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PROSPECTUS
DECEMBER 16, 1997
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 of a designated U.S. bank, the
Certificate of Deposit rate or the London InterBank Offered Rate. 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
$10.00. 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 $5.35) 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. The Securities and
Exchange Commission maintains a web site (http://www.sec.gov) that contains
material incorporated by reference herein and other information regarding the
Fund.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNT(2) FUND(3)
<S> <C> <C> <C>
Per Share....................... $10.00 None $10.00
Total(3)........................ $1,935,960,370 None $1,935,960,370
========================================================================================================
</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 $9.95 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 $473,580, 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
MERRILL LYNCH ASSET MANAGEMENT--INVESTMENT ADVISER
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
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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 (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 assets of the Fund will be invested in floating or variable
rate Corporate Loans made to corporations.
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2
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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 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
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3
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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. A significant portion of such Corporate Loans
are highly leveraged loans such as leveraged buy-out loans, leveraged
recapitalization loans and other types of acquisition loans. 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 notes with credit and pricing terms that 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 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
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4
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changes in the creditworthiness of Borrowers, Co-Lenders or
Participants interposed between the Fund and the Borrowers. In the
event such institutions were to default on their obligations, the
Fund might experience a reduction of both income and the value of its
assets.
The Fund may seek to hedge against interest rate risk by engaging in
certain interest rate hedging transactions. If the Investment Adviser
is incorrect in its forecasts of market values, interest rates and
other applicable factors, the investment performance of the Fund
would diminish compared with what it would have been if these
investment techniques were not used. If the other party to an
interest rate hedging transaction defaults, the Fund's risk of loss
consists of the net amount of interest payments that the Fund
contractually is entitled to receive.
LEVERAGE.................................. The Fund may borrow money in amounts up to 33 1/3% of the value of
its total assets for the purpose of financing additional investments
or to satisfy tender offers. Although it has no present intention to
do so, the Fund also may issue one or more series of preferred
shares. The Fund will borrow to finance additional investments or
issue a class of preferred shares only when it believes that the
return that may be earned on investments purchased with the proceeds
of such borrowings or offerings will exceed the costs, including debt
service and dividend obligations, associated therewith. However, to
the extent such costs exceed the return on the additional
investments, the return realized by the Fund's common shareholders
will be adversely affected.
Leverage creates certain risks for holders of Common Stock, including
the risk that higher volatility of both the net asset value and
market value of the Common Stock, and that fluctuations in the
dividend rates on the preferred shares will affect the yield to
holders of Common Stock. Additionally, changes in certain factors
could cause the relationship between the rates paid by the Fund as
dividends on the preferred shares and the rates received by the Fund
on its investment portfolio to change so that rates on the preferred
shares may substantially increase relative to rates on the
obligations in which the Fund may be invested. Under such conditions,
the benefit of leverage to holders of Common Stock would be reduced
and the Fund's 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
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5
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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. ('ML & Co'.) As of
November 30, 1997, the Investment Adviser or its affiliate, Fund
Asset Management, L.P., had a total of approximately $273.9 billion
in investment company and other portfolio assets under management,
including accounts of certain affiliates of the Investment Adviser.
See 'Investment Advisory and Administrative Arrangements.'
DISTRIBUTIONS............................. The Fund intends to continue to declare dividends daily and to pay
dividends monthly and to distribute substantially all of its net
investment income to holders of Common Stock. Net capital gains, if
any, will be distributed at least annually to holders of Common
Stock. See 'Dividends and Distributions.'
TENDER OFFERS............................. No market presently exists for the Fund's Common Stock and it is not
currently anticipated that a secondary market will develop. In view
of this, the Board of Directors of the Fund intends to continue to
consider the making of tender offers on a quarterly basis to purchase
Common Stock of the Fund from shareholders at a price per share equal
to the net asset value per share of the Common Stock determined at
the close of business on the day an offer terminates. The Board of
Directors is under no obligation to authorize the making of a tender
offer and no assurance can be given that in 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
$5.35) to confirm a repurchase of shares from such customers pursuant
to a Tender Offer. Tenders made
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6
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directly through the Fund's Transfer Agent are not subject to the
processing fee.
SPECIAL CONSIDERATIONS
AND RISK FACTORS........................ The Fund expects that there will be no secondary market for its
Common Stock. Moreover, Merrill Lynch and other selected dealers are
prohibited under applicable law from making a market in the Fund's
Common Stock while the Fund is making either a public offering of or
a tender offer to purchase its Common Stock. To the extent a
secondary market does develop, however, investors should be aware
that the shares of closed-end funds frequently trade in the secondary
market at a discount. Should there be a secondary market for the
Fund's shares of Common Stock, the market price of the shares may
vary from net asset value from time to time.
Because of the lack of a secondary market and the early withdrawal
charge, the Fund is designed primarily for long-term investors and
should not be considered a vehicle for trading purposes.
The Fund has registered as a 'non-diversified' investment company so
that it will be able to invest more than 5% of its assets in the
obligations of any single issuer, subject to the diversification
requirements of Subchapter M of the Internal Revenue Code of 1986, as
amended (the 'Code'), applicable to the Fund. Since the Fund may
invest a relatively high percentage of its assets in the obligations
of a limited number of issuers, the Fund may be more susceptible than
a more widely-diversified fund to any single economic, political or
regulatory occurrence.
The Fund may be deemed to be concentrated in securities of issuers in
the industry group consisting of financial institutions and their
holding companies, including commercial banks, thrift institutions,
insurance companies and finance companies. As a result, the Fund is
subject to certain risks associated with such institutions,
including, among other things, changes in governmental regulation,
interest rate levels and general economic conditions. See 'Investment
Objectives and Policies--Description of Participation Interests' and
'Investment Restrictions.'
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.
</TABLE>
7
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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 market value, by Moody's Investors
Service, Inc. ('Moody's') rating category, of the Corporate Loans
held by the Fund as of August 31, 1997:
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RATED OBLIGATIONS....................................... 70.80%
BA: 49.50%; B: 21.30%.
UNRATED OBLIGATIONS..................................... 29.20%
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When the Fund is acting in the capacity of a Participant with respect
to a Corporate Loan, the financial status of the Agent Bank and Co-
Lenders and Participants interposed between the Fund and a Borrower
may affect the ability of the Fund to receive payments of interest
and principal. For this reason, the Fund will invest in Corporate
Loans only if, at the time of investment, the outstanding debt
obligations of the Agent Bank and any such Co-Lenders and
Participants interposed between the Fund and a Borrower are
investment grade; i.e., rated BBB or A-3 or higher by Standard &
Poor's Ratings Services or Baa or P-3 or higher by Moody's, 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
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8
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'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.'
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9
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FEE TABLE
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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%
Other Expenses(c).................................................................... 0.38
Total Annual Expenses.................................................................. 1.33%
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- - ------------------
(a) See 'Early Withdrawal Charge'--page 29.
(b) See 'Investment Advisory and Administrative Arrangements'--page 32.
(c) Includes administrative fees, which are payable to the Investment Adviser by
the Fund at the rate of 0.25% of net assets attributable to common shares.
See 'Investment Advisory and Administrative Arrangements'--page 32.
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EXAMPLE 1 YEAR 3 YEARS 5 YEARS 10 YEARS
- - --------------------------------------------------------------------------- ------ ------- ------- --------
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An investor would pay the following expenses on a $1,000 investment
assuming (1) total annual expenses of 1.33%, (2) a 5% annual return
throughout the periods and (3) tender at the end of the period........... $ 44* $52* $73 $160
An investor would pay the following expenses on a $1,000 investment
assuming no tender at the end of the period.............................. $ 14 $42 $73 $160
</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 $5.35) for
confirming purchases and repurchases. Purchases and repurchases made directly
through the Transfer Agent are not subject to the processing fee.
10
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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 fiscal
year ended August 31, 1997 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.
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FOR THE
PERIOD
NOVEMBER 3,
FOR THE YEAR ENDED AUGUST 31, 1989+ TO
------------------------------------------------------------------ AUGUST 31,
1997 1996 1995 1994 1993 1992 1991 1990
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INCREASE (DECREASE) IN NET ASSET VALUE:
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period... $9.99 $10.02 $10.02 $10.02 $9.99 $9.99 $10.00 $10.00
------ ------ ------ ------ ------ ------ ------ ------
Investment income--net............... .68 .66 .75 .59 .53 .64 .85 .76
Realized and unrealized gain (loss)
on investments--net................ .03 (.03) --++ --++ .03 -- (.01) --
------ ------ ------ ------ ------ ------ ------ ------
Total from investment operations....... .71 .63 .75 .59 .56 .64 .84 .76
------ ------ ------ ------ ------ ------ ------ ------
Less dividends from investment
income--net.......................... (.68) (.66) (.75) (.59) (.53) (.64) (.85) (.76)
------ ------ ------ ------ ------ ------ ------ ------
Net asset value, end of period......... $10.02 $9.99 $10.02 $10.02 $10.02 $9.99 $9.99 $10.00
====== ===== ====== ====== ====== ====== ===== ======
TOTAL INVESTMENT RETURN:**
Based on net asset value per share..... 7.23% 6.53% 7.68% 5.94% 5.74% 6.58% 8.79% 7.63%#
====== ====== ====== ====== ====== ====== ====== ======
RATIOS TO AVERAGE NET ASSETS:
Expenses, excluding interest expense... 1.32% -- -- -- -- -- -- --
====== ====== ====== ====== ====== ====== ====== ======
Expenses, net of reimbursement......... 1.33% 1.34% 1.34% 1.43% 1.47% 1.39% 1.27% .79%*
====== ====== ====== ====== ====== ====== ====== ======
Expenses............................... 1.33% 1.34% 1.34% 1.43% 1.47% 1.41% 1.33% 1.35%*
====== ====== ====== ====== ====== ====== ====== ======
Investment income--net................. 6.72% 6.54% 7.45% 5.75% 5.27% 6.58% 8.44% 9.06%*
====== ====== ====== ====== ====== ====== ====== ======
LEVERAGE:
Amount of borrowings (in thousands).... -- -- -- -- -- -- -- --
====== ====== ====== ====== ====== ====== ====== ======
Average amount of borrowings
outstanding during the period (in
thousands)........................... $4,409 -- -- -- -- -- -- --
====== ====== ====== ====== ====== ====== ====== ======
Average amount of borrowings
outstanding per share during the
period............................... $.02 -- -- -- -- -- -- --
====== ====== ====== ====== ====== ====== ====== ======
SUPPLEMENTAL DATA:
Net assets, end of period (in
millions)............................ $2,992 $2,946 $2,163 $934 $713 $834 $1,705 $1,728
====== ====== ====== ====== ====== ====== ====== ======
Portfolio turnover..................... 74.00% 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.
- - -- See Notes to Financial Statements.
11
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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. ('Moody's') or BBB, A-3 or
higher by Standard & Poor's Ratings Services ('S&P') or, if unrated, determined
to be of comparable quality in the judgment of the Investment Adviser).
Securities rated Baa, BBB, P-3 or A-3 are considered to have adequate capacity
for payment of principal and interest, but are more susceptible to adverse
economic conditions and, in the case of securities rated BBB or Baa (or
comparable unrated securities), have speculative characteristics. Such
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 invest only
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 debt and equity
securities.
The Fund has no restrictions on portfolio maturity, but it is anticipated
that a majority of the Corporate Loans in which it will invest will have stated
maturities ranging from three to ten years. As a result of
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<PAGE>
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.
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
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<PAGE>
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. A significant portion of such Corporate Loans are highly
leveraged loans such as leveraged buy-out loans, leveraged recapitalization
loans and other types of acquisition loans. Such Corporate Loans may be
structured to include both term loans, which are generally fully funded at the
time of the 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 also may invest from
time to time in privately placed notes with credit and pricing terms which are,
in the opinion of the Investment Adviser, consistent with investments in senior
collateralized loan obligations. The Fund may invest without limitation in
highly leveraged Corporate Loans that are rated below investment grade or are
unrated. See 'Prospectus Summary--Special Considerations and Risk Factors.'
The Fund may invest in Corporate Loans that are made to non-U.S. Borrowers,
provided that the loans are U.S. dollar-denominated or otherwise provide for
payment in U.S. dollars, and any such Borrower meets the credit standards
established by the Investment Adviser for U.S. Borrowers. The Fund similarly may
invest in Corporate Loans made to U.S. Borrowers with significant non-dollar
denominated revenues, provided that the loans are U.S. dollar-denominated or
otherwise provide for payment to the Fund in U.S. dollars. In all cases where
the Corporate Loans are not denominated in U.S. dollars, the Corporate Loan
facility will provide for payments to the lenders, including the Fund, in U.S.
dollars pursuant to foreign currency swap arrangements. Loans to such non-U.S.
Borrowers or U.S. Borrowers may involve risks not typically involved in domestic
investment, including fluctuation in foreign exchange rates, future foreign
political and economic developments, and the possible imposition of exchange
controls or other foreign or U.S. governmental laws or restrictions applicable
to such loans. With respect to certain foreign countries, there is the
possibility of expropriation or confiscatory taxation, political or social
instability, or diplomatic developments which could affect the Fund's
investments in those countries. Moreover, individual foreign economies may
differ favorably or unfavorably from the U.S. economy in such respects as growth
of gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payment position. In addition, information with
respect to non-U.S. Borrowers may differ from that available with respect to
U.S. Borrowers, since foreign companies are not generally subject to uniform
accounting, auditing and financial reporting standards, practices and
requirements comparable to those applicable to U.S. Borrowers.
