UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21621
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, 6th
Floor, New York, New York 10080.
Registrant's telephone number, including area code: (212) 449-4742
Date of fiscal year end: 09/30/2007
Date of reporting period: 10/01/2006 - 09/30/2007
Item 1 - Report to Stockholders
Defined Strategy Fund Inc.
Annual Report
September 30, 2007
(IQ Logo) INVESTMENT ADVISORS
(N Logo) NUVEEN INVESTMENTS
www.IQIAFunds.com
Defined Strategy Fund Inc. seeks total returns that, exclusive of Fund fees
and expenses, exceed the performance of the 10 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.
P.O. Box 9011
Princeton, NJ 08543-9011
(GO PAPERLESS... logo)
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Defined Strategy Fund Inc.
Portfolio Information as of September 30, 2007
Percent of
Ten Largest Equity Holdings Net Assets
General Motors Corp. 10.9%
Verizon Communications, Inc. 10.8
AT&T Inc. 10.8
Merck & Co., Inc. 10.7
General Electric Co. 10.1
E.I. du Pont de Nemours & Co. 9.2
JPMorgan Chase & Co. 8.6
Pfizer, Inc. 8.6
Citigroup, Inc. 7.6
Altria Group, Inc. 7.4
Percent of
Five Largest Industries Net Assets
Diversified Telecommunication Services 21.6%
Pharmaceuticals 19.3
Diversified Financial Services 16.2
Automobiles 10.9
Industrial Conglomerates 10.1
Percent of
Sector Representation Net Assets
Telecommunication Services 21.6%
Health Care 19.5
Financials 16.2
Consumer Discretionary 11.4
Industrials 10.4
Consumer Staples 9.9
Materials 9.2
Information Technology 0.3
Utilities 0.2
Other* 1.3
* Includes portfolio holdings in short-term investments.
For Fund portfolio 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. Percentages shown include variable prepaid
forward contracts.
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
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 the Fund's subadviser.
The investment objective of Defined Strategy Fund Inc. (the "Fund") is to seek
total returns that, exclusive of Fund fees and expenses, exceed the
performance of the 10 highest dividend-yielding stocks included in the Dow
Jones Industrial Average (SM) ("DJIA (SM)") as determined once each year. The
Fund pursues its investment objective by investing substantially all of its
net assets in the ten highest dividend-yielding stocks in the DJIA in
approximately equal dollar amounts. In addition, seeking to enhance its
returns, the Fund enters into variable prepaid forward contracts with terms of
approximately one year to sell liquid equity securities (the "Other Stocks").
How did the Fund perform during the fiscal year?
For the annual period ended September 30, 2007, the Common Stock of the Fund
had total investment returns as set forth in the table below, based on a
change in per share net asset value of $21.16 to $23.41. For the same period,
the Fund's unmanaged reference index, the Dow Jones 10 Index, had total
returns as shown below. It is not possible to make a direct investment in the
Dow Jones 10 Index. All of the Fund and index information presented includes
the reinvestment of any dividends or distributions.
Dow Jones
Period Fund 10 Index Difference**
Fiscal Year ended
September 30, 2007 13.52% 15.40% -1.88%
Year to Date through
September 30, 2007 8.13% 9.84% -1.71%
Inception* through
September 30, 2007 31.94% 36.82% -4.88%
* The Fund commenced operations on 12/28/2004.
** Primarily due to fees and expenses.
For more detail with regard to 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),
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.
During the annual period ended September 30, 2007, the Fund paid distributions
to holders of its Common Stock as follows, in accordance with its distribution
policy:
Distribution
Payable Date Per Share
October 31, 2006 $ 0.138957
December 29, 2006 0.133241
April 30. 2007 0.134885
July 31, 2007 0.130671
How did the Fund's Other Stocks and variable prepaid forward contracts
(collectively, the "Additional Transactions") affect the Fund during the
fiscal year?
The Fund's Additional Transactions consist of a basket of 15-to-20 Other
Stocks, and a variable prepaid forward contract on each Other Stock. The
Additional Transactions are entered into approximately on an annual basis, and
are structured so that in total, approximately 2% of the Fund's capital is at
risk. During the fiscal year, approximately half of the Fund's Other Stocks
performed below expectations, and as a result, slightly detracted from the
Fund's overall performance. The current Additional Transactions are set to
expire during January 2008, at which time a new series of Additional
Transactions will be established.
How would you characterize the portfolio's position at the close of the
period?
Given the Fund's investment process and current positions, we believe the Fund
is appropriately positioned relative to market conditions.
Rob A. Guttschow
Portfolio Manager
October 12, 2007
Dow Jones Industrial Average and DJIA are service marks of
Dow Jones & Company, Inc..
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
Schedule of Investments as of September 30, 2007
Shares
Industry Common Stocks Held Value
Automobiles--10.9%
General Motors Corp. 292,409 $ 10,731,410
Biotechnology--5.0%
Amgen, Inc. (a) 88,000 4,978,160
Chemicals--9.2%
E.I. du Pont de Nemours & Co. 183,877 9,112,944
Computers & Peripherals--6.7%
Dell, Inc. (a) 240,000 6,624,000
Diversified Financial Services--16.2%
Citigroup, Inc. 161,453 7,535,012
JPMorgan Chase & Co. 185,671 8,507,445
--------------
16,042,457
Diversified Telecommunication
Services--21.6%
AT&T Inc. 251,149 10,626,114
Verizon Communications, Inc. 241,282 10,683,967
--------------
21,310,081
Food Products--2.5%
Kraft Foods, Inc. 72,623 2,506,220
Health Care Providers & Services--7.2%
DaVita, Inc. (a) 112,000 7,076,160
Household Durables--6.7%
Mohawk Industries, Inc. (a) 81,000 6,585,300
Independent Power Producers &
Energy Traders--9.6%
NRG Energy, Inc. (a) 224,000 9,472,960
Industrial Conglomerates--10.1%
General Electric Co. 241,282 9,989,075
Machinery--9.6%
Terex Corp. (a) 107,000 9,525,140
Media--5.3%
Comcast Corp. Special Class A (a) 219,000 5,247,240
Shares
Industry Common Stocks Held Value
Multiline Retail--10.0%
Kohl's Corp. (a) 91,000 $ 5,217,030
Sears Holdings Corp. (a) 37,000 4,706,400
--------------
9,923,430
Pharmaceuticals--24.0%
Forest Laboratories, Inc. (a) 123,000 4,586,670
Merck & Co., Inc. 205,404 10,617,333
Pfizer, Inc. 346,226 8,458,301
--------------
23,662,304
Software--7.8%
Oracle Corp. (a) 354,000 7,664,100
Specialty Retail--17.7%
AnnTaylor Stores Corp. (a) 190,000 6,017,300
AutoZone, Inc. (a) 52,000 6,039,280
Bed Bath & Beyond, Inc. (a) 160,000 5,459,200
--------------
17,515,780
Textiles, Apparel & Luxury Goods--6.7%
Coach, Inc. (a) 140,000 6,617,800
Tobacco--7.4%
Altria Group, Inc. 104,944 7,296,756
Total Common Stocks
(Cost--$167,080,162)--194.2% 191,881,317
Face
Amount Short-Term Securities
Time Deposits--1.2%
$ 1,226,990 State Street Bank & Trust Co., 3.75%
due 10/01/2007 1,226,990
Total Short-Term Securities
(Cost--$1,226,990)--1.2% 1,226,990
Total Investments (Cost--$168,307,152*)--195.4% 193,108,307
Liabilities in Excess of Other Assets--(95.4%) (94,281,613)
--------------
Net Assets--100.0% $ 98,826,694
==============
* The cost and unrealized appreciation (depreciation) of investments
as of September 30, 2007, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 172,532,379
================
Gross unrealized appreciation $ 28,413,223
Gross unrealized depreciation (7,837,295)
----------------
Net unrealized appreciation $ 20,575,928
================
(a) Non-income producing security.
o For Fund portfolio compliance purposes, the Fund's industry
classifications refer to any one or more of the industry
sub-classifications used by one or more widely recognized
market indexes or ratings group indexes, and/or as defined by
Fund management. This definition may not apply for purposes of
this report, which may combine industry sub-classifications for
reporting ease. Industries are shown as a percent of net assets.
The classifications are unaudited.
o Variable prepaid forward contracts as of September 30, 2007
were as follows:
Shares
Held Issue++ Value
88,000 Amgen, Inc. $ (4,974,871)
190,000 AnnTaylor Stores Corp. (5,937,095)
52,000 AutoZone, Inc. (5,969,629)
160,000 Bed Bath & Beyond, Inc. (5,427,198)
140,000 Coach, Inc. (6,491,209)
219,000 Comcast Corp. Special Class A (5,233,659)
112,000 DaVita, Inc. (6,899,525)
240,000 Dell, Inc. (6,493,166)
123,000 Forest Laboratories, Inc. (4,579,163)
91,000 Kohl's Corp. (5,202,076)
81,000 Mohawk Industries, Inc. (6,452,693)
224,000 NRG Energy, Inc. (9,250,730)
354,000 Oracle Corp. (7,473,382)
37,000 Sears Holdings Corp. (4,700,122)
107,000 Terex Corp. (9,289,408)
---------------
Total (Proceeds--$91,280,301) $ (94,373,926)
===============
++ Non-income producing securities.
See Notes to Financial Statements.
