cost--$0)--0.00% 93
Total Long-Term Investments (Cost--$2,155,051)--73.21% 2,156,432
Short-Term Investments
Commercial American Express Credit Corp. ($40,000 par, maturing 10/11/1996, yielding 5.30%) 39,776
Paper**--25.60% CIT Group Holdings Inc. ($25,000 par, maturing 9/10/1996, yielding 5.32%) 24,974
CIT Group Holdings Inc. ($32,000 par, maturing 9/23/1996, yielding 5.35%) 31,905
CIT Group Holdings Inc. ($30,000 par, maturing 10/04/1996, yielding 5.31%) 29,863
Ciesco L.P. ($30,000 par, maturing 9/06/1996, yielding 5.40%) 29,987
Ciesco L.P. ($50,000 par, maturing 10/16/1996, yielding 5.28%) 49,685
General Electric Capital Corp. ($62,560 par, maturing 9/03/1996, yielding 5.30%) 62,560
Goldman Sachs Group L.P. ($50,000 par, maturing 9/06/1996, yielding 5.42%) 49,977
Goldman Sachs Group L.P. ($50,000 par, maturing 9/20/1996, yielding 5.28%) 49,875
Goldman Sachs Group L.P. ($30,000 par, maturing 10/07/1996, yielding 5.30%) 29,850
Knight-Ridder Inc. ($48,500 par, maturing 9/23/1996, yielding 5.28%) 48,358
Monsanto Co. ($10,000 par, maturing 9/06/1996, yielding 5.40%) 9,995
National Fleet Fund, Inc. ($20,000 par, maturing 9/13/1996, yielding 5.35%) 19,970
National Fleet Fund, Inc. ($28,700 par, maturing 9/16/1996, yielding 5.40%) 28,644
National Fleet Fund, Inc. ($10,500 par, maturing 10/01/1996, yielding 5.33%) 10,456
National Fleet Fund, Inc. ($15,000 par, maturing 10/02/1996, yielding 5.29%) 14,936
Preferred Receivables Funding, Inc. ($50,225 par, maturing 9/04/1996, yielding
5.35%) 50,218
Preferred Receivables Funding, Inc. ($34,825 par, maturing 9/09/1996, yielding
5.42%) 34,794
Preferred Receivables Funding, Inc. ($30,000 par, maturing 9/10/1996, yielding
5.38%) 29,969
Shell Oil Co. ($20,000 par, maturing 9/04/1996, yielding 5.36%) 19,997
USAA Capital Corp. ($30,000 par, maturing 9/03/1996, yielding 5.40%) 30,000
Xerox Corp. ($30,000 par, maturing 9/18/1996, yielding 5.35%) 29,933
Xerox Credit Corp. ($28,600 par, maturing 10/11/1996, yielding 5.27%) 28,441
Total Commercial Paper (Cost--$754,163) 754,163
US Government Federal Home Loan Mortgage Corp. ($23,000 par, maturing 9/26/1996, yielding 5.28%) 22,922
& Agency
Obligations**--
0.78%
Total US Government & Agency Obligations (Cost--$22,922) 22,922
Total Short-Term Investments (Cost--$777,085)--26.38% 777,085
Total Investments (Cost--$2,932,136)--99.59% 2,933,517
Other Assets Less Liabilities--0.41% 12,010
----------
Net Assets--100.00% $2,945,527
==========
<FN>
(a)Warrants entitle the Fund to purchase a predetermined number of
common stock. The purchase price and numbers of share are subject to
adjustment under certain conditions until the expiration date.
++Not Rated.
Ratings of issues shown have not been audited by Deloitte &
Touche LLP.
*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, 1996.
**Commercial Paper and certain US Government & Agency Obligations
are traded on a discount basis; the interest rates shown are the
discount rates paid at the time of purchase by the Fund.
See Notes to Financial Statements.
