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 811-21413
Name of Fund: Floating Rate Income Strategies Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Terry K. Glenn, President,
Floating Rate Income Strategies Fund, 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: 08/31/04
Date of reporting period: 09/01/03 - 08/31/04
Item 1 - Report to Stockholders
(BULL LOGO)
Merrill Lynch Investment Managers
www.mlim.ml.com
Floating Rate
Income Strategies
Fund, Inc.
Annual Report
August 31, 2004
Floating Rate Income Strategies Fund, 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, 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-MER-FUND (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, Inc.
Box 9011
Princeton, NJ
08543-9011
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Floating Rate Income Strategies Fund, Inc.
The Benefits and Risks of Leveraging
Floating Rate Income Strategies Fund, 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.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
A Letter From the President
Dear Shareholder
In recent months, the Federal Reserve Board (the Fed) has taken
center stage as it shifts away from its long-accommodative monetary
stance. The Fed raised the Federal Funds rate 75 basis points (.75%)
in three separate moves since June, bringing the target short-term
interest rate to 1.75% - still low by historical standards. The
Fed has been deliberate in telegraphing its intention to take a
"measured" approach to interest rate increases in order to avoid
upsetting the economy or the financial markets, while still leaving
room to move more aggressively if inflation and economic growth
accelerate more than anticipated. The forward curve currently
projects further increases in short-term interest rates before year-
end. In addition to the Fed policy change, the financial markets
recently have had to grapple with a tense geopolitical environment,
higher oil prices and the worry and anticipation that accompanies a
presidential election.
The transition to higher rates can cause concern among equity and
fixed income investors alike. For bond investors, rising interest
rates means the value of older issues declines because they
bear the former lower interest rates. In addition, increasing
inflation erodes the purchasing power of fixed income securities.
Nevertheless, for the six-month and 12-month periods ended
August 31, 2004, fixed income markets provided positive results. For
example, the Lehman Brothers Aggregate Bond Index returned +1.15%
and +6.13%; the Credit Suisse First Boston High Yield Index returned
+3.42% and +14.68%; and the Citigroup Mortgage Index returned +1.79%
and +6.07% for the six-month and 12-month periods, respectively.
As always, our investment professionals are closely monitoring the
markets, the economy and the overall environment in an effort to
make well-informed decisions for the portfolios they manage. Our
goal is to provide shareholders with competitive returns, while
always keeping one eye on managing the unavoidable risk inherent in
investing.
We thank you for trusting Merrill Lynch Investment Managers with
your investment assets, and we look forward to serving you in the
months and years ahead.
Sincerely,
(Terry K. Glenn)
Terry K. Glenn
President and Director
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
A Discussion With Your Fund's Portfolio Manager
The Fund's yield increased during the period as we neared a fully
invested stance, and the Fund paid its first dividend as scheduled
in January 2004.
Describe market conditions during the past year.
The leveraged loan market, as measured by the Credit Suisse First
Boston (CSFB) Leveraged Loan Index, returned +7.05% for the
one-year period ended August 31, 2004. Since the beginning of 2004,
$100 billion of new issuance has come to the institutional market,
representing an annual record and an increase of 69% versus the same
period a year ago. However, the available pool of loans has only
grown by $19 billion; whereby, 81% of the activity has come from
refinancings. The supply/demand imbalance prompted decreased
spreads, transaction upsizing, smaller allocations and the near
elimination of up-front fees in the primary markets. The new-issue
spread for institutional loans rated BB/BB- was 213 basis points
(2.13%) in August 2004, compared to 295 basis points in September
2003. For loans rated B/B+, the spread was 291 basis points in
August 2004 compared to 350 basis points in September 2003. Torrid
demand also has served to bid up prices in the secondary market. The
net effect of these trends is higher net asset values but decreased
yield, although increases in the LIBOR (London Interbank Offer Rate)
over the period have helped to mitigate some of the decline in
margin.
Adding to investors' demand for the leveraged loan asset class has
been a declining default rate. Through the first eight months of
2004, there were just four loan defaults totaling $911 million. This
compared to 11 defaults totaling $2.7 billion during the same period
in 2003. The floating rate nature of leveraged loans also has been a
desirable characteristic for investors seeking to add a defensive
position to their portfolio in anticipation of rising interest
rates.
In addition to floating rate securities, the Fund invests a smaller
portion of its assets in high yield bonds. The CSFB High Yield Index
provided a 12-month return of +14.68% as of August 31, 2004.
Dynamics in the high yield market have been similar to those in the
loan market. Funds have excess cash to put to work and have bid up
prices in the secondary market and significantly impacted primary
market allocations. More importantly, recent declines in Treasury
yields have brought cash to the market and improved Index
performance over the last three months.
How did the Fund perform in light of the existing market conditions?
The Fund was introduced on October 31, 2003; therefore, performance
does not reflect a full year's results. From its inception on
October 31, 2003 to August 31, 2004, the Common Stock of Floating
Rate Income Strategies Fund, Inc.had net annualized yields of 4.20%
and 4.14%, based on a year-end per share net asset value of $19.16
and a per share market price of $19.44, respectively, and $0.675 per
share income dividends. Over the same period, the total investment
return on the Fund's Common Stock was +3.50%, based on a change in
per share net asset value from $19.10 to $19.16, and assuming
reinvestment of $0.600 per share ordinary income dividends.
The Fund's benchmark, which comprises 80% of the CSFB Leveraged Loan
Index and 20% of the CSFB High Yield Index, returned +5.91% for the
period from October 31, 2003 to August 31, 2004. Having spent
several months in ramp-up mode (that is, not fully invested), the
Fund's return fell short of the benchmark. However, the Fund
outpaced the benchmark by 0.53% in the last three months of the
period.
For the six-month period ended August 31, 2004, the total investment
return on the Fund's Common Stock was +2.22%, based on a change in
per share net asset value from $19.19 to $19.16, and assuming
reinvestment of $0.450 per share income dividends. The blended
benchmark returned +2.50% for the same period.
The Fund's yield increased during the period as we neared a fully
invested stance. The average daily yield since inception through
August 31, 2004, was 3.99%, up from 2.82% at the end of February
2004. Importantly, the Fund was able to meet and pay its fully
leveraged target dividend of 4.5% as scheduled, beginning with the
January disbursement.
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.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
What factors contributed to performance?
Fund performance was driven by the paper, chemical, manufacturing
and U.S. cable sectors. In the paper sector, results were positively
affected by Western Forest Products Inc., as the Fund participated
in a post-restructuring facility with an equity position. The
company's performance has improved along with an improvement in the
paper sector. In the chemical sector, PolyOne Corporation was a
standout. The company participates in a joint venture making chlor-
alkali, a market that has been very strong. In manufacturing, Case
New Holland Inc. and High Voltage Engineering Corporation
contributed significantly to Fund results. Case New Holland
benefited from strong demand for farm equipment. High Voltage, an
industrial power controls systems manufacturer, filed under Chapter
11 in March 2004. The Fund made a post-restructuring exit loan to
the company in July and, since then, it has rallied on improving
prospects for the company. In the U.S. cable sector, Adelphia Cable
declared bankruptcy in June 2002 and is preparing to auction its
assets in October 2004. The bank loans have been current throughout
the process and rallied significantly over the past year.
