UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
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: Robert C. Doll, Jr., Chief
Executive Officer, 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: 08/31/05
Date of reporting period: 09/01/04 - 02/28/05
Item 1 - Report to Stockholders
Floating Rate
Income Strategies
Fund, Inc.
Semi-Annual Report
February 28, 2005
(BULL LOGO) Merrill Lynch Investment Managers
www.mlim.ml.com
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
Floating Rate Income Strategies Fund, 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., FEBRUARY 28, 2005
A Letter From the President
Dear Shareholder
Financial markets broadly posted positive returns over the most
recent reporting period, with international equities providing some
of the most impressive results.
Total Returns as of February 28, 2005 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) + 9.99% + 6.98%
International equities (MSCI Europe Australasia Far East Index) +21.18 +18.68
Fixed income (Lehman Brothers Aggregate Bond Index) + 1.26 + 2.43
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 2.40 + 2.96
High yield bonds (Credit Suisse First Boston High Yield Index) + 7.53 +11.21
The U.S. economy has continued to show resilience in the face of
the Federal Reserve Board's (the Fed) continued interest rate hikes
and, more recently, higher oil prices. The Fed's measured tightening
program recently brought the federal funds rate to 2.75% en route
to a more "neutral" short-term interest rate target (relative to
inflation). Since the U.S. presidential election, progress has been
monitored on many fronts in Washington, although concerns remain
about the structural problems of debt and deficits, as reflected by
a significant decline in the U.S. dollar.
U.S. equities ended 2004 in a strong rally, but remained in a fairly
narrow trading range for the first two months of 2005. Divergences
were notable among sectors, with energy emerging as a clear leader.
On the positive side, corporations have accelerated their hiring
plans, capital spending remains reasonably robust and merger-and-
acquisition activity has increased. Offsetting the positives are
slowing corporate earnings growth, renewed energy price concerns and
the potential for an economic slowdown. International equities,
particularly in Asia, have benefited from higher economic growth
rates (China recorded growth of 9.3% in 2004), stronger currencies
and relatively reasonable valuations.
The major action in the bond market has been a flattening of the
yield curve. As short-term interest rates continued to rise, yields
on the long end of the curve remained relatively stable - even
declining at certain points since the Fed's monetary tightening
program began in June 2004. This phenomenon has been largely
attributed to continued foreign interest in U.S. bonds, which has
served to absorb much of the excess supply. By period-end, many
believed long-term yields were long overdue for a rise.
Looking ahead, the environment is likely to be a challenging one
for investors, with diversification and selectivity becoming
increasingly important themes. With this in mind, we encourage you
to meet with your financial advisor to review your goals and asset
allocation and to rebalance your portfolio, as necessary, to ensure
it remains aligned with your objectives and risk tolerance. As
always, 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,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Director
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
A Discussion With Your Fund's Portfolio Manager
Good security selection in the energy-other, telecommunication
services and U.S. cable sectors was the primary factor in the Fund's
outperformance versus its composite benchmark for the period.
Describe market conditions during the past six months.
Throughout the period, the leverage loan market continued to benefit
from the significant demand that it has experienced since the
beginning of 2004. This created an excess cash imbalance that was
left virtually intact through the end of February 2005, as new
inflows have continued to match the value of new issues. Demand in
the marketplace has led to higher secondary-market loan prices and
new issues with generally lower interest spreads over London
InterBank Offered Rate (LIBOR), and average new-issue allocation
amounts per investor that are lower than their historical levels.
A significant rise in LIBOR more than offset declines in the
interest rate spreads on BB-rated and B-rated new issues during the
period. Another positive development in the leveraged loan sector
has been the improving default rate. As of the end of February 2005,
the lagging 12-month institutional loan default rate stood at 1.36%
by number of loans and 1.37% of principal amount, according to
Standard & Poor's Leveraged Commentary & Data. Although this is a
12-month high due to the recent default of Tower Automotive Inc.,
the default rates are still well below the recent historical
averages (since 1998) of 3.87% by number of loans and 4.18% by
principal amount.
The fixed rate high yield bond market, in which the Fund can invest
up to 20% of its assets, has been affected by some of the same
fundamentals driving the leveraged loan market. The excess cash in
the market has been the primary factor in the rally in high yield
securities. Although concern surrounding higher interest rates has
hung over the market for some time, 10-year U.S. Treasury note
yields did not begin to rise until early 2005.
How did the Fund perform during the period in light of the existing
market conditions?
For the six-month period ended February 28, 2005, the Common Stock
of the Fund had net annualized yields of 5.55% and 5.63%, based on
a period-end per share net asset value of $19.65 and a per share
market price of $19.38, respectively, and $.541 per share in
ordinary income dividends. For the same period, the total investment
return on the Fund's Common Stock was +5.47%, based on a change in
net asset value from $19.16 to $19.65, and assuming reinvestment of
all distributions. For the same period, the Fund's unmanaged
benchmark, a composite comprised 80% of the Credit Suisse First
Boston (CSFB) Leveraged Loan Index and 20% of the CSFB High Yield
Index, posted a total return of +3.91%.
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.
Our holdings in the energy-other, telecommunication services and
U.S. cable sectors performed well during the period, while our
positions in food and tobacco, automotive and transportation had a
negative effect on the Fund's return.
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
The Fund's strong performance in the energy-other sector resulted
primarily from our position in Trico Marine Services, Inc., a
company that provides boat services to the energy industry, mainly
in the Gulf of Mexico and North Sea. Trico declared bankruptcy in
late 2004 after suffering through declining sales due to lower
levels of drilling in its markets. However, surges in the price of
oil significantly improved the company's sales and the loan security
rallied considerably upon the company's emergence from bankruptcy.
The Fund's positive return in the telecommunication services sector
was attributable to our holdings in Cincinnati Bell, Inc., Qwest
Communications International and Time Warner Telecom Holdings, Inc.