The Corporate Loans in which the Fund invests will, in many instances, hold
the most senior position in the capitalization structure of the Borrower, and,
in any case, will, in the judgment of the Investment Adviser, be in the category
of senior debt of the Borrower. Each Corporate Loan will be secured by
collateral which the Investment Adviser believes to have a market value, at the
time of the Fund's investment in the Corporate Loan, which equals or exceeds the
principal amount of the Corporate Loan. The value of such collateral generally
will be determined by an independent appraisal or by obtaining the market value
of such collateral (e.g., cash or securities) if it is readily ascertainable. In
the event of a default, however, the ability of the lender to have access to the
collateral may be limited by bankruptcy and other insolvency laws. The value of
the collateral may decline below the amount of the Corporate Loan subsequent to
the Fund's investment in the loan. Under certain circumstances, the collateral
may be released with the consent of the Agent Bank and Co-Lenders or pursuant to
the terms of the underlying credit agreement with the Borrower. There is no
assurance that the liquidation of the collateral would satisfy the Borrower's
obligation in the event of nonpayment of scheduled interest or principal, or
that the collateral could be readily liquidated. As a result, the Fund might not
receive payments to which it is entitled and thereby may experience a decline in
the value of the investment and, possibly, its net asset value.
14
<PAGE>
In the case of highly leveraged loans, a Borrower generally is required to
pledge collateral that may include (i) working capital assets, such as accounts
receivable and inventory, (ii) tangible fixed assets, such as real property,
buildings and equipment, (iii) intangible assets, such as trademarks, copyrights
and patent rights and (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
that 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,
LIBOR, the CD rate or another base lending rate used by commercial lenders. The
interest rate on Prime Rate-based Corporate Loans floats daily as the Prime Rate
changes, while the interest rate on LIBOR-based and CD-based Corporate Loans is
reset periodically, typically every 30 days to one year. Certain of the floating
or variable rate Corporate Loans in which the Fund 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, amendment 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 also may acquire warrants and other debt and equity securities
of the Borrower or its affiliates. The acquisition of such debt and equity
securities will only be incidental to the Fund's purchase of an interest in a
Corporate Loan.
The Fund will invest in a Corporate Loan only if, in the Investment
Adviser's judgment, the Borrower can meet debt service on such loan. In
addition, the Investment Adviser will consider other factors deemed by it to be
appropriate to the analysis of the Borrower and the Corporate Loan. Such factors
include financial ratios of the Borrower such as pre-tax interest coverage,
leverage ratios, the ratio of cash flows to total debt and the ratio of tangible
assets to debt. In its analysis of these factors, the Investment Adviser also
will be influenced by the nature of the industry in which the Borrower is
engaged, the nature of the Borrower's assets and the Investment Adviser's
assessments of the general quality of the Borrower. The factors utilized have
been reviewed and approved by the Fund's Board of Directors.
The 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
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<PAGE>
invested. Although the Investment Adviser will use due care in making such
analysis, there can be no assurance that such analysis will disclose factors
that may impair the value of the Corporate Loan.
Corporate Loans made in connection with highly leveraged transactions are
subject to greater credit risks than other Corporate Loans in which the Fund may
invest. These credit risks include a greater possibility of default or
bankruptcy of the Borrower and the assertion that the pledging of collateral to
secure the loan constituted a fraudulent conveyance or preferential transfer
which can be nullified or subordinated to the rights of other creditors of the
Borrower under applicable law.
The Fund does not have a policy with regard to minimum ratings for
Corporate Loans in which it may invest. Investments in Corporate Loans are based
primarily on the Investment Adviser's independent credit analyses of a
particular Borrower. Generally, the Corporate Loans in which the Fund invests
are unrated at the time of purchase. Moreover, the Investment Adviser does not
regard the ratings of other publicly held securities of a Borrower to be
relevant to its investment considerations. See 'Appendix--Ratings of
Securities.'
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 provides for payments to the lenders in U.S. dollars
pursuant to foreign currency swap arrangements. Foreign currency swaps involve
the exchange by the lenders, including the Fund, with another party (the
'counterparty') of the right to receive the currency in which the loan is
denominated for the right to receive U.S. dollars. The Fund will enter into a
transaction subject to a foreign currency swap only if, at the time of entering
into such swap, the outstanding debt obligations of the counterparty are
investment grade (i.e., rated BBB or A-3 or higher by S&P or Baa or P-3 or
higher by Moody's, 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
16
<PAGE>
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 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
17
<PAGE>
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 S&P or Baa or P-3 or higher by Moody's, 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 that such
institutions may make and the interest rates and fees that such institutions may
charge. The profitability of these institutions is largely dependent on the
availability and cost of capital funds, and has shown significant recent
fluctuation as a result of volatile interest rate levels. In addition, general
economic conditions are important to the operations of these institutions, with
exposure to credit losses resulting from possible financial difficulties of
borrowers potentially having an adverse effect. Insurance companies also are
affected by economic and financial conditions and are subject to extensive
government regulation, including rate regulation. The property and casualty
industry is cyclical, being subject to dramatic swings in profitability which
can be affected by natural catastrophes and other disasters. Individual
companies may be exposed to material risks, including reserve inadequacy, latent
health exposure and inability to collect from their reinsurance carriers. The
financial services area is currently undergoing relatively rapid change as
existing distinctions between financial service segments become less clear. In
this regard, recent business combinations have included insurance, finance and
securities brokerage under single ownership. Moreover, the Federal laws
generally separating commercial and investment banking are currently being
studied by Congress.
In a typical Corporate Loan, the Agent Bank administers the terms of the
Corporate Loan Agreement and is responsible for the collection of principal and
interest and fee payments from the Borrower and the apportionment of these
payments to the credit of all lenders which are parties to the Corporate Loan
Agreement. The Fund generally will rely on the Agent Bank or an Intermediate
Participant to collect its portion of the payments on the Corporate Loan.
Furthermore, the Fund will rely on the Agent Bank to use appropriate creditor
remedies against the Borrower. Typically, under Corporate Loan Agreements, the
Agent Bank is given broad discretion in enforcing the Corporate Loan Agreement,
and is obligated to use only the same care it would use in the management of its
own property. The Borrower compensates the Agent Bank for these services. Such
compensation may include special fees paid on structuring and funding the
Corporate Loan and other fees paid on a continuing basis.
In the event that an Agent Bank becomes insolvent, or has a receiver,
conservator, or similar official appointed for it by the appropriate bank
regulatory authority or becomes a debtor in a bankruptcy proceeding, assets held
by the Agent Bank under the Corporate Loan Agreement should remain available to
holders of Corporate Loans. If, however, assets held by the Agent Bank for the
benefit of the Fund were determined by an appropriate regulatory authority or
court to be subject to the claims of the Agent Bank's general or secured
creditors, the Fund might incur certain costs and delays in realizing payment on
a Corporate Loan or suffer a loss of principal and/or interest. In situations
involving Intermediate Participants similar risks may arise, as described above.
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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.'
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.
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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 commitments until payment is made. The Fund will make
commitments to purchase such interest or securities on such basis only with the
intention of actually acquiring these interests or securities, but the Fund may
sell such interests or securities prior to the settlement date if such sale is
considered to be advisable. To the extent the Fund engages in 'when issued' and
'delayed delivery' transactions, it will do so for the purpose of acquiring
interests or securities for the Fund's portfolio consistent with the Fund's
investment objective and policies and not for the purpose of investment
leverage. No specific limitation exists as to the percentage of the Fund's
assets which may be used to acquire securities on a 'when issued' or 'delayed
delivery' basis.
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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.
Recent legislation creates new categories of capital gains taxable at different
rates which the Fund may be able to pass through 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 also may engage in interest rate hedging transactions in the form
of purchasing or selling interest rate caps or floors. The Fund will not sell
interest rate caps or floors that it does not own. The purchase of an interest
rate cap entitles the purchaser, to the extent that a specified index exceeds a
predetermined interest rate, to receive payments of interest equal to the
difference of the index and the predetermined rate on a notional principal
amount (the reference amount with respect to which interest obligations are
determined although no actual exchange of principal occurs) from the party
selling such interest rate cap. The purchase of an interest rate floor entitles
the purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest at the difference of the index
and the predetermined rate on a notional principal amount from the party selling
such interest rate floor. The Fund will not enter into caps or floors if, on a
net basis, the aggregate notional principal amount with respect to such
agreements exceeds the net assets of the Fund.
Inasmuch as these interest rate hedging transactions are entered into for
good faith hedging purposes, the Investment Adviser believes that such
obligations do not constitute senior securities and, accordingly, will not
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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.
SPECIAL LEVERAGE CONSIDERATIONS
EFFECTS OF LEVERAGE
The Fund may borrow money representing up to approximately 33 1/3%, or
issue shares of preferred stock representing up to approximately 50%, of the
Fund's total assets immediately after such borrowing or issuance. There can be
no assurance, however, that money will actually be borrowed or that preferred
stock representing
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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. The Fund at times may borrow from affiliates of the
Investment Adviser, provided that the terms of such borrowings are no less
favorable than those available from comparable sources of funds in the
marketplace.
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 Merrill Lynch International
Bank Limited, an affiliate of MLAM, providing for an unsecured revolving credit
facility (the 'Facility'), the proceeds of which may be used to finance the
payment for shares tendered in tender offers by the Fund, and to pay interest
and fees incurred in connection with the Facility. The Facility provides for the
borrowing by the Fund of up to $100,000,000 at a rate of interest equal to, at
the Fund's option, the sum of the federal funds rate (as published by the
Federal Reserve Bank of New York) plus .25% or the sum of LIBOR plus .25%.
Interest on borrowings is computed on the basis of a year of 360 days for the
actual number of days elapsed and is payable in arrears on the last day of June,
September, December and March (which commenced June 1997) in the case of
borrowings that bear interest at the federal funds rate, and at the end of the
interest period selected by the Fund, and at three month intervals thereof, in
the case of borrowings that bear interest at the LIBOR rate. Each borrowing
under the Facility is required to be repaid on June 12, 1998, the maturity date
of the Facility. 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 150% of the outstanding principal balance of
borrowings under the Facility and accrued interest. The Fund may not during the
term of the Facility incur indebtedness except for indebtedness incurred under
the Facility, indebtedness in respect of hedging transactions, indebtedness in
respect of purchases of securities on short-term credit as may be necessary for
the clearance of sales or purchases of portfolio securities and subordinated
indebtedness. Additionally, during the term of the
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Facility, the Fund is restricted with respect to the declaration and payment of
dividends. As long as no default has occurred and is continuing under the
Facility the Fund may make periodic dividend payments to shareholders in an
amount not in excess of its net investment income for such period, and as long
as the maturity of any borrowings under the Facility have not been accelerated
prior to the maturity date thereof the Fund may distribute each year all of its
net investment income and net capital gain, so that it will not be subject to
tax under the Code. The Fund has determined that the terms of the Facility are
at least as favorable as those available from comparable sources of funds in the
marketplace.
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.
INVESTMENT RESTRICTIONS
The following are fundamental investment restrictions of the Fund and,
prior to issuance of any preferred stock, may not be changed without the
approval of the holders of a majority of the Fund's outstanding shares of Common
Stock (which for this purpose and under the 1940 Act means the lesser of (i) 67%
of the shares of Common Stock represented at a meeting at which more than 50% of
the outstanding shares of Common Stock are represented or (ii) more than 50% of
the outstanding shares). Subsequent to the issuance of a class of preferred
stock, the following investment restrictions may not be changed without the
approval of a majority of the outstanding shares of Common Stock and of the
preferred stock, voting together as a class, and the approval of a majority of
the outstanding shares of preferred stock, voting separately by class. The Fund
may not:
1. Borrow money or issue senior securities, except as permitted by
Section 18 of the 1940 Act.
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.
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<PAGE>
5. Underwriter securities of other issuers except insofar as the Fund
may be deemed an underwriter under the Securities Act of 1933 in selling
portfolio securities.
6. Make loans to other persons, except (i) to the extent that the Fund
may be deemed to be making loans by purchasing Corporate Loans, as a
Co-Lender or otherwise, and other debt securities and entering into
repurchase agreements in accordance with its investment objective, policies
and limitations and (ii) the Fund may lend its portfolio securities in an
amount not in excess of 33 1/3% of its total assets, taken at market value,
provided that such loans shall be made in accordance with the guidelines
set forth in this Prospectus.
7. Invest more than 25% of its total assets in the securities of
issuers in any one industry; provided that this limitation shall not apply
with respect to obligations issued or guaranteed by the U.S. Government or
by its agencies or instrumentalities; and provided further that the Fund
may invest more than 25% and may invest up to 100% of its assets in
securities of issuers in the industry group consisting of financial
institutions and their holding companies, including commercial banks,
thrift institutions, insurance companies and finance companies. For
purposes of this restriction, the term 'issuer' includes the Borrower, the
Agent Bank and any Intermediate Participant (as defined under 'Investment
Objective and Policies-- Description of Participation Interests').
8. Purchase any securities on margin, except that the Fund may obtain
such short-term credit as may be necessary for the clearance of purchases
and sales of portfolio securities.
9. Make short sales of securities or maintain a short position or
invest in put, call, straddle or spread options.
An additional investment restriction adopted by the Fund, which may be
changed by the Board of Directors, provides that the Fund may not mortgage,
pledge, hypothecate or in any manner transfer, as security for indebtedness, any
securities owned or held by the Fund except as may be necessary in connection
with hedging techniques involving interest rate transactions, foreign currency
swap transactions relating to non-U.S. dollar-denominated loans and permitted
borrowings by the Fund.
If a percentage restriction on investment policies or the investment or use
of assets set forth above is adhered to at the time a transaction is effected,
later changes in percentage resulting from changing values will not be
considered a violation.
Because of the affiliation of Merrill Lynch with the Fund, the Fund is
prohibited from engaging in certain transactions involving Merrill Lynch except
pursuant to an exemptive order or otherwise in compliance with the provisions of
the 1940 Act and the rules and regulations thereunder. Included among such
restricted 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 (including Senior High Income Portfolio, Inc. and
Debt Strategies Fund, 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.
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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 on that day, 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 $5.35) to confirm a purchase of shares by such
customers. Purchases made directly through the Fund's Transfer Agent are not
subject to the processing fee.