The utility, energy and telecommunications sectors negatively
affected Fund results. Calpine Corporation has weighed down utility
sector performance as it works through a period of overcapacity in
the electricity-generation market. We believe Calpine has the
liquidity to span the next two--three years until the power markets
in its regions recover. In the energy sector, Trico Marine Services,
Inc. failed to make a May coupon payment. The company has drifted
toward bankruptcy since then because of oversupply to a market that
has seen only slight increases in drilling activity. As of this
writing, Trico had declared Chapter 11. We look to the potential for
increased drilling activity in 2005 to improve the prospects for our
bond, which we anticipate will soon be converted to equity. Finally,
the telecommunications sector was battered by competitive concerns
for wireline carriers. Nevertheless, most of our securities in the
sector trade near par, and we are optimistic about their outlooks.
What changes were made to the portfolio during the period?
The Fund was in a start-up phase for approximately six months from
its inception. In establishing our initial investments, we put
greatest emphasis on those industries with strong asset values and
stable cash-flow characteristics. The 10 largest concentrations were
in utilities, U.S. cable, manufacturing, chemical, food/tobacco,
wireless, diversified media, telecommunications, services and
gaming.
The Fund may leverage up to 33.33% of its total assets. With
borrowing rates at historic lows, we took advantage of this
capability and began to employ leverage in early March 2004, once we
had achieved a fully invested stance. At period-end, the Fund was
approximately 25.6% leveraged. (For a complete discussion of the
benefits and risks of leverage, refer to page 2 of this report to
shareholders.)
How would you characterize the Fund's position at the close of the
period?
At August 31, 2004, the Fund was composed of 152 issuers in 30
industries. Compared to its blended benchmark, the Fund was
underweight in names rated Ba and above (35.7% versus 45.8% for the
index), overweight single B (47.3% versus 36.0%), underweight Caa or
below (2.9% versus 5.7%) and underweight "not rated" names (10.2%
versus 12.5%).
We believe the trend of smaller allocations and tighter spreads is
likely to continue. The movement in interest rates is one of the
larger variables affecting the leveraged loan and high yield bond
markets. The more protracted the timetable of interest rate
increases, the larger the flows to the leveraged loan market, with
likely negative effects for market technicals. Regardless, we expect
continued growth in the U.S. economy to bode well for default rates
in 2004 and into 2005. Going forward, we will aim to optimize Fund
performance, maintaining a focus on solid credit fundamentals and an
appropriate balance of risk and reward.
Joseph P. Matteo
Vice President and Portfolio Manager
September 21, 2004
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Portfolio Information (unaudited)
As of August 31, 2004
Percent of
Ten Largest Holdings Net Assets
Charter Communications, Term B,
due 4/27/2011 6.0%
Nextel Communications, Inc., Term E,
due 12/15/2010 4.3
Mission Energy Holding Company, Term,
due 12/11/2006 3.7
CenterPoint Energy, Inc., Term,
due 10/07/2006 2.3
Century Cable Holdings LLC, Term,
due 12/31/2009 2.2
Nalco Company, Term, due 11/04/2010 2.0
Atkins Nutritionals, Inc., Floating Term,
due 11/26/2009 2.0
Huntsman International LLC, Term,
due 12/31/2010 2.0
Berry Plastics Corporation, Term C,
due 7/22/2010 1.9
Dr Pepper Bottling, Term B, due 12/19/2010 1.7
Percent of
Five Largest Industries++ Net Assets
Utilities 15.2%
Cable--U.S. 13.8
Manufacturing 10.8
Chemicals 10.6
Food/Tobacco 8.8
++ For Fund compliance purposes, "Industries" means 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.
Percent of
Total
Quality Ratings by S&P/Moody's Investments
BBB/Baa 2.1%
BB/Ba 35.7
B/B 47.3
CCC/Caa 2.9
C/C 0.4
NR (Not Rated) 10.1
Other* 1.5
* Includes portfolio holdings in common stocks and short-term
investments.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Schedule of Investments
S&P Moody's Face
Industry++ Ratings+++ Ratings+++ Amount Senior Secured Floating Rate Loan Interests++++ Value
Automotive--4.9% B+ B1 $ 2,000,000 Goodyear Tire & Rubber, Deposit Account, due
9/30/2007 $ 2,023,750
BB- B1 3,980,000 Intermet Corporation, Term B, due 3/31/2009 4,009,850
B+ B1 1,904,348 Keystone Automotive Operations, Inc., Term, due
10/30/2009 1,929,639
B+ B1 2,394,531 NFIL Holdings Corp., Term B, due 2/27/2010 2,426,709
Tenneco Automotive Inc.:
B+ B1 3,225,172 Term B, due 12/12/2010 3,285,644
B+ B1 1,458,621 Term B-1, Credit Linked, due 12/12/2010 1,488,705
B+ B1 2,000,000 RJ Tower Corporation, First Lien Term, due 5/24/2009 2,003,750
---------------
17,168,047
Broadcasting--1.4% B+ Ba2 3,000,000 Emmis Operating Company, Term B, due 11/10/2011 3,024,375
B+ Ba2 2,000,000 Gray Television, Incremental Term, due 6/30/2011 2,016,250
---------------
5,040,625
Cable--U.S.--12.4% NR* Caa1 8,000,000 Century Cable Holdings LLC, Discretionary Term,
due 12/31/2009 7,801,664
B B2 21,250,000 Charter Communications Operating LLC, Term B,
due 4/27/2011 20,999,866
BB Ba2 2,064,796 DIRECTV Holdings Additional Term B-2, due 3/06/2010 2,094,477
Inmarsat:
BB- Ba3 2,500,000 Term B, due 1/23/2017 2,512,265
NR* NR* 2,500,000 Term C, due 1/23/2012 2,521,640
BB+ Ba3 4,975,000 Insight Midwest Holdings, LLC, Term B, due 12/31/2009 5,053,122
BB Ba3 2,500,000 Mediacom Broadband Group LLC, Term A, due 3/31/2010 2,495,702
---------------
43,478,736
Chemicals--8.5% BB Ba1 1,995,000 Hercules Incorporated, Term B, due 10/08/2010 2,011,834
B B1 6,750,000 Huntsman International LLC, Term B, due 12/31/2010 6,851,250
BB- B1 980,834 Kraton Polymers, Term, due 12/24/2010 982,060
BB Ba3 3,500,000 Kosa BV (Invista), Term, due 4/29/2011 3,521,875
BB Ba3 1,000,000 Lyondell-Citgo Refining, Term, due 5/21/2007 1,016,875
BB- B1 6,936,061 Nalco Company, Term B, due 11/04/2010 7,050,631
NR* NR* 1,671,088 Pinnacle Polymers (Epsilon Products), Term, due
12/15/2006 1,692,059
B+ B1 2,000,000 Rockwood Specialties Group, Inc., Term B, due 7/30/2012 2,016,608
B- B1 4,750,000 Wellman, Inc., Second Lien Term, due 2/10/2010 4,694,582
---------------
29,837,774
Consumer-- Simmons Co., Term B:
Durables--2.0% BB- Ba2 2,448,148 due 12/19/2011 2,477,729
B+ B3 4,500,000 due 6/19/2012 4,541,485
---------------
7,019,214
Consumer-- B+ B1 1,990,000 American Achievement Corp., Term B, due 3/22/2011 2,007,413
Non-durables--0.9% B B2 1,000,000 Ames True Temper, Inc., Term, due 6/28/2011 1,013,958
---------------
3,021,371
Diversified BB- Ba2 4,053,702 Dex Media West Inc., Term B, due 3/09/2010 4,116,198
Media--4.7% BB Ba3 3,000,000 Freedom Communications, Inc., Term B, due 5/18/2012 3,046,407
NR* NR* 5,500,000 Metro-Goldwyn-Mayer Studios Inc., Term B, due 4/30/2010 5,526,812