All three companies experienced improving operating results. In
addition, Cincinnati Bell and Qwest also benefited from the de-
leveraging of their balance sheets, while Time Warner's debt
security rose on investors' expectations that the company would call
the bond. In the U.S. cable sector, the Fund received positive
contributions from its positions in Rainbow National Services LLC,
Charter Communications Operating LLC and Century Cable Holdings LLC.
The bonds of Rainbow National, a division of Cablevision, rallied
because of the company's plan to spin-off its satellite business.
The price of Charter Communications' bank loan rose as the company
completed a refinancing to improve its liquidity. Finally, the bank
loan of Century Cable Holdings, an Adelphia company, gained as the
company nears the completion of its auction.
Conversely, the Fund's holdings in the food and tobacco sector
hindered its performance. We sold our Atkins Nutritionals, Inc. loan
because sales of the company's products declined and we believed
that this downward trend would continue. We liquidated our position
in a bank loan of Intermet Corp., which manufactures iron and
aluminum castings for the automotive and industrial markets, in
advance of what we believed would be a lengthy restructuring
process. In the transportation sector, the bank loan of Laidlaw
International, Inc. detracted from the Fund's return, as the company
repaid the loan at par value following an asset sale. The loan had
been trading above its par value at the beginning of the period.
What changes were made to the portfolio during the period?
During the period, we purchased assets of approximately
$96.2 million in par amount (face value), sold $25.5 million,
and received $105.7 million in repayments from the issuers of
several of our holdings. Reinvested proceeds from repayments
comprised approximately $25 million of the funds used for new
purchases.
Most of the assets we purchased during the period have subsequently
traded at premiums (above their par values). However, no individual
security contributed significantly to the Fund's outperformance.
How would you characterize the Fund's position at the close of the
period?
At the end of the period, the portfolio was composed of 167 issuers
spread among 31 industries. The Fund was underweight versus its
composite benchmark in securities rated Ba or better, credits rated
Caa or below, and unrated issues, and was overweight in B-rated
securities.
Looking forward, we anticipate that many of the same factors that
had an impact on leveraged loans in the past six months will
continue to influence the fundamentals in the market. We believe
that the trend of small allocation amounts for issuances of new
loans, lower interest rate spreads and above-par secondary market
prices will continue, especially given the benign credit environment
we expect over the next six months. A further benefit to the market
during the period would be an increase in LIBOR. Therefore, we plan
to continue to purchase assets predominately in the primary market,
while selectively participating in the secondary market.
Joseph P. Matteo
Vice President and Portfolio Manager
March 25, 2005
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
Portfolio Information
As of February 28, 2005
Percent of
Ten Largest Holdings Net Assets
Charter Communications Operating LLC
Tranche B Term Loan, due 4/07/2011 5.9%
Dow Jones CDX.NA.HY.3 Trust 3
December 2009, 8% due 12/29/2009 2.8
Century Cable Holdings LLC, Discretionary
Term Loan, due 12/31/2009 2.2
PanAmSat Corp. Tranche B Term Loan,
due 8/20/2011 2.0
Nalco Co. Tranche B Term Loan,
due 11/04/2010 1.9
Huntsman International LLC Term Loan B,
due 12/31/2010 1.8
Cincinnati Bell, Inc., 8.375% due 1/15/2014 1.7
Berry Plastics Corp. Term Loan,
due 7/22/2010 1.7
SBA Senior Finance, Inc. Tranche C Term Loan,
due 10/31/2008 1.6
Dr. Pepper/Seven Up Bottling Group, Inc.
Tranche B Term Loan, due 12/19/2010 1.6
Percent of
Five Largest Industries++ Net Assets
Cable--US 17.5%
Utilities 12.4
Chemicals 11.0
Manufacturing 8.1
Telecommunications 6.1
++ 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.
Percent of
Total
Quality Ratings by S&P/Moody's Investments
BB/Ba 34.8%
B/B 55.1
CCC/Caa 4.0
CC/Ca 0.6
NR (Not Rated) 5.2
Other* 0.3
* Includes portfolio holdings in common stocks and short-term
investments.
