UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21413
Name of Fund: Floating Rate Income Strategies Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Floating Rate Income Strategies Fund, Inc., 800 Scudders Mill
Road, Plainsboro, NJ, 08536. Mailing address: P.O. Box 9011,
Princeton, NJ, 08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 08/31/06
Date of reporting period: 09/01/05 - 02/28/06
Item 1 - Report to Stockholders
Semi-Annual Report
February 28, 2006
Floating Rate
Income Strategies Fund, Inc.
(BULL LOGO) Merrill Lynch Investment Managers
www.mlim.ml.com
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
Floating Rate Income Strategies Fund, Inc. seeks a high current income and
such preservation of capital as is consistent with "investment in a
diversified, leveraged portfolio consisting primarily of floating rate debt
securities and instruments.
This report, including the financial information herein, is transmitted for
use only to the shareholders of Floating Rate Income Strategies Fund, Inc. for
their information. It is not a prospectus, circular or representation intended
for use in the purchase of shares of the Fund or any securities mentioned in
this report. Past performance results shown in this report should not be
considered a representation of future performance. The Fund leverages its
Common Stock to provide Common Stock shareholders with a potentially higher
rate of return. Leverage creates risk for Common Stock shareholders, including
the likelihood of greater volatility of net asset value and market price of
Common Stock shares, and the risk that fluctuations in short-term interest
rates may reduce the Common Stock's yield. Statements and other information
herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities is available (1)
without charge, upon request, by calling toll-free 1-800-637-3863; (2) at
www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Fund voted proxies
relating to securities held in the Fund's portfolio during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and
(2) on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Floating Rate Income Strategies Fund, Inc.
Box 9011,
Princeton, NJ 08543-9011
(GO PAPERLESS LOGO)
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Floating Rate Income Strategies Fund, Inc.
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company that will be one of the world's largest asset management
firms with nearly $1 trillion in assets under management (based on combined
assets under management as of December 31, 2005). The transaction is expected
to close in the third quarter of 2006, at which time the new company will
operate under the BlackRock name. If approved by the Fund's Board of Directors
and Fund shareholders, the combined company that results from the transaction
is expected to become the investment adviser of the Fund.
The Benefits and Risks of Leveraging
Floating Rate Income Strategies Fund, Inc. utilizes leverage through
borrowings or issuance of short-term debt securities or shares of Preferred
Stock. The concept of leveraging is based on the premise that the cost of
assets to be obtained from leverage will be based on short-term interest
rates, which normally will be lower than the income earned by the Fund on its
longer-term portfolio investments. To the extent that the total assets of the
Fund (including the assets obtained from leverage) are invested in higher-
yielding portfolio investments, the Fund's Common Stock shareholders will be
the beneficiaries of the incremental yield.
Leverage creates risks for holders of Common Stock including the likelihood of
greater net asset value and market price volatility. In addition, there is the
risk that fluctuations in interest rates on borrowings (or in the dividend
rates on any Preferred Stock, if the Fund were to issue the Preferred Stock)
may reduce the Common Stock's yield and negatively impact its market price. If
the income derived from securities purchased with assets received from
leverage exceeds the cost of leverage, the Fund's net income will be greater
than if leverage had not been used. Conversely, if the income from the
securities purchased is not sufficient to cover the cost of leverage, the
Fund's net income will be less than if leverage had not been used, and
therefore the amount available for distribution to Common Stock shareholders
will be reduced.
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
A Letter From the President
Dear Shareholder
Financial markets began 2006 with a return to volatility following a fairly
uninspiring 2005. For the six- and 12-month periods ended February 28, 2006,
most major market indexes landed in positive territory:
Total Returns as of February 28, 2006 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) + 5.93% + 8.40%
Small cap U.S. equities (Russell 2000 Index) +10.24 +16.59
International equities (MSCI Europe, Australasia, Far East Index) +15.14 +17.41
Fixed income (Lehman Brothers Aggregate Bond Index) - 0.11 + 2.74
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 0.99 + 3.87
High yield bonds (Credit Suisse High Yield Index) + 1.89 + 3.27
The Federal Reserve Board (the Fed) increased interest rates 200 basis points
(2.00%) over the past 12 months, bringing the target federal funds rate to
4.5%. Notably, Ben Bernanke replaced Alan Greenspan as Fed chairman in
January, a month after the central bank removed the critical word "measured"
from the description of its rate-hiking program. Still, most observers expect
at least one more interest rate hike before the Fed pauses in its tightening
campaign.
U.S. economic growth, which came in at 4.1% in the third quarter of 2005, fell
to 1.6% in the fourth quarter. Growth is expected to reaccelerate in the first
quarter of 2006, although the economy is likely to feel some pressure in the
quarters ahead as the consumer sector seems to be softening. Capital spending
by businesses, however, appears relatively strong. Overall corporate health,
including strong company balance sheets, helped prompt robust dividend-
distribution, share-buyback and merger-and-acquisition activity in 2005, a
trend that has continued in 2006. This, as well as reasonably good company
earnings and low core inflation, has been supportive of U.S. stocks despite
the headwinds of rising interest rates and high energy prices. Many
international equity markets have fared even better, thanks in part to higher
economic growth rates and low inflation.
In the U.S. bond market, short-term interest rates continued to move higher
as longer-term interest rates advanced more moderately. After flattening
dramatically in 2005, the Treasury curve recently has been toying with bouts
of inversion, whereby short-term yields have surpassed long-term yields. At
period-end, the six-month Treasury bill offered the highest yield on the curve
at 4.74%.
Amid the uncertainty inherent in the financial markets, we encourage you
to review your goals periodically with your financial advisor and to
make portfolio changes, as needed. For timely "food for thought" for
investors, we also invite you to visit Shareholder magazine at
www.mlim.ml.com/shareholdermagazine. As always, we thank you for trusting
Merrill Lynch Investment Managers with your investment assets, and we
look forward to continuing to serve your investment needs.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Director
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
A Discussion With Your Fund's Portfolio Manager
The Fund outperformed its composite benchmark on a total return basis for the
period and provided attractive relative yields in a largely positive
environment for leveraged loans.
Describe market conditions during the period.
During the six-month period, the performance of the bank loan market benefited
from the rising London InterBank Offered Rate (LIBOR), decreasing spreads and
increasing demand for bank loans on the part of collateralized loan
obligations (CLOs), which kept prices close to par value. Investors earned
total returns consisting mainly of interest payments, as there were only
marginal net price changes. For the six months ended February 28, 2006, the
Credit Suisse Leveraged Loan Index returned +3.02%.
CLO issuance continues to drive supply and demand in the market. With strong
CLO issuance and relatively constrained loan supply, prices most likely will
rise and, more importantly, refinancing activity may increase. Changes to
leverage loan ratings currently under consideration by Moody's Investors
Service may allow greater leverage on new structures. The current relatively
benign credit environment also could contribute to lower spreads.
At the end of February, Standard & Poor's Leveraged Commentary & Data reported
a default rate of 2.09% based on number of loans, a 26-month high. Despite the
increase, the rate is still below the historical average of 3.56%. Although
defaults are expected to continue to increase, we do not expect default rates
to rise significantly above 3% for 2006.
High yield bonds, in which the Fund may invest up to 20% of its assets,
returned +1.89% for the six-month period, as measured by the Credit Suisse
High Yield Index. Much of the gain occurred in the first two months of 2006,
as the high yield market benefited from increasing strength in the U.S.
economy.
How did the Fund perform during the period?
For the six-month period ended February 28, 2006, the Common Stock of Floating
Rate Income Strategies Fund, Inc. had net annualized yields of 7.36% and
7.98%, based on a period-end per share net asset value of $19.30 and a per
share market price of $17.81, respectively, and $0.705 per share income
dividends. Over the same period, the total investment return on the Fund's
Common Stock was +3.84%, based on a change in net asset value from $19.35 to
$19.30, and assuming reinvestment of all distributions. The Fund's composite
benchmark, which consists 80% of the Credit Suisse Leveraged Loan Index and
20% of the Credit Suisse High Yield Index, returned +2.79% for the six-month
period.
For a description of the Fund's total investment return based on a change in
the per share market value of the Fund's Common Stock (as measured by the
trading price of the Fund's shares on the New York Stock Exchange), and
assuming reinvestment of dividends, please refer to the Financial Highlights
section of this report. As a closed-end fund, the Fund's shares may trade in
the secondary market at a premium or discount to the Fund's net asset value.
As a result, total investment returns based on changes in the market value of
the Fund's Common Stock can vary significantly from total investment returns
based on changes in the Fund's net asset value.
What factors most influenced Fund performance?
Security selection in the energy - other, gaming and manufacturing sectors
enhanced performance during the period, while our holdings in the chemical,
automotive and packaging sectors detracted from results.
In the energy - other sector, we saw strong performance from the common stock
of Trico Marine Services, Inc. and a bank loan issued by Dresser, Inc. Trico
Marine provides shipping services to the offshore oil and gas industry. Its
supply vessels serve the offshore oil and gas industry in the Gulf of Mexico
and the North Sea, two markets that have been booming as a result of high
energy prices. Following Trico's emergence from bankruptcy, the new common
stock has performed well as most of the company's debt has been eliminated.
While Dresser has struggled to deliver timely financial statements, the
company's energy-related flow measurement and compression business continues
to perform well. Dresser made an additional bank debt pre-payment in January
2006, continuing a trend of paying down its debt with free cash flow.
Within the gaming sector, Fund performance benefited from our holdings in
Majestic Star Casino high yield bonds. Majestic Star acquired Trump Indiana
during the period with a financing that was very favorable relative to the
company's existing 9.50% bonds. Most of the new debt to fund the acquisition
was subordinate to the existing 9.50% senior secured notes. That is, if the
company defaulted on its debt, holders of the 9.50% senior secured notes would
be paid before the holders of the new issues. The new deal significantly
improved the company's leverage profile.
