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: Terry K. Glenn, President, 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: 10/31/03
Date of reporting period: 03/01/03 - 04/30/03
Item 1 - Attach shareholder report
[LOGO] Merrill Lynch Investment Managers
Semi-Annual Report
April 30, 2003
Preferred Income
Strategies Fund, Inc.
www.mlim.ml.com
PREFERRED INCOME STRATEGIES FUND, INC.
The Benefits and
Risks of
Leveraging
Preferred Income Strategies Fund, Inc. will utilize leveraging through
borrowings or issuance of short-term debt securities or shares of Preferred
Stock. The concept of leveraging is based on the premise that the cost of assets
to be obtained from leverage will be based on short-term interest rates, which
normally will be lower than the return earned by the Fund on its longer-term
portfolio investments. Since the total assets of the Fund (including the assets
obtained from leverage) are invested in higher-yielding portfolio investments,
the Fund's Common Stock shareholders are the beneficiaries of the incremental
yield.
Leverage creates risks for holders of Common Stock including the likelihood of
greater net asset value and market price volatility. In addition, there is the
risk that fluctuations in interest rates on borrowings (or in the dividend rates
on any Preferred Stock, if the Fund were to issue Preferred Stock) may reduce
the Common Stock's yield and negatively impact its market price. If the income
derived from securities purchased with assets received from leverage exceeds the
cost of leverage, the Fund's net income will be greater than if leverage had not
been used. Conversely, if the income from the securities purchased is not
sufficient to cover the cost of leverage, the Fund's net income will be less
than if leverage had not been used, and therefore the amount available for
distribution to Common Stock shareholders will be reduced. In this case, the
Fund may nevertheless decide to maintain its leveraged position in order to
avoid capital losses on securities purchased with leverage. However, the Fund
will not generally utilize leverage if it anticipates that its leveraged capital
structure would result in a lower yield for its Common Stock than would be
obtained if the Common Stock were unleveraged for any significant amount of
time.
Preferred Income Strategies Fund, Inc., April 30, 2003
DEAR SHAREHOLDER
We are pleased to provide you with this first semi-annual report to shareholders
for Preferred Income Strategies Fund, Inc. The Fund seeks to provide
shareholders with current income by investing primarily in a diversified
portfolio of preferred securities, which are subordinated fixed income
securities. Issuers are rated in the investment-grade rating categories of the
established bond ratings services (Baa or higher by Moody's Investors Service,
Inc., BBB or higher by Standard & Poor's Ratings Services or BBB or higher by
Fitch, Inc.) or in unrated securities considered by the Fund's Investment
Adviser to be of comparable quality. In this and future reports to shareholders,
we will provide information on the Fund's performance and discuss our investment
strategy.
Since inception (March 28, 2003) through April 30, 2003, the Common Stock of
Preferred Income Strategies Fund, Inc. had a net annualized yield of 3.69%,
based on a period-end per share net asset value of $24.41. For the same period,
the total investment return on the Fund's Common Stock was +2.24%, based on a
change in per share net asset value from $23.88 to $24.41.
Economic and Market Overview
The economy has not gained as much momentum as had been hoped following the
Iraqi war. Recent data continues to indicate tepid consumer spending, weak
manufacturing and weak service sector activities. The potential economic impact
of SARS on the world economy is still not quantifiable. However, there are
several factors that contribute to our cautiously optimistic outlook. First,
geopolitical uncertainties are dissipating with the successful prosecution of
the Iraqi war. Oil prices have fallen below $25 per barrel, more than 25% below
pre-war levels. Consumer confidence is also higher with the Conference Board
Index registering an 81 reading in April, up from the 61.4 level in March.
Furthermore, we expect business spending to accelerate in the second quarter as
companies see a pickup in demand. At April 30, 2003, corporate earnings were
better than expected, as 63.5% exceeded analysts' earnings estimates, while only
16% came in below expectations.
The credit markets are sending an even clearer signal of improving economic
prospects. Yield spreads on corporate bonds and preferred securities (both high
grade and high yield) have narrowed remarkably in the last few months, to the
tightest levels in more than three years. While it is apparent that the
corporate market has been the beneficiary of reaching for yield as nominal rates
have continued to fall, there can be little doubt that the dramatic
outperformance is also the result of vastly improving credit fundamentals and
strong technical factors. Corporations have seen an increase of "net free cash
flows" for seven consecutive quarters, while paying down debt, creating a
healthy demand/supply imbalance.
The U.S. economy grew by just 1.9% in the first quarter of 2003, following a
1.4% increase in the fourth quarter of 2002.This sub-par performance has been
the result of sluggish growth, if not outright weakness in all key contributors
to the economy: consumption, investment and government spending. Looking ahead,
the economy is likely to expand at a slightly better rate in the second quarter
of 2003 (the low 2% area) and considerably faster in the second half of the
year. (2.5% - 3% annual rate).