Due to the administrative complexities associated with a continuous
offering, administrative errors may result in the Distributor or an affiliate
inadvertently acquiring nominal numbers (in no event in excess of 5% of the
shares of Common Stock) of shares of Common Stock which it may wish to resell.
Such shares of Common Stock will not be subject to any investment restriction
and may be resold pursuant to this Prospectus.
The Distributor compensates Merrill Lynch or other selected dealers at a
rate of 3.0% of amounts purchased. If the shares remain outstanding after one
year from the date of their original purchase, the Distributor will compensate
Merrill Lynch or such dealers quarterly at an annual rate equal to 0.25% of the
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. For the fiscal years ended August 31, 1995, 1996 and
1997 the
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Distributor paid $38,181,431, $29,197,327 and $12,542,788, respectively, to
Merrill Lynch in connection with the sale of shares of Common Stock of the Fund.
Upon the transfer of shares out of a Merrill Lynch brokerage account, an
investment account in the transferring shareholder's name may be opened at the
Fund's transfer agent, dividend disbursing agent and shareholder servicing
agent. Shareholders should be aware that it will not be possible to transfer
their shares from Merrill Lynch to another brokerage firm or financial
institution. Shareholders interested in transferring their brokerage accounts
from Merrill Lynch and who do not wish to have an account maintained for such
shares at the Fund's transfer agent must tender the shares for repurchase by the
Fund as described under 'Tender Offers' so that the cash proceeds can be
transferred to the account at the new firm.
TENDER OFFERS
In recognition of the possibility that a secondary market for the Fund's
shares will not exist, the Fund may take actions which will provide liquidity to
shareholders. The Fund may from time to time make offers to purchase its shares
of Common Stock from all beneficial holders of the Fund's Common Stock at a
price per share equal to the net asset value per share of the Common Stock
determined at the close of business on the day an offer terminates ('Tender
Offer'). Commencing with the second quarter of Fund operations, the Board of
Directors has considered the making of Tender Offers on a quarterly basis, and
the Board of Directors intends to continue this practice. There can be no
assurance, however, that the Board of Directors will decide to undertake the
making of a Tender Offer. Subject to the Fund's investment restriction with
respect to borrowings, the Fund may borrow money to finance the repurchase of
shares pursuant to any Tender Offers. See 'Special Leverage Considerations' and
'Investment Restrictions.'
The Fund expects that ordinarily there will be no secondary market for the
Fund's Common Stock and that periodic tenders will be the only source of
liquidity for Fund shareholders. Nevertheless, if a secondary market develops
for the Common Stock of the Fund, the market price of the shares may vary from
net asset value from time to time. Such variance may be affected by, among other
factors, relative demand and supply of shares and the performance of the Fund,
especially as it affects the yield on and net asset value of the Common Stock of
the Fund. A Tender Offer for shares of Common Stock of the Fund at net asset
value is expected to reduce any spread between net asset value and market price
that may otherwise develop. However, there can be no assurance that such action
would result in the Fund's Common Stock trading at a price which equals or
approximates net asset value.
Although the Board of Directors believes that the Tender Offers generally
would be beneficial to holders of the Fund's Common Stock, the acquisition of
shares of Common Stock by the Fund will decrease the total assets of the Fund
and therefore have the likely effect of increasing the Fund's expense ratio
(assuming such acquisition is not offset by the issuance of additional shares of
Common Stock). Furthermore, to the extent 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
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<PAGE>
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 (the 'Commission') relating to Tender Offers which includes
representations by the Fund that no secondary market for shares of the Fund's
Common Stock is expected to develop. The exemption is conditioned on the absence
of a secondary market. In the event that circumstances arise under which the
Fund does not conduct the Tender Offers regularly, the Board of Directors would
consider alternative means of providing liquidity for holders of Common Stock.
Such action would include an evaluation of any secondary market that then
existed and a determination of whether such market provided liquidity for
holders of Common Stock. If the Board of Directors determines that such market,
if any, fails to provide liquidity for the holders of Common Stock, the Board
expects that it will consider all then available alternatives to provide such
liquidity. Among the alternatives which the Board of Directors may consider is
the listing of the Fund's Common shares on a major domestic stock exchange or on
the NASDAQ National Market System in order to provide such liquidity. The Board
of Directors also may consider causing the Fund to repurchase its shares from
time to time in open-market or private transactions when it can do so on terms
that represent a favorable investment opportunity. In any event, the Board of
Directors expects that it will cause the Fund to take whatever action it deems
necessary or appropriate to provide liquidity for the holders of Common Stock in
light of the facts and circumstances existing at such time.
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.
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 $5.35) 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
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<PAGE>
Class A initial sales charge shares of certain Merrill Lynch-sponsored open-end
investment companies ('Eligible Class A Shares') at their net asset value,
without the imposition of the initial sales charge, if the conditions set forth
below are satisfied. First, net proceeds from the sale of the Original Shares in
the tender offer must be immediately reinvested in Eligible Class A Shares.
Second, the investment option is available only with respect to the proceeds of
shares of the Fund's Common Stock as to which no Early Withdrawal Charge is
applicable. Before taking advantage of this investment option, shareholders of
the Fund should obtain a currently effective prospectus of the mutual fund which
they intend to purchase. To exercise this investment option, shareholders should
consult their Merrill Lynch Financial Consultant.
EARLY WITHDRAWAL CHARGE
An Early Withdrawal Charge to recover distribution expenses incurred by the
Distributor will be charged against the shareholder's investment account and
paid to the Distributor in connection with most shares of Common Stock held for
less than three years which are accepted by the Fund for repurchase pursuant to
a Tender Offer in the manner described below. The Early Withdrawal Charge will
be imposed on those shares of Common Stock accepted for tender based on an
amount equal to the lesser of the then current net asset value of the shares of
Common Stock or the cost of the shares of Common Stock being tendered.
Accordingly, the Early Withdrawal Charge is not imposed on increases in the net
asset value above the initial purchase price. In addition, the Early Withdrawal
Charge is not imposed on shares derived from reinvestments of dividends or
capital gains distributions. In determining whether an Early Withdrawal Charge
is payable, it is assumed that the acceptance of an offer to repurchase pursuant
to a Tender Offer would be made from the earliest purchase of shares of Common
Stock. The Early Withdrawal Charge imposed will vary depending on the length of
time 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. The Early Withdrawal Charge will be waived on Fund shares tendered
following the death of all beneficial owners of such shares, provided the shares
are tendered within one year of death (a death certificate and other applicable
documents may be required). At the time of acceptance of the tender offer, the
record or succeeding beneficial owner must notify the Transfer Agent either
directly or indirectly through the Distributor that the Early Withdrawal Charge
should be waived. Upon confirmation of the owner's entitlement, the waiver will
be granted; otherwise, the waiver will be lost.
29
<PAGE>
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 fiscal years ended August 31, 1995, 1996 and 1997 the amount paid
to the Distributor in Early Withdrawal Charges aggregated $859,056, $3,171,259
and $4,868,307, respectively.
DIRECTORS AND OFFICERS
Information about the Directors and executive officers of the Fund,
including their ages and their principal occupations for at least the last five
years, is set forth below. Unless otherwise noted, the address of each Director
and executive officer is P.O. Box 9011, Princeton, New Jersey 08536-9011.
ARTHUR ZEIKEL (65)--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 ML & Co. since 1990.
RONALD W. FORBES (57)--Director(2)--1400 Washington Avenue, Albany, New
York 12222. Professor of Finance, School of Business, State University of New
York at Albany since 1989.
CYNTHIA A. MONTGOMERY (45)--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 (66)--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 from 1990 to 1991;
Adjunct Professor, Wharton School, The University of Pennsylvania from 1989 to
1990; Partner, Small Cities Cable Television since 1986.
KEVIN A. RYAN (65)--Director(2)--127 Commonwealth Avenue, Chestnut Hill,
Massachusetts 02167. Founder and current Director 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 (59)--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), and Alexander's Inc. (real estate company).
30
<PAGE>
TERRY K. GLENN (57)--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.
JOSEPH T. MONAGLE, JR. (49)--Senior Vice President(1)(2)--Senior Vice
President of the Investment Adviser and FAM since 1990; Senior Vice President of
Princeton Services since 1993.
R. DOUGLAS HENDERSON (40)--Vice President and Portfolio
Manager(1)(2)--First Vice President of the Investment Adviser since 1997; Vice
President of the Investment Adviser from 1989 to 1997.
DONALD C. BURKE (37)--Vice President(1)(2)--First Vice President of the
Investment Adviser since 1997; Vice President of the Investment Adviser from
1990 to 1997; and Director of Taxation of the Investment Adviser since 1990.
GERALD M. RICHARD (48)--Treasurer(1)(2)--Senior Vice President and
Treasurer of the Investment Adviser and FAM since 1984; Senior Vice President
and Treasurer of Princeton Services since 1993; Vice President of the
Distributor since 1981 and Treasurer since 1984.
PATRICK D. SWEENEY (43)--Secretary(1)(2)--First Vice President of the
Investment Adviser since 1997; Vice President of the Investment Adviser from
1990 to 1997.
At October 31, 1997, the Directors and officers of the Fund as a group (12
persons) owned an aggregate of less than 1% of the outstanding Common Stock of
the Fund. At such date, Mr. Zeikel, an officer and Director of the Fund, and the
other officers of the Fund, owned less than 1% of the outstanding shares of
common stock of ML & Co.
- - ------------------
(1) Interested person, as defined in the 1940 Act, of the Fund.
(2) Such Director or officer is a director, trustee, officer or member of the
advisory board of certain other investment companies for which the
Investment Adviser or FAM acts as investment adviser.
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 Director not affiliated with the Investment
Adviser (each a 'non-affiliated Director') a fee of $4,500 per year plus $400
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 and
Nominating Committee (the 'Committee'), which consists of all of the
non-affiliated Directors, an annual fee of $1,400. The Chairman of the Committee
receives an additional annual fee of $1,000. For the fiscal year ended August
31, 1997, fees and expenses paid to the non-affiliated Directors which were
allocated to the Fund aggregated $48,329.
The following table sets forth the compensation paid by the Fund to the
non-affiliated Directors for the fiscal year ended August 31, 1997 and the
aggregate compensation paid by all investment companies advised by
31
<PAGE>
MLAM and its affiliate FAM ('MLAM/FAM Advised Funds') to the non-affiliated
Directors for the calendar year ended December 31, 1996.
<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.................................... $8,800 None $142,500
Cynthia A. Montgomery............................... $8,800 None $142,500
Charles C. Reilly................................... $9,800 None $293,833
Kevin A. Ryan....................................... $8,800 None $142,500
Richard R. West..................................... $8,800 None $272,833
</TABLE>
- - ------------------
(1) The Directors serve on the Boards of other MLAM/FAM Advised Funds as
follows: Mr. Forbes (29 registered investment companies consisting of 42
portfolios); Ms. Montgomery (29 registered investment companies consisting
of 42 portfolios); Mr. Reilly (47 registered investment companies consisting
of 60 portfolios); Mr. Ryan (29 registered investment companies consisting
of 42 portfolios); and Mr. West (48 registered investment companies
consisting of 70 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 140 registered investment companies. The Investment
Adviser also offers investment advisory services to individuals and
institutions. As of November 30, 1997, the Investment Adviser and FAM had a
total of approximately $273.9 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.
32
<PAGE>
Under the terms of an administration agreement with the Fund (the
'Administration Agreement'), the Investment Adviser also performs or arranges
for the performance of the administrative services (i.e., services other than
investment advice and related portfolio activities) necessary for the operation
of the Fund, including paying all compensation of and furnishing office space
for officers and employees of the Fund connected with investment and economic
research, trading and investment management of the Fund, as well as the
compensation of all Directors of the Fund who are affiliated persons of the
Investment Adviser or any of its affiliates.
For the administrative services rendered to the Fund and the facilities
furnished, the Fund pays the Investment Adviser a monthly fee at an annual rate
of 0.25 of 1% of the Fund's average daily net assets determined in the same
manner as the fee payable by the Fund under the Investment Advisory Agreement.
The combined advisory and administration fees are greater than the advisory fees
paid by most funds but are similar in amount to the fees paid by similar funds
making similar investments.
For the fiscal years ended August 31, 1995, 1996 and 1997 the fee paid by
the Fund to the Investment Adviser pursuant to the Investment Advisory Agreement
was $13,654,371, $25,872,222 and $27,674,808, respectively, and the fee paid by
the Fund pursuant to the Administration Agreement was $3,593,255, $6,808,480 and
$7,282,844, respectively (based on average daily net assets of approximately
$1.4 billion, $2.7 billion and $2.9 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, Commission fees, fees and
expenses of non-interested 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 fiscal years ended August 31, 1995, 1996 and 1997, the
reimbursement for such services aggregated $197,653, $401,728 and $373,370,
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.
33
<PAGE>
CODE OF ETHICS
The Board of Directors of the Fund has adopted a Code of Ethics under Rule
17j-1 of the 1940 Act which incorporates the Code of Ethics of the Investment
Adviser (together, the 'Codes'). The Codes significantly restrict the personal
investing activities of all employees of the Investment Adviser and, as
described below, impose additional, more onerous, restrictions on Fund
investment personnel.
The Codes require that all employees of the Investment Adviser preclear any
personal securities investment (with limited exceptions, such as government
securities). The preclearance requirement and associated procedures are designed
to identify any substantive prohibition or limitation applicable to the proposed
investment. The substantive restrictions applicable to all employees of the
Investment Adviser include a ban on acquiring any securities in a 'hot' initial
public offering and a prohibition from profiting on short-term trading in
securities. In addition, no employee may purchase or sell any security which at
the time is being purchased or sold (as the case may be), or to the knowledge of
the employee is being considered for purchase or sale, by any fund advised by
the Investment Adviser. Furthermore, the Codes provide for trading 'blackout
periods' which prohibit trading by investment personnel of the Fund within
periods of trading by the Fund in the same (or equivalent) security (15 or 30
days depending upon the transaction).