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
Statement of Assets, Liabilities and Capital
As of September 30, 2007
Assets
Investments in unaffiliated securities, at value (identified cost--$168,307,152) $ 193,108,307
Receivables:
Dividends $ 243,929
Interest 128 244,057
---------------
Prepaid expenses 5,681
---------------
Total assets 193,358,045
---------------
Liabilities
Variable prepaid forward contracts, at value (proceeds--$91,280,301) 94,373,926
Investment adviser 60,290
Accrued expenses 97,135
---------------
Total liabilities 94,531,351
---------------
Net Assets
Net assets $ 98,826,694
===============
Capital
Common Stock, par value $.001 per share, 100,000,000 shares authorized $ 4,222
Paid-in capital in excess of par 78,666,726
Undistributed investment income--net $ 610,609
Accumulated realized capital losses--net (2,162,393)
Unrealized appreciation--net 21,707,530
---------------
Total accumulated earnings--net 20,155,746
---------------
Total Capital--Equivalent to $23.41 per share based on 4,221,696 shares of
Common Stock outstanding (market price--$21.77) $ 98,826,694
===============
See Notes to Financial Statements.
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
Statement of Operations
For the Year Ended September 30, 2007
Investment Income
Dividends $ 3,546,639
Interest 47,871
---------------
Total income 3,594,510
---------------
Expenses
Investment advisory fees $ 840,577
Professional fees 76,151
Directors' fees and expenses 60,424
Transfer agent fees 29,202
Accounting services 27,872
Listing fees 23,750
Licensing fees 23,124
Printing and shareholder reports 18,422
Repurchase offer fees 16,608
Custodian fees 16,123
Other 24,791
---------------
Total expenses 1,157,044
---------------
Investment income--net 2,437,466
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss) on:
Investments--net 4,885,594
Variable prepaid forward contracts--net (991,056) 3,894,538
---------------
Change in unrealized appreciation/depreciation on:
Investments--net 5,745,075
Variable prepaid forward contracts--net 1,239,133 6,984,208
--------------- ---------------
Total realized and unrealized gain--net 10,878,746
---------------
Net Increase in Net Assets Resulting from Operations $ 13,316,212
===============
See Notes to Financial Statements.
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
Statements of Changes in Net Assets
For the Year Ended
September 30,
Increase (Decrease) in Net Assets: 2007 2006
Operations
Investment income--net $ 2,437,466 $ 3,331,570
Realized gain (loss)--net 3,894,538 (6,051,121)
Change in unrealized appreciation/depreciation--net 6,984,208 25,638,066
--------------- ---------------
Net increase in net assets resulting from operations 13,316,212 22,918,515
--------------- ---------------
Dividends to Shareholders
Investment income--net (2,653,285) (3,627,054)
--------------- ---------------
Common Stock Transactions
Net redemption of Common Stock resulting from a repurchase offer (includes
$14,072 and $18,763 of repurchase fees, respectively) (30,916,865) (33,417,064)
--------------- ---------------
Net Assets
Total decrease in net assets (20,253,938) (14,125,603)
Beginning of year 119,080,632 133,206,235
--------------- ---------------
End of year* $ 98,826,694 $ 119,080,632
=============== ===============
* Undistributed investment income--net $ 610,609 $ 782,180
=============== ===============
See Notes to Financial Statements.
Statement of Cash Flows
For the Year Ended September 30, 2007
Cash Used for Operating Activities
Net increase in net assets resulting from operations $ 13,316,212
Adjustments to reconcile net increase in net assets resulting from operations to net cash used for
operating activities:
Decrease in receivables and prepaid expenses 59,161
Decrease in other liabilities and accrued expenses (6,413)
Realized and unrealized gain--net (10,878,746)
Proceeds from sales of long-term securities 50,328,598
Purchases of long-term securities (110,562,269)
Proceeds from sales of short-term investments--net 32,806
---------------
Cash used for operating activities (57,710,651)
---------------
Cash Provided by Financing Activities
Proceeds from variable prepaid forward contracts 91,280,801
Redemption of Common Stock from repurchase offer, net of repurchase fees (30,916,865)
Dividends paid to shareholders (2,653,285)
---------------
Cash provided by financing activities 57,710,651
---------------
Cash
Net increase in cash --
Cash at beginning of year --
---------------
Cash at end of year --
===============
Non-Cash Financing Activities
Securities delivered to settle variable prepaid forward contracts $ 102,609,426
===============
See Notes to Financial Statements.
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
Financial Highlights
For the Period
For the December 28,
Year Ended 2004++ to
The following per share data and ratios have been derived September 30, September 30,
from information provided in the financial statements. 2007 2006 2005
Per Share Operating Performance
Net asset value, beginning of period $ 21.16 $ 17.75 $ 19.10
------------ ------------ ------------
Investment income--net*** .52 .54 .40
Realized and unrealized gain (loss)--net 2.27++++ 3.42++++ (1.45)
------------ ------------ ------------
Total from investment operations 2.79 3.96 (1.05)
------------ ------------ ------------
Less dividends from investment income--net (.54) (.55) (.26)
------------ ------------ ------------
Offering costs resulting from the issuance of Common Stock -- -- (.04)
------------ ------------ ------------
Net asset value, end of period $ 23.41 $ 21.16 $ 17.75
============ ============ ============
Market price per share, end of period $ 21.77 $ 19.65 $ 16.25
============ ============ ============
Total Investment Return**
Based on net asset value per share 13.52% 23.16% (5.63%)(b)
============ ============ ============
Based on market price per share 13.68% 24.93% (17.49%)(b)
============ ============ ============
Ratios to Average Net Assets
Expenses, net of reimbursement 1.13% 1.15% 1.01%*
============ ============ ============
Expenses 1.13% 1.15% 1.02%*
============ ============ ============
Investment income--net 2.38% 2.94% 2.89%*
============ ============ ============
Supplemental Data
Net assets, end of period (in thousands) $ 98,827 $ 119,081 $ 133,206
============ ============ ============
Portfolio turnover (a) 54% 48% 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.
*** Based on average shares outstanding.
++ Commencement of operations.
++++ Includes repurchase fees, which are less than $.01 per share.
(a) Includes the periodic turnover of the securities related to the variable prepaid forward contracts.
(b) Aggregate total investment return.
See Notes to Financial Statements.
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
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 10 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. 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 Global 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 Capital Market 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. Valuation of short-term investment
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 New York Stock Exchange ("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 will generally be
determined as of 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 will 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. SEPTEMBER 30, 2007
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 due to an unfavorable change in the
price of the underlying security, or index, or if the counterparty does not
perform under the contract. The counterparty for certain instruments may
pledge cash or securities as collateral.
* 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 enters into variable prepaid
forward contracts with terms of approximately one year to sell liquid equity
securities and uses 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 are prepaid by the counterparties to these transactions and as a
result the Fund is not exposed to any risk that counterparties to these
transactions will be unable to meet their obligations under the arrangements.
The liquid equity securities serve as collateral for the Fund's obligation
under the variable prepaid forward contracts. The proceeds of the contracts
are reflected as a liability. The amount of the liability is subsequently
marked-to-market to reflect the current market value of the contracts.
* Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such financial futures contracts. Financial 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) Recent accounting pronouncements--Effective June 29, 2007, the Fund
implemented Financial Accounting Standards Board ("FASB") Interpretation
No. 48, "Accounting for Uncertainty in Income Taxes - an interpretation of
FASB Statement No. 109" ("FIN 48"). FIN 48 prescribes the minimum
recognition threshold a tax position must meet in connection with accounting
for uncertainties in income tax positions taken or expected to be taken by
an entity, including investment companies, before being measured and
recognized in the financial statements. Management has evaluated the
application of FIN 48 to the Fund, and has determined that the adoption of
FIN 48 does not have a material impact on the Fund's financial statements.
The Fund files U.S. and various state tax returns. No income tax returns are
currently under examination. All tax years of the fund are open at this
time.
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
Notes to Financial Statements (continued)
In addition, in September 2006, Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" ("FAS 157"), was issued and is effective
for fiscal years beginning after November 15, 2007. FAS 157 defines fair
value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. At this time, management is
evaluating the implications of FAS 157 and its impact on the Fund's financial
statements, if any, has not been determined.
In February 2007, the Financial Accounting Standards Board Statement of
Financial Accounting Standard No. 159, "The Fair Value Option for Financial
Assets and Financial Liabilities" ("FAS 159"), was issued and is effective for
fiscal years beginning after November 15, 2007. Early adoption is permitted as
of the beginning of a fiscal year that begins on or before November 15, 2007,
provided the entity also elects to apply the provisions of FAS 157. FAS 159
permits entities to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at
fair value. FAS 159 also establishes presentation and disclosure requirements
designed to facilitate comparisons between entities that choose different
measurement attributes for similar types of assets and liabilities. At this
time, management is evaluating the implications of FAS 159 and its impact on
the Fund's financial statements, if any, has not been determined.
(g) Reclassification--U.S. generally accepted accounting principles require
that certain components of net assets be adjusted to reflect permanent
differences between financial and tax reporting. Accordingly, during the
current year, $44,248 has been reclassified between paid-in capital in excess
of par and undistributed net investment income as a result of a permanent
difference attributable to nondeductible expenses. This reclassification has
no effect on net assets or net asset value per share.