Leverage Strategy
As of April 30, 2003, the Fund was approximately 90% invested. We anticipate
that the leveraging process will begin in June 2003 and that it could take
several months to reach our target leverage of 36% of the Fund's total assets.
We intend to borrow through an auction preferred stock offering at interest
rates that provide an attractive spread between our borrowing costs and the
preferred securities in our portfolio. While leverage can hurt total return in a
weak market, the converse is also true. We believe that attempting to time the
market is generally not successful. Therefore, we will seek to maintain our
leverage position at near 36% of total assets though that level may vary
somewhat as we adjust portfolio holdings. In order to try to reduce the effects
of rising interest rates (falling bond prices) on the Fund's net asset value, we
may seek to employ an active hedging strategy. (For a more complete explanation
of the benefits and risks of leveraging, see page 1 of this report to
shareholders.)
Investment Strategy
We are attempting to construct a diversified portfolio of investment-grade
issuers. Our process involves a rigorous credit approval procedure prior to the
purchase of an issuer. We have utilized both the new-issue and secondary markets
to find Fund investments. The largest investments have been in the bank,
insurance and real estate sectors, which are among the largest in the preferred
securities market.
In Conclusion
We thank you for your investment in Preferred Income Strategies Fund, Inc., and
we look forward to assisting you with your financial needs in the months and
years ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
/s/ John Burger
John Burger
Vice President and Portfolio Manager
/s/ Robert R. Peterson, Jr.
Robert R. Peterson, Jr.
Vice President and Portfolio Manager
/s/ Thomas Musmanno
Thomas Musmanno
Vice President and Portfolio Manager
May 29, 2003
2 & 3
Preferred Income Strategies Fund, Inc., April 30, 2003
SCHEDULE OF INVESTMENTS (in U.S. dollars)
Preferred Securities
-------------------------------------------------------------------------------------------------------------
S&P Moody's Face
INDUSTRY+ Ratings Ratings Amount Trust Preferred Value
===================================================================================================================================
Banks--11.2% A- A3 $ 5,035,000 ABN Amro NA Holding Capital, 6.523% due 12/29/2049 (a) $ 5,586,202
A- A2 5,000,000 Abbey National Capital Trust I, 8.963% due 12/29/2049 6,697,730
BBB+ A1 2,000,000 Bank One Capital III, 8.75% due 9/01/2030 2,657,986
A+ Aa3 5,000,000 Barclays Bank PLC, 6.86% due 9/29/2049 (a) 5,552,530
A- A2 1,000,000 Chase Capital I, 7.67% due 12/01/2026 1,095,408
BBB+ A2 30,000,000 Dresdner Funding Trust I, 8.151% due 6/30/2031 (a) 31,238,100
A- A2 2,000,000 HSBC Americas Capital Trust, 7.808% due 12/15/2026 (a) 2,225,484
A- A2 15,835,000 HSBC Capital Funding LP, 10.176% due 12/29/2049 (a) 23,829,046
NR* NR* 12,275,000 Hubco Capital Trust II, 7.65% due 6/15/2028 13,103,562
A- A2 2,000,000 Republic New York, 7.53% due 12/04/2026 2,200,786
A- A1 10,000,000 Royal Bank of Scotland, 7.648% due 8/31/2049 12,110,070
-----------
106,296,904
===================================================================================================================================
Electric--3.3% BBB- Baa2 15,000,000 Dominion Resources Capital Trust III, 8.40% due 1/15/2031 18,572,955
BB+ Ba2 14,950,000 Houston Light & Power Capital Trust II, 8.257% due 2/01/2037 12,713,629
-----------
31,286,584
===================================================================================================================================
Finance--2.3% BBB+ A3 10,000,000 CIT Capital Trust I, 7.70% due 2/15/2027 10,391,190
A+ A1 10,000,000 Sun Life Can (U.S.) Capital Trust, 8.526% due 5/29/2049 (a) 11,468,420
-----------
21,859,610
===================================================================================================================================
Financial--0.5% NR* Baa1 4,500,000 St. George Funding Company, 8.485% due 12/29/2049 (a) 4,776,269
===================================================================================================================================
Financial Services-- A- A2 998,000 JP Morgan Capital Trust I, 7.54% due 1/15/2027 1,074,557
Other--0.1%
===================================================================================================================================
Insurance--4.0% BBB Baa3 5,035,000 AON Capital Trust, 8.205% due 1/01/2027 5,333,022
AA Aa1 10,000,000 American General Institutional Capital A, 7.57%
due 12/01/2045 (a) 12,172,260
A- A2 6,066,000 ING Capital Funding Trust III, 8.439% due 12/29/2049 7,332,041
A+ A2 6,325,000 Principal Mutual, 8% due 3/01/2044 (Surplus Notes) (a) 6,962,301
A- Baa1 6,225,000 Transamerica Capital III, 7.625% due 11/15/2037 6,298,723
-----------
38,098,347
===================================================================================================================================
Insurance-- BBB+ A3 30,000,000 Axa, 8.60% due 12/15/2030 (Surplus Notes) 36,132,150
Multiline--4.5% BBB+ A3 1,000,000 Genamerica Capital I, 8.525% due 6/30/2027 (a) 1,140,698
BBB- Baa2 5,000,000 Safeco Capital Trust I, 8.072% due 7/15/2037 5,636,255
-----------
42,909,103
===================================================================================================================================
Oil--1.2% BBB Baa2 9,850,000 PHILLIPS 66 Capital Trust II, 8% due 1/15/2037 11,290,641
===================================================================================================================================
Pipelines--0.8% BB+ Baa3 1,750,000 K N Capital Trust, 7.63% due 4/15/2028 1,887,813
BB+ Baa3 5,000,000 K N Capital Trust I, 8.56% due 4/15/2027 5,825,000
-----------
7,712,813
===================================================================================================================================