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
Schedule of Investments (in U.S. dollars)
Face
Industry++ Amount Floating Rate Loan Interests++++ Value
Aerospace $ 2,101,911 MRO Acquisitions Corp. First Lien Term Loan, due 8/27/2010 $ 2,130,812
& Defense--2.2% Vought Aircraft Industries, Inc:
2,940,000 Term Loan, due 12/22/2011 2,985,938
560,000 Tranche B L/C Deposit, due 12/22/2010 569,100
2,000,000 Wyle Laboratories 2nd Lien Term Loan, due 7/20/2011 2,050,000
---------------
7,735,850
Automotive--3.7% 3,000,000 Affinia Group Tranche B, due 11/30/2011 3,050,250
2,000,000 Goodyear Tire & Rubber Term Loan, due 9/30/2007 2,016,876
1,826,087 Keystone Automotive Operations, Inc. Term Loan, due 10/30/2009 1,846,630
1,825,078 NFIL Holdings Corp. Term Loan B, due 2/27/2010 1,853,595
Tenneco Automotive, Inc.:
2,884,828 Term Loan B, due 12/12/2010 2,941,321
1,458,621 Tranche B-1 Credit Linked, due 12/12/2010 1,487,185
---------------
13,195,857
Broadcasting--1.4% 2,992,500 Emmis Operating Company Term Loan B, due 11/10/2011 3,034,817
2,000,000 Gray Television, Inc. Term Incremental, due 6/30/2011 2,028,334
---------------
5,063,151
Cable--U.S.--15.7% 8,000,000 Century Cable Holdings LLC, Discretionary Term Loan, due 12/31/2009 7,970,000
21,143,750 Charter Communications Operating LLC Tranche B Term Loan, due
4/07/2011 21,242,428
2,064,796 DIRECTV Holdings, Inc. Term Loan B-1, due 3/06/2010 2,097,919
Inmarsat Facility Term:
2,292,136 Loan B, due 1/08/2011 2,304,415
2,297,523 Loan C, due 1/08/2012 2,317,955
4,950,000 Insight Midwest Holdings, LLC Term Loan B, due 12/31/2009 5,042,813
3,000,000 Intelsat Ltd. Term Loan, due 7/28/2011 3,049,218
2,450,000 Mediacom Broadband Group Tranche A Term Loan, due 3/31/2010 2,439,281
3,200,000 Mediacom Communications, LLC Tranche B Term Loan, due 3/31/2013 3,243,715
6,947,289 PanAmSat Corp. Tranche B Term Loan, due 8/20/2011 7,065,192
---------------
56,772,936
Chemicals--8.1% 1,985,000 Hercules Inc. Term Loan B, due 10/08/2010 2,011,363
6,459,621 Huntsman International LLC Term Loan B, due 12/31/2010 6,583,968
Invista B.V. New Tranche:
2,355,088 B-1 Term Loan, due 4/29/2011 2,394,830
1,062,559 B-2 Term Loan, due 4/29/2011 1,080,490
737,064 Kraton Polymers Term Loan, due 12/16/2010 749,655
995,000 Lyondell-Citgo Refining Term Loan, due 5/21/2007 1,006,194
6,658,852 Nalco Co. Tranche B Term Loan, due 11/04/2010 6,791,103
1,334,127 Pinnacle Polymers (Epsilon Products) Term Loan, due 12/15/2006 1,354,005
2,000,000 Rockwood Specialties Group, Inc. Tranche D Term Loan, due 12/10/2012 2,034,286
4,750,000 Wellman, Inc. Second Lien Term Loan, due 2/10/2010 5,005,313
---------------
29,011,207
Consumer-- Simmons Co.:
Durables--2.0% 4,500,000 Term Loan, due 6/19/2012 4,584,375
2,448,148 Tranche B Term Loan, due 12/19/2011 2,502,211
---------------
7,086,586
Consumer-- 1,864,163 American Achievement Corp. Term Loan B, due 3/22/2011 1,894,456
Non-Durables--0.5%
Diversified 3,761,046 Dex Media West Inc. Term Loan B, due 3/09/2010 3,818,101
Media--4.4% 3,000,000 Freedom Communications, Inc. Term Loan B, due 5/18/2012 3,049,875
5,486,250 Metro-Goldwyn-Mayer Studios Inc. Term Loan B, due 4/30/2011 5,500,821
1,356,407 PRIMEDIA Inc. Term Loan B, due 6/30/2009 1,357,891
2,097,606 RH Donnelley Tranche D Term Loan, due 8/30/2011 2,131,811
---------------
15,858,499
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
Schedule of Investments (continued) (in U.S. dollars)
Face
Industry++ Amount Floating Rate Loan Interests++++ Value
Energy-- $ 2,750,000 Dresser, Inc. Term Loan Unsecured, due 2/25/2010 $ 2,798,125
Other--1.2% 1,391,250 Pride Offshore Inc. Term Loan, due 7/07/2011 1,416,177
---------------
4,214,302
Food & Drug--0.2% 757,653 Alimentation Couche-Tard, Inc. US Term Loan, due 12/17/2010 769,491
Food/Tobacco--4.4% 1,412,917 Constellation Brands Term Loan B, due 11/30/2011 1,435,104
1,745,625 Doane Pet Care Enterprises, Inc. Term Loan, due 11/05/2009 1,777,264
5,738,301 Dr. Pepper/Seven Up Bottling Group, Inc. Tranche B Term Loan,
due 12/19/2010 5,847,329
2,988,709 Meow Mix, Inc. First Lien Term Loan, due 10/10/2009 2,983,105
2,757,879 Michael Foods, Inc. Term Loan, due 11/21/2010 2,807,865
910,000 Pierre Foods, Inc. Term Loan B, due 6/30/2010 921,754
---------------
15,772,421
Gaming--2.2% 1,990,000 Boyd Gaming Corp. Term Loan, due 6/30/2011 2,018,606
1,169,471 Global Cash Access LLC Term Loan B, due 3/10/2010 1,178,242
1,985,000 Green Valley Ranch Gaming, LLC Term Loan, due 12/22/2010 2,012,294
992,500 Isle of Capri Black Hawk LLC Term Loan C, due 12/31/2007 1,005,527
1,800,000 Pinnacle Entertainment, Inc. Term Loan, due 8/27/2010 1,827,000
---------------
8,041,669
Health Care--3.2% 2,793,000 Community Health Systems, Inc. Term Loan, due 8/19/2011 2,828,130
4,186,364 Orthofix International NV Term Loan B, due 12/15/2008 4,246,543
683,311 Rotech Healthcare, Inc. Term Loan B, due 3/31/2008 691,711
3,661,204 Triad Hospitals Holdings, Inc. Term Loan B, due 9/30/2008 3,727,311
---------------
11,493,695
Housing--4.1% 2,100,000 General Growth Properties, Inc. Tranche B Term Loan, due 11/12/2008 2,135,198
4,148,438 Headwaters, Inc. Term Loan B, due 4/30/2011 4,208,934