Transfer Agency Services. Merrill Lynch Financial Data Services, Inc. (the
'Transfer Agent'), which is a subsidiary of ML & Co., acts as the Fund's
transfer agent pursuant to a Transfer Agency, Dividend Disbursing Agency and
Share holder Servicing Agency Agreement (the 'Transfer Agency Agreement').
Pursuant to the Transfer Agency Agreement, the Transfer Agent is responsible for
the issuance, transfer and tender of shares and the opening and maintenance of
shareholder accounts. Pursuant to the Transfer Agency Agreement, the Transfer
Agent receives an annual fee of up to $14.00 per shareholder account, and is
entitled to reimbursement for certain transaction charges and out-of-pocket
expenses incurred by the Transfer Agent under the Transfer Agency Agreement.
Additionally, a $.20 monthly closed account charge will be assessed on all
accounts which close during the calendar year. Application of this fee will
commence the month following the month the account is closed. At the end of the
calendar year, no further fees will be due. For purposes of the Transfer Agency
Agreement, the term 'account' includes a shareholder account maintained directly
by the Transfer Agent and any other account representing the beneficial interest
of a person in the relevant share class on a recordkeeping system, provided the
recordkeeping system is maintained by a subsidiary of ML & Co. For the fiscal
year ended August 31, 1997, the total fee paid by the Fund to the Transfer Agent
was $1,688,406.
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
34
<PAGE>
institutions, the Investment Adviser may consider, among other factors, the
financial strength, professional ability, level of service and research
capability of the institution. See 'Investment Objective and Policies--
Description of Participation Interests.' While such financial institutions
generally are not required to repurchase Participation Interests in Corporate
Loans which they have sold, they may act as principal or on an agency basis in
connection with the Fund's disposition of Corporate Loans.
The Fund has no obligation to deal with any bank, broker or dealer in
execution of transactions in portfolio securities. Subject to obtaining the best
price and execution, securities firms which provided supplemental investment
research to the Investment Adviser, including Merrill Lynch, may receive orders
for transactions by the Fund. Information so received will be in addition to and
not in lieu of the services required to be performed by the Investment Adviser
under the Investment Advisory Agreement and the expenses of the Investment
Adviser will not necessarily be reduced as a result of the receipt of such
supplemental information.
Other securities in which the Fund may invest are traded primarily in the
over-the-counter markets, and the Fund intends to deal directly with the dealers
who make markets in the securities involved, except in those circumstances where
better prices and execution are available elsewhere. Under the 1940 Act, except
as permitted by exemptive order, persons affiliated with the Fund are prohibited
from dealing with the Fund as principal in the purchase and sale of securities.
Since transactions in the over-the-counter market usually involve transactions
with dealers acting as principal for their own account, the Fund will not deal
with affiliated persons, including Merrill Lynch and its affiliates, in
connection with such transactions. See 'Investment Restrictions.' An affiliated
person of the Fund may serve as its broker in over-the-counter transactions
conducted on an agency basis.
PORTFOLIO TURNOVER
Generally, the Fund does not purchase securities for short-term trading
profits. However, the Fund may dispose of securities without regard to the time
they have been held when such actions, for defensive or other reasons, appear
advisable to the Investment Adviser. While it is not possible to predict
turnover rates with any certainty, at present it is anticipated that the Fund's
annual portfolio turnover rate, under normal circumstances, 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 fiscal years ended August 31, 1996 and 1997, the Fund's
portfolio turnover rate was 80.20% and 74.00%, 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 tax
purposes, the Fund will be required to distribute substantially all of its net
investment income for each calendar year. All net realized capital gains, if
any, are distributed at least annually to holders of Common Stock. Shares of
Common Stock accrue dividends as long as they are issued and outstanding. Shares
of
35
<PAGE>
Common Stock are issued and outstanding from the settlement date of a purchase
order to the settlement date of a tender offer. The Fund has entered into an
agreement providing for an unsecured revolving credit facility (the 'Facility')
which contains restrictions on the payment of dividends by the Fund. For a
description of such restrictions see 'Special Leverage Considerations.'
Under the 1940 Act, the Fund is not permitted to incur indebtedness unless
immediately after such incurrence the Fund has an asset coverage of 300% of the
aggregate outstanding principal balance of indebtedness. Additionally, under the
1940 Act, the Fund may not declare any dividend or other distribution upon any
class of its capital stock, or purchase any such capital stock, unless the
aggregate indebtedness of the Fund has at the time of the declaration of any
such dividend or distribution or at the time of any such purchase an asset
coverage of at least 300% after deducting the amount of such dividend,
distribution, or purchase price, as the case may be.
While any shares of preferred stock are outstanding, the Fund may not
declare any cash dividend or other distribution on its Common Stock, unless at
the time of such declaration, (1) all accumulated preferred stock dividends have
been paid and (2) the net asset value of the Fund's portfolio (determined after
deducting the amount of such dividend or other distribution) is at least 200% of
the liquidation value of the outstanding preferred stock (expected to be equal
to original purchase price per share plus any accumulated and unpaid dividends
thereon). This limitation, and the limitation contained in the preceding
paragraph, on the Fund's ability to make distributions on its Common Stock could
under certain circumstances impair the ability of the Fund to maintain its
qualification for taxation as a regulated investment company. See 'Special
Leverage Considerations' and 'Taxes.'
See 'Automatic Dividend Reinvestment Plan' for information concerning the
manner in which dividends and distributions to holders of Common Stock may be
automatically reinvested in shares of Common Stock of the Fund. Dividends and
distributions will be taxable to shareholders whether they are reinvested in
shares of the Fund or received in cash.
TAXES
GENERAL
The Fund intends to continue to qualify for the special tax treatment
afforded regulated investment companies ('RICs') under the Code. As long as 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. Recent legislation creates
additional categories of capital gains taxable at different rates. Although the
legislation does not explain how gain in these categories will be taxed to
shareholders of RICs, it authorizes regulations applying the new categories of
gain and the new rates to sales of securities by RICs. In the absence of
guidance, there is some uncertainty as to the manner in which the categories of
gain and related rates will be passed through to shareholders in capital gain
dividends. Any loss upon the sale or exchange of Fund
36
<PAGE>
shares held for six months or less 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. It is anticipated that guidance from the Internal Revenue Service
(the 'IRS') permitting categories of gain and related rates to be passed through
to shareholders would also require the Fund to designate the amounts of various
categories of capital gain income in capital gain dividends in a written notice
sent to shareholders. 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.
The IRS 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 the different categories of capital gains, discussed
above. A class's proportionate share of a particular type of income is
determined according to the percentage of total dividends paid by the RIC during
the year that was paid to such class. Consequently, if both Common Stock and
preferred stock are outstanding, the Fund intends to designate distributions
made to the classes as consisting of particular types of income in accordance
with the classes' proportionate shares of such income. Thus, capital gain
dividends, including the different categories of capital gains, as discussed
above, 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.
Under the terms of the Facility, the Fund may be restricted with respect to
the declaration and payment of dividends in certain circumstances. See 'Special
Leverage Considerations.' Additionally, 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.' Limits on the Fund's payment of dividends 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 and/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. The Fund will endeavor to
avoid restriction of its dividend payments under the Facility.
As noted above, the Fund must distribute annually at least 90% of its net
investment income. A distribution will only be counted for this purpose if it
qualifies for the dividends paid deduction under the Code. Some types
37
<PAGE>
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 IRS 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 IRS 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 IRS would agree that
dividends on the preferred stock are not preferential. If the IRS successfully
disallowed the dividends paid deduction for dividends on the preferred stock,
the Fund could lose the benefit of the special treatment afforded RICs under the
Code.
The Federal income tax rules governing the taxation of interest rate swaps
are not entirely clear and may require the Fund to treat payments received under
such arrangements as ordinary income and to amortize payments under certain
circumstances. Additionally, because the treatment of swaps under the RIC
qualification rules is not clear, the Fund will limit its activity in this
regard in order to maintain its qualification as a RIC.
Under certain Code provisions, some shareholders may be subject to a 31%
withholding tax on ordinary income dividends, capital gain dividends and
redemption payments ('backup withholding'). Generally, shareholders subject to
backup withholding will be those for whom no certified taxpayer identification
number is on file with the Fund or who, to the 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 the
applicable category of capital gain and related tax rate will depend on 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
38
<PAGE>
distribution which may be a taxable dividend in whole or in part. Holders of
Common Stock may wish to consult their tax advisers prior to tendering. If
holders of Common Stock whose shares are acquired by the Fund in the open market
sell less than all shares owned by or attributed to them, a risk exists that
these shareholders will be subject to taxable dividend treatment and a remote
risk exists that the remaining shareholders may be considered to have received a
deemed distribution.
------------------------------
The foregoing is a general and abbreviated summary of the applicable
provisions of the Code and Treasury Regulations presently in effect. For the
complete provisions, reference should be made to the pertinent Code sections and
the Treasury Regulations promulgated thereunder. The Code and the Treasury
Regulations are subject to change by legislative, judicial, or administrative
action either prospectively or retroactively.
Ordinary income and capital gain dividends may also be subject to state and
local taxes.
Shareholders are urged to consult their tax advisors regarding specific
questions as to Federal, foreign, state or local taxes. Foreign investors should
consider applicable foreign taxes in their evaluation of an investment in the
Fund.
AUTOMATIC DIVIDEND REINVESTMENT PLAN
All dividends and capital gains distributions are reinvested automatically
in full and fractional shares of the Fund at the net asset value per share next
determined on the payable date of such dividend or distribution. A shareholder
may at any time, by request to his Merrill Lynch financial consultant or by
written notification to Merrill Lynch if the shareholder's account is maintained
with Merrill Lynch or by written notification or by telephone (1-800-MER-FUND)
to the Transfer Agent if the shareholder's account is maintained with the
Transfer Agent, elect to have subsequent dividends or capital gains
distributions, or both, paid in cash, rather than reinvested, in which event
payment will be mailed on or about the payment date. The Fund is not responsible
for any failure of delivery to the shareholder's address of record and no
interest will accrue on amounts represented by uncashed distribution or
redemption checks. 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 business day during which the NYSE is open. The
NYSE is not open on New Year's Day, Martin Luther King, Jr. Day, Presidents'
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. For purposes of determining the net asset value of a share of
Common Stock, the value of the securities held by the Fund plus any cash or
other assets (including interest and dividends accumulated but not yet received)
minus all liabilities (including accrued expenses) and the aggregate liquidation
value of the outstanding shares of preferred stock is divided by the total
number of shares of Common Stock outstanding at such time. Expenses, including
the fees payable to the Investment Adviser, are accrued daily.
Corporate Loans will be valued in accordance with guidelines established by
the Board of Directors. Under the 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 calculating the mean of
39
<PAGE>
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.
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
40
<PAGE>
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 September 30, 1997, exclusive of that held by the Fund.
<TABLE>
<CAPTION>
AMOUNT OUTSTANDING
AS OF SEPTEMBER 30,
1997 (EXCLUSIVE OF
AMOUNT HELD BY AMOUNT HELD BY
AMOUNT FUND FOR OWN FUND FOR OWN
CLASS OF SHARES AUTHORIZED ACCOUNT ACCOUNT)
- - ---------------------------------------------------------- ------------- -------------- ------------------
<S> <C> <C> <C>
Common Stock.............................................. 1,000,000,000 -- 298,711,170
</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 2/3% 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.
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 Commission for the full text of these provisions.
41
<PAGE>
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 fiscal year ended August 31, 1997, the Fund earned
$0.669 per share income dividends, representing a net annualized yield of 6.70%,
based on a month-end per share net asset value of $10.02.
The Fund also may quote annual total return and aggregate total return
performance data. Total return quotations for the specified periods will be
computed by finding the rate of return (based on net investment income and any
capital gains or losses on portfolio investments over such periods) that would
equate the initial amount invested to the redeemable value of such investment at
the end of the period. For the fiscal year ended August 31, 1997, the annual
total return of the Fund was 7.23%, based on the change in per share net asset
value from $9.99 to $10.02, and assuming reinvestment of $0.668 per share income
dividends. For the period November 3, 1989 (commencement of operations) to
August 31, 1997, the aggregate total return of the Fund was 71.96%, based on the
change in per share net asset value from $10.00 to $10.02, and assuming
reinvestment of $5.404 per share income dividends.
The calculation of yield and total return does not reflect the imposition
of any Early Withdrawal Charges.
Yield and total return figures are based on the 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 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
IndexTM for money market deposit accounts offered by the 100 leading banks and
thrift institutions in the ten largest standard metropolitan statistical areas,
(5) yield data published by Lipper Analytical Services, Inc., or (6) the yield
on an investment in 90-day Treasury bills on a rolling basis, assuming quarterly
compounding. In addition, the Fund may compare the Prime Rate, the CD rate, the
Donoghue's averages and the other yield data described above to each other. As
with yield quotations, yield comparisons should not be considered 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 for the shares of the Fund is Merrill Lynch Financial
Data Services, Inc., 4800 Deer Lake Drive East, Jacksonville, Florida
32246-6484, a subsidiary of ML & Co.
42
<PAGE>
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.