</TABLE>
51
<PAGE> 54
FINANCIAL INFORMATION
<TABLE>
Statement of Assets and Liabilities as of August 31, 1996
<S> <S> <C> <C>
Assets: Investments, at value (identified cost--$2,932,135,993) (Note 1b) $ 2,933,517,310
Cash 2,660,488
Receivables:
Interest $ 17,464,064
Capital shares sold 2,846,301
Commitment fees 243,999 20,554,364
----------------
Prepaid registration fees and other assets (Note 1f) 1,680,474
----------------
Total assets 2,958,412,636
----------------
Liabilities: Payables:
Dividends to shareholders (Note 1g) 3,531,978
Investment adviser (Note 2) 2,500,916
Administrator (Note 2) 658,136
Securities purchased 210,453 6,901,483
----------------
Deferred income (Note 1e) 2,944,484
Accrued expenses and other liabilities 3,039,323
----------------
Total liabilities 12,885,290
----------------
Net Assets: Net assets $ 2,945,527,346
================
Net Assets Common Stock, par value $0.10 per share; 1,000,000,000
Consist of: shares authorized $ 29,484,938
Paid-in capital in excess of par 2,922,519,503
Accumulated realized capital losses on investments--net (Note 7) (7,858,412)
Unrealized appreciation on investments--net (Note 3) 1,381,317
----------------
Net Assets--Equivalent to $9.99 per share based on 294,849,377
shares of beneficial interest outstanding $ 2,945,527,346
================
</TABLE>
<TABLE>
Statement of Operations
<CAPTION>
For the Year Ended August 31, 1996
<S> <S> <C> <C>
Investment Income Interest and discount earned $ 210,982,851
(Note 1e): Facility and other fees 4,338,982
Dividends 149
----------------
Total income 215,321,982
----------------
Expenses: Investment advisory fees (Note 2) $ 25,872,222
Administrative fees (Note 2) 6,808,480
Transfer agent fees (Note 2) 1,697,281
Registration fees (Note 1f) 707,018
Accounting services (Note 2) 401,728
Professional fees 368,275
Tender offer costs 189,772
Custodian fees 189,706
Printing and shareholder reports 173,171
Borrowing costs (Note 6) 141,903
Directors' fees and expenses 47,788
Other 28,416
----------------
Total expenses 36,625,760
----------------
Investment income--net 178,696,222
----------------
Realized & Realized loss on investments--net (8,718,939)
Unrealized Change in unrealized appreciation on investments--net 1,207,962
Gain (Loss) on ----------------
Investments--Net Net Increase in Net Assets Resulting from Operations $ 171,185,245
(Notes 1c, 1e & 3): ================
See Notes to Financial Statements.
</TABLE>
52
<PAGE> 55
FINANCIAL INFORMATION (continued)
<TABLE>
Statements of Changes in Net Assets
<CAPTION>
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1996 1995
<S> <S> <C> <C>
Operations: Investment income--net $ 178,696,222 $ 107,081,243
Realized gain (loss) on investments--net (8,718,939) 901,282
Change in unrealized appreciation/depreciation on
investments--net 1,207,962 (102,235)
---------------- ----------------
Net increase in net assets resulting from operations 171,185,245 107,880,290
---------------- ----------------
Dividends to Investment income--net (178,696,222) (107,081,243)
Shareholders ---------------- ----------------
(Note 1g): Net decrease in net assets resulting from dividends to
shareholders (178,696,222) (107,081,243)
---------------- ----------------
Capital Share Net increase in net assets resulting from capital share
Transactions transactions 789,568,710 1,228,207,869
(Note 4): ---------------- ----------------
Net Assets: Total increase in net assets 782,057,733 1,229,006,916
Beginning of year 2,163,469,613 934,462,697
---------------- ----------------
End of year $ 2,945,527,346 $ 2,163,469,613
================ ================
</TABLE>
<TABLE>
Statement of Cash Flows
<CAPTION>
For the Year Ended
August 31, 1996
<S> <S> <C>
Cash Provided by Net increase in net assets resulting from operations $ 171,185,245
Operating Adjustments to reconcile net increase (decrease) in net assets
Activities: resulting from operations to net cash provided by operating activities:
Increase in receivables (2,336,872)
Increase in other assets (61,009)
Increase in other liabilities 5,662,709
Realized and unrealized loss on investments--net 7,510,977
Amortization of discount (45,530,880)
----------------
Net cash provided by operating activities 136,430,170
----------------
Cash Used for Proceeds from principal payments and sales of loan interests 1,502,664,427
Investing Purchases of loan interests (2,009,125,818)
Activities: Purchases of short-term investments (24,131,663,141)
Proceeds from sales and maturities of short-term investments 23,873,927,588
----------------
Net cash used for investing activities (764,196,944)
----------------
Cash Provided by Cash receipts on capital shares sold 993,247,884
Financing Cash payments on capital shares tendered (273,723,209)
Activities: Dividends paid to shareholders (89,097,413)
----------------
Net cash provided by financing activities 630,427,262
----------------
Cash: Net increase in cash 2,660,488
Cash at beginning of year 0
----------------
Cash at end of year $ 2,660,488
================
Non-Cash Capital shares issued in reinvestment of dividends paid to shareholders $ 90,287,773
Financing ================
Activities:
See Notes to Financial Statements.
</TABLE>
53
<PAGE> 56
FINANCIAL INFORMATION (concluded)
<TABLE>
Financial Highlights
The following per share data and ratios have been derived
from information provided in the financial statements.