1,096,023 Juno Lighting, Inc. First Lien Term Loan, due 11/21/2010 1,117,943
2,487,500 Nortek, Inc.,Term Loan, due 8/27/2011 2,533,623
4,855,000 PGT Industries, Inc. First Lien Term Loan, due 1/31/2009 4,930,859
---------------
14,926,557
Information 3,412,500 VUTEK Inc. Term Loan, due 6/25/2010 3,429,563
Technology--1.0%
Leisure--1.4% 4,469,860 24 Hour Fitness Worldwide Term Loan B, due 7/01/2009 4,542,496
782,564 Wyndham International, Inc. Term Loan II, due 4/01/2006 785,987
---------------
5,328,483
Manufacturing-- 2,379,776 Communications & Power Industries, Inc. Term Loan, due 7/23/2010 2,414,357
6.4% 1,875,000 High Voltage Engineering Corp.Term Loan A, due 7/31/2006 1,865,625
2,000,000 Invensys International Holdings Ltd. Second Lien Term Loan, due
12/04/2009 2,058,750
1,460,270 Itron, Inc. Tranche B, due 12/17/2010 1,476,089
4,500,000 Metokote Corp. Second Lien Term Loan, due 2/13/2011 4,590,000
3,071,101 Mueller Group, Inc. Initial Term Loan, due 4/23/2011 3,107,570
939,730 SPX Corp. Term Loan B, due 9/30/2009 945,839
Sensus Metering Systems Inc.:
5,539,130 Term Loan B-1, due 12/17/2010 5,600,294
830,870 Term Loan B-2, due 12/19/2010 840,044
---------------
22,898,568
Packaging--4.2% 6,082,063 Berry Plastics Corp. Term Loan, due 7/22/2010 6,177,095
3,000,000 Graham Packaging Co. LP Term Loan B, due 10/07/2011 3,058,500
1,995,000 Intertape Polymer US Inc. Term Loan B, due 7/28/2011 2,034,900
Owens-Illinois Group Inc.:
3,328,443 French Tranche C-1 Term Loan, due 4/01/2008 3,390,851
539,945 Term Loan B-1, due 4/01/2008 550,002
---------------
15,211,348
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
Schedule of Investments (continued) (in U.S. dollars)
Face
Industry++ Amount Floating Rate Loan Interests++++ Value
Paper--1.7% $ 1,401,252 Boise Cascade Holdings, LLC Tranche B Term Loan, due 10/28/2011 $ 1,428,665
SP Newsprint Co., Tranche B:
966,667 Line of Credit, due 1/09/2010 978,750
518,333 Term Loan, due 1/09/2010 529,348
Smurfit Stone Container Corp.:
2,294,118 Tranche B, due 11/01/2011 2,333,308
705,882 Tranche C, due 11/01/2011 718,059
---------------
5,988,130
Retail--0.9% 1,750,000 American Reprographics Co. LLC Second Lien Term Loan, due 12/18/2009 1,863,750
1,704,386 General Nutrition Centers, Inc. Tranche B Term Loan, due 12/05/2009 1,729,952
---------------
3,593,702
Services--2.8% 2,442,000 Baker Tanks, Inc., Term Loan, due 1/30/2011 2,477,868
2,885,500 Buhrmann US, Inc. Term C-1 Facility, due 12/23/2010 2,948,620
2,494,233 Coinstar, Inc. Term, due 7/07/2011 2,537,882
United Rentals, Inc.:
1,654,167 Term Loan, due 2/14/2011 1,684,148
333,333 Tranche B, Credit-Linked Deposit, due 2/14/2011 338,646
---------------
9,987,164
Telecommunications-- 2,185,333 Consolidated Communications, Inc. Term Loan C, due 10/14/2011 2,207,187
2.1% WilTel Communications, LLC:
3,590,526 First Lien Term Loan, due 6/30/2011 3,556,865
1,800,000 Second Lien Term Loan, due 12/31/2010 1,711,125
---------------
7,475,177
Utilities--9.9% 1,571,429 AES Corp. Term Loan, due 4/30/2008 1,607,768
4,939,812 Calpine Corp. Second Lien Term Loan, due 7/16/2007 4,420,104
Calpine Generating Co. LLC:
1,500,000 First Priority Term Loan, due 4/01/2009 1,540,625
2,500,000 Second Priority Term Loan, due 3/11/2010 2,450,625
5,458,750 Cogentrix Delaware Holdings, Inc. Term, due 2/25/2009 5,472,397
2,786,000 Dynegy Holdings Inc. Term, due 5/27/2010 2,838,238
El Paso Corp.:
1,425,000 Deposit Account, due 11/23/2009 1,449,604
2,365,500 Term Loan, due 11/23/2009 2,409,853
906,995 Midwest Generation LLC Term Loan C, due 4/27/2011 921,828
NRG Energy:
700,000 Credit Linked Deposit, due 12/24/2007 710,063
900,000 Term Loan, due 12/24/2011 913,275
2,475,000 Quanta Services, Inc. Credit Linked Deposit, due 6/19/2008 2,510,578
3,100,000 Reliant Energy, Inc., Term Loan, due 4/30/2010 3,151,206
4,953,846 Texas Genco Initial Term Loan, due 12/14/2011 5,038,819
---------------
35,434,983
Wireless 2,326,500 Centennial Cellular Operating Co. Term Loan, due 2/09/2011 2,367,214
Communications-- 1,000,000 Nextel Partners Operating Corp. Tranche C Term Loan, due 5/31/2011 1,015,089
2.6% 5,773,494 SBA Senior Finance, Inc. Tranche C Term Loan, due 10/31/2008 5,864,905
---------------
9,247,208
Total Investments in Floating Rate Loan Interests
(Cost--$306,487,998)--86.3% 310,431,003
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
Schedule of Investments (continued) (in U.S. dollars)
Face
Industry++ Amount Corporate Debt Obligations Value
Airlines--0.7% Delta Air Lines, Inc.:
$ 1,700,000 7.90% due 12/15/2009 $ 799,000
3,550,000 2.875% due 2/18/2024 (b)(f) 1,832,688
---------------
2,631,688
Automotive--0.3% 250,000 Delco Remy International, Inc., 6.66% due 4/15/2009 255,000
700,000 Tenneco Automotive, Inc., 8.625% due 11/15/2014 (b) 745,500
---------------
1,000,500
Broadcasting--2.5% 4,000,000 Granite Broadcasting Corp., 9.75% due 12/01/2010 3,830,000
4,750,000 Paxson Communications Corp., 5.41% due 1/15/2010 (b)(c) 4,856,875
250,000 XM Satellite Radio, Inc., 8.243% due 5/01/2009 (c) 257,188
---------------
8,944,063
Cable--U.S.--1.8% 850,000 Inmarsat Finance Plc, 7.625% due 6/30/2012 890,375
Intelsat Bermuda Ltd. (b):
750,000 7.794% due 1/15/2012 770,625
500,000 8.25% due 1/15/2013 523,750
