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: 11/01/02 - 10/31/03
Item 1 - Attach shareholder report
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Preferred Income
Strategies Fund, Inc.
Annual Report
October 31, 2003
[LOGO] Merrill Lynch Investment Managers
Preferred Income Strategies Fund, Inc.
The Benefits and Risks of Leveraging
Preferred Income Strategies Fund, Inc. has the ability to 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 or
dividend rates, which normally will be lower than the income earned by the Fund
on its longer-term portfolio investments. To the extent that the total assets of
the Fund (including the assets obtained from leverage) are invested in
higher-yielding portfolio investments, the Fund's Common Stock shareholders 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 net asset value and 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.
Electronic Delivery
The Fund is now offering electronic delivery of communications to its
shareholders. In order to receive this service, you must register your account
and provide us with e-mail information. To sign up for this service, simply
access this website http://www.icsdelivery.com/live and follow the instructions.
When you visit this site, you will obtain a personal identification number
(PIN). You will need this PIN should you wish to update your e-mail address,
choose to discontinue this service and/or make any other changes to the service.
This service is not available for certain retirement accounts at this time.
2 PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003
A Letter From the President
Dear Shareholder
As 2003 draws to a close, it seems appropriate to reflect on what has been a
meaningful year in many respects. We saw the beginning and the end of all-out
war in Iraq, equity market uncertainty turned to strength and sub par gross
domestic product growth of 1.4% in the first quarter of 2003 grew to an
extraordinary 8.2% in the third quarter. Amid the good news, fixed income
investments, which had become the asset class of choice during the preceding
three-year equity market decline, faced new challenges.
Earlier in the year, the Federal Reserve Board continued its accommodative
monetary policy, lowering the Federal Funds rate in June to 1%, its lowest level
since 1958. With this move, long-term interest rates continued to be volatile,
as investors began to anticipate the impact of future Federal Reserve Board
policy and economic revitalization. As of October 31, 2003, the ten-year
Treasury bond was yielding 4.33%. This compared to a yield of 3.89% six months
earlier and 3.93% one year ago.
Against this backdrop, our portfolio managers continued to work diligently to
deliver on our commitment to provide superior performance within reasonable
expectations for risk and return. With that said, remember that the advice and
guidance of a skilled financial advisor often can mean the difference between
successful and unsuccessful investing. A financial professional can help you
choose those investments that will best serve you as you plan for your financial
future.
Finally, I am proud to premiere a new look to our shareholder communications.
Our portfolio manager commentaries have been trimmed and organized in such a way
that you can get the information you need at a glance, in plain language.
Today's markets are confusing enough. We want to help you put it all in
perspective. The report's new size also allows us certain mailing efficiencies.
Any cost savings in production or postage are passed on to the Fund and,
ultimately, to Fund shareholders.
We thank you for trusting Merrill Lynch Investment Managers with your investment
assets, and we look forward to serving you in the months and years ahead.
Sincerely,
/s/ Terry K. Glenn
Terry K. Glenn
President and Director
PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003 3
[LOGO] Merrill Lynch Investment Managers
A Discussion With Your Fund's Portfolio Managers
Despite an uptick in long-term interest rates during the period, the Fund
provided a solid total return and significantly outperformed its benchmark.
How did the Fund perform since its inception in light of the existing market
conditions?
Since inception (March 28, 2003) through October 31, 2003, the Common Stock of
Preferred Income Strategies Fund, Inc. had a net annualized yield of 7.02%,
based on a period-end per share net asset value of $24.53 and $1.029 per share
income dividends. For the same period, the total investment return on the Fund's
Common Stock was +6.47%, based on a change in per share net asset value from
$23.88 to $24.53, and assuming reinvestment of $.867 per share ordinary income
dividends. For the same period, the unmanaged Merrill Lynch Preferred Stock
Fixed Rate Index rose 5.05%.
For a description of the Fund's total investment return based on a change in the
per share market value of the Fund's Common Stock (as measured by the trading
price of the Fund's shares on the New York Stock Exchange), and assuming
reinvestment of dividends, please refer to the Financial Highlights section of
the Financial Statements included in this report. As a closed-end fund, the
Fund's shares may trade in the secondary market at a premium or discount to the
Fund's net asset value. As a result, total investment returns based on changes
in the market value of the Fund's Common Stock can vary significantly from total
investment return based on changes in the Fund's net asset value.
The Fund performed well during a period in which long-term interest rates
generally moved higher. The ten-year U.S. Treasury note declined .32% between
March 28 and October 31, 2003, while its yield rose from 3.92% to 4.33%. The
unmanaged Merrill Lynch U.S. Corporate Master Index and the Merrill Lynch U.S.
Treasury/Agency Master Index returned +4.20% and +.74%, respectively, for the
same period. The U.S. economy displayed surprising strength during this period,
with gross domestic product in the third quarter of 2003 rising 8.2%, the
highest growth rate since the early 1980s.
What is the Fund's investment objective?
The Fund's primary objective is to provide shareholders with current income. The
secondary objective is to seek capital appreciation. To these ends, we invest
primarily in a diversified 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. At least 80% of the Fund's
total assets are invested in securities rated in the investment grade rating
categories of the established bond rating services or if unrated are considered
to be of comparable quality.
How did you manage the Fund during the period?
Since the Fund's inception on March 28, 2003, we began the gradual process of
investing assets received from shareholders in the Fund's initial offering. We
completed the initial investment process in mid-June. At the outset, we set a
goal of establishing 100 positions in the portfolio within 12 months of the
Fund's inception. We believed this would constitute a fully diversified
portfolio. We reached our targeted number of holdings five months ahead of our
timetable. As of October 31, 2003, the Fund held 101 securities.
As of October 31, 2003, the Fund was approximately 36% leveraged. During the
period, we leveraged the Fund through an offering of Auction Market Preferred
Stock (AMPS) in an effort to take advantage of the yield spreads between the
AMPS and the securities we held in the portfolio. (For a more complete
explanation of the benefits and risks of leveraging, see page 2 of this report
to shareholders.) In July, we hedged our exposure on the floating rate AMPS by
entering into an interest rate swap, whereby we swapped the floating rate on the
AMPS for a two-year fixed rate. We believe this interest rate swap should
provide shareholders with significant protection against rising interest rates.
As we added holdings to the portfolio, we reduced the Fund's exposure to
dividend received deduction (DRD) preferred securities and slightly decreased
our allocation to the corporate sector.
4 PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003
How would you characterize the Fund's position at the close of the period?
Investments in preferred and corporate fixed income securities are subject to
credit and interest rate risk. As the U.S. economy continues to improve, we view
the credit outlook for the corporate sector as somewhat positive. We have,
however, positioned the Fund with a slightly short duration versus its
comparable Lipper category of Income and Preferred Stock Funds, as we believe
long-term interest rates have bottomed and eventually will rise. We also have
employed some substantial interest rate hedges, including options and futures,
in an effort to reduce the Fund's exposure to interest rate risk. The Fund's
effective duration at October 31, 2003 was 15.3 years, while its hedged duration
stood at 8.5 years.
We believe the improving credit environment will support the performance of
preferred stocks. The limited supply of new preferred issues also should have a
positive effect on the market as the increased demand by closed-end funds that
invest in these securities exceeds the available supply.
At the end of the period, the Fund was fully invested and its largest sector
weight was in financial services (primarily banking). The Fund also held
positions in industrials, insurance (life and property & casualty), real estate
investment trusts, utilities (electric utilities, wireless telecommunications,
diversified telecommunications and cable) and U.S. government agency securities.
