UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21286
Name of Fund: Preferred 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, Preferred 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: 10/31/05
Date of reporting period: 11/01/04 - 10/31/05
Item 1 - Report to Stockholders
Preferred and Corporate Income Strategies Fund, Inc.
Preferred Income Strategies Fund, Inc.
Annual Reports
October 31, 2005
Preferred and Corporate Income Strategies Fund, Inc.
Preferred Income Strategies Fund, Inc.
The Benefits and Risks of Leveraging
The Funds utilize leverage through the issuance 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 or dividend rates on the
Preferred Stock, which normally will be lower than the income earned by each
Fund on its longer-term portfolio investments. To the extent that the total
assets of each Fund (including the assets obtained from leverage) are invested
in higher-yielding portfolio investments, each 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 the dividend rates on any Preferred Stock may reduce
the Common Stock's yield and negatively impact its net asset value and market
price. If the income derived from securities purchased with assets received from
leverage exceeds the cost of leverage, each 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, each
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.
Portfolio Information as of October 31, 2005
Percent of
Preferred and Corporate Income Total
Strategies Fund, Inc.'s Asset Mix Investments
--------------------------------------------------------------------------------
Capital Trusts ...................................................... 41.3%
Corporate Bonds ..................................................... 20.1
Preferred Stocks .................................................... 17.1
Real Estate Investment Trusts ....................................... 13.0
Trust Preferreds .................................................... 6.6
Foreign Government Obligations ...................................... 1.9
--------------------------------------------------------------------------------
Percent of
Preferred Income Strategies Fund, Inc.'s Total
Asset Mix Investments
--------------------------------------------------------------------------------
Capital Trusts ...................................................... 35.8%
Preferred Stocks .................................................... 23.3
Corporate Bonds ..................................................... 19.3
Real Estate Investment Trusts ....................................... 13.7
Trust Preferreds .................................................... 7.9
--------------------------------------------------------------------------------
Availability of Quarterly Schedules of Investments
The Funds file their complete schedules 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 Funds' Forms N-Q are available on the SEC's
Web site at http://www.sec.gov. The Funds' 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.
2 ANNUAL REPORTS OCTOBER 31, 2005
A Letter From the President
Dear Shareholder
As the financial markets continued to muddle their way through 2005, the Federal
Reserve Board (the Fed) advanced its monetary tightening campaign full steam
ahead. The 12th consecutive interest rate hike since June 2004 came on November
1, bringing the target federal funds rate to 4%. The central bank is clearly
more focused on inflationary figures than on economic growth, which has shown
some signs of moderating. Despite rising short-term interest rates and
record-high energy prices, the major market indexes managed to post positive
results for the current reporting period:
Total Returns as of October 31, 2005 6-month 12-month
======================================================================================
U.S. equities (Standard & Poor's 500 Index) + 5.27% + 8.72%
--------------------------------------------------------------------------------------
Small-cap U.S. equities (Russell 2000 Index) +12.25 +12.08
--------------------------------------------------------------------------------------
International equities (MSCI Europe Australasia Far East Index) + 8.63 +18.09
--------------------------------------------------------------------------------------
Fixed income (Lehman Brothers Aggregate Bond Index) + 0.15 + 1.13
--------------------------------------------------------------------------------------
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) + 0.59 + 2.54
--------------------------------------------------------------------------------------
High yield bonds (Credit Suisse First Boston High Yield Index) + 2.87 + 3.54
--------------------------------------------------------------------------------------
The headlines in recent months focused on Hurricanes Katrina and Rita and, more
recently, the nomination of Ben Bernanke to succeed Alan Greenspan as Chairman
of the Fed. While the hurricanes prompted a spike in energy prices and
short-term disruptions to production and spending, the longer-term economic
impact is likely to be tempered. In fact, the fiscal stimulus associated with
reconstruction efforts in the Gulf Coast region could add to gross domestic
product growth in 2006. Notably, the uncontroversial nomination of Dr. Bernanke
was well received by the markets.
The U.S. equity markets remained largely range bound in 2005. Up to this point,
strong corporate earnings reports and relatively low long-term bond yields have
worked in favor of equities. Looking ahead, high energy prices, continued
interest rate hikes, a potential consumer slowdown and/or disappointing earnings
pose the greatest risks to U.S. stocks. Internationally, many markets have
benefited from strong economic statistics, trade surpluses and solid finances.
The bond market continued to be characterized by a flattening yield curve,
although long-term yields finally began to inch higher toward period end. The
10-year Treasury yield hit 4.57% on October 31, 2005, its highest level in more
than six months. Still, the difference between the two-year and 10-year Treasury
yield was just 17 basis points (.17%) at period end, compared to 149 basis
points a year earlier.
Financial markets are likely to face continued crosscurrents in the months
ahead. Nevertheless, opportunities do exist and we encourage you to work with
your financial advisor to diversify your portfolio among a variety of asset
types. This can help to diffuse risk while also tapping into the potential
benefits of a broader range of investment alternatives. As always, we thank you
for trusting Merrill Lynch Investment Managers with your investment assets.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Director
ANNUAL REPORTS OCTOBER 31, 2005 3
A Discussion With Your Funds' Portfolio Managers
The Funds outperformed their benchmark for the fiscal year, benefiting
from considerably underweight positions in U.S. agency securities and a
substantial weighting in $25 par retail preferred issues.
Describe the market and economic environment during the period.
The yield curve flattened considerably as the rise in short-term interest rates
outpaced that of long-term interest rates during the past 12 months. The yield
difference between two-year and 10-year U.S. Treasury issues was just 17 basis
points (.17%) at period-end, compared to 149 basis points 12 months earlier.
Record-high oil prices and strong gross domestic product (GDP) growth led to
increased fears of inflation. GDP grew at an estimated annualized rate of 3.8%
in the third quarter of 2005, compared to 3.8% and 3.3% for the first and second
quarters, respectively. The yield on the 10-year Treasury note rose from 4.05%
on October 31, 2004, to 4.57% at period-end. The Federal Reserve Board (the Fed)
raised short-term interest rates in eight increments of .25% during the period.
The target federal funds rate stood at 3.75% at October 31, 2005, and was raised
to 4% one day after period-end on November 1.
Led by a 42.5% increase in energy costs, the Consumer Price Index (CPI) climbed
at a non-seasonally adjusted annualized rate of 5.1% for the first three
quarters of 2005, up significantly from the 3.3% increase for all of 2004.
However, the annualized rise in food prices was just 1.9% during the most recent
calendar quarter. Therefore, excluding food and energy costs, the CPI advanced
at a non-seasonally adjusted annualized rate of 1.4% for the third quarter of
2005.
How did the Funds perform during the fiscal year in light of the existing market
conditions?
For the 12-month period ended October 31, 2005, the Common Stock of Preferred
Income Strategies Fund, Inc. had net annualized yields of 8.98% and 9.43%, based
on a year-end per share net asset value of $22.26 and a per share market price
of $21.20, respectively, and $2.000 per share income dividends. For the same
period, the total investment return on the Fund's Common Stock was +3.73%, based
on a change in per share net asset value from $23.48 to $22.26, and assuming
reinvestment of all distributions.
The Common Stock of Preferred and Corporate Income Strategies Fund, Inc. had net
annualized yields of 8.94% and 9.51% for the year ended October 31, 2005, based
on a year-end per share net asset value of $22.36 and a per share market price
of $21.03, respectively, and $2.000 per share income dividends. The total
investment return on the Fund's Common Stock was +3.25% for the year, based on a
change in per share net asset value from $23.69 to $22.36, and assuming
reinvestment of all distributions.
For the same 12-month period, the Funds' benchmark, the Merrill Lynch Preferred
Stock Fixed Rate Index, returned +1.07%, while the broader-market Merrill Lynch
U.S. Corporate Master Index and the Merrill Lynch U.S. Treasury/Agency Master
Index returned +.80% and +.98%, respectively.
The Funds' relative performance during the fiscal year benefited from their
significant underweight positions in U.S. agency securities (Federal National
Mortgage Association, or "Fannie Mae," and Federal Home Loan Mortgage
Corporation, or "Freddie Mac"). The prices of these issues declined amid
investor concerns about accounting irregularities and uncertainty regarding the
possibility of increased oversight of the agencies by the federal government. A
substantial weighting in $25 par retail preferred issues and an overweight
position in floating rate preferred securities also enhanced performance.
Conversely, our overweight positions in foreign bank tier 1 (large
capitalization European banks) securities detracted from relative returns, as
these issues generally underperformed during the year.
For the six-month period ended October 31, 2005, the total investment return on
Preferred Income Strategies Fund's Common Stock was +.07%, based on a change in
per share net asset value from $23.27 to $22.26, and assuming reinvestment of
all distributions. The total investment return on Preferred and Corporate Income
Strategies Fund's Common Stock was +.04%, based on a change in per share net
asset value from $23.38 to $22.36, and assuming reinvestment of all
distributions. For the same period, the benchmark Merrill Lynch Preferred Stock
Fixed Rate Index returned +1.58%, while the Merrill Lynch U.S. Corporate Master
Index and the Merrill Lynch U.S. Treasury/Agency Master Index returned -.03% and
+.08%, respectively.
For a description of the Funds' total investment returns based on a change in
the per share market value of the Funds' Common Stock (as measured by the
trading price of the Funds' shares on the New York Stock Exchange), and assuming
reinvestment of dividends, please refer to the Financial
4 ANNUAL REPORTS OCTOBER 31, 2005
Highlights section of this report. As closed-end funds, the Funds' shares may
trade in the secondary market at a premium or discount to their net asset
values. As a result, total investment returns based on changes in the market
value of the Funds' Common Stock can vary significantly from total investment
returns based on changes in the Funds' net asset values.
What changes were made to the portfolios during the period?
Early in the fiscal year, we reduced the portfolios' durations -- which already
were shorter than that of their benchmark -- by approximately six months. This
was in keeping with our view that the Fed would continue to raise short-term
interest rates gradually, forcing long-term rates higher. We then increased each
Fund's duration by 2.5 years in mid April as the economy displayed signs of
slowing, which we believed would lead to a rally in U.S. Treasury securities.
This positioning benefited performance until July, when we reduced each
portfolio's duration by 1.5 years as it again appeared that the Fed would
continue to raise short-term rates. Consequently, the net change in each Fund's
duration during the fiscal year was an increase of nine months.
In addition, we reduced the portfolios' holdings in real estate investment
trusts based on our concerns about the increasingly speculative U.S. housing
market. We also trimmed our positions in the banking sector given our belief
that these securities are overvalued. We reinvested the proceeds from our sales
in securities of property and casualty and life insurance companies, as we
believe these issues had attractive valuations following their price declines in
the wake of projected losses resulting from the damage to the Gulf Coast caused
by Hurricanes Katrina and Rita.
We used net asset value hedges earlier in the fiscal year to shorten the
portfolios' duration in an effort to reduce the risk of loss in value associated
with rising interest rates. Among the hedges we implemented were pay-fixed
interest rate swaps, in which we entered into agreements to pay a fixed rate of
interest and receive variable interest payments in return.
How would you characterize the Funds' positioning at the close of the period?
We have positioned the Funds in an effort to protect their net asset values from
the downside risks associated with rising interest rates. We maintain our focus
on the financial sector, as our largest absolute weightings at the end of the
period were in banking and insurance issues, which comprised approximately 38%
and 45% of the net assets of Preferred Income Strategies Fund and Preferred and
Corporate Income Strategies Fund, respectively. The portfolios are well
diversified among issuers, and we intend to maintain this diversification.
At October 31, 2005, Preferred Income Strategies Fund and Preferred and
Corporate Income Strategies Fund had leveraged positions of approximately 36%
and 37%, respectively, of their total net assets. (For a more complete
explanation of the benefits and risks of leveraging, see page 2 of this report
to shareholders.) Also at period-end, each portfolio carried an average credit
rating of Baa1 from Moody's Investors Service. The average ratings for the Funds
remained unchanged for the fiscal year.