Reinsurance--5.2% BBB- Baa1 32,100,000 ACE Capital Trust II, 9.70% due 4/01/2030 39,435,620
A- A3 10,000,000 Zurich Capital Trust, 8.376% due 6/01/2037 (a) 9,776,900
-----------
49,212,520
===================================================================================================================================
Savings & Loan BB NR* 5,775,000 Webster Capital Trust I, 9.36% due 1/29/2027 (a) 6,354,007
Associations--0.6%
===================================================================================================================================
Total Investments in Trust Preferred
(Cost--$310,675,819)--33.7% 320,871,355
===================================================================================================================================
Shares
Held Preferred Stocks
===================================================================================================================================
Banks--1.6% 150 BBVA Privanza International, 7.764% (a) 15,405,000
===================================================================================================================================
Electric--5.2% 870,000 Georgia Power Company, 5.90% 21,615,293
200,000 Interstate P & L Company, 8.375% (a) 5,937,500
11,200 Met-Ed Capital Trust, 7.35% 280,511
15,897 PSEG Funding Trust II, 8.75% 419,414
200,000 TXU Corporation, 7.24% 19,900,000
38,000 Virginia Power Capital Trust (7.375%) 995,769
-----------
49,148,487
===================================================================================================================================
Finance--13.3% 2,000,000 Countrywide Capital IV, 6.75% 50,074,815
1,200,000 Fannie Mae, 5.125% 60,144,000
40,000 Household Finance Corporation, 6.875% 1,034,374
200,000 Lehman Brothers Holdings, 5.94% 10,150,000
35,000 Lehman Brothers Holding Capital Trust III, 6.375% 871,736
15,000 Morgan Stanley Capital Trust III, 6.25% 372,511
4,000 Principal Protected PreTSL IX Ltd, 14.50% 3,994,000
-----------
126,641,436
===================================================================================================================================
Insurance--1.6% 12,000 Fortis Regcaps Fund Trust II, 7.68% 14,688,000
===================================================================================================================================
Miscellaneous 26,000 SG Preferred Capital II, 6.302% 28,600,000
Materials &
Commodities--3.0%
===================================================================================================================================
Oil--0.7% 64,500 Apache Corporation, 5.68% 6,476,206
===================================================================================================================================
Pipelines--0.1% 20,000 Dominion Cng Capital Trust I, 7.80% 530,661
===================================================================================================================================
Reinsurance--3.7% 40,000 Everest Re Capital Trust, 7.85% 1,065,573
25,000 Zurich Regcaps Funding Trust I, 6.01% (a) 24,950,000
10,000 Zurich Regcaps Funding Trust I, 6.58% (a) 9,780,000
-----------
35,795,573
===================================================================================================================================
Special 200,000 Natural Rural Utility CFC, 6.75% 4,992,812
Situations--0.5%
===================================================================================================================================
4 & 5
Preferred Income Strategies Fund, Inc., April 30, 2003
SCHEDULE OF INVESTMENTS (concluded) (in U.S. dollars)
Preferred Securities (concluded)
----------------------------------------------------------------------------------------------------------
Shares
INDUSTRY+ Held Preferred Stocks Value
===================================================================================================================================
Specialty 80,000 Corp-Backed Trust Certificates, 8.375% $ 2,168,000
Markets--0.2%
===================================================================================================================================
Wireless 31,770 Centaur Funding Corporation, 9.08% 37,061,707
Communication--3.9%
===================================================================================================================================
Total Investments in Preferred Stocks
(Cost--$316,575,633)--33.8% 321,507,882
===================================================================================================================================
Real Estate Investment Trusts
===================================================================================================================================
Real Estate 780,000 Developers Divers Realty, 8% 19,765,200
Investment 4,000 Firstar Realty LLC, 8.875% (a) 5,080,000
Trusts--11.8% 1,600,000 New Plan Excel Realty Trust, 7.625% 40,700,000
607,550 Regency Centers Corporation, 7.45% 15,549,513
11,857 Sovereign REIT, 12% 16,599,800
600,000 Weingarten Realty Investment, 6.75% 15,288,000
===================================================================================================================================
Total Investments in Real Estate Investment Trusts
(Cost--$111,503,035)--11.8% 112,982,513
===================================================================================================================================
Total Investments in Preferred Securities
(Cost--$738,754,487)--79.3% 755,361,750
===================================================================================================================================
S&P Moody's Face
Ratings Ratings Amount Corporate Bonds
===================================================================================================================================
Cable Television BBB Baa3 $ 5,000,000 Comcast Corporation, 7.05% due 3/15/2033 5,424,210
Services--0.6%