For the Year Ended August 31,
Increase (Decrease) in Net Asset Value: 1996 1995 1994 1993 1992
<S> <S> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $ 10.02 $ 10.02 $ 10.02 $ 9.99 $ 9.99
Operating -------- -------- -------- -------- --------
Performance: Investment income--net .66 .75 .59 .53 .64
Realized and unrealized gain (loss) on
investments--net (.03) --++ --++ .03 --
-------- -------- -------- -------- --------
Total from investment operations .63 .75 .59 .56 .64
-------- -------- -------- -------- --------
Less dividends from investment income--net (.66) (.75) (.59) (.53) (.64)
-------- -------- -------- -------- --------
Net asset value, end of year $ 9.99 $ 10.02 $ 10.02 $ 10.02 $ 9.99
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 6.53% 7.68% 5.94% 5.74% 6.58%
Return:* ======== ======== ======== ======== ========
Ratios to Expenses, net of reimbursement 1.34% 1.34% 1.43% 1.47% 1.39%
Average ======== ======== ======== ======== ========
Net Assets: Expenses 1.34% 1.34% 1.43% 1.47% 1.41%
======== ======== ======== ======== ========
Investment income--net 6.54% 7.45% 5.75% 5.27% 6.58%
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in millions) $ 2,946 $ 2,163 $ 934 $ 713 $ 834
Data: ======== ======== ======== ======== ========
Portfolio turnover 80.20% 55.23% 61.31% 90.36% 46.48%
======== ======== ======== ======== ========
<FN>
*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.
++Amount is less than $.01 per share.
See Notes to Financial Statements.
</TABLE>
54
<PAGE> 57
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 of the Fund's investment. Because
agents and intermediaries are primarily commercial banks, the Fund's
investment in corporate loans at August 31, 1996 could be considered
to be concentrated in commercial banking.
(b) Valuation of investments--Until June 17, 1996, Loan Interests
were valued at fair value as determined in good faith by or under
the direction of the Board of Directors of the Fund. As of June 17,
1996, pursuant to the approval of the Board of Directors, the Loan
Interests are valued at the average of the mean between the bid
and asked quotes received from one or more brokers, if available.
Other portfolio securities 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. 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) Derivative financial instruments--The Fund may engage in various
portfolio strategies to seek to increase its return by hedging its
portfolio against adverse movements in the debt markets. Losses may
arise due to changes in the value of the contract or if the
counterparty does not perform under the contract.
- - Interest rate transactions--The Fund is authorized to enter into
interest rate swaps and purchase or sell interest rate caps and
floors. In an interest rate swap, the Fund exchanges with another
party their respective commitments to pay or receive interest on a
specified notional principal amount. The purchase of an interest
rate cap (or floor) entitles the purchaser, to the extent that a
specified index exceeds (or falls below) a predetermined interest
rate, to receive payments of interest equal to the difference
between the index and the predetermined rate on a notional principal
amount from the party selling such interest rate cap (or floor).
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no Federal income tax
provision is required.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). Interest 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.
(f) Prepaid registration fees--Prepaid registration fees are charged
to expense as the related shares are issued.
(g) 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
Merrill Lynch Asset Management, L.P. ("MLAM"). The general partner
of MLAM is Princeton Services, Inc. ("PSI"), an indirect wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner.
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.
NOTES TO FINANCIAL STATEMENTS (concluded)
For such services, the Fund pays a monthly fee at an annual rate of
0.95% of the Fund's average daily net
55
<PAGE> 58
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, distribution fees, brokerage fees and 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 Fund's 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 during any fiscal year which will cause such expenses to exceed the most
restrictive expense limitation at the time of such payment.
Merrill Lynch Financial Data Services, Inc. ("MLFDS"), 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 directors of the Fund are officers and/or
directors of MLAM, PSI, Merrill Lynch, Pierce, Fenner & Smith Inc.,
MLFDS, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the year ended August 31, 1996 were $2,009,336,271 and
$1,502,664,427, respectively.
Net realized and unrealized gains (losses) as of August 31, 1996
were as follows:
Realized Unrealized
Losses Gains
Long-term investments $ (8,715,722) $ 1,381,317
Short-term investments (3,217) --
-------------- --------------
Total $ (8,718,939) $ 1,381,317
============== ==============
As of August 31, 1996, net unrealized appreciation for financial
reporting and Federal income tax purposes aggregated $1,227,650, of
which $14,145,679 is related to appreciated securities and
$12,918,029 is related to depreciated securities. The aggregate cost
of investments at August 31, 1996 for Federal income tax purposes
was $2,932,289,660.
