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: 09/30/06
Date of reporting period: 10/31/05 - 03/31/06
Item 1 - Report to Stockholders
Defined Strategy Fund Inc.
Semi-Annual Report
March 31, 2006
(IQ LOGO) INVESTMENT ADVISORS
(N LOGO) NUVEEN INVESTMENTS
(IQ INVESTMENT ADVISORS LOGO) www.IQIAFunds.com
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 at www.IQIAFunds.com/proxyvoting.asp or 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. 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.IQIAFunds.com/proxyvoting.asp; and (2) on 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)
It's Fast, Convenient, & Timely!
To sign up today, go to www.icsdelivery.com/live.
Defined Strategy Fund Inc.
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, 2006
Portfolio Information
As of March 31, 2006
Percent of
Ten Largest Equity Holdings Net Assets
Verizon Communications, Inc. 10.4%
Merck & Co., Inc. 10.2
AT&T, Inc. 10.2
General Motors Corp. 10.1
Pfizer, Inc. 9.9
JPMorgan Chase & Co. 9.7
The Coca-Cola Co. 9.6
E.I. du Pont de Nemours & Co. 9.2
Citigroup, Inc. 8.9
Altria Group, Inc 8.8
Percent of
Five Largest Industries Net Assets
Diversified Telecommunication Services 20.6%
Pharmaceuticals 20.1
Diversified Financial Services 18.6
Automobiles 10.1
Beverages 9.6
Percent of
Sector Representation Net Assets**
Telecommunication Services 20.6%
Health Care 20.3
Financials 18.6
Consumer Staples 18.5
Consumer Discretionary 10.8
Materials 9.2
Information Technology 0.5
Energy 0.1
Industrials 0.1
Other* 1.1
* Includes portfolio holdings in short-term investments.
** Total may not equal 100%.
For Fund compliance purposes, the Fund's industry and sector
classifications refer to any one or more of the industry and
sector 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 and sector sub-
classifications for reporting ease. Percents shown include variable
prepaid forward contracts.
DEFINED STRATEGY FUND INC. MARCH 31, 2006
A Discussion With Your Fund's Portfolio Manager
We are pleased to provide you with this shareholder report for Defined
Strategy Fund Inc. While the Fund is advised by IQ Investment Advisors LLC,
the following discussion is provided by Nuveen Asset Management, the Fund's
subadviser.
How did the Fund perform during this period?
For the six-month period ended March 31, 2006, the total investment return of
Defined Strategy Fund Inc.'s Common Stock was +5.58%, based on a change in per
share net asset value from $17.75 to $18.41. The Fund's unmanaged benchmark,
the Dow Jones 10 Index (the "Index"), had a total return of +7.17% for the
same period.
The overall positive returns for the Index and the portfolio during the
six-month period were driven by Merck & Co., Inc., JPMorgan Chase & Co., and
AT&T, Inc., which were up 29.47%, 22.72%, and 12.81%, respectively, on a price
basis. The laggard of the portfolio was General Motors Corp., down 30.51% on a
price basis for the semi-annual period.
In addition to investing in the 10 highest dividend-yielding stocks in the Dow
Jones Industrial Average (SM) ("DJIA (SM)"), the Fund enters into variable
prepaid forward contracts ("VPFs") with terms of approximately one year to
sell liquid equity securities (the "Other Stocks"). The Other Stocks are a
risk-controlled investment in a 15 to 20-stock portfolio designed to add alpha
for the Fund. In exchange for a small upfront charge, the Fund participates in
the potential price appreciation of the Other Stocks between 3.5% and 7.0%. A
failure to appreciate 3.5% results in a loss of the upfront premium while an
appreciation above 7.0% results in no extra benefit for the Fund. During the
six-month period, the Other Stocks weighed on the portfolio's overall
performance.
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.
Dow Jones Industrial Average and DJIA are service marks of Dow Jones &
Company, Inc.