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, until September 30, 2007, provided certain
investment advisory services to IQ with respect to the Fund. For such
services, IQ paid 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.
Effective September 30, 2007, the Subadvisory Agreement continued on the same
terms with Nuveen's affiliate, Nuveen HydePark Group, LLC ("Nuveen HydePark"),
to which Nuveen contributed the personnel and resources servicing the Fund. At
a meeting held on September 12, 2007, the Fund's Board of Directors had
approved the change and determined that it would not result in assignment of
the Subadvisory Agreement within the meaning of the Investment Company Act of
1940. There was no change in the aggregate fees paid by the Fund for these
services.
On June 20, 2007, Nuveen Investments Inc. ("Nuveen Investments"), the parent
company of Nuveen HydePark, announced that it had entered into a definitive
Agreement and Plan of Merger (the "Merger Agreement") to be acquired by an
investor group majority-led by Madison Dearborn Partners, LLC. The investor
group's financial advisors and investors include ML & Co. and Merrill Lynch
Global Private Equity (both affiliates of IQ).
The merger is expected to be completed by the end of the year, subject to
customary conditions, including obtaining the approval of Nuveen Investments'
stockholders.
The consummation of the merger will be deemed to be an "assignment" (as
defined in the Investment Company Act of 1940) of the current investment
subadvisory agreement (the"Subadvisory Agreement") between IQ and Nuveen
HydePark. Under the terms of the Subadvisory Agreement, an assignment will
result in its automatic termination.
At a meeting held on July 24, 2007, the Board of Directors of the Fund
approved a new investment subadvisory agreement for the Fund to be presented
to shareholders for approval. The new subadvisory agreement contains the same
terms as the existing investment advisory agreement for the Fund, including
the same subadvisory fee. If approved by shareholders, this agreement will
take effect at the consummation of the merger.
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
Notes to Financial Statements (concluded)
In the event that the merger is consummated prior to the shareholder vote, the
Fund's Board, in reliance on Rule 15a-4 under the Investment Company Act, has
also approved an interim subadvisory agreement for the Fund with a term of up
to 150 days pending approval of the new subadvisory agreement by shareholders.
The Board determined that the scope and quality of services to be provided
under the interim subadvisory agreement are equivalent to the existing
subadvisory agreement and that other than the dates, parties and provisions
required by Rule 15a-4, there are no material differences between the interim
subadvisory agreement and the existing subadvisory agreement.
IQ has entered into an Administration Agreement with Princeton Administrators,
LLC (the "Administrator") as of October 2, 2006. The Administration Agreement
provides that IQ will pay the Administrator a fee at the annual rate of .12%
of the average daily of the Fund's net assets plus borrowings for leverage and
other investment purposes for the performance of administrative and other
services necessary for the operation of the Fund. The Administrator is an
indirect subsidiary of BlackRock, Inc. ML & Co. is a principal owner of
BlackRock, Inc.
Certain officers of the Fund are officers and/or directors of IQ and/or
Merrill Lynch.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended September 30, 2007, were $110,562,269 and $152,938,024,
respectively. Sales of investments include securities delivered to settle the
matured variable prepaid forward contracts.
4. Common Stock Transactions:
The Fund is authorized to issue 100,000,000 shares of stock par value $.001
per share, all of which are initially classified as Common Stock. The Board of
Directors is authorized, however, to classify and reclassify any un-issued
shares of Common Stock without approval of the holders of Common Stock.
Shares issued and outstanding during the years ended September 30, 2007 and
September 30, 2006, decreased by 1,407,231 and 1,876,309, respectively, as a
result of repurchase offers.
The Fund will make offers to repurchase its shares at annual (approximately
12-month) intervals. The shares tendered in the repurchase offer will be
subject to a repurchase fee retained by the Fund to compensate the Fund for
expenses directly related to the repurchase offer.
5. Distributions to Shareholders:
The Fund paid an ordinary income dividend to holders of Common Stock in the
amount of $.134154 per share on October 31, 2007 to shareholders of record on
October 22, 2007.
The tax character of distributions paid during the fiscal years ended
September 30, 2007 and September 30, 2006 was as follows:
9/30/07 9/30/06
Distributions paid from:
Ordinary income $ 2,653,285 $ 3,627,054
--------------- ---------------
Total taxable distribution $ 2,653,285 $ 3,627,054
=============== ===============
As of September 30, 2007, the components of accumulated earnings on a
tax basis were as follows:
Undistributed ordinary income--net $ 610,609
Undistributed long-term capital gains--net 2,062,834
---------------
Total undistributed earnings--net 2,673,443
Capital loss carryforward --
Unrealized gains--net 17,482,303*
---------------
Total accumulated earnings--net $ 20,155,746
===============
* The difference between book-basis and tax-basis net unrealized
gains is attributable primarily to the tax deferral of losses on
wash sales.
6. Subsequent Events:
In June 2007 Nuveen Investments Inc., the parent company of Nuveen HydePark,
entered into an Agreement and Plan of Merger to be acquired by an investor
group majority-led by Madison Dearborn Partners, LLC and which includes ML &
Co. and Merrill Lynch Global Private Equity (both affiliates of IQ). The
transaction closed on November 13, 2007.
The Fund's stockholder meeting, scheduled for November 13, 2007, to vote on
the subadvisory agreement to take effect upon the occurrence of the closing
has been adjourned as a quorum was not achieved and has been rescheduled for
December 21, 2007. Until the new subadvisory agreement is approved by
stockholders, the Fund will operate for up to 150 days under the interim
subadvisory agreement approved by the Fund Board of Directors in reliance on
Rule 15a-4 under the Investment Company Act of 1940.
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors
of Defined Strategy Fund Inc.:
We have audited the accompanying statement of assets, liabilities and capital,
including the schedule of investments, of Defined Strategy Fund Inc. (the
"Fund") as of September 30, 2007, and the related statements of operations and
cash flows for the year then ended, the statements of changes in net assets
for each of the two years in the period then ended, and the financial
highlights for each of the respective periods then ended. These financial
statements and financial highlights are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material
misstatement. The Fund is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. Our audits
included consideration of internal control over financial reporting as a basis
for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the
Fund's internal control over financial reporting. Accordingly, we express no
such opinion. An audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. Our
procedures included confirmation of securities owned as of September 30, 2007
by correspondence with the custodian. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Defined Strategy Fund Inc. as of September 30, 2007, the results of its
operations and its cash flows for the year then ended, the changes in its net
assets for each of the two years in the period then ended, and its financial
highlights for each of the respective periods then ended, in conformity with
accounting principles generally accepted in the United States of America.
Deloitte & Touche LLP
Princeton, New Jersey
November 27, 2007
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
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.)
Fund Certification
In July 2007, the Fund filed its Chief Executive Officer Certification for the
prior year with the New York Stock Exchange pursuant to Section 303A.12(a) of
the New York Stock Exchange Corporate Governance Listing Standards.
The Fund's Chief Executive Officer and Chief Financial Officer Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the
Fund's Form N-CSR and are available on the Securities and Exchange
Commission's Web site at http://www.sec.gov.
Important Tax Information
The following information is provided with respect to the ordinary income
distributions paid by Defined Strategy Fund Inc. during the fiscal year ended
September 30, 2007:
Qualified Dividend Income for Individuals 100%
Dividends Qualifying for the Dividends Received Deduction for Corporations 100%
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
Renewal of Current Investment Advisory and Management Agreements
The Board of Directors of the Defined Strategy Fund Inc. (the "Fund"),
currently consisting solely of Independent Directors, as defined in Section
2(a)(19) of the Investment Company Act of 1940 (the "Investment Company Act"),
has the responsibility under the Investment Company Act to consider annually
the Investment Advisory and Management Agreement of the Fund (the "Management
Agreement") with IQ Investment Advisors LLC ("IQ Advisors").
At a Board meeting held on June 14, 2007, all of the Directors present at
the meeting renewed the Management Agreement for the Fund for an additional
one-year term. The Management Agreement was considered separately by the
Fund's Directors. In considering whether to approve the Management Agreement,
the Directors reviewed a meeting book and other materials from counsel to the
Fund and from IQ Advisors which: (i) included information concerning the
services rendered to the Fund by IQ Advisors and IQ Advisors' affiliates; (ii)
contained information concerning the revenues and expenses incurred by IQ
Advisors and its affiliates from the operation of the Fund; and (iii) outlined
the legal duties of the Board under the Investment Company Act. The Board also
received information from Lipper, Inc. ("Lipper") comparing the Fund's fee
rate for advisory and administrative services to those of other closed-end
funds chosen by Lipper. In voting to approve the renewal of the Fund's
Management Agreement, the Directors considered in particular the following
factors:
(a) The nature, extent and quality of services provided by IQ Advisors and its
affiliates--The Directors reviewed the services that IQ Advisors has provided
to the Fund. They considered the size and experience of IQ Advisors' staff,
its use of technology, and the degree to which IQ Advisors exercises
supervision over the actions of the Fund's subadviser. In connection with the
investment advisory services provided, the Directors took into account
detailed discussions they had with officers of IQ Advisors regarding the
management of the Fund's investments in accordance with the Fund's stated
investment objective and policies and the types of transactions entered into
on behalf of the Fund. During these discussions, the Directors asked detailed
questions of, and received answers from, the officers of IQ Advisors regarding
the implementation of the Fund's investment strategy, its efficacy and risks.