4. Capital Share Transactions:
Transactions in capital shares were as follows:
For the Year Ended Dollar
August 31, 1996 Shares Amount
Shares sold 97,262,448 $ 973,004,146
Shares issued to share-
holders in reinvestment
of dividends 9,032,914 90,287,773
-------------- --------------
Total issued 106,295,362 1,063,291,919
Shares tendered (27,418,447) (273,723,209)
-------------- --------------
Net increase 78,876,915 $ 789,568,710
============== ==============
For the Year Ended Dollar
August 31, 1995 Shares Amount
Shares sold 129,276,626 $1,294,302,365
Shares issued to share-
holders in reinvestment
of dividends 5,015,241 50,211,612
-------------- --------------
Total issued 134,291,867 1,344,513,977
Shares tendered (11,618,992) (116,306,108)
-------------- --------------
Net increase 122,672,875 $1,228,207,869
============== ==============
5. Unfunded Loan Interests:
As of August 31, 1996, the Fund had unfunded loan commitments of
$268,840,813 which would be extended at the option of the borrower,
pursuant to the following loan agreements:
Unfunded
Commitment
Borrower (in thousands)
Atlas Air, Inc. $17,453
Jefferson Smurfit Company/
Container Corp. of America 2,784
Federated Department Stores Inc. 50,067
Fort Howard Corp. 2,703
Gulfstream Aerospace Corp. 10,192
Huntsman Corp. 572
IMO Industries, Inc. 8,077
Johnstown America Industrial Inc. .3,080
Loewen Group, Inc. 14,520
Marcus Cable Operating Co. 8,438
MobileMedia Corp. 874
OrNda Health Corp. 2,139
Overhead Door Corp. 5,114
Paging Network Inc. 21,621
The Pullman Co., Inc. 6,526
Ralph's Grocery Company 12,550
Reliance Communications Technology 9,862
SC International Corp., Inc. 18,000
Silgan Corp. 4,780
Stone Container Corp. 30,000
Thermadyne Industries, Inc. 14,064
Thrifty Payless Holdings, Inc. 14,520
UCAR International Inc. 6,906
56
<PAGE> 59
6. Short-Term Borrowings:
On March 14, 1996, the Fund extended its loan commitment from a
commercial bank. The commitment is for $100,000,000 bearing interest
at the Federal Funds rate plus .50% on the outstanding balance.
The Fund had no borrowings under this commitment during the
year ended August 31, 1996. For the year ended August 31, 1996,
facility and commitment fees aggregated $141,903.
7. Capital Loss Carryforward:
At August 31, 1996, the Fund had a net capital loss carryforward of
approximately $1,471,000, all of which expires in 2004. This amount
will be available to offset like amounts of any future taxable
gains.
8. Subsequent Event:
The Fund began a quarterly tender offer on September 17, 1996 which
concludes on October 15, 1996.
57
<PAGE> 60
APPENDIX
RATINGS OF SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S
("MOODY'S") SECURITIES RATINGS
Aaa -- Securities which are rated Aaa are judged to be of the best quality.
They carry the smallest degree of investment risk and are generally referred to
as "gilt edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa -- Securities which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade securities. They are rated lower than the best securities because
margins of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Securities which are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest are considered adequate, but elements
may be present which suggest a susceptibility to impairment sometime in the
future.
Baa -- Securities which are rated Baa are considered as medium grade
obligations; i.e., they are neither highly protected nor poorly secured.
Interest payments and principal security appear adequate for the present but
certain protective elements may be lacking or may be characteristically
unreliable over any great length of time. Such securities lack outstanding
investment characteristics and in fact have speculative characteristics as well.
Ba -- Securities which are rated Ba are judged to have speculative
elements; their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and thereby
not well safeguarded during both good and bad times over the future. Uncertainty
of position characterizes securities in this class.
B -- Securities which are rated B generally lack characteristics of the
desirable investment. Assurance of interest and principal payment or of
maintenance of other terms of the contract over any long period of time may be
small.
Caa -- Securities which are rated Caa are of poor standing. Such issues may
be in default or there may be present elements of danger with respect to
principal or interest.
Ca -- Securities which are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Securities which are rated C are the lowest rated class of securities,
and issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Those securities in the Aa, A, Baa, Ba and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
Short-term Notes: The four ratings of Moody's for short-term notes are MIG
1/VMIG 1, MIG 2/VMIG 2, MIG 3/VMIG 3 and MIG 4/VMIG 4; MIG 1/VMIG 1 denotes
"best quality, enjoying strong protection from established cash flows"; MIG
2/VMIG 2 denotes "high quality" with ample margins of protection; MIG 3/VMIG 3
notes are of "favorable quality . . . but lacking the undeniable strength of the
preceding grades"; MIG 4/VMIG 4 notes are of "adequate quality, carrying
specific risk but having protection . . . and not distinctly or predominantly
speculative".
58
<PAGE> 61
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 Merrill Lynch 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.
<TABLE>
<S> <C>
(PLEASE PRINT) --------------------------------
Name.........................................................
First Name Initial Last
Name
--------------------------------
Name of Co-Owner (if any).................................... Social Security No.
First Name Initial Last or Taxpayer Identification No.
Name
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. DIVIDEND AND CAPITAL GAIN DISTRIBUTION OPTION
Until you are notified by me, the following options with respect to dividends
and distributions are elected.
