-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KU85PxJVA3GITyCSnEBb+o6f4NElXZOndETZPh5fUUIcGeqsiUs7Jf2erkdDYGEn vqWAsO6KkGGws8Ph4XSOHg== 0000900092-06-000151.txt : 20060503 0000900092-06-000151.hdr.sgml : 20060503 20060503111914 ACCESSION NUMBER: 0000900092-06-000151 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20060228 FILED AS OF DATE: 20060503 DATE AS OF CHANGE: 20060503 EFFECTIVENESS DATE: 20060503 FILER: COMPANY DATA: COMPANY CONFORMED NAME: FLOATING RATE INCOME STRATEGIES FUND II INC CENTRAL INDEX KEY: 0001269143 IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-21464 FILM NUMBER: 06802199 BUSINESS ADDRESS: STREET 1: 800 SCUDDERS MILL ROAD CITY: PLAINSBORO STATE: NJ ZIP: 08536 BUSINESS PHONE: 6092822800 MAIL ADDRESS: STREET 1: 800 SCUDDERS MILL ROAD CITY: PLAINSBORO STATE: NJ ZIP: 08536 N-CSR 1 ml7365.txt FLOATING RATE INCOME STRATEGIES FUND II, INC. UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-21464 Name of Fund: Floating Rate Income Strategies Fund II, Inc. Fund Address: P.O. Box 9011 Princeton, NJ 08543-9011 Name and address of agent for service: Robert C. Doll, Jr., Chief Executive Officer, Floating Rate Income Strategies Fund II, Inc., 800 Scudders Mill Road, Plainsboro, NJ, 08536. Mailing address: P.O. Box 9011, Princeton, NJ, 08543-9011 Registrant's telephone number, including area code: (609) 282-2800 Date of fiscal year end: 02/28/06 Date of reporting period: 03/01/05 - 02/28/06 Item 1 - Report to Stockholders Annual Report February 28, 2006 Floating Rate Income Strategies Fund II, Inc. (BULL LOGO) Merrill Lynch Investment Managers www.mlim.ml.com Mercury Advisors A Division of Merrill Lynch Investment Managers www.mercury.ml.com Floating Rate Income Strategies Fund II, Inc. seeks a high current income and such preservation of capital as is consistent with investment in a diversified, leveraged portfolio consisting primarily of floating rate debt securities and instruments. This report, including the financial information herein, is transmitted for use only to the shareholders of Floating Rate Income Strategies Fund II, Inc. for their information. It is not a prospectus, circular or representation intended for use in the purchase of shares of the Fund or any securities mentioned in this report. Past performance results shown in this report should not be considered a representation of future performance. The Fund leverages its Common Stock to provide Common Stock shareholders with a potentially higher rate of return. Leverage creates risk for Common Stock shareholders, including the likelihood of greater volatility of net asset value and market price of Common Stock shares, and the risk that fluctuations in short-term interest rates may reduce the Common Stock's yield. Statements and other information herein are as dated and are subject to change. A description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling toll-free 1-800-637-3863; (2) at www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's Web site at http://www.sec.gov. Information about how the Fund voted proxies relating to securities held in the Fund's portfolio during the most recent 12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2) on the Securities and Exchange Commission's Web site at http://www.sec.gov. Floating Rate Income Strategies Fund II, Inc. Box 9011 Princeton, NJ 08543-9011 (GO PAPERLESS LOGO) It's Fast, Convenient, & Timely! To sign up today, go to www.icsdelivery.com/live. Floating Rate Income Strategies Fund II, Inc. Announcement to Shareholders On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co., Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's investment management business, Merrill Lynch Investment Managers, L.P. and certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch Investment Managers International Limited), to BlackRock to create a new independent company that will be one of the world's largest asset management firms with nearly $1 trillion in assets under management (based on combined assets under management as of December 31, 2005). The transaction is expected to close in the third quarter of 2006, at which time the new company will operate under the BlackRock name. If approved by the Fund's Board of Directors and Fund shareholders, the combined company that results from the transaction is expected to become the investment adviser of the Fund. The Benefits and Risks of Leveraging Floating Rate Income Strategies Fund II, Inc. utilizes leverage through borrowings or issuance of short-term debt securities or shares of Preferred Stock. The concept of leveraging is based on the premise that the cost of assets to be obtained from leverage will be based on short-term interest rates, which normally will be lower than the income earned by the Fund on its longer-term portfolio investments. To the extent that the total assets of the Fund (including the assets obtained from leverage) are invested in higher- yielding portfolio investments, the Fund's Common Stock shareholders will be the beneficiaries of the incremental yield. Leverage creates risks for holders of Common Stock including the likelihood of greater net asset value and market price volatility. In addition, there is the risk that fluctuations in interest rates on borrowings (or in the dividend rates on any Preferred Stock, if the Fund were to issue the Preferred Stock) may reduce the Common Stock's yield and negatively impact its market price. If the income derived from securities purchased with assets received from leverage exceeds the cost of leverage, the Fund's net income will be greater than if leverage had not been used. Conversely, if the income from the securities purchased is not sufficient to cover the cost of leverage, the Fund's net income will be less than if leverage had not been used, and therefore the amount available for distribution to Common Stock shareholders will be reduced. Availability of Quarterly Schedule of Investments The Fund files its complete schedule of portfolio holdings with the Securities and Exchange Commission ("SEC") for the first and third quarters of each fiscal year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the SEC's Public Reference Room in Washington, DC. Information on the operation of the Public Reference Room may be obtained by calling 1-800-SEC-0330. FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 A Letter From the President Dear Shareholder Financial markets began 2006 with a return to volatility following a fairly uninspiring 2005. For the six- and 12-month periods ended February 28, 2006, most major market indexes landed in positive territory:
Total Returns as of February 28, 2006 6-month 12-month U.S. equities (Standard & Poor's 500 Index) + 5.93% + 8.40% Small cap U.S. equities (Russell 2000 Index) +10.24 +16.59 International equities (MSCI Europe, Australasia, Far East Index) +15.14 +17.41 Fixed income (Lehman Brothers Aggregate Bond Index) - 0.11 + 2.74 Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 0.99 + 3.87 High yield bonds (Credit Suisse High Yield Index) + 1.89 + 3.27
The Federal Reserve Board (the Fed) increased interest rates 200 basis points (2.00%) over the past 12 months, bringing the target federal funds rate to 4.5%. Notably, Ben Bernanke replaced Alan Greenspan as Fed chairman in January, a month after the central bank removed the critical word "measured" from the description of its rate-hiking program. Still, most observers expect at least one more interest rate hike before the Fed pauses in its tightening campaign. U.S. economic growth, which came in at 4.1% in the third quarter of 2005, fell to 1.6% in the fourth quarter. Growth is expected to reaccelerate in the first quarter of 2006, although the economy is likely to feel some pressure in the quarters ahead as the consumer sector seems to be softening. Capital spending by businesses, however, appears relatively strong. Overall corporate health, including strong company balance sheets, helped prompt robust dividend- distribution, share-buyback and merger-and-acquisition activity in 2005, a trend that has continued in 2006. This, as well as reasonably good company earnings and low core inflation, has been supportive of U.S. stocks despite the headwinds of rising interest rates and high energy prices. Many international equity markets have fared even better, thanks in part to higher economic growth rates and low inflation. In the U.S. bond market, short-term interest rates continued to move higher as longer-term interest rates advanced more moderately. After flattening dramatically in 2005, the Treasury curve recently has been toying with bouts of inversion, whereby short-term yields have surpassed long-term yields. At period-end, the six-month Treasury bill offered the highest yield on the curve at 4.74%. Amid the uncertainty inherent in the financial markets, we encourage you to review your goals periodically with your financial advisor and to make portfolio changes, as needed. For timely "food for thought" for investors, we also invite you to visit Shareholder magazine at www.mlim.ml.com/shareholdermagazine. As always, we thank you for trusting Merrill Lynch Investment Managers with your investment assets, and we look forward to continuing to serve your investment needs. Sincerely, (Robert C. Doll, Jr.) Robert C. Doll, Jr. President and Director FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 A Discussion With Your Fund's Portfolio Managers The Fund outperformed its composite benchmark on a total return basis for the fiscal year and provided attractive relative yields in a largely positive environment for leveraged loans. Describe market conditions during the fiscal year. During the year, the performance of the bank loan market benefited from the rising London InterBank Offered Rate (LIBOR), decreasing spreads and increasing demand for bank loans on the part of collateralized loan obligations (CLOs), which kept prices close to par value. Investors earned total returns consisting mainly of interest payments, as there were only marginal net price changes. For the 12 months ended February 28, 2006, the Credit Suisse Leveraged Loan Index returned +5.96%. CLO issuance continues to drive supply and demand in the market. Approximately $50.9 billion in new institutional leveraged loans was issued in the first two months of 2006. A slowdown in February led to continued tightening in the institutional loan market, although repayment activity offset the lull in loan issuance for the month. With strong CLO issuance and relatively constrained loan supply, prices most likely will rise and, more importantly, refinancing activity may increase. Changes to leverage loan ratings currently under consideration by Moody's Investors Service may allow greater leverage on new structures. The current relatively benign credit environment also could contribute to lower spreads. At the end of February, Standard & Poor's Leveraged Commentary & Data reported a default rate of 2.09% based on number of loans, a 26-month high. Despite the increase, the rate is still below the historical average of 3.56%. Although defaults are expected to continue to increase, we do not expect default rates to rise significantly above 3% for 2006. High yield bonds, in which the Fund may invest up to 20% of its assets, returned +3.27% for the year, as measured by the Credit Suisse High Yield Index. Most of the gain in the market occurred in the first two months of 2006, as the high yield market benefited from increasing strength in the U.S. economy. How did the Fund perform during the fiscal year? For the 12-month period ended February 28, 2006, the Common Stock of Floating Rate Income Strategies Fund II, Inc. had net annualized yields of 6.59% and 7.20%, based on a year-end per share net asset value of $19.39 and a per share market price of $17.76, respectively, and $1.278 per share income dividends. For the same period, the total investment return on the Fund's Common Stock was +6.07%, based on a change in per share net asset value from $19.74 to $19.39, and assuming reinvestment of all distributions. The Fund's benchmark, which consists 80% of the Credit Suisse Leveraged Loan Index and 20% of the Credit Suisse High Yield Index, returned +5.43% for the 12-month period. For the six months ended February 28, 2006, the total investment return on the Fund's Common Stock was +3.64%, based on a change in per share net asset value from $19.56 to $19.39, and assuming reinvestment of all distributions. The composite benchmark returned +2.79% for the six-month period. For a description of the Fund's total investment return based on a change in the per share market value of the Fund's Common Stock (as measured by the trading price of the Fund's shares on the New York Stock Exchange), and assuming reinvestment of dividends, please refer to the Financial