In addition to the investment advisory services provided to the Fund, the
Directors considered that IQ Advisors and its affiliates also provide
administrative services, stockholder services, oversight of Fund accounting,
marketing services, assistance in meeting legal and regulatory requirements
and other services necessary for the operation of the Fund. In particular, the
Directors reviewed the compliance and administrative services provided to the
Fund by IQ Advisors, including its oversight of the Fund's day-to-day
operations and its oversight of Fund accounting. The Directors noted that IQ
Advisors has access to administrative, legal and compliance resources that
help ensure a high level of quality in the compliance and administrative
services provided to the Fund. The Directors also considered the Fund's
compliance history. Following their consideration of this information, and
based on the presentations at the meeting and the Directors' experience as
Directors of other investment companies advised by IQ Advisors, the Directors
concluded that the services provided to the Fund by IQ Advisors under the
respective Management Agreement were of a high quality and benefited the Fund.
(b) Investment performance of the Fund and IQ Advisors--The Directors
considered the history, experience, resources and strengths of IQ Advisors and
its affiliates in developing and implementing the investment strategies used
by the Fund. The Directors also considered the innovative nature of the Fund.
The Directors noted that the Fund uses a unique investment strategy and that
comparisons of the Fund's investment performance to the performance of other
investment companies were generally not meaningful. The Directors reviewed the
Fund's investment performance and compared such performance to the performance
of a relevant reference index. The Directors discussed the degree to which the
Fund was achieving its investment objective, noting that the Fund had been in
operation for a relatively short period of time. In particular, the Directors
noted that the Fund generally performed as expected relative to its reference
index and met its respective investment objectives. As a result of their
discussions and review, the Directors concluded that the Fund's performance
was satisfactory. Based on these factors, the Directors determined that IQ
Advisors continued to be an appropriate investment adviser for the Fund.
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
Renewal of Current Investment Advisory and Management Agreements (continued)
(c) Cost of services provided and profits realized by IQ Advisors and its
affiliates from the relationship with the Fund--The Directors reviewed and
considered a memorandum from IQ Advisors regarding the methodology used by IQ
Advisors in allocating its costs regarding the operations of the Fund and
calculating the Fund's profitability (if any) to IQ Advisors and its
affiliates. The Directors noted that IQ Advisors' methodology in calculating
profitability had previously been reviewed by independent consultants. The
Directors also reviewed a report detailing IQ Advisors' profitability. After
considering their discussion with IQ Advisors and reviewing its memorandum and
report, the Directors concluded that there was a reasonable basis for the
allocation of costs and the determination of profitability. The Directors
considered the cost of the services provided by IQ Advisors to the Fund and
the revenue derived by IQ Advisors and its affiliates. The Directors took into
account discussions that they had with representatives of IQ Advisors
regarding its general level of profitability (if any), and the profits derived
by its affiliates, from operating the Fund. The Directors also considered the
direct and indirect benefits derived by other IQ Advisors affiliates,
including Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), from
the establishment of the Fund, including the underwriting arrangements
relating to the initial distribution of Fund shares. The Directors considered
federal court decisions discussing an investment adviser's profitability and
profitability levels considered to be reasonable in those decisions. The
Directors concluded that any profits made by IQ Advisors and its affiliates
(including MLPF&S) are acceptable in relation to the nature, extent and
quality of services provided. The Directors also concluded that the Fund
benefited from such services provided by IQ Advisors' affiliates.
(d) The extent to which economies of scale would be realized as the Fund grows
and whether fee levels would reflect such economies of scale--The Directors
considered the extent to which economies of scale might be realized if the
assets of the Fund increase and whether there should be changes in the
management fee rate or structure in order to enable a Fund to participate in
these economies of scale. The Directors noted that, because the Fund is a
closed-end fund, any increase in asset levels generally would have to come
from appreciation through investment performance. The Directors also noted
that the Fund is an interval fund that periodically allows stockholders to
tender their shares to the Fund and that such tender offers reduce the amount
of Fund assets. In consideration of these and other factors, the Directors
determined that no changes were currently necessary to the Fund's fee
structure. The Directors also discussed the renewal requirements for
investment advisory agreements, and determined that they would revisit this
issue no later than when they next review the investment advisory fees.
(e) Comparison of services rendered and fees paid to those under other
investment advisory contracts, such as contracts of the same and other
investment advisers or other clients--The Directors compared both the services
rendered and the fees paid under the Management Agreements to the contracts of
other investment advisers with respect to other closed-end registered
investment companies. In particular, the Directors evaluated the Fund's
contractual fee rate for advisory and administrative services as compared to
the contractual fee rate of other closed-end funds chosen by Lipper. In
considering this information, the Directors took into account the unique
nature of the investment strategies of the Fund and the fact that the relevant
peer group of funds provided by Lipper for comparison have investment
strategies and restrictions different from those of the Fund. The Directors
did not consider compensation paid to IQ Advisors with respect to accounts
other than registered investment companies because IQ Advisors utilizes the
Fund's strategy in connection with only registered funds. In particular, the
Directors noted that the Fund's contractual advisory fee rate at a common
asset level was lower than the median fee rate of its Lipper comparison funds.
The Directors concluded that the advisory fee rates were reasonable in
comparison to the data reflected in the Lipper materials.
(f) Conclusion--No single factor was determinative to the decision of the
Directors. Based on the foregoing and such other matters as were deemed
relevant, all of the Directors concluded that the advisory fee rate of the
Fund was reasonable in relation to the services provided by IQ Advisors to the
Fund, as well as the costs incurred and benefits gained by IQ Advisors and its
affiliates in providing such services, including the investment advisory and
administrative components. The Directors also found the investment advisory
fees to be reasonable in comparison to the fees charged by advisers to other
funds of a similar size. As a result, the Board of Directors of the Fund voted
to approve the Management Agreement. The Directors were represented by
independent legal counsel who assisted them in their deliberations.
Renewal of Current Investment Subadvisory Agreement
The Board of Directors of the Defined Strategy Fund Inc. (the "Fund"),
currently consisting solely of Independent Directors, at a meeting held on
June 14, 2007 considered and approved the renewal of the Current Investment
Subadvisory Agreement of the Fund (the "Subadvisory Agreement"). The Directors
received, reviewed and evaluated information concerning the services and
personnel of Nuveen Asset Management ("Nuveen" or the "Subadviser"), as
subadviser to the Fund.
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
(a) The nature, extent and quality of services provided by the Subadviser--The
Directors reviewed the services that the Subadviser provides to the Fund. The
Directors considered their detailed discussions with officers of IQ Advisors
and members of the Subadviser's portfolio management team, the management of
the Fund's investments in accordance with the Fund's stated investment
objective and policies and the types of transactions that have been entered
into on behalf of the Fund. The Directors took into account the annual due
diligence investment review conducted by Merrill Lynch Global Wealth
Management Investment Management, an affiliate of IQ Advisors, of the
Subadviser and its report that concluded that the Subadviser has thus far
executed the Fund's investment strategies in accordance with the Fund's
objectives and general expectations. The Directors noted that, drawing on
their collective industry experience, they had discussed the Fund's investment
strategy with representatives from the Subadviser, including discussions
regarding the premises underlying the Fund's investment strategy, its efficacy
and potential risks. The Directors also considered the favorable history,
reputation and background of the Subadviser and its personnel, and the
substantial experience of such Subadviser's portfolio management teams. The
Directors discussed the compliance program of the Subadviser and the report of
Mrs. Catherine Johnston, the chief compliance officer of the Fund. Following
consideration of this information, and based on management presentations
during the Board meeting and their discussion during an Executive Session, the
Directors concluded that the nature, extent and quality of services provided
to the Fund by the Subadviser under its Subadvisory Agreement were of a high
quality and would continue to benefit the Fund.
(b) Investment performance of the Fund and the Subadviser--The Directors
received and considered information about the Fund's investment performance in
comparison to the performance of its relative reference index, where
applicable, and also in light of its stated investment objective and made the
determinations discussed above under "Renewal of Current Investment Advisory
and Management Agreement." Based on these factors, the Directors determined
that the Subadviser continued to be appropriate for the Fund.
(c) Cost of services provided and profits realized by the Subadviser from the
relationship with the respective Fund--The Directors noted that profitability
data was not provided with respect to the Subadviser and concluded that such
data was unnecessary because such subadvisory arrangements were entered into
at "arm's length" between Nuveen and IQ Advisors. The Directors then
considered the potential direct and indirect benefits to the Subadviser and
its affiliates from its relationship with the Fund, including the reputational
benefits from managing the Fund. The Directors of the Fund concluded that the
potential benefits to the Subadviser were consistent with those obtained by
other subadvisers in similar types of arrangements.
(d) The extent to which economies of scale would be realized as the Fund grows
and whether fee levels would reflect such economies of scale--The Directors
considered the extent to which economies of scale might be realized if the
assets of the Fund increase and whether there should be changes in the
subadvisory fee rate or structure in order to enable a Fund to participate in
these economies of scale. The Directors noted that the Subadviser's fees are
paid by IQ Advisors out of its fees and not directly by the Fund. The
Directors noted that, because the Fund is a closed-end fund, any increase in
asset levels would have to come from appreciation due to investment
performance. The Directors also noted that the Fund is an interval fund that
periodically allows stockholders to tender their shares to the Fund and that
such tender offers reduce the amount of Fund assets. The Directors also
discussed the renewal requirements for subadvisory agreements, and determined
that they would revisit this issue no later than when they next review the
subadvisory fee.
