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 811-21621
Name of Fund: Defined Strategy Fund Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Mitchell M. Cox, Chief
Executive Officer, Defined Strategy Fund Inc., 4 World
Financial Center, 5th Floor, New York, New York 10080.
Mailing address: P.O. Box 9011, Princeton, NJ, 08543-9011
Registrant's telephone number, including area code: (212) 449-8118
Date of fiscal year end: 09/30/05
Date of reporting period: 12/29/04 - 03/31/05
Item 1 - Report to Stockholders
Defined Strategy Fund Inc.
Semi-Annual Report
March 31, 2005
(IQ LOGO) INVESTMENT ADVISORS
(N LOGO)
NUVEEN
INVESTMENTS
Defined Strategy Fund Inc. seeks total returns that, exclusive of
Fund fees and expenses, exceed the performance of the ten highest
dividend-yielding stocks included in the Dow Jones Industrial
Average (SM) as determined once each year (normally two trading days
prior to the last day of the calendar year in which the U.S. stock
markets are open for trading).
This report, including the financial information herein, is
transmitted to shareholders of Defined Strategy Fund Inc. for their
information. It is not a prospectus. Past performance results shown
in this report should not be considered a representation of future
performance. 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 without charge, upon request, by calling toll-free
1-877-449-4742 or through the Securities and Exchange Commission's
Web site at http://www.sec.gov.
Defined Strategy Fund Inc.
Box 9011
Princeton, NJ 08543-9011
(GO PAPERLESS LOGO)
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Defined Strategy Fund Inc.
Portfolio Information as of March 31, 2005
Percent of
Ten Largest Equity Holdings Net Assets
E.I. Du Pont de Nemours & Co. 10.9%
Merck & Co., Inc. 10.5
Altria Group, Inc. 10.5
Pfizer, Inc. 10.2
The Coca-Cola Co. 10.2
SBC Communications, Inc. 9.6
Citigroup, Inc. 9.3
JPMorgan Chase & Co. 9.3
Verizon Communications, Inc. 9.2
General Motors Corp. 7.7
Percent of
Five Largest Industries* Net Assets
Pharmaceuticals 20.8%
Diversified Telecommunication Services 18.8
Diversified Financial Services 18.5
Beverages 10.2
Automobiles 7.7
* 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 such
industry sub-classifications for reporting ease.
Percent of
Sector Representation Net Assets**
Health Care 21.2%
Consumer Staples 20.7
Telecommunication Services 18.8
Financials 18.6
Materials 10.9
Consumer Discretionary 8.0
Information Technology 0.2
Industrials 0.2
Other* 1.6
* Includes portfolio holdings in short-term investments.
** Total may not equal 100%.
DEFINED STRATEGY FUND INC., MARCH 31, 2005
A Letter From the President
Dear Shareholder
Investing in the ten highest dividend-yielding stocks in the Dow
Jones Industrial Average ("DJIA") is a strategy followed by many
investors. The Defined Strategy Fund Inc. offers investors a unique
way to implement this popular strategy through a single closed-end
fund. The investment objective of the Fund is to seek total returns
that, exclusive of Fund fees and expenses, exceed the performance of
the ten highest dividend-yielding stocks included in the DJIA as
determined once each year.
The U.S. stock market, as measured by the total return of the DJIA
Index, returned -2.00% for the period since inception (December 28,
2004) through March 31, 2005. Over that same period, the total
return of the 10 highest dividend-yielding stocks included in the
DJIA returned -4.44%, while the Fund returned -4.07% (as measured by
the change in net asset value plus dividend reinvestment).
While we would obviously have preferred for the market to have been
up and the Fund to have had positive returns, we are encouraged that
the Fund has been able to replicate and modestly outperform the
strategy by 37 basis points (.37%).
IQ Investment Advisors continues to take a non-traditional approach
to asset management by seeking to identify specific economic or
strategic investment themes that aim to fulfill particular investor
needs. We encourage you to revisit your portfolio and your asset
allocation strategy to ensure you are well positioned to take
advantage of the opportunities that lie ahead in 2005. We thank you
for trusting IQ Investment Advisors with your investment assets, and
we look forward to serving you in the months and years ahead.