<TABLE>
Ordinary Income Dividends Long-Term Capital Gains
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
SELECT [ ] Reinvest SELECT [ ] Reinvest
ONE: [ ] Cash ONE: [ ] Cash
--------------------------------- ---------------------------------
</TABLE>
If no election is made, dividends and capital gains will be automatically
reinvested at net asset value without a sales charge.
IF CASH, SPECIFY HOW YOU WOULD LIKE YOUR DISTRIBUTIONS PAID TO YOU: [ ] Check
or [ ] Direct Deposit to bank account
IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, PLEASE COMPLETE BELOW:
I hereby authorize payment of dividend and capital gain distributions by direct
deposit to my bank account and, if necessary, debit entries and adjustments for
any credit entries made to my account in accordance with the terms I have
selected on the Merrill Lynch Senior Floating Rate Fund, Inc. Authorization
Form.
SPECIFY TYPE OF ACCOUNT (CHECK ONE): [ ] checking [ ] savings
Name on your Account............................................................
Bank Name.......................................................................
Bank Number ................................................... Account
Number..........................................................................
Bank Address....................................................................
I agree that this authorization will remain in effect until I provide written
notification to Merrill Lynch Financial Data Services, Inc. amending or
terminating this service.
Signature of Depositor..........................................................
Signature of Depositor ......................................................
Date............................................................................
(if joint account, both must sign)
NOTE: IF DIRECT DEPOSIT TO BANK ACCOUNT IS SELECTED, YOUR BLANK, UNSIGNED CHECK
MARKED "VOID" OR A DEPOSIT SLIP FROM YOUR SAVINGS ACCOUNT SHOULD ACCOMPANY THIS
APPLICATION.
- --------------------------------------------------------------------------------
59
<PAGE> 62
3. FOR DEALER ONLY
Branch, Office Address, Stamp
This form when completed should be mailed to:
Merrill Lynch Senior Floating Rate Fund, Inc.
c/o Merrill Lynch 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.
60
<PAGE> 63
(This page intentionally left blank)
<PAGE> 64
(This page intentionally left blank)
<PAGE> 65
- ------
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............ 24
Purchase of Shares................. 26
Tender Offers...................... 27
Early Withdrawal Charge............ 29
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
Independent Auditors............... 44
Independent Auditors' Report....... 45
Financial Statements............... 46
Appendix -- Ratings of
Securities....................... 58
Authorization Form................. 59
Code #10938-1296
</TABLE>
MERRILL LYNCH
SENIOR FLOATING
RATE FUND, INC.
LOGO
PROSPECTUS
December , 1996
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
<PAGE> 66
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.
<TABLE>
<CAPTION>
DESCRIPTION OF OMITTED LOCATION OF GRAPHIC
GRAPHIC OR IMAGE OR IMAGE IN TEXT
- ---------------------- -------------------
<S> <C>
Compass plate, circular Back cover of Prospectus
graph paper and Merrill Lynch
logo including stylized market
bull.
</TABLE>
<PAGE> 67
PART C.
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS.
(1) FINANCIAL STATEMENTS
Part A:
Financial Highlights for each of the years in the five-year period ended
August 31, 1996 and for the period November 3, 1989 (commencement of
operations) to August 31, 1990.
Part B:
Schedule of Investments as of August 31, 1996.
Statement of Assets and Liabilities as of August 31, 1996.
Statement of Operations for the year ended August 31, 1996.
Statements of Changes in Net Assets for each of the years in the two-year
period ended August 31, 1996.
Statement of Cash Flows for the year ended August 31, 1996.
Financial Highlights for each of the years in the five-year period ended
August 31, 1996.
(2) EXHIBITS:
<TABLE>
<C> <C> <S>
(a)(1) -- Articles of Incorporation of Registrant. (a)
(2) -- Articles of Amendment to Articles of Incorporation of Registrant. (a)
(3) -- Articles of Amendment to Articles of Incorporation of Registrant (name
change). (b)
(b) -- By-Laws of Registrant. (a)
(c) -- None.
(d) -- Portions of the Articles of Incorporation and By-Laws of the Registrant
defining the rights of holders of shares of the Registrant. (c)
(e) -- None.
(f) -- None.
(g)(1) -- Form of Investment Advisory Agreement between Registrant and Merrill Lynch
Asset Management,L.P. (a)
(2) -- Form of Administration Agreement between Registrant and Merrill Lynch Asset
Management, L.P. (a)
(h)(1) -- Form of Distribution Agreement between Registrant and Merrill Lynch Funds
Distributor, Inc. (a)
(2) -- Form of Selected Dealer Agreement. (a)
(i) -- None.
(j) -- Form of Custody Agreement between Registrant and The Bank of New York. (a)
(k)(1) -- Transfer Agency, Dividend Disbursing Agency and Shareholder Servicing
Agency Agreement between Registrant and (Merrill Lynch Financial Data
Services, Inc.) (a)
(2) -- Form of Agreement between Merrill Lynch & Co., Inc. and Registrant relating
to use by Registrant of Merrill Lynch name. (a)
(l) -- Opinion of Brown & Wood LLP, counsel to the Registrant.