===================================================================================================================================
Cellular BBB Baa2 18,000,000 AT&T Wireless Services Inc., 8.75% due 3/01/2031 22,414,230
Telephones--2.4%
===================================================================================================================================
Diversified BBB A2 19,000,000 General Motors Acceptance Corporation, 8% due 11/01/2031 19,789,222
Financials--2.1%
===================================================================================================================================
Electronic BBB Baa2 2,000,000 Motorola Inc., 7.50% due 5/15/2025 2,110,000
Components--0.2%
===================================================================================================================================
Foods--0.5% BBB Baa3 4,800,000 Tyson Foods Inc., 7% due 1/15/2028 4,609,157
===================================================================================================================================
Medical--1.2% AA A1 10,000,000 Bristol-Myers Squibb, 6.875% due 8/01/2097 11,413,690
===================================================================================================================================
Multimedia--2.1% BBB+ Baa1 18,000,000 AOL Time Warner Inc., 7.70% due 5/01/2032 20,044,170
===================================================================================================================================
Oil Field BBB Baa2 16,575,000 Duke Energy Field Services, 8.125% due 8/16/2030 20,293,601
Services--2.1%
===================================================================================================================================
Reinsurance--1.2% A A1 10,000,000 GE Global Insurance, 7.75% due 6/15/2030 11,539,970
===================================================================================================================================
Retail--0.5% BBB+ Baa1 5,000,000 Sears Roebuck Acceptance, 6.875% due 10/15/2017 5,143,865
===================================================================================================================================
Telephone--4.3% BBB- Baa3 18,000,000 France Telecom, 10% due 3/01/2031 23,942,088
Sprint Capital Corporation:
BBB- Baa3 2,000,000 6.90% due 5/01/2019 1,910,000
BBB- Baa3 14,000,000 8.75% due 3/15/2032 15,330,000
-----------
41,182,088
===================================================================================================================================
Total Investments in Corporate Bonds
(Cost--$154,971,326)--17.2% 163,964,203
===================================================================================================================================
Short-Term Securities
===================================================================================================================================
U.S. Government 10,000,000 U.S. Treasury Bills, 1.095% due 7/03/2003 (c) 9,980,490
Obligations**--1.1%
===================================================================================================================================
Total Investments in Short-Term Securities
(Cost--$9,980,838)--1.1% 9,980,490
===================================================================================================================================
Face Subject
OPTIONS To Options Issue
===================================================================================================================================
Options 50,000,000 Swaption, expiring October 2003 at USD 4.25 (b) 350,000
Purchased--0.1% 50,000,000 U.S. Treasury Notes, expiring July 2003 at USD 95 93,750
50,000,000 U.S. Treasury Notes, expiring July 2003 at USD 95.5 164,050
===================================================================================================================================
Total Options Purchased (Cost--$1,223,594)--0.1% 607,800
===================================================================================================================================
Total Investments (Cost--$904,930,245)--97.7% 929,914,243
Variation Margin on Financial Futures Contracts***--(0.2%) (2,039,063)
Other Assets Less Liabilities--2.5% 24,275,143
------------
Net Assets--100.0% $952,150,323
============
===================================================================================================================================
(a) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(b) This European style swaption, which can be exercised only on the
expiration date, represents a standby commitment whereby the Fund is
obligated to enter into a predetermined interest rate swap contract upon
exercise of the swaption.
(c) All or a portion of security held as collateral in connection with open
financial futures contracts.
+ For Fund compliance purposes, "Industry" means any one or more of the
industry sub-classifications used by one or more widely recognized market
indexes or ratings group indexes, and/or as defined by Fund management.
This definition may not apply for purposes of this report, which may
combine such industry sub-classifications for reporting ease.
* Not Rated.
** Certain U.S. Government Obligations are traded on a discount basis; the
interest rate shown reflects the discount rate paid at the time of
purchase by the Fund.
*** Financial futures contracts sold as of April 30, 2003 were as follows:
--------------------------------------------------------------------------
Number of Expiration
Contracts Issue Date Value
--------------------------------------------------------------------------
750 U.S. Treasury Notes June 2003 $ 86,343,750
1,700 U.S. Treasury Notes June 2003 193,853,125
--------------------------------------------------------------------------
Total Financial Futures Contracts Sold
(Total Contract Price--$273,853,819) $280,196,875
============
--------------------------------------------------------------------------
See Notes to Financial Statements.