At October 31, 2003, the portfolio carried an average credit rating of A3 from
Standard & Poor's, and approximately 89.4% of its assets was invested in
securities rated BBB or higher.
John D. Burger
Vice President and Portfolio Manager
Thomas Musmanno
Vice President and Portfolio Manager
Robert R. Peterson, Jr.
Vice President and Portfolio Manager
November 18, 2003
PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003 5
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (in U.S. dollars)
Preferred Securities
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Capital Trusts Value
===================================================================================================================================
Banks--19.5% A- A3 $12,035,000 ABN Amro NA Holding Capital, 6.523% (a)(b)(d) $ 12,969,987
A A2 11,000,000 Abbey National Capital Trust I, 8.963% (b)(d) 14,590,477
BBB+ A1 2,000,000 Bank One Capital III, 8.75% due 9/01/2030 2,584,482
A+ Aa3 29,230,000 Barclays Bank PLC, 6.86% (a)(b)(d) 31,528,998
A- A2 8,000,000 CBA Capital Trust I, 5.805% (a)(d) 8,138,320
A- A2 1,000,000 Chase Capital I, 7.67% due 12/01/2026 (a) 1,082,704
BBB+ A3 37,000,000 Dresdner Funding Trust I, 8.151% due 6/30/2031 (a) 40,737,074
A NR* 7,500,000 HBOS Capital Funding LP, 6.85% (d) 7,425,000
A Aa3 15,000,000 HBOS PLC, 5.375% (a)(b)(d) 15,015,900
A- A2 2,000,000 HSBC Americas Capital Trust, 7.808% due 12/15/2026 (a) 2,206,846
A- A2 15,835,000 HSBC Capital Funding LP, 10.176% (a)(b)(d) 22,985,057
NR* NR* 12,275,000 Hubco Capital Trust II, 7.65% due 6/15/2028 (a) 12,581,875
A+ Aa2 5,000,000 Lloyds TSB Bank PLC, 6.90% (d) 5,062,000
A A1 970,000 RBS Capital Trust I, 4.709% (b)(d) 912,980
A- A2 2,000,000 Republic New York, 7.53% due 12/04/2026 2,133,444
A A1 3,420,000 Royal Bank of Scotland Group PLC, 7.648% (b)(d) 4,049,766
A- A2 10,000,000 Westpac Capital Trust III, 5.819% (a)(b)(d) 10,278,900
------------
194,283,810
===================================================================================================================================
Electric--4.2% BBB- Baa2 15,000,000 Dominion Resources Capital Trust III, 8.40% due 1/15/2031 17,858,625
BB+ Ba2 14,950,000 Houston Light & Power Capital Trust II, 8.257% due 2/1/2037 14,882,979
BB+ Baa2 9,500,000 SWEPCO Capital Trust I, 5.25% due 10/01/2043 (b) 9,419,867
------------
42,161,471
===================================================================================================================================
Finance--2.3% BBB+ A3 10,000,000 CIT Capital Trust I, 7.70% due 2/15/2027 (a) 10,682,800
BB+ Baa3 1,000,000 MBNA Capital A, 8.278% due 12/01/2026 1,079,462
A+ A1 10,000,000 Sun Life Can (US) Capital Trust, 8.526% (a)(d) 11,071,380
------------
22,833,642
===================================================================================================================================
Financial--0.5% NR* Baa1 4,500,000 St. George Funding Company, 8.485% (a)(d) 5,234,940
===================================================================================================================================
Financial Services-- A- A2 998,000 JP Morgan Capital Trust I, 7.54% due 1/15/2027 (a) 1,071,829
Other--0.1%
===================================================================================================================================
Gas--0.6% BBB Baa2 5,000,000 AGL Capital Trust, 8.17% due 6/01/2037 5,613,965
===================================================================================================================================
Insurance--8.9% BBB Baa3 28,165,000 AON Capital Trust, 8.205% due 1/01/2027 31,690,131
AA Aa1 15,140,000 American General Capital II, 8.50% due 7/01/2030 19,663,241
AA Aa1 2,000,000 American General Institutional Capital A, 8.125%
due 3/15/2046 (a) 2,485,586
A- A2 6,066,000 ING Capital Funding Trust III, 8.439% (b)(d) 7,554,160
BB Ba1 1,000,000 Markel Capital Trust I, 8.71% due 1/01/2046 1,020,863
A+ A2 6,325,000 Principal Mutual, 8% due 3/01/2044 (Surplus Notes)(a) 6,644,501
BBB Baa1 14,000,000 QBE Insurance Group Limited, 5.647% due 7/01/2023 (a)(b) 13,198,990
A- Baa1 6,225,000 Transamerica Capital III, 7.625% due 11/15/2037 6,522,294
------------
88,779,766
===================================================================================================================================
Insurance-- BBB+ A3 36,725,000 Axa, 8.60% due 12/15/2030 (Surplus Notes) 45,255,740
Multiline--6.0% BBB+ A3 1,000,000 Genamerica Capital I, 8.525% due 6/30/2027 (a) 1,095,420
BBB- Baa2 11,566,000 Safeco Capital Trust I, 8.072% due 7/15/2037 (a) 12,923,721
------------
59,274,881
===================================================================================================================================
Oil--2.1% A- A2 10,000,000 Oil Insurance Limited, 5.15% due 8/15/2033 (a)(b) 10,062,000
BBB Baa2 9,850,000 PHILLIPS 66 Capital Trust II, 8% due 1/15/2037 (a) 10,980,603
------------
21,042,603
===================================================================================================================================
Pipelines--0.8% BB+ Baa3 5,000,000 K N Capital Trust I, 8.56% due 4/15/2027 (a) 5,736,055
BB+ Baa3 1,750,000 K N Capital Trust III, 7.63% due 4/15/2028 1,900,862
------------
7,636,917
===================================================================================================================================
Reinsurance--5.3% BBB- Baa1 32,100,000 ACE Capital Trust II, 9.70% due 4/01/2030 41,776,449
A- Baa2 10,000,000 Zurich Capital Trust, 8.376% due 6/01/2037 (a) 11,347,210
------------
53,123,659
6 PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003
Schedule of Investments (continued) (in U.S. dollars)
Preferred Securities (continued)
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Capital Trusts Value
===================================================================================================================================
Savings & Loan BB Ba1 $ 1,000,000 Astoria Capital Trust I, 9.75% due 11/01/2029 (a) $ 1,185,000
Associations--2.0% BB Ba1 5,000,000 Astoria Capital Trust I, 9.75% due 11/01/2029 5,925,000
BB Baa2 5,500,000 GreenPoint Capital Trust I, 9.10% due 6/01/2027 6,015,295
BB NR* 5,775,000 Webster Capital Trust I, 9.36% due 1/29/2027 (a) 6,402,887
------------
19,528,182
===================================================================================================================================
Special Situations-- NR* NR* 15,000,000 AgFirst Farm Credit Bank, 8.393% due 12/15/2016 (b) 17,090,115
4.2% BBB+ Baa3 15,000,000 Farmers Exchange Capital, 7.05% due 7/15/2028 (a) 13,898,865
AA- Aa3 11,000,000 Swedish Export Credit Corporation, 6.375% (a)(d) 10,697,500
------------
41,686,480
---------------------------------------------------------------------------------------------------------
Total Investments in Capital Trusts
(Cost--$554,790,622)--56.5% 562,272,145
=========================================================================================================
===================================================================================================================================
Shares
Held Preferred Stocks
===================================================================================================================================
Banks--8.7% 150 BBVA Privanza International, 7.764% (a) 15,450,000
200,000 MBNA Corporation, 5.50% 5,070,000
2,800,000 Royal Bank of Scotland Group PLC, 5.75% 66,500,000
------------
87,020,000
===================================================================================================================================
Electric--3.4% 14,000 Alabama Power Company, 5.83% 354,900
13,198 Carolina Power & Light Company, 5.44% 1,259,997
11,109 Connecticut Light and Power Company, 5.28% 498,170
11,394 Delmarva Power & Light Company, 4.20% 903,687
21,250 Delmarva Power & Light Company, 4.28% 1,717,266
8,200 Delmarva Power & Light Company, 4.56% 706,225
200,000 Interstate Power and Light Company, 8.375% 6,450,000
12,400 Public Service Electric and Gas Company, 5.28% 1,085,000
19,715 South Carolina Electric & Gas Company, 4.60% 998,072
200,000 TXU Corporation, 7.24% 20,200,000
------------
34,173,317
===================================================================================================================================
Finance--7.3% 1,000,000 Federal National Mortgage Association, 5.125% 46,700,000
200,000 Lehman Brothers Holdings, 5.94% 10,400,000
600,000 Lehman Brothers Holdings, 6.50% 15,675,000
------------
72,775,000