(m) -- None.
(n) -- Consent of Deloitte & Touche LLP, independent auditors for Registrant.
(o) -- None.
(p) -- Certificate of Merrill Lynch Asset Management, L.P. (a)
(q) -- None.
(r) -- Financial data schedule.
</TABLE>
- ------------------
(a) Previously filed pursuant to the Electronic Data Gathering, Analysis and
Retrieval ("EDGAR") phase-in requirements on November 7, 1995 as an exhibit
to Amendment No. 11 to the Registration Statement.
(b) Filed as an Exhibit to Registrant's Registration Statement on Form N-2 (File
No. 33-56391) under the Securities Act of 1933, as amended (the "1933
Act").
C-1
<PAGE> 68
(c) 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.
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement.
<TABLE>
<S> <C>
Registration...................................................... $302,424
Printing (other than stock certificates).......................... 75,000
Fees and expenses of qualifications under state securities laws... 50,000
Legal fees and expenses........................................... 10,000
NASD fees......................................................... 30,500
--------
Total........................................................ $467,924
========
</TABLE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT.
None.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES.
<TABLE>
<CAPTION>
NUMBER OF
HOLDERS
SEPTEMBER 30,
TITLE OF CLASS 1996
--------------- --------------
<S> <C>
Shares of Common Stock, par value $0.10 per share.............. 108,558
</TABLE>
- ------------------
Note: The number of holders shown above includes holders of record plus
beneficial owners whose shares are held of record by Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
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 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
C-2
<PAGE> 69
as officer or director of the Registrant. The Registrant, however, may not
purchase insurance on behalf of any officer or director of the Registrant that
protects or purports to protect such person from liability to the Registrant or
to its stockholders to which such officer or director would otherwise be subject
by reason of willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of his office.
Insofar as the conditional advancing of indemnification moneys for actions
based upon the Investment Company Act of 1940, as amended (the "1940 Act"), may
be concerned, such payments will be made only on the following conditions: (i)
the advances must be limited to amounts used, or to be used, for the preparation
or presentation of a defense to the action, including costs connected with the
preparation of a settlement; (ii) advances may be made only upon receipt of a
written promise by, or on behalf of, the recipient to repay that amount of the
advance which exceeds the amount to which it is ultimately determined that he is
entitled to receive from the Registrant by reason of indemnification; and (iii)
(a) such promise must be secured by a surety bond, other suitable insurance or
an equivalent form of security which assures that any repayments may be obtained
by the Registrant without delay or litigation, which bond, insurance or other
form of security must be provided by the recipient of the advance, of (b) a
majority of a quorum of the 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 1933 Act,
against certain types of civil liabilities arising in connection with the
Registration Statement or Prospectus and Statement of Additional Information.
Insofar as indemnification for liabilities arising under the 1933 Act may
be permitted to Directors, officers and controlling persons of the Registrant
and the principal underwriter pursuant to the foregoing provisions or otherwise,
the Registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the 1933 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a Director, officer, or controlling
person of the Registrant and the principal underwriter in connection with the
successful defense of any action, suit or proceeding) is asserted by such
Director, officer or controlling person or the principal underwriter in
connection with the shares being registered, the Registrant will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the 1933 Act and
will be governed by the final adjudication of such issue.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
Merrill Lynch Asset Management, L.P. (the "Investment Adviser" or "MLAM")
acts as investment adviser for the following open-end investment companies:
Merrill Lynch Adjustable Rate Securities Fund, Inc., Merrill Lynch Americas
Income Fund, Inc., Merrill Lynch Asset Builder Program, Inc., Merrill Lynch
Asset Growth Fund, Inc., Merrill Lynch Asset Income Fund, Inc., Merrill Lynch
Capital Fund, Inc., Merrill Lynch 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
Allocation Fund, Inc., Merrill Lynch Global Bond Fund for Investment and
Retirement, Merrill Lynch Global Convertible Fund, Inc., Merrill Lynch Global
Holdings, Inc., Merrill Lynch Global Resources Trust, Inc., Merrill Lynch Global
SmallCap Fund, Inc., Merrill Lynch Global Utility Fund, Inc., Merrill Lynch
Global Value Fund, Inc., Merrill Lynch Growth Fund, Merrill Lynch Healthcare
Fund, Inc., Merrill Lynch Institutional Intermediate Fund, Merrill Lynch
International Equity Fund, Merrill Lynch Latin America Fund, Inc., Merrill Lynch
Middle East/Africa Fund, Inc., Merrill Lynch Municipal Series Trust, Merrill
Lynch Pacific Fund, Inc., Merrill Lynch Puerto Rico Tax-Exempt Fund, Inc.,
Merrill Lynch Ready Assets Trust, Merrill Lynch Retirement Series Trust, Merrill
Lynch Series Fund, Inc., Merrill Lynch Short-
C-3
<PAGE> 70
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. and the following closed-end
investment companies: Convertible Holdings, Inc., Merrill Lynch High Income
Municipal Fund, Inc. and Merrill Lynch Municipal Strategy Fund, Inc.