B NR* 1,356,407 Primedia Inc., Term B, due 6/30/2009 1,304,524
BB Ba3 2,463,148 RH Donnelley, Term B-2, due 6/30//2010 2,484,701
---------------
16,478,642
Energy-- BB- Ba3 2,750,000 Dresser, Inc., Unsecured Term, due 3/1/2010 2,818,750
Other--2.1% BB+ Ba2 2,736,250 GulfTerra Energy Partners, L.P., Series B-1
Additional Term, due 12/10/2008 2,770,453
BB+ Ba1 1,750,000 Pride Offshore Inc., Term B, due 7/07/2011 1,772,239
---------------
7,361,442
Food & Drug--0.2% BB Ba2 761,480 Alimentation Couche-Tard, Inc. (ACT), Term, due
12/17/2010 766,715
Food & Tobacco--7.6% NR* NR* 7,720,000 Atkins Nutritionals, Inc., First Lien Term, due
11/26/2009 6,870,800
BB Ba1 1,500,000 Constellation Brands, Inc., Term B, due 11/30/2008 1,508,203
Doane Pet Care Enterprises Inc.:
B- B1 3,346,943 Term B, due 12/31/2005 3,372,045
B- B1 1,653,057 Term C, due 12/31/2006 1,665,455
NR* NR* 6,017,315 Dr Pepper/Seven Up Bottling Group Inc., Term B, due
12/19/2010 6,085,949
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Schedule of Investments (continued)
S&P Moody's Face
Industry++ Ratings+++ Ratings+++ Amount Senior Secured Floating Rate Loan Interests++++ Value
Food & Tobacco NR* NR* $ 3,027,273 Meow Mix Company, First Lien Term, due 10/10/2009 $ 2,993,216
(concluded) B+ B1 2,977,500 Michael Foods, Inc., Term, due 11/21/2010 3,023,559
B+ B1 1,000,000 Pierre Foods, Inc., Term B, due 6/30/2010 1,008,125
---------------
26,527,352
Gaming--2.3% BB Ba1 2,000,000 Boyd Gaming Corporation, Term, due 6/30/2011 2,022,188
B+ B2 1,234,375 Global Cash Access LLC, Term B, due 3/10/2010 1,252,891
B+ B1 1,990,000 Green Valley Ranch Gaming, LLC, Term, due 12/22/2010 2,019,850
B+ B1 997,500 Isle of Capri Black Hawk, Term C, due 12/31/2007 1,011,528
BB- Ba3 1,670,605 Scientific Games Corporation, Term C, due 11/04/2009 1,694,272
---------------
8,000,729
Health Care--3.7% BB- Ba3 2,800,000 Community Health Systems, Inc., Term, due 8/19/2011 2,804,001
BB- Ba3 5,700,000 Orthofix International NV, Term B, due 12/15/2008 5,762,347
BB Ba2 686,825 Rotech Healthcare, Inc., Term B, due 3/31/2008 695,410
BB- Ba2 3,687,474 Triad Hospitals, Inc., Term B, due 9/30/2008 3,752,927
---------------
13,014,685
Housing--2.7% B+ Ba3 3,111,111 Associated Materials Incorporated, Term, due 8/29/2010 3,152,592
B+ B1 1,181,818 Juno Lighting, Inc., First Lien Term, due 11/21/2010 1,199,545
B B1 4,975,000 PGT Industries, Inc., Term A, due 1/31/2009 5,049,625
---------------
9,401,762
IT--1.0% B+ B1 3,500,000 VUTEK Inc., Term, due 6/25/2010 3,491,250
Leisure--1.1% B B1 2,985,000 24 Hour Fitness Worldwide Inc., Term, due 7/01/2009 3,022,313
NR* NR* 853,353 Wyndham International, Inc., Increasing Rate Term,
due 4/01/2006 846,526
---------------
3,868,839
Manufacturing--9.2% B+ B1 2,493,750 Communications & Power Industries, Inc., Term,
due 7/23/2010 2,538,949
High Voltage Engineering Corporation:
NR* NR* 3,000,000 Term A, due 7/31/2006 2,985,000
NR* NR* 2,000,000 Term B, due 7/31/2007 (e) 2,070,000
B+ B1 2,000,000 Invensys International Holdings Ltd., Second Lien Term,
due 10/25/2009 2,066,250
BB- Ba3 2,000,000 Itron, Inc., Term B, due 12/17/2010 2,020,000
B- B3 4,500,000 Metokote Corporation, Second Lien Term, due 2/13/2011 4,556,250
B+ B2 3,071,101 Mueller Group, Term, due 4/23/2011 3,086,456
BB+ Ba2 4,875,000 Roper Industries, Inc., Term, due 12/29/2008 4,948,125
BBB- Ba2 1,318,029 SPX Corporation, Term B-1, due 9/30/2009 1,338,005
Sensus Metering Systems:
B+ B2 5,567,391 Term B-1, due 12/17/2010 5,626,545
B+ B2 835,109 Term B-2, due 12/19/2010 843,982
---------------
32,079,562
Packaging--4.4% B+ B1 6,720,923 Berry Plastics Corporation, Term, due 7/22/2010 6,807,737
B+ B1 2,000,000 Intertape Polymer Corp., Term B, due 7/28/2011 2,022,500
Owens-Illinois Group Inc.:
BB- B1 4,714,286 French Term C, due 4/01/2008 4,776,161
BB- B1 2,000,000 Term B-1, due 4/01/2008 2,031,042
---------------
15,637,440
Paper--1.3% B+ B1 1,492,500 SP Newsprint, Term B, due 1/09/2010 1,514,231
Stone Container Corporation:
NR* NR* 2,615,521 Term B, due 6/30/2009 2,640,041
NR* NR* 343,826 Term C, due 6/30/2009 347,694
---------------
4,501,966
Retail--2.2% B B3 2,370,711 American Reprographics Company, LLC, Second Lien
Term, due 12/18/2009 2,483,320
B+ B1 4,975,000 General Nutrition Centers, Inc., Term B, due
12/05/2009 5,032,213
---------------
7,515,533
Services--2.8% B+ B1 1,942,000 Baker Tanks, Inc., Term, due 1/30/2011 1,958,387
BB- Ba3 2,900,000 Buhrmann US Inc., Term C-1, due 12/23/2010 2,939,272
BB- Ba3 3,000,000 Coinstar, Inc., Term, due 7/07/2011 3,050,625
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Schedule of Investments (continued)
S&P Moody's Face
Industry++ Ratings+++ Ratings+++ Amount Senior Secured Floating Rate Loan Interests++++ Value
Services United Rentals, Inc.:
(concluded) BB Ba3 $ 1,662,500 Initial Term, due 2/14/2011 $ 1,681,827
BB Ba3 333,333 Term B Credit Linked Deposit, due 2/14/2011 338,472
---------------
9,968,583
Telecommunications-- B+ B1 2,200,000 Consolidated Communications, Inc., Term B, due
2.0% 10/14/2011 2,230,250
NR* NR* 4,954,305 WilTel Communications, Inc., Term, due 5/03/2008 4,948,112
---------------
7,178,362
Transportation--1.3% BB+ Ba3 4,546,820 Laidlaw International Inc., Term B, due 6/30/2009 4,623,548
Utilities--13.9% NR* Ba3 1,571,429 AES Corporation, Term, due 4/30/2008 1,586,582
B Ba3 4,964,887 Calpine Corporation, Second Lien Term, due 7/16/2007 4,220,154
Calpine Generating Company LLC:
B+ Ba3 1,500,000 First Priority Term, due 4/01/2009 1,504,969
B+ Ba3 2,500,000 Second Priority Term, due 4/01/2010 2,379,687
BBB Ba1 7,940,511 CenterPoint Energy, Inc., Term, due 10/07/2006 7,979,221
BB+ Ba2 5,486,250 Cogentrix Delaware Holdings, Inc., Term, due 2/25/2009 5,573,690
BB- B2 2,800,000 Dynegy Holdings Inc., Term, due 5/28/2010 2,853,376
B+ Ba3 997,500 Midwest Generation LLC, Term, due 4/27/2011 1,011,216
NR* NR* 13,000,000 Mission Energy Holding, Term, due 12/11/2006 13,065,000
NRG Energy:
BB B1 250,000 Credit Link Deposit, due 6/23/2010 258,437
BB B1 443,018 Term, due 6/23/2010 458,080
BB- Ba3 2,500,000 Quanta Services, Term, due 6/19/2008 2,510,938
B B1 1,566,395 Reliant Resources, Inc., Term, due 3/15/2007 1,568,353
B+ Ba3 3,812,308 Teton Power, Term B, due 3/12/2011 3,850,431
---------------
48,820,134
Wireless B- B2 2,338,250 Centennial Cellular Operating Co., Term, due 2/09/2011 2,346,471
Telecommunications-- B- B1 1,985,000 Dobson Cellular Systems, Inc., Term, due 3/31/2010 1,984,256
BB+ Ba1 14,925,000 Nextel Communications, Inc., Term E, due 12/15/2010 15,020,580
B B1 1,000,000 Nextel Partners Operating Corp., Term C, due 5/31/2011 1,014,125
CCC+ B2 4,283,077 SBA Communications Corp., Term B, due 10/31/2008 4,321,222
---------------
24,686,654
Total Investments in Senior Secured Floating
Rate Loan Interests (Cost--$348,335,837)--99.8% 349,488,965
Corporate Debt
Automotive--0.1% B- B1 250,000 Delco Remy International, Inc., 5.60% due 4/15/2009 (c) 253,750
Broadcasting--2.0% CCC B3 4,000,000 Granite Broadcasting Corporation, 9.75% due 12/01/2010 3,770,000