350,000 Mediacom Broadband LLC, 11% due 7/15/2013 387,187
250,000 New Skies Satellites NV, 7.438% due 11/01/2011 (b)(c) 262,187
3,000,000 Rainbow National Services LLC, 10.375% due 9/01/2014 (b) 3,570,000
---------------
6,404,124
Cable-- 400,000 Kabel Deutschland GmbH, 10.625% due 7/01/2014 (b) 460,000
International--1.1% NTL Cable Plc (b):
3,000,000 7.66% due 10/15/2012 (c) 3,093,750
375,000 8.75% due 4/15/2014 426,562
---------------
3,980,312
Chemicals--2.8% 1,950,000 Crompton Corp., 8.71% due 8/01/2010 (c) 2,115,750
2,186,000 GEO Speciality Chemicals, Inc., 11.064% due 12/31/2009 (f) 2,333,555
5,000,000 PolyOne Corp., 10.625% due 5/15/2010 5,700,000
---------------
10,149,305
Consumer-- 250,000 Elizabeth Arden, Inc., 7.75% due 1/15/2014 265,937
Non-Durables--0.8% 2,000,000 Playtex Products, Inc., 8% due 3/01/2011 2,195,000
350,000 Samsonite Corp., 8.875% due 6/01/2011 377,125
---------------
2,838,062
Diversified 250,000 CanWest Media, Inc., 8% due 9/15/2012 (b) 269,375
Media--0.1% 250,000 Universal City Florida Holding Co., 7.493% due 5/01/2010 (b)(c) 261,875
---------------
531,250
Energy--Exploration 250,000 Belden & Blake Corp., 8.75% due 7/15/2012 254,375
& Production--0.1%
Energy-- 250,000 Aventine Renewable Energy Holdings, Inc., 8.501% due
Other--1.1% 12/15/2011 (b)(c) 257,500
4,000,000 Trico Marine Services, Inc., 8.875% due 5/15/2012 (d) 3,600,000
---------------
3,857,500
Food & Drug--0.1% 275,000 Duane Reade, Inc., 7.01% due 12/15/2010 (b) 275,000
Food/Tobacco--1.2% 3,000,000 Smithfield Foods, Inc., 7% due 8/01/2011 3,225,000
1,050,000 The Wornick Co., 10.875% due 7/15/2011 1,134,000
---------------
4,359,000
Gaming--3.0% 5,000,000 Majestic Star Casino LLC, 9.50% due 10/15/2010 5,293,750
250,000 Mohegan Tribal Gaming Authority, 7.125% due 8/15/2014 260,312
325,000 River Rock Entertainment Authority, 9.75% due 11/01/2011 361,563
Station Casinos, Inc.:
4,000,000 6% due 4/01/2012 4,145,000
775,000 6.50% due 2/01/2014 809,875
---------------
10,870,500
Health Care--0.2% 575,000 US Oncology, Inc., due 8/15/2012 (b) 628,188
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
Schedule of Investments (continued) (in U.S. dollars)
Face
Industry++ Amount Corporate Debt Obligations Value
Housing--0.1% $ 450,000 Nortek, Inc., 8.50% due 9/01/2014 $ 459,000
Hybrid--2.8% 10,000,000 Dow Jones CDX.NA.HY.3 Trust 3 December 2009, 8% due 12/29/2009 (b) 10,112,500
Information 2,050,000 Freescale Semiconductor, Inc., 5.41% due 7/15/2009 (c) 2,139,687
Technology--0.9% 625,000 MagnaChip SemiConductor SA, 5.78% due 12/15/2011 (b) 643,750
250,000 Telcordia Technologies, 8.875% due 3/01/2013 (b) 258,125
---------------
3,041,562
Leisure--1.4% 3,900,000 Felcor Lodging LP, 6.874% due 6/01/2011 (c) 4,138,875
1,000,000 True Temper Sports, Inc., 8.375% due 9/15/2011 962,500
---------------
5,101,375
Manufacturing--1.7% 250,000 Altra Industrial Motion, Inc., 9% due 12/01/2011 (b) 251,875
2,500,000 Case New Holland, Inc., 6% due 6/01/2009 (b) 2,462,500
325,000 ERICO International Corp., 8.875% due 3/01/2012 338,812
2,900,000 Invensys Plc, 9.875% due 3/15/2011 (b) 3,132,000
---------------
6,185,187
Metal--Other--0.2% 700,000 Novelis, Inc., 7.25% due 2/15/2015 (b) 724,500
Packaging--0.9% 1,550,000 Consolidated Container Co. LLC, 10.75% due 6/15/2009 (a) 1,356,250
250,000 Constar International, Inc., 6.149% due 2/15/2012 (b) 253,750
250,000 Portola Packaging, Inc., 8.25% due 2/01/2012 203,750
600,000 Tekni-Plex, Inc., 8.75% due 11/15/2013 (b) 588,000
725,000 Wise Metals Group LLC, 10.25% due 5/15/2012 739,500
---------------
3,141,250
Paper--1.9% 2,650,000 Abitibi-Consolidated, Inc., 5.99% due 6/15/2011 (c) 2,729,500
700,000 Ainsworth Lumber Co. Ltd, 6.30% due 10/01/2010 (b)(c) 721,000
250,000 Boise Cascade LLC, 5.535% due 10/15/2012 (b)(c) 258,125
2,912,000 Western Forest Products, Inc., 15% due 7/28/2009 (e) 3,174,482
---------------
6,883,107
Retail--0.4% 1,300,000 Jean Coutu Group, Inc., 8.50% due 8/01/2014 1,332,500
Services--1.5% 3,375,000 Allied Waste North America Series B, 7.375% due 4/15/2014 3,240,000
2,000,000 United Rentals North America, Inc., 7.75% due 11/15/2013 (b) 2,005,000
---------------
5,245,000
Steel--2.4% 3,000,000 CSN Islands VIII Corp., 9.75% due 12/16/2013 (b) 3,270,000
5,000,000 Ispat Inland ULC, 9.31% due 4/01/2010 (c) 5,462,500
---------------
8,732,500
Telecommunications-- 6,000,000 Cincinnati Bell, Inc., 8.375% due 1/15/2014 6,202,500
4.0% 3,700,000 Qwest Communications International, 6.294% due 2/15/2009 (b)(c) 3,774,000
1,000,000 Terremark Worldwide Inc., 9% due 6/15/2009 927,500
3,500,000 Time Warner Telecom Holdings, Inc., 6.794% due 2/15/2011 (c) 3,631,250
---------------
14,535,250
Utilities--2.5% 2,000,000 Aquila, Inc., 7.625% due 11/15/2009 2,110,000
3,000,000 Calpine Canada Energy Finance Ulc, 8.50% due 5/01/2008 2,250,000
3,000,000 Calpine Corp., 9.875% due 12/01/2011 (b) 2,520,000
1,675,000 Reliant Energy, Inc., 6.75% due 12/15/2014 1,662,438
250,000 Sierra Pacific Resources, 8.625% due 3/15/2014 276,250
---------------
8,818,688
Wireless Rogers Wireless Communications, Inc.:
Communications-- 250,000 5.525% due 12/15/2010 (c) 263,750
0.7% 1,100,000 7.25% due 12/15/2012 1,190,750