43
<PAGE>
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, 1997, 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, 1997 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. as of August 31, 1997, 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 24, 1997
44
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (in Thousands)
Face Loan S&P Moody's Stated Value
Industries Amount Borrower Type Rating Rating Maturity Cost (Note 1a)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Senior Secured Floating Rate Loan Interests*
Advertising -- $471 Katz Media Corporation Reducing
0.7% Revolver NR+ Ba3 9/30/03 $472 $471
2,143 Katz Media Corporation Term A NR+ Ba3 9/30/03 2,140 2,146
6,633 Katz Media Corporation Term B NR+ Ba3 12/31/04 6,618 6,658
7,500 Outdoor Systems, Inc. Term NR+ NR+ 6/30/04 7,485 7,537
5,000 Outdoor Systems, Inc. Canadian
Term Loan NR+ NR+ 6/30/04 4,990 5,025
--------- ---------
Total Advertising 21,705 21,837
========= =========
Aerospace -- 0.3% 5,168 Whittaker Corporation Revolving
Credit NR+ NR+ 4/09/01 5,168 5,175
3,825 Whittaker Corporation Term NR+ NR+ 4/09/01 3,773 3,829
--------- ---------
Total Aerospace 8,941 9,004
========= =========
Air Transport -- 3,600 Continental Airlines, Inc. Term A BB- NR+ 7/31/02 3,595 3,586
0.3% 6,400 Continental Airlines, Inc. Term B BB- NR+ 7/31/04 6,400 6,396
--------- ---------
Total Air Transport 9,995 9,982
========= =========
Aircraft & 5,060 Aerostructures Hamble Holdings PLC Term B NR+ NR+ 9/30/03 5,037 5,089
Parts -- 2.2% 1,840 Aerostructures Hamble Holdings PLC Term C NR+ NR+ 9/30/04 1,832 1,850
9,783 Alliant Techsystems, Inc. Term NR+ Ba2 3/15/01 9,775 9,783
4,950 Banner Industries, Inc. Term B NR+ NR+ 6/30/03 4,928 4,941
7,494 Evergreen International Aviation, Inc. Term B NR+ Ba3 5/31/03 7,458 7,461
24,583 Gulfstream Aerospace Corp. Term NR+ NR+ 9/30/02 24,540 24,614
4,975 Mag Aerospace Term B NR+ NR+ 12/06/01 4,942 4,956
2,970 Technetics Term A NR+ NR+ 6/20/02 2,951 2,961
5,000 Tri Star Inc. Term NR+ NR+ 9/30/03 4,954 4,975
--------- ---------
Total Aircraft & Parts 66,417 66,630
========= =========
Amusement & 4,263 AMF Group, Inc. Revolving
Recreational Credit NR+ Ba3 3/31/02 4,263 4,263
Services -- 5.2% 9,929 AMF Group, Inc. Axel A NR+ Ba3 3/31/03 10,043 10,053
19,813 AMF Group, Inc. Axel B NR+ Ba3 3/31/04 19,844 20,110
2,453 AMF Group, Inc. Term NR+ Ba3 3/31/02 2,448 2,462
21,283 AMF Group, Inc. Term B NR+ Ba3 3/31/03 21,238 21,549
3,039 AMF Group, Inc. Term C1 NR+ Ba3 3/31/02 3,058 3,050
2,862 AMF Group, Inc. Term C1 NR+ Ba3 3/31/03 2,905 2,898
2,106 AMF Group, Inc. Term C2 NR+ Ba3 3/31/04 2,137 2,137
4,125 Amfac Parks, Inc. Term B NR+ NR+ 9/30/02 4,092 4,112
5,000 Fitness Holdings Term NR+ NR+ 12/31/00 4,971 4,981
7,143 KSL Recreation Group, Inc. Revolving
Credit NR+ B2 4/30/04 7,143 7,214
7,750 KSL Recreation Group, Inc. Term A NR+ B2 4/30/05 7,773 7,828
7,750 KSL Recreation Group, Inc. Term B NR+ B2 4/30/06 7,773 7,828
6,283 Kerastotes Revolving
Credit NR+ NR+ 12/31/03 6,283 6,251
3,677 Kerastotes Term NR+ NR+ 12/31/04 3,647 3,666
14,888 Metro Goldwyn Mayer Co. Term B NR+ Ba3 3/31/04 14,786 14,962
872 Six Flags Entertainment Corp. Term NR+ Ba3 10/28/01 872 873
5,496 Six Flags Entertainment Corp. Term A NR+ Ba3 10/28/01 5,510 5,510
17,473 Six Flags Entertainment Corp. Term B NR+ Ba3 6/23/03 17,404 17,604
7,500 Vail Corporation Term B NR+ NR+ 4/15/04 7,490 7,519
--------- ---------
Total Amusement & Recreational Services 153,680 154,870
========= =========
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Face Loan S&P Moody's Stated Value
Industries Amount Borrower Type Rating Rating Maturity Cost (Note 1a)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Apparel -- 1.2% 4,571 CS Brooks Canada Axel A NR+ NR+ 6/30/02 4,551 4,548
10,157 CS Brooks Canada Axel B NR+ NR+ 6/30/04 10,114 10,106
9,683 Humphreys Inc. Term B NR+ NR+ 1/15/03 9,683 9,683
5,000 Renfro Corp. Term B NR+ NR+ 1/15/03 4,977 4,994
6,237 William Carter Co. (The) Term BB- Ba3 10/31/03 6,209 6,237
--------- ---------
Total Apparel 35,534 35,568
========= =========
Automotive 4,000 American Bumper Term B NR+ NR+ 10/31/02 3,990 4,015
Equipment -- 23,731 Collins & Aikman Corp. Term B B+ B1 12/31/02 23,635 23,790
1.7% 385 Johnstown America Industrial Inc. Revolving
Credit NR+ B1 3/31/02 385 375
19,001 Johnstown America Industrial Inc. Term B NR+ B1 3/31/03 18,925 18,639
5,000 Safelite Glass Corp. Term B BB- Ba3 9/08/04 4,982 5,028
--------- ---------
Total Automotive Equipment 51,917 51,847
========= =========
Broadcast -- 5,593 American Radio Systems Corp. Revolving
Radio & TV -- Credit B+ Ba2 12/31/04 5,593 5,588
6.2% 3,905 Benedek Broadcasting Corp. Axel A B+ Ba3 5/01/01 3,894 3,896
4,200 Benedek Broadcasting Corp. Axel B B+ Ba3 11/01/02 4,187 4,190
480 Chancellor Broadcasting, Inc. Revolving
Credit NR+ Ba2 6/26/04 480 479
12,000 Chancellor Broadcasting, Inc. Term NR+ Ba2 6/26/04 11,956 11,985
4,613 Citicasters Inc. (Jacor) Term B BB- Ba2 9/17/04 4,592 4,608
7,371 Evergreen Media Corp. Revolving
Credit NR+ NR+ 6/30/05 7,371 7,325
53,571 Evergreen Media Corp. Term NR+ NR+ 6/30/05 53,391 53,471
8,261 Latin Communications Term NR+ NR+ 3/31/04 8,211 8,235
10,000 Sinclair Broadcasting Group Inc. Term B NR+ Ba2 12/31/04 9,985 10,000
9,193 Sullivan Broadcasting Term B NR+ Ba3 12/31/03 9,164 9,175
46,682 Viacom, Inc. Term NR+ Ba2 7/01/02 46,622 46,639
20,000 Western Wireless Corp. Term B B+ B1 3/31/05 20,000 20,119
--------- ---------
Total Broadcast -- Radio & TV 185,446 185,710
========= =========
Building & Con- 4,447 Fenway Holdings, Inc. Term B NR+ NR+ 9/15/02 4,421 4,395
struction -- 0.1% --------- ---------
Total Building & Construction 4,421 4,395
========= =========
Building 3,750 Amerimax Term C NR+ NR+ 6/30/04 3,745 3,750
Materials -- 3.0% 4,190 Behr Process Term B NR+ NR+ 3/31/04 4,184 4,190
2,793 Behr Process Term C NR+ NR+ 3/31/05 2,789 2,796
3,695 Dal Tile International Inc. Revolving
Credit NR+ NR+ 12/31/02 3,695 3,665
4,143 Dal Tile International Inc. Term NR+ NR+ 12/31/02 4,138 4,121
27,000 Dal Tile International Inc. Term B NR+ NR+ 12/31/03 26,868 26,916
2,521 Euramax Holdings Term B NR+ NR+ 6/30/04 2,518 2,521
5,000 Falcon Building Products, Inc. Term NR+ B1 6/30/05 4,980 5,006
29,875 National Gypsum Co. Term B NR+ Ba3 9/20/03 29,824 29,987
8,248 Walter Industrials, Inc. Term B NR+ NR+ 2/22/03 8,234 8,263
--------- ---------
Total Building Materials 90,975 91,215
========= =========
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Face Loan S&P Moody's Stated Value
Industries Amount Borrower Type Rating Rating Maturity Cost (Note 1a)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Cable TV 6,000 Cablevision of Ohio Term NR+ Ba2 12/31/05 5,987 5,992
Services -- 5.4% 24,375 Chelsea Communications Term B NR+ NR+ 12/31/04 24,278 24,322
17,081 Classic Cable Inc. Term B NR+ B1 6/30/05 16,911 16,568
18,683 Coaxial Communications Term B NR+ NR+ 12/31/99 18,627 18,497
5,000 FrontierVision Operating Partners L.P. Term B NR+ Ba3 6/30/05 4,972 5,000
10,000 Intermedia Communications, Inc. Term NR+ Ba3 1/01/05 9,977 10,038
3,193 Marcus Cable Operating Co. Revolving
Credit NR+ NR+ 4/30/14 3,193 3,177
30,625 Marcus Cable Operating Co. Term A NR+ NR+ 12/31/02 30,521 30,644
35,750 Marcus Cable Operating Co. Term B NR+ NR+ 4/30/04 35,483 35,951
10,000 Triax Midwest Term B NR+ NR+ 6/30/05 9,942 9,997
--------- ---------
Total Cable TV Services 159,891 160,186
========= =========
Casinos -- 0.2% 5,293 Alliance Gaming Corp. Term B NR+ NR+ 1/31/05 5,294 5,336
1,392 Alliance Gaming Corp. Term C NR+ NR+ 7/31/05 1,392 1,404
--------- ---------
Total Casinos 6,686 6,740
========= =========
Chemicals -- 5.3% 8,890 Aztar Corporation Revolving
Credit NR+ NR+ 12/31/99 8,890 8,890
4,140 Aztar Corporation Term NR+ NR+ 12/31/99 4,142 4,137
11,396 Cedar Chemical Term B NR+ NR+ 10/31/03 11,321 11,368
4,988 Exide Corporation Term D NR+ NR+ 6/15/01 4,988 4,994
2,189 HSC Holdings Revolving
Credit NR+ NR+ 12/31/99 2,189 2,184
3,350 HSC Holdings Term NR+ NR+ 12/31/99 3,335 3,342
2,886 Harris Specialty Chemicals Revolving
Credit NR+ NR+ 12/30/01 2,886 2,897
219 Harris Specialty Chemicals Term A NR+ NR+ 12/30/00 219 220
226 Harris Specialty Chemicals Term A NR+ NR+ 12/30/01 226 227
602 Harris Specialty Chemicals Term B NR+ NR+ 12/30/99 601 605
2,447 Harris Specialty Chemicals Term B NR+ NR+ 12/30/01 2,437 2,457
35,990 Huntsman Corp. Term A NR+ NR+ 12/31/02 35,962 35,934
5,000 Huntsman Corp. Term B NR+ NR+ 3/15/04 4,995 5,050
14,850 Huntsman Corp. Term B NR+ NR+ 12/31/05 14,800 14,850
15,000 Huntsman Corp. Term B NR+ NR+ 6/30/04 15,000 15,103
5,000 Huntsman Corp. Term C NR+ NR+ 3/15/05 4,995 5,050
8,000 Pioneer Americas Acquisition Corp. Term NR+ NR+ 12/5/06 8,069 8,077
24,143 Sterling Chemicals, Inc. Term B NR+ Ba3 9/30/04 24,033 24,173
6,611 Texas Petrochemicals Corp. Term B NR+ Ba3 6/30/04 6,589 6,595
1,047 Thoro World Systems, Inc. Term A NR+ NR+ 12/30/00 1,042 1,051
1,422 Thoro World Systems, Inc. Term B NR+ NR+ 12/30/01 1,413 1,427
--------- ---------
Total Chemicals 158,132 158,631
========= =========
Computer-Related 7,000 Anacomp, Inc. Term NR+ B2 3/31/01 6,969 7,057
Services & 11,000 DecisionOne Corp. Term B NR+ B1 8/07/05 10,983 10,986
Products -- 1.4% 7,417 Fairchild Semiconductors Corp. Term B NR+ Ba3 3/11/03 7,399 7,473
12,438 Phase Metrics Term NR+ NR+ 11/12/01 12,383 12,189
5,000 Triad Systems Corp. Term NR+ NR+ 2/27/03 4,971 4,953
--------- ---------
Total Computer-Related Services & Products 42,705 42,658
========= =========
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Face Loan S&P Moody's Stated Value
Industries Amount Borrower Type Rating Rating Maturity Cost (Note 1a)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consumer 615 E & S Holdings Corp. Revolving
Products -- Credit NR+ B1 9/30/03 615 615
1.8% 2,059 E & S Holdings Corp. Term NR+ B1 9/30/03 2,059 2,059
5,172 Hedstrom Corp. Term A NR+ B1 6/30/03 5,147 5,153
15,000 Playtex Family Products Inc. Term B NR+ Ba2 9/15/03 14,926 15,112
7,228 RTI Funding Corp. (Ritvik Toys) Term B NR+ NR+ 2/07/03 7,168 7,255
7,228 RTI Funding Corp. (Ritvik Toys) Term C NR+ NR+ 2/07/04 7,165 7,255
15,000 Revlon Consumer Products Corp. Term NR+ NR+ 5/30/02 14,988 15,007
--------- ---------
Total Consumer Products 52,068 52,456
========= =========
Diversified 1,712 Ameriserve Food Corp. Term A NR+ NR+ 6/30/03 1,721 1,722
Manufacturing -- 5,000 Sarah Michael Term B NR+ NR+ 6/30/04 5,000 5,000
0.5% 7,490 Thermadyne Industries, Inc. Revolving
Credit NR+ Ba3 6/30/01 7,490 7,490
--------- ---------
Total Diversified Manufacturing 14,211 14,212