Highlights section of this report. As a closed-end fund, the Fund's shares may trade in the secondary market at a premium or discount to the Fund's net asset value. As a result, total investment returns based on changes in the market value of the Fund's Common Stock can vary significantly from total investment returns based on changes in the Fund's net asset value. What factors most influenced Fund performance? The Fund's performance for the year benefited primarily from the relatively higher weighted average yield spread advantage of our bank loan holdings versus three-month LIBOR and the comparatively higher average coupon of the portfolio's high yield securities. The Fund's use of leverage also enhanced results. Offsetting these positives somewhat was a net decline in the market value of several securities, particularly in the troubled paper sector. From a sector perspective, our holdings in the utility, information technology and airlines sectors performed well, while security selection in the paper, packaging and chemical sectors detracted from relative performance. FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 The strong performance in the utility sector resulted primarily from our positions in first- and second-lien loans of Calpine Generating Corporation, an independent power producer. The bonds rallied following the bankruptcy filing of the company's parent, Calpine Corporation. The filing indicated that the loans of Calpine Generating would remain current on interest payments, thereby reducing the likelihood of serious financial impairment. Positive contributors in information technology included Quantum Corporation and Cypress Semiconductor Corporation. Quantum is a manufacturer of data storage devices. The price of the company's 4.375% convertible bonds rose significantly during the year. Reports released during the period indicated an increase in earnings of 50% quarter over quarter, which was 100% above consensus expectations. We believe Quantum will continue to outperform due to strong capital spending trends and high cash levels within its corporate customer base. The rally in Cypress Semiconductor's 1.25% convertibles resulted from strong new product introductions. In addition, the company's 87% ownership position in SunPower Corp., the world's leading solar manufacturer, benefited the performance of its debt securities as that stock rose sharply on strong earnings fundamentals. Notably, Cypress Semiconductor's position in SunPower virtually equals the company's entire market value, notwithstanding the fact that SunPower accounts for only about 13% of Cypress Semiconductor's revenue. Our position in American Airlines, Inc. also enhanced Fund results. The company's 7.80% enhanced equipment trust certificates appreciated significantly as the carrier enhanced its liquidity ahead of the security's October 2007 maturity. The negative performance in the paper sector resulted from our holding in Tembec Inc., a lumber products manufacturer. The performance of these bonds deteriorated as a result of weakness in the paper and forest products sector that was exacerbated by continued strength in the Canadian dollar and high energy prices. In the packaging sector, our position in a security of Pliant Corporation hindered results for the year. Pliant filed for bankruptcy protection in the fall of 2005 as resin prices skyrocketed on the heels of the Gulf Coast hurricanes. The company filed a pre-negotiated plan to exit bankruptcy and hopes to emerge before mid-2006. We believe the valuation for the bonds when Pliant emerges from bankruptcy support higher prices for the securities. Fund performance in the chemical sector was hindered mainly by our holdings in the common stock and floating rate notes of GEO Specialty Chemicals, Inc., manufacturer of a diverse range of products for several niche markets. High energy and raw materials prices hurt GEO's profit margins as its costs increased faster than the prices of its products. This trend has abated in the near-term, and we believe 2006 will be a key turnaround year for the company. What changes were made to the portfolio during the period? We purchased approximately $116.6 million in par assets and experienced $63.5 million in repayments from issuers during the period. In addition, we sold roughly $36.5 million in assets. During the year, we maintained significant exposure to the utility, cable and gaming industries, and reduced the Fund's exposure to the paper and forest products sector. In addition, we continued to target an allocation to fixed rate securities of roughly 20% and a leverage ratio of approximately 30%. How would you characterize the Fund's position at the close of the period? At the end of the period, the portfolio was composed of 123 issuers spread among 25 industries. The Fund was underweight versus its composite benchmark in securities rated Ba or higher, Caa or below and unrated issues. The Fund was overweight in B-rated credits. We anticipate that many of the same factors that influenced leveraged loan securities in the past year will remain intact. In our view, the trends of less frequent new-loan issuance, lower interest rate spreads and above-par secondary market prices are likely to continue, especially given the benign credit environment that we expect over the next year. A further benefit to the market should be an increase in the three-month LIBOR. Consequently, we intend to continue to purchase assets predominately in the primary market while selectively participating in the secondary market. Joseph P. Matteo Vice President and Co-Portfolio Manager Jaimin PatelVice President and Co-Portfolio Manager March 14, 2006 Effective March 31, 2006, Jaimin Patel is solely responsible for the day-to-day management of Floating Rate Income Strategies Fund II, Inc. FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Proxy Results During the six-month period ended February 28, 2006, Floating Rate Income Strategies Fund II, Inc.'s Common Stock shareholders voted on the following proposal. The proposal was approved at a shareholders' meeting on January 26, 2006. A description of the proposal and number of shares voted are as follows:
Shares Voted Shares Withheld For From Voting 1. To elect the Fund's Board of Directors: Robert C. Doll, Jr. 10,020,149 300,727 Ronald W. Forbes 10,020,155 300,721 Cynthia A. Montgomery 10,020,649 300,227 Jean Margo Reid 10,020,649 300,227 Roscoe S. Suddarth 10,012,981 307,895 Richard R. West 10,012,981 307,895 Edward D. Zinbarg 10,014,149 306,727
Portfolio Information as of February 28, 2006 Percent of Ten Largest Holdings Net Assets PanAmSat Corp. Tranche B Term Loan, 6.489% due 8/20/2011 3.9% Calpine Generating Co., LLC Term Loan, 9.61% due 3/12/2010 3.5 Charter Communications Operating LLC Tranche B Term Loan, 7.92% due 4/07/2011 2.9 Century Cable Holdings LLC, Discretionary Term Loan, 9.50% due 12/31/2009 2.9 Metro-Goldwyn-Mayer Studios, Inc. Term Loan B, 6.78% due 4/30/2011 2.7 Majestic Star Casino LLC, 9.50% due 10/15/2010 2.6 Aquila, Inc. Term Loan, 9.991% due 9/14/2009 2.5 Graham Packaging Co. LP Term Loan B, 6.75% - 6.938% due 10/07/2011 2.5 Resorts International First Lien Term Loan, 7.53% due 4/26/2012 2.5 Metaldyne Corp. Term Loan D, 9.044% due 12/31/2009 2.3 Percent of Five Largest Industries Net Assets Utility 22.9% Cable--U.S. 19.7 Gaming 15.5 Aerospace & Defense 6.6 Manufacturing 6.0 For Fund compliance purposes, the Fund's industry classifications refer to any one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by Fund management. This definition may not apply for purposes of this report, which may combine industry sub-classifications for reporting ease. Percent of Total Quality Ratings by S&P/Moody's Investments BBB/Baa 0.4% BB/Ba 28.0 B/B 59.1 CCC/Caa 5.4 D 0.1 NR (Not Rated) 6.9 Other* 0.1 * Includes portfolio holdings in common stocks, warrants and short-term investments. FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Schedule of Investments Face Amount Floating Rate Loan Interests** Value Aerospace & Defense--6.1% $1,600,000 IAP Worldwide Services, Inc. First Lien Term Loan, 7.625% due 12/30/2012 $ 1,619,000 1,596,875 K&F Industries, Inc. Term Loan, 6.86% - 6.87% due 11/18/2013 1,618,334 4,000,000 MRO Acquisitions Corp. Second Lien Term Loan, 10.23% due 8/15/2011 4,070,000 1,194,000 Spirit Aerosystems, Inc. Tranche 2, 6.85% due 12/31/2011 1,212,284 1,923,077 Standard Aero Holdings Term Loan, 6.83% - 6.96% due 8/24/2012 1,911,660 Vought Aircraft Industries, Inc.: 1,664,188 Term Loan, 7.10% due 12/22/2011 1,685,250 320,000 Tranche B Line of Credit Deposit, 7.10% due 12/22/2010 323,560 --------------- 12,440,088 Airlines--0.9% 1,000,000 Delta Air Lines, Inc. Term Loan B, 11.01% due 3/27/2008 1,039,750 656,250 United Air Lines Term Loan B, 8.625% due 2/01/2012 668,391 --------------- 1,708,141 Automotive--3.1% 1,000,000 Delphi Corp. Tranche B Dip Jp Pr, 7.375% due 10/08/2007 1,017,500 Metaldyne Corp. Term Loan D: 4,619,751 9.044% due 12/31/2009 4,709,259 660,000 11.25% due 12/31/2009 668,869 --------------- 6,395,628 Broadcasting--4.0% 1,995,000 Entravision Communications Term Loan B, 6.03% due 3/29/2013 2,010,587 1,745,625 NextMedia Group, Inc. First Lien Term Loan, 6.57% due 11/15/2012 1,760,899 1,750,000 Paxson Communications Corp. First Lien Term Loan, 7.777% due 11/15/2012 1,755,469 2,487,469 Spanish Broadcasting System, Inc. Tranche 2 First Lien Term Loan B, 6.28% due 6/10/2012 2,519,599 --------------- 8,046,554 Cable--International--1.0% 2,000,000 NTL Investment Holdings, Ltd. Term Loan B2, 7.57% due 4/14/2012 2,011,250 Cable--U.S.--18.0% 3,000,000 Adelphia Communications Corp. Term Loan B, 9.50% due 6/30/2009 2,948,751 1,970,000 Bragg Communications Term Loan B, 6.81% due 8/31/2011 1,992,163 6,000,000 Century Cable Holdings LLC, Discretionary Term Loan, 9.50% due 12/31/2009 5,880,000 5,892,599 Charter Communications Operating LLC Tranche B Term Loan, 7.92% due 4/07/2011 5,967,123 2,000,000 Hilton Head Communications UCA Term Loan B, 8.75% due 3/31/2008 1,948,958 1,980,000 Intelsat Ltd. Term Loan, 6.313% due 7/28/2011 2,002,895 2,640,000 Mediacom Broadband Group Tranche A Term Loan, 5.54% - 6.04% due 3/31/2010 2,640,942 Face Amount Floating Rate Loan Interests** Value Cable--U.S. (concluded) $3,168,000 Mediacom Communications LLC Tranche B Term Loan, 6.18% - 7% due 3/31/2013 $ 3,215,520 7,920,000 PanAmSat Corp. Tranche B Term Loan, 6.489% due 8/20/2011 8,026,429 1,985,000 Rainbow National Services LLC Term Loan B, 7.375% - 7.563% due 3/31/2012 2,011,674 --------------- 36,634,455 Chemicals--3.4% Rockwood Specialties Group, Inc. Tranche D Term Loan: 1,702,500 5.93% due 9/15/2012 1,726,442 3,000,000 5.93% due 12/10/2012 3,042,189 2,000,000 Wellman, Inc. Second Lien Term Loan, 11.43% due 2/10/2010 2,052,500 --------------- 6,821,131 Consumer--Non-Durables--1.1% 756,000 Camelbak Products LLC First Lien Term Loan, 8.17% due 8/04/2011 732,375 1,485,000 Culligan International Co. Term Loan, 7.07% due 9/30/2011 1,506,347 --------------- 2,238,722 Diversified Media--3.6% 5,500,000 Metro-Goldwyn-Mayer Studios, Inc. Term Loan B, 6.78% due 4/30/2011 5,570,939 1,817,005 RH Donnelley Tranche D Term Loan, 6.25% - 6.31% due 6/30/2011 1,833,691 --------------- 7,404,630 Energy--Other--2.0% 1,995,000 Cheniere Energy, Inc. Term Loan B, 9.25% due 8/31/2012 2,021,184 1,000,000 Key Energy Services, Inc. Term Loan B, 7.52% - 7.78% due 6/30/2012 1,015,625 1,000,000 Markwest Energy Operating Co. LLC Term Loan B, 6.82% due 12/29/2010 1,012,500 --------------- 4,049,309 Food & Tobacco--0.5% 989,167 Commonwealth Brands Term Loan, 7% due 12/22/2012 1,002,149 Gaming--10.0% 1,985,000 Herbst Gaming, Inc. Term Loan, 6.20% - 6.527% due 10/08/2010 2,011,053 3,172,727 MGM Mirage Revolving Line of Credit, 5.871% - 6.284% due 4/25/2010 3,095,376 970,435 Mississippi Band of Choctaw Indians Term Loan, 6.45% - 6.94% due 11/04/2011 982,565 3,241,875 Penn National Gaming, Inc. Term Loan B, 6.28% - 6.46% due 10/03/2012 3,289,492 1,500,000 Pinnacle Entertainment Term Loan, 6.57% due 12/15/2011 1,515,938 5,000,000 Resorts International First Lien Term Loan, 7.53% due 4/26/2012 4,993,750 995,000 Trump Entertainment Resorts Holdings LP Term Loan B-1, 7.17% due 5/01/2012 1,007,437 FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Schedule of Investments (continued) Face Amount Floating Rate Loan Interests** Value Gaming (concluded) Venetian Casino Resort LLC: $ 1,000,000 Delay Draw Term Loan, 5.462% due 6/15/2011 $ 1,010,859 2,400,000 Term Loan B, 6.28% due 6/15/2011 2,426,062 --------------- 20,332,532 Health Care--3.3% 1,975,000 Community Health Systems, Inc. Term Loan, 6.36% - 6.56% due 8/19/2011 2,002,156 912,310 Duloxetine Royalty Term Loan, 9.10% due 10/18/2013 916,871 HealthSouth Corp.: 1,567,125 Term Loan, 7.11% due 3/08/2010 1,574,472 425,000 Tranche B Term Loan, 