===================================================================================================================================
Gas--1.6% 626,000 Southern Union Company, 7.55% 15,956,740
===================================================================================================================================
Insurance--3.7% 880,000 ACE Limited, 7.80% 23,452,000
12,000 Fortis Regcaps Fund Trust II, 7.68% 13,560,000
------------
37,012,000
===================================================================================================================================
Miscellaneous Materials 26,000 SG Preferred Capital II, 6.302% 27,040,000
& Commodities--2.7%
===================================================================================================================================
Oil--0.7% 64,500 Apache Corporation, 5.68% 6,454,031
===================================================================================================================================
Printing & Publishing-- 200,000 NewsCorp Overseas Ltd., 5.75% 4,800,000
0.5%
===================================================================================================================================
Reinsurance--3.4% 25,000 Zurich Regcaps Funding Trust I, 6.01% (a) 24,750,000
10,000 Zurich Regcaps Funding Trust I, 6.58% (a) 9,500,000
------------
34,250,000
===================================================================================================================================
Specialty Markets--0.2% 80,000 Corp-Backed Trust Certificates, 8.375% 2,200,800
===================================================================================================================================
Wireless 35,423 Centaur Funding Corporation, 9.08% 42,341,572
Communication--4.3%
---------------------------------------------------------------------------------------------------------
Total Investments in Preferred Stocks
(Cost--$365,017,251)--36.5% 364,023,460
=========================================================================================================
PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003 7
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (continued) (in U.S. dollars)
Preferred Securities (concluded)
Shares
Industry+ Held Real Estate Investment Trusts Value
===================================================================================================================================
Real Estate 196,000 AMB Property Corporation, 6.50% $ 4,783,635
Investment Trusts 400,000 CBL & Associates Properties, Inc., 7.75% 10,560,000
600,000 CarrAmerica Realty Corporation, 7.50% 15,525,000
200,000 Cousins Properties, Inc., 7.75% 5,137,500
780,000 Developers Diversified Realty Corporation, 8.0% 20,958,600
280,000 Developers Diversified Realty Corporation, 7.375% 7,084,000
100,000 Duke Realty Corporation, 6.625% 2,503,130
787,000 Equity Residential Properties Trust, 6.48% 19,202,800
4,000 Firstar Realty LLC, 8.875% (a) 5,100,000
686,000 Kimco Realty Corporation, 6.65% 17,458,700
1,600,000 New Plan Excel Realty Trust, 7.625% 42,800,000
607,550 Regency Centers Corporation, 7.45% 16,227,660
11,857 Sovereign Real Estate Investment Trust, 12% 17,666,930
130,000 Wachovia Preferred Funding Corporation, 7.25% 3,552,900
600,000 Weingarten Realty Investment, 6.75% 15,510,000
=========================================================================================================
Total Investments in Real Estate Investment Trusts
(Cost--$196,337,085)--20.5% 204,070,855
=========================================================================================================
===================================================================================================================================
S&P Moody's Face
Ratings@ Ratings@ Amount Trust Preferred
===================================================================================================================================
Auto--1.0% BB Baa3 $10,000,000 Delphi Trust I, 8.25% due 10/15/2033 10,022,598
===================================================================================================================================
Banks--1.6% A- A2 17,375,000 J.P. Morgan Chase Capital XI, 5.875% due 6/15/2033 16,307,731
===================================================================================================================================
Electric--2.4% A A2 21,750,000 Georgia Power Company, 5.90% due 4/15/2033 21,838,477
BB+ Baa1 280,000 Met-Ed Capital Trust, 7.35% due 9/01/2039 280,920
BB+ Baa3 397,425 PSEG Funding Trust II, 8.75% due 12/31/2032 431,192
BBB Baa1 950,000 Virginia Power Capital Trust, 7.375% due 7/30/2042 1,008,138
-------------
23,558,727
===================================================================================================================================
Finance--3.7% BBB+ Baa1 27,000,000 Countrywide Capital IV, 6.75% due 4/01/2033 27,270,360
NR* A2 1,000,000 Household Finance Corporation, 6.875% due 1/30/2033 1,031,881
BBB+ A3 875,000 Lehman Brothers Holding Capital Trust III, 6.375%
due 3/15/2052 872,835
A- A1 3,317,000 Morgan Stanley Capital Trust III, 6.25% due 3/01/2033 3,290,132
NR* NR* 4,000,000 Principal Protected PreTSL IX, Ltd., 14.50% due 4/03/2033 3,979,000
-------------
36,444,208
===================================================================================================================================
Gas--0.9% BB Baa3 8,750,000 Southwest Gas Capital II, 7.70% due 9/15/2043 9,169,789
===================================================================================================================================
Insurance--0.5% BBB Baa1 5,000,000 Lincoln National Capital VI, 6.75% due 9/11/2052 5,050,128
===================================================================================================================================
Pipelines--0.1% BBB- Baa1 500,000 Dominion Cng Capital Trust I, 7.80% due 10/31/2041 531,670
===================================================================================================================================
Reinsurance--0.1% BBB Baa1 1,000,000 Everest Re Capital Trust, 7.85% due 11/15/2032 1,079,147
===================================================================================================================================
Special Situations-- BBB+ A3 5,000,000 Natural Rural Utility CFC, 6.75% due 2/15/2043 5,172,796
0.5%
===================================================================================================================================
Total Investments in Trust Preferred
(Cost--$107,237,949)--10.8% 107,336,794
=========================================================================================================
Total Investments in Preferred Securities
(Cost--$1,223,382,907)--124.3% 1,237,703,254
=========================================================================================================
8 PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003
Schedule of Investments (continued) (in U.S. dollars)
S&P Moody's Face
Industry+ Ratings@ Ratings@ Amount Corporate Bonds Value
===================================================================================================================================
Auto--0.9% BBB Baa1 $10,000,000 Ford Motor Company, 7.45% due 7/16/2031 $ 8,983,000
===================================================================================================================================
Broadcasting/Media-- BBB- Baa3 10,000,000 Liberty Media Corporation, 5.70% due 5/15/2013 9,776,670
1.0%
===================================================================================================================================
Cable Television BBB Baa3 15,000,000 Comcast Corporation, 7.05% due 3/15/2033 15,980,985
Services--1.6%
===================================================================================================================================
Cellular Telephones-- BBB Baa2 28,000,000 AT&T Wireless Services Inc., 8.75% due 3/01/2031 33,671,316
3.4%
===================================================================================================================================
Diversified B+ Baa3 11,500,000 Fuji JGB Investment LLC, 9.87% (a)(b)(d) 12,766,978
Financials--4.8% BBB A3 29,000,000 General Motors Acceptance Corporation, 8% due 11/1/2031 29,823,629
B+ Baa3 5,000,000 SB Treasury Company LLC, 9.40% (a)(b)(d) 5,550,000
------------
48,140,607
===================================================================================================================================
Electronics--1.1% BBB- Baa2 10,000,000 FirstEnergy Corp., 6.45% due 11/15/2011 10,622,330