250,000 8% due 12/15/2012 270,938
250,000 Rural Cellular Corp., 6.99% due 3/15/2010 (c) 262,500
350,000 SBA Communications Corp., 8.50% due 12/01/2012 (b) 378,000
250,000 SBA Telecommunications, Inc., 9.75% due 12/15/2011 (a) 218,750
---------------
2,584,688
Total Investments in Corporate Debt Obligations
(Cost--$127,430,647)--37.2% 133,620,974
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
Schedule of Investments (concluded) (in U.S. dollars)
Shares
Industry++ Held Common Stocks Value
Chemicals--0.0% 13,117 GEO Specialty Chemicals, Inc. (g) $ 196,755
Paper--0.2% 84,448 Western Forest Products, Inc. 542,743
Total Investments in Common Stocks
(Cost--$420,193)--0.2% 739,498
Beneficial
Interest Short-Term Securities
$ 742,145 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I** 742,145
Total Investments in Short-Term Securities
(Cost--$742,145)--0.2% 742,145
Total Investments (Cost--$435,080,983*)--123.9% 445,533,620
Liabilities in Excess of Other Assets--(23.9%) (85,921,221)
---------------
Net Assets--100.0% $ 359,612,399
===============
(a) Represents a step-up bond; the interest rate shown is 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 security; issuer 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.
(f) Convertible security.
(g) Non-income producing security.
++ 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.
++++ Floating rate loan interests in which the Fund invests generally pay
interest at rates that are periodically predetermined 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.
* The cost and unrealized appreciation (depreciation) of investments
as of February 28, 2005, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 435,098,808
==============
Gross unrealized appreciation $ 12,210,564
Gross unrealized depreciation (1,775,752)
--------------
Net unrealized appreciation $ 10,434,812
==============
** 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 $(5,612,425) $19,637
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
Statement of Assets, Liabilities and Capital
As of February 28, 2005
Assets
Investments in unaffiliated securities, at value (identified cost--$434,338,838) $ 444,791,475
Investments in affiliated securities, at value (identified cost--$742,145) 742,145
Cash 52,967
Unfunded loan commitment 7,373
Receivables:
Interest (including $1,597 from affiliates) $ 4,339,792
Securities sold 3,450,988
Principal paydowns 194,758
Commitment fees 12,380 7,997,918
---------------
Prepaid expenses 25,606
---------------
Total assets 453,617,484
---------------
Liabilities
Loans 88,800,000
Deferred income 12,117
Payables:
Securities purchased 4,397,744
Dividends to shareholders 472,517
Investment adviser 204,935
Interest on loans 28,794
Commitment fees 4,793
Other affiliates 3,125 5,111,908
---------------
Accrued expenses and other liabilities 81,060
---------------
Total liabilities 94,005,085
---------------
Net Assets
Net Assets $ 359,612,399
===============
Capital
Common Stock, par value $.10 per share; 200,000,000 shares authorized
(18,298,439 shares issued and outstanding) $ 1,829,844
Paid-in capital in excess of par 347,243,873
Undistributed investment income--net $ 2,171,648
Accumulated realized capital loss--net (2,092,976)
Unrealized appreciation--net 10,460,010
---------------
Total accumulated earnings--net 10,538,682
---------------
Total capital--Equivalent to $19.65 net asset value per share of Common Stock
(market price--$19.38) $ 359,612,399
===============
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
Statement of Operations
For the Six Months Ended February 28, 2005
Investment Income
Interest (including $19,637 from affiliates) $ 13,877,973
Facility and other fees 101,974
---------------
Total income 13,979,947
---------------
Expenses
Investment advisory fees $ 1,744,580
Loan interest expense 1,327,099
Borrowing costs 121,421
Professional fees 84,816
Accounting services 66,102
Printing and shareholder reports 31,042
Transfer agent fees 26,604
Directors' fees and expenses 24,086
Listing fees 10,873
Custodian fees 7,901
Pricing services 3,759
Other 20,773
---------------
Total expenses 3,469,056
---------------
Investment income--net 10,510,891
---------------
Realized & Unrealized Gain (Loss)--Net
Realized loss on investments--net (2,092,976)
Change in unrealized appreciation (depreciation) on:
Investments 10,229,514
Unfunded corporate loans 33,382 10,262,896
--------------- ---------------
Total realized and unrealized gain--net 8,169,920
---------------
Net Increase in Net Assets Resulting from Operations $ 18,680,811
===============
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
Statements of Changes in Net Assets
For the Six For the Period
Months Ended October 31, 2003++
February 28, to August 31,
Increase (Decrease) in Net Assets: 2005 2004
Operations
Investment income--net $ 10,510,891 $ 12,084,220
Realized gain (loss)--net (2,092,976) 216,488
Change in unrealized appreciation (depreciation)--net 10,262,896 197,114
--------------- ---------------
Net increase in net assets resulting from operations 18,680,811 12,497,822
--------------- ---------------
Dividends & Distributions to Shareholders
Investment income--net (9,521,307) (10,902,156)