6.364% due 3/08/2010 426,992 1,846,154 Psychiatric Solutions, Inc. Term Loan B, 6.26% - 6.46% due 7/01/2012 1,866,347 --------------- 6,786,838 Housing--4.8% 2,388,571 Associated Materials, Inc. Term Loan, 6.26% - 7.09% due 8/29/2010 2,387,079 2,920,211 Headwaters, Inc. Term Loan B-1, 6.86% due 4/30/2011 2,944,545 826,105 LIONS Gables Realty Term Loan B, 6.32% due 9/30/2006 831,416 2,177,084 Lake at Las Vegas Joint Venture First Lien Term Loan, 7.355% - 7.46% due 11/01/2009 2,183,304 1,477,500 Nortek, Inc. Term Loan, 6.94% - 9% due 8/27/2011 1,491,352 --------------- 9,837,696 Information Technology--1.8% 1,320,000 Fidelity National Information Solutions, Inc. Term Loan B, 6.32% due 3/09/2013 1,330,879 2,376,000 Viasystems, Inc. Replacement Tranche B Term Loan, 8.83% due 9/30/2009 2,393,820 --------------- 3,724,699 Leisure--2.9% 2,000,000 24 Hour Fitness Term Loan B, 7.54% - 7.70% due 6/08/2012 2,032,500 3,916,023 True Temper Sports, Inc. Term Loan B, 7.45% - 7.53% due 3/15/2011 3,940,498 --------------- 5,972,998 Manufacturing--5.3% 2,015,728 Amsted Industries, Inc. Term Loan B-1, 7.028% - 7.19% due 10/15/2010 2,046,804 2,165,462 Blount, Inc. US Term Loan B, 7.03% - 9% due 8/09/2010 2,188,020 1,412,442 GenTek, Inc. First Lien Term Loan, 6.76% - 7.50% due 2/28/2011 1,424,581 1,985,000 Metokote Corp. Second Lien Term Loan, 7.53% - 7.67% due 11/27/2011 1,996,166 2,992,500 Mueller Group LLC Term Loan B, 6.466% - 7.06% due 10/03/2012 3,032,845 --------------- 10,688,416 Face Amount Floating Rate Loan Interests** Value Packaging--3.0% $ 995,000 Berry Plastics Corp. Term Loan, 6.447% due 12/02/2011 $ 1,009,822 4,950,000 Graham Packaging Co. LP Term Loan B, 6.75% - 6.938% due 10/07/2011 5,021,156 --------------- 6,030,978 Paper--2.3% 832,595 Boise Cascade Holdings LLC Tranche D Term Loan, 6.281% - 6.375% due 10/28/2011 844,280 Georgia Pacific Corp.: 1,000,000 First Lien Term Loan B, 7.56% due 2/14/2013 1,008,917 1,000,000 Second Lien Term Loan, 7.56% due 2/14/2014 1,000,000 1,839,179 Smurfit Stone Container Corp. Term Loan C, 6.75% - 6.875% due 11/01/2011 1,865,158 --------------- 4,718,355 Retail--1.2% 1,359,935 General Nutrition Centers, Inc. Tranche B Term Loan, 7.61% - 7.80% due 12/05/2009 1,379,060 949,367 The Neiman Marcus Group, Inc. Term Loan, 6.947% due 4/06/2013 964,201 --------------- 2,343,261 Service--2.6% 1,000,000 RGIS Inventory Specialists First Lien Term Loan, 7.12% due 12/31/2012 1,006,875 United Rentals, Inc.: 2,457,545 Term Loan, 6.86% due 2/14/2011 2,489,289 99,261 Tranche B Credit Linked Deposit, 4.57% due 2/14/2011 100,543 Wastequip, Inc.: 250,000 Second Lien Term Loan, 10.527% due 7/15/2012 253,125 497,500 Tranche 2 Term Loan B, 7.027% - 7.068% due 7/15/2011 504,962 982,353 Weight Watchers International, Inc. First Lien Term Loan, 6.82% - 6.85% due 11/18/2010 994,632 --------------- 5,349,426 Telecommunications--2.7% Alaska Communications Systems Holdings, Inc.: 2,500,000 Term Loan, 6.527% due 2/01/2012 2,523,750 3,000,000 Term Loan B, 6.527% due 2/01/2012 3,028,500 --------------- 5,552,250 Utility--18.7% 5,000,000 Aquila, Inc. Term Loan, 9.991% due 9/14/2009 5,175,000 Calpine Generating Co. LLC: 2,000,000 First Lien Term Loan, 7.61% due 4/01/2009 2,097,500 6,500,000 Term Loan, 9.61% due 3/12/2010 7,024,875 986,405 Cogentrix Delaware Holdings, Inc. Term Loan, 6.28% due 4/15/2012 997,605 Covanta Energy Corp.: 1,990,244 First Lien Letter of Credit, 3.36% due 6/24/2012 2,025,073 1,342,317 First Lien Term Loan, 6.46% due 6/24/2012 1,365,808 1,700,000 Second Lien Term Loan, 10.081% - 10.019% due 6/24/2013 1,731,875 FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Schedule of Investments (continued) Face Amount Floating Rate Loan Interests** Value Utility (concluded) El Paso Corp.: $ 750,000 Deposit Account, 5.17% due 11/23/2009 $ 758,020 1,225,000 Term Loan, 7.313% due 11/23/2009 1,240,738 1,975,038 KGen LLC Tranche A Term Loan, 7.152% due 8/05/2011 1,975,038 1,496,250 LSP Kendall Energy Term Loan B, 6.527% due 10/07/2013 1,499,367 1,995,000 Primary Energy Finance LLC Term Loan, 6.527% due 8/23/2012 2,022,431 483,861 Reliant Energy, Inc. Term Loan, 6.089% due 4/30/2010 483,369 4,274,533 Riverside Energy Center Term Loan, 8.918% due 6/24/2011 4,338,651 Rocky Mountain Energy Center LLC: 339,834 Credit Linked Deposit, 7.93% due 6/24/2011 344,931 2,957,488 Term Loan, 8.918% due 6/24/2011 3,001,850 Wolf Hollow I, L.P.: 500,000 First Lien Term Loan, 6.751% due 6/22/2012 505,469 400,000 Letter of Credit, 6.68% due 6/22/2012 404,375 100,000 Revolving Credit, 6.52% due 6/22/2012 100,937 1,000,000 Second Lien Term Loan, 9.001% due 12/22/2012 1,015,000 --------------- 38,107,912 Total Floating Rate Loan Interests (Cost--$205,263,532)--102.3% 208,197,418 Corporate Bonds Aerospace & Defense--0.5% 1,000,000 Transdigm, Inc., 8.375% due 7/15/2011 1,045,000 Airlines--1.0% 2,000,000 American Airlines, Inc. Class C, 7.80% due 4/01/2008 1,987,116 Broadcasting--1.2% 411,429 Emmis Communications Corp.,10.366% due 6/15/2012 (b) 411,429 2,000,000 Paxson Communications Corp.,10.777% due 1/15/2013 (a)(b) 1,935,000 --------------- 2,346,429 Cable--U.S.--1.7% 2,000,000 Charter Communications Holdings II LLC, 10.25% due 9/15/2010 1,995,000 1,000,000 Mediacom Broadband LLC,11% due 7/15/2013 1,070,000 450,000 Quebecor Media, Inc., 7.75% due 3/15/2016 (a) 461,250 --------------- 3,526,250 Chemicals--1.0% 1,646,000 GEO Specialty Chemicals, Inc.,13.036% due 12/31/2009 (c) 1,415,560 625,000 Nova Chemicals Corp., 7.561% due 11/15/2013 (b) 637,500 --------------- 2,053,060 Face Amount Corporate Bonds Value Diversified Media--0.5% RH Donnelley Corp. (a): $ 250,000 6.875% due 1/15/2013 $ 235,000 250,000 8.875% due 1/15/2016 260,937 250,000 Series A-2, 6.875% due 1/15/2013 235,000 250,000 Universal City Florida Holding Co. I, 9.43% due 5/01/2010 (b) 253,750 --------------- 984,687 Energy--Other--0.3% 700,000 Allis-Chalmers Energy, Inc., 9% due 1/15/2014 (a) 700,000 Food & Tobacco--1.1% 250,000 AmeriQual Group LLC, 9% due 4/01/2012 (a) 262,500 2,000,000 Landry's Restaurants, Inc. Series B, 7.50% due 12/15/2014 1,935,000 --------------- 2,197,500 Gaming--5.5% 650,000 Galaxy Entertainment Finance Co. Ltd., 9.655% due 12/15/2010 (a)(b) 671,125 1,000,000 Little Traverse Bay Bands of Odawa Indians, 10.25% due 2/15/2014 (a) 987,500 5,000,000 Majestic Star Casino LLC, 9.50% due 10/15/2010 5,350,000 1,000,000 Pinnacle Entertainment, Inc., 8.25% due 3/15/2012 1,040,000 3,000,000 Poster Financial Group, Inc., 8.75% due 12/01/2011 3,150,000 --------------- 11,198,625 Health Care--0.5% 1,000,000 US Oncology Holdings, Inc., 9.264% due 3/15/2015 (b) 995,000 Information Technology--3.8% 525,000 Activant Solutions, Inc.,10.53% due 4/01/2010 (a)(b) 538,125 1,000,000 Cypress Semiconductor Corp., 1.25% due 6/15/2008 (c) 1,292,500 MagnaChip Semiconductor SA: 2,000,000 7.741% due 12/15/2011 (b) 2,030,000 2,000,000 8% due 12/15/2014 1,930,000 2,000,000 Quantum Corp., 4.375% due 8/01/2010 (c) 2,035,000 --------------- 7,825,625 Manufacturing--0.7% 1,000,000 Invensys Plc, 9.875% due 3/15/2011 (a) 1,035,000 342,000 Medis Technologies Ltd., 6% due 7/15/2010 (a)(c) 376,200 --------------- 1,411,200 Packaging--0.1% 900,000 Pliant Corp.,13% due 6/01/2010 (f) 220,500 Paper--2.1% 2,000,000 Abitibi-Consolidated, Inc., 7.991% due 6/15/2011 (b) 1,945,000 250,000 Boise Cascade LLC, 7.475% due 10/15/2012 (b) 248,750 2,000,000 Bowater, Inc., 7.491% due 3/15/2010 (b) 2,000,000 --------------- 4,193,750 FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Schedule of Investments (concluded) Face Amount Corporate Bonds Value Retail--1.0% $2,000,000 Neiman-Marcus Group, Inc., 9% due 10/15/2015 (a) $ 2,112,500 Telecommunications--1.6% 800,000 Qwest Corp., 7.741% due 6/15/2013 (b) 874,000 2,718,000 Terremark Worldwide, Inc., 9% due 6/15/2009 (c) 2,419,020 --------------- 3,293,020 Utility--4.2% 3,500,000 Electricidad de Caracas Finance BV,10.25% due 10/15/2014 (a) 3,815,000 2,000,000 NRG Energy, Inc., 7.25% due 2/01/2014 2,050,000 3,000,000 Reliant Energy, Inc., 6.75% due 12/15/2014 2,711,250 --------------- 8,576,250 Wireless Communications--0.9% 1,100,000 Dobson Cellular Systems, 9.43% due 11/01/2011 (b) 1,144,000 325,000 Dobson Communications Corp., 8.85% due 10/15/2012 321,750 250,000 Rogers Wireless Communications, Inc., 7.616% due 12/15/2010 (b) 258,750 --------------- 1,724,500 Total Corporate Bonds (Cost--$55,827,667)--27.7% 56,391,012 Shares Held Common Stocks Value Chemicals--0.0% 10,732 GEO Specialty Chemicals, Inc. (d) $ 48,294 Total Common Stocks (Cost--$0)--0.0% 48,294 Warrants (g) Utility--0.0% 14,548 Reliant Resources (expires 10/25/2008) 89,107 Total Warrants (Cost--$0)--0.0% 89,107 Beneficial Interest Short-Term Securities $ 161,867 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I, 4.42% (b)(e) 161,867 Total Short-Term Securities (Cost--$161,867)--0.1% 161,867 Total Investments (Cost--$261,253,066*)--130.1% 264,887,698 Liabilities in Excess of Other Assets--(30.1%) (61,330,521) --------------- Net Assets--100.0% $ 203,557,177 =============== * The cost and unrealized appreciation (depreciation) of investments as of February 28, 2006, as computed for federal income tax purposes, were as follows: Aggregate cost $ 261,253,066 ================ Gross unrealized appreciation $ 4,938,582 Gross unrealized depreciation (1,303,950) ---------------- Net unrealized appreciation $ 3,634,632 ================ ** Floating rate loan interests in which the Fund invests generally pay interest at rates that are periodically redetermined by reference to a base lending rate plus a premium. The base lending rates are generally (i) the lending rate offered by one or more major European banks, such as LIBOR (London InterBank Offered Rate), (ii) the prime rate offered by one or more major U.S. banks or (iii) the certificate of deposit rate. (a) The security may be offered and sold to "qualified institutional buyers" under Rule 144A of the Securities Act of 1933. (b) Floating rate security. (c) Convertible security. (d) Non-income producing security. (e) Investments in companies considered to be an affiliate of the Fund, for purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as follows: Net Interest Affiliate Activity Income Merrill Lynch Liquidity Series, LLC Cash Sweep Series I $67,520 $26,374 (f) Non-income producing security; issuer filed for bankruptcy or is in default of interest payments. (g) Warrants entitle the Fund to purchase a predetermined number of shares of common stock and are non-income producing. The purchase price and number of shares are subject to adjustment under certain conditions until the expiration date. o For Fund compliance purposes, the Fund's industry classifications refer to any one or more of the industry sub-classifications used by one or more widely recognized market indexes or ratings group indexes, and/or as defined by Fund management. This definition may not apply for purposes of this report, which may combine industry sub-classifications for reporting ease. Industries are shown as a percent of net assets. These industry classifications are unaudited. See Notes to Financial Statements. FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Statement of Assets, Liabilities and Capital
As of February 28, 2006 Assets Investments in unaffiliated securities, at value (identified cost--$261,091,199) $ 264,725,831 Investments in affiliated securities, at value (identified cost--$161,867) 161,867 Cash 2,872,109 Receivables: Interest $ 2,931,687 Principal paydowns 29,816 Commitment fees 17,628 2,979,131 --------------- Prepaid expenses 4,527 --------------- Total assets 270,743,465 --------------- Liabilities Loans 61,400,000 Unfunded loan commitment 257,070 Payables: Securities purchased 4,968,182 Dividends to shareholders 290,746 Investment adviser 125,515 Interest on loans 32,371 Other affiliates 1,760 5,418,574 --------------- Accrued expenses and other liabilities 110,644 --------------- Total liabilities 67,186,288 --------------- Net Assets Net assets $ 203,557,177 =============== Capital Common Stock, par value $.10 per share; 200,000,000 shares authorized (10,496,930 shares issued and outstanding) $ 1,049,693 Paid-in capital in excess of par 199,119,933 Undistributed investment income--net $ 1,850,453 Accumulated realized capital losses--net (1,954,529) Unrealized appreciation--net 3,491,627 --------------- Total accumulated earnings--net 3,387,551 --------------- Total capital--Equivalent to $19.39 net asset value per share of Common Stock (market price--$17.76) $ 203,557,177 =============== See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Statement of Operations