===================================================================================================================================
Foods--0.5% BBB Baa3 4,800,000 Tyson Foods Inc., 7% due 1/15/2028 4,799,314
===================================================================================================================================
Medical--1.1% AA- A1 10,000,000 Bristol-Myers Squibb Company, 6.875% due 8/01/2097 10,738,810
===================================================================================================================================
Multimedia--3.2% AOL Time Warner Inc.:
BBB+ Baa1 10,000,000 7.625% due 4/15/2031 11,174,170
BBB+ Baa1 18,000,000 7.70% due 5/01/2032 20,338,038
------------
31,512,208
===================================================================================================================================
Oil Field Services-- BBB Baa2 16,575,000 Duke Energy Field Services, 8.125% due 8/16/2030 20,029,545
2.0%
===================================================================================================================================
Reinsurance--1.1% A- A1 10,000,000 GE Global Insurance, 7.75% due 6/15/2030 11,557,380
===================================================================================================================================
Retail--0.6% BBB Baa1 5,000,000 Sears Roebuck Acceptance Corporation, 6.875% due 10/15/2017 5,790,685
===================================================================================================================================
Savings & Loan NR* NR* 8,000,000 Roslyn Real Estate Asset Corporation, 4.79% (b)(d) 8,000,000
Associations--0.8%
===================================================================================================================================
Telephone--6.6% BBB Baa3 28,000,000 France Telecom, 9.75% due 3/01/2031 36,954,988
Sprint Capital Corporation:
BBB- Baa3 2,000,000 6.90% due 5/01/2019 1,982,176
BBB- Baa3 24,000,000 8.75% due 3/15/2032 27,297,888
------------
66,235,052
=========================================================================================================
Total Investments in Corporate Bonds
(Cost--$278,405,416)--28.7% 285,837,902
=========================================================================================================
===================================================================================================================================
Face Amount/
Beneficial Interest Short-Term Securities
===================================================================================================================================
$10,000,000 Federal Home Loan Mortgage Corporation, 1.01%
due 12/5/2003 (g)** 9,991,022
21,767,413 Merrill Lynch Liquidity Series, LLC Cash
Sweep Series I (c) 21,767,413
---------------------------------------------------------------------------------------------------------
Total Investments in Short-Term Securities
(Cost--$31,758,435)--3.2% 31,758,435
=========================================================================================================
===================================================================================================================================
Number of
Options Contracts Put Options Purchased
===================================================================================================================================
150 Swaption, expiring November 2003 at $5.31,
Broker JP Morgan Chase (e) 161,250
50 Swaption, expiring December 2003 at $6.0,
Broker JP Morgan Chase (e) 221,800
100 Swaption, expiring January 2004 at $5.10,
Broker UBS Warburg (e) 933,000
97 Swaption, expiring September 2008 at $6.49,
Broker Lehman Brothers, Inc. (e) 6,400,552
5,850 U.S. Treasury Bonds, expiring November 2003
at $108.0, Broker Greenwich Capital Markets 457,031
500 U.S. Treasury Bonds, expiring November 2003
at $112.0, Broker Greenwich Capital Markets 406,250
1,500 U.S. Treasury Bonds, expiring December 2003
at $107.0, Broker Greenwich Capital Markets 726,562
---------------------------------------------------------------------------------------------------------
Total Options Purchased
(Premiums Paid--$25,020,861)--0.9% 9,306,446
=========================================================================================================
Total Investments (Cost--$1,558,567,619) 1,564,606,037
=========================================================================================================
PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003 9
[LOGO] Merrill Lynch Investment Managers
Schedule of Investments (concluded) (in U.S. dollars)
Number of
Options Contracts Put Options Written Value
===================================================================================================================================
175 Swaption, expiring September 2008 at USD 6.65,
Broker Lehman Brothers, Inc. (e) $ (8,851,850)
500 U.S. Treasury Bonds, expiring November 2003
at $110.0, Broker Greenwich Capital Markets (132,813)
---------------------------------------------------------------------------------------------------------
Total Options Written
(Premiums Received--$10,528,750)--0.9% (8,984,663)
===================================================================================================================================
Total Investments, Net of Options Written (Cost--$1,548,038,869)--156.2% 1,555,621,374
Unrealized Appreciation on Swaps--Net***--0.2% 1,817,334
Variation Margin on Financial Futures Contracts (f)--(0.2%) (1,653,125)
Liabilities in Excess of Other Assets--(1.0%) (10,032,041)
Preferred Stock, at Redemption Value--(55.2%) (550,031,304)
--------------
Net Assets Applicable to Common Stock--100.0% $ 995,722,238
==============
(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) Investments in companies considered to be an affiliate of the Fund (such
companies are defined as "Affiliated Companies" in Section 2 (a)(3) of the
Investment Company Act of 1940) are as follows:
--------------------------------------------------------------------------
Net Interest
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series,
LLC Cash Sweep Series I 21,767,413 $ 458,111
--------------------------------------------------------------------------
(d) The security is a perpetual bond and has no definite maturity date.
(e) 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.
(f) Financial futures contracts sold as of October 31, 2003 were as follows:
-------------------------------------------------------------------------
Number of Expiration Face Unrealized
Contracts Issue Date Value Loss
-------------------------------------------------------------------------
2,300 U.S. 30-Year December 2003 $247,342,625 $(2,710,500)
Treasury Bonds
-------------------------------------------------------------------------
(g) 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.
These industry classifications are unaudited. This definition may not
apply for purposes of this report, which may combine such industry
sub-classifications for reporting ease.
@ Ratings of issues shown are unaudited.
* 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.
*** Swap contracts entered into as of October 31, 2003 were as follows:
--------------------------------------------------------------------------------------
Unrealized
Notional Appreciation/
Amount Depreciation
--------------------------------------------------------------------------------------
Receive a variable rate equal to 1-month LIBOR
at quarterly reset date and pay a fixed rate
equal to 1.3275%.
Broker, J.P. Morgan Chase
Expires June 2005 $125,000,000 $1,204,852
Receive a variable rate equal to 1-month LIBOR
at quarterly reset date and pay a fixed rate
equal to 1.33%.
Broker, Morgan Stanley Capital Services Inc.
Expires June 2005 $125,000,000 1,180,563
Receive a variable rate equal to 1-month LIBOR
at quarterly reset date and pay a fixed rate
equal to 1.32%.
Broker, UBS Warburg
Expires June 2005 $ 25,000,000 245,719
Receive a variable rate equal to 1-month LIBOR
at quarterly reset date and pay a fixed rate
equal to 1.31%.
Broker, UBS Warburg
Expires June 2005 $150,000,000 1,454,200
Receive a variable rate equal to 3-month LIBOR
at quarterly reset date and pay a fixed rate
equal to 4.92%.
Broker, Morgan Stanley Capital Services Inc.
Expires January 2014 $300,000,000 (2,268,000)
--------------------------------------------------------------------------------------
Total $1,817,334
==========
See Notes to Financial Statements.