John Burger
Vice President and Portfolio Manager
Thomas Musmanno
Vice President and Portfolio Manager
November 8, 2005
ANNUAL REPORTS OCTOBER 31, 2005 5
Schedule of Investments
Preferred and Corporate Income Strategies Fund, Inc. (in U.S. dollars)
Preferred Securities
Face
Amount Capital Trusts Value
===============================================================================
Commercial Banks--13.1%
$ 2,000,000 Cullen Frost Capital Trust I, 5.42%
due 3/01/2034 (a) $ 2,058,898
8,000,000 Dresdner Funding Trust I, 8.151%
due 6/30/2031 (c) 9,495,480
5,000,000 First Chicago NBD Institutional Capital I,
4.80% due 2/01/2027 (a) 4,731,365
910,000 First Empire Capital Trust II, 8.277%
due 6/01/2027 983,713
450,000 First Security Capital I, 8.41% due 12/15/2026 482,664
1,400,000 Firstar Capital Trust I Series B, 8.32%
due 12/15/2026 1,505,567
3,000,000 Hubco Capital Trust I Series B, 8.98%
due 2/01/2027 3,219,240
1,500,000 Hubco Capital Trust II Series B, 7.65%
due 6/15/2028 (c) 1,601,250
3,500,000 Mizuho JGB Investment LLC, 9.87% (a)(b)(c) 3,874,927
2,000,000 SB Treasury Co. LLC, 9.40% (a)(b)(c) 2,191,302
-------------
30,144,406
===============================================================================
Consumer Finance--0.4%
910,000 MBNA Capital A, 8.278% due 12/01/2026 973,305
===============================================================================
Diversified Financial Services--3.0%
3,000,000 Farm Credit Bank of Texas Series 1, 7.561%
(a)(b) 3,275,010
3,335,000 Sun Life Canada US Capital Trust, 8.526%
(b)(c) 3,610,758
-------------
6,885,768
===============================================================================
Electric Utilities--2.5%
4,060,000 Comed Financing III, 6.35% due 3/15/2033 3,581,631
2,000,000 Southern Co. Capital Trust I, 8.19%
due 2/01/2037 2,142,770
-------------
5,724,401
===============================================================================
Gas Utilities--4.2%
9,000,000 AGL Capital Trust I Series B, 8.17%
due 6/01/2037 9,697,293
===============================================================================
Insurance--27.8%
6,990,000 AON Corp., 8.205% due 1/01/2027 7,857,277
9,000,000 AXA, 8.60% due 12/15/2030 11,710,215
8,510,000 Ace Capital Trust II, 9.70% due 4/01/2030 11,234,757
9,110,000 Farmers Exchange Capital, 7.05%
due 7/15/2028 (c) 9,206,156
6,000,000 Mangrove Bay Pass-Through Trust, 6.102%
due 7/15/2033 (a)(c) 5,899,080
10,000,000 Markel Capital Trust I Series B, 8.71%
due 1/01/2046 10,654,300
915,000 Oil Casualty Insurance Ltd., 8% due 9/15/2034
(c) 914,348
5,000,000 QBE Insurance Group Ltd., 5.647%
due 7/01/2023 (a)(c) 4,919,760
1,400,000 Zurich Capital Trust I, 8.376% due 6/01/2037
(c) 1,514,271
-------------
63,910,164
===============================================================================
Multi-Utilities--0.6%
1,200,000 Dominion Resources Capital Trust I, 7.83%
due 12/01/2027 1,292,867
===============================================================================
Oil, Gas & Consumable Fuels--5.7%
2,000,000 KN Capital Trust III, 7.63% due 4/15/2028 2,176,204
8,000,000 Pemex Project Funding Master Trust, 7.375%
due 12/15/2014 8,744,000
2,000,000 Phillips 66 Capital Trust II, 8% due 1/15/2037
(c) 2,135,648
-------------
13,055,852
===============================================================================
Thrifts & Mortgage Finance--8.4%
1,465,000 Dime Capital Trust I Series A, 9.33%
due 5/06/2027 1,612,974
6,735,000 Greenpoint Capital Trust I, 9.10%
due 6/01/2027 7,336,732
760,000 ML Capital Trust I, 9.875% due 3/01/2027 822,106
5,900,000 Sovereign Capital Trust, 9% due 4/01/2027 6,357,952
3,000,000 Webster Capital Trust I, 9.36% due 1/29/2027
(c) 3,254,100
-------------
19,383,864
-------------------------------------------------------------------------------
Total Capital Trusts
Cost--$146,226,461)--65.7% 151,067,920
===============================================================================
Shares
Held Preferred Stocks
===============================================================================
Capital Markets--3.4%
24,000 Goldman Sachs Group, Inc. Series A, 3.91% (a) 607,680
280,000 Lehman Brothers Holdings, Inc., 6.50% 7,210,000
-------------
7,817,680
===============================================================================
Commercial Banks--2.1%
104,800 Banco Santander Central Hispano SA, 6.41% 2,640,960
1,176 First Tennessee Bank NA, 3.90% (a)(c) 1,175,265
42,000 Provident Financial Group, Inc., 7.75% 1,110,375
-------------
4,926,600
===============================================================================
Diversified Financial Services--3.2%
135,000 CIT Group, Inc. Series A, 6.35% 3,404,700
80,000 Cobank ACB, 7% 3,994,320
-------------
7,399,020
===============================================================================
Electric Utilities--0.4%
20,000 Duquesne Light Co., 6.50% 1,020,000
===============================================================================
Gas Utilities--3.1%
270,000 Southern Union Co., 7.55% 7,138,800
===============================================================================
Insurance--5.6%
120,000 ACE Ltd. Series C, 7.80% 3,133,200
35,000 Axis Capital Holdings Ltd., 7.25% 869,533
35,200 Endurance Specialty Holdings Ltd., 7.75% 858,176
318,000 Metlife, Inc. Series B, 6.50% 8,010,420
-------------
12,871,329
===============================================================================
Multi-Utilities--0.4%
36,000 Pacific Gas & Electric Co. Series A, 6% 900,000
===============================================================================
Thrifts & Mortgage Finance--7.4%
305,000 Fannie Mae, 7% (a) 16,698,750
6,000 Fannie Mae Series L, 5.125% 241,500
-------------
16,940,250
===============================================================================
Wireless Telecommunication Services--1.5%
2,720 Centaur Funding Corp., 9.08% (c) 3,496,050
-------------------------------------------------------------------------------
Total Preferred Stocks
(Cost--$60,112,331)--27.1% 62,509,729
===============================================================================
6 ANNUAL REPORTS OCTOBER 31, 2005
Schedule of Investments (continued)
Preferred and Corporate Income Strategies Fund, Inc. (in U.S. dollars)
Preferred Securities (concluded)
Shares
Held Real Estate Investment Trusts Value
===============================================================================
Real Estate--20.7%
63,800 Alexandria Real Estate Equities, Inc.
Series C, 8.375% $ 1,661,990
400,000 CBL & Associates Properties, Inc. Series C,
7.75% 10,292,000
400,000 CarrAmerica Realty Corp. Series E, 7.50% 10,280,000
20,000 Duke Realty Corp. Series K, 6.50% 491,400
610 First Industrial Realty Trust, Inc.,
6.236% (a) 617,434
425,000 HRPT Properties Trust Series B, 8.75% 11,037,250
192,000 Health Care Property Investors, Inc. Series F,
7.10% 4,896,000
44,000 Health Care REIT, Inc. Series F, 7.625% 1,120,627
120,000 iStar Financial, Inc. Series I, 7.50% 3,000,000
PS Business Parks, Inc.:
18,400 Series K, 7.95% 474,720
16,000 Series M, 7.20% 390,400
80,000 Public Storage, Inc. Series X, 6.45% 1,924,000
14,800 Regency Centers Corp., 7.25% 370,463
36,800 Vornado Realty Trust Series E, 7% 917,700
-------------------------------------------------------------------------------
Total Real Estate Investment Trusts
(Cost--$47,139,750)--20.7% 47,473,984
===============================================================================
Face
Amount Trust Preferreds
===============================================================================
Aerospace & Defense--0.9%
$ 2,050,000 RC Trust I, 7% due 5/15/2006 2,071,783
===============================================================================
Gas Utilities--4.6%
10,000,000 Southwest Gas Capital II, 7.70% due 9/15/2043 10,568,308
===============================================================================
Insurance--2.7%
4,000,000 ABN AMRO North America Capital Funding
Trust II, 3.925% (a)(b)(c) 3,918,253
2,250,000 Lincoln National Capital VI Series F, 6.75%
due 9/11/2052 2,282,693
-------------
6,200,946
===============================================================================
Thrifts & Mortgage Finance--2.4%
5,500,000 Countrywide Financial Corp., 1.50%
due 4/01/2033 5,413,726
-------------------------------------------------------------------------------
Total Trust Preferreds
(Cost--$23,622,336)--10.6% 24,254,763
-------------------------------------------------------------------------------
Total Preferred Securities
(Cost--$277,100,878)--124.1% 285,306,396
===============================================================================
Face
Amount Corporate Bonds Value
===============================================================================
Automobiles--6.1%
9,000,000 DaimlerChrysler NA Holding Corp., 8.50%
due 1/18/2031 10,562,553
5,000,000 General Motors Corp., 7.70% due 4/15/2016 3,537,500
-------------
14,100,053
===============================================================================
Containers & Packaging--2.2%
5,000,000 Sealed Air Corp., 6.875% due 7/15/2033 (c) 5,070,885
===============================================================================
Diversified Financial Services--4.3%
2,000,000 Ford Motor Credit Co., 7% due 10/01/2013 1,830,532
3,000,000 General Motors Acceptance Corp., 8%
due 11/01/2031 3,097,022
5,000,000 Sigma Finance Corp., 6.84% due 8/15/2011 (d) 5,000,000
-------------
9,927,554
===============================================================================
Diversified Telecommunication Services--2.3%
4,000,000 France Telecom SA, 8.50% due 3/01/2031 5,226,500
===============================================================================
Electric Utilities--2.4%
5,000,000 Energy East Corp., 6.75% due 9/15/2033 5,464,540
===============================================================================
Media--8.2%
3,000,000 Comcast Corp., 7.05% due 3/15/2033 3,207,420
8,000,000 Liberty Media Corp., 8.25% due 2/01/2030 7,503,456
2,000,000 TCI Communications, Inc., 8.75% due 8/01/2015 2,413,436
5,000,000 Time Warner, Inc., 7.625% due 4/15/2031 5,637,570
-------------
18,761,882
===============================================================================
Thrifts & Mortgage Finance--0.9%
2,000,000 Residential Capital Corp., 6.875%
due 6/30/2015 (c) 2,105,668
===============================================================================
Wireless Telecommunication Services--5.7%
5,000,000 AT&T Wireless Services, Inc., 8.75%
due 3/01/2031 6,520,255
5,000,000 Sprint Capital Corp., 8.75% due 3/15/2032 6,467,180
-------------
12,987,435
-------------------------------------------------------------------------------
Total Corporate Bonds
(Cost--$73,467,375)--32.1% 73,644,517
===============================================================================
Foreign Government Obligations
===============================================================================
7,032,000 Mexico Government International Bond, 5.875%
due 1/15/2014 7,144,512
-------------------------------------------------------------------------------
Total Foreign Government Obligations
(Cost--$6,961,680)--3.1% 7,144,512
===============================================================================
Total Investments (Cost--$357,529,933*)--159.3% 366,095,425
Other Assets Less Liabilities--0.1% 352,355
Preferred Stock, at Redemption Value--(59.4%) (136,598,089)
-------------
Net Assets Applicable to Common Stock--100.0% $ 229,849,691
=============
ANNUAL REPORTS OCTOBER 31, 2005 7
Schedule of Investments (concluded)
Preferred and Corporate Income Strategies Fund, Inc. (in U.S. dollars)
* The cost and unrealized appreciation (depreciation) of investments as of
October 31, 2005, as computed for federal income tax purposes, were as
follows:
Aggregate cost ......................................... $ 356,350,264
=============
Gross unrealized appreciation .......................... $ 15,039,935
Gross unrealized depreciation .......................... (5,294,774)
-------------
Net unrealized appreciation ............................ $ 9,745,161
=============
(a) Floating rate note.
(b) The security is a perpetual bond and has no definite maturity date.
(c) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(d) Restricted securities as to resale, representing 2.2% of net assets, were
as follows:
--------------------------------------------------------------------------
Acquisition
Issue Date Cost Value
--------------------------------------------------------------------------
Sigma Finance Corp., 6.84%
due 8/15/2011 2/13/2004 $5,000,000 $5,000,000
--------------------------------------------------------------------------
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 $(1,944,332) $ 25,527
--------------------------------------------------------------------------
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. These industry
classifications are unaudited.
Swaps outstanding as of October 31, 2005 were as follows:
-------------------------------------------------------------------------------
Unrealized
Notional Appreciation
Amount (Depreciation)
-------------------------------------------------------------------------------
Sold credit default protection on a basket of
preferred securities and receive 2.03%
Broker, Lehman Brothers Special Finance
Expires September 2007 $ 9,000,000 $ (23,418)
Receive a fixed rate of 4.14% and pay a
floating rate based on 3-month LIBOR
Broker, Lehman Brothers Special Finance
Expires February 2012 $ 50,000,000 (1,992,181)
Pay a fixed rate of 5.7075% and receive a
floating rate based on 3-month LIBOR
Broker, Morgan Stanley Capital Services, Inc.
Expires December 2015 $110,000,000 (5,352,930)
Pay a fixed rate of 5.135% and receive a
floating rate based on 3-month LIBOR
Broker, JPMorgan Chase Bank
Expires December 2015 $ 40,000,000 (167,800)
Pay a fixed rate of 4.981% and receive a
floating rate based on 3-month LIBOR
Broker, JPMorgan Chase Bank
Expires January 2016 $ 15,000,000 130,800
Pay a fixed rate of 5.1035% and receive a
floating rate based on 3-month LIBOR
Broker, Lehman Brothers Special Finance
Expires December 2035 $ 18,000,000 502,254
-------------------------------------------------------------------------------
Total $ (6,903,275)
============
See Notes to Financial Statements.