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
In manufacturing, our position in a security of Medis Technologies Ltd., a
healthcare equipment manufacturer, benefited Fund results. During the period,
the company continued to market and deploy its semi-manufactured power pack
units, delivering them in bulk to Underwriters Laboratories for testing and to
General Dynamics under the ruggedized military personal digital assistant
contract. These positive developments prompted a rally in the price of Medis'
common stock, thereby increasing the value of the company's convertible
securities by approximately 10% during the period. (Convertible securities can
be exchanged for a certain number of shares of a company's common stock at a
specified price.)
Fund performance in the chemical sector was hindered mainly by our holdings in
the common stock and floating rate notes of GEO Specialty Chemicals, Inc.,
manufacturer of a diverse range of products for several niche markets. High
energy and raw materials prices hurt GEO's profit margins as its costs rose
faster than the prices of its products. This trend has abated in the near
term, and we believe 2006 will be a key turnaround year for the company.
Detracting from performance in the automotive sector was our position in the
debt of General Motors Corp. (GM). A voluntary bankruptcy filing by Delphi,
one of GM's largest suppliers, sparked investor concerns regarding the
potential for a disruption in the supply of parts to GM during the critical
launch of a new truck platform in 2006. Also of concern was the possibility of
a prolonged strike at Delphi and the prospect that GM might need to subsidize
a restructuring of Delphi's wage and benefit agreements with union workers.
Finally, Fund results in the packaging sector were hindered by our holding in
Wise Metals Group LLC, a manufacturer of aluminum cans for companies in the
beverage and food packaging industries, which declined amid speculation that
the company had liquidity concerns. We were confident this was not true, and
the bonds have returned to their previous price levels.
What changes were made to the portfolio during the period?
The Fund purchased assets of approximately $117.5 million in par amount (face
value), and experienced $77.3 million in repayments from issuers. We sold
roughly $65.1 million in assets while attempting to minimize sales given our
desire to maintain a relatively small cash position.
During the period, we maintained significant exposure to the utility, cable
and gaming industries and reduced the Fund's exposure to the paper and forest
products sector. In addition, we continued to target a fixed rate securities
allocation of roughly 15% and a leverage ratio of approximately 30%.
How would you characterize the Fund's position at the close of the period?
At period-end, the portfolio was composed of 178 issuers spread among 29
industries. The Fund was underweight versus its composite benchmark in
securities rated Ba or better, Caa or below and unrated credits, and had an
overweight position in B-rated securities.
We anticipate that many of the same factors that influenced leveraged loan
securities in the past year will remain intact. We believe the trends of less
frequent new-loan issuance, lower interest rate spreads and above-par
secondary market prices will continue, especially given the benign credit
environment we expect over the next year. A further benefit to the market
should be an increase in the three-month LIBOR. Consequently, we intend to
continue to purchase assets predominately in the primary market while
selectively participating in the secondary market.
Joseph P. Matteo
Vice President and Co-Portfolio Manager
Jaimin Patel
Vice President and Co-Portfolio Manager
March 14, 2006
We are pleased to announce that Jaimin Patel was named Vice President and
Portfolio Manager of Floating Rate Income Strategies Fund, Inc. Effective
March 31, 2006, Mr. Patel is solely responsible for the day-to-day management
of the Fund's portfolio. Mr. Patel has been a Director (Global Fixed Income)
of Merrill Lynch Investment Managers since 2005 and was a Vice President
thereof from 2000 to 2005. Previously, he was a Vice President at Chase
Securities, Inc. from 1993 to 2000.
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Portfolio Information
As of February 28, 2006
Percent of
Ten Largest Holdings Net Assets
Charter Communications Operating LLC
Tranche B Term Loan, 7.86% - 7.92%
due 4/07/2011 6.0%
Century Cable Holdings LLC, Discretionary
Term Loan, 9.50% due 12/31/2009 3.3
Metro-Goldwyn-Mayer Studios, Inc.
Term Loan B, 6.78% due 4/30/2011 2.9
Huntsman ICI Holdings Term Loan B,
6.32% due 8/16/2012 2.0
PanAmSat Corp. Tranche B Term Loan,
6.489% due 8/20/2011 2.0
Nalco Co. Tranche B Term Loan, 6.25% - 6.48%
due 11/04/2010 1.9
Berry Plastics Corp. Term Loan, 6.447%
due 12/02/2011 1.7
Cincinnati Bell, Inc., 8.375% due 1/15/2014 1.7
Felcor Lodging LP, 8.83% due 6/01/2011 1.6
Dr. Pepper/Seven Up Bottling Group, Inc.
Term Loan B, 6.57% due 12/19/2010 1.5
Percent of
Five Largest Industries Net Assets
Cable--U.S. 20.0%
Utility 14.0
Chemicals 9.1
Gaming 8.8
Manufacturing 6.4
For Fund compliance purposes, the Fund's industry classifications
refer to any one or more of the industry sub-classifications used
by one or more widely recognized market indexes or ratings group
indexes, and/or as defined by Fund management. This definition
may not apply for purposes of this report, which may combine
industry sub-classifications for reporting ease.
Percent of
Total
Quality Ratings by S&P/Moody's Investments
BBB/Baa 2.3%
BB/Ba 32.3
B/B 53.8
CCC/Caa 4.4
D 0.4
NR (Not Rated) 5.9
Other* 0.9
* Includes portfolio holdings in common stocks, warrants, rights
and short-term investments.
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Schedule of Investments
Face
Amount Floating Rate Loan Interests** Value
Aerospace & Defense--3.6%
$2,400,000 IAP Worldwide Services, Inc. First Lien Term
Loan, 7.625% due 12/30/2012 $ 2,428,500
1,874,807 K&F Industries, Inc. Term Loan, 6.86% - 8.50%
due 11/18/2013 1,900,000
2,101,911 MRO Acquisitions Corp. First Lien Term Loan,
7.48% due 8/27/2010 2,134,753
2,777,778 Standard Aero Holdings Term Loan,
6.83% - 6.96% due 8/24/2012 2,761,286
Vought Aircraft Industries, Inc.:
2,912,329 Term Loan, 7.10% due 12/22/2011 2,949,188
560,000 Tranche B Line of Credit Deposit, 7.10%
due 12/22/2010 566,230
---------------
12,739,957
Airlines--0.7%
1,000,000 Delta Air Lines, Inc. Term Loan B,11.01%
due 3/27/2008 1,039,750
1,312,500 United Air Lines Term Loan B, 8.625%
due 2/01/2012 1,336,781
---------------
2,376,531
Automotive--2.8%
2,672,143 Affinia Group Term Loan B, 7.67%
due 11/30/2011 2,650,432
1,250,000 Delphi Corp. Tranche B Dip Jp Pr, 7.375%
due 10/08/2007 1,271,875
1,618,283 Keystone Automotive Operations, Inc. Term Loan,
6.497% - 7.07% due 10/30/2009 1,626,375
Tenneco Automotive, Inc.:
2,896,483 Term Loan B, 7.02% due 12/12/2010 2,941,741
1,272,374 Tranche B-1 Credit Linked Deposit, 6.82%
due 12/12/2010 1,292,255
---------------
9,782,678
Broadcasting--2.7%
1,316,327 Emmis Operating Co. Term Loan B, 6.32%
due 11/10/2011 1,326,302
2,000,000 Gray Communications Term Loan B, 6.03%
due 11/22/2012 2,016,000
NextMedia Group, Inc.:
383,654 Delay Draw Term Loan, 6.57%
due 11/15/2012 387,011
863,221 First Lien Term Loan, 6.57% due 11/15/2012 870,774
1,750,000 Second Lien Term Loan, 9.07%
due 11/15/2013 1,783,542
3,250,000 Paxson Communications Corp. First Lien Term
Loan, 7.777% due 11/15/2012 3,260,156
---------------
9,643,785
Cable--U.S.--17.1%
12,000,000 Century Cable Holdings LLC, Discretionary Term
Loan, 9.50% due 12/31/2009 11,760,000
20,905,260 Charter Communications Operating LLC Tranche B
Term Loan, 7.86% - 7.92% due 4/07/2011 21,169,648
2,000,000 DIRECTV Holdings, Inc. Tranche B Term Loan,
5.983% - 6.07% due 4/13/2013 2,025,312
5,000,000 Hilton Head Communications UCA Term Loan B,
8.75% due 3/31/2008 4,872,395
4,900,000 Insight Midwest Holdings LLC Term Loan C,
6.563% due 12/31/2009 4,974,059
2,970,000 Intelsat Ltd. Term Loan, 5.25% due 7/28/2011 3,004,342
Face
Amount Floating Rate Loan Interests** Value
Cable--U.S. (concluded)
$2,200,000 Mediacom Broadband Group Tranche A Term
Loan, 5.54% - 6.04% due 3/31/2010 $ 2,200,785
3,168,000 Mediacom Communications LLC Tranche B Term
Loan, 6.18% - 7% due 3/31/2013 3,215,520
6,912,500 PanAmSat Corp. Tranche B Term Loan,
6.489% due 8/20/2011 7,005,390
---------------
60,227,451
Chemicals--7.6%
1,965,000 Hercules, Inc. Term Loan B, 6.027% - 6.06%
due 10/08/2010 1,982,602
7,033,079 Huntsman ICI Holdings Term Loan B, 6.32%
due 8/16/2012 7,082,529
974,899 Invista Canada Term Loan, 6.375%
due 4/29/2011 982,211
2,215,680 Invista SARL, 6.375% due 4/29/2011 2,243,837
985,000 Lyondell-Citgo Refining Term Loan, 6.527%
due 5/21/2007 994,850
6,658,852 Nalco Co. Tranche B Term Loan, 6.25% - 6.48%
due 11/04/2010 6,734,223
1,980,000 Rockwood Specialties Group, Inc. Tranche D
Term Loan, 6.668% due 12/10/2012 2,007,845
4,750,000 Wellman, Inc. Second Lien Term Loan, 11.43%
due 2/10/2010 4,874,688
---------------
26,902,785
Consumer--Durables--1.9%
Simmons Co.:
4,500,000 Term Loan, 8.50% due 6/19/2012 4,561,173
2,283,534 Tranche B Term Loan, 7.125% - 8.50%
due 12/19/2011 2,288,530
---------------
6,849,703
Consumer--Non-Durables--1.1%
1,584,295 American Achievement Corp. Term Loan B,
6.92% due 3/22/2011 1,612,020
1,488,750 Burt's Bees, Inc. Term Loan, 7.04% - 7.44%
due 3/29/2011 1,508,290
756,000 Camelbak Products LLC First Lien Term Loan,
8.67% due 8/04/2011 732,375
---------------
3,852,685
Diversified Media--4.2%
4,635,843 Liberty Group Operating Term Loan B, 6.875%
due 2/28/2012 4,681,335
10,000,000 Metro-Goldwyn-Mayer Studios, Inc. Term Loan B,
6.78% due 4/30/2011 10,128,980
---------------
14,810,315
Energy--Other--1.7%
2,750,000 Dresser, Inc. Term Loan Unsecured, 7.99%
due 2/25/2010 2,825,625
1,500,000 Key Energy Services, Inc. Term Loan B,
7.52% - 7.78% due 6/30/2012 1,523,438
1,500,000 Markwest Energy Operating Co. LLC Term Loan B,
6.82% due 12/29/2010 1,518,750
---------------
5,867,813
Food & Drug--0.2%
750,000 Alimentation Couche-Tard, Inc. US Term Loan,
6.375% due 12/17/2010 759,688
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Schedule of Investments (continued)
Face
Amount Floating Rate Loan Interests** Value
Food & Tobacco--3.7%
$1,000,000 Bolthouse Farms, Inc. Second Lien Term Loan,
10.07% due 12/01/2013 $ 1,026,250
1,483,750 Commonwealth Brands Term Loan, 7%
due 12/22/2012 1,503,224
3,184,781 Constellation Brands Term Loan B,
5.75% - 6.375% due 11/30/2011 3,229,766
1,134,656 Doane Pet Care Co. Tranche B Term Loan,
6.621% - 6.94% due 10/24/2012 1,151,676
5,304,723 Dr. Pepper/Seven Up Bottling Group, Inc.