10 PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003
Statement of Net Assets
As of October 31, 2003
========================================================================================================================
Assets
------------------------------------------------------------------------------------------------------------------------
Investments, at value (identified cost--$1,533,546,758) ........... $1,555,299,591
Options purchased, at value (premiums paid--$25,020,861) .......... 9,306,446
Unrealized appreciation on swaps--net ............................. 1,817,334
Receivables:
Interest ....................................................... $ 18,488,355
Dividends ...................................................... 821,150 19,309,505
------------
Prepaid expenses .................................................. 54,380
--------------
Total assets ...................................................... 1,585,787,256
--------------
========================================================================================================================
Liabilities
------------------------------------------------------------------------------------------------------------------------
Options written, at value (premiums received--$10,528,750) ........ 8,984,663
Payables:
Securities purchased ........................................... 14,992,919
Custodian bank ................................................. 9,849,265
Swaps .......................................................... 1,717,832
Variation margin ............................................... 1,653,125
Dividends to Common Stock shareholders ......................... 1,453,448
Investment adviser ............................................. 889,502
Offering costs ................................................. 423,166
Other affiliates ............................................... 5,700 30,984,957
------------
Accrued expenses and other liabilities ............................ 64,094
--------------
Total liabilities ................................................. 40,033,714
--------------
========================================================================================================================
Preferred Stock
------------------------------------------------------------------------------------------------------------------------
Preferred Stock, at redemption value, par value $.10 per share
(2,800 Series M7 Shares, 2,800 Series T7 Shares, 2,800 Series
W7 Shares, 2,800 Series TH7 Shares, 2,800 Series F7 Shares,
4,000 Series W28 Shares and 4,000 Series TH28 Shares of AMPS*
issued and outstanding at $25,000 per share liquidation preference) 550,031,304
--------------
========================================================================================================================
Net Assets Applicable to Common Stock
------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock ............................. $ 995,722,238
==============
========================================================================================================================
Analysis of Net Assets Applicable to Common Stock
------------------------------------------------------------------------------------------------------------------------
Common Stock, par value $.10 per share (40,593,070 shares issued
and outstanding) .................................................. $ 4,059,307
Paid-in capital in excess of par .................................. 958,587,338
Undistributed investment income--net .............................. $ 8,345,285
Undistributed realized capital gains on investments--net .......... 18,040,969
Unrealized appreciation on investments--net ....................... 6,689,339
------------
Total accumulated earnings--net ................................... 33,075,593
--------------
Total--Equivalent to $24.53 net asset value per share of Common
Stock (market price--$23.69) ...................................... $ 995,722,238
==============
* Auction Market Preferred Stock
See Notes to Financial Statements.
PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003 11
[LOGO] Merrill Lynch Investment Managers
Statement of Operations
For the Period March 28, 2003+ to October 31, 2003
========================================================================================================================
Investment Income
------------------------------------------------------------------------------------------------------------------------
Interest .......................................................... $ 35,071,587
Dividends ......................................................... 15,408,714
--------------
Total income ...................................................... 50,480,301
--------------
========================================================================================================================
Expenses
------------------------------------------------------------------------------------------------------------------------
Investment advisory fees .......................................... $ 4,951,715
Commission fees ................................................... 530,820
Accounting services ............................................... 190,674
Directors' fees and expenses ...................................... 65,924
Transfer agent fees ............................................... 45,695
Custodian fees .................................................... 20,298
Printing and shareholder reports .................................. 15,489
Pricing fees ...................................................... 2,552
Professional fees ................................................. 1,650
Other ............................................................. 11,127
------------
Total expenses before waiver ...................................... 5,835,944
Waiver of expenses ................................................ (1,467,160)
------------
Total expenses after waiver ....................................... 4,368,784
--------------
Investment income--net ............................................ 46,111,517
--------------
========================================================================================================================
Realized & Unrealized Gain on Investments--Net
------------------------------------------------------------------------------------------------------------------------
Realized gain on investments--net ................................. 18,173,984
Unrealized appreciation on investments--net ....................... 6,689,339
--------------
Total realized and unrealized gain on investments--net ............ 24,863,323
--------------
========================================================================================================================
Dividends to Preferred Stock Shareholders
------------------------------------------------------------------------------------------------------------------------
Investment income--net ............................................ (2,706,868)
--------------
Net Increase in Net Assets Resulting from Operations .............. $ 68,267,972
==============
+ Commencement of operations.
See Notes to Financial Statements.
12 PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003
Statements of Changes in Net Assets
For the Period
March 28,
2003+ to
October 31,
Increase (Decrease) in Net Assets: 2003
====================================================================================================================
Operations
--------------------------------------------------------------------------------------------------------------------
Investment income--net ......................................................... $ 46,111,517
Realized gain on investments--net .............................................. 18,173,984
Unrealized appreciation on investments--net .................................... 6,689,339
Dividends to Preferred Stock shareholders ...................................... (2,706,868)
-------------
Net increase in net assets resulting from operations ........................... 68,267,972
-------------
====================================================================================================================
Dividends to Common Stock Shareholders
--------------------------------------------------------------------------------------------------------------------
Investment income--net ......................................................... (35,192,379)
-------------
Net decrease in net assets resulting from dividends to Common Stock shareholders (35,192,379)
-------------
====================================================================================================================
Stock Transactions
--------------------------------------------------------------------------------------------------------------------
Net proceeds from issuance of Common Stock ..................................... 968,131,250
Value of shares issued to Common Stock shareholders in reinvestment to dividends 965,500
Offering costs resulting from the issuance of Common Stock ..................... (570,622)
Offering and underwriting costs resulting from the issuance of Preferred Stock . (5,979,495)
-------------
Net increase in net assets derived from stock transactions ..................... 962,546,633
-------------
====================================================================================================================
Net Assets Applicable to Common Stock
--------------------------------------------------------------------------------------------------------------------
Total increase in net assets applicable to Common Stock ........................ 995,622,226
Beginning of period ............................................................ 100,012
-------------
End of period* ................................................................. $ 995,722,238
=============
* Undistributed investment income--net ...................................... $ 8,345,285
=============
+ Commencement of operations.
See Notes to Financial Statements.
PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003 13
[LOGO] Merrill Lynch Investment Managers
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
October 31,
Increase (Decrease) in Net Asset Value: 2003
=======================================================================================================================
Per Share Operating Performance
-----------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period ............................................... $ 23.88
--------
Investment income--net ............................................................. 1.14
Realized and unrealized gain on investments--net ................................... .61
Dividends to Preferred Stock shareholders from investment income--net .............. (.07)
--------
Total from investment operations ................................................... 1.68
--------
Less dividends to Common Stock shareholders from investment income--net ............ (.87)
--------
Capital charge resulting from the issuance of Common Stock ......................... (.01)
--------
Capital charge and underwriting costs resulting from the issuance of Preferred Stock (.15)
--------
Net asset value, end of period ..................................................... $ 24.53
========
Market price per share, end of period .............................................. $ 23.69
========
=======================================================================================================================
Total Investment Return**
-----------------------------------------------------------------------------------------------------------------------
Based on market price per share .................................................... (1.80%)@
========
Based on net asset value per share ................................................. 6.47%@
========
=======================================================================================================================
Ratios Based on Average Net Assets of Common Stock
-----------------------------------------------------------------------------------------------------------------------
Total expenses, net of waiver*** ................................................... .79%*
========
Total expenses*** .................................................................. 1.05%*
========
Total investment income--net*** .................................................... 8.31%*
========
Amount of dividends to Preferred Stock shareholders ................................ .49%*
========
Investment income--net, to Common Stock shareholders ............................... 7.82%*
========
=======================================================================================================================
Ratios Based on Average Net Assets of Common & Preferred Stock***
-----------------------------------------------------------------------------------------------------------------------
Total expenses, net of waiver ...................................................... .54%*
========
Total expenses ..................................................................... .72%*
========
Total investment income--net ....................................................... 5.67%*
========
=======================================================================================================================
Ratios Based on Average Net Assets of Preferred Stock
-----------------------------------------------------------------------------------------------------------------------
Dividends to Preferred Stock shareholders .......................................... 1.05%*
========
14 PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003
Financial Highlights (concluded)
For the Period
The following per share data and ratios have been derived March 28,
from information provided in the financial statements. 2003+ to
October 31,
Increase (Decrease) in Net Asset Value: 2003
===========================================================================================================
Supplemental Data
-----------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock, end of period (in thousands) $995,722
========
Preferred Stock outstanding, end of period (in thousands) ......... $550,000
========
Portfolio turnover ................................................ 27.31%
========
===========================================================================================================
Leverage
-----------------------------------------------------------------------------------------------------------
Asset coverage per $1,000 ......................................... $ 2,810
========
===========================================================================================================
Dividends Per Share on Preferred Stock Outstanding++
-----------------------------------------------------------------------------------------------------------
Series M7--Investment income--net ................................. $ 127
========
Series T7--Investment income--net ................................. $ 122
========
Series W7--Investment income--net ................................. $ 122
========
Series TH7--Investment income--net ................................ $ 184
========
Series F7--Investment income--net ................................. $ 125
========
Series W28--Investment income--net ................................ $ 105
========
Series TH28--Investment income--net ............................... $ 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
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.