Standard & Poor's 500, S&P 500, S&P SmallCap 600 and the S&P 100 Index are
registered trademarks of the McGraw-Hill Companies.
Describe the market environment during the six-month period.
U.S. equities performed exceptionally well during the six-month period ended
March 31, 2006, with the Standard & Poor's 500 (R) ("S&P 500 (R)") Index
finishing March at 1,295, near the 52-week high of 1,307. The equity market
demonstrated surprising resiliency as it bounced back from an unexpected low
gross domestic product (GDP) for the fourth quarter of 2005 (actual 1.7% vs.
expected 3.5%), lingering effects of Hurricanes Rita and Katrina, an inverted
yield curve, moderately rising inflation, and initial signs of a slowing
housing market.
Further headwinds were provided by the 15th consecutive 0.25% increase in the
target federal funds rate to 4.75% on March 28, 2006. The move was fully
expected by the market, but the accompanying statement was highly anticipated
as this was the first Federal Reserve Board statement under the new chairman,
Ben S. Bernanke. The statement was in line with expectations or perhaps
slightly more hawkish, ending with "further policy firming may be needed."
On a positive note, strong consumer spending, higher corporate profits, robust
employment, and favorable weather conditions during the first few months of
2006 were more than enough to drive the economy and equity markets higher.
Economists' estimates indicate that GDP for the first quarter of 2006 grew at
a 4.7% annualized rate, a full three-percentage point improvement over the
previous three-month period, and approximately 0.5% ahead of the first quarter
of 2005.
DEFINED STRATEGY FUND INC. MARCH 31, 2006
For the three-month and 12-month periods ended March, 31 2006, the broad
equity market, as represented by the S&P 500 Index, posted total returns of
+4.21% and +11.73%, respectively. In spite of this impressive run, we continue
to see value in the equity markets as the S&P 500 price/earnings (P/E) ratio
at March 31, 2006 was 17.97, slightly below the 18.20 P/E ratio at September
30, 2005, and well below the 2-year and 5-year average P/E ratios of 19.50 and
29.10, respectively.
Small cap stocks outperformed the broader market as the S&P SmallCap 600 (R)
Index posted returns for the three-month and twelve-month periods ended March
31, 2006 of +12.84% and +24.07%, respectively. The performance of the equity
markets' largest stocks, as represented by the S&P 100 (R) Index, lagged
slightly during the three months and twelve months ended March 31, 2006 with
total returns of just +3.67% and +6.85%, respectively.
How have you managed the Fund during this period?
Per the Fund's prospectus, the Fund has continued to invest substantially all
of its assets in the ten highest dividend-yielding stocks in the DJIA. Trading
activity during the fourth quarter of 2005 was driven by the annual
rebalancing of the Dow Jones 10 Index and the Fund's annual repurchase offer
for outstanding shares. Both events marginally impacted the portfolio as the
Fund's underlying holdings in the Dow Jones 10 Index stocks had to be slightly
readjusted on the Index reconstitution date, December 31, 2005. The actual
names in the Index remained unchanged, but their respective weightings changed
slightly to account for market gains and losses during 2005. The repurchase
offer resulted in the repurchase of 25% of the Fund's outstanding shares and
appropriate liquidity was maintained to accommodate the repurchase offer.
In addition, during the fourth quarter of 2005, the Fund's original VPF
contracts matured, resulting in the delivery of the Other Stocks to offset
these positions. At the various expiration dates of the VPFs in the original
portfolio, the Fund made its full economic gain on six of the fifteen Other
Stocks and a partial gain on one. Eight of the fifteen Other Stock
transactions expired out-of-the-money.
As each VPF contract matured, a new Other Stock VPF contract was executed to
maintain the Fund's economic exposure to the potential out-performance of the
Other Stock portfolio. The fifteen VPF trades were replaced by a total of
sixteen new trades. The new trades were structured so that in total 2% of the
Fund's capital is at risk on the trades. The Fund will participate in the
appreciation of the Other Stocks between approximately 4.0% and 7.0%. Any loss
in the Other Stocks due to their potential decline is strictly limited by the
risk control structure of the VPF trades.