8 ANNUAL REPORTS OCTOBER 31, 2005
Schedule of Investments
Preferred Income Strategies Fund, Inc. (in U.S. dollars)
Preferred Securities
Face
Amount Capital Trusts Value
===============================================================================
Commercial Banks--19.6%
$ 12,035,000 ABN AMRO North America Holding Preferred
Capital Repackaging Trust I, 6.523% (a)(b)(c) $ 12,743,837
2,000,000 Bank One Capital III, 8.75% due 9/01/2030 2,624,574
1,000,000 Chase Capital I Series A, 7.67%
due 12/01/2026 (a) 1,059,560
16,455,000 Chase Capital II Series B, 4.75%
due 2/01/2027 (b) 15,506,122
34,000,000 Dresdner Funding Trust I, 8.151%
due 6/30/2031 (a) 40,355,790
3,630,000 First Empire Capital Trust II, 8.277%
due 6/01/2027 3,924,041
1,820,000 First Security Capital I, 8.41%
due 12/15/2026 1,952,107
5,600,000 Firstar Capital Trust I Series B, 8.32%
due 12/15/2026 6,022,268
2,000,000 HSBC America Capital Trust I, 7.808%
due 12/15/2026 (a) 2,126,350
15,835,000 HSBC Capital Funding LP/Jersey Channel
Islands, 10.176% (a)(b)(c) 23,720,402
12,275,000 Hubco Capital Trust II Series B, 7.65%
due 6/15/2028 (a) 13,103,562
998,000 JPM Capital Trust I, 7.54% due 1/15/2027 (a) 1,057,634
2,000,000 Lloyds TSB Bank PLC, 6.90% (c) 2,032,600
13,500,000 Mizuho JGB Investment LLC, 9.87% (a)(b)(c) 14,946,147
18,470,000 Nationsbank Capital Trust III, 4.70%
due 1/15/2027 (b) 17,797,563
2,000,000 Republic New York Corp., 7.53% due 12/04/2026 2,116,686
10,000,000 SB Treasury Co. LLC, 9.40% (a)(b)(c) 10,956,510
4,500,000 ST George Funding Co. LLC, 8.485% (a)(c) 4,843,737
--------------
176,889,490
===============================================================================
Consumer Finance--0.5%
4,630,000 MBNA Capital A, 8.278% due 12/01/2026 4,952,091
===============================================================================
Diversified Financial Services--5.3%
15,000,000 Agfirst Farm Credit Bank, 8.393%
due 12/15/2016 (b) 16,765,725
10,000,000 CIT Capital Trust I, 7.70% due 2/15/2027 (a) 10,619,040
9,000,000 Farm Credit Bank of Texas Series 1, 7.561%
(b)(c) 9,825,030
10,000,000 Sun Life Canada US Capital Trust, 8.526%
(a)(c) 10,826,860
--------------
48,036,655
===============================================================================
Electric Utilities--2.3%
14,950,000 HL&P Capital Trust II Series B, 8.257%
due 2/01/2037 15,772,250
5,000,000 SWEPCO Capital I, 5.25% due 10/01/2043 (b) 4,927,420
--------------
20,699,670
===============================================================================
Gas Utilities--0.6%
5,000,000 AGL Capital Trust I Series B, 8.17%
due 6/01/2037 5,387,385
===============================================================================
Insurance--18.8%
24,175,000 AON Corp., 8.205% due 1/01/2027 27,174,489
21,300,000 Ace Capital Trust II, 9.70% due 4/01/2030 28,119,898
23,725,000 Axa, 8.60% due 12/15/2030 30,869,428
15,000,000 Farmers Exchange Capital, 7.05%
due 7/15/2028 (a) 15,158,325
10,000,000 GE Global Insurance Holding Corp., 7.75%
due 6/15/2030 10,862,520
1,000,000 Genamerica Capital I, 8.525% due 6/30/2027
(a) 1,087,826
6,066,000 ING Capital Funding Trust III, 8.439% (b)(c) 6,895,301
1,000,000 Markel Capital Trust I Series B, 8.71%
due 1/01/2046 1,065,430
3,605,000 Oil Casualty Insurance Ltd., 8% due 9/15/2034
(a) 3,602,430
6,325,000 Principal Life Insurance Co., 8%
due 3/01/2044 (a) 6,931,188
14,000,000 QBE Insurance Group Ltd., 5.647%
due 7/01/2023 (a)(b) 13,775,328
6,225,000 Transamerica Capital III, 7.625%
due 11/15/2037 7,112,175
15,600,000 Zurich Capital Trust I, 8.376% due 6/01/2037
(a) 16,873,303
--------------
169,527,641
===============================================================================
Multi-Utilities--3.2%
10,000,000 Dominion Resources Capital Trust I, 7.83%
due 12/01/2027 10,773,890
15,000,000 Dominion Resources Capital Trust III, 8.40%
due 1/15/2031 17,965,545
--------------
28,739,435
===============================================================================
Oil, Gas & Consumable Fuels--2.0%
5,000,000 KN Capital Trust I Series B, 8.56%
due 4/15/2027 (a) 5,377,885
1,750,000 KN Capital Trust III, 7.63% due 4/15/2028 1,904,178
9,850,000 Phillips 66 Capital Trust II, 8%
due 1/15/2037 (a) 10,518,066
--------------
17,800,129
===============================================================================
Thrifts & Mortgage Finance--4.5%
Astoria Capital Trust I:
1,000,000 9.75% due 11/01/2029 (a) 1,144,100
5,000,000 Series B, 9.75% due 11/01/2029 5,795,500
5,760,000 Dime Capital Trust I Series A, 9.33%
due 5/06/2027 6,341,795
12,765,000 Greenpoint Capital Trust I, 9.10%
due 6/01/2027 13,905,476
3,005,000 ML Capital Trust I, 9.875% due 3/01/2027 3,250,563
9,775,000 Webster Capital Trust I, 9.36% due 1/29/2027
(a) 10,602,942
--------------
41,040,376
-------------------------------------------------------------------------------
Total Capital Trusts
(Cost--$494,396,483)--56.8% 513,072,872
===============================================================================
Shares
Held Preferred Stocks
===============================================================================
Capital Markets--2.0%
96,000 Goldman Sachs Group, Inc. Series A, 3.91% (b) 2,430,720
600,000 Lehman Brothers Holdings, Inc., 6.50% 15,450,000
--------------
17,880,720
===============================================================================
Commercial Banks--9.0%
150 BBVA Privanza International Ltd., 7.764%
(a)(d) 15,676,575
435,200 Banco Santander Central Hispano SA, 6.41% 10,967,040
137,579 First Republic Bank, 6.25% 3,289,005
4,650 First Tennessee Bank NA, 3.90% (a)(b) 4,647,094
166,800 Provident Financial Group, Inc., 7.75% 4,409,775
750,000 Royal Bank of Scotland Group Plc Series L,
5.75% 17,287,500
23,000 SG Preferred Capital II, 6.302% 24,716,766
--------------
80,993,755
===============================================================================
Diversified Financial Services--4.2%
855,000 CIT Group, Inc. Series A, 6.35% 21,563,100
320,000 Cobank ACB, 7% 15,977,280
--------------
37,540,380
===============================================================================
ANNUAL REPORTS OCTOBER 31, 2005 9
Schedule of Investments (continued)
Preferred Income Strategies Fund, Inc. (in U.S. dollars)
Preferred Securities (continued)
Shares
Held Preferred Stocks Value
===============================================================================
Electric Utilities--0.8%
14,000 Alabama Power Co., 5.83% $ 349,860
80,000 Duquesne Light Co., 6.50% 4,080,000
80,000 Interstate Power & Light Co. Series B, 8.375% 2,640,000
--------------
7,069,860
===============================================================================
Gas Utilities--1.6%
556,000 Southern Union Co., 7.55% 14,700,640
===============================================================================
Insurance--10.1%
880,000 ACE Ltd. Series C, 7.80% 22,976,800
140,000 Axis Capital Holdings Ltd., 7.25% 3,478,132
139,200 Endurance Specialty Holdings Ltd., 7.75% 3,393,696
1,260,000 Metlife, Inc. Series B, 6.50% 31,739,400
140,000 Prudential Plc, 6.50% 3,435,600
16,340 Zurich RegCaPS Funding Trust, 6.01% (a)(b) 16,508,506
9,800 Zurich RegCaPS Funding Trust, 6.58% (a)(b) 10,237,938
--------------
91,770,072
===============================================================================
Multi-Utilities--0.4%
140,000 Pacific Gas & Electric Co. Series A, 6% 3,500,000
===============================================================================
Thrifts & Mortgage Finance--8.5%
1,210,000 Fannie Mae, 7% (b) 66,247,500
264,650 Fannie Mae Series L, 5.125% 10,652,163
--------------
76,899,663
===============================================================================
Wireless Telecommunication Services--0.3%
2,423 Centaur Funding Corp., 9.08% 3,114,312
-------------------------------------------------------------------------------
Total Preferred Stocks
(Cost--$327,081,618)--36.9% 333,469,402
===============================================================================
Real Estate Investment Trusts
===============================================================================
Real Estate--21.8%
251,400 Alexandria Real Estate Equities, Inc.
Series C, 8.375% 6,548,970
400,000 CBL & Associates Properties, Inc. Series C,
7.75% 10,292,000
600,000 CarrAmerica Realty Corp. Series E, 7.50% 15,420,000
680,000 Developers Diversified Realty Corp., 8% 17,544,000
80,000 Duke Realty Corp. Series K, 6.50% 1,965,600
2,390 First Industrial Realty Trust, Inc., 6.236%
(b) 2,419,128
4,000 Firstar Realty LLC, 8.875% (a) 5,220,000
768,000 Health Care Property Investors, Inc. Series
F, 7.10% 19,584,000
172,800 Health Care REIT, Inc. Series F, 7.625% 4,401,009
684,700 Kimco Realty Corp. Series F, 6.65% 17,432,462
1,600,000 New Plan Excel Realty Trust Series E, 7.625% 41,216,000
PS Business Parks, Inc.:
72,000 Series K, 7.95% 1,857,600
64,000 Series M, 7.20% 1,561,600
320,000 Public Storage, Inc. Series X, 6.45% 7,696,000
58,000 Regency Centers Corp., 7.25% 1,451,815
607,550 Regency Centers Corp., 7.45% 15,437,846
11,857 Sovereign Real Estate Investment Corp., 12% 17,074,080
145,000 Vornado Realty Trust Series E, 7% 3,615,938
130,000 Wachovia Preferred Funding Corp. Series A,
7.25% 3,568,500
96,000 Weingarten Realty Investors Series D, 6.75% 2,539,200
-------------------------------------------------------------------------------
Total Real Estate Investment Trusts
(Cost--$192,765,535)--21.8% 196,845,748
===============================================================================
Aerospace & Defense--3.1%
27,450,000 RC Trust I, 7% due 5/15/2006 27,741,684
===============================================================================
Capital Markets--0.1%
875,000 Lehman Brothers Holdings Capital Trust III
Series K, 1.558% due 3/15/2052 851,945
===============================================================================
Communications Equipment--0.2%
2,000,000 Corporate-Backed Trust Certificates, 8.375%
due 11/15/2028 2,069,234
===============================================================================
Electric Utilities--1.5%
4,750,000 Georgia Power Co. Series O, 1.475%
due 4/15/2033 4,577,807
3,000,000 HECO Capital Trust III, 6.50% due 3/18/2034 3,118,070
5,000,000 National Rural Utilities Cooperative Finance
Corp., 6.75% due 2/15/2043 4,967,879
950,000 Virginia Power Capital Trust II, 1.844%
due 7/30/2042 967,858
--------------
13,631,614
===============================================================================
Gas Utilities--0.7%
500,000 Dominion CNG Capital Trust I, 1.95%
due 10/31/2041 508,164
5,750,000 Southwest Gas Capital II, 7.70% due 9/15/2043 6,073,168
--------------
6,581,332
===============================================================================
Insurance--3.2%
16,000,000 ABN AMRO North America Capital Funding
Trust II, 3.925% (a)(b)(c) 15,669,618
7,375,000 Berkley W R Capital Trust, 6.75%
due 7/26/2045 6,995,247
1,000,000 Everest Re Capital Trust, 1.963%
due 11/15/2032 1,034,933
5,000,000 Lincoln National Capital VI Series F, 6.75%
due 9/11/2052 5,069,871
--------------
28,769,669
===============================================================================
Multi-Utilities--0.0%
397,425 PSEG Funding Trust II, 8.75% due 12/31/2032 418,437
===============================================================================
Thrifts & Mortgage Finance--3.6%
27,000,000 Countrywide Financial Corp., 1.50%
due 4/01/2033 26,561,617
6,000,000 Dime Community Capital I, 7% due 4/14/2034 5,910,000
--------------
32,471,617
-------------------------------------------------------------------------------
Total Trust Preferreds
(Cost--$112,904,785)--12.4% 112,535,532
-------------------------------------------------------------------------------
Total Preferred Securities
(Cost--$1,127,148,421)--127.9% 1,155,923,554
===============================================================================
Corporate Bonds
===============================================================================
Automobiles--3.3%
22,500,000 DaimlerChrysler NA Holding Corp., 8.50%
due 1/18/2031 26,406,382
5,000,000 Ford Motor Co., 7.45% due 7/16/2031 3,675,000
--------------
30,081,382
===============================================================================
Commercial Banks--1.7%
5,000,000 HBOS Plc, 5.92% (a)(b)(c) 4,927,160
10,000,000 Resona Preferred Global Securities Ltd.,
7.191% (a)(b)(c) 10,188,110
--------------
15,115,270
10 ANNUAL REPORTS OCTOBER 31, 2005
Schedule of Investments (concluded)
Preferred Income Strategies Fund, Inc. (in U.S. dollars)
Face
Amount Corporate Bonds Value
===============================================================================
Diversified Financial Services--5.8%
$ 8,000,000 Ford Motor Credit Co., 7% due 10/01/2013 $ 7,322,128
29,000,000 General Motors Acceptance Corp., 8%
due 11/01/2031 29,937,889
15,000,000 Sigma Finance Corp., 6.84% due 8/15/2011 (e) 15,000,000
--------------
52,260,017
===============================================================================
Diversified Telecommunication Services--3.7%
25,500,000 France Telecom SA, 8.50% due 3/01/2031 33,318,937
===============================================================================
Electric Utilities--1.1%
10,000,000 FirstEnergy Corp. Series B, 6.45%
due 11/15/2011 10,519,080
===============================================================================
Food Products--0.6%
4,800,000 Tyson Foods, Inc., 7% due 1/15/2028 5,091,038
===============================================================================
Independent Power Producers & Energy Traders--2.3%
16,575,000 Duke Energy Field Services LLC, 8.125%
due 8/16/2030 20,696,904
===============================================================================
Media--4.1%
10,000,000 Comcast Corp., 7.05% due 3/15/2033 10,691,400
Time Warner, Inc.:
5,000,000 7.625% due 4/15/2031 5,637,570
18,000,000 7.70% due 5/01/2032 20,500,056
--------------
36,829,026
===============================================================================
Thrifts & Mortgage Finance--1.8%
8,000,000 Residential Capital Corp., 6.875%
due 6/30/2015 (a) 8,422,672
8,000,000 Roslyn Real Estate Asset Corp. Series D,
7.67% (b)(c) 8,000,000
--------------
16,422,672
===============================================================================
Wireless Telecommunication Services--6.3%
18,000,000 AT&T Wireless Services, Inc., 8.75%
due 3/01/2031 23,472,918
Sprint Capital Corp.:
2,000,000 6.90% due 5/01/2019 2,170,882
24,000,000 8.75% due 3/15/2032 31,042,464
--------------
56,686,264
-------------------------------------------------------------------------------
Total Corporate Bonds
(Cost--$265,124,654)--30.7% 277,020,590
===============================================================================
Total Investments
(Cost--$1,392,273,075*)--158.6% 1,432,944,144
Other Assets Less Liabilities--2.3% 20,756,680
Preferred Stock, at Redemption Value--(60.9%) (550,100,062)
--------------
Net Assets Applicable to Common Stock--100.0% $ 903,600,762
==============
* The cost and unrealized appreciation (depreciation) of investments as of
October 31, 2005, as computed for federal income tax purposes, were as
follows:
Aggregate cost .......................................... $1,386,043,290
==============
Gross unrealized appreciation ........................... $ 61,737,667
Gross unrealized depreciation ........................... (14,836,813)
------------
Net unrealized appreciation ............................. $ 46,900,854
==============
(a) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(b) Floating rate note.
(c) The security is a perpetual bond and has no definite maturity date.
(d) Depositary receipts.
(e) Restricted securities as to resale, representing 1.7% of net assets, were
as follows:
--------------------------------------------------------------------------
Acquisition
Issue Date Cost Value
--------------------------------------------------------------------------
Sigma Finance Corp., 6.84%
due 8/15/2011 2/13/2004 $15,000,000 $15,000,000
--------------------------------------------------------------------------
Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2 (a)(3) of the Investment Company Act, were as
follows:
--------------------------------------------------------------------------
Net Interest
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I -- $133,189
Merrill Lynch Liquidity Series, LLC
Money Market Series -- $ 2,842
--------------------------------------------------------------------------
See Notes to Financial Statements.
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 such industry classifications for reporting
ease. Industries are shown as a percent of net assets. These industry
classifications are unaudited.