6 & 7
Preferred Income Strategies Fund, Inc., April 30, 2003
STATEMENT OF NET ASSETS
As of April 30, 2003
===================================================================================================================
Assets: Investments, at value (identified cost--$903,706,651) ... $929,306,443
Options purchased, at value (cost--$1,223,594) .......... 607,800
Receivables:
Capital shares sold ................................... $ 23,875,000
Interest .............................................. 10,650,158 34,525,158
------------- ------------
Total assets ............................................ 964,439,401
------------
===================================================================================================================
Liabilities: Payables:
Custodian bank ........................................ 7,461,397
Securities purchased .................................. 2,204,685
Variation margin ...................................... 2,039,063
Organization costs .................................... 558,004
Accounting services ................................... 22,227
Other affiliates ...................................... 2,301 12,287,677
-------------
Accrued expenses and other liabilities .................. 1,401
------------
Total liabilities ....................................... 12,289,078
------------
===================================================================================================================
Net Assets Net assets applicable to Common Stock ................... $952,150,323
Applicable to ============
Common Stock:
===================================================================================================================
Analysis of Net Common Stock, par value $.10 per share (39,004,189 shares
Assets Applicable issued and outstanding) ................................. $ 3,900,419
To Common Stock: Paid-in capital in excess of par ........................ 926,765,897
Undistributed investment income--net .................... $ 3,348,421
Accumulated realized capital losses on investments--net . (505,356)
Unrealized appreciation on investments--net ............. 18,640,942
-------------
Total accumulated earnings--net ......................... 21,484,007
------------
Total--Equivalent to $24.41 net asset value per share of
Common Stock (market price--$25.01) ..................... $952,150,323
============
===================================================================================================================
See Notes to Financial Statements.
STATEMENT OF OPERATIONS
For the Period March 28, 2003+ to April 30, 2003
=============================================================================================================
Investment Income: Interest ............................................. $ 3,304,839
Dividends ............................................ 91,590
------------
Total income ......................................... 3,396,429
------------
=============================================================================================================
Expenses: Investment advisory fees ............................. $ 497,201
Accounting services .................................. 24,528
Directors' fees and expenses ......................... 8,430
Custodian fees ....................................... 4,079
Transfer agent fees .................................. 3,893
Printing and shareholder reports ..................... 3,872
Professional fees .................................... 1,768
Pricing fees ......................................... 362
Other ................................................ 1,076
---------
Total expenses before waiver ......................... 545,209
Waiver of expenses ................................... (497,201)
---------
Total expenses after waiver .......................... 48,008
------------
Investment income--net ............................... 3,348,421
------------
=============================================================================================================
Realized & Realized loss on investments--net .................... (505,356)
Unrealized Gain (Loss) Unrealized appreciation on investments--net .......... 18,640,942
On Investments -- Net: ------------
Total realized and unrealized gain on investments--net 18,135,586
------------
Net Increase in Net Assets Resulting from Operations . $ 21,484,007
============
=============================================================================================================
+ Commencement of operations.
See Notes to Financial Statements.
8 & 9
Preferred Income Strategies Fund, Inc., April 30, 2003
STATEMENT OF CHANGES IN NET ASSETS
For the Period
March 28,
2003+ to
April 30,
Increase (Decrease) in Net Assets: 2003
===========================================================================================================
Operations: Investment income--net .......................................... $ 3,348,421
Realized loss on investments--net ............................... (505,356)
Unrealized appreciation on investments--net ..................... 18,640,942
-------------
Net increase in net assets resulting from operations ............ 21,484,007
-------------
===========================================================================================================
Common Stock Net proceeds from issuance of Common Stock ...................... 931,125,000
Transactions: Offering costs resulting from the issuance of Common Stock ...... (558,696)
-------------
Net increase in net assets derived from Common Stock transactions 930,566,304
-------------
===========================================================================================================
Net Assets Total increase in net assets applicable to Common Stock ......... 952,050,311
Applicable to Beginning of period ............................................. 100,012
Common Stock: -------------
End of period* .................................................. $ 952,150,323
=============
===========================================================================================================
* Undistributed investment income--net ............................ $ 3,348,421
=============
===========================================================================================================
+ Commencement of operations.
See Notes to Financial Statements.