Sincerely,
(Mitchell M. Cox)
Mitchell M. Cox
President, IQ Investment Advisors
DEFINED STRATEGY FUND INC., MARCH 31, 2005
A Discussion With Your Fund's Portfolio Manager
We are pleased to provide you with this first shareholder report for
Defined Strategy Fund Inc., a newly organized closed-end investment
company. While the Fund is advised by IQ Investment Advisors, the
following discussion is provided to you by Nuveen Asset Management,
the Fund's sub-adviser.
How has the Fund performed since its inception?
Since inception (December 28, 2004) through March 31, 2005, the
Common Stock of Defined Strategy Fund Inc. had a total investment
return of -4.07%, based on a change in per share net asset
value from $19.10 to $18.19, and assuming reinvestment of all
distributions. The Fund's unmanaged benchmark, the Dow Jones
10 Index, returned -4.44% for the same period.
For a description of the Fund's total investment return based on a
change in 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 a 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.
Describe the market environment during the reporting period.
After a stellar fourth quarter of 2004 (marked by an S&P 500 Index
return of +9.23%), the equity markets suffered a mild pullback in
the first quarter of 2005. The broader markets, as measured by the
S&P 500 and the Dow Jones Industrial Average (DJIA), had returns of
- -2.15% and -2.06%, respectively. The Dow Jones 10 Index had a return
of -4.62%, as its overweight position in General Motors Corp. (GM),
down 25.6% for the quarter, cost it performance relative to the
broader indexes. In general, higher-beta stocks (small cap and
technology names) were the worst performers for the quarter, as
indicated by the -7.95% return of the Nasdaq Composite Index (a
common measure of technology stock performance) and the -5.34%
return of the small cap Russell 2000 Index.
How have you managed the portfolio since its inception?
As this was the first quarter of the Fund's existence, we were
actively investing the portfolio throughout a portion of January.
Investment activity focused on investing substantially all of the
Fund's assets in the ten highest dividend yielding stocks included
in the DJIA and entering into certain other transactions designed
to seek enhanced returns. Overall, this investment process went
smoothly, with approximately 98% of the initial proceeds invested in
the 10 highest-yielding stocks in the DJIA.
How would you characterize the portfolio's position at the close of
the period?
We believe the portfolio is well positioned to continue to meet
its stated objectives. We have some concern regarding the future
financial flexibility of GM. The stock price has already declined
substantially, but there is room for more deterioration and a
potential cut in the dividend may loom on the horizon. However,
consistent with the Fund's policies, we will continue to hold GM
and let the Dow Jones index selection methodology guide us in the
rebalancing process at year-end.
How do the plans for the sale of St. Paul Travelers' stake in Nuveen
Investments affect me as a shareholder?
Pursuant to an investment management agreement between Defined
Strategy Fund Inc. (the "Fund") and IQ Investment Advisors LLC
("IQ"), IQ has served as the Fund's investment adviser and has
been responsible for the overall investment strategy of your Fund.
As the investment adviser of your Fund, IQ entered into an
investment sub-advisory agreement for the Fund pursuant to which
Nuveen Asset Management ("NAM") was retained to furnish investment
advisory services to the Fund. NAM is a wholly-owned subsidiary of
Nuveen Investments, Inc. ("Nuveen"). Nuveen is a publicly traded
company and was until recently a majority-owned subsidiary of The
St. Paul Travelers Companies, Inc. ("St. Paul"). St. Paul previously
announced a three-part program to sell its interest in Nuveen to the
public in a registered, broadly disseminated offering (the "Sale").
DEFINED STRATEGY FUND INC., MARCH 31, 2005
Upon completion of the three-part program that comprises the
Sale, the sub-advisory agreement between NAM and IQ may be
terminated by operation of law. In order for NAM to continue to
serve as sub-adviser of the Fund after the completion of the Sale,
the shareholders of the Fund must approve a new sub-advisory
agreement.
Your investment in the Fund will not change as a result of the Sale.
You will still own the same shares in the Fund, and the value of
your investment will not change as a direct result of the Sale. If
approved, the new sub-advisory agreement will still be with NAM, the
portfolio manager and other members of the Fund's investment team
at NAM are not anticipated to change and the terms of the new sub-
advisory agreement will be substantially identical to the terms of
the original sub-advisory agreement. In addition, the Sale is not
anticipated to have any effect on the personnel advising the Fund.