Term Loan B, 6.57% due 12/19/2010 5,384,294
794,167 Pierre Foods, Inc. Term Loan B, 6.56%
due 6/30/2010 804,839
---------------
13,100,049
Gaming--6.4%
1,970,000 Boyd Gaming Corp. Term Loan, 5.70% - 6.027%
due 6/30/2011 1,993,804
810,874 Global Cash Access LLC Term Loan B, 6.855%
due 3/10/2010 822,023
1,965,150 Green Valley Ranch Gaming LLC Term Loan,
6.527% due 12/22/2010 1,992,171
897,750 Isle of Capri Black Hawk Term Loan B,
6.48% - 6.81% due 10/24/2011 904,483
995,000 Isle of Capri Casinos, Inc. Tranche 3 Delay Draw
Term Loan, 6.277% due 2/04/2011 1,009,054
3,241,875 Penn National Gaming, Inc. Term Loan B,
6.28% - 6.46% due 10/03/2012 3,289,492
2,000,000 Pinnacle Entertainment Term Loan, 6.57%
due 12/15/2011 2,021,250
5,001,000 Resorts International First Lien Term Loan, 7.53%
due 4/26/2012 4,994,749
1,492,500 Trump Entertainment Resorts Holdings LP
Term Loan B-1, 7.17% due 5/01/2012 1,511,156
Venetian Casino Resort LLC:
1,000,000 Delay Draw Term Loan, 6.28%
due 6/15/2011 1,010,859
3,100,000 Term Loan B, 6.28% due 6/15/2011 3,133,663
---------------
22,682,704
Health Care--3.8%
2,765,000 Community Health Systems, Inc. Term Loan,
6.36% - 6.56% due 8/19/2011 2,803,019
3,291,750 DaVita Inc. Tranche B Term Loan, 6.54% - 7.05%
due 10/05/2012 3,343,868
1,140,387 Duloxetine Royalty Term Loan, 9.10%
due 10/18/2013 1,146,089
HealthSouth Corp.:
1,958,906 Term Loan, 7.11% due 3/08/2010 1,968,090
531,250 Tranche B Term Loan, 6.89% due 3/08/2010 533,741
1,912,165 LifePoint Hospitals, Inc. Term Loan B, 6.185%
due 4/15/2012 1,925,843
804,545 Orthofix International NV Term Loan B, 6.60%
due 12/15/2008 809,071
676,285 Rotech Healthcare, Inc. Term Loan B, 7.53%
due 3/31/2008 681,357
---------------
13,211,078
Face
Amount Floating Rate Loan Interests** Value
Housing--3.1%
$2,920,211 Headwaters, Inc. Term Loan B-1, 8.86%
due 4/30/2011 $ 2,944,545
1,166,053 LIONS Gables Realty Term Loan B, 6.32%
due 9/30/2006 1,173,549
2,462,500 Nortek, Inc. Term Loan, 6.94% - 8.50%
due 8/27/2011 2,485,586
4,380,452 PGT Industries, Inc. First Lien Term Loan,
7.75% due 2/14/2012 4,380,452
---------------
10,984,132
Information Technology--2.1%
3,520,000 Fidelity National Information Solutions, Inc.
Term Loan B, 6.32% due 3/09/2013 3,549,012
1,990,000 SunGard Data Systems, Inc. Term Loan B,
7.215% due 2/11/2013 2,020,827
1,985,000 Telcordia Technologies, Inc. Term Loan, 7.22%
due 9/15/2012 1,966,391
---------------
7,536,230
Leisure--1.2%
4,000,000 24 Hour Fitness Term Loan B, 7.54% - 7.70%
due 6/08/2012 4,065,000
Manufacturing--5.0%
2,500,000 Communications & Power Industries, Inc.
Term Loan, 6.82% due 7/23/2010 2,523,957
2,000,000 Invensys International Holdings Ltd. Second Lien
Term Loan, 9.431% due 12/04/2009 2,045,000
162,162 Itron, Inc. Tranche C Term Loan, 6.188% - 8.25%
due 12/17/2010 163,176
2,481,250 Metokote Corp. Second Lien Term Loan,
7.53% - 7.67% due 11/27/2011 2,495,207
4,488,750 Mueller Group LLC Term Loan B,
6.466% - 7.06% due 10/03/2012 4,549,267
Sensus Metering Systems, Inc.:
5,284,783 Term Loan B-1, 7.07% - 7.44%
due 12/17/2010 5,342,588
683,207 Term Loan B-2, 7.22% - 7.44%
due 12/19/2010 690,679
---------------
17,809,874
Packaging--4.2%
6,036,444 Berry Plastics Corp. Term Loan, 6.447%
due 12/02/2011 6,126,363
2,970,000 Graham Packaging Co. LP Term Loan B,
6.75% - 6.938% due 10/07/2011 3,012,694
1,975,000 Intertape Polymer US, Inc. Term Loan B,
6.73% - 8.25% due 7/28/2011 2,003,801
Owens-Illinois Group, Inc.:
525,619 Term Loan B-1, 6.35% due 4/01/2008 528,986
3,240,129 Tranche Term Loan C, 6.39%
due 4/01/2008 3,261,394
---------------
14,933,238
Paper--3.0%
1,362,429 Boise Cascade Holdings LLC Tranche D
Term Loan, 6.281% - 6.375% due 10/28/2011 1,381,549
Georgia Pacific Corp.:
1,000,000 First Lien Term Loan B, 6.56% due 2/14/2013 1,008,917
1,000,000 Second Lien Term Loan, 7.56%
due 2/14/2014 1,000,000
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Schedule of Investments (continued)
Face
Amount Floating Rate Loan Interests** Value
Paper (concluded)
$ 1,685,064 Riverside Energy Center Term Loan, 8.918%
due 6/24/2011 $ 1,710,340
SP Newsprint Co. Tranche B-1:
1,972,738 Credit Linked Deposit, 4.605%
due 1/09/2010 2,002,329
762,735 Term Loan, 6.82% - 6.86%
due 1/09/2010 774,176
2,758,769 Smurfit Stone Container Corp. Term Loan C,
6.75% - 6.875% due 11/01/2011 2,797,736
---------------
10,675,047
Retail--1.2%
1,160,574 American Reprographics Co. Term Loan, 6.26%
due 6/18/2009 1,173,631
1,687,172 General Nutrition Centers, Inc. Tranche B
Term Loan, 7.61% - 7.80% due 12/05/2009 1,710,898
1,424,051 The Neiman Marcus Group, Inc. Term Loan,
6.947% due 4/06/2013 1,446,301
---------------
4,330,830
Service--4.1%
1,995,000 Baker Tanks, Inc. Term Loan B, 7.105% - 7.206%
due 11/23/2012 2,023,678
2,856,500 Burhrmann USA, Inc. Term Loan C,
6.238% - 6.44% due 12/23/2010 2,896,671
2,000,000 Coinmach Laundry Corp. Term Loan B, 7.125%
due 12/16/2012 2,033,334
2,469,165 Coinstar, Inc. Term Loan, 6.55% due 7/07/2011 2,495,400
1,000,000 RGIS Inventory Specialists First Lien Term Loan,
7.12% due 12/31/2012 1,006,875
United Rentals, Inc.:
810,132 Term Loan, 6.86% due 2/14/2011 820,596
164,912 Tranche B Credit Linked Deposit, 4.57%
due 2/14/2011 167,042
Weight Watchers International, Inc.:
1,964,706 First Lien Term Loan, 6.82% - 6.85%
due 11/18/2010 1,989,265
1,000,000 Term Loan C, 9.489% due 4/18/2006 1,014,375
---------------
14,447,236
Telecommunications--0.6%
2,172,500 Consolidated Communications, Inc. Term Loan D,
6.118% - 6.28% due 10/14/2011 2,197,393
Utility--11.6%
1,571,429 AES Corp. Term Loan, 5.69% - 6.75%
due 4/30/2008 1,591,857
4,902,199 Calpine Corp. Term Loan B,10.35%
due 7/16/2007 (f) 4,567,217
Calpine Generating Co. LLC:
1,500,000 First Lien Term Loan, 8.041% due 4/01/2009 1,573,125
2,500,000 Second Lien Term Loan,10.041%
due 3/11/2010 2,701,875
2,318,052 Cogentrix Delaware Holdings, Inc. Term Loan,
6.28% due 4/15/2012 2,344,371
Face
Amount Floating Rate Loan Interests** Value
Utility (concluded)
Covanta Energy Corp.:
$2,487,805 First Lien Letter of Credit, 3.85% - 3.89%
due 6/24/2012 $ 2,531,341
1,677,896 First Lien Term Loan, 7.52% - 7.581%
due 6/24/2012 1,707,260
2,500,000 Second Lien Term Loan, 10.019% - 10.081%
due 6/24/2013 2,546,875
El Paso Corp.:
1,425,000 Deposit Account, 4.29% - 7.313%
due 11/23/2009 1,440,239
2,327,500 Term Loan, 7.313% due 11/23/2009 2,357,401
4,962,500 KGen LLC Tranche A Term Loan, 7.152%
due 8/05/2011 4,962,500
2,493,750 LSP Kendall Energy Term Loan B, 6.527%
due 10/07/2013 2,498,944
436,122 Midwest Generation LLC Term Loan C,
6.28% - 6.39% due 4/27/2011 441,778
500,000 Mirant Corp. Term Loan B, 6.32% due 1/03/2013 504,553
2,450,000 Quanta Services, Inc. Credit Linked Deposit,
4.50% - 7.50% due 6/19/2008 2,482,156
1,153,822 Reliant Energy, Inc. Term Loan, 6.089%
due 4/30/2010 1,152,650
Rocky Mountain Energy Center LLC:
133,966 Credit Linked Deposit, 4.568% due 6/24/2011 135,975
1,165,871 Term Loan, 8.918% due 6/24/2011 1,183,360
Wolf Hollow I, L.P.:
1,500,000 First Lien Term Loan, 6.751%
due 6/22/2012 1,516,407
1,200,000 Letter of Credit, 6.72% due 6/22/2012 1,213,126
300,000 Revolving Credit, 6.72% due 6/22/2012 302,812
1,000,000 Second Lien Term Loan, 9.001%
due 12/22/2012 1,015,000
---------------
40,770,822
Wireless Communications--0.6%
2,154,167 Centennial Cellular Operating Co. Term Loan,
6.45% - 7.23% due 2/09/2011 2,185,880
Total Floating Rate Loan Interests
(Cost--$329,330,551)--94.2% 332,742,904
Corporate Bonds
Automotive--0.2%
700,000 Tenneco Automotive, Inc., 8.625%
due 11/15/2014 696,500
Broadcasting--2.1%
737,143 Emmis Communications Corp.,10.366%
due 6/15/2012 (a) 737,143
4,000,000 Granite Broadcasting Corp., 9.75%
due 12/01/2010 3,620,000
3,000,000 Paxson Communications Corp.,10.777%
due 1/15/2013 (a)(b) 2,902,500
250,000 XM Satellite Radio, Inc., due 5/01/2009 (a) 253,438
---------------
7,513,081
Cable--International--0.1%
375,000 NTL Cable Plc, 8.75% due 4/15/2014 382,500