For the Year Ended February 28, 2006 Investment Income Interest (including $26,374 from affiliates) (net of $10,523 foreign withholding tax) $ 18,764,289 Facility and other fees 255,855 --------------- Total income 19,020,144 --------------- Expenses Loan interest expense $ 2,474,295 Investment advisory fees 2,003,917 Borrowing costs 152,722 Professional fees 99,607 Accounting services 85,088 Transfer agent fees 45,894 Directors' fees and expenses 44,140 Printing and shareholder reports 40,013 Listing fees 19,117 Custodian fees 18,049 Pricing services 10,515 Other 18,777 --------------- Total expenses 5,012,134 --------------- Investment income--net 14,008,010 --------------- Realized & Unrealized Gain (Loss)--Net Realized gain (loss) on: Investments--net (1,999,659) Swaps--net 45,130 (1,954,529) --------------- Change in unrealized appreciation/depreciation on: Investments--net (1,262,000) Unfunded corporate loans--net (106,145) (1,368,145) --------------- --------------- Total realized and unrealized loss--net (3,322,674) --------------- Net Increase in Net Assets Resulting from Operations $ 10,685,336 =============== See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Statements of Changes in Net Assets
For the For the Period Year Ended July 30, 2004++ February 28, to February 28, Increase (Decrease) in Net Assets: 2006 2005 Operations Investment income--net $ 14,008,010 $ 6,024,951 Realized gain (loss)--net (1,954,529) 1,230,145 Unrealized appreciation/depreciation--net (1,368,145) 4,859,772 --------------- --------------- Net increase in net assets resulting from operations 10,685,336 12,114,868 --------------- --------------- Dividends & Distributions to Shareholders Dividends and distributions to shareholders on: Investment income--net (13,283,655) (4,898,853) Realized gain--net (1,099,532) (130,613) --------------- --------------- Net decrease from dividends and distributions to shareholders (14,383,187) (5,029,466) --------------- --------------- Common Stock Transactions Net proceeds from issuance of Common Stock -- 200,072,500 Value of shares issued to Common Stock shareholders in reinvestment of dividends and distributions -- 322,024 Offering costs resulting from the issuance of Common Stock -- (324,906) --------------- --------------- Net increase in net assets resulting from Common Stock transactions -- 200,069,618 --------------- --------------- Net Assets Total increase (decrease) in net assets (3,697,851) 207,155,020 Beginning of period 207,255,028 100,008 --------------- --------------- End of period* $ 203,557,177 $ 207,255,028 =============== =============== * Undistributed investment income--net $ 1,850,453 $ 1,126,098 =============== =============== ++ Commencement of operations. See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Statement of Cash Flows
For the Year Ended February 28, 2006 Cash Provided by Operating Activities Net increase in net assets resulting from operations $ 10,685,336 Adjustments to reconcile net increase in net assets resulting from operations to net cash provided by operating activities: Increase in receivables (148,052) Increase in other assets (3,193) Increase in other liabilities 43,770 Realized and unrealized loss--net 3,322,674 Amortization of premium and discount (201,521) Proceeds from sales and paydowns of long-term securities 191,353,817 Other investment related transactions 643,428 Purchases of long-term securities (189,755,155) Purchases of short-term investments (67,520) --------------- Cash provided by operating activities 15,873,584 --------------- Cash Used for Financing Activities Cash receipts from borrowings 145,500,000 Cash payments on borrowings (144,400,000) Cash payments on offering costs (25,862) Dividends paid to shareholders (14,391,634) --------------- Cash used for financing activities (13,317,496) --------------- Cash Net increase in cash 2,556,088 Cash at beginning of year 316,021 --------------- Cash at end of year $ 2,872,109 =============== Information Cash paid for interest $ 2,461,716 =============== See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Financial Highlights
For the For the Period Year Ended July 30, 2004++ to The following per share data and ratios have been derived February 28, February 28, from information provided in the financial statements. 2006 2005 Per Share Operating Performance Net asset value, beginning of period $ 19.74 $ 19.10 --------------- --------------- Investment income--net*** 1.33 .58 Realized and unrealized gain (loss)--net (.31) .57 --------------- --------------- Total from investment operations 1.02 1.15 --------------- --------------- Less dividends and distributions from: Investment income--net (1.27) (.47) Realized gain--net (.10) (.01) --------------- --------------- Total dividends and distributions (1.37) (.48) --------------- --------------- Offering costs resulting from the issuance of Common Stock -- (.03) --------------- --------------- Net asset value, end of period $ 19.39 $ 19.74 =============== =============== Market price per share, end of period $ 17.76 $ 19.44 =============== =============== Total Investment Return** Based on net asset value per share 6.07% 5.97%+++ =============== =============== Based on market price per share (1.35%) (.34%)+++ =============== =============== Ratios to Average Net Assets Expenses, net of waiver and excluding interest expense 1.25% .92%* =============== =============== Expenses, net of waiver 2.46% 1.30%* =============== =============== Expenses 2.46% 1.48%* =============== =============== Investment income--net 6.88% 5.11%* =============== =============== Leverage Amount of borrowings, end of period (in thousands) $ 61,400 $ 60,300 =============== =============== Average amount of borrowings outstanding during the period (in thousands) $ 63,725 $ 29,072 =============== =============== Average amount of borrowings outstanding per share during the period*** $ 6.07 $ 2.80 =============== =============== Supplemental Data Net assets, end of period (in thousands) $ 203,557 $ 207,255 =============== =============== Portfolio turnover 72.49% 29.68% =============== =============== * Annualized. ** Total investment returns based on market price, which can be significantly greater or lesser than the net asset value, may result in substantially different returns. Total investment returns exclude the effects of sales charges. *** Based on average shares outstanding. ++ Commencement of operations. +++ Aggregate total investment return. See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Notes to Financial Statements 1. Significant Accounting Policies: Floating Rate Income Strategies Fund II, Inc. (the "Fund") is registered under the Investment Company Act of 1940, as amended, as a diversified, closed-end management investment company. The Fund's financial statements are prepared in conformity with U.S. generally accepted accounting principles, which may require the use of management accruals and estimates. Actual results may differ from these estimates. The Fund determines and makes available for publication the net asset value of its Common Stock on a daily basis. The Fund's Common Stock shares are listed on the New York Stock Exchange ("NYSE") under the symbol FRB. (a) Corporate debt obligations--The Fund invests principally in floating rate obligations of companies, including floating rate loans made by banks and other financial institutions and both privately and publicly offered corporate bonds and notes. Because agents and intermediaries are primarily commercial banks or other financial institutions, the Fund's investment in floating rate loans could be considered concentrated in financial institutions. (b) Valuation of investments--Floating rate loans are valued in accordance with guidelines established by the Fund's Board of Directors. Floating rate loans are valued at the mean between the last available bid and asked prices from one or more brokers or dealers as obtained from Loan Pricing Corporation. For the limited number of floating rate loans for which no reliable price quotes are available, such floating rate loans may be valued by Loan Pricing Corporation through the use of pricing matrixes to determine valuations. If the pricing service does not provide a value for a floating rate loan, Fund Asset Management, L.P. ("FAM") will value the floating rate loan at fair value, which is intended to approximate market value. Debt securities are traded primarily in over-the-counter ("OTC") markets and are valued at the last available bid price in the OTC market or on the basis of values obtained by a pricing service. Pricing services use valuation matrixes that incorporate both dealer-supplied valuations and valuation models. The procedures of the pricing service and its valuations are reviewed by the officers of the Fund under the general direction of the Board of Directors. Such valuations and procedures will be reviewed periodically by the Board of Directors of the Fund. Securities that are held by the Fund that are traded on stock exchanges or the Nasdaq National Market are valued at the last sale price or official close price on the exchange on which such securities are traded, as of the close of business on the day the securities are being valued or, lacking any sales, at the last available bid price for long positions, and at the last available asked price for short positions. In cases where securities are traded on more than one exchange, the securities are valued on the exchange designated as the primary market by or under the authority of the Board of Directors of the Fund. Long positions in securities traded in the OTC market, Nasdaq Small Cap or Bulletin Board are valued at the last available bid price or yield equivalent obtained from one or more dealers or pricing services approved by the Board of Directors of the Fund. Short positions traded in the OTC market are valued at the last available asked price. Portfolio securities that are traded both in the OTC market and on a stock exchange are valued according to the broadest and most representative market. When the Fund writes an option, the amount of the premium received is recorded on the books of the Fund as an asset and an equivalent liability. The amount of the liability is subsequently valued to reflect the current market value of the option written, based on the last sale price in the case of exchange-traded options or, in the case of options traded in the OTC market, the last asked price. Options purchased by the Fund are valued at their last sale price in the case of exchange traded options or, in the case of options traded in the OTC market, the last bid price. Swap agreements are valued based upon quoted fair valuations received daily by the Fund from a pricing service or counterparty. Other investments, including futures contracts and related options, are stated at market value. Obligations with remaining maturities of 60 days or less are valued at amortized cost unless FAM believes that this method no longer produces fair valuations. Repurchase agreements will be valued at cost plus accrued interest. Generally, trading in foreign securities, as well as U.S. government securities, money market instruments and certain fixed income securities, is substantially completed each day at various times prior to the close of business on the NYSE. The values of such securities used in computing the net asset value of the Fund's shares are determined as of such times. Foreign currency exchange rates also are generally determined prior to the close of business on the NYSE. Occasionally, events affecting the values of such securities and such exchange rates may occur between the times at which they are determined and the close of business on the NYSE that may not be reflected in the computation of the Fund's net asset value. If events (for example, a company announcement, market volatility or a natural disaster) occur during such periods that are expected to materially affect the value of such securities, those securities may be valued at their fair value as determined in good faith by the Fund's Board of Directors or by FAM using a pricing service and/or procedures approved by the Fund's Board of Directors. FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Notes to Financial Statements (continued) (c) Derivative financial instruments--The Fund may engage in various portfolio investment strategies both to increase the return of the Fund and to hedge, or protect, its exposure to interest rate movements and movements in the securities markets. Losses may arise due to changes in the value of the contract or if the counterparty does not perform under the contract. * Financial futures contracts--The Fund may purchase or sell financial futures contracts and options on such futures contracts. Futures contracts are contracts for delayed delivery of securities at a specific future date and at a specific price or yield. Upon entering into a contract, the Fund deposits and maintains as collateral such initial margin as required by the exchange