B B1 3,000,000 Paxson Communications Corporation, 4.35% due
1/15/2010 (b)(c) 2,985,000
CCC+ Caa1 250,000 XM Satellite Radio Inc., 7.194% due 5/01/2009 (c) 254,375
---------------
7,009,375
Cable--U.S.--1.4% B B2 850,000 Inmarsat Finance PLC, 7.625% due 6/30/2012 (b) 833,000
Intelsat, Ltd.:
BBB+ Ba3 500,000 5.25% due 11/01/2008 465,082
BBB+ Ba3 500,000 6.50% due 11/01/2013 430,587
CCC+ Caa1 3,000,000 Rainbow National Services LLC, 10.375% due
9/01/2014 (b) 3,105,000
---------------
4,833,669
Cable-- B B3 400,000 Kabel Deutschland GmbH, 10.625% due 7/01/2014 (b) 410,000
International--1.1% NTL Cable PLC (b):
B- B3 3,000,000 6.61% due 10/15/2012 (c) 3,060,000
B- B3 375,000 8.75% due 4/15/2014 390,000
---------------
3,860,000
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Schedule of Investments (continued)
S&P Moody's Face
Industry++ Ratings+++ Ratings+++ Amount Corporate Debt Value
Chemicals--2.1% B B1 $ 1,950,000 Crompton Corporation, 7.67% due 8/01/2010 (b)(c) $ 1,993,875
B+ B3 5,000,000 PolyOne Corporation, 10.625% due 5/15/2010 5,437,500
---------------
7,431,375
Consumer-- B- B3 250,000 Elizabeth Arden, Inc., 7.75% due 1/15/2014 258,750
Non-Durables--0.9% CCC+ B3 250,000 Leiner Health Products Inc., 11% due 6/01/2012 (b) 261,250
B B2 2,000,000 Playtex Products, Inc., 8% due 3/01/2011 (b) 2,085,000
B- B3 350,000 Samsonite Corporation, 8.875% due 6/01/2011 (b) 360,500
---------------
2,965,500
Energy--Other--0.5% D Ca 4,000,000 Trico Marine Services, Inc., 8.875% due 5/15/2012 (d) 1,920,000
Energy--Exploration B- B3 250,000 Belden & Blake Corporation, 8.75% due 7/15/2012 (b) 260,625
& Production--0.1%
Food & Tobacco--1.2% BB Ba2 3,000,000 Smithfield Foods, Inc., 7% due 8/01/2011 (b) 3,105,000
B+ B2 1,050,000 The Wornick Company, 10.875% due 7/15/2011 (b) 1,102,500
---------------
4,207,500
Gaming--3.0% B B2 5,000,000 The Majestic Star Casino, LLC, 9.50% due 10/15/2010 5,112,500
BB+ Ba1 250,000 Mohegan Tribal Gaming Authority, 7.125% due 8/15/2014 256,875
B+ B2 325,000 River Rock Entertainment Authority, 9.75% due 11/01/2011 344,500
Station Casinos, Inc.:
BB- Ba3 4,000,000 6% due 4/01/2012 4,010,000
B+ B1 775,000 6.50% due 2/01/2014 775,000
---------------
10,498,875
Health Care--0.2% B- B2 575,000 US Oncology, Inc., 9% due 8/15/2012 (b) 602,313
Housing--0.1% B- B3 450,000 Nortek, Inc., 8.50% due 9/01/2014 (b) 469,125
Hybrid--2.8% NR* B3 10,000,000 Dow Jones CDX.NA.HY.3 Trust 3 December 2009, 8% due
12/29/2009 (b) 9,925,000
IT--0.6% BB+ Ba2 2,050,000 Freescale Semiconductor, Inc., 4.38% due 7/15/2009 (b)(c) 2,085,875
Leisure--1.4% B- B1 3,900,000 FelCor Lodging LP, 5.84% due 6/01/2011 (b)(c) 3,919,500
CCC+ B3 1,000,000 True Temper Sports, Inc., 8.375% due 9/15/2011 930,000
---------------
4,849,500
Manufacturing--1.6% BB- Ba3 2,500,000 Case New Holland Inc., 6% due 6/01/2009 (b) 2,450,000
B- B3 325,000 Erico International Corporation, 8.875% due 3/01/2012 334,750
B- B3 2,900,000 Invensys PLC, 9.875% due 3/15/2011 (b) 2,943,500
---------------
5,728,250
Metal--Other--0.5% NR* Ba2 2,000,000 Vale Overseas Ltd., 8.25% due 1/17/2034 1,900,000
Packaging--0.8% CCC B3 1,550,000 Consolidated Container Company LLC, 10.75% due
6/15/2009 (a)(b) 1,240,000
B- B2 250,000 Portola Packaging, Inc., 8.25% due 2/01/2012 (b) 217,500
B- B2 600,000 Tekni-Plex, Inc., 8.75% due 11/15/2013 (b) 576,000
B B2 725,000 Wise Metals Group LLC, 10.25% due 5/15/2012 (b) 728,625
---------------
2,762,125
Paper--1.9% BB Ba2 2,650,000 Abitibi-Consolidated Inc., 5.02% due 6/15/2011 (b)(c) 2,703,000
NR* NR* 2,912,000 Western Forest Products Inc., 15% due 7/28/2009 (e) 3,261,440
---------------
5,964,440
Retail--0.5% B+ B1 350,000 Finlay Fine Jewelry Corporation, 8.375% due
6/01/2012 (b) 372,750
B B3 1,300,000 The Jean Coutu Group, Inc., 8.50% due 8/01/2014 (b) 1,309,750
---------------
1,682,500
Services--1.6% B+ B2 3,375,000 Allied Waste North America, Inc., 7.375% due 4/15/2014 3,277,969
B- B3 400,000 FTD, Inc., 7.75% due 2/15/2014 390,000
B+ B2 2,000,000 United Rentals (North America), Inc., 7.75% due
11/15/2013 1,860,000
---------------
5,527,969
Steel--2.3% B+ B1 3,000,000 CSN Islands VIII Corp., 9.75% due 12/16/2013 (b) 2,985,000
B Caa1 5,000,000 Ispat Inland ULC, 8.35% due 4/01/2010 (b)(c) 5,212,500
---------------
8,197,500
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Schedule of Investments (concluded)
S&P Moody's Face
Industry++ Ratings+++ Ratings+++ Amount Corporate Debt Value
Telecommunications-- B- B3 $ 6,000,000 Cincinnati Bell Inc., 8.375% due 1/15/2014 $ 5,310,000
3.5% B B3 3,700,000 Qwest Communications International Inc., 5.211%
due 2/15/2009 (b)(c) 3,441,000
B B1 3,500,000 Time Warner Telecom Holdings, Inc., 5.711% due
2/15/2011 (c) 3,412,500
---------------
12,163,500
Utilities--1.3% CCC+ Caa1 3,000,000 Calpine Canada Energy Finance ULC, 8.50% due 5/01/2008 1,912,500
B NR* 3,000,000 Calpine Corporation, 9.875% due 12/01/2011 (b) 2,430,000
B- B2 250,000 Sierra Pacific Resources, 8.625% due 3/15/2014 (b) 262,500
---------------
4,605,000
Wireless B- B2 250,000 Rural Cellular Corporation, 6.02% due 3/15/2010 (b)(c) 253,750
Telecommunications-- CCC- Caa1 450,000 SBA Telecommunications, Inc., 9.75% due 12/15/2011 (a) 351,000
0.2% ---------------
604,750
Total Investments in Corporate Debt
(Cost--$111,510,525)--31.5% 110,308,516
Shares
Held Common Stocks
Paper 84,448 Western Forest Products Inc. (Restricted Shares) (b) 692,197
Total Investments in Common Stocks
(Cost--$420,193)--0.2% 692,197
Beneficial
Interest Short-Term Securities
$ 6,354,570 Merrill Lynch Liquidity Series, LLC Cash Sweep
Series I** 6,354,570
Total Investments in Short-Term Securities
(Cost--$6,354,570)--1.8% 6,354,570
Total Investments (Cost--$466,621,125***)--133.3% 466,844,248
Liabilities in Excess of Other Assets--(33.3%) (116,590,656)
---------------
Net Assets--100.0% $ 350,253,592
===============
* Not Rated.
** Investments in companies considered to be an affiliate of the Fund
(such companies are defined as "Affiliated Companies" in 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 $6,354,570 $217,778
*** The cost and unrealized appreciation/depreciation of investments
as of August 31, 2004, as computed for federal income tax purposes
were as follows:
Aggregate cost $ 466,638,950
=============
Gross unrealized appreciation $ 6,408,603
Gross unrealized depreciation (6,203,305)
-------------
Net unrealized appreciation $ 205,298
=============
++ For Fund compliance purposes, "Industry" means 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.
++++ Senior secured 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. These 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.
+++ Ratings of issues shown are unaudited.
(a) Represents a step bond; the interest rate shown reflects the
effective yield at the time of purchase by the Fund.
(b) The security may be offered and sold to "qualified institutional
buyers" under Rule 144A of the Securities Act of 1933.