Realized gain--net (216,488) --
--------------- ---------------
Net decrease in net assets resulting from dividends and distributions
to shareholders (9,737,795) (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 and distributions 415,791 3,760,823
Offering costs resulting from the issuance of Common Stock -- (435,405)
--------------- ---------------
Net increase in net assets resulting from Common Stock transactions 415,791 348,557,918
--------------- ---------------
Net Assets
Total increase in net assets 9,358,807 350,153,584
Beginning of period 350,253,592 100,008
--------------- ---------------
End of period* $ 359,612,399 $ 350,253,592
=============== ===============
* Undistributed investment income--net $ 2,171,648 $ 1,182,064
=============== ===============
++ Commencement of operations.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
Statement of Cash Flows
For the Six Months Ended February 28, 2005
Cash Provided By Operating Activities
Net increase in net assets resulting from operations $ 18,680,811
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided by operating activities:
Increase in receivables (482,995)
Increase in other assets (1,966)
Increase in other liabilities 180,928
Realized and unrealized gain--net (8,169,920)
Amortization of premium and discount--net (281,560)
Proceeds from sales and paydowns of long-term securities 131,005,632
Proceeds on other investment related transactions 87,723
Purchases of long-term securities (105,363,793)
Sales of short-term investments--net 5,612,425
---------------
Net cash provided by investing activities 41,267,285
---------------
Cash Used for Financing Activities
Cash receipts from borrowings--net 100,840,000
Cash payments from borrowings (135,265,000)
Dividends and distributions paid to shareholders (8,849,487)
---------------
Net cash used for financing activities (43,274,487)
---------------
Cash
Net decrease in cash (2,007,202)
Cash at beginning of period 2,060,169
---------------
Cash at end of period $ 52,967
===============
Cash Flow Information
Cash paid for interest $ 1,341,441
===============
Non-Cash Financing Activities
Capital shares issued in reinvestment of dividends paid to shareholders $ 415,791
===============
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
Financial Highlights
For the Six For the Period
Months Ended October 31, 2003++
The following per share data and ratios have been derived February 28, to August 31,
from information provided in the financial statements. 2005 2004
Per Share Operating Performance
Net asset value, beginning of period $ 19.16 $ 19.10
--------------- ---------------
Investment income--net .57*** .66
Realized and unrealized gain--net .45 .02
--------------- ---------------
Total from investment operations 1.02 .68
--------------- ---------------
Less dividends and distributions from:
Investment income--net (.52) (.60)
Realized gain--net (.01) --
--------------- ---------------
Total dividends and distributions (.53) (.60)
--------------- ---------------
Offering costs resulting from the issuance of Common Stock -- (.02)
--------------- ---------------
Net asset value, end of period $ 19.65 $ 19.16
=============== ===============
Market price per share, end of period $ 19.38 $ 19.44
=============== ===============
Total Investment Return**
Based on net asset value per share 5.47%+++ 3.50%+++
=============== ===============
Based on market price per share 2.52%+++ .29%+++
=============== ===============
Ratios to Average Net Assets
Expenses, net of waiver and excluding interest expense 1.22%* .71%*
=============== ===============
Expenses, net of waiver 1.97%* .87%*
=============== ===============
Expenses 1.97%* 1.08%*
=============== ===============
Investment income--net 5.97%* 3.80%*
=============== ===============
Leverage
Amount of borrowings, end of period (in thousands) $ 88,800 $ 123,225
=============== ===============
Average amount of borrowings outstanding during the period (in thousands) $ 114,256 $ 38,654
=============== ===============
Average amount of borrowings outstanding per share during the period*** $ 6.25 $ 2.11
=============== ===============
Supplemental Data
Net assets, end of period (in thousands) $ 359,612 $ 350,254
=============== ===============
Portfolio turnover 22.09% 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.
*** Based on average shares outstanding.
++ Commencement of operations.
+++ Aggregate total investment return.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
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. 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. These unaudited financial statements reflect
all adjustments, which are, in the opinion of management, necessary
to present a fair statement of the results for the interim period.
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 floating
rate loans made by banks and other financial institutions and both
privately and publicly offered corporate bonds and notes. Because
agents and intermediaries are primarily commercial banks or other
financial institutions, the Fund's investment in floating rate loans
could be considered concentrated in financial institutions.