Fund Asset Management, L.P. ("FAM"), an affiliate of the Investment
Adviser, acts as the investment adviser for the following open-end investment
companies: CBA Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA
Multi-State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, The
Corporate Fund Accumulation Program, Inc., Financial Institutions Series Trust,
Merrill Lynch Basic Value Fund, Inc., Merrill Lynch California Municipal Series
Trust, Merrill Lynch Corporate Bond Fund, Inc., Merrill Lynch Emerging Tigers
Fund, Inc., Merrill Lynch Federal Securities Trust, Merrill Lynch Funds for
Institutions Series, Merrill Lynch Multi-State Limited Maturity Municipal Series
Trust, Merrill Lynch Multi-State Municipal Series Trust, Merrill Lynch Municipal
Bond Fund, Inc., Merrill Lynch Phoenix Fund, Inc., Merrill Lynch Special Value
Fund, Inc., Merrill Lynch World Income Fund, Inc. and The Municipal Fund
Accumulation Program, Inc.; and the following closed-end investment companies:
Apex Municipal Fund Inc., Corporate High Yield Fund, Inc., Corporate High Yield
Fund II, Inc., Income Opportunities Fund 1999, Inc., Income Opportunities Fund
2000, Inc., MuniAssets Fund, 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 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., 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. 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, 15th Floor,
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 and Merrill Lynch & Co., Inc. ("ML&Co.") is World Financial Center, North
Tower, 250 Vesey Street, New York, New York 10281. The address of Merrill Lynch
Financial Data Services, Inc. ("MLFDS") is 4800 Deer Lake Drive East,
Jacksonville, Florida 32246-6484.
Set forth below is a list of each executive officer and director of the
Investment Adviser indicating each business, profession, vocation or employment
of a substantial nature in which each such person has been engaged since
September 1, 1994 for his, her or its 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. Messrs. Zeikel, Glenn and Richard also hold the same position with
all or substantially all of the investment companies advised by FAM as they do
with those advised by the Investment Adviser. Messrs. Giordano, Harvey, Hewitt,
Kirstein and Monagle are directors or officers of one or more of such companies.
C-4
<PAGE> 71
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ---------------------------- -------------------------- -------------------------------------
<S> <C> <C>
Merrill Lynch & Co., Inc.... Limited Partner Financial Services Holding Company;
Limited Partner of FAM
Princeton Services, Inc.
("Princeton Services").... General Partner General Partner of FAM
Arthur Zeikel............... President President of FAM; President and
Director of Princeton Services;
Director of Merrill Lynch Funds
Distributor, Inc. ("MLFD");
Executive Vice President of ML&Co.
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 MLFDS; President of
Princeton Administrators, L.P.
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
Norman R. Harvey............ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Michael J. Hennewinkel...... 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
General Counsel and Counsel and Secretary of FAM; Senior
Secretary Vice President, General Counsel,
Director and Secretary of Princeton
Services; Director of MLFD
Ronald M. Kloss............. Senior Vice President and Senior Vice President and Controller
Controller of FAM; Senior Vice President and
Controller of Princeton Services
Stephen M. M. Miller........ Senior Vice President Executive Vice President of Princeton
Administrators, L.P.; Senior Vice
President of Princeton Services
Joseph T. Monagle, Jr. ..... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
Michael L. Quinn............ Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services; Managing Director and
First Vice President of Merrill
Lynch, Pierce, Fenner & Smith
Incorporated from 1989 to 1995
Richard L. Reller........... 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
Treasurer of FAM; Senior Vice President and
Treasurer of Princeton Services;
Vice President and Treasurer of
MLFD
</TABLE>
C-5
<PAGE> 72
<TABLE>
<CAPTION>
POSITION WITH OTHER SUBSTANTIAL BUSINESS,
NAME INVESTMENT ADVISER PROFESSION, VOCATION OR EMPLOYMENT
- ---------------------------- -------------------------- -------------------------------------
<S> <C> <C>
Ronald L. Welburn........... Senior Vice President Senior Vice President of FAM; Senior
Vice President of Princeton
Services
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 1940 Act and the Rules thereunder will be maintained at the
offices of the Registrant, 800 Scudders Mill Road, Plainsboro, New Jersey 08536
and MLFDS, 4800 Deer Lake Drive East, Jacksonville, Florida 32246-6484.
ITEM 32. MANAGEMENT SERVICES.
Not Applicable.
ITEM 33. UNDERTAKINGS.