*** 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.
See Notes to Financial Statements.
PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003 15
[LOGO] Merrill Lynch Investment Managers
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 amended, 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. The Fund's Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol PSY. The following is a summary of significant
accounting policies followed by the Fund.
(a) Valuation of investments -- Equity securities that are held by the Fund that
are traded on stock exchanges or the Nasdaq National Market are valued at the
last sale price or official close price on the exchange, as of the close of
business on the day the securities are being valued or, lacking any sales, at
the last available bid price for long positions, and at the last available 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 Fund.
Long positions traded in the over-the-counter ("OTC") market, Nasdaq Small Cap
or Bulletin Board are valued at the last available bid price or yield equivalent
obtained from one or more dealers or pricing services approved by the Board of
Directors of the Fund. Short positions traded in the OTC market are valued at
the last available ask price. Portfolio securities that are traded both in the
OTC market and on a stock exchange are valued according to the broadest and most
representative market.
Options written are valued at the last sale price in the case of exchange-traded
options or, in the case of options traded in the OTC market, the last ask price.
Options purchased are valued at their last sale price in the case of
exchange-traded options or, in the case of options traded in the OTC market, the
last bid price. Swap agreements are valued daily based upon quotations from
market makers. Financial futures contracts and options thereon, which are traded
on exchanges, are valued at their last sale price as of the close of such
exchanges. Obligations with remaining maturities of 60 days or less are valued
at amortized cost, which approximates market value unless the Investment Adviser
believes that this method no longer produces fair valuations.
Repurchase agreements are valued at cost plus accrued interest. The Fund employs
pricing services to provide certain securities prices for the Fund. Securities
and assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board of
Directors of the Fund, including valuations furnished by the pricing services
retained by the Fund, which may use a matrix system for valuations. The
procedures of a pricing service and its valuations are reviewed by the officers
of the Fund under the general supervision of the Fund's Board of Directors. Such
valuations and procedures will be reviewed periodically by the Board of
Directors of the Fund.
Generally, trading in foreign securities, as well as U.S. government securities
and money market instruments, is substantially completed each day at various
times prior to the close of business on the NYSE. The values of such securities
used in computing the net asset value of the Fund's shares are determined as of
such times. Foreign currency exchange rates also are generally determined prior
to the close of business on the NYSE. Occasionally, events affecting the values
of such securities and such exchange rates may occur between the times at which
they are determined and the close of business on the NYSE that may not be
reflected in the computation of the Fund's net asset value. If events (for
example, a company announcement, market volatility or a natural disaster) occur
during such periods that are expected to materially affect the value of such
securities, those securities may be valued at their fair value as determined in
good faith by the Fund's Board of Directors or by the Investment Adviser using a
pricing service and/or procedures approved by the Fund's Board of Directors.
(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 movement 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 -- 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.
16 PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003
Notes to Financial Statements (continued)
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 Swaps -- The Fund may enter into swap agreements, which are
over-the-counter contracts in which the Fund and a counterparty agree to
make periodic net payments on a specified notional amount. The net
payments can be made for a set period of time or may be triggered by a
pre-determined 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.
(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.
(h) Reclassification -- Accounting principles generally accepted in the United
States of America require that certain components of net assets be adjusted to
reflect permanent differences between financial and tax reporting. Accordingly,
the current year's permanent book/tax difference of $133,015 has been
reclassified between undistributed realized capital gains and undistributed net
investment income. This reclassification has no effect on net assets or net
asset value per share.
2. Investment Advisory Agreement and Transactions with Affiliates:
The Fund has entered into an Investment Advisory Agreement with 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
October 31, 2003, FAM earned fees of $4,951,715, of which $1,467,160 was waived.
During the period March 28, 2003 to October 31, 2003, Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), an affiliate of FAM, received
underwriting fees of $45,618,750 in connection with the issuance of the Fund's
Common Stock.
For the period March 28, 2003 to October 31, 2003, the Fund reimbursed FAM
$11,422 for certain accounting services.
PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003 17
[LOGO] Merrill Lynch Investment Managers
Notes to Financial Statements (concluded)
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, and/or ML & Co.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the
period March 28, 2003 to October 31, 2003 were $1,878,194,074 and $359,064,524,
respectively.
Net realized gains (losses) for the period March 28, 2003 to October 31, 2003
and net unrealized gains (losses) as of October 31, 2003 were as follows:
--------------------------------------------------------------------------------
Realized Unrealized
Gains (Losses) Gains (Losses)
--------------------------------------------------------------------------------
Long-term investments ................ $(16,712,956) $ 21,752,833
Options purchased .................... 15,297,775 (15,714,415)
Options written ...................... (2,200,250) 1,544,087
Swaps ................................ (302,019) 1,817,334
Financial futures contracts .......... 22,091,434 (2,710,500)
--------------------------------
Total ................................ $ 18,173,984 $ 6,689,339
================================
As of October 31, 2003, net unrealized appreciation for Federal income tax
purposes aggregated $4,651,518, of which $42,462,111 related to appreciated
securities and $37,810,593 related to depreciated securities. At October 31,
2003, the aggregate cost of investments, net of options written for Federal
income tax purposes was $1,550,969,856.
Transactions in options written for the period March 28, 2003 to October 31,
2003 were as follows:
--------------------------------------------------------------------------------
Number of Premiums
Put Options Written Contracts Received
--------------------------------------------------------------------------------
Outstanding put options written,
beginning of period ............. -- --
Options written .................... 1,936,425 $ 162,059,269,750
Options closed ..................... (1,934,750) (162,048,604,875)
Options expired .................... (1,000) (136,125)
---------------------------------
Outstanding put options written,
end of period ................... 675 $ 10,528,750
=================================
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 October 31,
2003 increased by 40,550,000 from shares sold and 38,881 from reinvestment.
Preferred Stock
Auction Market Preferred Stock ("AMPS") are redeemable shares of Preferred Stock
of the Fund, 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, 2003 were as follows:
Series M7, 1.17%; Series T7, 1.099%; Series W7, 1.14%; Series TH7, 1.15%; Series
F7, 1.13%; Series W28, 1.13% and Series TH28, 1.15%.