How would you characterize the Fund's position at the close of the period?
We believe the Fund is well positioned to continue to meet its stated
objectives. The indicative dividend yield on the Dow Jones 10 Index is +4.38%
as compared to 1.76% indicative dividend yield of the S&P 500 Index. The
current Other Stock portfolio is performing well, up on average 7.68% year-to-
date as of March 31, 2006.
Rob. A. Guttschow
Portfolio Manager
April 21, 2006
DEFINED STRATEGY FUND INC. MARCH 31, 2006
Schedule of Investments
Shares
Industry Common Stocks Held Value
Automobiles--10.1%
General Motors Corp. 492,389 $ 10,473,114
Beverages--9.6%
The Coca-Cola Co. 237,375 9,938,891
Biotechnology--5.5%
Genentech, Inc. (a) 68,000 5,746,680
Chemicals--9.2%
E.I. du Pont de Nemours & Co. 225,073 9,500,331
Communications Equipment--15.8%
Cisco Systems, Inc. (a) 372,000 8,061,240
Corning, Inc. (a) 307,500 8,274,825
-------------
16,336,065
Diversified Financial Services--18.6%
Citigroup, Inc. 196,755 9,294,706
JPMorgan Chase & Co. 240,780 10,026,079
-------------
19,320,785
Diversified Telecommunication
Services--20.6%
AT&T, Inc. 390,150 10,549,656
Verizon Communications, Inc. 317,229 10,804,820
-------------
21,354,476
Energy Equipment & Services--11.8%
Nabors Industries Ltd. (a) 84,000 6,012,720
Pride International, Inc. (a) 198,500 6,189,230
-------------
12,201,950
Food Products--7.2%
Del Monte Foods Co. 627,000 7,436,220
Health Care Equipment & Supplies--6.2%
Zimmer Holdings, Inc. (a) 95,000 6,422,000
Health Care Providers & Services--6.1%
WellPoint, Inc. (a) 82,000 6,349,260
Internet & Catalog Retail--6.4%
IAC/InterActiveCorp (a) 224,500 6,616,015
Shares
Industry Common Stocks Held Value
Machinery--5.7%
Navistar International Corp. (a) 214,500 $ 5,915,910
Media--6.6%
EchoStar Communications Corp.
Class A (a) 231,000 6,899,970
Pharmaceuticals--20.1%
Merck & Co., Inc. 300,744 10,595,211
Pfizer, Inc. 409,768 10,211,419
-------------
20,806,630
Semiconductors & Semiconductor
Equipment--9.8%
Nvidia Corp. (a) 178,000 10,192,280
Specialty Retail--26.7%
AutoNation, Inc. (a) 295,500 6,368,025
Charming Shoppes, Inc. (a) 496,000 7,375,520
Office Depot, Inc. (a) 219,500 8,174,180
Pacific Sunwear of California, Inc. (a) 260,500 5,772,680
-------------
27,690,405
Tobacco--8.8%
Altria Group, Inc. 128,215 9,085,315
Total Common Stocks
(Cost--$204,570,324)--204.8% 212,286,297
Face
Amount Short-Term Securities
Time Deposits--1.1%
$ 1,140,157 State Street Bank & Trust Co., 3.95%
due 4/03/2006 1,140,157
Total Short-Term Securities
(Cost--$1,140,157)--1.1% 1,140,157
Total Investments (Cost--$205,710,481*)--205.9% 213,426,454
Liabilities in Excess of Other Assets--(105.9%) (109,772,811)
-------------
Net Assets--100.0% $ 103,653,643
=============
* The cost and unrealized appreciation (depreciation) of investments
as of March 31, 2006, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 205,710,481
================
Gross unrealized appreciation $ 15,349,730
Gross unrealized depreciation (7,633,757)
----------------
Net unrealized appreciation $ 7,715,973
================
(a) Non-income producing security.