(e) Comparison of services rendered and fees paid to those under other
subadvisory contracts, such as contracts of the same and other investment
advisers or other clients--The Directors discussed the services rendered by
the Subadviser and determined that such services were consistent with those
provided by subadvisers generally and sufficient for the management of the
Fund. Taking into account the totality of the information and materials
provided to the Directors as noted above, including the fact that the
subadvisory fee for the Fund was negotiated with IQ Advisors and not payable
directly by the Fund, the Directors concluded that the subadvisory fee for the
Fund was reasonable for the services being rendered.
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
Renewal of Current Investment Advisory and Management Agreements (concluded)
Conclusion--No single factor was determinative to the decision of the
Directors. Based on the foregoing and such other matters as were deemed
relevant, all of the Directors concluded that the subadvisory fee rate was
reasonable in relation to the services provided by the Subadviser. As a
result, all of the Directors voted to approve the Subadvisory Agreement for
the Fund. The Directors were represented by independent legal counsel who
assisted them in their deliberations.
Approval of New Subadvisory Agreement and Interim Subadvisory Agreement
At meetings held on July 24 and September 12, 2007,the Board of Directors,
currently consisting solely of Independent Directors, considered and approved
a new investment subadvisory agreement (the "New Subadvisory Agreement")
between IQ Advisors and Nuveen HydePark Group, LLC ("HydePark" or the
"Subadviser") and an interim investment subadvisory agreement (the "Interim
Subadvisory Agreement") between IQ Advisors and HydePark.
The New Subadvisory Agreement was approved to take effect, following its
approval by stockholders of the Fund, upon the acquisition of Nuveen
Investments Inc. ("Nuveen") by an investor group majority-led by Madison
Dearborn Partners, LLC (the "Nuveen Transaction"). The Nuveen Transaction
would result in an assignment and automatic termination of the current
subadvisory agreement for the Fund (the "Current Subadvisory Agreement"). The
Interim Subadvisory Agreement was approved to go into effect for a maximum of
150 days following the closing of the Nuveen Transaction only in the event
that stockholders have not approved the New Subadvisory Agreement prior to
such time.
At these meetings, the Directors discussed, among other things, the factors
below in approving the New Subadvisory Agreement and Interim Subadvisory
Agreement, as well as the information considered and the conclusions drawn in
connection with the recent renewal of the Current Subadvisory Agreement. At
the September 12, 2007 Board meeting, the Directors considered that the New
Subadvisory Agreement would be with HydePark, rather than Nuveen Asset
Management ("NAM") (and references below to the "Subadviser" include
discussions held with representatives of NAM), and referred to the same
information and factors they considered at the July 24, 2007 Board meeting.
The Board also considered additional information relating to HydePark.
(a) Nature, Extent and Quality of Services--In connection with their
consideration of the New Subadvisory Agreement and Interim Subadvisory
Agreement, the Directors considered representations by representatives of IQ
Advisors and HydePark that there would be no diminution in the services to be
rendered by IQ Advisors and HydePark, respectively, to the Fund as a result of
the change in control of Nuveen and the effectiveness of the New Subadvisory
Agreement and Interim Subadvisory Agreement. The Directors noted that
representatives of the Subadviser stated that they did not anticipate any
change in the personnel of HydePark responsible for providing services to the
Fund, and in particular that the investment and compliance personnel of
HydePark were not expected to change, as a result of the change in control of
Nuveen.
In reviewing the New Subadvisory Agreement, the Directors focused on the
experience of the Subadviser in managing registered funds. The Directors
considered the reputation and investment experience of the Subadviser and its
investment professionals who would continue to serve as portfolio managers
after the change in control. The Directors noted the representations of the
Subadviser's representatives that the change in control would have no adverse
effect on the experience, resources and strengths of HydePark in managing
investment companies. The Directors then discussed the Subadviser's
anticipated financial condition after the change in control. The Directors
noted statements from the Subadviser's representatives that the financial
position of the Subadviser would not be negatively affected by the Nuveen
Transaction. The Directors also considered representations from the Subadviser
that the change in control would not have an effect on the Subadviser's
compliance personnel or compliance procedures. The Directors then discussed
the due diligence performed by officers of IQ Advisors regarding NAM and
HydePark. Based on the discussions held and the materials presented at this
meeting and prior meetings, the Directors determined that the proposed change
in control of Nuveen would not likely cause an adverse change in the nature,
extent and quality of the services to be provided under the New Subadvisory
Agreement and Interim Subadvisory Agreement. In addition, the Directors were
of the view that the Subadviser had evidenced a commitment to maintaining a
culture of compliance which would continue after the Nuveen Transaction.
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
(b) The Investment Performance of the Fund and the Subadviser--The Directors
based their review of the Subadviser's performance primarily on the experience
of NAM in managing the Fund's investment program. The Directors also reviewed
NAM's performance with other registered investment companies with investment
strategies similar to the those of the Fund. The Directors did not
specifically consider NAM's performance with respect to most other accounts it
manages, because these accounts might have investment objectives, policies or
restrictions different from those of the Fund. The Directors considered the
reputation and investment experience of the Subadviser and its investment
professionals, taking into account NAM's historical position as a leading
sponsor of unit investment trusts ("UITs"), including UITs involving similar
management techniques as those employed by the Fund. The Directors discussed
the experience, resources and strengths of the Subadviser in managing or
sponsoring investment companies. The Directors also considered the experience
of the Fund's portfolio managers and discussions held with the managers
regarding implementation of the Fund's investment program. Following its
deliberations, the Directors concluded that, while past performance is not an
indicator of future performance, HydePark should likely be able to effectively
implement the Fund's investment strategy in attempting to meet a Fund's
investment objectives.
(c) Fees and Profitability of the Subadviser--The Directors considered
representations by representatives of IQ Advisors and the Subadviser that
there would be no change in the allocation of the management fee between IQ
Advisors and the Subadviser in relation to the services provided by the
Subadviser, as a result of the change in control of Nuveen and the
effectiveness of the New Subadvisory Agreement or Interim Subadvisory
Agreement. In considering the compensation to be paid to the Subadviser,
noting that no change to such compensation from that payable under the Current
Subadvisory Agreement was proposed, the Directors referred to the materials
presented and discussions held in connection with their consideration of the
Current Subadvisory Agreement for the Fund. The Directors noted that in
connection with such considerations they had received and reviewed fee
comparison data from Lipper Inc. (which included information regarding the
fees paid by certain investment advisers to subadvisers of peer funds), and
concluded that such information continued to be relevant to their current
deliberations. In reviewing that data, the Directors noted that the
subadvisory fee with respect to the Fund was at a level that continued to be
reasonable and similar to that of comparable funds. Taking into account the
totality of the information and materials provided to it at this meeting and
at prior meetings, including, among other things, the fact that the
subadvisory fee was negotiated by IQ Advisors on an arm's length basis, the
Directors concluded that the subadvisory fee proposed under the New
Subadvisory Agreement continued to be reasonable for the services being
rendered.
(d) Economies of Scale and Whether Fee Levels Reflect these Economies of
Scale--The Directors also considered whether the Fund would be able to
participate in any economies of scale that the Subadviser may experience
given present asset levels of the Fund. On this point, the Directors noted
the uncertainty of the asset levels of the Fund going forward, including the
fact that the Fund offers to repurchase its shares annually and that it is
scheduled to terminate after a five-year term. The Directors discussed the
renewal requirements for investment advisory agreements in general, and
determined that it would revisit this issue from time to time.
(e) Conclusion--The Board examined the totality of the information it was
provided and did not identify any single factor discussed previously as
controlling. The Directors concluded that the terms of the New Subadvisory
Agreement and Interim Subadvisory Agreement were fair and reasonable, that the
Subadviser's fees are reasonable in light of the services provided to the
Fund, and that the New Subadvisory Agreement and Interim Subadvisory Agreement
should be approved.
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
Automatic Dividend Reinvestment Plan
How the Plan Works--The Fund offers a Dividend Reinvestment Plan (the "Plan")
under which income and capital gains dividends paid by the Fund are
automatically reinvested in additional shares of Common Stock of the Fund. The
Plan is administered on behalf of the shareholders by The Bank of New York
Mellon (the "Plan Agent"). Under the Plan, whenever the Fund declares a
dividend, participants in the Plan will receive the equivalent in shares of
Common Stock of the Fund. The Plan Agent will acquire the shares for the
participant's account either (i) through receipt of additional unissued but
authorized shares of the Fund ("newly issued shares") or (ii) by purchase of
outstanding shares of Common Stock on the open market on the New York Stock
Exchange or elsewhere. If, on the dividend payment date, the Fund's net asset
value per share is equal to or less than the market price per share plus
estimated brokerage commissions (a condition often referred to as a "market
premium"), the Plan Agent will invest the dividend amount in newly issued
shares. If the Fund's net asset value per share is greater than the market
price per share (a condition often referred to as a "market discount"), the
Plan Agent will invest the dividend amount by purchasing on the open market
additional shares. If the Plan Agent is unable to invest the full dividend
amount in open market purchases, or if the market discount shifts to a market
premium during the purchase period, the Plan Agent will invest any uninvested
portion in newly issued shares. The shares acquired are credited to each
shareholder's account. The amount credited is determined by dividing the
dollar amount of the dividend by either (i) when the shares are newly issued,
the net asset value per share on the date the shares are issued or (ii) when
shares are purchased in the open market, the average purchase price per share.