FINANCIAL HIGHLIGHTS
For the Period
The following per share data and ratios have been derived March 28,
from information provided in the financial statements. 2003+ to
April 30,
Increase (Decrease) in Net Asset Value: 2003
===========================================================================================================
Per Share Net asset value, beginning of period .............................. $ 23.88
Operating -----------
Performance: Investment income--net ............................................ .09
Realized and unrealized gain on investments--net .................. .45
-----------
Total from investment operations .................................. .54
-----------
Capital charge resulting from the issuance of Common Stock ........ (.01)
-----------
Net asset value, end of period .................................... $ 24.41
===========
Market price per share, end of period ............................. $ 25.01
===========
===========================================================================================================
Total Investment Based on market price per share ................................... .04%++
Return:** ===========
Based on net asset value per share ................................ 2.24%++
===========
===========================================================================================================
Ratios Based on Total expenses, net of waiver ..................................... .06%*
Average Net Assets ===========
Of Common Stock: Total expenses .................................................... .67%*
===========
Total investment income--net ...................................... 4.10%*
===========
===========================================================================================================
Supplemental Net assets applicable to Common Stock, end of period (in thousands) $ 952,150
Data: ===========
Portfolio turnover ................................................ 1.04%
===========
===========================================================================================================
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
different returns. Total investment returns exclude the effects of sales
charges. If applicable, the Fund's Investment Adviser voluntarily waived a
portion of its management fee. Without such waiver, the Fund's performance
would have been lower.
+ Commencement of operations.
++ Aggregate total investment return.
See Notes to Financial Statements.
10 & 11
Preferred Income Strategies Fund, Inc., April 30, 2003
NOTES TO FINANCIAL STATEMENTS
1. Significant Accounting Policies:
Preferred Income Strategies Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940 as a diversified, closed-end management
investment company. Prior to commencement of operations on March 28, 2003, the
Fund had no operations other than those relating to organizational matters and
the sale of 4,189 shares of Common Stock on March 12, 2003 to Fund Asset
Management, L.P. ("FAM") for $100,012. The Fund's financial statements are
prepared in conformity with accounting principles generally accepted in the
United States of America, which may require the use of management accruals and
estimates. These unaudited financial statements reflect all adjustments, which
are, in the opinion of management, necessary to a fair statement of the results
for the interim period presented. All such adjustments are of a normal,
recurring nature. The Fund's Common Stock is listed on the New York Stock
Exchange under the symbol PSY. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments -- Portfolio securities are valued on the basis of
prices furnished by one or more pricing services which determine prices for
normal, institutional-size trading units of such securities using market
information, transactions for comparable securities and various relationships
between securities which are generally recognized by institutional traders. In
certain circumstances, portfolio securities are valued at the last sale price on
the exchange that is the primary market for such securities, or the last quoted
bid price for those securities for which the over-the-counter market is the
primary market or for listed securities in which there were no sales during the
day. The value of interest rate swaps, caps and floors is determined in
accordance with a formula and then confirmed periodically by obtaining a bank
quotation. 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 sale price in the case of
exchange-traded options. In the case of options traded in the over-the-counter
market, valuation is the last asked price (options written) or the last bid
price (options purchased). Obligations with remaining maturities of sixty days
or less are valued at amortized cost, which approximates market value, unless
this method no longer produces fair valuations. Rights or warrants to acquire
stock, or stock acquired pursuant to the exercise of a right or warrant, may be
valued taking into account various factors such as original cost to the Fund,
earnings and net worth of the issuer, market prices for securities of similar
issuers, assessment of the issuer's future prosperity, liquidation value or
third party transactions involving the issuer's securities. Securities for which
there exist no price quotations or valuations and all other assets are valued at
fair value as determined in good faith by or on behalf of the Board of Directors
of the Fund. Occasionally, events affecting the values of securities and other
assets may occur between the times at which valuations of such securities are
determined (that is, close of the market on which such securities trade) and the
close of business on the NYSE. If events (for example, company announcement,
natural disasters, market volatility) occur during such periods that are
expected to materially affect the value for such securities, those securities
may be valued at their fair market 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 Board of Directors of the Fund.
(b) Derivative financial instruments -- The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect, its exposure to interest rate movements and movements in 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 -- The Fund is authorized to write and purchase call and put options.
When the Fund writes an option, an amount equal to the premium received by the
Fund is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked to market to reflect the current market value
of the option written.
When a security is purchased or sold through an exercise of an option, the
related premium paid (or received) is added to (or deducted from) the basis of
the security acquired or deducted from (or added to) the proceeds of the
security sold. When an option expires (or the Fund enters into a closing
transaction), the Fund realizes a gain or loss on the option to the extent of
the premiums received or paid (or gain or loss to the extent the cost of the
closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
o Financial futures contracts -- The Fund may purchase or sell financial futures
contracts and options on such futures contracts. Futures contracts are contracts
for delayed delivery of securities at a specific future date and at a specific
price or yield. Upon entering into a contract, the Fund deposits and maintains
as collateral such initial margin as required by the exchange on which the
transaction is effected. Pursuant to the contract, the Fund agrees to receive
from or pay to the broker an amount of cash equal to the daily fluctuation in
value of the contract. Such receipts or payments are known as variation margin
and are recorded by the Fund as unrealized gains or losses. When the contract is
closed, the Fund records a realized gain or loss equal to the difference between
the value of the contract at the time it was opened and the value at the time it
was closed.
o Interest rate swaps -- The Fund is authorized to enter into interest rate swap
agreements. In a swap agreement, the Fund exchanges with the counterparty their
respective commitments to pay or receive interest on a specified notional
principal amount. If the counterparty defaults on its obligation, the Fund's
ability to receive interest will be delayed or limited. Furthermore, if the Fund
does not have sufficient income to pay its obligation under the swap agreement,
the Fund would be in default and the counterparty would be able to terminate the
swap agreement. When the swap agreement is closed, the Fund records a gain or
loss equal to the difference between the value of the swap agreement at the time
it was entered into and the value at the time it was closed.