Rob A. Guttschow
Portfolio Manager
April 25, 2005
DEFINED STRATEGY FUND INC., MARCH 31, 2005
Schedule of Investments
Industry* Shares Held Common Stocks Value
Automobiles--7.7% 356,928 General Motors Corp. $ 10,490,114
Beverages--10.2% 333,035 The Coca-Cola Co. 13,877,569
Biotechnology--13.6% 145,000 Amgen, Inc. (b) 8,440,450
284,431 Gilead Sciences, Inc. (b) 10,182,630
---------------
18,623,080
Capital Markets--6.3% 720,243 E*Trade Financial Corp. (b) 8,642,916
Chemicals--10.9% 291,133 E.I. Du Pont de Nemours & Co. 14,917,655
Commercial Services 117,502 Apollo Group, Inc. Class A (b) 8,702,198
& Supplies--6.4%
Computers & Peripherals--6.5% 230,000 Dell, Inc. (b) 8,836,600
Diversified Financial 281,956 Citigroup, Inc. 12,671,102
Services--18.5% 366,102 JPMorgan Chase & Co. 12,667,129
---------------
25,338,231
Diversified Telecommunication 553,497 SBC Communications, Inc. 13,112,344
Services--18.8% 352,498 Verizon Communications, Inc. 12,513,679
---------------
25,626,023
Food & Staples Retailing--6.5% 557,000 The Kroger Co. (b) 8,928,710
Health Care Equipment 275,000 Boston Scientific Corp. (b) 8,054,750
& Supplies--5.9%
Health Care Providers 123,000 Express Scripts, Inc. (b) 10,724,370
& Services--7.9%
Multiline Retail--7.6% 199,957 Kohl's Corp. (b) 10,323,780
Pharmaceuticals--26.7% 222,118 Forest Laboratories, Inc. (b) 8,207,260
443,555 Merck & Co., Inc. 14,357,875
530,343 Pfizer, Inc. 13,932,111
---------------
36,497,246
Road & Rail--7.9% 488,400 Swift Transportation Co., Inc. (b) 10,813,176
Semiconductors & Semiconductor 825,000 Micron Technology, Inc. (b) 8,530,500
Equipment--6.2%
Software--6.2% 675,000 Oracle Corp. (b) 8,424,000
Specialty Retail--12.6% 104,000 Autozone, Inc. (b) 8,912,800
228,311 Bed Bath & Beyond, Inc. (b) 8,342,484
---------------
17,255,284
Tobacco--10.5% 218,515 Altria Group, Inc. 14,288,696
Total Investments in Common Stocks
(Cost--$279,531,391)--196.9% 268,894,898
Beneficial
Interest Short-Term Securities
$2,198,624 Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I (a) 2,198,624
Total Investments in Short-Term Securities
(Cost--$2,198,624)--1.6% 2,198,624
Total Investments (Cost--$281,730,015**)--198.5% 271,093,522
Liabilities in Excess of Other Assets--(98.5%) (134,553,737)
---------------
Net Assets--100.0% $ 136,539,785
===============
DEFINED STRATEGY FUND INC., MARCH 31, 2005
Schedule of Investments (concluded)
* 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 such industry
sub-classifications for reporting ease.
** The cost and unrealized appreciation (depreciation) of
investments as of March 31, 2005, as computed for federal income
tax purposes, were as follows:
Aggregate cost $ 281,730,015
==============
Gross unrealized appreciation $ 6,236,629
Gross unrealized depreciation (16,873,122)
--------------
Net unrealized depreciation $ (10,636,493)
==============
(a) 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 $2,198,624 $18,396
(b) Non-income producing security.
Variable prepaid forward contracts as of March 31, 2005 were
as follows:
Shares Held Issue++ Value
145,000 Amgen, Inc. $ (8,363,078)
117,502 Apollo Group, Inc. (8,600,151)
104,000 Autozone, Inc. (8,800,397)
228,311 Bed, Bath & Beyond, Inc. (8,261,731)
275,000 Boston Scientific Corp. (7,983,470)
230,000 Dell, Inc. (8,734,549)
720,243 E*Trade Financial Corp. (8,527,258)
123,000 Express Scripts, Inc. (10,519,267)
222,118 Forest Laboratories, Inc. (8,105,017)
284,431 Gilead Sciences, Inc. (10,007,309)
199,957 Kohl's Corp. (10,123,723)
557,000 The Kroger Co. (8,831,458)
825,000 Micron Technology, Inc. (8,429,107)
675,000 Oracle Corp. (8,344,823)
488,000 Swift Transportation Co., Inc. (10,613,611)
---------------
Total (Proceeds--$138,373,179) $ (134,244,949)
===============
++ Non-income producing securities.