Swaps outstanding as of October 31, 2005 were as follows:
-----------------------------------------------------------------------------------
Unrealized
Notional Appreciation
Amount (Depreciation)
-----------------------------------------------------------------------------------
Sold credit default protection on a basket of
preferred securities and receive 2.03%
Broker, Lehman Brothers Special Finance
Expires September 2007 $ 36,000,000 $ (93,672)
Receive a fixed rate of 4.14% and pay a
floating rate based on 3-month LIBOR
Broker, Lehman Brothers Special Finance
Expires February 2012 $200,000,000 (7,968,722)
Pay a fixed rate of 5.7075% and receive a
floating rate based on 3-month LIBOR
Broker, Morgan Stanley Capital Services, Inc.
Expires December 2015 $300,000,000 (14,598,900)
Pay a fixed rate of 5.135% and receive a
floating rate based on 3-month LIBOR
Broker, JPMorgan Chase Bank
Expires December 2015 $160,000,000 (671,200)
Pay a fixed rate of 4.981% and receive a
floating rate based on 3-month LIBOR
Broker, JPMorgan Chase Bank
Expires January 2016 $ 60,000,000 523,200
Pay a fixed rate of 5.1035% and receive a
floating rate based on 3-month LIBOR
Broker, Lehman Brothers Special Finance
Expires December 2035 $72,000,000 2,009,016
-----------------------------------------------------------------------------------
Total $ (20,800,278)
ANNUAL REPORTS OCTOBER 31, 2005 11
Statements of Net Assets
Preferred and Preferred
Corporate Income Income
Strategies Strategies
As of October 31, 2005 Fund, Inc. Fund, Inc.
===================================================================================================================================
Assets
-----------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value* .................... $ 366,095,425 $1,432,944,144
Cash ................................................................. 3,995,257 18,534,399
Receivable for securities sold ....................................... -- 38,085,713
Interest receivable** ................................................ 4,872,829 18,034,544
Dividends receivable ................................................. 273,182 872,529
Receivable for swaps ................................................. 58,238 234,982
Prepaid expenses ..................................................... 11,709 68,071
--------------------------------
Total assets ......................................................... 375,306,640 1,508,774,382
--------------------------------
===================================================================================================================================
Liabilities
-----------------------------------------------------------------------------------------------------------------------------------
Unrealized depreciation on swaps ..................................... 6,903,275 20,800,278
Payable for securities purchased ..................................... -- 26,700,985
Dividends payable to Common Stock shareholders ....................... 1,713,197 6,765,575
Payable to investment adviser ........................................ 174,780 694,773
Payable to other affiliates .......................................... 4,848 18,301
Accrued expenses ..................................................... 62,760 93,646
--------------------------------
Total liabilities .................................................... 8,858,860 55,073,558
--------------------------------
===================================================================================================================================
Preferred Stock
-----------------------------------------------------------------------------------------------------------------------------------
Preferred Stock, at redemption value, par value $.10 per share+
of AMPS@ at $25,000 per share liquidation preference 136,598,089 550,100,062
--------------------------------
===================================================================================================================================
Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock ................................ $ 229,849,691 $ 903,600,762
================================
12 ANNUAL REPORTS OCTOBER 31, 2005
Statements of Net Assets (concluded)
Preferred and Preferred
Corporate Income Income
Strategies Strategies
As of October 31, 2005 Fund, Inc. Fund, Inc.
===================================================================================================================================
Analysis of Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------------------
Undistributed investment income--net ................................. $ 1,474,705 $ 3,724,607
Accumulated realized capital losses--net ............................. (16,765,379) (82,563,796)
Unrealized appreciation--net ......................................... 1,662,217 19,870,791
--------------------------------
Total accumulated losses--net ........................................ (13,628,457) (58,968,398)
--------------------------------
Common Stock, par value $.10 per share++ ............................. 1,027,919 4,059,307
Paid-in capital in excess of par ..................................... 242,450,229 958,509,853
--------------------------------
Net Assets ........................................................... $ 229,849,691 $ 903,600,762
================================
Net asset value per share of Common Stock ............................ $ 22.36 $ 22.26
--------------------------------
Market price ......................................................... $ 21.03 $ 21.20
--------------------------------
* Identified cost for unaffiliated securities .................... $ 357,529,933 $1,392,273,075
================================
** Interest from affiliates ....................................... $ 15 --
================================
+ Preferred Stock authorized, issued and outstanding:
Series M7 Shares ............................................ 2,730 2,800
--------------------------------
Series T7 Shares ............................................ 2,730 2,800
--------------------------------
Series W7 Shares ............................................ -- 2,800
--------------------------------
Series TH7 Shares ........................................... -- 2,800
--------------------------------
Series F7 Shares ............................................ -- 2,800
--------------------------------
Series W28 Shares ........................................... -- 4,000
--------------------------------
Series TH28 Shares .......................................... -- 4,000
--------------------------------
++ Common Stock issued and outstanding ............................ 10,279,189 40,593,070
================================
@ Auction Market Preferred Stock.
See Notes to Financial Statements.
ANNUAL REPORTS OCTOBER 31, 2005 13
Statements of Operations
Preferred and Preferred
Corporate Income Income
Strategies Strategies
For the Year Ended October 31, 2005 Fund, Inc. Fund, Inc.
===================================================================================================================================
Investment Income
-----------------------------------------------------------------------------------------------------------------------------------
Interest* ............................................................ $ 17,876,899 $ 60,992,357
Dividends ............................................................ 7,376,070 35,043,940
Securities lending--net .............................................. -- 2,842
--------------------------------
Total income ......................................................... 25,252,969 96,039,139
--------------------------------
===================================================================================================================================
Expenses
-----------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ............................................. 2,263,703 8,970,488
Commission fees ...................................................... 346,382 1,422,352
Accounting services .................................................. 138,350 422,643
Transfer agent fees .................................................. 64,006 160,537
Professional fees .................................................... 64,438 75,399
Custodian fees ....................................................... 22,043 56,912
Printing and shareholder reports ..................................... 23,540 75,209
Trustees' fees and expenses .......................................... 32,275 101,758
Pricing fees ......................................................... 9,991 13,082
Listing fees ......................................................... 19,117 28,869
Other ................................................................ 39,869 56,406
--------------------------------
Total expenses ....................................................... 3,023,714 11,383,655
--------------------------------
Investment income--net ............................................... 22,229,255 84,655,484
--------------------------------
===================================================================================================================================
Realized & Unrealized Gain (Loss)--Net
-----------------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net ................................................. (782,230) (1,856,357)
Futures contracts and swaps--net ................................. (4,024,765) (15,221,854)
Options written--net ............................................. 7,463 29,849
--------------------------------
Total realized loss--net ............................................. (4,799,532) (17,048,362)
--------------------------------
Change in unrealized appreciation/depreciation on:
Investments--net ................................................. (11,002,487) (33,293,852)
Futures contracts and swaps--net ................................. 4,601,628 13,832,369
--------------------------------
Total change in unrealized appreciation/depreciation--net ............ (6,400,859) (19,461,483)
--------------------------------
Total realized and unrealized loss--net .............................. (11,200,391) (36,509,845)
--------------------------------
===================================================================================================================================
Dividends to Preferred Stock Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................... (4,112,800) (16,331,142)
--------------------------------
Net Increase in Net Assets Resulting from Operations ................. $ 6,916,064 $ 31,814,497
================================
* Interest from affiliates ......................................... $ 25,527 $ 133,189
================================
See Notes to Financial Statements.
14 ANNUAL REPORTS OCTOBER 31, 2005
Statements of Changes in Net Assets
Preferred and Corporate Income Strategies Fund, Inc.
For the Year Ended
October 31,
--------------------------------
Increase (Decrease) in Net Assets: 2005 2004
===================================================================================================================================
Operations
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................... $ 22,229,255 $ 22,521,477
Realized loss--net ................................................... (4,799,532) (8,097,410)
Change in unrealized appreciation/depreciation--net .................. (6,400,859) 887,799
Dividends to Preferred Stock shareholders ............................ (4,112,800) (1,892,108)
--------------------------------
Net increase in net assets resulting from operations ................. 6,916,064 13,419,758
--------------------------------
===================================================================================================================================
Dividends to Common Stock Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................... (20,558,419) (20,558,419)
--------------------------------
Net decrease in net assets resulting from dividends to
Common Stock shareholders ........................................... (20,558,419) (20,558,419)
--------------------------------
===================================================================================================================================
Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------------------
Total decrease in net assets applicable to Common Stock .............. (13,642,355) (7,138,661)
Beginning of year .................................................... 243,492,046 250,630,707
--------------------------------
End of year* ......................................................... $ 229,849,691 $ 243,492,046
================================
* Undistributed investment income--net ........................... $ 1,474,705 $ 539,947
================================
See Notes to Financial Statements.
Preferred Income Strategies Fund, Inc.
For the Year Ended
October 31,
--------------------------------
Increase (Decrease) in Net Assets: 2005 2004
===================================================================================================================================
Operations
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................... $ 84,655,484 $ 86,983,438
Realized loss--net ................................................... (17,048,362) (64,731,102)
Change in unrealized appreciation/depreciation--net .................. (19,461,483) 32,642,935
Dividends and distributions to Preferred Stock shareholders .......... (16,331,142) (7,473,764)
--------------------------------
Net increase in net assets resulting from operations ................. 31,814,497 47,421,507
--------------------------------
===================================================================================================================================
Dividends and Distributions to Common Stock Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................... (81,186,307) (86,340,486)
Realized gain--net ................................................... -- (3,830,687)
--------------------------------
Net decrease in net assets resulting from dividends and
distributions to Common Stock shareholders .......................... (81,186,307) (90,171,173)
--------------------------------
===================================================================================================================================
Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------------------
Total decrease in net assets applicable to Common Stock .............. (49,371,810) (42,749,666)
Beginning of year .................................................... 952,972,572 995,722,238
--------------------------------
End of year* ......................................................... $ 903,600,762 $ 952,972,572
================================
* Undistributed investment income--net ........................... $ 3,724,607 $ 1,937,813
================================
See Notes to Financial Statements.
ANNUAL REPORTS OCTOBER 31, 2005 15
Financial Highlights Preferred and Corporate Income Strategies Fund, Inc.
For the Year Ended For the Period
October 31, August 1, 2003+
The following per share data and ratios have been derived ----------------------- to October 31,
from information provided in the financial statements. 2005 2004 2003
==================================================================================================================================
Per Share Operating Performance
----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ........................ $ 23.69 $ 24.38 $ 23.88
-----------------------------------------
Investment income--net ...................................... 2.16 2.19 .39
Realized and unrealized gain (loss)--net .................... (1.09) (.70) .67
Dividends to Preferred Stock shareholders from
investment income--net ..................................... (.40) (.18) (.03)
-----------------------------------------
Total from investment operations ............................ .67 1.31 1.03
-----------------------------------------
Less dividends to Common Stock shareholders from
investment income--net ..................................... (2.00) (2.00) (.33)
-----------------------------------------
Offering costs resulting from the issuance of
Common Stock ............................................... -- -- (.04)
-----------------------------------------
Offering and underwriting costs resulting from the
issuance of Preferred Stock ................................ -- -- (.16)
-----------------------------------------
Net asset value, end of period .............................. $ 22.36 $ 23.69 $ 24.38
=========================================
Market price per share, end of period ....................... $ 21.03 $ 22.84 $ 23.60
=========================================
==================================================================================================================================
Total Investment Return**
----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share .......................... 3.25% 5.86% 3.53%@
=========================================
Based on market price per share ............................. .73% 5.44% (4.33%)@
=========================================
==================================================================================================================================
Ratios Based on Average Net Assets of Common Stock
----------------------------------------------------------------------------------------------------------------------------------
Total expenses, net of waiver*** ............................ 1.26% 1.26% .49%*
=========================================
Total expenses*** ........................................... 1.26% 1.27% 1.11%*
=========================================
Total investment income--net*** ............................. 9.23% 9.04% 6.79%*
=========================================
Amount of dividends to Preferred Stock shareholders ......... 1.71% .76% .50%*
=========================================
Investment income--net, to Common Stock shareholders ........ 7.52% 8.28% 6.29%*
=========================================
==================================================================================================================================
Ratios Based on Average Net Assets of Preferred Stock
----------------------------------------------------------------------------------------------------------------------------------
Dividends to Preferred Stock shareholders ................... 3.01% 1.39% 1.11%*
=========================================
16 ANNUAL REPORTS OCTOBER 31, 2005
Financial Highlights (concluded)
Preferred and Corporate Income Strategies Fund, Inc.
For the Year Ended For the Period
October 31, August 1, 2003+
The following per share data and ratios have been derived ----------------------- to October 31,
from information provided in the financial statements. 2005 2004 2003
==================================================================================================================================
Supplemental Data
----------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock, end of period
(in thousands) ............................................. $229,850 $243,492 $250,631
=========================================
Preferred Stock outstanding, end of period
(in thousands) ............................................. $136,500 $136,500 $136,500
=========================================
Portfolio turnover .......................................... 25.44% 27.11% 11.51%
=========================================
==================================================================================================================================
Leverage
----------------------------------------------------------------------------------------------------------------------------------
Asset coverage per $1,000 ................................... $ 2,684 $ 2,784 $ 2,836
=========================================
==================================================================================================================================
Dividends Per Share on Preferred Stock Outstanding++
----------------------------------------------------------------------------------------------------------------------------------
Series M7--Investment income--net ........................... $ 747 $ 347 $ 55
=========================================
Series T7--Investment income--net ........................... $ 759 $ 346 $ 50
=========================================
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
dif ferent returns. Total investment returns exclude the effects of sales
charges.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on August 26, 2003.
@ Aggregate total investment return.
See Notes to Financial Statements.
ANNUAL REPORTS OCTOBER 31, 2005 17
Financial Highlights Preferred Income Strategies Fund, Inc.