(a) Registrant undertakes to suspend offerings of the shares of Common
Stock covered hereby until it amends its Prospectus contained herein if (1)
subsequent to the effective date of this Registration Statement, its net asset
value per share of Common Stock declines more than 10 percent from its net asset
value per share of Common Stock as of the effective date of this Registration
Statement, or (2) its net asset value per share of Common Stock increases to an
amount greater than its net proceeds as stated in the Prospectus contained
herein.
(b) The undersigned registrant hereby undertakes:
(1) To file during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement.
(i) To include any prospectus required by section 10(a)(3) of the
1933 Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which individually or in the aggregate
represent a fundamental change in the information set forth in the
Registration Statement; and
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the 1933
Act, each such post-effective amendment shall be deemed to be a new
Registration Statement relating to the securities offered therein and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
C-6
<PAGE> 73
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 12th
day of November, 1996.
MERRILL LYNCH SENIOR FLOATING RATE FUND,
INC.
(Registrant)
By TERRY K. GLENN
--------------------------------------
(Terry K. Glenn, Executive Vice
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>
ARTHUR ZEIKEL President (Principal Executive November 12, 1996
- ------------------------------------- Officer) and Director
(Arthur Zeikel)
GERALD M. RICHARD Treasurer (Principal Financial and November 12, 1996
- ------------------------------------- Accounting Officer)
(Gerald M. Richard)
RONALD W. FORBES Director November 12, 1996
- -------------------------------------
(Ronald W. Forbes)
CYNTHIA A. MONTGOMERY Director November 12, 1996
- -------------------------------------
(Cynthia A. Montgomery)
CHARLES C. REILLY Director November 12, 1996
- -------------------------------------
(Charles C. Reilly)
KEVIN A. RYAN Director November 12, 1996
- -------------------------------------
(Kevin A. Ryan)
RICHARD R. WEST Director November 12, 1996
- -------------------------------------
(Richard R. West)
</TABLE>
C-7
<PAGE> 74
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
LETTER DESCRIPTION
- ------- ---------------------------------------------------------------------
<S> <C>
(l) -- Opinion of Brown & Wood LLP, counsel for the Registrant
(n) -- Consent of Deloitte & Touche LLP, independent auditors for the
Registrant
(r) -- Financial Data Schedule
</TABLE>
<PAGE> 1
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
Telephone: (212) 839-5300
Facsimile: (212) 839-5599
November 12, 1996
Merrill Lynch Senior Floating Rate
Fund, Inc.
P.O. Box 9011
Princeton, New Jersey 08543-9011
Ladies and Gentlemen:
We have acted as counsel for Merrill Lynch Senior Floating Rate Fund,
Inc., a Maryland corporation (the "Fund"), in connection with the registration
of 100,000,000 shares of common stock, par value $0.10 per share (the "Common
Stock"), under the Securities Act of 1933, as amended, pursuant to a
registration statement on Form N-2 to be filled 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 Common Stock. 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 Common Stock,
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 LLP
<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 18, 1996 and to the reference to us under the caption "Financial
Highlights" appearing in the Prospectus, which is a part of such Registration
Statement.
Deloitte & Touche LLP
Princeton, New Jersey
November 8, 1996
<TABLE> <S> <C>
<ARTICLE> 6
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> AUG-31-1996
<PERIOD-START> SEP-01-1995
<PERIOD-END> AUG-31-1996
<INVESTMENTS-AT-COST> 2,932,135,993
<INVESTMENTS-AT-VALUE> 2,933,517,310
<RECEIVABLES> 20,554,364
<ASSETS-OTHER> 4,340,962
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,958,412,636
<PAYABLE-FOR-SECURITIES> 210,453
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12,674,837
<TOTAL-LIABILITIES> 12,885,290
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 2,952,004,441
<SHARES-COMMON-STOCK> 294,849,377
<SHARES-COMMON-PRIOR> 215,972,462
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> (7,858,412)
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 1,381,317
<NET-ASSETS> 2,945,527,346
<DIVIDEND-INCOME> 149
<INTEREST-INCOME> 210,928,851
<OTHER-INCOME> 4,338,982
<EXPENSES-NET> (36,625,760)
<NET-INVESTMENT-INCOME> 178,696,222
<REALIZED-GAINS-CURRENT> (8,718,939)
<APPREC-INCREASE-CURRENT> 1,207,962
<NET-CHANGE-FROM-OPS> 171,185,245
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> (178,696,222)
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 97,262,448
<NUMBER-OF-SHARES-REDEEMED> (27,418,447)
<SHARES-REINVESTED> 9,032,914
<NET-CHANGE-IN-ASSETS> 782,057,733
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 860,527
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 25,872,222
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 36,625,760
<AVERAGE-NET-ASSETS> 2,708,590,747
<PER-SHARE-NAV-BEGIN> 10.02
<PER-SHARE-NII> .66
<PER-SHARE-GAIN-APPREC> (.03)
<PER-SHARE-DIVIDEND> (.66)
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 9.99
<EXPENSE-RATIO> 1.34
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