Participation in the Plan--Participation in the Plan is automatic, that is, a
shareholder is automatically enrolled in the Plan when he or she purchases
shares of Common Stock of the Fund unless the shareholder specifically elects
not to participate in the Plan. Shareholders who elect not to participate will
receive all dividend distributions in cash. Shareholders who do not wish to
participate in the Plan must advise the Plan Agent in writing (at the address
set forth below) that they elect not to participate in the Plan. Participation
in the Plan is completely voluntary and may be terminated or resumed at any
time without penalty by writing to the Plan Agent.
Benefits of the Plan--The Plan provides an easy, convenient way for
shareholders to make additional, regular investments in the Fund. The Plan
promotes a long-term strategy of investing at a lower cost. All shares
acquired pursuant to the Plan receive voting rights. In addition, if the
market price plus commissions of the Fund's shares is above the net asset
value, participants in the Plan will receive shares of the Fund for less than
they could otherwise purchase them and with a cash value greater than the
value of any cash distribution they would have received. However, there may
not be enough shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem
shares, the price on resale may be more or less than the net asset value.
Plan Fees--There are no enrollment fees or brokerage fees for participating in
the Plan. The Plan Agent's service fees for handling the reinvestment of
distributions are paid for by the Fund. However, brokerage commissions may be
incurred when the Fund purchases shares on the open market and shareholders
will pay a pro rata share of any such commissions.
Tax Implications--The automatic reinvestment of dividends and distributions
will not relieve participants of any federal, state or local income tax that
may be payable (or required to be withheld) on such dividends. Therefore,
income and capital gains may still be realized even though shareholders do not
receive cash. Participation in the Plan generally will not affect the tax-
exempt status of exempt interest dividends paid by the Fund. If, when the
Fund's shares are trading at a market premium, the Fund issues shares pursuant
to the Plan that have a greater fair market value than the amount of cash
reinvested, it is possible that all or a portion of the discount from the
market value (which may not exceed 5% of the fair market value of the Funds
shares) could be viewed as a taxable distribution. If the discount is viewed
as a taxable distribution, it is also possible that the taxable character of
this discount would be allocable to all the shareholders, including
shareholders who do not participate in the Plan. Thus, shareholders who do not
participate in the Plan might be required to report as ordinary income a
portion of their distributions equal to their allocable share of the discount.
Contact Information--All correspondence concerning the Plan, including any
questions about the Plan, should be directed to the Plan Agent at The Bank of
New York Mellon, Church Street Station, P.O. Box 11258, New York, NY 10286-
1258, Telephone: 800-432-8224.
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
Proxy Results
During the six-month period ended September 30, 2007, the shareholders of
Defined Strategy Fund Inc. voted on the following proposal, which was approved
at an annual shareholders' meeting on April 27, 2007. A description of the
proposal and number of shares voted are as follows:
Shares Voted Shares Withheld
For From Voting
To elect the Fund's Board of Directors: Paul Glasserman 3,116,708 366,642
Steven W. Kohlhagen 3,116,708 366,642
William J. Rainer 3,116,708 366,642
Directors and Officers
Number of
IQ Advisors-
Affiliate
Advised Funds Other Public
Position(s) Length of and Portfolios Directorships
Held with Time Overseen by Held by
Name, Address & Age Fund Served** Principal Occupation(s) During Past 5 Years Director Director
>
Non-Interested Directors*
Paul Glasserman Director & 2004 to Professor, Columbia University Business 11 None
P.O. Box 9095 Chairman present School since 1991; Senior Vice Dean since
Princeton, NJ of the July 2004.
08543-9095 Audit
Age: 45 Committee
Steven W. Kohlhagen Director & 2005 to Retired since August 2002; Managing Director, 11 Ametek, Inc.
P.O. Box 9095 Chairman of present Wachovia National Bank and its predecessors
Princeton, NJ Nominating (1992-2002).
08543-9095 & Corporate
Age: 60 Governance
Committee
William J. Rainer Director & 2004 to Retired since November 2004; Chairman and 11 None
P.O. Box 9095 Chairman of present Chief Executive Officer, OneChicago, LLC, a
Princeton, NJ the Board designated contract market (2001 to November
08543-9095 2004); Chairman, U.S. Commodity Futures
Age: 61 Trading Commission (1999-2001).
Laura S. Unger Director 2007 to Independent Consultant; Commissioner of the 11 CA, Inc.
P.O. Box 9095 present Securities and Exchange Commission from (software) and
Princeton, NJ November 1997 to February 2002, including Acting Ambac Financial
08543-9095 Chairperson of the SEC from February to August Group, Inc.
Age: 46 2001; Regulatory Expert for CNBC from June 2002
through June 2003.
* Each of the Non-Interested Directors is a member of the Audit Committee and the Nominating and
Corporate Governance Committee.
** Each Director will serve for a term of one year and until his successor is elected and qualifies,
or his earlier death, resignation or removal as provided in the Fund's Bylaws, charter or by statute.
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
Directors and Officers (concluded)
Position(s) Length of
Held with Time
Name, Address & Age Fund Served Principal Occupation(s) During Past 5 Years
Fund Officers*
Mitchell M. Cox President 2004 to IQ Investment Advisors LLC, President since April 2004; MLPF&S, Managing Director,
P.O. Box 9011 present Head of Financial Products Group since 2007; Head of Global Wealth Management
Princeton, NJ Market Investments and Origination (2003 - 2007); MLPF&S, Managing Director,
08543-9011 Head of Structured Products Origination and Sales (2001 - 2003); FAM Distributors
Age: 41 ("FAMD"), Director since 2006; IQ Financial Products LLC, Director since 2006.
Justin C. Ferri Vice 2005 to IQ Investment Advisors LLC, Vice President since 2005; MLFP&S, Director,
P.O. Box 9011 President present Structured and Alternative Solutions since 2007; Director, Global Wealth
Princeton, NJ Management Market Investments & Origination (2005 - 2007); MLPF&S, Vice
08543-9011 President, Global Private Client Market Investments & Origination (2005);
Age: 32 MLPF&S, Vice President, Head of Global Private Client Rampart Equity
Derivatives (2004 - 2005); MLPF&S, Vice President, Co-Head Global Private
Client Domestic Analytic Development (2002 - 2004); mPower Advisors LLC,
Vice President, Quantitative Development (1999 - 2002).
Donald C. Burke Vice 2004 to IQ Investment Advisors LLC, Secretary and Treasurer (2004 - March 2007);
P.O. Box 9011 President present BlackRock, Inc., Managing Director since 2006; Merrill Lynch Investment
Princeton, NJ and Managers L.P. ("MLIM") and Fund Asset Management ("FAM"), Managing Director
08543-9011 Secretary (2006); MLIM and FAM, First Vice President (1997 - 2005) and Treasurer
Age: 47 (1999 - 2006); Princeton Services, Inc., Senior Vice President and Treasurer
(1999 - 2006).
James E. Hillman Vice 2007 to IQ Investment Advisors LLC, Treasurer since March 2007; MLPF&S, Director,
P.O. Box 9011 President present Structured and Alternative Solutions since 2007; Director, Global Wealth
Princeton, NJ and Management Market Investments & Origination (2006 - 2007); Managed Account
08543-9011 Treasurer Advisors LLC, Vice President and Treasurer since November 2006; Director,
Age: 50 Citigroup Alternative Investments Tax Advantaged Short Term Fund in 2006;
Director, Korea Equity Inc. Fund in 2006; Independent Consultant, January to
September 2006; Managing Director, The Bank of New York, Inc. (1999 - 2006).
Catherine Johnston Chief 2007 to IQ Investment Advisors LLC, Chief Compliance Officer since April 2007;
P.O. Box 9011 Compliance present Merrill Lynch & Co, Inc., Director, Corporate Compliance, since September 2007;
Princeton, NJ Officer BlackRock, Inc., Director (2006 - 2007); MLIM, Director (2003 - 2006), Vice
08543-9011 President (1998 - 2003).
Age: 53
Martin G. Byrne Chief 2006 to IQ Investment Advisors LLC, Chief Legal Officer since June 2006; Merrill Lynch &
P.O. Box 9011 Legal present Co., Inc., Office of General Counsel, Managing Director since 2006, First Vice
Princeton, NJ Officer President (2002 - 2006), Director (2000 - 2002); Managed Account Advisors LLC,
08543-9011 Chief Legal Officer since November 2006; FAMD, Director since 2006.
Age: 45
Jay M. Fife Vice 2005 to IQ Investment Advisors LLC, Vice President (2005 - March 2007); BlackRock, Inc.,
P.O. Box 9011 President present Managing Director since 2007; BlackRock, Inc., Director in 2006; MLIM, Director
Princeton, NJ and (2000 - 2006); MLPF&S, Director (2000) and Vice President (1997 - 2000).
08543-9011 Assistant
Age: 37 Treasurer
Colleen R. Rusch Vice 2005 to IQ Investment Advisors LLC, Chief Administrative Officer and Secretary since 2007,
P.O. Box 9011 President present Vice President since 2005; MLPF&S, Director, Structured and Alternative Solutions
Princeton, NJ and since 2007; MLPF&S, Director, Global Wealth Management Market Investments &
08543-9011 Assistant Origination (2005 - 2007); MLIM, Director from January 2005 to July 2005; Vice
Age: 40 Secretary President of MLIM (1998-2004).