========= =========
Drilling -- 0.3% 4,676 IRI International Term A NR+ NR+ 3/31/02 4,660 4,702
4,846 Rigco North America Term NR+ NR+ 9/30/98 4,832 4,871
--------- ---------
Total Drilling 9,492 9,573
========= =========
Drug/Proprietary 204 Duane Reade Co. Term A NR+ NR+ 9/30/98 204 204
Stores -- 0.9% 10,000 Duane Reade Co. Term B NR+ NR+ 9/30/99 9,953 9,987
8,366 Smith's Food & Drug Centers, Inc. Term A NR+ NR+ 3/31/05 8,356 8,369
9,574 Smith's Food & Drug Centers, Inc. Term B NR+ NR+ 3/31/05 9,563 9,586
--------- ---------
Total Drug/Proprietary Stores 28,076 28,146
========= =========
Electronics/ 7,275 Amphenol Corp. Term B NR+ Ba3 3/31/02 7,390 7,364
Electrical 6,911 Amphenol Corp. Term C NR+ Ba3 3/31/03 7,021 7,000
Components -- 2,986 Circo Craft Co. (Viasystems) Term B NR+ NR+ 6/30/04 2,976 2,997
2.2% 1,800 Circo Craft Co. (Viasystems) Term C NR+ NR+ 6/30/05 1,794 1,807
5,550 Communications & Power Industries Inc. Term B NR+ NR+ 8/11/02 5,507 5,564
4,089 Details, Inc. Term A NR+ NR+ 1/31/01 4,066 4,076
2,957 Dictaphone Corp. Revolving
Credit B- B1 3/31/01 2,957 2,817
2,870 Dictaphone Corp. Term A B- B1 3/31/01 2,818 2,769
20,000 International Wire Group, Inc. Term B NR+ B1 9/30/03 19,981 20,040
1,364 L-3 Communications Corp. Term A NR+ Ba3 3/31/03 1,361 1,381
2,494 L-3 Communications Corp. Term B NR+ Ba3 3/31/05 2,490 2,526
1,645 L-3 Communications Corp. Term C NR+ Ba3 3/31/06 1,641 1,665
7,000 Telex Communications, Inc. Term B NR+ Ba3 11/30/04 6,983 7,048
--------- ---------
Total Electronics/Electrical Components 66,985 67,054
========= =========
Entertainment -- 4,500 Moovies Inc. Term A NR+ NR+ 3/31/02 4,500 4,500
0.2% --------- ---------
Total Entertainment 4,500 4,500
========= =========
Financial 14,842 Outsourcing Solutions Inc. Term B NR+ B1 10/15/03 14,774 14,888
Services -- 0.5% --------- ---------
Total Financial Services 14,774 14,888
========= =========
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Face Loan S&P Moody's Stated Value
Industries Amount Borrower Type Rating Rating Maturity Cost (Note 1a)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Food & Kindred 7,369 American Italian Pasta Company Term C NR+ NR+ 2/26/04 7,303 7,378
Products -- 2,945 Del Monte Corp. Revolving
4.7% Credit NR+ B2 3/31/03 2,945 2,945
3,273 Del Monte Corp. Term A NR+ B2 3/31/03 3,273 3,285
5,100 Del Monte Corp. Term B NR+ B2 3/31/05 5,095 5,145
17,418 Favorite Brands International Term B NR+ NR+ 8/30/04 17,345 17,461
163 International Homefoods, Inc. Revolving
Credit NR+ Ba3 3/31/03 163 163
3,983 International Homefoods, Inc. Term A NR+ Ba3 3/31/03 4,003 3,994
15,000 International Homefoods, Inc. Term B NR+ Ba3 9/30/04 14,940 15,088
2,500 Mistic Beverage, Inc. Term B NR+ NR+ 6/01/04 2,488 2,513
2,500 Mistic Beverage, Inc. Term C NR+ NR+ 6/01/05 2,488 2,513
4,609 President Baking Co., Inc. Term B NR+ NR+ 9/30/00 4,590 4,616
3,358 Rykoff-Sexton, Inc. Term B BB- Ba3 10/31/02 3,358 3,364
1,611 Rykoff-Sexton, Inc. Term C BB- Ba3 4/30/03 1,611 1,614
1,960 Select Beverages Inc. Term B NR+ NR+ 6/30/01 1,946 1,963
2,910 Select Beverages Inc. Term C NR+ NR+ 6/30/02 2,890 2,919
7,500 Snapple Beverage Corp. Term B NR+ NR+ 6/01/04 7,463 7,537
7,500 Snapple Beverage Corp. Term C NR+ NR+ 6/01/05 7,463 7,537
23,057 Specialty Foods Inc. Term B NR+ B3 4/30/01 22,958 23,005
7,062 Van De Kamps Inc. Term B NR+ Ba3 4/30/03 7,031 7,097
4,431 Van De Kamps Inc. Term C NR+ Ba3 9/30/03 4,411 4,453
6,617 Volume Services Term B NR+ B2 12/31/02 6,563 6,617
3,312 Volume Services Term C NR+ B2 12/31/03 3,284 3,312
4,844 Windsor Quality Food Term B NR+ NR+ 12/31/02 4,823 4,783
--------- ---------
Total Food & Kindred Products 138,434 139,302
========= =========
Funeral Homes & 15,448 Loewen Group Inc. Revolving
Parlors -- 1.3% Credit NR+ Ba1 5/29/01 15,448 15,410
14,833 Prime Succession International Group Axel A BB- NR+ 8/01/03 14,784 15,019
6,907 Rose Hills Acquisition Corp. Axel A BB NR+ 12/01/03 6,891 7,010
--------- ---------
Total Funeral Homes & Parlors 37,123 37,439
========= =========
Furniture & 9,978 Lifestyle Furnishings International
Fixtures -- 0.3% Ltd. Term NR+ Ba2 6/27/07 9,978 10,028
--------- ---------
Total Furniture & Fixtures 9,978 10,028
========= =========
General 8,458 CSK Auto Inc. Term NR+ Ba3 10/31/03 8,409 8,513
Merchandise 1,000 Kmart Corp. Revolving
Stores -- 0.7% Credit BB+ B1 1/06/00 1,000 999
1,938 Music Acquisition Term B NR+ NR+ 8/31/01 1,912 1,288
7,500 Music Acquisition Term C NR+ NR+ 8/31/02 7,400 4,988
5,000 Sneaker Stadium Term NR+ NR+ 12/31/02 5,000 5,000
--------- ---------
Total General Merchandise Stores 23,721 20,788
========= =========
Grocery -- 1.6% 10,400 Big V Supermarkets Inc. Term B NR+ NR+ 3/15/00 10,326 10,296
3,120 Bruno's, Inc. Revolving
Credit NR+ B1 6/02/03 3,120 3,038
4,000 Bruno's, Inc. Term B NR+ B1 6/02/05 3,990 3,980
806 Carr Gottstein Foods Co. Revolving
Credit NR+ NR+ 6/30/01 806 806
2,499 Carr Gottstein Foods Co. Term A NR+ B1 6/30/01 2,503 2,509
3,546 Carr Gottstein Foods Co. Term B NR+ B1 12/31/02 3,553 3,572
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Face Loan S&P Moody's Stated Value
Industries Amount Borrower Type Rating Rating Maturity Cost (Note 1a)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Grocery 2,971 Ralph's Grocery Company Revolving
(concluded) Credit NR+ Ba3 2/15/03 2,971 2,964
4,952 Ralph's Grocery Company Term A NR+ Ba3 2/15/03 4,941 4,969
6,983 Ralph's Grocery Company Term B NR+ Ba3 2/15/04 6,974 7,044
4,184 Star Markets Co., Inc. Term B NR+ Ba3 12/31/01 4,170 4,174
3,132 Star Markets Co., Inc. Term C NR+ Ba3 12/31/02 3,120 3,120
--------- ---------
Total Grocery 46,474 46,472
========= =========
Health 16,212 Community Health Systems, Inc. Term B NR+ NR+ 12/31/03 16,140 16,263
Services -- 5.9% 16,212 Community Health Systems, Inc. Term C NR+ NR+ 12/31/04 16,139 16,263
12,205 Community Health Systems, Inc. Term D NR+ NR+ 12/31/05 12,149 12,259
5,001 Corning/Quest Term A NR+ NR+ 12/06/02 4,989 5,007
3,252 Dade International, Inc. Term B NR+ B1 12/31/02 3,235 3,256
3,252 Dade International, Inc. Term C NR+ B1 12/31/03 3,235 3,256
3,433 Dade International, Inc. Term D NR+ B1 12/31/04 3,413 3,451
7,500 Endo Pharmaceuticals Term B NR+ NR+ 6/30/04 7,485 7,533
5,000 FPA Medical Management, Inc. Term NR+ NR+ 9/30/01 4,993 5,000
8,069 Horizons/CMS Revolving
Credit NR+ NR+ 3/31/03 8,069 8,067
2,447 Imed Corp. (Alaris) Term B BB- B1 11/30/03 2,441 2,472
2,447 Imed Corp. (Alaris) Term C BB- B1 11/30/04 2,441 2,473
2,303 Imed Corp. (Alaris) Term D BB- B1 11/30/05 2,297 2,327
9,905 MEDIQ, Inc. Term B B+ NR+ 9/30/04 9,850 9,911
13,009 Medical Specialties Axel NR+ NR+ 6/30/04 12,935 12,977
4,786 Medical Specialties Term NR+ NR+ 6/30/01 4,762 4,774
6,491 Merit Behavioral Care Corp. Term A NR+ B2 6/01/03 6,451 6,485
15,849 Merit Behavioral Care Corp. Term B NR+ B2 4/06/02 15,783 15,893
35,000 National Medical Care Inc. Term BB Ba1 9/30/03 34,888 34,869
5,000 Prime Medical Services, Inc. Term B NR+ NR+ 4/30/03 4,982 5,005
--------- ---------
Total Health Services 176,677 177,541
========= =========
Hotels & 3,125 Capstar Hotel Company Term B NR+ NR+ 6/30/04 3,125 3,142
Motels -- 0.8% 5,130 Doubletree Corporation Term B NR+ NR+ 5/15/04 5,112 5,159
2,424 Westin Hotels Ltd. Revolving
Credit NR+ NR+ 2/08/02 2,424 2,429
13,576 Westin Hotels Ltd. Term NR+ NR+ 2/08/02 13,544 13,601
--------- ---------
Total Hotels & Motels 24,205 24,331
========= =========
Industrial 8,955 Elis/Omni Axel NR+ NR+ 10/30/05 8,944 9,179
Services -- 0.3% --------- ---------
Total Industrial Services 8,944 9,179
========= =========
Leasing & Rental 2,978 Brand Scaffold Term B NR+ NR+ 9/30/03 2,964 2,987
Services -- 0.6% 1,985 Brand Scaffold Term C NR+ NR+ 9/30/04 1,975 1,993
12,959 Coinmachine Corp. Term B NR+ NR+ 6/30/04 12,923 13,056
--------- ---------
Total Leasing & Rental Services 17,862 18,036
========= =========
Manufacturing -- 10,386 Calmar Inc. Axel A NR+ B1 9/15/03 10,344 10,374
2.0% 7,790 Calmar Inc. Axel B NR+ B1 3/15/04 7,757 7,809
10,000 Polyfibron Technologies Term B NR+ NR+ 12/28/03 10,000 10,000
2,757 Rayovac Corp. Term B NR+ Ba3 9/30/03 2,751 2,776
2,757 Rayovac Corp. Term C NR+ Ba3 9/30/04 2,751 2,779
5,000 Russell Stanley Term B NR+ NR+ 6/30/05 4,981 5,050
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Face Loan S&P Moody's Stated Value
Industries Amount Borrower Type Rating Rating Maturity Cost (Note 1a)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Manufacturing 701 Trans Technology Corp. Revolving
(concluded) Credit NR+ NR+ 3/31/02 701 698
1,715 Trans Technology Corp. Term A NR+ NR+ 3/31/02 1,715 1,715
14,400 Trans Technology Corp. Term B NR+ NR+ 6/30/02 14,282 14,418
1,277 Walls Industries Term B NR+ NR+ 2/28/05 1,277 1,277
1,723 Walls Industries Term C NR+ NR+ 2/28/06 1,723 1,723
--------- ---------
Total Manufacturing 58,282 58,619
========= =========
Measuring, 9,331 CHF/Ebel USA Inc. Term B NR+ NR+ 9/30/01 9,331 9,331
Analyzing & 10,840 Graphic Controls Corp. Term B NR+ B1 9/28/03 10,794 10,867
Controlling 5,000 Packard Bioscience Co. Term NR+ Ba3 3/31/03 4,982 5,013
Instruments --
0.8% --------- ---------
Total Measuring, Analyzing & Controlling Instruments 25,107 25,211
========= =========
Metals & 5,059 Adience, Inc. Term B NR+ NR+ 4/15/05 5,040 5,084
Mining -- 1.2% 4,767 Alliance Coal Term B NR+ B1 12/31/02 4,746 4,770
4,955 Anker Coal Group, Inc. Term B NR+ NR+ 6/30/04 4,952 4,943
2,192 Centennial Resources Term A NR+ NR+ 3/31/02 2,172 2,181
5,163 Centennial Resources Term B NR+ NR+ 12/31/03 5,114 5,151
2,400 Northwestern Steel & Mining Revolving
Credit NR+ B2 12/31/00 2,400 2,400
10,171 UCAR International Inc. Term B NR+ Ba2 12/31/02 10,162 10,179
--------- ---------
Total Metals & Mining 34,586 34,708
========= =========
Packaging -- 7,875 IPC, Inc. Term NR+ B1 9/30/01 7,853 7,895
0.7% 2,716 Mail-Well, Inc./Supremex Term A NR+ Ba2 3/31/03 2,713 2,709
3,870 Mail-Well, Inc./Supremex Term A NR+ Ba3 3/31/03 3,866 3,867
1,207 Mail-Well, Inc./Supremex Term B NR+ Ba2 7/31/03 1,207 1,204
1,941 Silgan Corp. Revolving
Credit NR+ Ba2 12/31/03 1,941 1,937
2,813 Silgan Corp. Term A NR+ Ba2 12/31/03 2,812 2,807
--------- ---------
Total Packaging 20,392 20,419
========= =========
Paper -- 9.4% 4,764 Crown Paper Co. Term B BB Ba3 8/22/03 4,715 4,794
828 Jefferson Smurfit Company/ Revolving
Container Corp. of America Credit BB Ba3 4/30/01 828 826
24,191 Jefferson Smurfit Company/
Container Corp. of America Term A BB Ba3 4/30/01 24,135 24,214
6,564 Jefferson Smurfit Company/
Container Corp. of America Term B BB Ba3 4/30/01 6,558 6,621
47,905 Jefferson Smurfit Company/