(c) Income taxes -- It is the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no Federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
(e) Offering expenses -- Direct expenses relating to the public offering of the
Fund's Common Stock were charged to capital at the time of issuance of the
shares.
(f) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
(g) Custodian bank -- The Fund recorded an amount payable to the Custodian Bank
reflecting an overnight overdraft which resulted from management estimates of
available cash.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with FAM. The general
partner of FAM is Princeton Services, Inc. ("PSI"), an indirect, wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("ML & Co."), which is the limited
partner.
FAM is responsible for the management of the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, the Fund pays a monthly fee at
an annual rate of .60% of the Fund's average weekly net assets including
proceeds from the issuance of Preferred Stock, plus the proceeds of any
outstanding borrowings used for leverage. For the period March 28, 2003 to April
30, 2003, FAM earned fees of $497,201, all of which was waived.
During the period March 28, 2003 to April 30, 2003, Merrill Lynch, Pierce,
Fenner & Smith Incorporated, an affiliate of FAM, received underwriting fees of
$43,875,000 in connection with the issuance of the Fund's Common Stock.
For the period March 28, 2003 to April 30, 2003, the Fund reimbursed FAM $2,301
for certain accounting services.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
12 & 13
Preferred Income Strategies Fund, Inc., April 30, 2003
NOTES TO FINANCIAL STATEMENTS (concluded)
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period March 28, 2003 to April 30, 2003 were $901,888,707 and $7,618,000,
respectively.
Net realized losses for the period March 28, 2003 to April 30, 2003 and net
unrealized gains (losses) as of April 30, 2003 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Losses Gains (Losses)
--------------------------------------------------------------------------------
Long-term investments ................ $ (505,356) $ 25,600,140
Short-term investments ............... -- (348)
Options purchased .................... -- (615,794)
Financial futures contracts .......... -- (6,343,056)
------------ ------------
Total ................................ $ (505,356) $ 18,640,942
============ ============
--------------------------------------------------------------------------------
As of April 30, 2003, net unrealized appreciation for Federal income tax
purposes aggregated $24,983,998, of which $27,112,301 related to appreciated
securities and $2,128,303 related to depreciated securities. The aggregate cost
of investments at April 30, 2003 for Federal income tax purposes was
$904,930,245.
4. Stock Transactions:
The 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.
Common Stock
Shares issued and outstanding during the period March 28, 2003 to April 30, 2003
increased by 39,000,000 from shares sold.
5. Subsequent Event:
The Fund paid an ordinary income dividend to holders of Common Stock in the
amount of $.083702 per share payable on May 30, 2003 to shareholders of record
on May 16, 2003.
On May 14, 2003, the Fund sold 1,550,000 shares of Common Stock pursuant to the
underwriters' overallotment option.
OFFICERS AND DIRECTORS
Terry K. Glenn, President and Director
David O. Beim, Director
James T. Flynn, Director
Todd Goodwin, Director
George W. Holbrook, Jr., Director
W. Carl Kester, Director
Karen P. Robards, Director
John Burger, Vice President
Thomas Musmanno, Vice President
Robert R. Peterson, Jr., Vice President
Donald C. Burke, Vice President and Treasurer
Bradley J. Lucido, Secretary
Custodian
State Street Bank & Trust Co.
P.O. Box 351
Boston, MA 02101
Transfer Agent
EquiServe
P.O. Box 43010
Providence, RI 02940-3010
NYSE Symbol
PSY
14 & 15
[LOGO] Merrill Lynch Investment Managers
[GRAPHICS OMITTED]
Preferred Income Strategies Fund, Inc. seeks to provide shareholders with
current income and 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.
This report, including the financial information herein, is transmitted to
shareholders of Preferred Income Strategies Fund, Inc. for their information. It
is not a prospectus. The Fund intends to leverage its Common Stock to provide
Common Stock shareholders with a potentially higher rate of return. Leverage
creates risk for Common Stock shareholders, including the likelihood of greater
volatility of net asset value and market price of Common Stock shares, and the
risk that fluctuations in short-term interest rates may reduce the Common
Stock's yield. Past performance results shown in this report should not be
considered a representation of future performance. Statements and other
information herein are as dated and are subject to change.
Preferred Income Strategies Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
[RECYCLED LOGO] Printed on post-consumer recycled paper #PIS--4/03
Item 2 - Did registrant adopt 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, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant
or a third party? If not, why not? Briefly describe any amendments or
waivers that occurred during the period. State here if code of
ethics/amendments/waivers are on website and give website address-.