(b) Valuation of investments--Floating rate loans are valued in
accordance with guidelines established by the Fund's Board of
Directors. Floating rate loans are valued at the mean between the
last available bid and asked prices from one or more brokers or
dealers as obtained from Loan Pricing Corporation. For the limited
number of floating rate loans for which no reliable price quotes are
available, such floating rate loans may be valued by Loan Pricing
Corporation through the use of pricing matrixes to determine
valuations. If the pricing service does not provide a value for a
floating rate loan, the Investment Adviser will value the floating
rate 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 Directors 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.
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
Notes to Financial Statements (continued)
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.
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. These periodic payments received or made by
the Fund are recorded in the accompanying Statement of Operations as
realized gains or losses, respectively. Gains or losses are also
realized upon termination of the swap agreements. Swaps are marked-
to-market daily based on dealer-supplied valuations and changes in
value are recorded as unrealized appreciation (depreciation). Risks
include changes in the returns of the underlying instruments,
failure of the counterparties to perform under the contracts' terms
and the possible lack of liquidity with respect to the swap
agreements.
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
Notes to Financial Statements (continued)
(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.
(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 Fund
Asset Management, L.P. ("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.
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, an affiliate of
FAM, or its affiliates. Pursuant to that order, the Fund also has
retained Merrill Lynch Investment Managers, LLC ("MLIM, LLC"), an
affiliate of FAM, as the securities lending agent for a fee based on
a share of the returns on investment of cash collateral. MLIM, LLC
may, on behalf of the Fund, invest cash collateral received by the
Fund for such loans, among other things, in a private investment
company managed by MLIM, LLC or in registered money market funds
advised by FAM or its affiliates.
For the six months ended February 28, 2005, the Fund reimbursed FAM
$3,828 for certain accounting services.
Certain officers and/or directors of the Fund are officers and/or
directors of FAM, PSI, and/or ML & Co.
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
Notes to Financial Statements (concluded)
3. Investments:
Purchases and sales (including paydowns) of investments, excluding
short-term securities, for the six months ended February 28, 2005
were $101,925,662 and $125,980,249, 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 capital stock without approval
of the holders of Common Stock.
Shares issued and outstanding for the six months ended February 28,
2005 increased by 21,622 from reinvestment of dividends and 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.
5. Unfunded Loan Interest:
As of February 28, 2005, the Fund had unfunded loan commitments of
$6,606,000 which would be extended at the option of the borrower,
pursuant to the following loan agreement:
Unfunded
Commitment
Borrower (in Thousands)
Vought Aircraft Industries, Inc. $3,000
Pinnacle Entertainment, Inc. $1,560
Texas Genco $2,046
6. Short-Term Borrowings:
The Fund has entered into a revolving credit and security agreement
funded by a commercial paper asset securitization program with
Citicorp North America, Inc. ("Citicorp") as Agent, certain
secondary backstop lenders, and certain asset securitization
conduits as lenders (the "Lenders"). The credit facility has a
maximum limit of $172,500,000. Under the Citicorp program, the
conduits will fund advances to the Fund through the issuance of
highly rated commercial paper. As security for its obligations to
the Lenders under the revolving securitization facility, the Fund
has granted a security interest in substantially all of its assets
to and in favor of the Lenders. The interest rate on the Fund's
borrowings is based on the interest rate carried by the commercial
paper plus a program fee. The Fund pays additional borrowing costs
including a backstop commitment fee.
The weighted average annual interest rate was 2.36% and the average
borrowing was approximately $114,256,000 for the six months ended
February 28, 2005.
7. Distributions to Shareholders:
The Fund paid an ordinary income dividend to holders of Common
Stock in the amount of $.095833 per share on March 31, 2005 to
shareholders of record on March 15, 2005.
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
Officers and Directors
Robert C. Doll, Jr., President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Jean Margo Reid, Director
Roscoe S. Suddarth, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Joseph P. Matteo, Vice President
Donald C. Burke, Vice President and Treasurer
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
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
Effective January 1, 2005, Terry K. Glenn, President and Director
and Kevin A. Ryan, Director of Floating Rate Income Strategies Fund,
Inc. retired. The Fund's Board of Directors wishes Messrs. Glenn and
Ryan well in their retirements.
Effective January 1, 2005, Robert C. Doll, Jr. became President and
Director of the Fund.
FLOATING RATE INCOME STRATEGIES FUND, INC., FEBRUARY 28, 2005
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 at
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., FEBRUARY 28, 2005
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this
semi-annual report
Item 4 - Principal Accountant Fees and Services - Not Applicable to
this semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to
this semi-annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for
Closed-End Management Investment Companies - Not Applicable to this
semi-annual report
Item 8 - Portfolio Managers of Closed-End Management Investment
Companies - Not Applicable to this semi-annual report
Item 9 - Purchases of Equity Securities by Closed-End Management
Investment Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not
Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably
designed such disclosure controls and procedures to ensure material
information relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined that
the registrant's disclosure controls and procedures are effective
based on our evaluation of these controls and procedures as of a
date within 90 days prior to the filing date of this report.
11(b) - There were no changes in the registrant's internal control
over financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the last fiscal half-year
of the period covered by this report that has materially affected,
or is reasonably likely to materially affect, the registrant's
internal control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual
report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, the registrant has duly
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Floating Rate Income Strategies Fund, Inc.
By: _/s/ Robert C. Doll, Jr._______
Robert C. Doll, Jr.,
Chief Executive Officer of
Floating Rate Income Strategies Fund, Inc.
Date: April 22, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934
and the Investment Company Act of 1940, this report has been signed
below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
By: _/s/ Robert C. Doll, Jr.________
Robert C. Doll, Jr.,
Chief Executive Officer of
Floating Rate Income Strategies Fund, Inc.
Date: April 22, 2005
By: _/s/ Donald C. Burke________
Donald C. Burke,
Chief Financial Officer of
Floating Rate Income Strategies Fund, Inc.
Date: April 22, 2005