Container Corp. of America Term B BB Ba3 4/30/02 47,840 48,324
12,776 Jefferson Smurfit Company/
Container Corp. of America Term C BB Ba3 10/31/02 12,749 12,888
5,620 Riverwood International Corp. Term A B+ B1 2/28/03 5,451 5,634
63,415 Riverwood International Corp. Term B B+ B1 2/28/04 62,591 63,930
24,368 Riverwood International Corp. Term C B+ B1 8/28/04 24,046 24,566
1,147 S.D. Warren Co. Term A NR+ Ba2 12/31/01 1,147 1,149
19,301 S.D. Warren Co. Term B NR+ Ba2 6/30/02 19,261 19,373
2,423 St. Laurent Paperboard, Inc. Term B NR+ NR+ 5/31/03 2,416 2,453
2,577 St. Laurent Paperboard, Inc. Term C NR+ NR+ 5/31/04 2,570 2,610
13,930 Stone Container Corp. Term B NR+ Ba3 4/01/00 13,833 14,043
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Face Loan S&P Moody's Stated Value
Industries Amount Borrower Type Rating Rating Maturity Cost (Note 1a)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Paper 20,117 Stone Container Corp. Term C NR+ Ba3 4/01/00 20,091 20,287
(concluded) 20,000 Stone Container Corp. Term E NR+ Ba3 10/01/03 20,119 20,200
9,451 Stronghaven Term B NR+ NR+ 5/15/04 9,407 9,475
--------- ---------
Total Paper 277,757 281,387
========= =========
Printing & 7,187 Advanstar Communications Term B NR+ NR+ 12/21/03 7,148 7,178
Publishing -- 21,097 American Media Term B BB- Ba2 9/30/02 21,028 21,071
3.9% 8,789 Garden State Newspapers, Inc. Revolving
Credit 'A' NR+ NR+ 6/30/03 8,789 8,773
1,740 Garden State Newspapers, Inc. Term A NR+ NR+ 3/31/04 1,737 1,737
4,000 Garden State Newspapers, Inc. Term B NR+ NR+ 3/31/04 3,985 3,992
8,762 Journal News Co. Term NR+ NR+ 12/31/01 8,746 8,751
2,948 K-III Communications Corp. Revolving
Credit NR+ Ba3 12/31/00 2,948 2,931
12,620 K-III Communications Corp. Revolving
Credit 'A' NR+ Ba3 12/31/00 12,620 12,549
5,000 K-III Communications Corp. Revolving
Credit 'C' NR+ Ba3 12/31/00 5,000 4,972
6,000 K-III Communications Corp. Term NR+ Ba3 6/30/04 5,995 5,974
10,000 Morris Communications Term B NR+ NR+ 6/30/05 9,981 10,000
14,000 Newsquest Capital PLC Term 2 NR+ NR+ 12/31/04 13,934 14,017
6,213 Petersen Publishing Co. Term 3 B+ B1 9/30/04 6,191 6,228
3,571 Von Hoffmann Press Inc. Term B NR+ B1 5/22/05 3,563 3,603
3,571 Von Hoffmann Press Inc. Term C NR+ B1 5/22/06 3,563 3,603
--------- ---------
Total Printing & Publishing 115,228 115,379
========= =========
Rendering -- 0.2% 4,956 CBP Resources Inc. Term B NR+ NR+ 9/30/03 4,924 4,943
--------- ---------
Total Rendering 4,924 4,943
========= =========
Restaurants -- 0.1% 4,000 AFC Enterprises Term NR+ Ba3 6/30/02 3,981 4,005
--------- ---------
Total Restaurants 3,981 4,005
========= =========
Retail -- 0.1% 2,500 Murray's Discount Auto Stores Term NR+ NR+ 6/30/03 2,500 2,500
--------- ---------
Total Retail 2,500 2,500
========= =========
Telephone 8,000 Arch Communications Group, Inc. Term B NR+ B1 12/31/03 7,972 7,975
Communications -- 8,368 MobileMedia Corp. Term A NR+ Caa 6/30/02 8,339 7,447
5.5% 1,667 MobileMedia Corp. Term B1 NR+ Caa 6/30/02 1,667 1,485
8,000 MobileMedia Corp. Term B2 NR+ Caa 6/30/03 7,980 7,130
1,989 Nextel Communications, Inc. Revolving
Credit NR+ B1 3/31/03 1,989 1,970
10,348 Nextel Communications, Inc. Revolving
Credit 'B' NR+ B1 3/31/03 10,348 10,248
8,427 Nextel Communications, Inc. Term C NR+ B1 3/31/03 8,295 8,391
35,000 Nextel Communications, Inc. Term D NR+ B1 6/30/03 34,404 35,339
17,888 Paging Network Inc. Revolving
Credit NR+ Ba3 12/31/04 17,888 17,636
4,821 Shared Technologies Cellular, Inc. Term B NR+ B1 3/31/03 4,796 4,828
25,000 Sprint Spectrum L.P./Nortel Term NR+ B1 6/29/01 24,918 25,125
17,775 Sprint Spectrum L.P. Term 1 NR+ B1 7/04/05 17,636 17,875
17,776 Sprint Spectrum L.P. Term 2 NR+ B1 7/04/05 17,634 17,875
--------- ---------
Total Telephone Communications 163,866 163,324
========= =========
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (continued) (in Thousands)
Face Loan S&P Moody's Stated Value
Industries Amount Borrower Type Rating Rating Maturity Cost (Note 1a)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Textiles/Mill 4,267 Ithaca Industries, Inc. Revolving
Products -- Credit NR+ NR+ 8/31/99 4,267 4,245
0.7% 12,237 Ithaca Industries, Inc. Term NR+ NR+ 8/31/99 12,202 12,176
3,289 Joan Fabrics Term B NR+ NR+ 6/30/05 3,285 3,328
1,711 Joan Fabrics Term C NR+ NR+ 6/30/06 1,708 1,731
--------- ---------
Total Textiles/Mill Products 21,462 21,480
========= =========
Transportation 28,107 Atlas Air, Inc. Revolving
Services -- 1.8% Credit NR+ NR+ 6/30/98 28,107 28,142
10,000 Atlas Freight Term NR+ NR+ 5/29/04 9,976 10,031
7,469 International Logistics Term B NR+ NR+ 12/31/03 7,435 7,455
3,333 Petro Stopping Centers Term B BB- Ba3 12/31/03 3,325 3,327
3,994 Travel Centers Term B NR+ B2 3/27/05 3,979 4,021
--------- ---------
Total Transportation Services 52,822 52,976
========= =========
Waste 11,000 American Disposal Services, Inc. Term NR+ NR+ 5/31/04 10,984 11,014
Management -- 2,500 Laidlaw Environmental Services, Inc. Term B NR+ NR+ 5/15/05 2,494 2,547
0.5% 2,500 Laidlaw Environmental Services, Inc. Term C NR+ NR+ 5/15/04 2,494 2,548
--------- ---------
Total Waste Management 15,972 16,109
========= =========
Total Senior Secured Floating Rate Loan Securities -- 82.7% 2,466,848 2,474,278
========= =========
<CAPTION>
Shares
Held Equity Investments
<S> <C> <C> <C> <C>
Cable TV 1 Classic Cable, Inc. (Warrants) (a) 0 0
Services -- 0.0%
Drilling -- 0.0% 12 Rigco North America (Warrants)(a) 0 0
Restaurants -- 0.0% 44 Flagstar Companies, Inc. 0 12
--------- ---------
Total Equity Investments -- 0.0% 0 12
========= =========
Total Long-Term Investments -- 82.7% 2,466,848 2,474,290
========= =========
<CAPTION>
Short-Term Investments
<S> <C> <C> <C>
Commercial Countrywide Home Loans, Inc. ($14,000 par, maturing 9/18/1997, yielding
Paper** -- 14.2% 5.52%) 13,966 13,966
GTE Funding Inc. ($48,000 par, maturing 10/06/1997, yielding 5.50%) 47,751 47,751
General Motors Acceptance Corp. ($57,368 par, maturing 9/02/1997, yielding
5.69%) 57,368 57,368
Goldman Sachs Group ($50,000 par, maturing 9/16/1997, yielding 5.53%) 49,892 49,892
Goldman Sachs Group ($26,000 par, maturing 9/18/1997, yielding 5.52%) 25,936 25,936
Morgan (J.P.) & Company, Inc. ($37,870 par, maturing 9/08/1997, yielding
5.49%) 37,835 37,835
Morgan Stanley Group, Inc. ($50,000 par, maturing 10/07/1997, yielding
5.50%) 49,732 49,732
National Fleet Funding Corp. ($15,275 par, maturing 9/11/1997, yielding
5.53%) 15,254 15,254
Riverwoods Funding Corp. ($50,000 par, maturing 9/02/1997, yielding 5.50%) 50,000 50,000
Xerox Corp. ($32,000 par, maturing 9/10/1997, yielding 5.50%) 31,961 31,961
Xerox Corp. ($46,000 par, maturing 9/23/1997, yielding 5.48%) 45,853 45,853
---------- ----------
Total Commercial Paper 425,548 425,548
========== ==========
</TABLE>
53
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
SCHEDULE OF INVESTMENTS (concluded) (in Thousands)
Value
Short-Term Investments Cost (Note 1a)
<S> <C> <C> <C>
US Government Agency Federal Home Loan Mortgage Corporation ($20,000 par, maturing 9/05/1997,
Obligations** -- 2.4% yielding 5.46%) 19,991 19,991
Federal Home Loan Mortgage Corporation
($50,000 par, maturing 9/12/1997, yielding 5.41%) 49,925 49,925
---------- ----------
Total US Government Agency Obligations 69,916 69,916
========== ==========
Total Short-Term Investments -- 16.6% 495,464 495,464
========== ==========
Total Investments -- 99.3% $2,962,312 2,969,754
==========
Other Assets Less Liabilities -- 0.7% 22,036
----------
Net Assets -- 100.0% $2,991,790
==========
</TABLE>
(a) Warrants entitle the Fund to purchase a predetermined number of
shares of common stock. The purchase price and numbers of shares are
subject to adjustment under certain conditions until expiration
date.
+ Not Rated.
* 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, 1997.
** 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. Ratings of
issues shown have not been audited by Deloitte & Touche LLP.
See Notes to Financial Statements.
54
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
FINANCIAL INFORMATION
Statement of Assets and Liabilities as of August 31, 1997
<S> <C> <C> <C>
Assets: Investments, at value (identified cost -- $2,962,312,311) (Note 1b) $2,969,754,258
Cash 3,333,212
Receivables:
Interest $23,156,172
Capital shares sold 6,864,898
Principal paydowns 1,323,008
Commitment fees 407,651 31,751,729
---------------
Prepaid registration fees and other assets (Note 1f) 2,827,494
---------------
Total assets 3,007,666,693
---------------
Liabilities: Payables:
Securities purchased 5,040,176
Dividends to shareholders (Note 1g) 3,944,807
Investment adviser (Note 2) 2,458,075
Administrator (Note 2) 646,862
Interest expense (Note 6) 256,210 12,346,130
---------------
Deferred income (Note 1e) 2,620,628
Accrued expenses and other liabilities. 910,294
---------------
Total liabilities 15,877,052
---------------
Net Assets: Net assets $2,991,789,641
===============
Net Assets Common Stock, par value $0.10 per share; 1,000,000,000 shares
Consist of: authorized $29,871,117
Paid-in capital in excess of par 2,960,840,225
Accumulated realized capital losses on investments -- net (Note 7) (6,363,648)
Unrealized appreciation on investments -- net 7,441,947
---------------
Net Assets -- Equivalent to $10.02 per share based on 298,711,170
shares of capital stock outstanding $2,991,789,641
===============
</TABLE>
See Notes to Financial Statements.
55
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
FINANCIAL INFORMATION (continued)
Statement of Operations
For the Year Ended
August 31, 1997
<S> <C> <C> <C>
Investment Income Interest and discount earned $231,932,345
(Note 1e): Facility and other fees 2,570,817
---------------
Total income 234,503,162
---------------
Expenses: Investment advisory fees (Note 2) $27,674,808
Administrative fees (Note 2) 7,282,844
Transfer agent fees (Note 2) 1,688,406
Professional fees 595,135
Accounting services (Note 2) 373,370
Custodian fees 300,414
Loan interest expense (Note 6) 256,210
Tender offer costs 189,018
Printing and shareholder reports 152,575
Borrowing costs (Note 6) 74,125
Registration fees (Note 1f) 66,689
Directors' fees and expenses 48,329
Other 42,802
---------------
Total expenses 38,744,725
---------------
Investment income -- net 195,758,437
---------------
Realized & Realized gain on investments -- net 1,494,764
Unrealized Gain on Change in unrealized appreciation on investments -- net 6,060,630
Investments -- Net ---------------
(Notes 1c, 1e & 3): Net Increase in Net Assets Resulting from Operations $203,313,831
===============
</TABLE>
See Notes to Financial Statements.