Shares issued and outstanding during the period May 16, 2003 to October 31, 2003
increased by 22,000 from issuance of Preferred Stock.
The 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 period March 28, 2003 to October 31, 2003, MLPF&S earned
$336,653 as commissions.
5. Distributions to Shareholders:
The Fund paid an ordinary income dividend of $.161458 per share on November 28,
2003 to shareholders of record on November 14, 2003.
The tax character of distributions paid during the period March 28, 2003 to
October 31, 2003 was as follows:
--------------------------------------------------------------------------------
Distributions paid from:
Ordinary income ..................................... $37,899,247
-----------
Total taxable distributions ............................ $37,899,247
===========
As of October 31, 2003, the components of accumulated earnings on a tax basis
were as follows:
-------------------------------------------------------------------------------
Undistributed income--net ................................. $ 4,721,084
Undistributed long term capital gain--net ................. 4,090,450
-----------
Total undistributed earnings--net ......................... 8,811,534
-----------
Capital loss carryforward ................................. --
Unrealized gains--net ..................................... 24,264,059*
-----------
Total accumulated earnings--net ........................... $33,075,593
===========
* 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 (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.
18 PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003
Report of Independent Auditors
To the Shareholders and Board of Directors of
Preferred Income Strategies Fund, Inc.:
We have audited the accompanying statement of net assets, including the schedule
of investments, of Preferred Income Strategies Fund, Inc. as of October 31,
2003, the related statement of operations and the statement of changes in net
assets and the financial highlights for the period March 28, 2003 (commencement
of operations) to October 31, 2003. These financial statements and financial
highlights are the responsibility of the Fund's management. Our responsibility
is to express an opinion on these financial statements and financial highlights
based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of October 31, 2003, by correspondence with the custodian
and others. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides 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 Income Strategies Fund, Inc. at October 31, 2003, the results of its
operations, the changes in its net assets, and its financial highlights for the
the period March 28, 2003 through October 31, 2003, in conformity with
accounting principles generally accepted in the United States of America.
Ernst & Young LLP
MetroPark, New Jersey
December 17, 2003
Important Tax Information (unaudited)
The following information is provided with respect to the ordinary income
distributions paid by Preferred Income Strategies Fund, Inc. during the fiscal
period ended October 31, 2003:
--------------------------------------------------------------------------------
Qualified Dividend Income for Individuals ....................... 15.70%
Dividends Qualifying for the Dividends Received
Deduction for Corporations ................................... 9.18%
--------------------------------------------------------------------------------
Please retain this information for your records.
PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003 19
[LOGO] Merrill Lynch Investment Managers
Automatic Dividend Reinvestment Plan (unaudited)
The following description of the Fund's Automatic Dividend Reinvestment Plan
(the "Plan") is sent to you annually as required by Federal securities laws.
Pursuant to the Fund's Plan, unless a holder of Common Stock otherwise elects,
all dividend and capital gains distributions will be automatically reinvested by
EquiServe (the "Plan Agent"), as agent for shareholders in administering the
Plan, in additional shares of Common Stock of the Fund. Holders of Common Stock
who elect not to participate in the Plan will receive all distributions in cash
paid by check mailed directly to the shareholder of record (or, if the shares
are held in street or other nominee name then to such nominee) by EquiServe, as
dividend paying agent. Such participants may elect not to participate in the
Plan and to receive all distributions of dividends and capital gains in cash by
sending written instructions to EquiServe, as dividend paying agent, at the
address set forth below. Participation in the Plan is completely voluntary and
may be terminated or resumed at any time without penalty by written notice if
received by the Plan Agent not less than ten days prior to any dividend record
date; otherwise such termination will be effective with respect to any
subsequently declared dividend or distribution.
Whenever the Fund declares an income dividend or capital gains distribution
(collectively referred to as "dividends") payable either in shares or in cash,
non-participants in the Plan will receive cash and participants in the Plan will
receive the equivalent in shares of Common Stock. The shares will be acquired by
the Plan Agent for the participant's account, depending upon the circumstances
described below, either (i) through receipt of additional unissued but
authorized shares of Common Stock from the Fund ("newly issued shares") or (ii)
by purchase of outstanding shares of Common Stock on the open market
("open-market purchases") on the New York Stock Exchange or elsewhere. If on the
payment date for the dividend, the net asset value per share of the Common Stock
is equal to or less than the market price per share of the Common Stock plus
estimated brokerage commissions (such conditions being referred to herein as
"market premium"), the Plan Agent will invest the dividend amount in newly
issued shares on behalf of the participant. The number of newly issued shares of
Common Stock to be credited to the participant's account will be determined by
dividing the dollar amount of the dividend by the net asset value per share on
the date the shares are issued, provided that the maximum discount from the then
current market price per share on the date of issuance may not exceed 5%. If on
the dividend payment date the net asset value per share is greater than the
market value (such condition being referred to herein as "market discount"), the
Plan Agent will invest the dividend amount in shares acquired on behalf of the
participant in open-market purchases.
In the event of a market discount on the dividend payment date, the Plan Agent
will have until the last business day before the next date on which the shares
trade on an "ex-dividend" basis or in no event more than 30 days after the
dividend payment date (the "last purchase date") to invest the dividend amount
in shares acquired in open-market purchases. It is contemplated that the Fund
will pay monthly income dividends. Therefore, the period during which
open-market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of Common Stock exceeds the
net asset value per share, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisitions of fewer shares than if the dividend had been paid in newly issued
shares on the dividend payment date. Because of the foregoing difficulty with
respect to open-market purchases, the Plan provides that if the Plan Agent is
unable to invest the full dividend amount in open-market purchases during the
purchase period or if the market discount shifts to a market premium during the
purchase period, the Plan Agent will cease making open-market purchases and will
invest the uninvested portion of the dividend amount in newly issued shares at
the close of business on the last purchase date determined by dividing the
uninvested portion of the dividend by the net asset value per share.
The Plan Agent maintains all shareholders' accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in non-certificated form in the name
of the participant, and each shareholder's proxy will include those shares
purchased or received pursuant to the Plan. The Plan Agent will forward all
proxy solicitation materials to participants and vote proxies for shares held
pursuant to the Plan in accordance with the instructions of the participants.
In the case of shareholders such as banks, brokers or nominees which hold shares
of others who are the beneficial owners, the Plan Agent will administer the Plan
on the basis of the
20 PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003
Automatic Dividend Reinvestment Plan (unaudited) (concluded)
number of shares certified from time to time by the record shareholders as
representing the total amount registered in the record shareholder's name and
held for the account of beneficial owners who are to participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by the
Fund as a result of dividends or capital gains distributions payable either in
shares or in cash. However, each participant will pay a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open-market
purchases in connection with the reinvestment of dividends.
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.
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus commissions
of the Fund's shares is above the net asset value, participants in the Plan will
receive shares of the Fund at less than they could otherwise purchase them and
will have shares with a cash value greater than the value of any cash
distribution they would have received on their shares. If the market price plus
commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem
shares, the price on resale may be more or less than the net asset value.
The value of shares acquired pursuant to the Plan will generally be excluded
from gross income to the extent that the cash amount reinvested would be
excluded from gross income. If, when the Fund's shares are trading at a premium
over net asset value, the Fund issues shares pursuant to the Plan that have a
greater fair market value than the amount of cash reinvested, it is possible
that all or a portion of such discount (which may not exceed 5% of the fair
market value of the Fund's shares) could be viewed as a taxable distribution. If
the discount is viewed as a taxable distribution, it is also possible that the
taxable character of this discount would be allocable to all the shareholders,
including shareholders who do not participate in the Plan. Thus, shareholders
who do not participate in the Plan might be required to report as ordinary
income a portion of their distributions equal to their allocable share of the
discount.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund reserves the right to amend or terminate the Plan. There is no direct
service charge to participants in the Plan; however, the Fund reserves the right
to amend the Plan to include a service charge payable by the participants.