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Schedule of Investments (continued)
Face
Amount Corporate Bonds Value
Cable--U.S.--2.9%
CSC Holdings Inc.:
$1,000,000 8.125% due 7/15/2009 $ 1,031,250
3,000,000 Series B, 7.625% due 4/01/2011 3,022,500
Cablevision Systems Corp. Series B:
2,000,000 8.716% due 4/01/2009 (a) 2,067,500
2,000,000 8% due 4/15/2012 1,965,000
Intelsat Bermuda Ltd. (b):
750,000 9.609% due 1/15/2012 (a) 765,000
500,000 8.25% due 1/15/2013 511,250
800,000 Quebecor Media, Inc., 7.75% due 3/15/2016 (b) 820,000
---------------
10,182,500
Chemicals--1.5%
2,011,000 GEO Specialty Chemicals, Inc.,13.036%
due 12/31/2009 (b)(c) 1,729,460
1,125,000 Nova Chemicals Corp., 7.561%
due 11/15/2013 (a)(b) 1,147,500
2,275,000 PolyOne Corp.,10.625% due 5/15/2010 2,439,938
---------------
5,316,898
Consumer--Non-Durables--0.1%
350,000 Samsonite Corp., 8.875% due 6/01/2011 370,125
Diversified Media--0.4%
RH Donnelley Corp. (b):
250,000 6.875% due 1/15/2013 235,000
550,000 8.875% due 1/15/2016 574,063
450,000 Series A-2, 6.875% due 1/15/2013 423,000
250,000 Universal City Florida Holding Co. I, 9.43%
due 5/01/2010 (a) 253,750
---------------
1,485,813
Energy--Other--0.5%
1,400,000 Allis-Chalmers Energy, Inc., 9%
due 1/15/2014 (b) 1,400,000
250,000 Aventine Renewable Energy Holdings, Inc.,
10.491% due 12/15/2011 (a)(b) 263,750
---------------
1,663,750
Food & Drug--0.2%
500,000 Stripes Acquisition LLC,10.625%
due 12/15/2013 (b) 522,500
Food & Tobacco--1.2%
250,000 AmeriQual Group LLC, 9% due 4/01/2012 (b) 262,500
3,000,000 Smithfield Foods, Inc., 7% due 8/01/2011 3,037,500
1,050,000 The Wornick Co.,10.875% due 7/15/2011 1,094,625
---------------
4,394,625
Gaming--2.4%
1,100,000 Galaxy Entertainment Finance Co. Ltd., 9.655%
due 12/15/2010 (a)(b) 1,135,750
2,000,000 Little Traverse Bay Bands of Odawa Indians,
10.25% due 2/15/2014 (b) 1,975,000
5,000,000 Majestic Star Casino LLC, 9.50%
due 10/15/2010 5,350,000
---------------
8,460,750
Face
Amount Corporate Bonds Value
Health Care--0.2%
$ 575,000 US Oncology, Inc., 9% due 8/15/2012 $ 615,250
Information Technology--3.6%
4,050,000 Freescale Semiconductor, Inc., 7.35%
due 7/15/2009 (a) 4,151,250
4,625,000 MagnaChip Semiconductor SA, 7.741%
due 12/15/2011 (a) 4,694,375
Sungard Data Systems, Inc. (b):
1,825,000 9.431% due 8/15/2013 (a) 1,925,375
1,900,000 10.25% due 8/15/2015 1,992,625
---------------
12,763,625
Leisure--1.6%
5,400,000 Felcor Lodging LP, 8.83% due 6/01/2011 (a) 5,616,000
Manufacturing--1.4%
325,000 ERICO International Corp., 8.875%
due 3/01/2012 335,563
2,900,000 Invensys Plc, 9.875% due 3/15/2011 (b) 3,001,500
1,369,000 Medis Technologies Ltd., 6%
due 7/15/2010 (b)(c) 1,505,900
---------------
4,842,963
Metal--Other--0.2%
700,000 Novelis, Inc., 7.75% due 2/15/2015 679,000
Packaging--0.4%
1,725,000 Wise Metals Group LLC,10.25% due 5/15/2012 1,319,625
Paper--1.4%
2,650,000 Abitibi-Consolidated, Inc., 7.991%
due 6/15/2011 (a) 2,577,125
700,000 Ainsworth Lumber Co. Ltd., 8.277%
due 10/01/2010 (a) 693,000
250,000 Boise Cascade LLC, 7.475% due 10/15/2012 (a) 248,750
725,000 Domtar, Inc., 7.125% due 8/15/2015 607,188
925,000 NewPage Corp.,10.93% due 5/01/2012 (a) 971,250
---------------
5,097,313
Retail--1.0%
1,600,000 Jean Coutu Group, Inc., 8.50% due 8/01/2014 1,528,000
2,000,000 Neiman-Marcus Group, Inc., 9%
due 10/15/2015 (b) 2,112,500
---------------
3,640,500
Service--1.9%
250,000 Ahern Rentals, Inc., 9.25% due 8/15/2013 (b) 262,500
3,375,000 Allied Waste North America, Inc. Series B,
7.375% due 4/15/2014 3,315,938
600,000 Dycom Industries, Inc., 8.125%
due 10/15/2015 (b) 624,000
250,000 Mac-Gray Corp., 7.625% due 8/15/2015 256,250
2,000,000 Sunstate Equipment Co. LLC,10.50%
due 4/01/2013 (b) 2,080,000
---------------
6,538,688
Steel--2.4%
3,000,000 CSN Islands VIII Corp., 9.75%
due 12/16/2013 (b) 3,446,250
5,000,000 Ispat Inland ULC,11.28% due 4/01/2010 (a) 5,150,000
---------------
8,596,250
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Schedule of Investments (concluded)
Face
Amount Corporate Bonds Value
Telecommunications--4.6%
$6,000,000 Cincinnati Bell, Inc., 8.375% due 1/15/2014 $ 6,060,000
3,700,000 Qwest Communications International, Inc.,
8.249% due 2/15/2009 (a)(b) 3,778,625
1,450,000 Qwest Corp., 7.741% due 6/15/2013 (a) 1,584,125
1,515,000 Terremark Worldwide, Inc., 9%
due 6/15/2009 (c) 1,348,350
3,500,000 Time Warner Telecom Holdings, Inc., 8.749%
due 2/15/2011 (a) 3,574,375
---------------
16,345,475
Utility--2.4%
2,000,000 Calpine Corp., 9.875% due 12/01/2011 (b)(f) 1,850,000
3,000,000 NRG Energy, Inc., 7.25% due 2/01/2014 3,075,000
4,000,000 Reliant Energy, Inc., 6.75% due 12/15/2014 3,615,000
---------------
8,540,000
Wireless Communications--1.0%
3,250,000 Rogers Wireless Communications, Inc., 7.616%
due 12/15/2010 (a) 3,363,750
250,000 Rural Cellular Corp., 8.991%
due 3/15/2010 (a) 255,000
---------------
3,618,750
Total Corporate Bonds
(Cost--$117,460,440)--33.7% 119,202,481
Shares
Held Common Stocks
Chemicals--0.0%
13,117 GEO Specialty Chemicals, Inc. (e) 59,027
Energy--Other--1.1%
127,985 Trico Marine Services, Inc. (e) 3,728,203
Shares
Held Common Stocks value
Paper--0.0%
84,448 Western Forest Products, Inc. (e) $ 126,158
Total Common Stocks
(Cost--$2,943,636)--1.1% 3,913,388
Warrants (d)
Utility--0.0%
4,558 Reliant Resources (expires 10/25/2008) 27,918
Total Warrants (Cost--$0)--0.0% 27,918
Rights
Paper--0.0%
84,448 Western Forest Products, Inc. (g) 1,484
Total Rights (Cost--$0)--0.0% 1,484
Beneficial
Interest Short-Term Securities
$3,817 Merrill Lynch Liquidity Series, LLC Cash Sweep
Series I, 4.42% (a)(h) 3,817
Total Short-Term Securities
(Cost--$3,817)--0.0% 3,817
Total Investments
(Cost--$449,738,444*)--129.0% 455,891,992
Liabilities in Excess of Other Assets--(29.0%) (102,609,679)
---------------
Net Assets--100.0% $ 353,282,313
===============
* The cost and unrealized appreciation (depreciation) of investments
as of February 28, 2006, as computed for federal income tax purposes,
were as follows:
Aggregate cost $ 449,672,729
================
Gross unrealized appreciation $ 8,498,481
Gross unrealized depreciation (2,279,218)
----------------
Net unrealized appreciation $ 6,219,263
================
** Floating rate loan interests in which the Fund invests generally pay
interest at rates that are periodically redetermined by reference to a
base lending rate plus a premium. The base lending rates are generally
(i) the lending rate offered by one or more major European banks, such as
LIBOR (London InterBank Offered Rate), (ii) the prime rate offered by one
or more major U.S. banks or (iii) the certificate of deposit rate.
(a) Floating rate security.
(b) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(c) Convertible security.
(d) Warrants entitle the Fund to purchase a predetermined number of shares of
common stock and are non-income producing. The purchase price and number
of shares are subject to adjustment under certain conditions until the
expiration date.
(e) Non-income producing security.
(f) Non-income producing security; issuer filed for bankruptcy or is in
default of interest payments.
(g) The rights may be exercised until 3/09/2006.
(h) Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940,
were as follows:
Net Interest
Affiliate Activity Income
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $3,817 $24,417
o For Fund compliance purposes, the Fund's industry classifications refer to
any one or more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for purposes of
this report, which may combine industry sub-classifications for reporting
ease. Industries are shown as a percent of net assets.
o Forward interest rate swaps entered into as of February 28, 2006
were as follows:
Notional Unrealized
Amount Depreciation
Sold credit default protection on
General Motors Corp. and receive 4.40%
Broker, Morgan Stanley Capital Services, Inc.
Expires June 2007 $3,000,000 $(314,130)
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Statement of Assets, Liabilities and Capital