(c) Floating rate note.
(d) Non-income producing issue filed for bankruptcy or is in default
of interest payments.
(e) Represents a pay-in-kind security, which may pay interest/dividends
in additional face/shares.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Statement of Assets, Liabilities and Capital
As of August 31, 2004
Assets
Investments in unaffiliated securities, at value (identified cost--$460,266,555) $ 460,489,678
Investments in affiliated securities, at value (identified cost--$6,354,570) 6,354,570
Cash 2,060,169
Receivables:
Securites sold $ 8,138,319
Interest (including $3,301 from affiliates) 3,856,797
Principal paydowns 532,810 12,527,926
---------------
Prepaid expenses and other assets 36,020
---------------
Total assets 481,468,363
---------------
Liabilities
Loan 123,225,000
Payables:
Securities purchased 7,835,875
Interest on loans 43,136
Investment adviser 19,379
Commitment fees 6,038
Other affiliates 3,007 7,907,435
---------------
Accrued expenses 82,336
---------------
Total liabilities 131,214,771
---------------
Net Assets
Net assets $ 350,253,592
===============
Capital
Common Stock, par value $.10 per share; 200,000,000 shares authorized
(18,276,817 shares issued and outstanding) $ 1,827,682
Paid-in capital in excess of par 346,830,244
Undistributed investment income--net $ 1,182,064
Accumulated realized capital gains--net 216,488
Unrealized appreciation--net 197,114
---------------
Total accumulated earnings--net 1,595,666
---------------
Total capital--Equivalent to $19.16 net asset value per share of Common Stock
(market price--$19.44) $ 350,253,592
===============
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Statement of Operations
For the Period October 31, 2003++ to August 31, 2004
Investment Income
Interest (including $217,778 from affiliates) $ 14,747,296
Facility and other fees 117,363
---------------
Total income 14,864,659
---------------
Expenses
Investment advisory fees $ 2,386,236
Loan interest expense 507,796
Borrowing costs 147,392
Professional fees 119,248
Accounting services 101,865
Directors' fees and expenses 40,568
Transfer agent fees 39,765
Printing and shareholder reports 28,423
Listing fees 27,643
Custodian fees 24,235
Pricing services 11,198
Other 14,951
---------------
Total expenses before waiver 3,449,320
Waiver of expenses (668,881)
---------------
Total expenses after waiver 2,780,439
---------------
Investment income--net 12,084,220
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain on investments--net 216,488
Unrealized appreciation/depreciation on:
Investments 223,123
Unfunded corporate loans (26,009) 197,114
--------------- ---------------
Total realized and unrealized gain--net 413,602
---------------
Net Increase in Net Assets Resulting from Operations $ 12,497,822
===============
++ Commencement of operations.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Statement of Changes in Net Assets
For the Period
October 31, 2003++
to August 31,
Increase (Decrease) in Net Assets: 2004
Operations
Investment income--net $ 12,084,220
Realized gain--net 216,488
Unrealized appreciation/depreciation--net 197,114
---------------
Net increase in net assets resulting from operations 12,497,822
---------------
Dividends to Shareholders
Dividends to shareholders from investment income--net (10,902,156)
---------------
Common Stock Transactions
Proceeds from issuance of Common Stock 345,232,500
Value of shares issued to Common Stock shareholders in reinvestment of dividends 3,760,823
Offering costs resulting from the issuance of Common Stock (435,405)
---------------
Net increase in net assets resulting from Common Stock transactions 348,557,918
---------------
Net Assets
Total increase in net assets 350,153,584
Beginning of period 100,008
---------------
End of period* $ 350,253,592
===============
* Undistributed investment income--net $ 1,182,064
===============
++ Commencement of operations.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Statement of Cash Flows
For the Period October 31, 2003++ to August 31, 2004
Cash Used For Operating Activities
Net increase in net assets resulting from operations $ 12,497,822
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided by operating activities:
Increase in receivables (3,856,797)
Increase in other assets (36,020)
Increase in other liabilities 153,896
Realized and unrealized gain--net (413,602)
Amortization of premium and discount--net (649,553)
Proceeds from sales of long-term securities 125,073,570
Purchases of long-term securities (585,706,737)
Purchases of short-term investments--net (5,983,180)
---------------
Net cash used for investing activities (458,920,601)
---------------
Cash Provided by Financing Activities
Cash receipts from issuance of common stock 345,232,500
Proceeds from borrowings--net 123,225,000
Cash payments on offering costs (435,405)
Dividends paid to shareholders (7,141,333)
---------------
Net cash provided by financing activities 460,880,762
---------------
Cash
Net increase in cash 1,960,161
Cash at beginning of period 100,008
---------------
Cash at end of period $ 2,060,169
===============
Cash Flow Information
Cash paid for interest $ 464,660
===============
Non-Cash Financing Activities
Capital shares issued in reinvestment of dividends paid to shareholders $ 3,760,823
===============
++ Commencement of operations.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Financial Highlights
The following per share data and ratios have been derived For the Period
from information provided in the financial statements. October 31, 2003++
to August 31,
Increase (Decrease) in Net Asset Value: 2004
Per Share Operating Performance
Net asset value, beginning of period $ 19.10
---------------
Investment income--net .66
Realized and unrealized gain--net .02
---------------
Total from investment operations .68
---------------
Less dividends from investment income--net (.60)
---------------
Offering costs resulting from the issuance of Common Stock (.02)
---------------
Net asset value, end of period $ 19.16
===============
Market price per share, end of period $ 19.44
===============
Total Investment Return**
Based on net asset value per share 3.50%+++
===============
Based on market price per share .29%+++
===============
Ratios to Average Net Assets
Expenses, net of waiver and excluding interest expense .71%*
===============
Expenses, net of waiver .87%*
===============
Expenses 1.08%*
===============
Investment income--net 3.80%*
===============
Leverage
Amount of borrowings, end of period (in thousands) $ 123,225
===============
Average amount of borrowings outstanding during the period (in thousands) $ 38,654
===============
Average amount of borrowings outstanding per share during the period $ 2.11
===============
Supplemental Data
Net assets, end of period (in thousands) $ 350,254
===============
Portfolio turnover 43.32%
===============
* 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.