o For Fund compliance purposes, the Fund's industry classifications
refer to any one or more of the industry sub-classifications used
by one or more widely recognized market indexes or ratings group
indexes, and/or as defined by Fund management. This definition may
not apply for the purposes of this report, which may combine industry
sub-classifications for reporting ease. Industries are shown as a
percent of net assets.
o Variable prepaid forward contracts as of March 31, 2006 were as follows:
Shares Issue++ Value
295,500 AutoNation, Inc. $ (6,284,014)
496,000 Charming Shoppes, Inc. (7,238,574)
372,000 Cisco Systems, Inc. (7,894,659)
307,500 Corning, Inc. (8,116,309)
627,000 Del Monte Foods Co. (7,280,724)
231,000 EchoStar Communications Corp. Class A (6,774,144)
68,000 Genentech, Inc. (5,688,683)
224,500 IAC/InterActiveCorp (6,488,836)
84,000 Nabors Industries Ltd. (5,940,194)
214,500 Navistar International Corp. (5,844,331)
178,000 Nvidia Corp. (10,013,604)
219,500 Office Depot, Inc. (8,012,540)
260,500 Pacific Sunwear of California, Inc. (5,695,754)
198,500 Pride International, Inc. (6,107,210)
82,000 WellPoint, Inc. (6,263,365)
95,000 Zimmer Holdings, Inc. (6,317,291)
---------------
Total (Proceeds--$101,617,871) $ (109,960,232)
===============
++ Non-income producing securities.
See Notes to Financial Statements.
DEFINED STRATEGY FUND INC. MARCH 31, 2006
Statement of Assets, Liabilities and Capital
As of March 31, 2006
Assets
Investments in unaffiliated securities, at value (identified cost--$205,710,481) $ 213,426,454
Receivables:
Dividends $ 290,441
Interest 125 290,566
--------------- ---------------
Total assets 213,717,020
---------------
Liabilities
Variable prepaid forward contracts, at value (proceeds--$101,617,871) 109,960,232
Investment adviser 65,756
Accrued expenses 37,389
---------------
Total liabilities 110,063,377
---------------
Net Assets
Net assets $ 103,653,643
===============
Capital
Common Stock, par value $.001 per share, 100,000,000 shares authorized $ 5,629
Paid-in capital in excess of par 109,626,432
Undistributed investment income--net $ 704,901
Accumulated realized capital losses--net (6,056,931)
Unrealized depreciation--net (626,388)
---------------
Total accumulated losses--net (5,978,418)
---------------
Total Capital--Equivalent to $18.41 per share based on 5,628,927 shares of Common Stock
outstanding (market price--$16.59) $ 103,653,643
===============
See Notes to Financial Statements.
DEFINED STRATEGY FUND INC. MARCH 31, 2006
Statement of Operations
For the Six Months Ended March 31, 2006
Investment Income
Dividends $ 2,450,070
Interest 37,058
---------------
Total income 2,487,128
---------------
Expenses
Investment advisory fees $ 483,676
Professional fees 46,861
Directors' fees and expenses 33,359
Printing and shareholder reports 23,296
Transfer agent fees 22,589
Accounting services 17,060
Repurchase offer fees 15,767
Custodian fees 11,935
Listing fees 9,988
Pricing fees 513
Other 33,069
---------------
Total expenses 698,113
---------------
Investment income--net 1,789,015
---------------
Realized & Unrealized Gain (Loss)--Net
Realized loss on:
Investments--net (4,291,757)
Variable prepaid forward contracts--net (1,759,364) (6,051,121)
---------------
Change in unrealized appreciation/depreciation on:
Investments--net 7,606,272
Variable prepaid forward contracts--net 2,682,084 10,288,356
--------------- ---------------
Total realized and unrealized gain--net 4,237,235
---------------
Net Increase in Net Assets Resulting from Operations $ 6,026,250
===============
See Notes to Financial Statements.