As of February 28, 2006
Assets
Investments in unaffiliated securities, at value (identified cost--$449,734,627) $ 455,888,175
Investments in affiliated securities, at value (identified cost--$3,817) 3,817
Receivables:
Securities sold $ 4,933,857
Interest 4,695,003
Principal paydowns 89,089
Swaps 26,034
Commitment fees 14,439 9,758,422
---------------
Prepaid expenses 1,716
---------------
Total assets 465,652,130
---------------
Liabilities
Loans 93,500,000
Bank overdraft 2,784,873
Unrealized depreciation on swaps 314,130
Unfunded loan commitment 177,315
Payables:
Securities purchased 14,790,107
Dividends to shareholders 432,695
Investment adviser 213,824
Interest on loans 50,044
Other affiliates 5,103 15,491,773
---------------
Accrued expenses 101,726
---------------
Total liabilities 112,369,817
---------------
Net Assets
Net assets $ 353,282,313
===============
Capital
Common Stock, par value $.10 per share; 200,000,000 shares authorized
(18,305,029 shares issued and outstanding) $ 1,830,503
Paid-in capital in excess of par 347,369,214
Undistributed investment income--net $ 2,399,458
Accumulated realized capital losses--net (4,010,054)
Unrealized appreciation--net 5,693,192
---------------
Total accumulated earnings--net 4,082,596
---------------
Total capital--Equivalent to $19.30 net asset value per share of Common Stock
(market price--$17.81) $ 353,282,313
===============
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Statement of Operations
For the Six Months Ended February 28, 2006
Investment Income
Interest (including $24,417 from affiliates) $ 16,245,950
Facility and other fees 158,221
---------------
Total income 16,404,171
---------------
Expenses
Loan interest expense $ 2,347,727
Investment advisory fees 1,708,119
Borrowing costs 109,008
Accounting services 67,737
Professional fees 44,121
Transfer agent fees 33,053
Printing and shareholder reports 26,613
Directors' fees and expenses 23,100
Custodian fees 13,341
Listing fees 11,127
Pricing services 8,973
Other 9,357
---------------
Total expenses 4,402,276
---------------
Investment income--net 12,001,895
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain (loss) on:
Investments--net (1,380,450)
Swaps--net 66,367
Foreign currency transactions--net 21,260 (1,292,823)
---------------
Change in unrealized appreciation/depreciation on:
Investments--net 1,647,346
Swaps--net (363,081)
Unfunded corporate loans--net (55,432)
Foreign currency transactions--net (279) 1,228,554
--------------- ---------------
Total realized and unrealized loss--net (64,269)
---------------
Net Increase in Net Assets Resulting from Operations $ 11,937,626
===============
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Statements of Changes in Net Assets
For the Six For the
Months Ended Year Ended
February 28, August 31,
Increase (Decrease) in Net Assets: 2006 2005
Operations
Investment income--net $ 12,001,895 $ 22,425,360
Realized loss--net (1,292,823) (2,683,511)
Change in unrealized appreciation/depreciation--net 1,228,554 4,267,524
--------------- ---------------
Net increase in net assets resulting from operations 11,937,626 24,009,373
--------------- ---------------
Dividends & Distributions to Shareholders
Investment income--net (12,895,728) (20,347,853)
Realized gain--net -- (216,488)
--------------- ---------------
Net decrease in net assets resulting from dividends and distributions to shareholders (12,895,728) (20,564,341)
--------------- ---------------
Common Stock Transactions
Value of shares issued to Common Stock shareholders in reinvestment of dividends
and distributions 126,000 415,791
--------------- ---------------
Net increase in net assets resulting from Common Stock transactions 126,000 415,791
--------------- ---------------
Net Assets
Total increase (decrease) in net assets (832,102) 3,860,823
Beginning of period 354,114,415 350,253,592
--------------- ---------------
End of period* $ 353,282,313 $ 354,114,415
=============== ===============
* Undistributed investment income--net $ 2,399,458 $ 3,293,291
=============== ===============
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Statement of Cash Flows
For the Six Months Ended February 28, 2006
Cash Provided By Operating Activities
Net increase in net assets resulting from operations $ 11,937,626
Adjustments to reconcile net increase in net assets resulting from operations to net cash
provided by operating activities:
Decrease in receivables 664,921
Decrease in other liabilities (79,608)
Realized and unrealized loss--net 64,269
Amortization of premium and discount (169,077)
Proceeds from sales and paydowns of long-term securities 138,886,192
Other investment related transactions 187,168
Purchases of long-term securities (110,225,017)
Purchases of short-term investments (3,817)
---------------
Cash provided by operating activities 41,262,657
---------------
Cash Used for Financing Activities
Cash receipts from borrowings 102,100,000
Cash payments for borrowings (132,200,000)
Dividends paid to shareholders (12,806,357)
Increase in bank overdraft 1,643,666
---------------
Cash used for financing activities (41,262,691)
---------------
Cash
Net decrease in cash (34)
Cash at beginning of period 34
---------------
Cash at end of period $ 0
===============
Cash Flow Information
Cash paid for interest $ 2,388,562
===============
Non-Cash Financing Activities
Capital shares issued in reinvestment of dividends paid to shareholders $ 126,000
===============
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Financial Highlights
For the Six For the For the Period
Months Ended Year Ended October 31, 2003++
The following per share data and ratios have been derived February 28, August 31, to August 31,
from information provided in the financial statements. 2006 2005 2004
Per Share Operating Performance
Net asset value, beginning of period $ 19.35 $ 19.16 $ 19.10
------------- ------------- -------------
Investment income--net .66*** 1.23*** .66
Realized and unrealized gain (loss)--net (.01) .08 .02
------------- ------------- -------------
Total from investment operations .65 1.31 .68
------------- ------------- -------------
Less dividends and distributions from:
Investment income--net (.70) (1.11) (.60)
Realized gain--net -- (.01) --
------------- ------------- -------------
Total dividends and distributions (.70) (1.12) (.60)
------------- ------------- -------------
Offering costs resulting from the issuance of Common Stock -- -- (.02)
------------- ------------- -------------
Net asset value, end of period $ 19.30 $ 19.35 $ 19.16
============= ============= =============
Market price per share, end of period $ 17.81 $ 17.85 $ 19.44
============= ============= =============
Total Investment Return**
Based on net asset value per share 3.84%+++ 7.27% 3.50%+++
============= ============= =============
Based on market price per share 3.88%+++ (2.47%) .29%+++
============= ============= =============
Ratios to Average Net Assets
Expenses, net of waiver and excluding interest expense 1.18%* 1.22% .71%*
============= ============= =============
Expenses, net of waiver 2.53%* 2.18% .87%*
============= ============= =============
Expenses 2.53%* 2.18% 1.08%*
============= ============= =============
Investment income--net 6.90%* 6.34% 3.80%*
============= ============= =============
Leverage
Amount of borrowings, end of period (in thousands) $ 93,500 $ 123,600 $ 123,225
============= ============= =============
Average amount of borrowings outstanding during the period (in thousands) $ 108,655 $ 117,702 $ 38,654
============= ============= =============
Average amount of borrowings outstanding per share during the period*** $ 5.94 $ 6.43 $ 2.11
============= ============= =============
Supplemental Data
Net assets, end of period (in thousands) $ 353,282 $ 354,114 $ 350,254
============= ============= =============
Portfolio turnover 26.30% 47.96% 43.32%
============= ============= =============
* Annualized.