++ Commencement of operations.
+++ Aggregate total investment return.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Notes to Financial Statements
1. Significant Accounting Policies:
Floating Rate Income Strategies Fund, Inc. (the "Fund") is
registered under the Investment Company Act of 1940, as amended, as
a diversified, closed-end management investment company. Prior to
commencement of operations on October 31, 2003, the Fund had no
operations other than those relating to organizational matters and
the sale of 5,236 shares of Common Stock on October 15, 2003 to Fund
Asset Management, L.P. ("FAM") for $100,008. 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. All such adjustments are of a normal, recurring nature.
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 is listed on the New York Stock Exchange ("NYSE") under the
symbol FRA.
(a) Corporate debt obligations--The Fund invests principally in
floating rate debt obligations of companies, including Corporate
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 Corporate Loans
could be considered concentrated in financial institutions.
(b) Valuation of investments--Corporate Loans are valued in
accordance with guidelines established by the Fund's Board of
Directors. Corporate 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
Corporate Loans for which no reliable price quotes are available,
such Corporate Loans will be valued by Loan Pricing Corporation
through the use of pricing matrices to determine valuations. If the
pricing service does not provide a value for a Corporate Loan, the
Investment Adviser will value the Corporate Loan at fair value,
which is intended to approximate market value.
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
ask 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 the Fund. Long positions in securities traded in the over-
the-counter ("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 ask 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 ask 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. The value of swaps,
including interest rate swaps, caps and floors, will be determined
by obtaining dealer quotations. 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 the Investment Adviser believes that this
method no longer produces fair valuations. Repurchase agreements
will be valued at cost plus accrued interest. The Fund employs
certain pricing services to provide securities prices for the Fund.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or
under the direction of the Board of Directors of the Fund, including
valuations furnished by the pricing services retained by the Fund,
which may use a matrix system for valuations. The procedures of a
pricing service and its valuations are reviewed by the officers of
the Fund under the general supervision of the Fund's Board of
Directors. Such valuations and procedures will be reviewed
periodically by the Fund's Board of Directors.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Notes to Financial Statements (continued)
Generally, trading in foreign securities, as well as U.S. government
securities and money market instruments, 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 the Investment
Adviser using a pricing service and/or procedures approved by the
Fund's Board of Directors.
(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.
(d) Income taxes--It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated
investment companies and to distribute substantially all of its
taxable income to its shareholders. Therefore, no federal income tax
provision is required.
(e) Security transactions and investment income--Security
transactions are recorded on the dates the transactions are entered
into (the trade dates). 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.
(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.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Notes to Financial Statements (continued)
(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. During the Fund's start-up
phase, FAM elected to waive a portion of its management fee. For the
period October 31, 2003 to August 31, 2004, FAM earned fees of
$2,386,236, of which $668,881 was waived.
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"), a
subsidiary of ML & Co., 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 period October 31, 2003 to August 31, 2004, MLPF&S received
underwriting fees of $13,059,419 in connection with the issuance
of the Fund's Common Stock. In addition, the Fund reimbursed
MLPF&S $96,785 as a partial reimbursement of expenses incurred
in connection with the issuance of the Fund's Common Stock.
For the period October 31, 2003 to August 31, 2004, the Fund
reimbursed FAM $5,914 for certain accounting services.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities,
for the period October 31, 2003 to August 31, 2004 were $593,542,612
and $133,744,699, respectively.
4. Common 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 Common Stock without approval
of the holders of Common Stock.
Shares issued and outstanding during the period October 31, 2003 to
August 31, 2004 increased by 18,075,000 from shares sold and 196,581
from reinvestment of dividends.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Notes to Financial Statements (concluded)
5. Unfunded Loan Interests:
As of August 31, 2004, the Fund had unfunded loan commitments of
$516,923 which would be extended at the option of the borrower,
pursuant to the following loan agreement:
Unfunded
Commitment
Borrower (in Thousands)
SBA Senior Finance, Inc. $ 517
6. Short-Term Borrowings:
On May 26, 2004, the Fund renewed a $172,500,000 revolving credit
and security agreement with Citibank, N.A. and other lenders (the
"Lenders"). The Fund may borrow money through (i) a line of credit
from certain Lenders at the eurodollar rate plus .75%, or the
highest of the Federal Funds rate plus .50%, a base rate as
determined by Citibank, N.A. and the latest 3-week moving average
of secondary market morning offering rates in the United States for
3-month certificates of deposit of major U.S. money market banks
plus .50%, or (ii) the issuance of commercial paper notes by certain
Lenders at rates of interest derived from the weighted average of
the per annum rates paid or payable by such Lenders in respect of
those commercial notes. As security for its obligations to the
Lenders under the learning credit and security agreement, the Fund
has granted a security interest in substantially all of its assets
to and in favor of the Lender. For the period October 31, 2003 to
August 31, 2004, the average amount borrowed was approximately
$38,654,248 and its daily weighted average interest rate was 1.57%.
7. Distributions to Shareholders:
The Fund paid an ordinary income dividend to holders of Common Stock
in the amount of $.075000 per share on September 30, 2004 to
shareholders of record on September 14, 2004.