For the Year Ended For the Period
October 31, August 1, 2003+
The following per share data and ratios have been derived ----------------------- to October 31,
from information provided in the financial statements. 2005 2004 2003
==================================================================================================================================
Per Share Operating Performance
----------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ........................ $ 23.48 $ 24.53 $ 23.88
-----------------------------------------
Investment income--net ...................................... 2.09@@ 2.14@@ 1.14
Realized and unrealized gain (loss)--net .................... (.91) (.78) .61
Dividends and distributions to Preferred Stock
shareholders:
Investment income--net .................................. (.40) (.18) (.07)
Realized gain--net ...................................... -- (.01) --
-----------------------------------------
Total from investment operations ............................ .78 1.17 1.68
-----------------------------------------
Less dividends and distributions to Common Stock
shareholders:
Investment income--net .................................. (2.00) (2.13) (.87)
Realized gain--net ...................................... -- (.09) --
-----------------------------------------
Total dividends and distributions to Common Stock
shareholders ............................................... (2.00) (2.22) (.87)
-----------------------------------------
Offering costs resulting from the issuance of Common
Stock ...................................................... -- -- (.01)
-----------------------------------------
Offering and underwriting costs resulting from the
issuance of Preferred Stock ................................ -- -- (.15)
-----------------------------------------
Net asset value, end of period .............................. $ 22.26 $ 23.48 $ 24.53
=========================================
Market price per share, end of period ....................... $ 21.20 $ 22.87 $ 23.69
=========================================
==================================================================================================================================
Total Investment Return**
----------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share .......................... 3.73% 5.22% 6.47%@
=========================================
Based on market price per share ............................. 1.43% 6.12% (1.80%)@
=========================================
==================================================================================================================================
Ratios Based on Average Net Assets of Common Stock
----------------------------------------------------------------------------------------------------------------------------------
Total expenses, net of waiver*** ............................ 1.20% 1.19% .79%*
=========================================
Total expenses*** ........................................... 1.20% 1.19% 1.05%*
=========================================
Total investment income--net*** ............................. 8.96% 8.93% 8.31%*
=========================================
Amount of dividends to Preferred Stock shareholders ......... 1.73% .74% .49%*
=========================================
Investment income--net, to Common Stock shareholders ........ 7.23% 8.19% 7.82%*
=========================================
==================================================================================================================================
Ratios Based on Average Net Assets of Preferred Stock
----------------------------------------------------------------------------------------------------------------------------------
Dividends to Preferred Stock shareholders ................... 2.97% 1.32% 1.05%*
=========================================
18 ANNUAL REPORTS OCTOBER 31, 2005
Financial Highlights (concluded) Preferred Income Strategies Fund, Inc.
For the Year Ended For the Period
October 31, August 1, 2003+
The following per share data and ratios have been derived ----------------------- to October 31,
from information provided in the financial statements. 2005 2004 2003
==================================================================================================================================
Supplemental Data
----------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock, end of period
(in thousands) ............................................. $903,601 $952,973 $995,722
=========================================
Preferred Stock outstanding, end of period
(in thousands) ............................................. $550,000 $550,000 $550,000
=========================================
Portfolio turnover .......................................... 27.96% 22.56% 27.31%
=========================================
==================================================================================================================================
Leverage
----------------------------------------------------------------------------------------------------------------------------------
Asset coverage per $1,000 ................................... $ 2,643 $ 2,733 $ 2,810
=========================================
==================================================================================================================================
Dividends Per Share on Preferred Stock Outstanding++
----------------------------------------------------------------------------------------------------------------------------------
Series M7--Investment income--net ........................... $ 744 $ 330 $ 127
=========================================
Series T7--Investment income--net ........................... $ 757 $ 329 $ 122
=========================================
Series W7--Investment income--net ........................... $ 734 $ 327 $ 122
=========================================
Series TH7--Investment income--net .......................... $ 737 $ 320 $ 184
=========================================
Series F7--Investment income--net ........................... $ 740 $ 326 $ 125
=========================================
Series W28--Investment income--net .......................... $ 751 $ 338 $ 105
=========================================
Series TH28--Investment income--net ......................... $ 733 $ 324 $ 95
=========================================
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
dif ferent returns. Total investment returns exclude the effects of sales
charges.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on May 16, 2003.
@ Aggregate total investment return.
@@ Based on average shares outstanding.
See Notes to Financial Statements.
ANNUAL REPORTS OCTOBER 31, 2005 19
Notes to Financial Statements
1. Significant Accounting Policies:
Preferred and Corporate Income Strategies Fund, Inc. and Preferred Income
Strategies Fund, Inc. (the "Funds" or individually as the "Fund") are registered
under the Investment Company Act of 1940, as amended, as diversified, closed-end
management investment companies. The Funds' financial statements are prepared in
conformity with U.S. generally accepted accounting principles, which may require
the use of management accruals and estimates. Actual results may differ from
these estimates. The Funds' Common Stock shares are listed on the New York Stock
Exchange ("NYSE") under the symbol PSW for Preferred and Corporate Income
Strategies Fund, Inc. and PSY for Preferred Income Strategies Fund, Inc. The
following is a summary of significant accounting policies followed by the Funds.
(a) Valuation of investments -- 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 Funds under the general direction
of the Board of Directors. Such valuations and procedures will be reviewed
periodically by the Board of Directors of the Funds. Financial futures contracts
and options thereon, which are traded on exchanges, are valued at their closing
prices as of the close of such exchanges. Options written or purchased are
valued at the last sales price in the case of exchange-traded options. In the
case of options traded in the OTC market, valuation is the last asked price
(options written) or the last bid price (options purchased). Swap agreements are
valued based upon quoted fair valuations received daily by each Fund from a
pricing service or counterparty. Short-term investments with a remaining
maturity of 60 days or less are valued at amortized cost, which approximates
market value, under which method the investment is valued at cost and any
premium or discount is amortized on a straight line basis to maturity.
Repurchase agreements are valued at cost plus accrued interest. Investments in
open-end investment companies are valued at their net asset value each business
day. Securities and other assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Funds.
Equity securities that are held by the Funds, which are traded on stock
exchanges or the Nasdaq National Market, are valued at the last sale price or
official close price on the exchange, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price for long positions, and at the last available ask price for short
positions. In cases where equity securities are traded on more than one
exchange, the securities are valued on the exchange designated as the primary
market by or under the authority of the Board of Directors of the Funds. Long
positions traded in the OTC market, Nasdaq Small Cap or Bulletin Board are
valued at the last available bid price obtained from one or more dealers or
pricing services approved by the Board of Directors of the Funds. 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.
Generally, trading in foreign 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 in each of the Fund's net
asset value. If events (for example, a company announcement, market volatility
or a natural disaster) occur during such periods that are expected to materially
affect the value of such securities, those securities may be valued at their
fair value as determined in good faith by the Fund's Board of Directors or by
the Investment Adviser using a pricing service and/or procedures approved by the
Fund's Board of Directors.
(b) Derivative financial instruments -- Each Fund may engage in various
portfolio investment strategies both to increase the return of each 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.
o Options -- Each 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
20 ANNUAL REPORTS OCTOBER 31, 2005
Notes to Financial Statements (continued)
current market value of the option written. When a security is purchased or sold
through an exercise of an option, the related premium paid (or received) is
added to (or deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option expires (or the
Fund enters into a closing transaction), the Fund realizes a gain or loss on the
option to the extent of the premiums received or paid (or gain or loss to the
extent the cost of the closing transaction exceeds the premium paid or
received).
Written and purchased options are non-income producing investments.
o Financial futures contracts -- Each 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.
o Swaps -- Each Fund may enter into swap agreements, which are
over-the-counter contracts in which the Fund and a counterparty agree to
make periodic net payments on a specified notional amount. The net
payments can be made for a set period of time or may be triggered by a
predetermined credit event. The net periodic payments may be based on a
fixed or variable interest rate; the change in market value of a specified
security, basket of securities, or index; or the return generated by a
security. These periodic payments received or made by the Fund are
recorded in the accompanying Statement of Operations as realized gains or
losses, respectively. Gains or losses are also realized upon termination
of the swap agreements. Swaps are marked-to-market daily 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.
(c) Income taxes -- It is each Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Funds amortize all
premiums and discounts on debt securities.
(e) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
(f) Securities lending -- Each 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.
(g) Reclassifications -- Preferred and Corporate Income Strategies Fund, Inc.
U.S. generally accepted accounting principles require that certain components of
net assets be adjusted to reflect
ANNUAL REPORTS OCTOBER 31, 2005 21
Notes to Financial Statements (continued)
permanent differences between financial and tax reporting. Accordingly, during
the current year, $3,376,722 has been reclassified between accumulated realized
capital losses and undistributed net investment income as a result of permanent
differences attributable to the classification of investments, gains from the
sale of stock of passive foreign investment companies, and swap agreements. This
reclassification has no effect on net assets or net asset values per share.
Preferred Income Strategies Fund, Inc.
U.S. generally accepted accounting principles require that certain components of
net assets be adjusted to reflect permanent differences between financial and
tax reporting. Accordingly, during the current year, $14,645,385 has been
reclassified between accumulated net realized capital losses and undistributed
net investment income and $3,374 has been reclassified between paid-in capital
in excess of par and undistributed net investment income as a result of
permanent differences attributable to swap transactions, the classification of
investments, passive foreign investment companies and non-deductible expenses.
These reclassifications have no effect on net assets or net asset values per
share.
2. Investment Advisory Agreement and Transactions with Affiliates:
Each Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner.
FAM is responsible for the management of each Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, each Fund pays a monthly fee
at an annual rate of .60% of the Fund's average daily (for Preferred and
Corporate Income Strategies Fund, Inc.) and weekly (for Preferred Income
Strategies Fund, Inc.) net assets (including proceeds from the issuance of
Preferred Stock) plus the proceeds of any outstanding borrowings used for
leverage.
Each 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 ("MLPF&S"), an affiliate of FAM, or its affiliates.
Pursuant to that order, the Fund also has retained Merrill Lynch Investment
Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities lending
agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private investment
company managed by MLIM, LLC or in registered money market funds advised by FAM
or its affiliates. For the year ended October 31, 2005, MLIM, LLC received
$1,218 in securities lending agent fees for the Preferred Income Strategies
Fund, Inc.
For the year ended October 31, 2005, each Fund reimbursed FAM for certain
accounting services. The reimbursements were as follows:
--------------------------------------------------------------------------------
Reimbursement
--------------------------------------------------------------------------------
Preferred and Corporate Income Strategies Fund, Inc. ............. $ 9,358
Preferred Income Strategies Fund, Inc. ........................... $27,493
--------------------------------------------------------------------------------
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, ML & Co., and/or MLIM, LLC.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
year ended October 31, 2005 were as follows:
--------------------------------------------------------------------------------
Preferred and Preferred
Corporate Income Income
Strategies Strategies
Fund, Inc. Fund, Inc.
--------------------------------------------------------------------------------
Total Purchases ........................... $97,058,887 $419,392,450
Total Sales ............................... $97,338,714 $444,042,126
--------------------------------------------------------------------------------
Transactions in options written for the year ended October 31, 2005 were as
follows:
--------------------------------------------------------------------------------
Preferred and Corporate Income Number of Premiums
Strategies Fund, Inc. Contracts Received
--------------------------------------------------------------------------------
Outstanding put options written,
beginning of year ........................ -- --
Options written ........................... 173 $ 7,462
Options expired ........................... (173) (7,462)
--------------------------------
Outstanding put options written,
end of year .............................. -- --
================================
--------------------------------------------------------------------------------
Preferred Income Number of Premiums
Strategies Fund, Inc. Contracts Received
--------------------------------------------------------------------------------
Outstanding put options written,
beginning of year ........................ -- --
Options written ........................... 692 $ 29,849
Options expired ........................... (692) (29,849)
--------------------------------
Outstanding put options written,
end of year .............................. -- --
================================
4. Stock Transactions:
Each Fund is authorized to issue 200,000,000 shares of stock, including
Preferred Stock, par value $.10 per share, all of which were initially
classified as Common Stock. The Board of Directors is authorized, however, to
reclassify any unissued shares of stock without approval of holders of Common
Stock.
22 ANNUAL REPORTS OCTOBER 31, 2005
Notes to Financial Statements (concluded)
Preferred Stock
Auction Market Preferred Stock are redeemable shares of Preferred Stock of the
Funds, with a par value of $.10 per share and liquidation preference of $25,000
per share, plus accrued and unpaid dividends, that entitle their holders to
receive cash dividends at an annual rate that may vary for the successive
dividend periods. The yields in effect at October 31, 2005 were as follows:
--------------------------------------------------------------------------------
Preferred and Preferred
Corporate Income Income
Strategies Strategies
Fund, Inc. Fund, Inc.
--------------------------------------------------------------------------------
Series M7 .............................. 3.69% 3.65%
Series T7 .............................. 3.70% 3.70%
Series W7 .............................. -- 3.65%
Series TH7 ............................. -- 3.67%
Series F7 .............................. -- 3.75%
Series W28 ............................. -- 3.99%
Series TH28 ............................ -- 3.88%
--------------------------------------------------------------------------------
Each Fund pays commissions to certain broker-dealers at the end of each auction
at an annual rate ranging from .25% to .375%, calculated on the proceeds of each
auction. For the year ended October 31, 2005, MLPF&S earned commissions as
follows:
--------------------------------------------------------------------------------
Commissions
--------------------------------------------------------------------------------
Preferred and Corporate Income Strategies Fund, Inc. ........... $272,748
Preferred Income Strategies Fund, Inc. ......................... $534,251
--------------------------------------------------------------------------------
5. Distributions to Shareholders:
Each Fund paid an ordinary income dividend to holders of Common Stock on
November 30, 2005 to shareholders of record on November 15, 2005. The amount of
the ordinary income dividend per share was as follows:
--------------------------------------------------------------------------------
Per Share
Amount
--------------------------------------------------------------------------------
Preferred and Corporate Income Strategies Fund, Inc. ........... $.166667
Preferred Income Strategies Fund, Inc. ......................... $.166667
--------------------------------------------------------------------------------
The tax character of distributions paid during the fiscal years ended October
31, 2005 and October 31, 2004 was as follows:
--------------------------------------------------------------------------------
Preferred and Corporate Income
Strategies Fund, Inc. 10/31/2005 10/31/2004
--------------------------------------------------------------------------------
Distributions paid from:
Ordinary income ......................... $24,671,219 $22,450,527
------------------------------
Total taxable distributions .............. $24,671,219 $22,450,527
==============================
--------------------------------------------------------------------------------
Preferred Income
Strategies Fund, Inc. 10/31/2005 10/31/2004
--------------------------------------------------------------------------------
Distributions paid from:
Ordinary income ......................... $97,517,449 $93,554,460
Net long-term capital gains ............. -- 4,090,477
------------------------------
Total taxable distributions .............. $97,517,449 $97,644,937
==============================
As of October 31, 2005, the components of accumulated losses on a tax basis were
as follows:
-----------------------------------------------------------------------------
Preferred and Corporate Income Strategies Fund, Inc.