All correspondence concerning the Plan should be directed to the Plan Agent at
EquiServe, P.O. Box 43010, Providence, RI 02940-3010, Telephone: 800-426-5523.
PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003 21
[LOGO] Merrill Lynch Investment Managers
Officers and Directors (unaudited)
Number of
Portfolios in Other Public
Position(s) Length Fund Complex Directorships
Held of Time Overseen by Held by
Name Address & Age with Fund Served Principal Occupation(s) During Past 5 Years Director Director
====================================================================================================================================
Interested Director
------------------------------------------------------------------------------------------------------------------------------------
Terry K. P.O. Box 9011 President 2003 to President and Chairman of the Merrill Lynch 124 Funds None
Glenn* Princeton, NJ and present Investment Managers, L.P. ("MLIM")/Fund Asset 163 Portfolios
08543-9011 Director Management, L.P. ("FAM")--Advised Funds
Age: 63 since 1999; Chairman (Americas Region) of MLIM
from 2000 to 2002; Executive Vice President of FAM
and MLIM (which terms as used herein include their
corporate predecessors) from 1983 to 2002; President
of FAM Distributors, Inc. ("FAMD") from 1986 to 2002
and Director thereof from 1991 to 2002; Executive Vice
President and Director of Princeton Services, Inc.
("Princeton Services") from 1993 to 2002; President of
Princeton Administrators, L.P. from1989 to 2002;
Director of Financial Data Services, Inc. since 1985.
------------------------------------------------------------------------------------------------------------------------
* Mr. Glenn is a director, trustee or member of an advisory board of certain other investment companies for which FAM or
MLIM act as investment adviser. Mr. Glenn is an "interested person," as described in the Investment Company Act, of
the Fund based on his former positions with FAM, MLIM, FAMD, Princeton Services and Princeton Administrators, L.P. The
Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of the
year in which they turn 72. As Fund President, Mr. Glenn 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 10 Funds None
Beim Princeton, NJ present University Graduate School of Business since 1991; 17 Portfolios
08543-9095 Chairman of Wave Hill, Inc. since 1990; Chairman
Age: 63 of Outward Bound U.S.A. from 1997 to 2002; Trustee
of Phillips Exeter Academy.
------------------------------------------------------------------------------------------------------------------------------------
James T. P.O. Box 9095 Director 2003 to Chief Financial Officer of J.P. Morgan & Co., Inc. 10 Funds None
Flynn Princeton, NJ present from 1990 to 1995. 17 Portfolios
08543-9095
Age: 64
------------------------------------------------------------------------------------------------------------------------------------
Todd P.O. Box 9095 Director 2003 to General Partner of Gibbons, Goodwin, van 9 Funds None
Goodwin Princeton, NJ present Amerongen (investment banking firm) since 16 Portfolios
08543-9095 1984.
Age: 72
------------------------------------------------------------------------------------------------------------------------------------
George W. P.O. Box 9095 Director 2003 to Managing Partner of Bradley Resources Company 9 Funds Thoratec
Holbrook Princeton, NJ present (private investment company) and associated with 16 Portfolios Laboratories
08543-9095 that Firm and its predecessors since 1953; Director Corporation
Age: 72 of Thoratec Laboratories Corporation (medical device
manufacturers).
------------------------------------------------------------------------------------------------------------------------------------
W. Carl P.O. Box 9095 Director 2003 to Mizuho Financial Group Professor of Finance, 10 Funds None
Kester Princeton, NJ present Senior Associate Dean and Chairman of the MBA 17 Portfolios
08543-9095 Program of Harvard University Graduate School of
Age: 51 Business Administration since 1999; Serves on the
Board of Advisors of Security Leasing Partners.
------------------------------------------------------------------------------------------------------------------------------------
Karen P. P.O. Box 9095 Director 2003 to President of Robards & Company, a financial advisory 10 Funds None
Robards Princeton, NJ present firm providing services to companies in the health 17 Portfolios
08543-9095 care industry; Director of Enable Medical Corporation
Age: 53 since 1996; Director of Atricure, Inc. since 2000;
Founder and President of The Cooke Center for
Learning and Development, a non-profit educational
organization, since 1987.
------------------------------------------------------------------------------------------------------------------------
* The Director's term is unlimited. Directors serve until their resignation, removal or death, or until December 31 of
the year in which they turn 72.
------------------------------------------------------------------------------------------------------------------------------------
22 PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003
Officers and Directors (unaudited) (concluded)
Position(s) Length
Held of Time
Name Address & Age with Fund Served* Principal Occupation(s) During Past 5 Years
====================================================================================================================================
Fund Officers
------------------------------------------------------------------------------------------------------------------------------------
Donald C. P.O. Box 9011 Vice 2003 to First Vice President of FAM and MLIM since 1997 and Treasurer thereof
Burke Princeton, NJ President present since 1999; Senior Vice President and Treasurer of Princeton Services since
08543-9011 and 1999; Vice President of FAMD since 1999; Director of MLIM Taxation since 1990.
Age: 43 Treasurer
------------------------------------------------------------------------------------------------------------------------------------
John D. P.O. Box 9011 Vice 2003 to Director (Global Fixed Income) of MLIM since 2000; Vice President of MLIM from
Burger Princeton, NJ President present 1998 to 2000.
08543-9011
Age: 41
------------------------------------------------------------------------------------------------------------------------------------
Thomas P.O. Box 9011 Vice 2003 to Vice President of MLIM since 1997.
Musmanno Princeton, NJ President present
08543-9011
Age: 34
------------------------------------------------------------------------------------------------------------------------------------
Robert R. P.O. Box 9011 Vice 2003 to Managing Director of MLIM since 2000; Director (Global Fixed Income) of MLIM
Peterson, Princeton, NJ President present from 1997 to 2000.
Jr. 08543-9011
Age: 50
------------------------------------------------------------------------------------------------------------------------------------
Bradley J. P.O. Box 9011 Secretary 2003 to Director of MLIM since 2002; Vice President (Legal Advisory) of MLIM from
Lucido Princeton, NJ present 1999 to 2002 and attorney since 1995.
08543-9011
Age: 37
------------------------------------------------------------------------------------------------------------------------
* 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
P.O. Box 43010
Providence, RI 02940-3010
Preferred Stock:
The Bank of New York
100 Church Street
New York, NY 10286
NYSE Symbol
PSY
PREFERRED INCOME STRATEGIES FUND, INC. OCTOBER 31, 2003 23
[LOGO] Merrill Lynch Investment Managers www.mlim.ml.com
Preferred Income Strategies Fund, Inc. seeks to provide shareholders with
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.
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.
A description of the policies and procedures that the Fund uses to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863); (2)
on www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's
website at http://www.sec.gov.
Preferred Income Strategies Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
#PIS -- 10/03
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--
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 - 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. -
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 11 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 - 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. N/A
(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.
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 -- 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: December 22, 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: December 22, 2003
By: /s/ Donald C. Burke
--------------------------------------
Donald C. Burke,
Chief Financial Officer of
Preferred Income Strategies Fund, Inc.
Date: December 22, 2003
Attached hereto as a furnished exhibit are the certifications pursuant to
Section 906 of the Sarbanes-Oxley Act.