The tax character of distributions paid during the fiscal year ended
August 31, 2004 was as follows:
8/31/2004
Distributions paid from:
Ordinary income $ 10,902,156
--------------
Total distributions $ 10,902,156
==============
As of August 31, 2004, the components of accumulated gains on a tax
basis were as follows:
Undistributed ordinary income--net $ 1,700,487
--------------
Total undistributed earnings--net 1,700,487
Capital loss carryforward --
Unrealized losses--net (104,821)*
--------------
Total accumulated gains--net $ 1,595,666
==============
* The difference between book-basis and tax-basis net unrealized
losses is attributable primarily to the difference between book
and tax amortization methods for premiums and discounts on
fixed income securities and book/tax differences in the accrual
of income on securities in default.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Floating Rate Income Strategies Fund, Inc.:
We have audited the accompanying statement of assets, liabilities
and capital, including the schedule of investments, of Floating
Rate Income Strategies Fund, Inc. as of August 31, 2004, the
related statements of operations, changes in net assets and cash
flows, and the financial highlights for the period October 31, 2003
(commencement of operations) to August 31, 2004. 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
audit.
We conducted our audit 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. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. Our procedures
included confirmation of securities owned as of August 31, 2004, by
correspondence with the custodian and financial intermediaries;
where replies were not received from financial intermediaries, we
performed other auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides 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, Inc. as
of August 31, 2004, the results of its operations, the changes in
its net assets, its cash flows, and its financial highlights for the
period October 31, 2003 through August 31, 2004, in conformity with
U.S. generally accepted accounting principles.
Deloitte & Touche LLP
Princeton, New Jersey
October 22, 2004
Proxy Results
During the six-month period ended August 31, 2004, Floating Rate
Income Strategies Fund, Inc.'s shareholders voted on the following
proposal. The proposal was approved at a shareholders' meeting on
August 25, 2004. 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: Terry K. Glenn 17,664,697 56,992
Ronald W. Forbes 17,661,097 60,592
Cynthia A. Montgomery 17,664,375 57,314
Kevin A. Ryan 17,659,625 62,064
Roscoe S. Suddarth 17,653,425 68,264
Richard R. West 17,658,497 63,192
Edward D. Zinbarg 17,655,025 66,664
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Automatic Dividend Reinvestment Policy
The following description of the Fund's Automatic Dividend
Reinvestment Plan (the "Plan") is sent to you annually as required
by federal securities laws.
Pursuant to the Fund's Plan, unless a holder of Common Stock
otherwise elects, all dividend and capital gains distributions will
be automatically reinvested by EquiServe (the "Plan Agent"), as
agent for shareholders in administering the Plan, in additional
shares of Common Stock of the Fund. Holders of Common Stock who
elect not to participate in the Plan will receive all distributions
in cash paid by check mailed directly to the shareholder of record
(or, if the shares are held in street or other nominee name then to
such nominee) by EquiServe, as dividend paying agent. Such
participants may elect not to participate in the Plan and to receive
all distributions of dividends and capital gains in cash by sending
written instructions to EquiServe, as dividend paying agent, at the
address set forth below. Participation in the Plan is completely
voluntary and may be terminated or resumed at any time without
penalty by written notice if received by the Plan Agent not less
than ten days prior to any dividend record date; otherwise such
termination will be effective with respect to any subsequently
declared dividend or distribution.
Whenever the Fund declares an income dividend or capital gains
distribution (collectively referred to as "dividends") payable
either in shares or in cash, non-participants in the Plan will
receive cash and participants in the Plan will receive the
equivalent in shares of Common Stock. The shares will be acquired by
the Plan Agent for the participant's account, depending upon the
circumstances described below, either (i) through receipt of
additional unissued but authorized shares of Common Stock from the
Fund ("newly issued shares") or (ii) by purchase of outstanding
shares of Common Stock on the open market ("open-market purchases")
on the New York Stock Exchange or elsewhere. If on the payment date
for the dividend, the net asset value per share of the Common Stock
is equal to or less than the market price per share of the Common
Stock plus estimated brokerage commissions (such conditions being
referred to herein as "market premium"), the Plan Agent will invest
the dividend amount in newly issued shares on behalf of the
participant. The number of newly issued shares of Common Stock to be
credited to the participant's account will be determined by dividing
the dollar amount of the dividend by the net asset value per share
on the date the shares are issued, provided that the maximum
discount from the then current market price per share on the date of
issuance may not exceed 5%. If on the dividend payment date the net
asset value per share is greater than the market value (such
condition being referred to herein as "market discount"), the Plan
Agent will invest the dividend amount in shares acquired on behalf
of the participant in open-market purchases.
In the event of a market discount on the dividend payment date, the
Plan Agent will have until the last business day before the next
date on which the shares trade on an "ex-dividend" basis or in no
event more than 30 days after the dividend payment date (the "last
purchase date") to invest the dividend amount in shares acquired in
open-market purchases. It is contemplated that the Fund will pay
monthly income dividends. Therefore, the period during which open-
market purchases can be made will exist only from the payment date
on the dividend through the date before the next "ex-dividend" date,
which typically will be approximately ten days. If, before the Plan
Agent has completed its open-market purchases, the market price of a
share of Common Stock exceeds the net asset value per share, the
average per share purchase price paid by the Plan Agent may exceed
the net asset value of the Fund's shares, resulting in the
acquisitions of fewer shares than if the dividend had been paid in
newly issued shares on the dividend payment date. Because of the
foregoing difficulty with respect to open-market purchases, the Plan
provides that if the Plan Agent is unable to invest the full
dividend amount in open-market purchases during the purchase period
or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will cease making open-market
purchases and will invest the uninvested portion of the dividend
amount in newly issued shares at the close of business on the last
purchase date determined by dividing the uninvested portion of the
dividend by the net asset value per share.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
The Plan Agent maintains all shareholders' accounts in the Plan and
furnishes written confirmation of all transactions in the account,
including information needed by shareholders for tax records. Shares
in the account of each Plan participant will be held by the Plan
Agent in non-certificated form in the name of the participant, and
each shareholder's proxy will include those shares purchased or
received pursuant to the Plan. The Plan Agent will forward all proxy
solicitation materials to participants and vote proxies for shares
held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of shareholders such as banks, brokers or nominees
which hold shares of others who are the beneficial owners, the
Plan Agent will administer the Plan on the basis of the number of
shares certified from time to time by the record shareholders as
representing the total amount registered in the record shareholder's
name and held for the account of beneficial owners who are to
participate in the Plan.
There will be no brokerage charges with respect to shares issued
directly by the Fund as a result of dividends or capital gains
distributions payable either in shares or in cash. However, each
participant will pay a pro rata share of brokerage commissions
incurred with respect to the Plan Agent's open-market purchases in
connection with the reinvestment of dividends.
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.
Shareholders participating in the Plan may receive benefits not
available to shareholders not participating in the Plan. 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 at less than they could otherwise purchase them and will
have shares with a cash value greater than the value of any cash
distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants
will receive distributions in shares with a net asset value greater
than the value of any cash distribution they would have received on
their shares. However, there may be insufficient 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.
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 premium over net asset value, 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 such discount (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.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the
Plan. There is no direct service charge to participants in the Plan;
however, the Fund reserves the right to amend the Plan to include a
service charge payable by the participants.
All correspondence concerning the Plan should be directed to the
Plan Agent at EquiServe, P.O. Box 43010, Providence, RI 02940-3010,
Telephone: 800-426-5523.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Officers and Directors (unaudited)
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
Terry K. Glenn* President 2003 to President of the Merrill Lynch Investment 124 Funds None
P.O. Box 9011 and present Managers, L.P. ("MLIM")/Fund Asset 157 Portfolios
Princeton, Director Management, L.P. ("FAM")--Advised Funds
NJ 08543-9011 since 1999; Chairman (Americas Region)
Age: 63 of MLIM from 2000 to 2002; Executive
Vice President of MLIM and FAM (which
terms as used herein include their
corporate predecessors) from 1983 to
2002; President of FAM Distributors, Inc.