** Total investment returns based on market price, which can be significantly greater or lesser than
the net asset value, may result in substantially different returns. Total investment returns exclude
the effects of sales charges.
*** Based on average shares outstanding.
++ Commencement of operations.
+++ Aggregate total investment return.
See Notes to Financial Statements.
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Notes to Financial Statements
1. Significant Accounting Policies:
Floating Rate Income Strategies Fund, Inc. (the "Fund") is registered under
the Investment Company Act of 1940, as amended, as a diversified, closed-end
management investment company. The Fund's financial statements are prepared in
conformity with U.S. generally accepted accounting principles, which may
require the use of management accruals and estimates. Actual results may
differ from these estimates. These unaudited financial statements reflect all
adjustments, which are, in the opinion of management, necessary to present a
fair statement of the results for the interim period. All such adjustments are
of a normal, recurring nature. The Fund determines and makes available for
publication the net asset value of its Common Stock on a daily basis. The
Fund's Common Stock shares are listed on the New York Stock Exchange ("NYSE")
under the symbol FRA.
(a) Corporate debt obligations--The Fund invests principally in floating rate
debt obligations of companies, including floating rate loans made by banks and
other financial institutions and both privately and publicly offered corporate
bonds and notes. Because agents and intermediaries are primarily commercial
banks or other financial institutions, the Fund's investment in floating rate
loans could be considered concentrated in financial institutions.
(b) Valuation of investments--Floating rate loans are valued in accordance
with guidelines established by the Fund's Board of Directors. Floating rate
loans are valued at the mean between the last available bid and asked prices
from one or more brokers or dealers as obtained from Loan Pricing Corporation.
For the limited number of floating rate loans for which no reliable price
quotes are available, such floating rate loans may be valued by Loan Pricing
Corporation through the use of pricing matrixes to determine valuations. If
the pricing service does not provide a value for a floating rate loan, Fund
Asset Management, L.P. ("FAM") will value the floating rate loan at fair
value, which is intended to approximate market value.
Debt securities are traded primarily in the over-the-counter ("OTC") markets
and are valued at the last available bid price in the OTC market or on the
basis of values obtained by a pricing service. Pricing services use valuation
matrixes that incorporate both dealer-supplied valuations and valuation
models. The procedures of the pricing service and its valuations are reviewed
by the officers of the Fund under the general direction of the Board of
Directors. Such valuations and procedures will be reviewed periodically by the
Board of Directors of the Fund.
Securities that are held by the Fund that are traded on stock exchanges or the
Nasdaq National Market are valued at the last sale price or official close
price on the exchange on which such securities are traded, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available
asked price for short positions. In cases where securities are traded on more
than one exchange, the securities are valued on the exchange designated as the
primary market by or under the authority of the Board of Directors of the
Fund. Long positions in securities traded in the OTC market, Nasdaq Small Cap
or Bulletin Board are valued at the last available bid price or yield
equivalent obtained from one or more dealers or pricing services approved by
the Board of Directors of the Fund. Short positions traded in the OTC market
are valued at the last available asked price. Portfolio securities that are
traded both in the OTC market and on a stock exchange are valued according to
the broadest and most representative market. When the Fund writes an option,
the amount of the premium received is recorded on the books of the Fund as an
asset and an equivalent liability. The amount of the liability is subsequently
valued to reflect the current market value of the option written, based on the
last sale price in the case of exchange-traded options or, in the case of
options traded in the OTC market, the last asked price. Options purchased by
the Fund are valued at their last sale price in the case of exchange traded
options or, in the case of options traded in the OTC market, the last bid
price. Swap agreements are valued based upon quoted fair valuations received
daily by the Fund from a pricing service or counterparty. Other investments,
including futures contracts and related options, are stated at market value.
Obligations with remaining maturities of 60 days or less are valued at
amortized cost unless FAM believes that this method no longer produces fair
valuations. Repurchase agreements will be valued at cost plus accrued
interest.
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Notes to Financial Statements (continued)
Generally, trading in foreign securities, as well as U.S. government
securities, money market instruments and certain fixed income securities, is
substantially completed each day at various times prior to the close of
business on the NYSE. The values of such securities used in computing the net
asset value of the Fund's shares are determined as of such times. Foreign
currency exchange rates also are generally determined prior to the close of
business on the NYSE. Occasionally, events affecting the values of such
securities and such exchange rates may occur between the times at which they
are determined and the close of business on the NYSE that may not be reflected
in the computation of the Fund's net asset value. If events (for example, a
company announcement, market volatility or a natural disaster) occur during
such periods that are expected to materially affect the value of such
securities, those securities may be valued at their fair value as determined
in good faith by the Fund's Board of Directors or by FAM using a pricing
service and/or procedures approved by the Fund's Board of Directors.
(c) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in the
securities markets. Losses may arise due to changes in the value of the
contract or if the counterparty does not perform under the contract.
* Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such futures contracts. Futures contracts are
contracts for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund deposits
and maintains as collateral such initial margin as required by the exchange on
which the transaction is effected. Pursuant to the contract, the Fund agrees
to receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
* Options--The Fund may write and purchase call and put options. When the Fund
writes an option, an amount equal to the premium received by the Fund is
reflected as an asset and an equivalent liability. The amount of the liability
is subsequently marked-to-market to reflect the current market value of the
option written. When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or deducted from)
the basis of the security acquired or deducted from (or added to) the proceeds
of the security sold. When an option expires (or the Fund enters into a
closing transaction), the Fund realizes a gain or loss on the option to the
extent of the premiums received or paid (or gain or loss to the extent the
cost of the closing transaction is less than or exceeds the premiums paid or
received).
Written and purchased options are non-income producing investments.
* Swaps--The Fund may enter into swap agreements, which are over-the-counter
contracts in which the Fund and a counterparty agree to make periodic net
payments on a specified notional amount. The net payments can be made for a
set period of time or may be triggered by a predetermined credit event. The
net periodic payments may be based on a fixed or variable interest rate; the
change in market value of a specified security, basket of securities, or
index; or the return generated by a security. These periodic payments received
or made by the Fund are recorded in the accompanying Statement of Operations
as realized gains or losses, respectively. Gains or losses are also realized
upon termination of swap agreements. Swaps are marked-to-market daily and
changes in value are recorded as unrealized appreciation (depreciation). Risks
include changes in the returns of the underlying instruments, failure of the
counterparties to perform under the contracts' terms and the possible lack of
liquidity with respect to the swap agreements.
(d) Foreign currency transactions--Transactions denominated in foreign
currencies are recorded at the exchange rate prevailing when recognized.
Assets and liabilities denominated in foreign currencies are valued at the
exchange rate at the end of the period. Foreign currency transactions are the
result of settling (realized) or valuing (unrealized) assets or liabilities
expressed in foreign currencies into U.S. dollars. Realized and unrealized
gains or losses from investments include the effects of foreign exchange rates
on investments. The Fund invests in foreign securities, which may involve a
number of risk factors and special considerations not present with investments
in securities of U.S. corporations.
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Notes to Financial Statements (continued)
(e) 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.
(f) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Interest income is recognized on the accrual basis. The
Fund amortizes all premiums and discounts on debt securities.
(g) Offering costs--Direct expenses relating to the public offering of the
Fund's Common Stock were charged to capital at the time of issuance of the
shares.
(h) Dividends and distributions--Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates. The Fund may at times pay out less than the entire amount
of net investment income earned in any particular period and may at times pay
out such accumulated undistributed income in other periods to permit the Fund
to maintain a more stable level of dividends.