56
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
FINANCIAL INFORMATION (continued)
Statements of Changes in Net Assets
For the Year Ended August 31,
Increase (Decrease) in Net Assets: 1997 1996
<S> <C> <C> <C>
Operations: Investment income -- net $195,758,437 $178,696,222
Realized gain (loss) on investments -- net 1,494,764 (8,718,939)
Change in unrealized appreciation/depreciation on
investments -- net. 6,060,630 1,207,962
-------------- --------------
Net increase in net assets resulting from operations 203,313,831 171,185,245
-------------- --------------
Dividends to Investment income -- net (195,758,437) (178,696,222)
Shareholders -------------- --------------
(Note 1g): Net decrease in net assets resulting from dividends to shareholders (195,758,437) (178,696,222)
-------------- --------------
Capital Share Net increase in net assets resulting from capital share transactions 38,706,901 789,568,710
Transactions -------------- --------------
(Note 4):
Net Assets: Total increase in net assets 46,262,295 782,057,733
Beginning of year 2,945,527,346 2,163,469,613
-------------- --------------
End of year $2,991,789,641 $2,945,527,346
============== ==============
</TABLE>
See Notes to Financial Statements.
57
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
FINANCIAL INFORMATION (continued)
Statement of Cash Flows
For the Year Ended
August 31, 1997
<S> <C> <C>
Cash Provided by Net increase in net assets resulting from operations $203,313,831
Operating Activities: Adjustments to reconcile net increase in net assets resulting from operations to net
cash provided by operating activities:
Increase in receivables (5,855,760)
Increase in other assets (1,147,020)
Decrease in other liabilities (2,250,790)
Realized and unrealized gain on investments -- net (7,555,394)
Amortization of discount (27,355,717)
----------------
Net cash provided by operating activities 159,149,150
----------------
Cash Provided by Proceeds from principal payments and sales of loan interests 1,961,516,374
Investing Activities: Purchases of loan interests (2,268,240,139)
Purchases of short-term investments (21,312,835,470)
Proceeds from sales and maturities of short-term investments 21,621,740,112
----------------
Net cash provided by investing activities 2,180,877
----------------
Cash Used for Cash receipts from borrowings 50,000,000
Financing Activities: Cash payments from borrowings (50,000,000)
Cash receipts on capital shares sold 426,269,518
Cash payments on capital shares tendered (486,786,078)
Dividends paid to shareholders (100,140,743)
----------------
Net cash used for financing activities (160,657,303)
----------------
Cash: Net increase in cash 672,724
Cash at beginning of year 2,660,488
----------------
Cash at end of year $3,333,212
================
Non-Cash Capital shares issued in reinvestment of dividends paid to shareholders $95,204,864
Financing Activities: ================
</TABLE>
See Notes to Financial Statements.
58
<PAGE>
<TABLE>
<CAPTION>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
FINANCIAL INFORMATION (concluded)
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,
1997 1996 1995 1994 1993
Increase (Decrease) in Net Asset Value:
<S> <C> <C> <C> <C> <C> <C>
Per Share Net asset value, beginning of year $9.99 $10.02 $10.02 $10.02 $9.99
Operating -------- -------- -------- -------- --------
Performance: Investment income -- net .68 .66 .75 .59 .53
Realized and unrealized gain (loss) on
investments -- net .03 (.03) --+ --+ .03
-------- -------- -------- -------- --------
Total from investment operations .71 .63 .75 .59 .56
-------- -------- -------- -------- --------
Less dividends from investment income -- net (.68) (.66) (.75) (.59) (.53)
-------- -------- -------- -------- --------
Net asset value, end of year $10.02 $9.99 $10.02 $10.02 $10.02
======== ======== ======== ======== ========
Total Investment Based on net asset value per share 7.23% 6.53% 7.68% 5.94% 5.74%
Return:* ======== ======== ======== ======== ========
Ratio to Average Expenses, excluding interest expense 1.32% -- -- -- --
Net Assets: ======== ======== ======== ======== ========
Expenses 1.33% 1.34% 1.34% 1.43% 1.47%
======== ======== ======== ======== ========
Investment income -- net 6.72% 6.54% 7.45% 5.75% 5.27%
======== ======== ======== ======== ========
Leverage: Amount of borrowings (in thousands) -- -- -- -- --
======== ======== ======== ======== ========
Average amount of borrowings outstanding
during the period (in thousands) $4,409 -- -- -- --
======== ======== ======== ======== ========
Average amount of borrowings outstanding
per share during the period $.02 -- -- -- --
======== ======== ======== ======== ========
Supplemental Net assets, end of year (in millions) $2,992 $2,946 $2,163 $934 $713
Data: ======== ======== ======== ======== ========
Portfolio turnover 74.00% 80.20% 55.23% 61.31% 90.36%
======== ======== ======== ======== ========
</TABLE>
* Total investment returns exclude 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.
+ Amount is less than $.01 per share.
See Notes to Financial Statements.
59
<PAGE>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
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,
1997 could be considered to be concentrated in commercial banking.
(b) Valuation of investments -- The Loan Interests will be valued in
accordance with guidelines established by the Fund's Board of Directors.
Under the Fund's current guidelines, Loan Interests will be 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.
[bullet] 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
60
<PAGE>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
NOTES TO FINANCIAL STATEMENTS (concluded)
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.
For such services, the Fund pays a monthly fee at an annual rate of
0.95% of the Fund's average daily net assets. The Fund also has an
Administrative Services Agreement with MLAM whereby MLAM will receive
a fee equal to an annual rate of 0.25% of the Fund's average daily net
assets on a monthly basis, in return for the performance of
administrative services (other than investment advice and related
portfolio activities) necessary for the operation of the Fund.
For the year ended August 31, 1997, Merrill Lynch Funds Distributor,
Inc. ("MLFD") earned early withdrawal charges of $4,868,307 relating to
the tender of the Fund's shares.
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.
The Fund's credit facility is currently provided by Merrill Lynch
International Bank Limited, an affiliate of MLAM (see Note 6).
Certain officers and/or directors of the Fund are officers and/or
directors of MLAM, PSI, MLFDS, MLFD, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for
the year ended August 31, 1997 were $2,273,069,862 and $1,962,839,382,
respectively.
Net realized and unrealized gains as of August 31, 1997 were as follows:
Realized Unrealized
Gains Gains
Long-term investments $1,487,434 $7,441,947
Short-term investments 7,330 --
----------- -----------
Total $1,494,764 $7,441,947
=========== ===========
As of August 31, 1997, net unrealized appreciation for financial
reporting and Federal income tax purposes aggregated $7,441,947, of
which $14,800,526 is related to appreciated securities and $7,358,579 is
related to depreciated securities. The aggregate cost of investments at
August 31, 1997 for Federal income tax purposes was $2,962,312,311.
4. Capital Share Transactions:
Transactions in capital shares were as follows:
For the Year Ended Dollar
August 31, 1997 Shares Amount
Shares sold 43,063,467 $430,288,115
Shares issued to share-
holders in reinvestment
of dividends 9,529,624 95,204,864
------------- -------------
Total issued 52,593,091 525,492,979
Shares tendered (48,731,298) (486,786,078)
------------- -------------
Net increase 3,861,793 $38,706,901
============= =============
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
============= =============
61
<PAGE>
Merrill Lynch Senior Floating Rate Fund, Inc. August 31, 1997
5. Unfunded Loan Interests:
As of August 31, 1997, the Fund had unfunded loan commitments of
$342,215,631, which would be extended at the option of the borrower,
pursuant to the following loan agreements:
Unfunded
Commitment
Borrower (in thousands)
AFC Enterprises $10,000
AMF Group, Inc. 383
Alliance Gaming Corp. 15,000
American Radio Systems Corp. 4,407
Ameriserve Financial Corp. 3,288
Arch Communications Group, Inc. 3,125
Aztar Corporation 1,738
Bruno's, Inc. 1,947
Capstar Hotel Company 3,125
Carr Gottstein Foods Co. 2,294
Chancellor Broadcasting Inc. 12,569
Continental Airlines, Inc. 6,400
Corning/Quest 1,667
Dal Tile International Inc. 1,409
Del Monte Corp. 2,782
Dictaphone Corp. 328
E&S Holdings Corp. 2,287
Evergreen Media Corp. 14,057
Fort Howard Corp. 11,409
Garden State Newspapers, Inc. 1,421
HSC Holdings 5,131
Hedstrom Corp. 4,710
Horizons/CMS 1,813
Huntsman Corp. 9,581
IMO Industries, Inc. 3,813
International Homefoods, Inc. 1,355
Ithaca Industries, Inc. 12,216
Jefferson Smurfit Company/Container
Corp. of America 2,230
Johnstown America Industrial Inc. 3,115
K-III Communications Corp. 3,307
KSL Recreation Group, Inc. 5,357
Kmart Corp. 9,000
Katz Media Corporation 2,386
Kerastotes 7,022
Loewen Group Inc. 17,052
Marcus Cable Operating Co. 10,369
Nextel Communications, Inc. 17,090
Northwestern Steel & Mining 12,600
Paging Network Inc. 16,446
Ralph's Grocery Company 4,903
Riverwood International Corp. 5,000
SC International Corp., Inc. 18,000
S.D. Warren Co. 1,897
Silgan Corp. 16,197
Six Flags Entertainment Corp. 1,787
Smith's Food & Drug Centers, Inc. 3,273
Sprint Spectrum L.P. 15,000
Thermadyne Industries, Inc. 7,510
Trans Technology Corp. 1,422
UCAR International Inc. 7,126
Viasystems Technologies, Inc. 5,000
Whittaker Corporation 872
Worldcom Inc. 10,000
6. Short-Term Borrowings:
On June 13, 1997, the Fund extended its credit agreement with Merrill
Lynch International Bank Limited, an affiliate of MLAM, through June 12,
1998. The agreement is a $100,000,000 credit facility bearing interest
at the Federal Funds rate plus 0.25% and/or LIBOR plus 0.25%. For the
year ended August 31, 1997, the maximum amount borrowed was $50,000,000,
the average amount borrowed was approximately $4,409,000, and the daily
weighted average interest rate was 5.81%. For the year ended August 31,
1997, facility and commitment fees aggregated approximately $74,125.
7. Capital Loss Carryforward:
At August 31, 1997, the Fund had a net capital loss carryforward of
approximately $4,752,000, of which $1,471,000 expires in 2004 and
$3,281,000 expires in 2005. 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 23, 1997 which
concludes on October 21, 1997.
62
<PAGE>
APPENDIX
RATINGS OF SECURITIES
DESCRIPTION OF MOODY'S INVESTORS SERVICE, INC.'S ('MOODY'S') SECURITIES RATINGS
<TABLE>
<S> <C> <C>
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.
</TABLE>
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.'
63
<PAGE>
[This page is intentionally left blank]
64
<PAGE>
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.
(PLEASE PRINT)
<TABLE>
<S> <C>
Name.......................................................
First Name Initial Last
Name
| | | | | | | | | |
Social Security No.
or Taxpayer Identification No.
Name.......................................................
First Name Initial Last
Name
</TABLE>
<TABLE>
<S> <C> <C> <C>
Name of Co-Owner (if any) ............................................................................................
First Name Initial Last
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.
<TABLE>
<S> <C>
Signature of Owner......................................... Signature of Co-Owner (if any)...........................
</TABLE>
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>
<S> <C>
Ordinary Income Dividends Long-Term Capital Gains
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.
65
<PAGE>
MERRILL LYNCH SENIOR FLOATING RATE FUND, INC.--AUTHORIZATION FORM (PART
1)--(CONTINUED)
- - --------------------------------------------------------------------------------
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
<TABLE>
<S> <C>
.......................................
Branch Code F/C No. F/C Last Name
Dealer's Customer F/C No.
</TABLE>
66
<PAGE>
Investment Adviser
Merrill Lynch Asset Management, L.P.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
Mailing Address:
P.O. Box 9011
Princeton, New Jersey 08543-9011
Distributors
Merrill Lynch Funds Distributor, Inc.
Administrative Offices:
800 Scudders Mill Road
Plainsboro, New Jersey 08536
North Tower
World Financial Center
250 Vesey Street
New York, New York 10281
Custodian
The Bank of New York
90 Washington Street
New York, New York 10286
Transfer Agent
Merrill Lynch Financial Data Services, Inc.
Administrative Offices:
4800 Deer Lake Drive East
Jacksonville, Florida 32246-6484
Mailing Address
P.O. Box 45290
Jacksonville, Florida 32232-5290
Independent Auditors
Deloitte & Touche LLP
117 Campus Drive
Princeton, New Jersey 08540
Counsel
Brown & Wood LLP
One World Trade Center
New York, New York 10048-0557
<PAGE>
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................ 22
Investment Restrictions........................ 24
Purchase of Shares............................. 26
Tender Offers.................................. 27
Early Withdrawal Charge........................ 29
Directors and Officers......................... 30
Investment Advisory and Administrative
Arrangements................................. 32
Portfolio Transactions......................... 34
Dividends and Distributions.................... 35
Taxes.......................................... 36
Automatic Dividend Reinvestment Plan........... 39
Net Asset Value................................ 39
Description of Capital Stock................... 40
Performance Data............................... 42
Custodian...................................... 42
Transfer Agent, Dividend Disbursing Agent and
Shareholder Servicing Agent; Shareholder
Reports...................................... 42
Legal Opinions................................. 43
Independent Auditors........................... 43
Independent Auditors' Report................... 44
Financial Statements........................... 45
Appendix--Ratings of Securities................ 63
Authorization Form............................. 65
</TABLE>
Code #10938--1297
MERRILL LYNCH
SENIOR FLOATING
RATE FUND, INC.
PROSPECTUS
December 16, 1997
Distributor:
Merrill Lynch
Funds Distributor, Inc.
This prospectus should be
retained for future reference.