("FAMD") from 1986 to 2002 and Director
thereof from 1991 to 2002; Executive Vice
President and Director of Princeton
Services, Inc. ("Princeton Services") from
1993 to 2002; President of Princeton
Administrators, L.P. from 1989 to 2002;
Director of Financial Data Services, Inc.
since 1985.
* Mr. Glenn 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. Glenn is an "interested person," as
described in the Investment Company Act, of the Fund based on his
present and former positions with MLIM, FAM, FAMD, Princeton
Services and Princeton Administrators, L.P. The Director's term is
unlimited. Directors serve until their resignation, removal or
death, or until December 31 of the year in which they turn 72. As
Fund President, Mr. Glenn serves at the pleasure of the Board of
Directors.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Officers and Directors (unaudited)(continued)
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*
Ronald W. Forbes Director 2003 to Professor Emeritus of Finance, School of 48 Funds None
P.O. Box 9095 present Business, State University of New York at 48 Portfolios
Princeton, Albany since 2000 and Professor thereof
NJ 08543-9095 from 1989 to 2000; International Consultant,
Age: 63 Urban Institute, Washington, D.C. from
1995 to 1999.
Cynthia A. Montgomery Director 2003 to Professor, Harvard Business School since 48 Funds Newell
P.O. Box 9095 present 1989; Associate Professor, J.L. Kellogg 48 Portfolios Rubbermaid,
Princeton, Graduate School of Management, Northwestern Inc.
NJ 08543-9095 University from 1985 to 1989; Associate
Age: 52 Professor, Graduate School of Business
Administration, University of Michigan
from 1979 to 1985.
Jean Margo Reid Director 2004 to Self-employed consultant since 2001; 48 Funds None
P.O. Box 9095 present Counsel of Alliance Capital Management 48 Portfolios
Princeton, (investment adviser) in 2000; General
NJ 08543-9095 Counsel, Director and Secretary of
Age: 59 Sanford C. Bernstein & Co., Inc.
(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; Director of Covenant House
from 2001 to 2004.
Kevin A. Ryan Director 2003 to Founder and currrently Director Emeritus 48 Funds None
P.O. Box 9095 present of Boston University Center for the 48 Portfolios
Princeton, Advancement of Ethics and Character and
NJ 08543-9095 Director thereof from 1989 to 1999;
Age: 71 Professor from 1982 to 1999 and currently
Professor Emeritus of Education of Boston
University; formerly taught on the faculties
of The University of Chicago, Stanford
University and Ohio State University.
Roscoe S. Suddarth Director 2003 to President, Middle East Institute from 48 Funds None
P.O. Box 9095 present 1995 to 2001; Foreign Service Officer, 48 Portfolios
Princeton, United States Foreign Service from 1961
NJ 08543-9095 to 1995; Career Minister from 1989 to 1995;
Age: 69 Deputy Inspector 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 2003 to Professor of Finance since 1984, Dean from 48 Funds Bowne & Co.,
P.O. Box 9095 present 1984 to 1993 and currently Dean Emeritus of 48 Portfolios Inc.; Vornado
Princeton, New York University Leonard N. Stern School Realty Trust;
NJ 08543-9095 of Business Administration, New York Vornado
Age: 66 University from 1994 to present; Professor Operating
of Finance thereof from 1982 to 1994. Company;
Alexander's, Inc.
Edward D. Zinbarg Director 2003 to Self-employed financial consultant since 48 Funds None
P.O. Box 9095 present 1994; Executive Vice President of The 48 Portfolios
Princeton, Prudential Insurance Company of America
NJ 08543-9095 from 1988 to 1994; former Director of
Age: 69 Prudential Reinsurance Company and former
Trustee of the Prudential Foundation.
* The Director's term is unlimited. Directors serve until their
resignation, removal or death, or until December 31 of the year in
which they turn 72.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
Officers and Directors (unaudited)(concluded)
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 2003 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since
P.O. Box 9011 President present 1999; Senior Vice President, Director and Treasurer of Princeton Services
Princeton, and since 1999; Vice President of FAMD since 1999; Director of MLIM Taxation
NJ 08543-9011 Treasurer since 1990.
Age: 44
Joseph P. Matteo Vice 2003 to Director (Global Fixed Income) of MLIM since 2001; Vice President of MLIM
P.O. Box 9011 President present from 1997 to 2001.
Princeton,
NJ 08543-9011
Age: 40
Jeffrey Hiller Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice
P.O. Box 9011 Compliance present President and Chief Compliance Officer of MLIM since 2004; Global Director
Princeton, Officer of Compliance at Morgan Stanley Investment Management from 2002 to 2004;
NJ 08543-9011 Managing Director and Global Director of Compliance at Citigroup Asset
Age: 53 Management from 2000 to 2002; Chief Compliance Officer at Soros Fund
Management in 2000; Chief Compliance Officer at Prudential Financial from
1995 to 2000.
Alice A. Pellegrino Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from
P.O. Box 9011 present 1999 to 2002; Attorney associated with MLIM since 1997.
Princeton,
NJ 08543-9011
Age: 44
* 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
EquiServe
P.O. Box 43010
Providence, RI 02940-3010
NYSE Symbol
FRA
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
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.
Electronic Delivery
The Fund offers electronic delivery of communications to its
shareholders. In order to receive this service, you must
register your account and provide us with e-mail information.
To sign up for this service, simply access this Web site
http://www.icsdelivery.com/live and follow the instructions.
When you visit this site, you will obtain a personal identification
number (PIN). You will need this PIN should you wish to update your
e-mail address, choose to discontinue this service and/or make any
other changes to the service. This service is not available for
certain retirement accounts at this time.
FLOATING RATE INCOME STRATEGIES FUND, INC., AUGUST 31, 2004
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 August 31, 2004 - $43,100
Fiscal Year Ending August 31, 2003 - $Not applicable
The audit fees include services in connections with the registration
and initial public offering of the Fund.
(b) Audit-Related Fees -
Fiscal Year Ending August 31, 2004 - $0
Fiscal Year Ending August 31, 2003 - $Not applicable
(c) Tax Fees -
Fiscal Year Ending August 31, 2004 - $5,200
Fiscal Year Ending August 31, 2003 - $Not applicable
The nature of the services include tax compliance, tax advice and
tax planning.
(d) All Other Fees -
Fiscal Year Ending August 31, 2004 - $0
Fiscal Year Ending August 31, 2003 - $Not applicable
(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 August 31, 2004 - $14,913,836
Fiscal Year Ending August 31, 2003 - $18,318,444
(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) - $945,000, 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
Charles C. Reilly (retired as of December 31, 2003)
Kevin A. Ryan
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 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:
* 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.
* 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.
* 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.
* 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.
* 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.
* Routine proposals related to requests regarding the formalities of
corporate meetings.
* 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.
* 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 - Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers - Not Applicable
Item 9 - Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 10 - Controls and Procedures
10(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.
10(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 11 - Exhibits attached hereto
11(a)(1) - Code of Ethics - See Item 2
11(a)(2) - Certifications - Attached hereto
11(a)(3) - Not Applicable
11(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, Inc.
By: _/s/ Terry K. Glenn_______
Terry K. Glenn,
President of
Floating Rate Income Strategies Fund, Inc.
Date: October 18, 2004
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/ Terry K. Glenn________
Terry K. Glenn,
President of
Floating Rate Income Strategies Fund, Inc.
Date: October 18, 2004
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
Floating Rate Income Strategies Fund, Inc.
Date: October 18, 2004