State here if fund will send code of ethics to shareholders without
charge upon request-- N/A (not answered until July 15, 2003 and only
annually for funds)
Item 3 - Did the registrant's board of directors determine that the registrant
either: (i) has at least one audit committee financial expert serving
on its audit committee; or (ii) does not have an audit committee
financial expert serving on its audit committee? If yes, disclose name
of financial expert and whether he/she is "independent," (fund may, but
is not required, to disclose name/independence of more than one
financial expert) If no, explain why not. -N/A (not answered until July
15, 2003 and only annually for funds)
Item 4 - Disclose annually only (not answered until December 15, 2003)
(a) Audit Fees - Disclose aggregate fees billed for each of the last two
fiscal years for professional services rendered by the
principal accountant for the audit of the registrant's
annual financial statements or services that are
normally provided by the accountant in connection with
statutory and regulatory filings or engagements for
those fiscal years. N/A.
(b) Audit-Related Fees - Disclose aggregate fees billed in each of the
last two fiscal years for assurance and related
services by the principal accountant that are
reasonably related to the performance of the
audit of the registrant's financial statements
and are not reported under paragraph (a) of this
Item. Registrants shall describe the nature of
the services comprising the fees disclosed under
this category. N/A.
(c) Tax Fees - Disclose aggregate fees billed in each of the last two
fiscal years for professional services rendered by the
principal accountant for tax compliance, tax advice, and
tax planning. Registrants shall describe the nature of the
services comprising the fees disclosed under this category.
N/A.
(d) All Other Fees - Disclose aggregate fees billed in each of the last
two fiscal years for products and services provided
by the principal accountant, other than the services
reported in paragraphs (a) through (c) of this Item.
Registrants shall describe the nature of the
services comprising the fees disclosed under this
category. N/A.
(e)(1) Disclose the audit committee's pre-approval policies and procedures
described in paragraph (c)(7) of Rule 2-01 of Regulation S-X. N/A.
(e)(2) Disclose the percentage of services described in each of paragraphs
(b) through (d) of this Item that were approved by the audit
committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of
Regulation S-X. N/A.
(f) If greater than 50%, disclose the percentage of hours expended on
the principal accountant's engagement to audit the registrant's
financial statements for the most recent fiscal year that were
attributed to work performed by persons other than the principal
accountant's full-time, permanent employees. N/A.
(g) Disclose the aggregate non-audit fees billed by the registrant's
accountant for services rendered to the registrant, and rendered to
the registrant's investment adviser (not including any sub-adviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another investment adviser), and any entity
controlling, controlled by, or under common control with the adviser
that provides ongoing services to the registrant for each of the
last two fiscal years of the registrant. N/A.
(h) Disclose whether the registrant's audit committee has considered
whether the provision of non-audit services that were rendered to
the registrant's investment adviser (not including any subadviser
whose role is primarily portfolio management and is subcontracted
with or overseen by another 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. N/A.
Item 5 - If the registrant is a listed issuer as defined in Rule 10A-3 under the
Exchange Act, state whether or not the registrant has a
separately-designated standing audit committee established in
accordance with Section 3(a)(58)(A) of the Exchange Act. If the
registrant has such a committee, however designated, identify each
committee member. If the entire board of directors is acting as the
registrant's audit committee in Section 3(a)(58)(B) of the Exchange
Act, so state.
If applicable, provide the disclosure required by Rule 10A-3(d) under
the Exchange Act regarding an exemption from the listing standards for
audit committees.
(Listed issuers must be in compliance with the new listing rules by the
earlier of their first annual shareholders meeting after January 2004,
or October 31, 2004 (annual requirement))
Item 6 - Reserved
Item 7 - For closed-end funds that contain voting securities in their portfolio,
describe the policies and procedures that it uses to determine how to
vote proxies relating to those portfolio securities. N/A (not answered
until July 1, 2003)
Item 8 -- Reserved
Item 9(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.
Item 9(b) -- There were no significant changes in the registrant's internal
controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and
material weaknesses.
Item 10 - Exhibits
10(a) - Attach code of ethics or amendments/waivers, unless code of ethics or
amendments/waivers is on website or offered to shareholders upon request
without charge. N/A.
10(b) - Attach certifications pursuant to Section 302 of the Sarbanes-Oxley Act.
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/ Terry K. Glenn
--------------------------------------
Terry K. Glenn,
President of
Preferred Income Strategies Fund, Inc.
Date: June 23, 2003
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/ Terry K. Glenn
--------------------------------------
Terry K. Glenn,
President of
Preferred Income Strategies Fund, Inc.
Date: June 23, 2003
By: /s/ Donald C. Burke
--------------------------------------
Donald C. Burke,
Chief Financial Officer of
Preferred Income Strategies Fund, Inc.
Date: June 23, 2003
Attached hereto as an exhibit are the certifications pursuant to Section 906 of
the Sarbanes-Oxley Act.