on which the transaction is effected. Pursuant to the contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the daily fluctuation in value of the contract. Such receipts or payments are known as variation margin and are recorded by the Fund as unrealized gains or losses. When the contract is closed, the Fund records a realized gain or loss equal to the difference between the value of the contract at the time it was opened and the value at the time it was closed. * Options--The Fund may write and purchase call and put options. When the Fund writes an option, an amount equal to the premium received by the Fund is reflected as an asset and an equivalent liability. The amount of the liability is subsequently marked-to-market to reflect the current market value of the option written. When a security is purchased or sold through an exercise of an option, the related premium paid (or received) is added to (or deducted from) the basis of the security acquired or deducted from (or added to) the proceeds of the security sold. When an option expires (or the Fund enters into a closing transaction), the Fund realizes a gain or loss on the option to the extent of the premiums received or paid (or gain or loss to the extent the cost of the closing transaction is less than or exceeds the premiums paid or received). Written and purchased options are non-income producing investments. * Swaps--The Fund may enter into swap agreements, which are over-the-counter contracts in which the Fund and a counterparty agree to make periodic net payments on a specified notional amount. The net payments can be made for a set period of time or may be triggered by a predetermined credit event. The net periodic payments may be based on a fixed or variable interest rate; the change in market value of a specified security, basket of securities, or index; or the return generated by a security. These periodic payments received or made by the Fund are recorded in the accompanying Statement of Operations as realized gains or losses, respectively. Gains or losses are also realized upon termination of swap agreements. Swaps are marked-to-market daily and changes in value are recorded as unrealized appreciation (depreciation). Risks include changes in the returns of the underlying instruments, failure of the counterparties to perform under the contracts' terms and the possible lack of liquidity with respect to the swap agreements. (d) Income taxes--It is the Fund's policy to comply with the requirements of the Internal Revenue Code applicable to regulated investment companies and to distribute substantially all of its taxable income to its shareholders. Therefore, no federal income tax provision is required. Under the applicable foreign tax law, a withholding tax may be imposed on interest, dividends and capital gains at various rates. (e) Security transactions and investment income--Security transactions are recorded on the dates the transactions are entered into (the trade dates). Realized gains and losses on security transactions are determined on the identified cost basis. Interest income is recognized on the accrual basis. The Fund amortizes all premiums and discounts on debt securities. (f) Offering costs--Direct expenses relating to the public offering of the Fund's Common Stock were charged to capital at the time of issuance of the shares. FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Notes to Financial Statements (continued) (g) Dividends and distributions--Dividends from net investment income are declared and paid monthly. Distributions of capital gains are recorded on the ex-dividend dates. The Fund may at times pay out less than the entire amount of net investment income earned in any particular period and may at times pay out such accumulated undistributed income in other periods to permit the Fund to maintain a more stable level of dividends. (h) Securities lending--The Fund may lend securities to financial institutions that provide cash or securities issued or guaranteed by the U.S. government as collateral, which will be maintained at all times in an amount equal to at least 100% of the current market value of the loaned securities. The market value of the loaned securities is determined at the close of business of the Fund and any additional required collateral is delivered to the Fund on the next business day. Where the Fund receives securities as collateral for the loaned securities, it collects a fee from the borrower. The Fund typically receives the income on the loaned securities but does not receive the income on the collateral. Where the Fund receives cash collateral, it may invest such collateral and retain the amount earned on such investment, net of any amount rebated to the borrower. Loans of securities are terminable at any time and the borrower, after notice, is required to return borrowed securities within five business days. The Fund may pay reasonable finder's, lending agent, administrative and custodial fees in connection with its loans. In the event that the borrower defaults on its obligation to return borrowed securities because of insolvency or for any other reason, the Fund could experience delays and costs in gaining access to the collateral. The Fund also could suffer a loss where the value of the collateral falls below the market value of the borrowed securities, in the event of borrower default or in the event of losses on investments made with cash collateral. 2. Investment Advisory Agreement and Transactions with Affiliates: The Fund has entered into an Investment Advisory Agreement with FAM. The general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited partner. FAM is responsible for the management of the Fund's portfolio and provides the necessary personnel, facilities, equipment and certain other services necessary to the operations of the Fund. For such services, the Fund pays a monthly fee at an annual rate of .75% of the Fund's average daily net assets plus the proceeds of any outstanding borrowings used for leverage. The Fund has received an exemptive order from the Securities and Exchange Commission permitting it to lend portfolio securities to Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate of FAM, or its affiliates. Pursuant to that order, the Fund also has retained Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities lending agent for a fee based on a share of the returns on investment of cash collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral received by the Fund for such loans, among other things, in a private investment company managed by MLIM, LLC or in registered money market funds advised by FAM or its affiliates. For the year ended February 28, 2006, the Fund reimbursed FAM $4,881 for certain accounting services. In addition, MLPF&S received $1,250 in commissions on the execution of portfolio security transactions for the Fund for the year ended February 28, 2006. Certain officers and/or directors of the Fund are officers and/or directors of FAM, PSI, ML & Co., and/or MLIM, LLC. In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to merge ML & Co.'s investment management business, including FAM, with the investment management business of BlackRock, Inc. The transaction is expected to close in the third quarter of 2006. 3. Investments: Purchases and sales (including paydowns) of investments, excluding short-term securities, for the year ended February 28, 2006 were $191,792,001 and $191,129,883, respectively. 4. Stock Transactions: The Fund is authorized to issue 200,000,000 shares of capital stock par value $.10, all of which are initially classified as Common Stock. The Board of Directors is authorized, however, to classify and reclassify any unissued shares of capital stock without approval of the holders of Common Stock. FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Notes to Financial Statements (concluded) Shares issued and outstanding during the year ended February 28, 2006 remained constant. Shares issued and outstanding during the period July 30, 2004 to February 28, 2005, increased by 10,475,000 from shares sold and by 16,694 as a result of dividend reinvestment. 5. Short-Term Borrowings: On May 24, 2005, the Fund renewed its revolving credit and security agreement funded by a commercial paper asset securitization program with Citicorp North America, Inc. ("Citicorp") as Agent, certain secondary backstop lenders, and certain asset securitization conduits as lenders (the "Lenders"). The agreement was renewed for one year and has a maximum limit of $100,000,000. Under the Citicorp program, the conduits will fund advances to the Fund through the issuance of highly rated commercial paper. As security for its obligations to the Lenders under the revolving securitization facility, the Fund has granted a security interest in substantially all of its assets to and in favor of the Lenders. The interest rate on the Fund's borrowings is based on the interest rate carried by the commercial paper plus a program fee. The Fund pays additional borrowing costs including a backstop commitment fee. The weighted average annual interest rate was 3.88% and the average borrowing was approximately $63,725,000 for the year ended February 28, 2006. 6. Unfunded Corporate Loans: As of February 28, 2006, the Fund had unfunded loan commitments of approximately $11,434,000, which would be extended at the option of the borrower pursuant to the following loan agreements: (in Thousands) Unfunded Borrower Commitment Value Aquila, Inc. $3,000 $2,940 MGM Mirage Revolving Line of Credit $1,845 $1,795 Spanish Broadcasting System, Inc. $2,500 $2,431 Trump Entertainment Delayed Draw $ 995 $1,007 Trump Entertainment Resorts Holdings LP $2,000 $1,950 United Airlines $ 94 $ 94 Vought Aircraft Industries, Inc. $1,000 $ 960 7. Distributions to Shareholders: The Fund paid an ordinary income dividend to holders of Common Stock in the amount of $0.108333 per share on March 31, 2006 to shareholders of record on March 14, 2006. The tax character of distributions paid during the fiscal year ended February 28, 2006 and the period July 30, 2004 to February 28, 2005 was as follows: 7/30/2004++ - 2/28/2006 2/28/2005 Distributions paid from: Ordinary income $ 14,383,187 $ 5,029,466 --------------- --------------- Total taxable distributions $ 14,383,187 $ 5,029,466 =============== =============== ++ Commencement of operations. As of February 28, 2006, the components of accumulated earnings on a tax basis were as follows: Undistributed ordinary income--net $ 1,850,453 Undistributed long-term capital gains--net -- --------------- Total undistributed earnings--net 1,850,453 Capital loss carryforward (467,774)* Unrealized gains--net 2,004,872** --------------- Total accumulated earnings--net $ 3,387,551 =============== * On February 28, 2006, the Fund had a net capital loss carryforward of $467,774, all of which expires in 2014. This amount will be available to offset like amounts of any future taxable gains. ** The difference between book-basis and tax-basis net unrealized gains is attributable primarily to the deferral of post-October capital losses for tax purposes. FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Report of Independent Registered Public Accounting Firm To the Shareholders and Board of Directors of Floating Rate Income Strategies Fund II, Inc.: We have audited the accompanying statement of assets, liabilities and capital, including the schedule of investments, of Floating Rate Income Strategies Fund II, Inc. as of February 28, 2006, and the related statements of operations and cash flows for the year then ended, and the statements of changes in net assets, and the financial highlights for the year then ended and for the period July 30, 2004 (commencement of operations) through February 28, 2005. These financial statements and financial highlights are the responsibility of the Fund's management. Our responsibility is to express an opinion on these financial statements and financial highlights based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and financial highlights are free of material misstatement. The Fund is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Fund's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our procedures included confirmation of securities owned as of February 28, 2006, by correspondence with the custodian and financial intermediaries; where replies were not received from financial intermediaries, we performed other auditing procedures. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements and financial highlights referred to above present fairly, in all material respects, the financial position of Floating Rate Income Strategies Fund II, Inc. as of February 28, 2006, the results of its operations and its cash flows for the year then ended and the changes in its net assets, and its financial highlights for the year then ended and for the period July 30, 2004 through February 28, 2005, in conformity with U.S. generally accepted accounting principles. Deloitte & Touche LLP Princeton, New Jersey April 24, 2006 Fund Certification (unaudited) In February 2006, the Fund filed its Chief Executive Officer Certification for the prior year with the New York Stock Exchange pursuant to Section 303A. 12(a) of the New York Stock Exchange Corporate Governance Listing Standards. The Fund's Chief Executive Officer and Chief Financial Officer Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the Fund's Form N-CSR and are available on the Securities and Exchange Commission's Web site at http://www.sec.gov. Important Tax Information (unaudited) The following information is provided with respect to the ordinary income distributions paid by Floating Rate Income Strategies II, Inc. for the fiscal year ended February 28, 2006: Interest-Related Dividends for Non-U.S. Residents Month Paid: March 2005 0.00%* April 2005 76.70%* May 2005 - December 2005 87.10%* January 2006 48.59%* February 2006 82.16%* * Represents the portion of the taxable ordinary income dividends eligible for exemption from U.S. withholding tax for nonresident aliens and foreign corporations. FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Automatic Dividend Reinvestment Plan How the Plan Works--The Fund offers a Dividend Reinvestment Plan (the "Plan") under which income and capital gains dividends paid by the Fund are automatically reinvested in additional shares of Common Stock of the Fund. The Plan is administered on behalf of the shareholders by Computershare Trust Company, N.A. (the "Plan Agent"). Under the Plan, whenever the Fund declares a dividend, participants in the Plan will receive the equivalent in shares of Common Stock of the Fund. The Plan Agent will acquire the shares for the participant's account either (i) through receipt of additional unissued but authorized shares of the Fund ("newly issued shares") or (ii) by purchase of outstanding shares of Common Stock on the open market on the New York Stock Exchange or elsewhere. If, on the dividend payment date, the Fund's net asset value per share is equal to or less than the market price per share plus estimated brokerage commissions (a condition often referred to as a "market premium"), the Plan Agent will invest the dividend amount in newly issued shares. If the Fund's net asset value per share is greater than the market price per share (a condition often referred to as a "market discount"), the Plan Agent will invest the dividend amount by purchasing on the open market additional shares. If the Plan Agent is unable to invest the full dividend amount in open market purchases, or if the market discount shifts to a market premium during the purchase period, the Plan Agent will invest any uninvested portion in newly issued shares. The shares acquired are credited to each shareholder's account. The amount credited is determined by dividing the dollar amount of the dividend by either (i) when the shares are newly issued, the net asset value per share on the date the shares are issued or (ii) when shares are purchased in the open market, the average purchase price per share. Participation in the Plan--Participation in the Plan is automatic, that is, a shareholder is automatically enrolled in the Plan when he or she purchases shares of Common Stock of the Fund unless the shareholder specifically elects not to participate in the Plan. Shareholders who elect not to participate will receive all dividend distributions in cash. Shareholders who do not wish to participate in the Plan must advise the Plan Agent in writing (at the address set forth below) that they elect not to participate in the Plan. Participation in the Plan is completely voluntary and may be terminated or resumed at any time without penalty by writing to the Plan Agent. Benefits of the Plan--The Plan provides an easy, convenient way for shareholders to make additional, regular investments in the Fund. The Plan promotes a long-term strategy of investing at a lower cost. All shares acquired pursuant to the Plan receive voting rights. In addition, if the market price plus commissions of the Fund's shares is above the net asset value, participants in the Plan will receive shares of the Fund for less than they could otherwise purchase them and with a cash value greater than the value of any cash distribution they would have received. However, there may not be enough shares available in the market to make distributions in shares at prices below the net asset value. Also, since the Fund does not redeem shares, the price on resale may be more or less than the net asset value. Plan Fees--There are no enrollment fees or brokerage fees for participating in the Plan. The Plan Agent's service fees for handling the reinvestment of distributions are paid for by the Fund. However, brokerage commissions may be incurred when the Fund purchases shares on the open market and shareholders will pay a pro rata share of any such commissions. Tax Implications--The automatic reinvestment of dividends and distributions will not relieve participants of any federal, state or local income tax that may be payable (or required to be withheld) on such dividends. Therefore, income and capital gains may still be realized even though shareholders do not receive cash. The value of shares acquired pursuant to the Plan will generally be excluded from gross income to the extent that the cash amount reinvested would be excluded from gross income. If, when the Fund's shares are trading at a market premium, the Fund issues shares pursuant to the Plan that have a greater fair market value than the amount of cash reinvested, it is possible that all or a portion of the discount from the market value (which may not exceed 5% of the fair market value of the Fund's shares) could be viewed as a taxable distribution. If the discount is viewed as a taxable distribution, it is also possible that the taxable character of this discount would be allocable to all the shareholders, including shareholders who do not participate in the Plan. Thus, shareholders who do not participate in the Plan might be required to report as ordinary income a portion of their distributions equal to their allocable share of the discount. Contact Information--All correspondence concerning the Plan, including any questions about the Plan, should be directed to the Plan Agent at Computershare Trust Company, N.A., P.O. Box 43010, Providence, RI 02940-3010, Telephone: 800-426-5523. FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Officers and Directors
Number of Portfolios in Other Public Position(s) Length of Fund Complex Directorships Held with Time Overseen by Held by Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director Interested Director Robert C. Doll, Jr.* President 2005 to President of the MLIM/FAM-advised funds since 131 Funds None P.O. Box 9011 and present 2005; President of MLIM and FAM since 2001; 177 Portfolios Princeton, Director Co-Head (Americas Region) thereof from 2000 NJ 08543-9011 to 2001 and Senior Vice President from 1999 Age: 51 to 2001; President and Director of Princeton Services, Inc. ("Princeton Services") since 2001; President of Princeton Administrators, L.P. ("Princeton Administrators") since 2001; Chief Investment Officer of OppenheimerFunds, Inc. in 1999 and Executive Vice President thereof from 1991 to 1999. * Mr. Doll is a director, trustee or member of an advisory board of certain other investment companies for which MLIM or FAM acts as investment adviser. Mr. Doll is an "interested person," as defined in the Investment Company Act, of the Fund based on his positions with MLIM, FAM, Princeton Services and Princeton Administrators. Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. As Fund President, Mr. Doll serves at the pleasure of the Board of Directors. Independent Directors* Ronald W. Forbes** Director 2004 to Professor Emeritus of Finance, School of 49 Funds None P.O. Box 9095 present Business, State University of New York at 50 Portfolios Princeton, Albany since 2000 and Professor thereof from NJ 08543-9095 1989 to 2000; International Consultant, Age: 65 Urban Institute, Washington, D.C. from 1995 to 1999. Cynthia A. Montgomery Director 2004 to Professor, Harvard Business School since 1989; 49 Funds Newell P.O. Box 9095 present Associate Professor, J.L. Kellogg Graduate 50 Portfolios Rubbermaid, Princeton, School of Management, Northwestern University Inc. NJ 08543-9095 from 1985 to 1989; Associate Professor, Graduate (manufacturing). Age: 53 School of Business Administration, University of Michigan from 1979 to 1985; Director, Harvard Business School Publishing since 2005; Director, McLean Hospital since 2005. Jean Margo Reid Director 2004 to Self-employed consultant since 2001; Counsel 49 Funds None P.O. Box 9095 present of Alliance Capital Management (investment 50 Portfolios Princeton, adviser) in 2000; General Counsel, Director and NJ 08543-9095 Secretary of Sanford C. Bernstein & Co., Inc. Age: 60 (investment adviser/broker-dealer) from 1997 to 2000; Secretary, Sanford C. Bernstein Fund, Inc. from 1994 to 2000; Director and Secretary of SCB, Inc. since 1998; Director and Secretary of SCB Partners, Inc. since 2000; and Director of Covenant House from 2001 to 2004. Roscoe S. Suddarth Director 2004 to President, Middle East Institute, from 1995 to 49 Funds None P.O. Box 9095 present 2001; Foreign Service Officer, United States 50 Portfolios Princeton, Foreign Service, from 1961 to 1995 and Career NJ 08543-9095 Minister from 1989 to 1995; Deputy Inspector Age: 70 General, U.S. Department of State, from 1991 to 1994; U.S. Ambassador to the Hashemite Kingdom of Jordan from 1987 to 1990. Richard R. West Director 2004 to Professor of Finance from 1984 to 1995, 49 Funds Bowne & Co., P.O. Box 9095 present Dean from 1984 to 1993 and since 1995 50 Portfolios Inc. (financial Princeton, Dean Emeritus of New York University's Leonard printers); NJ 08543-9095 N. Stern School of Business Administration. Vornado Realty Age: 68 Trust (real estate company); Alexander's, Inc. (real estate company).
FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Officers and Directors (concluded)
Number of Portfolios in Other Public Position(s) Length of Fund Complex Directorships Held with Time Overseen by Held by Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Director Director Independent Directors (concluded)* Edward D. Zinbarg Director 2004 to Self-employed financial consultant since 1994; 49 Funds None P.O. Box 9095 present Executive Vice President of the Prudential 50 Portfolios Princeton, Insurance Company of America from 1988 to NJ 08543-9095 1994; Former Director of Prudential Reinsurance Age: 71 Company and former Trustee of the Prudential Foundation. * Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. ** Chairman of the Board of Directors and the Audit Committee. Position(s) Length of Held with Time Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years Fund Officers* Donald C. Burke Vice 2004 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since 1999; P.O. Box 9011 President present Senior Vice President and Treasurer of Princeton Services since 1999 and Director Princeton, and since 2004; Vice President of FAM Distributors, Inc. ("FAMD") since 1999 and NJ 08543-9011 Treasurer Director since 2004; Vice President of MLIM and FAM from 1990 to 1997; Director of Age: 45 Taxation of MLIM from 1990 to 2001; Vice President, Treasurer and Secretary of the IQ Funds since 2004. Jaimin J. Patel Vice 2004 to Director (Global Fixed Income) of MLIM since 2005; Vice President of MLIM from P.O. Box 9011 President present 2000 to 2005; Vice President at Chase Securities, Inc. from 1993 to 2000. Princeton, NJ 08543-9011 Age: 47 Jeffrey Hiller Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President and P.O. Box 9011 Compliance present Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief Compliance Princeton, Officer Officer of the IQ Funds since 2004; Global Director of Compliance at Morgan Stanley NJ 08543-9011 Investment Management from 2002 to 2004; Managing Director and Global Director Age: 54 of Compliance at Citigroup Asset Management from 2000 to 2002; Chief Compliance Officer at Soros Fund Management in 2000; Chief Compliance Officer at Prudential Financial from 1995 to 2000; Senior Counsel in the Commission's Securities and Exchange Division of Enforcement in Washington, D.C. from 1990 to 1995. Alice A. Pellegrino Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999 to P.O. Box 9011 present 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD Princeton, and Princeton Services since 2004. NJ 08543-9011 Age: 45 * Officers of the Fund serve at the pleasure of the Board of Directors.