-----------------------------------------------------------------------------
Undistributed ordinary income--net ...................... $ 108,319
Undistributed long-term capital gains--net .............. --
Total undistributed earnings--net ....................... 108,319
Capital loss carryforward ............................... (16,578,662)*
Unrealized gains--net ................................... 2,841,886**
------------
Total accumulated losses--net ........................... $(13,628,457)
============
* At October 31, 2005, the Fund had a net capital loss carryforward of
$16,578,662, of which $1,276,621 expires in 2011, $10,243,141 expires in
2012, and $5,058,900 expires in 2013. These amounts will be available to
offset like amounts of any future taxable gains.
** The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the realization for tax purposes of unrealized
gains (losses) on certain futures contracts, the realization for tax
purposes of unrealized gains on investments in passive foreign investment
companies and other book/tax temporary differences.
-----------------------------------------------------------------------------
Preferred Income Strategies Fund, Inc.
-----------------------------------------------------------------------------
Undistributed ordinary income--net ...................... $ --
Undistributed long-term capital gains--net .............. --
Total undistributed earnings--net ....................... --
Capital loss carryforward ............................... (80,644,979)*
Unrealized gains--net ................................... 21,676,581**
------------
Total accumulated losses--net ........................... $(58,968,398)
============
* At October 31, 2005, the Fund had a net capital loss carryforward of
$80,644,979, of which $62,733,648 expires in 2012 and $17,911,331 expires
in 2013. These amounts will be available to offset like amounts of any
future taxable gains.
** The difference between book-basis and tax-basis net unrealized gains is
attributable primarily to the tax deferral of losses on wash sales, the
realization for tax purposes of unrealized gains on investments in passive
foreign investment companies and other book/tax temporary differences.
ANNUAL REPORTS OCTOBER 31, 2005 23
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of
Preferred and Corporate Income Strategies
Fund, Inc. and Preferred Income Strategies
Fund, Inc.:
We have audited the accompanying statements of net assets of Preferred and
Corporate Income Strategies Fund, Inc. and Preferred Income Strategies Fund,
Inc. (the "Funds"), including the schedule of investments, as of October 31,
2005, the related statements of operations for the year then ended, the
statements of changes in net assets for each of the two years in the period then
ended, and the financial highlights for each of the periods indicated therein.
These financial statements and financial highlights are the responsibility of
the Funds' management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. We were
not engaged to perform an audit of the Funds' internal control over financial
reporting. Our audits included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Funds' internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements and financial highlights, assessing the accounting principles used
and significant estimates made by management, and evaluating the overall
financial statement presentation. Our procedures included confirmation of
securities owned as of October 31, 2005, by correspondence with the custodian
and brokers. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, such financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of
Preferred and Corporate Income Strategies Fund, Inc. and Preferred Income
Strategies Fund, Inc. at October 31, 2005, the results of their operations for
the year then ended, the changes in their net assets for each of the two years
in the period then ended, and their financial highlights for each of the periods
indicated therein, in conformity with U.S. generally accepted accounting
principles.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
December 9, 2005
Fund Certification (unaudited)
In September 2005, Preferred and Corporate Income Strategies Fund, Inc. and
Preferred Income Strategies Fund, Inc. filed its Chief Executive Officer
Certification for the prior year with the New York Stock Exchange pursuant to
Section 303A.12(a) of the New York Stock Exchange Corporate Governance Listing
Standards.
The Funds' Chief Executive Officer and Chief Financial Officer Certifications
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 were filed with the
Funds' Form N-CSR and are available on the Securities and Exchange Commission's
Web site at http://www.sec.gov.
24 ANNUAL REPORTS OCTOBER 31, 2005
Important Tax Information
The Funds are required by the Internal Revenue Code to advise shareholders
within 60 days of the Funds' fiscal year end of the tax status of dividends paid
during the year. Additionally, the following information is provided with
respect to the ordinary income distributions paid by Preferred and Corporate
Income Strategies Fund, Inc. and Preferred Income Strategies Fund, Inc. during
the fiscal year ended October 31, 2005:
Preferred and Corporate Income Strategies Fund, Inc.
Common Stock Shareholders:
--------------------------------------------------------------------------------
Qualified Dividend Dividends Received
Income for Deduction for
Payable Date Individuals* Corporations
--------------------------------------------------------------------------------
November 1, 2004 ..................... 15.69% 7.98%
November 30, 2004 .................... 11.40% 10.77%
December 21, 2004-January 10, 2005 ... 11.15% 11.09%
February 28, 2005-September 30, 2005 . 19.53% 11.09%
--------------------------------------------------------------------------------
Preferred Stock Shareholders:
--------------------------------------------------------------------------------
Qualified Dividend Dividends Received
Income for Deduction for
Individuals* Corporations
------------------------------ ------------------
November 2004- January 2005- November 2004-
December 2004 October 2005 October 2005
--------------------------------------------------------------------------------
Series M-7 .................. 11.15% 18.55% 11.09%
Series T-7 .................. 11.15% 18.40% 11.09%
--------------------------------------------------------------------------------
Preferred Income Strategies Fund, Inc.
Common Stock Shareholders:
--------------------------------------------------------------------------------
Qualified Dividend Dividends Received
Income for Deduction for
Payable Date Individuals* Corporations
--------------------------------------------------------------------------------
November 1, 2004 ............................. 19.54% 14.04%
November 30, 2004-January 10, 2005 ........... 15.60% 14.55%
February 28, 2005-September 30, 2005 ......... 26.33% 14.55%
--------------------------------------------------------------------------------
Preferred Stock Shareholders:
--------------------------------------------------------------------------------
Qualified Dividend Dividends Received
Income for Deduction for
Individuals* Corporations
------------------------------ ------------------
November 2004- January 2005- November 2004-
December 2004 October 2005 October 2005
--------------------------------------------------------------------------------
Series M-7 .................. 15.60% 24.38% 14.55%
Series T-7 .................. 15.60% 24.22% 14.55%
Series W-7 .................. 15.60% 24.22% 14.55%
Series TH-7 ................. 15.60% 24.21% 14.55%
Series F-7 .................. 15.60% 24.32% 14.55%
Series W-28 ................. 15.60% 24.08% 14.55%
Series TH-28 ................ 15.60% 24.03% 14.55%
--------------------------------------------------------------------------------
* Each Fund hereby designates the percentage indicated above or the maximum
amount allowable by law.
Please consult your tax adviser regarding the appropriate tax treatment of
distributions.
ANNUAL REPORTS OCTOBER 31, 2005 25
Automatic Dividend Reinvestment Plan
How the Plan Works -- The Funds offer a Dividend Reinvestment Plan (the "Plan")
under which income and capital gains dividends paid by each Fund are
automatically reinvested in additional shares of Common Stock of each Fund. The
Plan is administered on behalf of the shareholders by Equiserve Trust Company
N.A. (the "Plan Agent"). Under the Plan, whenever the Funds declare a dividend,
participants in the Plan will receive the equivalent in shares of Common Stock
of each Fund. The Plan Agent will acquire the shares for the participant's
account either (i) through receipt of additional unissued but authorized shares
of each Fund ("newly issued shares") or (ii) by purchase of outstanding shares
of Common Stock on the open market on the New York Stock Exchange or elsewhere.
If, on the dividend payment date, each Fund's net asset value per share is equal
to or less than the market price per share plus estimated brokerage commissions
(a condition often referred to as a "market premium"), the Plan Agent will
invest the dividend amount in newly issued shares. If the Funds' net asset value
per share is greater than the market price per share (a condition often referred
to as a "market discount"), the Plan Agent will invest the dividend amount by
purchasing on the open market additional shares. If the Plan Agent is unable to
invest the full dividend amount in open market purchases, or if the market
discount shifts to a market premium during the purchase period, the Plan Agent
will invest any uninvested portion in newly issued shares. The shares acquired
are credited to each shareholder's account. The amount credited is determined by
dividing the dollar amount of the dividend by either (i) when the shares are
newly issued, the net asset value per share on the date the shares are issued or
(ii) when shares are purchased in the open market, the average purchase price
per share.
Participation in the Plan -- Participation in the Plan is automatic, that is, a
shareholder is automatically enrolled in the Plan when he or she purchases
shares of Common Stock of the Funds unless the shareholder specifically elects
not to participate in the Plan. Shareholders who elect not to participate will
receive all dividend distributions in cash. Shareholders who do not wish to
participate in the Plan, must advise the Plan Agent in writing (at the address
set forth below) that they elect not to participate in the Plan. Participation
in the Plan is completely voluntary and may be terminated or resumed at any time
without penalty by writing to the Plan Agent.
Benefits of the Plan -- The Plan provides an easy, convenient way for
shareholders to make additional, regular investments in the Funds. The Plan
promotes a long-term strategy of investing at a lower cost. All shares acquired
pursuant to the Plan receive voting rights. In addition, if the market price
plus commissions of each Fund's shares is above the net asset value,
participants in the Plan will receive shares of the Funds for less than they
could otherwise purchase them and with a cash value greater than the value of
any cash distribution they would have received. However, there may not be enough
shares available in the market to make distributions in shares at prices below
the net asset value. Also, since each Fund does not redeem shares, the price on
resale may be more or less than the net asset value.
Plan Fees -- There are no enrollment fees or brokerage fees for participating in
the Plan. The Plan Agent's service fees for handling the reinvestment of
distributions are paid for by the Funds. However, brokerage commissions may be
incurred when the Funds purchase shares on the open market and shareholders will
pay a pro rata share of any such commissions.
Tax Implications -- The automatic reinvestment of dividends and distributions
will not relieve participants of any federal, state or local income tax that may
be payable (or required to be withheld) on such dividends. Therefore, income and
capital gains may still be realized even though shareholders do not receive
cash.
Contact Information -- All correspondence concerning the Plan, including any
questions about the Plan, should be directed to the Plan Agent at Equiserve
Trust Company N.A. (c/o Computershare Investor Services), P.O. Box 43010,
Providence, RI 02940-3010, Telephone: 800-426-5523.
26 ANNUAL REPORTS OCTOBER 31, 2005
Proxy Results Preferred and Corporate Income Strategies Fund, Inc.
During the six-month period ended October 31, 2005, Preferred and Corporate
Income Strategies Fund, Inc.'s Common Stock shareholders voted on the following
proposal. The proposal was approved at a shareholders' meeting on August 23,
2005. A description of the proposal and number of shares voted were as follows:
--------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
--------------------------------------------------------------------------------
1. To elect the Fund's Directors: David O. Beim 9,485,646 186,255
James T. Flynn 9,484,253 187,648
Karen P. Robards 9,490,216 181,685
--------------------------------------------------------------------------------
During the six-month period ended October 31, 2005, Preferred and Corporate
Income Strategies Fund, Inc.'s Preferred Stock (Series M7 & T7) shareholders
voted on the following proposal. The proposal was approved at a shareholders'
meeting on August 23, 2005. A description of the proposal and number of shares
voted were as follows:
---------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
---------------------------------------------------------------------------------------
1. To elect the Fund's Board of Directors:
Robert C. Doll, Jr., David O. Beim, James T. Flynn,
W. Carl Kester and Karen P. Robards 3,275 97
---------------------------------------------------------------------------------------
Proxy Results Preferred Income Strategies Fund, Inc.
During the six-month period ended October 31, 2005, Preferred Income Strategies
Fund, Inc.'s Common Stock shareholders voted on the following proposal. The
proposal was approved at a shareholders' meeting on August 23, 2005. A
description of the proposal and number of shares voted were as follows:
--------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
--------------------------------------------------------------------------------
1. To elect the Fund's Directors: David O. Beim 38,221,129 871,152
James T. Flynn 38,229,216 863,065
Karen P. Robard 38,230,996 861,285
--------------------------------------------------------------------------------
During the six-month period ended October 31, 2005, Preferred Income Strategies
Fund, Inc.'s Preferred Stock (Series M7, T7, W7, TH7, F7, W28 & TH28)
shareholders voted on the following proposal. The proposal was approved at a
shareholders' meeting on August 23, 2005. A description of the proposal and
number of shares voted were as follows:
---------------------------------------------------------------------------------------
Shares Voted Shares Withheld
For From Voting
---------------------------------------------------------------------------------------
1. To elect the Fund's Board of Directors:
Robert C. Doll, Jr., David O. Beim, James T. Flynn,
W. Carl Kester and Karen P. Robards 15,619 121
---------------------------------------------------------------------------------------
ANNUAL REPORTS OCTOBER 31, 2005 27
Disclosure of Investment Advisory Agreement
Activities of and Composition of the Board of Directors
All but one member of each Fund's 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 each Fund and
certain other funds advised by the Investment Adviser or its affiliates. The
Chair of each 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 each 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 Agreements -- Matters Considered by the Board
Every year, each Board considers approval of each Fund's investment advisory
agreement (the "Investment Advisory Agreement"). Each Board assesses the nature,
scope and quality of the services provided to each 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. Each Board also
receives and assesses information regarding the services provided to the Fund by
certain unaffiliated service providers.
At various times throughout the year, each 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 each Fund; (b) Fund operating expenses paid to third parties; (c)
the resources devoted to and compliance reports relating to each 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.
Each 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 generally of high quality. Each 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. Each Board works closely with the Investment Adviser in overseeing the
Investment Adviser's efforts to achieve good performance. As part of this
effort, each 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 Approvals by the Board of Directors
In the period prior to the Board meeting to consider renewal of the Investment
Advisory Agreement, each Board requests and receives materials specifically
relating to the Fund's Investment Advisory Agreement. These materials are
prepared separately for each Fund, and include (a) information compiled by
Lipper Inc. ("Lipper") on the fees and expenses and the investment performance
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. Each 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.
Certain Specific Renewal Data
In connection with the most recent renewal of each Fund's Investment Advisory
Agreement in May 2005, the independent directors' and Board's review included
the following:
Services Provided by the Investment Adviser -- Each 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. Each
Board focused primarily on the Investment Adviser's investment advisory services
and the Fund's investment performance, having concluded that the other services
provided to
28 ANNUAL REPORTS OCTOBER 31, 2005
the Fund by the Investment Adviser were satisfactory. Each 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 each
Board reviews performance data at least quarterly, consistent with the
Investment Adviser's investment goals, each Board attaches more importance to
performance over relatively long periods of time, typically three to five years
or, in the case of a fund that, like the Funds, has been in operations for less
than three years, performance since inception. Each Fund ranked in the fifth
quintile for the one-year and since inception periods ended March 31, 2005. The
Directors also requested and considered additional information from the
Investment Adviser analyzing the Funds' performance compared to investors'
expectations and in light of the interest rate environment since inception.