DEFINED STRATEGY FUND INC. MARCH 31, 2006
Statements of Changes in Net Assets
For the Period
For the Six December 28,
Months Ended 2004++ to
March 31, September 30,
Increase (Decrease) in Net Assets: 2006 2005
Operations
Investment income--net $ 1,789,015 $ 3,035,502
Realized loss--net (6,051,121) (5,810)
Change in unrealized appreciation/depreciation--net 10,288,356 (10,914,744)
--------------- ---------------
Net increase (decrease) in net assets resulting from operations 6,026,250 (7,885,052)
--------------- ---------------
Dividends to Shareholders
Investment income--net (2,161,778) (1,958,721)
--------------- ---------------
Common Stock Transactions
Net proceeds from issuance of Common Stock -- 143,250,000
Offering cost resulting from issuance of Common Stock -- (300,000)
Net redemption of Common Stock resulting from a repurchase offer (includes $18,763 of
repurchase offer fees) (33,417,064) --
--------------- ---------------
Net increase (decrease) in net assets resulting from Common Stock transactions (33,417,064) 142,950,000
--------------- ---------------
Net Assets
Total increase (decrease) in net assets (29,552,592) 133,106,227
Beginning of period 133,206,235 100,008
--------------- ---------------
End of period* $ 103,653,643 $ 133,206,235
=============== ===============
* Undistributed investment income--net $ 704,901 $ 1,077,664
=============== ===============
++ Commencement of operations.
See Notes to Financial Statements.
DEFINED STRATEGY FUND INC. MARCH 31, 2006
Statement of Cash Flows
For the Six Months Ended March 31, 2006
Cash Provided by Operating Activities
Net increase in net assets resulting from operations $ 6,026,250
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided by operating activities:
Decrease in receivables 316,524
Increase in other liabilities 6,709
Realized and unrealized gain--net (4,237,235)
Proceeds from sales of long-term securities--net 183,283,890
Purchases of long-term securities--net (112,614,579)
Proceeds from sales of short-term investments--net 1,316,809
---------------
Net cash provided by operating activities 74,098,368
---------------
Cash Used for Financing Activities
Cash payments of Common Stock (33,417,064)
Cash payments on variable prepaid forward contracts (38,514,672)
Cash payments on offering costs (4,854)
Dividends paid to shareholders (2,161,778)
---------------
Cash used for financing activities (74,098,368)
---------------
Cash
Net increase in cash --
Cash at beginning of period --
---------------
Cash at end of period --
===============
See Notes to Financial Statements.
DEFINED STRATEGY FUND INC. MARCH 31, 2006
Financial Highlights
For the Period
For the Six December 28,
Months Ended 2004++ to
The following per share data and ratios have been derived March 31, September 30,
from information provided in the financial statements. 2006 2005
Per Share Operating Performance
Net asset value, beginning of period $ 17.75 $ 19.10
--------------- ---------------
Investment income--net** .27 .40
Realized and unrealized gain (loss)--net .68+++++ (1.45)
--------------- ---------------
Total from investment operations .95 (1.05)
--------------- ---------------
Less dividends from investment income--net (.29) (.26)
--------------- ---------------
Offering costs resulting from the issuance of Common Stock -- (.04)
--------------- ---------------
Net asset value, end of period $ 18.41 $ 17.75
=============== ===============
Market price per share, end of period $ 16.59 $ 16.25
=============== ===============
Total Investment Return++++
Based on net asset value per share 5.58%+++ (5.63%)+++
=============== ===============
Based on market price per share 3.92%+++ (17.49%)+++
=============== ===============
Ratios to Average Net Assets
Expenses, net of reimbursement 1.18%* 1.01%*
=============== ===============
Expenses 1.18%* 1.02%*
=============== ===============
Investment income--net 3.03%* 2.89%*
=============== ===============
Supplemental Data
Net assets, end of period (in thousands) $ 103,654 $ 133,206
=============== ===============
Portfolio turnover*** 45.08% 0%
=============== ===============
* Annualized.