* Officers of the Fund serve at the pleasure of the Board of Directors.
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
The Bank of New York Mellon
101 Barclay Street - 11 East
New York, NY 10286
NYSE Symbol
DSF
DEFINED STRATEGY FUND INC. SEPTEMBER 30, 2007
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.
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. SEPTEMBER 30, 2007
Item 2 - Code of Ethics - The registrant (or the "Fund") has adopted a code
of ethics, as of the end of the period covered by this report, that
applies to the registrant's principal executive officer, principal
financial officer and principal accounting officer, or persons
performing similar functions. During the period covered by this
report, there have been no amendments to or waivers granted under
the code of ethics. A copy of the code of ethics is available
without charge upon request by calling toll-free 1-877-449-4742.
Item 3 - Audit Committee Financial Expert - The registrant's board of
directors has determined that (i) the registrant has the following
audit committee financial experts serving on its audit committee and
(ii) each audit committee financial expert is independent: (1) Alan
R. Batkin (resigned as of February 22, 2007) and (2) Steven W.
Kohlhagen.
Under applicable securities laws, a person determined to be an audit
committee financial expert will not be deemed an "expert" for any
purpose, including without limitation for the purposes of Section 11
of the Securities Act of 1933, as a result of being designated or
identified as an audit committee financial expert. The designation
or identification as an audit committee financial expert does not
impose on such person any duties, obligations, or liabilities
greater than the duties, obligations, and liabilities imposed on
such person as a member of the audit committee and board of
directors in the absence of such designation or identification.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees (b) Audit-Related Fees (1) (c) Tax Fees (2) (d) All Other Fees
Current Previous Current Previous Current Previous Current Previous
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Entity Name End End End End End End End End
Defined Strategy
Fund Inc. $22,700 $22,700 $0 $0 $6,100 $6,000 $0 $0
(1) The nature of the services include assurance and related services reasonably
related to the performance of the audit of financial statements not included
in Audit Fees.
(2) The nature of the services include tax compliance, tax advice and tax planning.
(e)(1) Audit Committee Pre-Approval Policies and Procedures:
The registrant's audit committee (the "Committee") has
adopted policies and procedures with regard to the pre-approval of
services. Audit, audit-related and tax compliance services provided
to the registrant on an annual basis require specific pre-approval
by the Committee. The Committee also must approve other non-audit
services provided to the registrant and those non-audit services
provided to the registrant's affiliated service providers that
relate directly to the operations and the financial reporting of the
registrant. Certain of these non-audit services that the Committee
believes are a) consistent with the SEC's auditor independence rules
and b) routine and recurring services that will not impair the
independence of the independent accountants may be approved by the
Committee without consideration on a specific case-by-case basis
("general pre-approval"). However, such services will only be
deemed pre-approved provided that any individual project does not
exceed $5,000 attributable to the registrant or $50,000 for all of
the registrants the Committee oversees. Any proposed services
exceeding the pre-approved cost levels will require specific pre-
approval by the Committee, as will any other services not subject to
general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to
general pre-approval at the next regularly scheduled in-person board
meeting.
(e)(2) None of the services described in each of Items 4(b)
through (d) were approved by the audit committee pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X.
(f) Not Applicable
(g) Affiliates' Aggregate Non-Audit Fees:
Current Previous
Fiscal Year Fiscal Year
Entity Name End End
Defined Strategy Fund Inc. $6,100 $2,176,750
(h) The registrant's audit committee has considered and determined
that the provision of non-audit services that were rendered to the
registrant's investment adviser(not including any sub-adviser whose
role is primarily portfolio management and is subcontracted with or
overseen by the registrant's investment adviser), and any entity
controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
that were not pre-approved pursuant to paragraph (c)(7)(ii) of Rule
2-01 of Regulation S-X is compatible with maintaining the principal
accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $2,094,000, 0%
Item 5 - Audit Committee of Listed Registrants - The following individuals
are members of the registrant's separately-designated standing audit
committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act (15 U.S.C. 78c(a)(58)(A)):
Alan R. Batkin (resigned as of February 22, 2007)
Steven W. Kohlhagen
Paul Glasserman
William J. Rainer
Laura S. Unger (effective September 12, 2007)
Item 6 - Schedule of Investments - The registrant's Schedule of Investments
is included as part of the Report to Stockholders filed under Item 1
of this form.
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - The Registrant has delegated the
voting of proxies relating to its voting securities to its
investment sub-advisor, Nuveen HydePark Group, LLC (the "Sub-
Adviser"). The Proxy Voting Policies and Procedures of the Sub-
Adviser (the "Proxy Voting Policies") are attached as an Exhibit
99.PROXYPOL hereto.
PROXY VOTING POLICIES AND PROCEDURES
FOR
NUVEEN ASSET MANAGEMENT-
DIRECT MANAGEMENT OF EQUITY ACCOUNTS
Introduction
Nuveen Asset Management ("NAM") provides direct (i.e., not through a
delegation to a sub-adviser) investment management services in equity
strategies to certain registered investment companies ("Equity Accounts"). NAM
maintains separate procedures with respect to providing direct services in
fixed income strategies or to registered funds in which a subadviser exercises
investment and voting discretion.
With respect to the Equity Accounts, NAM has engaged Institutional
Shareholder Services, Inc. ("ISS") to vote proxies for securities held in
client accounts, whether or not the proxy presented NAM with a material
conflict of interest. A member of NAM's legal and compliance department will
monitor the administration of the voting, ensure that records were maintained
in accordance with Rule 206(4)-6, and ensure that records of proxy voting
information were made available to the Equity Accounts. Based on the
information provided, each Equity Account would be responsible for preparing
and making any required filings (e.g., Form N-PX).
Exceptions to Voting Securities
NAM may instruct ISS not to vote proxies in respect of securities of any
issuer if it determines it would be in its clients' overall best interests not
to vote. Such determination may apply in respect of all client holdings of the
securities or only certain specified clients, as NAM deems appropriate under
the circumstances.
Generally, NAM would instruct ISS not to vote proxies associated with
the securities of any issuer if as a result of voting, subsequent purchases or
sales of such securities would be blocked. However, NAM may decide, on an
individual security basis, that it is in the best interests of its clients for
ISS to vote the proxy associated with such a security, taking into account the
loss of liquidity. In addition, NAM may instruct ISS not to vote proxies where
the voting would in NAM's judgment result in some other financial, legal,
regulatory disability or burden to NAM or the client (such as imputing control
with respect to the issuer).
To the extent that NAM receives proxies for securities that are
transferred into a client's portfolio that were not recommended or selected by
NAM and are sold or expected to be sold promptly in an orderly manner ("legacy
securities"), NAM will generally instruct ISS to refrain from voting such
proxies. In such circumstances, since legacy securities are expected to be
sold promptly, voting proxies on such securities would not further NAM's
interest in maximizing the value of client investments. NAM may agree to an
institutional client's special request to vote a legacy security proxy, and
would instruct ISS to vote such proxy in accordance with its guidelines.
In addition, NAM may determine: (a) not to recall securities on loan if,
in its judgment, the negative consequences to clients of disrupting the
securities lending program would outweigh the benefits of voting in the
particular instance or, (b) not to vote a proxy if, in its judgment, the
expense and administrative inconvenience outweighs the benefits to clients of
voting the securities.
Exceptions to ISS voting of proxies
If NAM determines that it wishes to override ISS's recommendations and
vote the proxy, it must first determine whether voting the proxy would present
it with a material conflict of interest.
Voting the securities of an issuer where the following relationships or
circumstances exist is deemed to give rise to a material conflict of interest
for purposes of these Policies and Procedures:
* The issuer is an investment advisory client of NAM that pays (or is
expected to pay) fees to NAM in excess of 1% of NAM's annual revenue in
the year in which the proxy is to be voted.
* The issuer is an entity in which an executive officer of NAM or a
relative (1) of any such person is or was (within the past three years
of the proxy vote) an executive officer or director or employee.
* Any other circumstance that NAM is aware of where NAM's duty to serve
its clients' interests, typically referred to as its "duty of loyalty,"
could be materially compromised.
A conflict of interest shall not be considered material for the purposes
of these Policies and Procedures in respect of a specific vote or circumstance
if the matter to be voted on relates to a restructuring of the terms of
existing securities or the issuance of new securities or a similar matter
arising out of the holding of securities, other than common equity, in the
context of a bankruptcy or threatened bankruptcy of the issuer, even if a
conflict described in the three bullets above is present.
In its process of determining whether there are material conflicts of
interest, NAM does not consider nonpublic information about the business
arrangements of its affiliates or their officers and directors. Business
arrangements that NAM is not actively involved in shall not be deemed to raise
a material conflict of interest for NAM.
NAM must document its reason(s) for voting the proxy in a manner
contrary to ISS's recommendations.
Recordkeeping and Retention
NAM shall retain records relating to the voting of proxies, including:
Copies of these Policies and Procedures and any amendments thereto.
A copy of each proxy ballot and proxy statement filed by the issuer with the
Securities and Exchange Commission ("Proxy Statement") that NAM receives
regarding client securities.