Custodian State Street Bank and Trust Company P.O. Box 351 Boston, MA 02101 Transfer Agent Computershare Trust Company, N.A. P.O. Box 43010 Providence, RI 02940-3010 NYSE Symbol FRB FLOATING RATE INCOME STRATEGIES FUND II, INC. FEBRUARY 28, 2006 Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the end of the period covered by this report, that applies to the registrant's principal executive officer, principal financial officer and principal accounting officer, or persons performing similar functions. A copy of the code of ethics is available without charge upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863). Item 3 - Audit Committee Financial Expert - The registrant's board of directors has determined that (i) the registrant has the following audit committee financial experts serving on its audit committee and (ii) each audit committee financial expert is independent: (1) Ronald W. Forbes, (2) Richard R. West, and (3) Edward D. Zinbarg. Item 4 - Principal Accountant Fees and Services (a) Audit Fees - Fiscal Year Ending February 28, 2006 - $40,200 Fiscal Year Ending February 28, 2005 - $42,000 (b) Audit-Related Fees - Fiscal Year Ending February 28, 2006 - $8,000 Fiscal Year Ending February 28, 2005 - $9,600 The nature of the services include assurance and related services reasonably related to the performance of the audit of financial statements not included in Audit Fees. (c) Tax Fees - Fiscal Year Ending February 28, 2006 - $6,000 Fiscal Year Ending February 28, 2005 - $5,700 The nature of the services include tax compliance, tax advice and tax planning. (d) All Other Fees - Fiscal Year Ending February 28, 2006 - $0 Fiscal Year Ending February 28, 2005 - $0 (e)(1) The registrant's audit committee (the "Committee") has adopted policies and procedures with regard to the pre-approval of services. Audit, audit-related and tax compliance services provided to the registrant on an annual basis require specific pre- approval by the Committee. The Committee also must approve other non-audit services provided to the registrant and those non-audit services provided to the registrant's affiliated service providers that relate directly to the operations and the financial reporting of the registrant. Certain of these non-audit services that the Committee believes are a) consistent with the SEC's auditor independence rules and b) routine and recurring services that will not impair the independence of the independent accountants may be approved by the Committee without consideration on a specific case- by-case basis ("general pre-approval"). However, such services will only be deemed pre-approved provided that any individual project does not exceed $5,000 attributable to the registrant or $50,000 for all of the registrants the Committee oversees. Any proposed services exceeding the pre-approved cost levels will require specific pre-approval by the Committee, as will any other services not subject to general pre-approval (e.g., unanticipated but permissible services). The Committee is informed of each service approved subject to general pre-approval at the next regularly scheduled in-person board meeting. (e)(2) 0% (f) Not Applicable (g) Fiscal Year Ending February 28, 2006 - $4,944,454 Fiscal Year Ending February 28, 2005 - $11,046,527 (h) The registrant's audit committee has considered and determined that the provision of non-audit services that were rendered to the registrant's investment adviser and any entity controlling, controlled by, or under common control with the investment adviser that provides ongoing services to the registrant that were not pre- approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible with maintaining the principal accountant's independence. Regulation S-X Rule 2-01(c)(7)(ii) - $1,227,000, 0% Item 5 - Audit Committee of Listed Registrants - The following individuals are members of the registrant's separately-designated standing audit committee established in accordance with Section 3(a)(58)(A) of the Exchange Act (15 U.S.C. 78c(a)(58)(A)): Ronald W. Forbes Cynthia A. Montgomery Jean Margo Reid Roscoe S. Suddarth Richard R. West Edward D. Zinbarg Item 6 - Schedule of Investments - Not Applicable Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies - Proxy Voting Policies and Procedures Each Fund's Board of Directors/Trustees has delegated to Merrill Lynch Investment Managers, L.P. and/or Fund Asset Management, L.P. (the "Investment Adviser") authority to vote all proxies relating to the Fund's portfolio securities. The Investment Adviser has adopted policies and procedures ("Proxy Voting Procedures") with respect to the voting of proxies related to the portfolio securities held in the account of one or more of its clients, including a Fund. Pursuant to these Proxy Voting Procedures, the Investment Adviser's primary objective when voting proxies is to make proxy voting decisions solely in the best interests of each Fund and its shareholders, and to act in a manner that the Investment Adviser believes is most likely to enhance the economic value of the securities held by the Fund. The Proxy Voting Procedures are designed to ensure that the Investment Adviser considers the interests of its clients, including the Funds, and not the interests of the Investment Adviser, when voting proxies and that real (or perceived) material conflicts that may arise between the Investment Adviser's interest and those of the Investment Adviser's clients are properly addressed and resolved. In order to implement the Proxy Voting Procedures, the Investment Adviser has formed a Proxy Voting Committee (the "Committee"). The Committee is comprised of the Investment Adviser's Chief Investment Officer (the "CIO"), one or more other senior investment professionals appointed by the CIO, portfolio managers and investment analysts appointed by the CIO and any other personnel the CIO deems appropriate. The Committee will also include two non- voting representatives from the Investment Adviser's Legal department appointed by the Investment Adviser's General Counsel. The Committee's membership shall be limited to full-time employees of the Investment Adviser. No person with any investment banking, trading, retail brokerage or research responsibilities for the Investment Adviser's affiliates may serve as a member of the Committee or participate in its decision making (except to the extent such person is asked by the Committee to present information to the Committee, on the same basis as other interested knowledgeable parties not affiliated with the Investment Adviser might be asked to do so). The Committee determines how to vote the proxies of all clients, including a Fund, that have delegated proxy voting authority to the Investment Adviser and seeks to ensure that all votes are consistent with the best interests of those clients and are free from unwarranted and inappropriate influences. The Committee establishes general proxy voting policies for the Investment Adviser and is responsible for determining how those policies are applied to specific proxy votes, in light of each issuer's unique structure, management, strategic options and, in certain circumstances, probable economic and other anticipated consequences of alternate actions. In so doing, the Committee may determine to vote a particular proxy in a manner contrary to its generally stated policies. In addition, the Committee will be responsible for ensuring that all reporting and recordkeeping requirements related to proxy voting are fulfilled. The Committee may determine that the subject matter of a recurring proxy issue is not suitable for general voting policies and requires a case-by-case determination. In such cases, the Committee may elect not to adopt a specific voting policy applicable to that issue. The Investment Adviser believes that certain proxy voting issues require investment analysis - such as approval of mergers and other significant corporate transactions - akin to investment decisions, and are, therefore, not suitable for general guidelines. The Committee may elect to adopt a common position for the Investment Adviser on certain proxy votes that are akin to investment decisions, or determine to permit the portfolio manager to make individual decisions on how best to maximize economic value for a Fund (similar to normal buy/sell investment decisions made by such portfolio managers). While it is expected that the Investment Adviser will generally seek to vote proxies over which the Investment Adviser exercises voting authority in a uniform manner for all the Investment Adviser's clients, the Committee, in conjunction with a Fund's portfolio manager, may determine that the Fund's specific circumstances require that its proxies be voted differently. To assist the Investment Adviser in voting proxies, the Committee has retained Institutional Shareholder Services ("ISS"). ISS is an independent adviser that specializes in providing a variety of fiduciary-level proxy-related services to institutional investment managers, plan sponsors, custodians, consultants, and other institutional investors. The services provided to the Investment Adviser by ISS include in-depth research, voting recommendations (although the Investment Adviser is not obligated to follow such recommendations), vote execution, and recordkeeping. ISS will also assist the Fund in fulfilling its reporting and recordkeeping obligations under the Investment Company Act. The Investment Adviser's Proxy Voting Procedures also address special circumstances that can arise in connection with proxy voting. For instance, under the Proxy Voting Procedures, the Investment Adviser generally will not seek to vote proxies related to portfolio securities that are on loan, although it may do so under certain circumstances. In addition, the Investment Adviser will vote proxies related to securities of foreign issuers only on a best efforts basis and may elect not to vote at all in certain countries where the Committee determines that the costs associated with voting generally outweigh the benefits. The Committee may at any time override these general policies if it determines that such action is in the best interests of a Fund. From time to time, the Investment Adviser may be required to vote proxies in respect of an issuer where an affiliate of the Investment Adviser (each, an "Affiliate"), or a money management or other client of the Investment Adviser (each, a "Client") is involved. The Proxy Voting Procedures and the Investment Adviser's adherence to those procedures are designed to address such conflicts of interest. The Committee intends to strictly adhere to the Proxy Voting Procedures in all proxy matters, including matters involving Affiliates and Clients. If, however, an issue representing a non-routine matter that is material to an Affiliate or a widely known Client is involved such that the Committee does not reasonably believe it is able to follow its guidelines (or if the particular proxy matter is not addressed by the guidelines) and vote impartially, the Committee may, in its discretion for the purposes of ensuring that an independent determination is reached, retain an independent fiduciary to advise the Committee on how to vote or to cast votes on behalf of the Investment Adviser's clients. In the event that the Committee determines not to retain an independent fiduciary, or it does not follow the advice of such an independent fiduciary, the powers of the Committee shall pass to a subcommittee, appointed by the CIO (with advice from the Secretary of the Committee), consisting solely of Committee members selected by the CIO. The CIO shall appoint to the subcommittee, where appropriate, only persons whose job responsibilities do not include contact with the Client and whose job evaluations would not be affected by the Investment Adviser's relationship with the Client (or failure to retain such relationship). The subcommittee shall determine whether and how to vote all proxies on behalf of the Investment Adviser's clients or, if the proxy matter is, in their judgment, akin to an investment decision, to defer to the applicable portfolio managers, provided that, if the subcommittee determines to alter the Investment Adviser's normal voting guidelines or, on matters where the Investment Adviser's policy is case-by-case, does not follow the voting recommendation of any proxy voting service or other independent fiduciary that may be retained to provide research or advice to the Investment Adviser on that matter, no proxies relating to the Client may be voted unless the Secretary, or in the Secretary's absence, the Assistant Secretary of the Committee concurs that the subcommittee's determination is consistent with the Investment Adviser's fiduciary duties In addition to the general principles outlined above, the Investment Adviser has adopted voting guidelines with respect to certain recurring proxy issues that are not expected to involve unusual circumstances. These policies are guidelines only, and the Investment Adviser may elect to vote differently from the recommendation set forth in a voting guideline if the Committee determines that it is in a Fund's best interest to do so. In addition, the guidelines may be reviewed at any time upon the request of a Committee member and may be amended or deleted upon the vote of a majority of Committee members present at a Committee meeting at which there is a quorum. The Investment Adviser has adopted specific voting guidelines with respect to the following proxy issues: o Proposals related to the composition of the Board of Directors of issuers other than investment companies. As a general matter, the Committee believes that a company's Board of Directors (rather than shareholders) is most likely to have access to important, nonpublic information regarding a company's business and prospects, and is therefore best-positioned to set corporate policy and oversee management. The Committee, therefore, believes that the foundation of good corporate governance is the election of qualified, independent corporate directors who are likely to diligently represent the interests of shareholders and oversee management of the corporation in a manner that will seek to maximize shareholder value over time. In individual cases, the Committee may look at a nominee's history of representing shareholder interests as a director of other companies or other factors, to the extent the Committee deems relevant. o Proposals related to the selection of an issuer's independent auditors. As a general matter, the Committee believes that corporate auditors have a responsibility to represent the interests of shareholders and provide an independent view on the propriety of financial reporting decisions of corporate management. While the Committee will generally defer to a corporation's choice of auditor, in individual cases, the Committee may look at an auditors' history of representing shareholder interests as auditor of other companies, to the extent the Committee deems relevant. o Proposals related to management compensation and employee benefits. As a general matter, the Committee favors disclosure of an issuer's compensation and benefit policies and opposes excessive compensation, but believes that compensation matters are normally