(i) Securities lending--The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. The market
value of the loaned securities is determined at the close of business of the
Fund and any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral for the
loaned securities, it collects a fee from the borrower. The Fund typically
receives the income on the loaned securities but does not receive the income
on the collateral. Where the Fund receives cash collateral, it may invest such
collateral and retain the amount earned on such investment, net of any amount
rebated to the borrower. Loans of securities are terminable at any time and
the borrower, after notice, is required to return borrowed securities within
five business days. The Fund may pay reasonable finder's, lending agent,
administrative and custodial fees in connection with its loans. In the event
that the borrower defaults on its obligation to return borrowed securities
because of insolvency or for any other reason, the Fund could experience
delays and costs in gaining access to the collateral. The Fund also could
suffer a loss where the value of the collateral falls below the market value
of the borrowed securities, in the event of borrower default or in the event
of losses on investments made with cash collateral.
(j) Bank overdraft--The Fund recorded an amount payable to the custodian
reflecting an overnight overdraft, which resulted from management estimates of
available cash.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM. The
general partner of FAM is Princeton Services, Inc. ("PSI"), an indirect,
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is
the limited partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of .75% of the Fund's average daily net assets
plus the proceeds of any outstanding borrowings used for leverage.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to Merrill Lynch,
Pierce, Fenner & Smith Incorporated, an affiliate of FAM, or its affiliates.
Pursuant to that order, the Fund also has retained Merrill Lynch Investment
Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities lending
agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private
investment company managed by MLIM, LLC or in registered money market funds
advised by FAM or its affiliates.
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Notes to Financial Statements (concluded)
For the six months ended February 28, 2006, the Fund reimbursed FAM $3,897 for
certain accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, ML & Co., and/or MLIM, LLC.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
merge ML & Co.'s investment management business, including FAM, with the
investment management business of BlackRock, Inc. The transaction is expected
to close in the third quarter of 2006.
3. Investments:
Purchases and sales (including paydowns) of investments, excluding short-term
securities, for the six months ended February 28, 2006, were $121,065,124 and
$143,903,263, respectively.
4. Common Stock Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock par value
$.10, all of which are initially classified as Common Stock. The Board of
Directors is authorized, however, to classify and reclassify any unissued
shares of capital stock without approval of the holders of Common Stock.
Shares issued and outstanding for the six months ended February 28, 2006
increased by 6,590 from reinvestment of dividends. Share issued and
outstanding for the year ended August 31, 2005 increased by 21,622 from
reinvestment of dividends and distributions.
5. Unfunded Loan Interest:
As of February 28, 2006, the Fund had unfunded loan commitments of
approximately $7,924,000 which would be extended at the option of the
borrower, pursuant to the following loan agreements:
(in Thousands)
Unfunded
Borrower Commitment Value
Baker Tanks, Inc. $ 240 $ 240
Trump Entertainment Delayed Draw $1,496 $1,514
Trump Entertainment Resorts
Holdings LP $3,000 $2,925
United Airlines $ 188 $ 188
Vought Aircraft Industries, Inc $3,000 $2,880
6. Short-Term Borrowings:
On May 24, 2005, the Fund renewed its revolving credit and security agreement
funded by a commercial paper asset securitization program with Citicorp North
America, Inc. ("Citicorp") as Agent, certain secondary backstop lenders, and
certain asset securitization conduits as lenders (the "Lenders"). The
agreement was renewed for one year and has a maximum limit of $172,500,000.
Under the Citicorp program, the conduits will fund advances to the Fund
through the issuance of highly rated commercial paper. As security for its
obligations to the Lenders under the revolving securitization facility, the
Fund has granted a security interest in substantially all of its assets to and
in favor of the Lenders. The interest rate on the Fund's borrowings is based
on the interest rate carried by the commercial paper plus a program fee. The
Fund pays additional borrowing costs including a backstop commitment fee.
The weighted average annual interest rate was 4.38% and the average borrowing
was approximately $108,655,000 for the six months ended February 28, 2006.
7. Capital Loss Carryforward:
On August 31, 2005, the Fund had a capital loss carryforward of $2,226,224,
all of which expires in 2013. This amount will be available to offset like
amounts of any future taxable gains.
8. Subsequent Event:
The Fund paid an ordinary income dividend in the amount of $0.108333 per share
on March 31, 2006 to shareholders of record on March 14, 2006.
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Disclosure of Investment Advisory Agreement
Activities of and Composition of the Board of Directors
All but one member of the Board of Directors is an independent director whose
only affiliation with Fund Asset Management, L.P. (the "Investment Adviser")
or other Merrill Lynch affiliates is as a director of the Fund and certain
other funds advised by the Investment Adviser or its affiliates. The Chairman
of the Board is also an independent director. New director nominees are chosen
as nominees by a Nominating Committee comprised of independent directors. All
independent directors also are members of the Board's Audit Committee and the
independent directors meet in executive session at each in-person Board
meeting. The Board and the Audit Committee meet in person for at least two
days each quarter and conduct other in-person and telephone meetings
throughout the year, some of which are formal board meetings, and some of
which are informational meetings. The independent counsel to the independent
directors attends all in-person Board and Audit Committee meetings and other
meetings at the independent directors' request.
Investment Advisory Agreement--Matters Considered by the Board
Every year, the Board considers approval of the Fund's investment advisory
agreement (the "Investment Advisory Agreement"). The Board assesses the
nature, scope and quality of the services provided to the Fund by the
personnel of the Investment Adviser and its affiliates, including
administrative services, shareholder services, oversight of fund accounting,
marketing services and assistance in meeting legal and regulatory
requirements. The Board also receives and assesses information regarding the
services provided to the Fund by certain unaffiliated service providers.
At various times throughout the year, the Board also considers a range of
information in connection with its oversight of the services provided by the
Investment Adviser and its affiliates. Among the matters considered are: (a)
fees (in addition to management fees) paid to the Investment Adviser and its
affiliates by the Fund, such as transfer agency fees; (b) Fund operating
expenses paid to third parties; (c) the resources devoted to and compliance
reports relating to the Fund's investment objective, policies and
restrictions, and its compliance with its Code of Ethics and the Investment
Adviser's compliance policies and procedures; and (d) the nature, cost and
character of non-investment management services provided by the Investment
Adviser and its affiliates.
The Board believes that the Investment Adviser is one of the most experienced
global asset management firms and considers the overall services provided by
the Investment Adviser to be of high quality. The Board also believes that the
Investment Adviser is financially sound and well managed and notes that the
Investment Adviser is affiliated with one of America's largest financial
firms. The Board works closely with the Investment Adviser in overseeing the
Investment Adviser's efforts to achieve good performance. As part of this
effort, the Board discusses portfolio manager effectiveness and, when
performance is not satisfactory, discusses with the Investment Adviser taking
steps such as changing investment personnel.
Annual Consideration of Approval by the Board of Directors--In the period
prior to the Board meeting to consider renewal of the Investment Advisory
Agreement, the Board requested and received materials specifically relating to
the Fund's Investment Advisory Agreement. These materials include (a)
information compiled by Lipper Inc. ("Lipper") on the fees and expenses,
investment performance, and leverage of the Fund as compared to a comparable
group of funds as classified by Lipper; (b) information comparing the Fund's
market price with its net asset value per share; (c) a discussion by the
Fund's portfolio management team of investment strategies used by the Fund
during its most recent fiscal year; (d) information on the profitability to
the Investment Adviser and its affiliates of the Investment Advisory Agreement
and other relationships with the Fund; and (e) information provided by the
Investment Adviser concerning investment advisory fees charged to other
clients, such as offshore funds under similar investment mandates and
generally to institutional clients. The Board also considers other matters it
deems important to the approval process such as services related to the
valuation and pricing of Fund portfolio holdings, allocation of Fund brokerage
fees, the Fund's portfolio turnover statistics, and direct and indirect
benefits to the Investment Adviser and its affiliates from their relationship
with the Fund. The Board did not identify any particular information as
controlling, and each member of the Board may have attributed different
weights to the various items considered.
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Disclosure of Investment Advisory Agreement (continued)
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's Investment Advisory
Agreement in February, 2006, the independent directors' and Board's review
included the following:
Services Provided by the Investment Adviser--The Board reviewed the nature,
extent and quality of services provided by the Investment Adviser, including
the investment advisory services and the resulting performance of the Fund.
The Board focused primarily on the Investment Adviser's investment advisory
services and the Fund's investment performance. The Board compared Fund
performance - both including and excluding the effects of the Fund's fees and
expenses - to the performance of a comparable group of funds, and the
performance of a relevant index or combination of indexes. While the Board
reviews performance data at least quarterly, consistent with the Investment
Adviser's investment goals, the Board attached more importance to performance
over relatively long periods of time, typically three to five years, or a
shorter period in the case of a fund that has been in existence less than five
years. According to Lipper's ranking of all closed-end leveraged loan
participation funds, the Fund's performance after fees and expenses ranked in
the fifth quintile for the one-year period ended November 30, 2005 and in the
first quintile for the period since inception (October 31, 2003) through
November 30, 2005. The Board also considered the Fund's performance based on
annualized yields and noted the Fund's yield in 2005 was in the second
quintile, and in the fourth quintile for fiscal year ended in November 2004.
Considering these factors, the Board concluded that the Fund's performance
supported the continuation of the Investment Advisory Agreement.