** Based on average shares outstanding.
*** Includes the periodic turnover of the securities related to the variable prepaid forward contracts.
++ Commencement of operations.
++++ 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.
+++ Aggregate total investment return.
+++++ Includes repurchase offer fees, which are less than $.01 per share.
See Notes to Financial Statements.
DEFINED STRATEGY FUND INC. MARCH 31, 2006
Notes to Financial Statements
1. Significant Accounting Policies:
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 those same
liquid equity securities other than the Stocks. 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 shares are 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 and variable prepaid forward
contracts are valued based upon quoted fair valuations received daily by the
Fund from a pricing service or counterparty. 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. Valuation of
other short-term vehicles is generally based on the net asset value of the
underlying investment vehicle or amortized cost.
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, money market instruments and certain fixed income securities, is
substantially completed each day at various times prior to the close of
business on the NYSE. The values of such securities used in computing the net
asset value of the Fund's shares are determined as of such times. Foreign
currency exchange rates also are generally determined prior to the close of
business on the NYSE. Occasionally, events affecting the values of such
securities and such exchange rates may occur between the times at which they
are determined and the close of business on the NYSE that may not be reflected
in the computation of the Fund's net asset value. If events (for example, a
company announcement, market volatility or a natural disaster) occur during
such periods that are expected to materially affect the value of such
securities, those securities may be valued at their fair value as determined
in good faith by the Fund's Board of Directors or by the Investment Adviser
using a pricing service and/or procedures approved by the Fund's Board of
Directors.
DEFINED STRATEGY FUND INC. MARCH 31, 2006
Notes to Financial Statements (continued)
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies to increase the return of the Fund. 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 may 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 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.
(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, 2006
Notes to Financial Statements (concluded)
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory 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
Subadvisory Agreement with Nuveen Asset Management ("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 lend 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 may retain
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 Merrill Lynch Investment Managers, L.P. ("MLIM"), an
affiliate of IQ.
Certain officers and/or directors of the Fund are officers and/or directors of
IQ, ML & Co., MLIM, and/or MLIM, LLC.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including MLIM, to the
investment management business of BlackRock, Inc. The transaction is expected
to close in the third quarter of 2006.
3. Investments:
Purchases and sales, excluding short-term securities, for the six months ended
March 31, 2006 were $112,614,579 and $183,283,890, respectively.
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 six months ended March 31, 2006
decreased by 1,876,309, as a result of a repurchase offer and during the
period December 28, 2004 to September 30, 2005, increased by 7,500,000 from
shares sold.
The Fund will make offers to repurchase its shares at annual (approximately 12-
month) intervals.
5. Subsequent Event:
The Fund paid an ordinary income dividend to holders of Common Stock in the
amount of $.125228 per share on April 28, 2006 to shareholders of record on
April 21, 2006.
Contact Information
For more information regarding the Fund, please visit www.IQIAFunds.com or
contact us at 1-877-449-4742.
DEFINED STRATEGY FUND INC. MARCH 31, 2006
Fundamental Periodic Repurchase Policy
The Board of Directors approved a fundamental policy whereby the Fund would
adopt an "interval fund" structure pursuant to Rule 23c-3 under the Investment
Company Act of 1940, as amended (the "1940 Act"). As an interval fund, the
Fund will make annual repurchase offers at net asset value (less repurchase
fee not to exceed 2%) to all Fund shareholders. The percentage of outstanding
shares that the Fund can repurchase in each offer will be established by the
Fund's Board of Directors shortly before the commencement of each offer, and
will be between 5% and 25% of the Fund's then outstanding shares.