best determined by an issuer's board of directors, rather than shareholders. Proposals to "micro-manage" an issuer's compensation practices or to set arbitrary restrictions on compensation or benefits will, therefore, generally not be supported. o Proposals related to requests, principally from management, for approval of amendments that would alter an issuer's capital structure. As a general matter, the Committee will support requests that enhance the rights of common shareholders and oppose requests that appear to be unreasonably dilutive. o Proposals related to requests for approval of amendments to an issuer's charter or by-laws. As a general matter, the Committee opposes poison pill provisions. o Routine proposals related to requests regarding the formalities of corporate meetings. o Proposals related to proxy issues associated solely with holdings of investment company shares. As with other types of companies, the Committee believes that a fund's Board of Directors (rather than its shareholders) is best-positioned to set fund policy and oversee management. However, the Committee opposes granting Boards of Directors authority over certain matters, such as changes to a fund's investment objective, that the Investment Company Act envisions will be approved directly by shareholders. o Proposals related to limiting corporate conduct in some manner that relates to the shareholder's environmental or social concerns. The Committee generally believes that annual shareholder meetings are inappropriate forums for discussion of larger social issues, and opposes shareholder resolutions "micromanaging" corporate conduct or requesting release of information that would not help a shareholder evaluate an investment in the corporation as an economic matter. While the Committee is generally supportive of proposals to require corporate disclosure of matters that seem relevant and material to the economic interests of shareholders, the Committee is generally not supportive of proposals to require disclosure of corporate matters for other purposes. Item 8 - Portfolio Managers of Closed-End Management Investment Companies - as of March 31, 2006. (a)(1) Mr. Jaimin J. Patel is primarily responsible for the day-to- day management of the registrant's portfolio ("Portfolio Manager"). Mr. Patel has been a Director of the Investment Adviser since 2005 and was previously a Vice President at the Investment Adviser since 2000. He has been a portfolio manager and Vice President of the Fund since 2004. His investment experience includes the analysis and management of senior floating rate loans and the use of leverage techniques to manage portfolios. (a)(2) As of March 31, 2006*:
(iii) Number of Other Accounts and (ii) Number of Other Accounts Managed Assets for Which Advisory Fee is and Assets by Account Type Performance-Based Other Other (i) Name of Registered Other Pooled Registered Other Pooled Portfolio Investment Investment Other Investment Investment Other Manager Companies Vehicles Accounts Companies Vehicles Accounts Jaimin J. Patel 1 3 1 0 0 0 $ 355,068,398 $ 629,062,198 $ 301,970,712 $ 0 $ 0 $ 0 * As of April 3, 2006, Mr. Patel took on additional asset management responsibilities. The data represents Mr. Patel's assets under management as of that date. (iv) Potential Material Conflicts of Interest
Real, potential or apparent conflicts of interest may arise when a portfolio manager has day-to-day portfolio management responsibilities with respect to more than one fund or account, including the following: Certain investments may be appropriate for the Fund and also for other clients advised by the Investment. Adviser and its affiliates, including other client accounts managed by the Fund's portfolio management team. Investment decisions for the Fund and other clients are made with a view to achieving their respective investment objectives and after consideration of such factors as their current holdings, availability of cash for investment and the size of their investments generally. Frequently, a particular security may be bought or sold for only one client or in different amounts and at different times for more than one but less than all clients. Likewise, because clients of the Investment Adviser and its affiliates may have differing investment strategies, a particular security may be bought for one or more clients when one or more other clients are selling the security. The investment results for the Fund may differ from the results achieved by other clients of the Investment Adviser and its affiliates and results among clients may differ. In addition, purchases or sales of the same security may be made for two or more clients on the same day. In such event, such transactions will be allocated among the clients in a manner believed by the Investment Adviser and its affiliates to be equitable to each. The Investment Adviser will not determine allocations based on whether it receives a performance based fee from the client. In some cases, the allocation procedure could have an adverse effect on the price or amount of the securities purchased or sold by the Fund. Purchase and sale orders for the Fund may be combined with those of other clients of the Investment Adviser and its affiliates in the interest of achieving the most favorable net results to the Fund. To the extent that the Fund's portfolio management team has responsibilities for managing accounts in addition to the Fund, a portfolio manager will need to divide his time and attention among relevant accounts. In some cases, a real, potential or apparent conflict may also arise where (i) the Investment Adviser may have an incentive, such as a performance based fee, in managing one account and not with respect to other accounts it manages or (ii) where a member of the Fund's portfolio management team owns an interest in one fund or account he or she manages and not another. (a)(3) As of March 31, 2006: Portfolio Manager Compensation The Portfolio Manager Compensation Program of MLIM and its affiliates, including the Investment Adviser (collectively, "MLIM"), is critical to MLIM's ability to attract and retain the most talented asset management professionals. This program ensures that compensation is aligned with maximizing investment returns and it provides a competitive pay opportunity for competitive performance. Compensation Program The elements of total compensation for MLIM portfolio managers are a fixed base salary, annual performance-based cash and stock compensation (cash and stock bonus) and other benefits. MLIM has balanced these components of pay to provide portfolio managers with a powerful incentive to achieve consistently superior investment performance. By design, portfolio manager compensation levels fluctuate--both up and down--with the relative investment performance of the portfolios that they manage. Base Salary Under the MLIM approach, like that of many asset management firms, base salaries that are fixed on an annual basis represent a relatively small portion of a portfolio manager's total compensation. This approach serves to enhance the motivational value of the performance-based (and therefore variable) compensation elements of the compensation program. Performance-Based Compensation MLIM believes that the best interests of investors are served by recruiting and retaining exceptional asset management talent and managing their compensation within a consistent and disciplined framework that emphasizes pay for performance in the context of an intensely competitive market for talent. To that end, portfolio manager incentive compensation for MLIM and its affiliates is based on a formulaic compensation program. MLIM's formulaic portfolio manager compensation program includes: investment performance relative to general closed-end, non-leveraged, fixed income funds over 1-, 3-, and 5-year performance periods and a measure of operational efficiency. Portfolio managers are compensated based on the pre-tax performance of the products they manage. A discretionary element of portfolio manager compensation may include consideration of: financial results of MLIM, expense control, profit margins, strategic planning and implementation, quality of client service, market share, corporate reputation, capital allocation, compliance and risk control, leadership, workforce diversity, technology and innovation. MLIM and its affiliates also consider the extent to which individuals exemplify and foster Merrill Lynch's principles of client focus, respect for the individual, teamwork, responsible citizenship and integrity. All factors are considered collectively by MLIM management. Cash Bonus Performance-based compensation is distributed to portfolio managers in a combination of cash and stock. Typically, the cash bonus, when combined with base salary, represents more than 60% of total compensation for portfolio managers. Stock Bonus A portion of the dollar value of the total annual performance-based bonus is paid in restricted shares of Merrill Lynch & Co., Inc. (herein, the "Company") stock. Paying a portion of annual bonuses in stock puts compensation earned by a portfolio manager for a given year "at risk" based on the Company's ability to sustain and improve its performance over future periods. The ultimate value of stock bonuses is dependent on future Company stock price performance. As such, the stock bonus aligns each portfolio manager's financial interests with those of the Company shareholders and encourages a balance between short-term goals and long-term strategic objectives. Management strongly believes that providing a significant portion of competitive performance-based compensation in stock is in the best interests of investors and shareholders. This approach ensures that portfolio managers participate as shareholders in both the "downside risk" and "upside opportunity" of the Company's performance. Portfolio managers therefore have a direct incentive to protect the Company's reputation for integrity. Other Compensation Programs Portfolio managers who meet relative investment performance and financial management objectives during a performance year are eligible to participate in a deferred cash program. Awards under this program are in the form of deferred cash that may be benchmarked to a menu of MLIM mutual funds (including their own fund) during a five-year vesting period. The deferred cash program aligns the interests of participating portfolio managers with the investment results of MLIM products and promotes continuity of successful portfolio management teams. Other Benefits Portfolio managers are also eligible to participate in broad-based plans offered generally to the Company's employees, including broad-based retirement, 401(k), health, and other employee benefit plans. (a)(4) Beneficial Ownership of Securities. As of March 31, 2006, Mr. Booth beneficially owns stock issued by the Fund in the range of $100,001-$500,000. Item 9 - Purchases of Equity Securities by Closed-End Management Investment Company and Affiliated Purchasers - Not Applicable Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable Item 11 - Controls and Procedures 11(a) - The registrant's certifying officers have reasonably designed such disclosure controls and procedures to ensure material information relating to the registrant is made known to us by others particularly during the period in which this report is being prepared. The registrant's certifying officers have determined that the registrant's disclosure controls and procedures are effective based on our evaluation of these controls and procedures as of a date within 90 days prior to the filing date of this report. 11(b) - There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR 270.30a-3(d)) that occurred during the second fiscal half-year of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. Item 12 - Exhibits attached hereto 12(a)(1) - Code of Ethics - See Item 2 12(a)(2) - Certifications - Attached hereto 12(a)(3) - Not Applicable 12(b) - Certifications - Attached hereto Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Floating Rate Income Strategies Fund II, Inc. By: /s/ Robert C. Doll, Jr. ---------------------------- Robert C. Doll, Jr., Chief Executive Officer of Floating Rate Income Strategies Fund II, Inc. Date: April 20, 2006 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By: /s/ Robert C. Doll, Jr. ---------------------------- Robert C. Doll, Jr., Chief Executive Officer of Floating Rate Income Strategies Fund II, Inc. Date: April 20, 2006 By: /s/ Donald C. Burke ---------------------------- Donald C. Burke, Chief Financial Officer of Floating Rate Income Strategies Fund II, Inc. Date: April 20, 2006 EX-99.CERT 2 ex99cert.txt SECTION 302 EX-99. CERT CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Robert C. Doll, Jr., Chief Executive Officer of Floating Rate Income Strategies Fund II, Inc., certify that: 1. I have reviewed this report on Form N-CSR of Floating Rate Income Strategies Fund II, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under out supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 20, 2006 /s/ Robert C. Doll, Jr. ----------------------- Robert C. Doll, Jr., Chief Executive Officer of Floating Rate Income Strategies Fund II, Inc. EX-99. CERT CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 I, Donald C. Burke, Chief Financial Officer of Floating Rate Income Strategies Fund II, Inc., certify that: 1. I have reviewed this report on Form N-CSR of Floating Rate Income Strategies Fund II, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under out supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the second fiscal quarter of the period covered by this report that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: April 20, 2006 /s/ Donald C. Burke -------------------- Donald C. Burke, Chief Financial Officer of Floating Rate Income Strategies Fund II, Inc. EX-99.1350CERT 3 section906.txt SECTION 906 Exhibit 99.1350CERT Certification Pursuant to Section 906 of the Sarbanes Oxley Act I, Robert C. Doll, Jr., Chief Executive Officer of Floating Rate Income Strategies Fund II, Inc. (the "Fund"), certify that: 1. The N-CSR of the Fund (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Fund. Dated: April 20, 2006 /s/ Robert C. Doll, Jr. ----------------------- Robert C. Doll, Jr., Chief Executive Officer of Floating Rate Income Strategies Fund II, Inc. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Floating Rate Income Strategies Fund II, Inc. and will be retained by Floating Rate Income Strategies Fund II, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. Exhibit 99.1350CERT Certification Pursuant to Section 906 of the Sarbanes Oxley Act I, Donald C. Burke, Chief Financial Officer of Floating Rate Income Strategies Fund II, Inc. (the "Fund"), certify that: 1. The N-CSR of the Fund (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Fund. Dated: April 20, 2006 /s/ Donald C. Burke ------------------- Donald C. Burke, Chief Financial Officer of Floating Rate Income Strategies Fund II, Inc. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to Floating Rate Income Strategies Fund II, Inc. and will be retained by Floating Rate Income Strategies Fund II, Inc. and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----