See Notes to Financial Statements.
DEFINED STRATEGY FUND INC., MARCH 31, 2005
Statement of Assets, Liabilities and Capital
As of March 31, 2005
Assets
Investments in unaffiliated securities, at value (identified cost--$279,531,391) $ 268,894,898
Investments in affiliated securities, at value (identified cost--$2,198,624) 2,198,624
Receivables:
Dividends $ 421,316
Interest from affiliates 5,864 427,180
---------------
Other assets 19,072
---------------
Total assets 271,539,774
---------------
Liabilities
Variable prepaid forward contracts, at value (proceeds--$138,373,179) 134,244,949
Payables:
Dividends to shareholders 420,833
Offering costs 249,975
Investment adviser 84,232 755,040
--------------- ---------------
Total liabilities 134,999,989
---------------
Net Assets
Net assets $ 136,539,785
===============
Capital
Common Stock, par value $.001 per share, 100,000,000 shares authorized $ 7,505
Paid-in capital in excess of par 143,042,503
Undistributed investment income--net $ 3,851
Accumulated realized capital losses--net (5,811)
Unrealized depreciation--net (6,508,263)
---------------
Total accumulated losses--net (6,510,223)
---------------
Total Capital--Equivalent to $18.19 per share based on 7,505,236 shares of
Common Stock outstanding (market price--$16.69) $ 136,539,785
===============
See Notes to Financial Statements.
DEFINED STRATEGY FUND INC., MARCH 31, 2005
Statement of Operations
For the Period December 28, 2004++ to March 31, 2005
Investment Income
Dividends $ 1,109,562
Interest (including $18,396 from affiliates) 180,562
---------------
Total income 1,290,124
---------------
Expenses
Investment advisory fees $ 293,576
Directors' fees and expenses 20,755
Transfer agent fees 11,703
Accounting services 8,178
Listing fees 7,786
Printing and shareholder reports 7,786
Professional fees 5,820
Custodian fees 3,319
Pricing fees 346
Other 2,573
---------------
Total expenses 361,842
---------------
Investment income--net 928,282
---------------
Realized & Unrealized Loss--Net
Realized loss on investments--net (5,811)
Unrealized appreciation (depreciation) on:
Investments--net (10,636,493)
Variable prepaid forward contracts--net 4,128,230 (6,508,263)
--------------- ---------------
Total realized and unrealized loss--net (6,514,074)
---------------
Net Decrease in Net Assets Resulting from Operations $ (5,585,792)
===============
++ Commencement of operations.
See Notes to Financial Statements.
DEFINED STRATEGY FUND INC., MARCH 31, 2005
Statement of Changes in Net Assets
For the Period December 28, 2004++ to March 31, 2005
Operations
Investment income--net $ 928,282
Realized loss--net (5,811)
Unrealized depreciation--net (6,508,263)
---------------
Net decrease in net assets resulting from operations (5,585,792)
---------------
Dividends to Shareholders
Investment income--net (924,431)
---------------
Common Stock Transactions
Proceeds from issuance of Common Stock 143,250,000
Offering cost resulting from issuance of Common Stock (300,000)
---------------
Net increase in net assets resulting from Common Stock transactions 142,950,000
---------------
Net Assets
Total increase in net assets 136,439,777
Beginning of period 100,008
---------------
End of period* $ 136,539,785
===============
* Undistributed investment income--net $ 3,851
===============
++ Commencement of operations.
See Notes to Financial Statements.