Considering all of these factors, each Board concluded that the Fund's
performance supported the continuation of the Investment Advisory Agreement.
The Investment Adviser's Personnel and Investment Process -- Each Board reviews
at least annually the Fund's investment objectives and strategies. Each Board
discusses with senior management of the Investment Adviser responsible for
investment operations and the senior management of the Investment Adviser's
taxable fixed-income investing group the strategies being used to achieve the
stated objectives. Among other things, the Board considers the size, education
and experience of the Investment Adviser's investment staff, its use of
technology, and the Investment Adviser's approach to training and retaining
portfolio managers and other research, advisory and management personnel. Each
Board also reviews the Investment Adviser's compensation policies and practices
with respect to the Fund's portfolio managers. Each Board also considered the
experience of the Fund's portfolio managers. Each Board noted that Messrs.
Burger and Musmanno have more than twelve and eight years of investment
experience, respectively. The Investment Adviser and its investment staff have
extensive experience in analyzing and managing the types of investments used by
the Funds. Each Board concluded that the Fund benefits from that expertise.
Management Fees and Other Expenses -- Each Board reviews 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 in its Lipper category. It also compares the Fund's total
expenses to those of other comparable funds. Each Board considered the services
provided to and the fees charged by the Investment Adviser to other types of
clients such as offshore funds, with similar investment mandates and noted that
the fees charged by the Investment Adviser in those cases typically exceeded
those being charged to the Fund. Each 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. Preferred and Corporate Income Strategies Fund, Inc.'s contractual
management fee rate, actual management fee rate, and total expenses are lower
than the median fees and expenses charged by comparable funds as determined by
Lipper. Preferred Income Strategies Fund, Inc.'s contractual management fee rate
is below, actual management fee rate is equal to, and total expenses are
slightly higher than, the fees and expenses charged by such comparable funds.
Each Board has concluded that the Fund's management fee and fee rate and overall
expense ratio are reasonable compared to those of other comparable funds.
Profitability -- Each Board considers the cost of the services provided to the
Fund by the Investment Adviser, and the Investment Adviser's and its affiliates'
profits relating to the management and distribution of the Fund and the
MLIM/FAM-advised funds. As part of its analysis, each 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.
Each Board believes the Investment Adviser's profits are reasonable in relation
to the nature and quality of services provided. The Boards also considered the
federal court decisions discussing an investment adviser's profitability and
profitability levels considered to be reasonable in those decisions.
Economies of Scale -- Each Board considered the extent to which economies of
scale might be realized as the assets of the Fund increase and whether there
should be changes in the management fee rate or structure in order to enable the
Fund to participate in these economies of scale. Each Board considered economies
of scale to the extent applicable to each Fund's closed-end structure and
determined that each Fund's management fee currently appropriately reflects
economies of scale.
Conclusion
After the independent directors deliberated in executive session, each 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.
ANNUAL REPORTS OCTOBER 31, 2005 29
Officers and Directors
Number of
Portfolios in Other Public
Position(s) Length of Fund Complex Directorships
Held Time Overseen by Held by
Name Address & Age with Funds Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Interested Director
------------------------------------------------------------------------------------------------------------------------------------
Robert C. P.O. Box 9011 President 2005 to President of the MLIM/FAM-advised funds since 2005; 131 Funds None
Doll, Jr.* Princeton, NJ and present President of MLIM and FAM since 2001; Co-Head 177 Portfolios
08543-9011 Director (Americas Region) thereof from 2000 to 2001 and
Age: 51 Senior Vice President from 1999 to 2001; President
and Director of Princeton Services, Inc. ("Princeton
Services") since 2001; President of Princeton
Administrators, L.P. ("Princeton Administrators")
since 2001; Chief Investment Officer of Oppenheimer
Funds, Inc. in 1999 and Executive Vice President
thereof from 1991 to 1999.
------------------------------------------------------------------------------------------------------------------------
* Mr. Doll is a director, trustee or member of an advisory board of certain other investment companies for which MLIM
or FAM acts as investment adviser. Mr. Doll is an "interested person," as defined in the Investment Company Act, of
the Fund based on his current positions with MLIM, FAM, Princeton Services and Princeton Administrators. Directors
serve until their resignation, removal or death, or until December 31 of the year in which they turn 72. As Fund
President, Mr. Doll serves at the pleasure of the Board of Directors.
====================================================================================================================================
Independent Directors*
------------------------------------------------------------------------------------------------------------------------------------
David O. P.O. Box 9095 Director 2003 to Professor of Finance and Economics at the Columbia 20 Funds None
Beim** Princeton, NJ present University Graduate School of Business since 1991; 26 Portfolios
08543-9095 Chairman of Outward Bound U.S.A. from 1997 to
Age: 65 2001; Chairman of Wave Hill, Inc. since 1990;
Trustee of Phillips Exeter Academy from 2002 to
present.
------------------------------------------------------------------------------------------------------------------------------------
James T. P.O. Box 9095 Director 2003 to Chief Financial Officer of JPMorgan & Co., Inc. from 20 Funds None
Flynn Princeton, NJ present 1990 to 1995 and an employee of JPMorgan in 26 Portfolios
08543-9095 various capacities from 1967 to 1995.
Age: 66
------------------------------------------------------------------------------------------------------------------------------------
W. Carl P.O. Box 9095 Director 2003 to Mizuho Financial Group, Professor of Finance, 21 Funds None
Kester Princeton, NJ present Harvard Business School, Unit Head, Finance since 27 Portfolios
08543-9095 2005; Senior Associate Dean and Chairman of the
Age: 53 MBA Program of Harvard Business School, 1999
to 2005; Member of the faculty of Harvard Business
School since 1981. Independent Consultant since
1978.
------------------------------------------------------------------------------------------------------------------------------------
Karen P. P.O. Box 9095 Director 2003 to President of Robards & Company, a financial advisory 20 Funds AtriCure,
Robards*** Princeton, NJ present firm since 1987; formerly an investment banker with 26 Portfolios Inc. (medical
08543-9095 Morgan Stanley for more than ten years; Director devices)
Age: 55 of Enable Medical Corp. from 1996 to 2005;
Director of AtriCure, Inc. since 2000; Director of
the Cooke Center for Learning and Development,
a not-for-profit organization, since 1987.
------------------------------------------------------------------------------------------------------------------------
* Directors serve until their resignation, removal or death, or until December 31 of the year in which they turn 72.
** Chairman of the Audit Committee.
*** Chair of the Board.
30 ANNUAL REPORTS OCTOBER 31, 2005
Officers and Directors (concluded)
Position(s) Length of
Held Time
Name Address & Age with Funds Served Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers*
------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 2003 to First Vice President of MLIM and FAM since 1997 and Treasurer thereof since 1999;
Burke Princeton, NJ President present Senior Vice President and Treasurer of Princeton Services since 1999 and Director
08543-9011 and since 2004; Vice President of FAM Distributors, Inc. ("FAMD") since 1999; Vice
Age: 45 Treasurer President of MLIM and FAM from 1990 to 1997; Director of Taxation of MLIM from 1990
to 2001; Vice President, Treasurer and Secretary of the IQ Funds since 2004.
------------------------------------------------------------------------------------------------------------------------------------
John D. P.O. Box 9011 Vice 2003 to Managing Director (Global Fixed Income) of MLIM since 2004; Director of MLIM from
Burger Princeton, NJ President present 1998 to 2004 and Vice President thereof from 1993 to 1998.
08543-9011
Age: 43
------------------------------------------------------------------------------------------------------------------------------------
Thomas P.O. Box 9011 Vice 2003 to Director (Global Fixed Income) of MLIM since 2004; Vice President of MLIM from 1996
Musmanno Princeton, NJ President present to 2004; Derivatives and Structured Products Specialist with MLIM from 2000 to
08543-9011 2002.
Age: 36
------------------------------------------------------------------------------------------------------------------------------------
Jeffrey P.O. Box 9011 Chief 2004 to Chief Compliance Officer of the MLIM/FAM-advised funds and First Vice President and
Hiller Princeton, NJ Compliance present Chief Compliance Officer of MLIM (Americas Region) since 2004; Chief Compliance
08543-9011 Officer Officer of the IQ Funds since 2004; Global Director of Compliance at Morgan Stanley
Age: 54 Investment Management from 2002 to 2004; Managing Director and Global Director of
Compliance at Citigroup Asset Management from 2000 to 2002; Chief Compliance
Officer at Soros Fund Management in 2000; Chief Compliance Officer at Prudential
Financial from 1995 to 2000; Senior Counsel in the Commission's Division of
Enforcement in Washington, D.C. from 1990 to 1995.
------------------------------------------------------------------------------------------------------------------------------------
Alice A. P.O. Box 9011 Secretary 2004 to Director (Legal Advisory) of MLIM since 2002; Vice President of MLIM from 1999 to
Pellegrino Princeton, NJ present 2002; Attorney associated with MLIM since 1997; Secretary of MLIM, FAM, FAMD and
08543-9011 Princeton Services since 2004.
Age: 45
------------------------------------------------------------------------------------------------------------------------
* Officers of the Fund serve at the pleasure of the Board of Directors.
------------------------------------------------------------------------------------------------------------------------------------
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agents
Common Stock:
Equiserve Trust Company N.A.
(c/o Computershare Investor Services)
P.O. Box 43010
Providence, RI 02940-3010
1-800-426-5523
Preferred Stock:
The Bank of New York
101 Barclay Street -- 7 West
New York, NY 10286
Investment Objectives
NYSE Symbol Preferred and Corporate Income Strategies Fund, Inc. seeks to
PSW provide shareholders with high current income. The secondary
objective of the Fund is to seek to provide shareholders with
capital appreciation. The Fund seeks to achieve its objectives
by investing primarily in a portfolio of preferred securities
and debt securities, including convertible securities that may
be converted into common stock or other securities of the same
or a different issuer.
NYSE Symbol Preferred Income Strategies Fund, Inc. seeks to provide
PSY shareholders with high current income. The secondary objective
of the Fund is to seek to provide shareholders with capital
appreciation. The Fund seeks to achieve its objectives by
investing primarily in a portfolio of preferred securities,
including convertible preferred securities that may be
converted into common stock or other securities of the same or
a different issuer.
ANNUAL REPORTS OCTOBER 31, 2005 31
[LOGO] Merrill Lynch Investment Managers
www.mlim.ml.com
--------------------------------------------------------------------------------
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
These reports, including the financial information herein, are transmitted to
shareholders of Preferred and Corporate Income Strategies Fund, Inc. and
Preferred Income Strategies Fund, Inc. for their information. This is not a
prospectus. The Funds leverage their Common Stock to provide Common Stock
shareholders with potentially higher rates 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.
Past performance results shown in these reports should not be considered a
representation of future performance. Statements and other information herein
are as dated and are subject to change.
A description of the policies and procedures that the Funds use to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
at www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
Web site at http://www.sec.gov. Information about how the Funds voted proxies
relating to securities held in the Funds' portfolios 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.
Preferred and Corporate Income Strategies Fund, Inc.
Preferred Income Strategies Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
#PCPIS -- 10/05
Item 2 - Code of Ethics - The registrant has adopted a code of ethics, as of the
end of the period covered by this report, that applies to the
registrant's principal executive officer, principal financial officer
and principal accounting officer, or persons performing similar
functions. A copy of the code of ethics is available without charge
upon request by calling toll-free 1-800-MER-FUND (1-800-637-3863).
Item 3 - Audit Committee Financial Expert - The registrant's board of directors
has determined that (i) the registrant has the following audit
committee financial experts serving on its audit committee and (ii)
each audit committee financial expert is independent: (1) David O.
Beim, (2) W. Carl Kester, (3) James T. Flynn and (4) Karen P. Robards.
The registrant's board of directors has determined that David O. Beim,
W. Carl Kester and Karen P. Robards qualify as financial experts
pursuant to Item 3(c)(4) of Form N-CSR.
Mr. Beim has a thorough understanding of generally accepted accounting
principles, financial statements and internal control over financial
reporting as well as audit committee functions. For 25 years, Mr. Beim
was an investment banker actively engaged in financial analysis for
securities transactions and mergers. These transactions presented a
breadth and level of complexity of accounting issues that are generally
comparable to the breadth and complexity of issues that can reasonably
be expected to be raised by the Registrant's financial statements. Mr.
Beim has also been a professor of finance and economics at the Columbia
University Graduate School of Business for the past 12 years.
Prof. Kester has a thorough understanding of generally accepted
accounting principles, financial statements and internal control over
financial reporting as well as audit committee functions. Prof. Kester
has been involved in providing valuation and other financial consulting
services to corporate clients since 1978. Prof. Kester's financial
consulting services present a breadth and level of complexity of
accounting issues that are generally comparable to the breadth and
complexity of issues that can reasonably be expected to be raised by
the Registrant's financial statements.
Ms. Robards has a thorough understanding of generally accepted
accounting principles, financial statements and internal control over
financial reporting as well as audit committee functions. Ms. Robards
has been President of Robards & Company, a financial advisory firm,
since 1987. Ms. Robards was formerly an investment banker for more than
10 years where she was responsible for evaluating and assessing the
performance of companies based on their financial results. Ms. Robards
has over 30 years of experience analyzing financial statements. She
also is the member of the Audit Committees of two privately held
companies and a non-profit organization.
Item 4 - Principal Accountant Fees and Services
(a) Audit Fees - Fiscal Year Ending October 31, 2005 - $41,000
Fiscal Year Ending October 31, 2004 - $38,000
(b) Audit-Related Fees - Fiscal Year Ending October 31, 2005 - $3,500
Fiscal Year Ending October 31, 2004 - $3,000
The nature of the services include assurance and related services
reasonably related to the performance of the audit of financial
statements not included in Audit Fees.
(c) Tax Fees - Fiscal Year Ending October 31, 2005 - $5,700
Fiscal Year Ending October 31, 2004 - $5,200
The nature of the services include tax compliance, tax advice and tax
planning.
(d) All Other Fees - Fiscal Year Ending October 31, 2005 - $0
Fiscal Year Ending October 31, 2004 - $0
(e)(1) The registrant's audit committee (the "Committee") has adopted
policies and procedures with regard to the pre-approval of services.