The Fund has adopted the following fundamental policy regarding periodic
repurchases:
a) The Fund will make offers to repurchase its shares at annual (approximately
12-month) intervals pursuant to Rule 23c-3 under the 1940 Act ("Offers"). The
Board of Directors may place such conditions and limitations on an Offer, as
may be permitted under Rule 23c-3.
b) The repurchase request deadline for each Offer, by which the Fund must
receive repurchase requests submitted by shareholders in response to the most
recent Offer, will be determined by reference to the Fund's initial repurchase
request deadline of December 22, 2005, and thereafter upon the approximate
anniversary date of the repurchase request deadline for the previous year (the
"Repurchase Request Deadline").
c) The maximum number of days between a Repurchase Request Deadline and the
next repurchase pricing date will be fourteen days; provided that if the
fourteenth day after a Repurchase Request Deadline is not a business day, the
repurchase pricing date shall be the next business day (the "Repurchase
Pricing Date").
d) Offers may be suspended or postponed under certain circumstances, as
provided for in Rule 23c-3. (For further details, see Note 4 to the Financial
Statements.)
Under the terms of the Offer for the most recent annual period, the Fund
offered to purchase up to 1,876,309 shares from shareholders at an amount per
share equal to the Fund's net asset value per share calculated as of the close
of business of the New York Stock Exchange on January 5, 2006, eight business
days after Thursday, December 22, 2005, the Repurchase Request Deadline. As of
January 5, 2006, 1,876,309 shares, or 25% of the Fund's outstanding shares,
were purchased by the Fund at $17.82 per share (subject to a repurchase fee of
0.10% of the net asset value per share); the Fund's net asset value per share
was determined as of 4:00 p.m. EST, Thursday, January 5, 2006.
Officers and Directors
Alan R. Batkin, Director and Chairman of the Board
Paul Glasserman, Director and Chairman of the Audit
Committee
Steven W. Kohlhagen, Director
William J. Rainer, Director and Chairman of the
Nominating and Corporate Governance
Committee
Andrew J. Donohue, Director and Chief Legal Officer*
Mitchell M. Cox, President
Donald C. Burke, Vice President, Treasurer and Secretary
Jeffrey Hiller, Chief Compliance Officer
Justin C. Ferri, Vice President
Jay M. Fife, Vice President and Assistant Treasurer
Colleen R. Rusch, Vice President and Assistant Secretary
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
* Mr. Donohue gave notice to the Fund and the Advisor of his intention to
resign his positions as a Director and Officer of the Fund and as an Officer
of the Advisor in May 2006 in order to assume the role of director of the
Securities and Exchange Commission's Division of Investment Management.
DEFINED STRATEGY FUND INC. MARCH 31, 2006
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 -
Period (a) Total (b) Average (c) Total Number of (d) Maximum Number (or
Number of Price Paid per Shares Purchased as Part Approx. Dollar Value) of
Shares Share of Publicly Announced Shares that May Yet Be
Purchased Plans or Programs Purchased Under the Plans
or Programs
October 1-31, 2005
November 1-30, 2005
December 1-31, 2005
January 1-31, 2006 1,876,309 $17.82 per Share (1) 1,876,309 (2) 0
February 1-28, 2006
March 1-31, 2006
Total: 1,876,309 $17.82 per Share (1) 1,876,309 (2) 0
(1) Subject to a repurchase fee of 0.10% of the net asset value per share.
(2) On November 18, 2005, the repurchase offer was announced to repurchase up to 25% of outstanding
shares. The expiration date of the offer was December 22, 2005. The registrant may conduct annual
repurchases for between 5% and 25% of its outstanding shares pursuant to Rule 23c-3 under the
Investment Company Act of 1940, as amended.
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 22, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Mitchell M. Cox
---------------------------
Mitchell M. Cox,
Chief Executive Officer of
Defined Strategy Fund Inc.
Date: May 22, 2006
By: /s/ Donald C. Burke
---------------------------
Donald C. Burke,
Chief Financial Officer of
Defined Strategy Fund Inc.
Date: May 22, 2006