Statement of Cash Flows
For the Period December 28, 2004++ to March 31, 2005
Cash Used for Operating Activities
Net decrease in net assets resulting from operations $ (5,585,792)
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided by operating activities:
Increase in receivables (427,180)
Increase in other assets (19,072)
Increase in other liabilities 334,207
Realized and unrealized loss--net 6,514,074
Amortization of premium and discount (162,167)
Purchases of long-term securities--net (279,531,391)
Purchases of short-term investments--net (2,042,268)
---------------
Net cash used for operating activities (280,919,589)
---------------
Cash Provided by Financing Activities
Proceeds from issuance of Common Stock 143,250,000
Proceeds from Variable prepaid forward contracts 138,373,179
Cash payments on offering costs (300,000)
Dividends paid to shareholders (503,598)
---------------
Net cash provided by financing activities 280,819,581
---------------
Cash
Net decrease in cash (100,008)
Cash at beginning of period 100,008
---------------
Cash at end of period $ --
===============
++ Commencement of operations.
See Notes to Financial Statements.
DEFINED STRATEGY FUND INC., MARCH 31, 2005
Financial Highlights
For the Period
December 28,
2004++ to
The following per share data and ratios have been derived March 31,
from the information provided in the financial statements: 2005
Per Share Operating Performance
Net asset value, beginning of period $ 19.10
---------------
Investment income--net .12
Realized and unrealized loss--net (.87)
---------------
Total from investment operations (.75)
---------------
Less dividends from investment income--net (.12)
---------------
Offering costs resulting from the issuance of Common Stock (.04)
---------------
Net asset value, end of period $ 18.19
---------------
Market price per share, end of period $ 16.69
===============
Total Investment Return**
Based on net asset value per share (4.07%)+++
===============
Based on market price per share (15.94%)+++
===============
Ratios to Average Net Assets
Expenses 1.01%*
===============
Investment income--net 2.59%*
===============
Supplemental Data
Net assets, end of period (in thousands) $ 136,540
===============
Portfolio turnover 0%
===============
* Annualized.
** Total investment returns based on market value, 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.
DEFINED STRATEGY FUND INC., MARCH 31, 2005
Notes to Financial Statements
1. Significant Accounting Policies:
The Defined Strategy Fund Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, closed-
end management investment company with a fixed term of existence.
The Fund pursues its investment objective by investing substantially
all of its net assets, in approximately equal amounts, in the ten
highest dividend-yielding stocks in the Dow Jones Industrial Average
(as of a date determined once each year) (the "Stocks"). To enhance
its returns, the Fund will simultaneously enter into variable
prepaid forward contracts, with terms of approximately one year,
to sell liquid equity securities and will use the proceeds to
purchase liquid equity securities other than the Stocks. Prior to
commencement of operations on December 28, 2004, the Fund had no
operations other than those relating to organizational matters and
the sale of 5,236 shares of Common Stock on December 9, 2004 to
Merrill Lynch Investment Managers, L.P. ("MLIM") 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. These unaudited financial statements reflect all
adjustments, which are, in 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 DSF.
The following is a summary of significant accounting policies
followed by the Fund.
(a) Valuation of investments--Equity 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, as of the close of business on the day the securities
are being valued or, lacking any sales, at the last available bid
price for long positions, and at the last available asked price for
short positions. In cases where equity 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 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 asked price. Portfolio securities
that are traded both in the OTC market and on a stock exchange are
valued according to the broadest and most representative market.
Options written are valued at the last sale price in the case of
exchange-traded options or, in the case of options traded in the
OTC market, the last asked price. Options purchased are valued at
their last sale price in the case of exchange-traded options or,
in the case of options traded in the OTC market, the last bid price.
Swap agreements are valued daily based upon quotations from market
makers. Financial futures contracts and options thereon, which are
traded on exchanges, are valued at their last sale price as of the
close of such exchanges. 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 are valued at cost plus accrued interest. The
Fund employs pricing services to provide certain 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 Board of Directors of the Fund.
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.
DEFINED STRATEGY FUND INC., MARCH 31, 2005
Notes to Financial Statements (continued)
(b) Derivative financial instruments--The Fund will 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.
* Options--The Fund will purchase and write 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 exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Variable prepaid forward contracts--The Fund will enter into
variable prepaid forward contracts with terms of approximately one
year to sell liquid equity securities and will use the sale proceeds
to purchase those same liquid equity securities. In a variable
prepaid forward contract, the amount of shares (or their cash
equivalent) that the seller is required to deliver at maturity
varies as a function of the stock's performance. The variable
prepaid forward contracts will be prepaid to the counterparties to
these transactions and as a result the Fund will not be exposed to
any risk that counterparties to these transactions will be unable to
meet their obligations under the arrangements. The liquid equity
securities may serve as collateral for the Fund's obligation under
the variable prepaid forward contracts.