Audit, audit-related and tax compliance services provided to the
registrant on an annual basis require specific pre-approval by the
Committee. The Committee also must approve other non-audit services
provided to the registrant and those non-audit services provided to the
registrant's affiliated service providers that relate directly to the
operations and the financial reporting of the registrant. Certain of
these non-audit services that the Committee believes are a) consistent
with the SEC's auditor independence rules and b) routine and recurring
services that will not impair the independence of the independent
accountants may be approved by the Committee without consideration on a
specific case-by-case basis ("general pre-approval"). However, such
services will only be deemed pre-approved provided that any individual
project does not exceed $5,000 attributable to the registrant or
$50,000 for all of the registrants the Committee oversees. Any proposed
services exceeding the pre-approved cost levels will require specific
pre-approval by the Committee, as will any other services not subject
to general pre-approval (e.g., unanticipated but permissible services).
The Committee is informed of each service approved subject to general
pre-approval at the next regularly scheduled in-person board meeting.
(e)(2) 0%
(f) Not Applicable
(g) Fiscal Year Ending October 31, 2005 - $9,200
Fiscal Year Ending October 31, 2004 - $8,200
(h) The registrant's audit committee has considered and determined that
the provision of non-audit services that were rendered to the
registrant's investment adviser and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
Regulation S-X Rule 2-01(c)(7)(ii) - $0, 0%
Item 5 - Audit Committee of Listed Registrants - The following individuals are
members of the registrant's separately-designated standing audit
committee established in accordance with Section 3(a)(58)(A) of the
Exchange Act (15 U.S.C. 78c(a)(58)(A)):
David O. Beim
James T. Flynn
W. Carl Kester
Karen P. Robards
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies -
Proxy Voting Policies and Procedures
Each Fund's Board of Directors/Trustees has delegated to Merrill Lynch
Investment Managers, L.P. and/or Fund Asset Management, L.P. (the
"Investment Adviser") authority to vote all proxies relating to the
Fund's portfolio securities. The Investment Adviser has adopted
policies and procedures ("Proxy Voting Procedures") with respect to the
voting of proxies related to the portfolio securities held in the
account of one or more of its clients, including a Fund. Pursuant to
these Proxy Voting Procedures, the Investment Adviser's primary
objective when voting proxies is to make proxy voting decisions solely
in the best interests of each Fund and its shareholders, and to act in
a manner that the Investment Adviser believes is most likely to enhance
the economic value of the securities held by the Fund. The Proxy Voting
Procedures are designed to ensure that the Investment Adviser considers
the interests of its clients, including the Funds, and not the
interests of the Investment Adviser, when voting proxies and that real
(or perceived) material conflicts that may arise between the Investment
Adviser's interest and those of the Investment Adviser's clients are
properly addressed and resolved.
In order to implement the Proxy Voting Procedures, the Investment
Adviser has formed a Proxy Voting Committee (the "Committee"). The
Committee is comprised of the Investment Adviser's Chief Investment
Officer (the "CIO"), one or more other senior investment professionals
appointed by the CIO, portfolio managers and investment analysts
appointed by the CIO and any other personnel the CIO deems appropriate.
The Committee will also include two non-voting representatives from the
Investment Adviser's Legal department appointed by the Investment
Adviser's General Counsel. The Committee's membership shall be limited
to full-time employees of the Investment Adviser. No person with any
investment banking, trading, retail brokerage or research
responsibilities for the Investment Adviser's affiliates may serve as a
member of the Committee or participate in its decision making (except
to the extent such person is asked by the Committee to present
information to the Committee, on the same basis as other interested
knowledgeable parties not affiliated with the Investment Adviser might
be asked to do so). The Committee determines how to vote the proxies of
all clients, including a Fund, that have delegated proxy voting
authority to the Investment Adviser and seeks to ensure that all votes
are consistent with the best interests of those clients and are free
from unwarranted and inappropriate influences. The Committee
establishes general proxy voting policies for the Investment Adviser
and is responsible for determining how those policies are applied to
specific proxy votes, in light of each issuer's unique structure,
management, strategic options and, in certain circumstances, probable
economic and other anticipated consequences of alternate actions. In so
doing, the Committee may determine to vote a particular proxy in a
manner contrary to its generally stated policies. In addition, the
Committee will be responsible for ensuring that all reporting and
recordkeeping requirements related to proxy voting are fulfilled.
The Committee may determine that the subject matter of a recurring
proxy issue is not suitable for general voting policies and requires a
case-by-case determination. In such cases, the Committee may elect not
to adopt a specific voting policy applicable to that issue. The
Investment Adviser believes that certain proxy voting issues require
investment analysis - such as approval of mergers and other significant
corporate transactions - akin to investment decisions, and are,
therefore, not suitable for general guidelines. The Committee may elect
to adopt a common position for the Investment Adviser on certain proxy
votes that are akin to investment decisions, or determine to permit the
portfolio manager to make individual decisions on how best to maximize
economic value for a Fund (similar to normal buy/sell investment
decisions made by such portfolio managers). While it is expected that
the Investment Adviser will generally seek to vote proxies over which
the Investment Adviser exercises voting authority in a uniform manner
for all the Investment Adviser's clients, the Committee, in conjunction
with a Fund's portfolio manager, may determine that the Fund's specific
circumstances require that its proxies be voted differently.
To assist the Investment Adviser in voting proxies, the Committee has
retained Institutional Shareholder Services ("ISS"). ISS is an
independent adviser that specializes in providing a variety of
fiduciary-level proxy-related services to institutional investment
managers, plan sponsors, custodians, consultants, and other
institutional investors. The services provided to the Investment
Adviser by ISS include in-depth research, voting recommendations
(although the Investment Adviser is not obligated to follow such
recommendations), vote execution, and recordkeeping. ISS will also
assist the Fund in fulfilling its reporting and recordkeeping
obligations under the Investment Company Act.
The Investment Adviser's Proxy Voting Procedures also address special
circumstances that can arise in connection with proxy voting. For
instance, under the Proxy Voting Procedures, the Investment Adviser
generally will not seek to vote proxies related to portfolio securities
that are on loan, although it may do so under certain circumstances. In
addition, the Investment Adviser will vote proxies related to
securities of foreign issuers only on a best efforts basis and may
elect not to vote at all in certain countries where the Committee
determines that the costs associated with voting generally outweigh the
benefits. The Committee may at any time override these general policies
if it determines that such action is in the best interests of a Fund.
From time to time, the Investment Adviser may be required to vote proxies in
respect of an issuer where an affiliate of the Investment Adviser (each, an
"Affiliate"), or a money management or other client of the Investment Adviser
(each, a "Client") is involved. The Proxy Voting Procedures and the Investment
Adviser's adherence to those procedures are designed to address such conflicts
of interest. The Committee intends to strictly adhere to the Proxy Voting
Procedures in all proxy matters, including matters involving Affiliates and
Clients. If, however, an issue representing a non-routine matter that is
material to an Affiliate or a widely known Client is involved such that the
Committee does not reasonably believe it is able to follow its guidelines (or if
the particular proxy matter is not addressed by the guidelines) and vote
impartially, the Committee may, in its discretion for the purposes of ensuring
that an independent determination is reached, retain an independent fiduciary to
advise the Committee on how to vote or to cast votes on behalf of the Investment
Adviser's clients.
In the event that the Committee determines not to retain an independent
fiduciary, or it does not follow the advice of such an independent
fiduciary, the powers of the Committee shall pass to a subcommittee,
appointed by the CIO (with advice from the Secretary of the Committee),
consisting solely of Committee members selected by the CIO. The CIO
shall appoint to the subcommittee, where appropriate, only persons
whose job responsibilities do not include contact with the Client and
whose job evaluations would not be affected by the Investment Adviser's
relationship with the Client (or failure to retain such relationship).
The subcommittee shall determine whether and how to vote all proxies on
behalf of the Investment Adviser's clients or, if the proxy matter is,
in their judgment, akin to an investment decision, to defer to the
applicable portfolio managers, provided that, if the subcommittee
determines to alter the Investment Adviser's normal voting guidelines
or, on matters where the Investment Adviser's policy is case-by-case,
does not follow the voting recommendation of any proxy voting service
or other independent fiduciary that may be retained to provide research
or advice to the Investment Adviser on that matter, no proxies relating
to the Client may be voted unless the Secretary, or in the Secretary's
absence, the Assistant Secretary of the Committee concurs that the
subcommittee's determination is consistent with the Investment
Adviser's fiduciary duties
In addition to the general principles outlined above, the Investment
Adviser has adopted voting guidelines with respect to certain recurring
proxy issues that are not expected to involve unusual circumstances.
These policies are guidelines only, and the Investment Adviser may
elect to vote differently from the recommendation set forth in a voting
guideline if the Committee determines that it is in a Fund's best
interest to do so. In addition, the guidelines may be reviewed at any
time upon the request of a Committee member and may be amended or
deleted upon the vote of a majority of Committee members present at a
Committee meeting at which there is a quorum.
The Investment Adviser has adopted specific voting guidelines with
respect to the following proxy issues:
o Proposals related to the composition of the Board of Directors of issuers
other than investment companies. As a general matter, the Committee
believes that a company's Board of Directors (rather than shareholders) is
most likely to have access to important, nonpublic information regarding a
company's business and prospects, and is therefore best-positioned to set
corporate policy and oversee management. The Committee, therefore,
believes that the foundation of good corporate governance is the election
of qualified, independent corporate directors who are likely to diligently
represent the interests of shareholders and oversee management of the
corporation in a manner that will seek to maximize shareholder value over
time. In individual cases, the Committee may look at a nominee's history
of representing shareholder interests as a director of other companies or
other factors, to the extent the Committee deems relevant.
o Proposals related to the selection of an issuer's independent auditors. As
a general matter, the Committee believes that corporate auditors have a
responsibility to represent the interests of shareholders and provide an
independent view on the propriety of financial reporting decisions of
corporate management. While the Committee will generally defer to a
corporation's choice of auditor, in individual cases, the Committee may
look at an auditors' history of representing shareholder interests as
auditor of other companies, to the extent the Committee deems relevant.
o Proposals related to management compensation and employee benefits. As a
general matter, the Committee favors disclosure of an issuer's
compensation and benefit policies and opposes excessive compensation, but
believes that compensation matters are normally best determined by an
issuer's board of directors, rather than shareholders. Proposals to
"micro-manage" an issuer's compensation practices or to set arbitrary
restrictions on compensation or benefits will, therefore, generally not be
supported.
o Proposals related to requests, principally from management, for approval
of amendments that would alter an issuer's capital structure. As a general
matter, the Committee will support requests that enhance the rights of
common shareholders and oppose requests that appear to be unreasonably
dilutive.
o Proposals related to requests for approval of amendments to an issuer's
charter or by-laws. As a general matter, the Committee opposes poison pill
provisions.
o Routine proposals related to requests regarding the formalities of
corporate meetings.
o Proposals related to proxy issues associated solely with holdings of
investment company shares. As with other types of companies, the Committee
believes that a fund's Board of Directors (rather than its shareholders)
is best-positioned to set fund policy and oversee management. However, the
Committee opposes granting Boards of Directors authority over certain
matters, such as changes to a fund's investment objective, that the
Investment Company Act envisions will be approved directly by
shareholders.
o Proposals related to limiting corporate conduct in some manner that
relates to the shareholder's environmental or social concerns. The
Committee generally believes that annual shareholder meetings are
inappropriate forums for discussion of larger social issues, and opposes
shareholder resolutions "micromanaging" corporate conduct or requesting
release of information that would not help a shareholder evaluate an
investment in the corporation as an economic matter. While the Committee
is generally supportive of proposals to require corporate disclosure of
matters that seem relevant and material to the economic interests of
shareholders, the Committee is generally not supportive of proposals to
require disclosure of corporate matters for other purposes.
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - as
of October 31, 2005.
(a)(1) Messrs. John D. Burger and Thomas F. Musmanno are primarily
responsible for the day-to-day management of the registrant's
portfolio ("Portfolio Manager"). Mr. Burger has been a Managing
Director of the Investment Adviser since 2002 and was Director at
the Investment Adviser from 1996 to 2004 and a portfolio manager
therewith since 1992. He has been a portfolio manager and Vice
President of the Fund since 2003. Mr. Musmanno has been a Director
of the Investment Adviser since 2004 and was a Vice President
therewith from 1996 to 2004. He has been the Derivatives and
Structured Products Specialist with MLIM since 2000 and has been a
portfolio manager in the fixed income management group since 1996.
Mr. Musmanno has five years of experience as a portfolio manager
for registered investment companies. He has been a portfolio
manager and Vice President of the Fund since 2003.
(a)(2)As of October 31, 2005:
(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
John D. Burger 10 3 7 0 0 0
$5,337,329,821 $ 615,467,172 $461,477,023 $ 0 $ 0 $ 0
Thomas F.
Musmanno 8 1 0 0 0 0
$2,472,951,743 $10,099,856,851 $ 0 $ 0 $ 0 $ 0
(iv) Potential Material Conflicts of Interest
Real, potential or apparent conflicts of interest may arise when a
portfolio manager has day-to-day portfolio management responsibilities with
respect to more than one fund or account, including the following:
Certain investments may be appropriate for the Fund and also for other
clients advised by the 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 October 31, 2005:
Portfolio Manager Compensation
The portfolio manager compensation program of the Investment Adviser and
its affiliates (collectively, herein "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 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, the portfolio manager incentive compensation is based on a formulaic
compensation program.
MLIM's formulaic portfolio manager compensation program includes: pre-tax
investment performance over 1-, 3- and 5-year performance periods and a measure
of operational efficiency. Due to the unique nature of the Fund, its performance
is measured based on a Board of Directors-approved metric which considers both
total return performance and dividend performance over time, adjusted for the
cost of leverage. If a portfolio manager's tenure is less than 5-years,
performance periods will reflect time in position. Portfolio managers are
compensated based on the products they manage. A smaller discretionary element
of portfolio manager compensation may include consideration of: financial
results, 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 also considers 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's 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 expense
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
funds) 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 Company employees, including broad-based retirement,
401(k), health, and other employee benefit plans.
(a)(4) Beneficial Ownership of Securities. As of October 31, 2005, Mr.
Burger does not beneficially own any stock issued by the Fund. As
of October 31, 2005, Mr. Musmanno beneficially owns stock issued by
the Fund in the range of $1 to $10,000.
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 second 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 - See Item 2
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Preferred Income Strategies Fund, Inc.
By: /s/ Robert C. Doll, Jr.
-----------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Preferred Income Strategies Fund, Inc.
Date: December 16, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert C. Doll, Jr.
-----------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Preferred Income Strategies Fund, Inc.
Date: December 16, 2005
By: /s/ Donald C. Burke
-----------------------
Donald C. Burke,
Chief Financial Officer of
Preferred Income Strategies Fund, Inc.
Date: December 16, 2005