Records of each vote cast on behalf of clients; these records may be maintained
on an aggregate basis.
A copy of any documents created by NAM that were material to making a decision
on how to vote or that memorializes the basis for that decision.
A copy of each written request for information on how NAM voted proxies on
behalf of the client, and a copy of any written response by NAM to any (oral or
written) request for information on how NAM voted.
These records shall be maintained and preserved in an easily accessible place
for a period of not less than five years from the end of NAM's fiscal year
during which the last entry was made in the records, the first two years in an
appropriate office of NAM.
NAM may rely on proxy statements filed on the SEC's EDGAR system or on proxy
statements and records of votes maintained by ISS or another third party
service provider.
(1) For the purposes of these Guidelines, "relative" includes the following
family members: spouse, non-minor children or stepchildren living in the
same household.
Adopted: February 28, 2007
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - as
of September 30, 2007.
(a)(1) Mr. Rob A. Guttschow, CFA is primarily responsible for the
day-to-day management of the registrant's portfolio
("Portfolio Manager") since 2004. Mr. Guttschow is Managing
Director and Overlay Manager of Nuveen Asset Management
("NAM"). He is responsible for developing and implementing
derivatives-based hedging strategies for NAM. Mr. Guttschow
joined NAM in May 2004. Mr. Guttschow was a Managing
Director and Senior Portfolio Manager at Lotsoff Capital
Management ("LCM") from 1993 until 2004. While at LCM, Mr.
Guttschow managed a variety of taxable fixed income
portfolios and enhanced equity index products totaling $1.5
billion. Mr. Guttschow is a Chartered Financial Analyst
("CFA") and a member of the Association for Investment
Management Research. He has served as a member of the TRIAD
group for the Investment Analyst Society of Chicago.
Education: University of Illinois at Urbana/Champaign, B.S.,
M.B.A., CFA.
(a)(2) As of September 30, 2007:
(iii) Number of Other Accounts and
(ii) Number of Other Accounts Managed Assets for Which Advisory Fee is
and Assets by Account Type Performance-Based
Other Other
(i) Name of Registered Other Pooled Registered Other Pooled
Portfolio Investment Investment Other Investment Investment Other
Manager Companies Vehicles Accounts Companies Vehicles Accounts
Rob Guttschow,
CFA 6 0 3 1 0 0
$1,885,000,000 $0 $500,000 $24,900,000 $0 $0
(iv) Potential Material Conflicts of Interest
Real, potential or apparent conflicts of interest may arise when a
portfolio manager has day-to-day portfolio management
responsibilities with respect to more than one fund or account,
including the following:
Certain investments may be appropriate for the Fund and also for
other clients advised by the Adviser and its affiliates, including
other client accounts managed by the Fund's portfolio management
team. Investment decisions for the Fund and other clients are made
with a view to achieving their respective investment objectives and
after consideration of such factors as their current holdings,
availability of cash for investment and the size of their
investments generally. Frequently, a particular security may be
bought or sold for only one client or in different amounts and at
different times for more than one but less than all clients.
Likewise, because clients of the Adviser and its affiliates may have
differing investment strategies, a particular security may be bought
for one or more clients when one or more other clients are selling
the security. The investment results for the Fund may differ from
the results achieved by other clients of the Adviser and its
affiliates. In addition, purchases or sales of the same security may
be made for two or more clients on the same day. In such event, such
transactions will be allocated among the clients in a manner
believed by the Adviser and its affiliates to be equitable to each.
The Adviser will not determine allocations based on whether it
receives a performance-based fee from the client. In some cases, the
allocation procedure could have an adverse effect on the price or
amount of the securities purchased or sold by the Fund. Purchase and
sale orders for the Fund may be combined with those of other clients
of the Adviser and its affiliates in the interest of achieving the
most favorable net results to the Fund.
To the extent that the Fund's portfolio management team has
responsibilities for managing accounts in addition to the Fund, a
portfolio manager will need to divide his or her time and attention
among relevant accounts.
In some cases, a real, potential or apparent conflict may also arise
where (i) the Adviser may have an incentive, such as a performance-
based fee, in managing one account and not with respect to other
accounts it manages or (ii) where a member of the Fund's portfolio
management team owns an interest in one fund or account he or she
manages and not another.
NAM has adopted policies and procedures designed to address
conflicts of interest its portfolio managers may face.
(a)(3) As of September 30, 2007:
Portfolio Manager Compensation
Mr. Guttschow's compensation consists of three basic elements--base
salary, cash bonus and long-term incentive compensation. The
Subadviser's compensation strategy is to annually compare overall
compensation, including these three elements, to the market in order
to create a compensation structure that is competitive and
consistent with similar financial services companies. As discussed
below, several factors are considered in determining Mr. Guttschow's
total compensation. In any year these factors may include, among
others, the effectiveness of the investment strategies recommended
by Mr. Guttschow's investment team, the investment performance of
the accounts managed by Mr. Guttschow, and the overall performance
of Nuveen Investments, Inc. (the parent company of the Subadviser).
Although investment performance is a factor in determining Mr.
Guttschow's compensation, it is not necessarily a decisive factor.
Additionally, although the Subadviser will use a proprietary
benchmark consisting of a composite of the performance of the DJIASM
and a series of hypothetical call options written on the DIAMONDS
Trust (a passively managed investment trust that seeks investment
results that generally correspond to the price and yield performance
of the DJIASM) to evaluate Mr. Guttschow's performance, it is only
one factor used in deciding upon his compensation.
Base salary. Mr. Guttschow is paid a base salary that is set at a
level determined by the Subadviser in accordance with its overall
compensation strategy discussed above. The Subadviser is not under
any current contractual obligation to increase Mr. Guttschow's base
salary.
Cash bonus. Mr. Guttschow is also eligible to receive an annual cash
bonus. The level of this bonus is based upon evaluations and
determinations made by Mr. Guttschow's supervisors, along with
reviews submitted by his peers. These reviews and evaluations often
take into account a number of factors, including the effectiveness
of the investment strategies recommended to the Subadviser's
investment team, the performance of the accounts for which he serves
as portfolio manager relative to any benchmarks established for
those accounts, his effectiveness in communicating investment
performance to stockholders and their representatives, and his
contribution to the Subadviser's investment process and to the
execution of investment strategies. The cash bonus component is also
impacted by the overall performance of Nuveen Investments, Inc. in
achieving its business objectives.
Long-term incentive compensation. Mr. Guttschow is eligible to
receive bonus compensation in the form of equity-based awards issued
in securities issued by Nuveen Investments, Inc. The amount of such
compensation is dependent upon the same factors articulated for cash
bonus awards but also factors in his long-term potential with the
firm.
Material Conflicts of Interest. Mr. Guttschow's simultaneous
management of the Fund and the other registered investment company
noted above may present actual or apparent conflicts of interest
with respect to the allocation and aggregation of securities orders
placed on behalf of the Fund and the other account. The Subadviser,
however, believes that such potential conflicts are mitigated by the
fact that this Fund and the one other fund currently managed by
Mr. Guttschow are not actively managed with respect to the equity
securities chosen for each fund's portfolio and will generally
change their core equity portfolio holdings at different times.
The Subadviser has adopted several policies that address potential
conflicts of interest, including best execution and trade allocation
policies that are designed to ensure (1) that portfolio management
is seeking the best price for portfolio securities under the
circumstances, (2) fair and equitable allocation of investment
opportunities among accounts over time and (3) compliance with
applicable regulatory requirements. All accounts are to be treated
in a non-preferential manner, such that allocations are not based
upon account performance, fee structure or preference of the
portfolio manager. In addition, the Subadviser has adopted a Code of
Conduct that sets forth policies regarding conflicts of interest.
(a)(4) Beneficial Ownership of Securities. As of September 30,
2007, Mr. Guttschow did not beneficially own any stock
issued by the Fund.
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable due to no such
purchases during the period covered by this report.
Item 10 - Submission of Matters to a Vote of Security Holders - The
registrant's Nominating Committee will consider nominees to the
Board recommended by shareholders when a vacancy becomes available.
Shareholders who wish to recommend a nominee should send nominations
which include biographical information and set forth the
qualifications of the proposed nominee to the registrant's
Secretary. There have been no material changes to these procedures.
Item 11 - Controls and Procedures
11(a) - The registrant's principal executive and principal financial
officers or persons performing similar functions have concluded that
the registrant's disclosure controls and procedures (as defined in
Rule 30a-3(c) under the Investment Company Act of 1940, as amended
(the "1940 Act")) are effective as of a date within 90 days of the
filing of this report based on the evaluation of these controls and
procedures required by Rule 30a-3(b) under the 1940 Act and Rule
13a-15(b) under the Securities and Exchange Act of 1934, as amended.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act)
that occurred during the second fiscal quarter of the period covered
by this report that have materially affected, or are reasonably
likely to materially affect, the registrant's internal control over
financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Defined Strategy Fund Inc.
By: /s/ Mitchell M. Cox
-------------------
Mitchell M. Cox,
Chief Executive Officer (principal executive officer) of
Defined Strategy Fund Inc.
Date: November 19, 2007
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 (principal executive officer) of
Defined Strategy Fund Inc.
Date: November 19, 2007
By: /s/ James E. Hillman
---------------------
James E. Hillman,
Chief Financial Officer (principal financial officer) of
Defined Strategy Fund Inc.
Date: November 19, 2007