* 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 end 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.
(c) 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.
(d) 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. Dividend
income is recorded on the ex-dividend dates. Interest income is
recognized on the accrual basis.
(e) Dividends and distributions--Dividends and distributions paid by
the Fund are recorded on the ex-dividend dates.
(f) Offering expenses--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) 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.
DEFINED STRATEGY FUND INC., MARCH 31, 2005
Notes to Financial Statements (concluded)
2. Investment Advisory and Management Agreement and Transactions
with Affiliates:
The Fund has entered into an Investment Advisory and Management
Agreement with IQ Investment Advisors LLC ("IQ"), an indirect
subsidiary of Merrill Lynch & Co. Inc. ("ML & Co.").
IQ is responsible for the investment advisory, management and
administrative services to the Fund. In addition, IQ provides the
necessary personnel, facilities, equipment and certain other
services necessary to the operations of the Fund. For such services,
the Fund will pay a monthly fee at an annual rate equal to .82% of
the average daily value of the Fund's net assets plus borrowings for
leverage and other investment purposes. IQ has entered into a Sub-
Advisory Agreement with Nuveen Asset Management, Inc. ("Nuveen"),
pursuant to which Nuveen provides certain investment advisory
services to IQ with respect to the Fund. For such services, IQ will
pay Nuveen a monthly fee at an annual rate equal to .35% of the
average daily value of the Fund's net assets plus borrowings for
leverage and other investment purposes. There was no increase in
the aggregate fees paid by the Fund for these services.
The Fund has received an exemptive order from the Securities and
Exchange Commission permitting it to l end portfolio securities
to ML & Co. and its affiliates, including Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), an affiliate of IQ. Pursuant
to that order, the Fund also has retained Merrill Lynch Investment
Managers, LLC ("MLIM, LLC"), an affiliate of IQ, 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 MLIM or
its affiliates.
For the period December 28, 2004 to March 31, 2005, MLPF&S received
gross fees from underwriting of $5,671,871 in connection with the
issuance of the Fund's Common Stock. In addition, the Fund
reimbursed MLPF&S $33,350 as a partial reimbursement of expenses
incurred in connection with the issuance of the Fund's Common Stock.
Certain officers and/or directors of the Fund are officers and/or
directors of MLIM, IQ, MLIM LLC, and/or ML & Co.
3. Investments:
Purchases, excluding short-term securities, for the period December
28, 2004 to March 31, 2005 were $279,531,391.
4. Common Stock Transactions:
The Fund is authorized to issue 100,000,000 shares of capital stock,
par value $.001, 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 during the period December 28, 2004 to
March 31, 2005 increased by 7,500,000 from shares sold.
DEFINED STRATEGY FUND INC., MARCH 31, 2005
Officers and Directors
Alan R. Batkin, Director and Chairman of the Board
Paul Glasserman, Director and Chairman of Audit
Committee
William J. Rainer, Director and Chairman of
Nominating Committee
Andrew J. Donohue, Director and Chief Legal Officer
Steven W. Kohlhagen, Director
Mitchell M. Cox, President
Jay M. Fife, Vice President
Colleen R. Rusch, Vice President
Donald C. Burke, Vice President, Secretary and
Treasurer
Jeffrey Hiller, Chief Compliance Officer
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
The Bank of New York
101 Barclay Street--11 East
New York, NY 10286
NYSE Symbol
DSF
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.
DEFINED STRATEGY FUND INC., MARCH 31, 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.
Defined Strategy Fund Inc.
By: /s/ Mitchell M. Cox
---------------------------
Mitchell M. Cox,
Chief Executive Officer of
Defined Strategy Fund Inc.
Date: May 23, 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/ Mitchell M. Cox
----------------------------
Mitchell M. Cox,
Chief Executive Officer of
Defined Strategy Fund Inc.
Date: May 23, 2005
By: /s/ Donald C. Burke
----------------------------
Donald C. Burke,
Chief Financial Officer of
Defined Strategy Fund Inc.
Date: May 23, 2005