The Investment Adviser's Personnel and Investment Process--The Board reviewed
the investment objectives and strategies of the Fund. The Board discussed with
senior management of the Investment Adviser's taxable fixed income investing
group the extent to which the Fund was leveraged during the period and other
strategies being used to achieve the stated objectives. Among other things,
the Board considered the size, education and experience of the Investment
Adviser's taxable fixed income staff, noting the Investment Adviser has a
management group within the taxable fixed income department dedicated to
analyzing and investing in the types of bank loans used by the Fund, how that
staff used technology to manage its taxable fixed income funds - including the
Fund - and their investments, and the Investment Adviser's approach to
training and retaining portfolio managers and other research, advisory and
management personnel throughout the firm, including within the taxable fixed
income management group. The Board discussed these factors with senior
management of the Investment Adviser and also discussed how the Investment
Adviser's staffing and overall approach to taxable fixed income fund
management affected the Fund. The Board also reviewed the Investment Adviser's
compensation policies and practices with respect to the Trust's portfolio
manager. The Board also considered the experience of the Fund's portfolio
manager and noted that Mr. Matteo has over 10 years' experience analyzing and
investing in fixed income securities, including bank loans. The Board
concluded that the Investment Adviser and its investment staff and the Fund's
management team have extensive experience in analyzing and managing the types
of investments used by the Fund and that the Fund benefits from that
experience.
Management Fees and Other Expenses--The Board reviewed the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels - the actual rate includes advisory and
administrative service fees and the effects of any fee waivers - compared to
the other funds considered comparable by Lipper. It also compared the Fund's
total expenses to those of other comparable funds. The Board considered the
services provided to and the fees charged by the Investment Adviser to other
types of clients, such as off-shore funds, with similar investment mandates
and noted that the fees charged by the Investment Adviser to the offshore
funds typically exceeded those being charged to the Fund. The Board also noted
that, as a general matter, fees charged to institutional clients were lower
than the fees charged to the Fund, but believed that less extensive services
were being provided to such clients. The Fund's contractual and actual
management fee rates, as well as its actual total expenses, including
investment-related expenses, were lower than the median fees charged by
comparable funds, as determined by Lipper. The Board has concluded that the
Fund's management fee and fee rate and overall expense ratio are acceptable
compared to those of other comparable funds.
Profitability--The Board considered the cost of the services provided to the
Fund by the Investment Adviser, and the Investment Adviser's and its
affiliates' profits in relating to the management of the Fund and the MLIM/
FAM-advised funds. As part of its analysis, the Board reviewed the Investment
Adviser's methodology in allocating its costs to the management of the Fund
and concluded that there was a reasonable basis for the allocation. The Board
also considered federal court decisions discussing an investment adviser's
profitability and profitability levels considered to be reasonable in those
decisions. The Board concluded that the Investment Adviser's profits are
acceptable in relation to the nature and quality of services provided and
given the level of fees and expenses overall.
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Disclosure of Investment Advisory Agreement (concluded)
Economies of Scale--The Board considered whether there have been economies of
scale in respect of the management of MLIM/FAM-advised funds, whether the
MLIM/FAM-advised funds (including the Fund) have appropriately benefited from
any economies of scale, and whether there is potential for realization of any
further economies of scale. The Board considered economies of scale to the
extent applicable to the Fund's closed-end structure and determined that no
changes were currently necessary.
Conclusion
After the independent directors deliberated in executive session, the entire
Board, including all of the independent directors, approved the renewal of the
existing Investment Advisory Agreement, concluding that the advisory fee was
reasonable in relation to the services provided and that a contract renewal
was in the best interests of the shareholders.
Officers & Directors
Robert C. Doll, Jr., President and Director
Ronald W. Forbes, Director
Cynthia A. Montgomery, Director
Jean Margo Reid, Director
Roscoe S. Suddarth, Director
Richard R. West, Director
Edward D. Zinbarg, Director
Donald C. Burke, Vice President and Treasurer
Jaimin J. Patel, Vice President
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
Computershare Trust Company, N.A.
P.O. Box 43010
Providence, RI 02940-3010
NYSE Symbol
FRA
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
FLOATING RATE INCOME STRATEGIES FUND, INC. FEBRUARY 28, 2006
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-
annual report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to this semi-
annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable to this semi-
annual report
Item 8 - Portfolio Managers of Closed-End Management Investment Companies -
as of March 31, 2006.
(a)(1) Mr. Jaimin J. Patel is primarily responsible for the day-to-
day management of the registrant's portfolio ("Portfolio
Manager"). Mr. Patel has been a Director of the Investment
Adviser since 2005 and was previously a Vice President at
the Investment Adviser since 2000. He has been a portfolio
manager of the Fund since 2006. His investment experience
includes the analysis and management of senior floating rate
loans and the use of leverage techniques to manage
portfolios.
(a)(2) As of March 31, 2006*:
(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
Jaimin J.
Patel 1 3 1 0 0 0
$ 204,158,028 $ 629,062,198 $ 301,970,712 $ 0 $ 0 $ 0
* As of April 3, 2006, Mr. Patel took on additional asset management responsibilities.
The data represents Mr. Patel's assets under management as of that date.
(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 Investment. 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
Investment 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 Investment Adviser and
its affiliates and results among clients may differ. 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 Investment Adviser and its affiliates to be equitable to
each. The Investment 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 Investment 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 time and attention among relevant accounts.
In some cases, a real, potential or apparent conflict may also arise
where (i) the Investment 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.
(a)(3) As of March 31, 2006:
Portfolio Manager Compensation
The Portfolio Manager Compensation Program of MLIM and its affiliates,
including the Investment Adviser (collectively, "MLIM"), is critical to MLIM's
ability to attract and retain the most talented asset management professionals.
This program ensures that compensation is aligned with maximizing investment
returns and it provides a competitive pay opportunity for competitive
performance.
Compensation Program
The elements of total compensation for MLIM portfolio managers are a
fixed base salary, annual performance-based cash and stock compensation (cash
and stock bonus) and other benefits. MLIM has balanced these components of pay
to provide portfolio managers with a powerful incentive to achieve consistently
superior investment performance. By design, portfolio manager compensation
levels fluctuate--both up and down--with the relative investment performance of
the portfolios that they manage.
Base Salary
Under the MLIM approach, like that of many asset management firms, base
salaries that are fixed on an annual basis represent a relatively small portion
of a portfolio manager's total compensation. This approach serves to enhance
the motivational value of the performance-based (and therefore variable)
compensation elements of the compensation program.
Performance-Based Compensation
MLIM believes that the best interests of investors are served by
recruiting and retaining exceptional asset management talent and managing their
compensation within a consistent and disciplined framework that emphasizes pay
for performance in the context of an intensely competitive market for talent.
To that end, portfolio manager incentive compensation for MLIM and its
affiliates is based on a formulaic compensation program. MLIM's formulaic
portfolio manager compensation program includes: investment performance
relative to general closed-end, non-leveraged, fixed income funds over 1-, 3-,
and 5-year performance periods and a measure of operational efficiency.
Portfolio managers are compensated based on the pre-tax performance of the
products they manage. A discretionary element of portfolio manager compensation
may include consideration of: financial results of MLIM, expense control,
profit margins, strategic planning and implementation, quality of client
service, market share, corporate reputation, capital allocation, compliance and
risk control, leadership, workforce diversity, technology and innovation. MLIM
and its affiliates also consider the extent to which individuals exemplify and
foster Merrill Lynch's principles of client focus, respect for the individual,
teamwork, responsible citizenship and integrity. All factors are considered
collectively by MLIM management.
Cash Bonus
Performance-based compensation is distributed to portfolio managers in
a combination of cash and stock. Typically, the cash bonus, when combined with
base salary, represents more than 60% of total compensation for portfolio
managers.
Stock Bonus
A portion of the dollar value of the total annual performance-based
bonus is paid in restricted shares of Merrill Lynch & Co., Inc. (herein, the
"Company") stock. Paying a portion of annual bonuses in stock puts compensation
earned by a portfolio manager for a given year "at risk" based on the Company's
ability to sustain and improve its performance over future periods. The
ultimate value of stock bonuses is dependent on future Company stock price
performance. As such, the stock bonus aligns each portfolio manager's financial
interests with those of the Company shareholders and encourages a balance
between short-term goals and long-term strategic objectives. Management
strongly believes that providing a significant portion of competitive
performance-based compensation in stock is in the best interests of investors
and shareholders. This approach ensures that portfolio managers participate as
shareholders in both the "downside risk" and "upside opportunity" of the
Company's performance. Portfolio managers therefore have a direct incentive to
protect the Company's reputation for integrity.
Other Compensation Programs
Portfolio managers who meet relative investment performance and
financial management objectives during a performance year are eligible to
participate in a deferred cash program. Awards under this program are in the
form of deferred cash that may be benchmarked to a menu of MLIM mutual funds
(including their own fund) during a five-year vesting period. The deferred cash
program aligns the interests of participating portfolio managers with the
investment results of MLIM products and promotes continuity of successful
portfolio management teams.
Other Benefits
Portfolio managers are also eligible to participate in broad-based
plans offered generally to the Company's employees, including broad-based
retirement, 401(k), health, and other employee benefit plans.
(a)(4) Beneficial Ownership of Securities. As of March 31, 2006,
Mr. Patel does 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
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others
particularly during the period in which this report is being
prepared. The registrant's certifying officers have determined
that the registrant's disclosure controls and procedures are
effective based on our evaluation of these controls and procedures
as of a date within 90 days prior to the filing date of this
report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act
(17 CFR 270.30a-3(d)) that occurred during the last fiscal half-
year of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Floating Rate Income Strategies Fund, Inc.
By: /s/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Floating Rate Income Strategies Fund, Inc.
Date: April 20, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on
the dates indicated.
By: /s/ Robert C. Doll, Jr.
---------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Floating Rate Income Strategies Fund, Inc.
Date: April 20, 2006
By: /s/ Donald C. Burke
---------------------------
Donald C. Burke,
Chief Financial Officer of
Floating Rate Income Strategies Fund, Inc.
Date: April 20, 2006