UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSRS
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT
INVESTMENT COMPANIES
Investment Company Act file number 811-21286
Name of Fund: Preferred Income Strategies Fund, Inc.
Fund Address: P.O. Box 9011
Princeton, NJ 08543-9011
Name and address of agent for service: Robert C. Doll, Jr., Chief Executive
Officer, Preferred Income Strategies Fund, Inc., 800 Scudders Mill Road,
Plainsboro, NJ 08536. Mailing address: P.O. Box 9011, Princeton, NJ
08543-9011
Registrant's telephone number, including area code: (609) 282-2800
Date of fiscal year end: 10/31/06
Date of reporting period: 11/01/05 - 04/30/06
Item 1 - Report to Stockholders
Semi-Annual Reports
April 30, 2006
Preferred and Corporate Income
Strategies Fund, Inc.
Preferred Income Strategies Fund, Inc.
Preferred and Corporate Income Strategies Fund, Inc.
Preferred Income Strategies Fund, Inc.
Announcement to Shareholders
On February 15, 2006, BlackRock, Inc. ("BlackRock") and Merrill Lynch & Co.,
Inc. ("Merrill Lynch") entered into an agreement to contribute Merrill Lynch's
investment management business, Merrill Lynch Investment Managers, L.P. and
certain affiliates (including Fund Asset Management, L.P. and Merrill Lynch
Investment Managers International Limited), to BlackRock to create a new
independent company that will be one of the world's largest asset management
firms with over $1 trillion in assets under management (based on combined assets
under management as of March 31, 2006). The transaction is expected to close in
the third quarter of 2006, at which time the new company will operate under the
BlackRock name. The Funds' Board of Directors has approved a new investment
advisory agreement with BlackRock Advisors, Inc. or its successor ("BlackRock
Advisors") on substantially the same terms and for the same advisory fee as the
current investment advisory agreement with the Investment Adviser. If the new
agreement is approved by the Funds' shareholders, BlackRock Advisors is expected
to become the Funds' investment adviser upon the closing of the transaction
between Merrill Lynch and BlackRock.
The Benefits and Risks of Leveraging
The Funds utilize leverage through the issuance of Preferred Stock. The concept
of leveraging is based on the premise that the cost of assets to be obtained
from leverage will be based on short-term interest or dividend rates on the
Preferred Stock, which normally will be lower than the income earned by each
Fund on its longer-term portfolio investments. To the extent that the total
assets of each Fund (including the assets obtained from leverage) are invested
in higher-yielding portfolio investments, each Fund's Common Stock shareholders
will be the beneficiaries of the incremental yield.
Leverage creates risks for holders of Common Stock including the likelihood of
greater net asset value and market price volatility. In addition, there is the
risk that fluctuations in the dividend rates on any Preferred Stock may reduce
the Common Stock's yield and negatively impact its net asset value and market
price. If the income derived from securities purchased with assets received from
leverage exceeds the cost of leverage, each Fund's net income will be greater
than if leverage had not been used. Conversely, if the income from the
securities purchased is not sufficient to cover the cost of leverage, each
Fund's net income will be less than if leverage had not been used, and therefore
the amount available for distribution to Common Stock shareholders will be
reduced.
Portfolio Information as of April 30, 2006
Percent of
Preferred and Corporate Income Total
Strategies Fund, Inc.'s Asset Mix Investments
--------------------------------------------------------------------------------
Capital Trusts .............................................. 40.9%
Preferred Stocks ............................................ 18.1
Corporate Bonds ............................................. 18.1
Real Estate Investment Trusts ............................... 13.3
Trust Preferred ............................................. 6.8
Foreign Government Obligations .............................. 2.0
Other* ...................................................... 0.8
--------------------------------------------------------------------------------
Percent of
Preferred Income Strategies Fund, Inc.'s Total
Asset Mix Investments
--------------------------------------------------------------------------------
Capital Trusts .............................................. 36.0%
Preferred Stocks ............................................ 22.8
Corporate Bonds ............................................. 17.1
Real Estate Investment Trusts ............................... 13.6
Trust Preferred ............................................. 7.9
Other* ...................................................... 2.6
--------------------------------------------------------------------------------
* Includes portfolio holdings in short-term investments.
2 SEMI-ANNUAL REPORTS APRIL 30, 2006
A Letter From the President
Dear Shareholder
You may be aware that changes are on the horizon at Merrill Lynch Investment
Managers ("MLIM"). On February 15, 2006, Merrill Lynch announced plans to
combine the firm's investment advisory business, including MLIM, with another
highly regarded investment manager -- BlackRock, Inc. ("BlackRock").
We believe this merger of asset management strength will benefit our investors.
MLIM is a leading investment management organization with over $576 billion in
assets under management globally and 2,757 employees in 17 countries. It offers
over 100 investment strategies in vehicles ranging from mutual funds to
institutional portfolios. BlackRock is one of the largest publicly traded
investment management firms in the United States with $463.1 billion in assets
under management and 1,839 employees. It manages assets on behalf of
institutional and individual investors worldwide through a variety of equity,
fixed income, liquidity and alternative investment products.
At the completion of the transaction, which is expected in the third quarter of
this year, the resultant firm will be a top-10 investment manager worldwide with
over $1 trillion in assets under management.* The combined company will provide
a wider selection of high-quality investment solutions across a range of asset
classes and investment styles. MLIM and BlackRock possess complementary
capabilities that together create a well-rounded organization uniting some of
the finest money managers in the industry. At the same time, the firms share
similar values and beliefs -- they are focused on delivering excellence on
behalf of clients, and both make investment performance their single most
important mission. In short, the merger only reinforces our commitment to
shareholders.
Most of MLIM's investment products -- including mutual funds, separately managed
accounts, annuities and variable insurance funds -- eventually will carry the
"BlackRock" name. As a shareholder in one or more MLIM-advised mutual funds, you
will receive a proxy package in the coming weeks in connection with this
transaction. After you receive this information, should you have any questions
or concerns, do not hesitate to contact your financial advisor.
As always, we thank you for entrusting us with your investment assets, and we
look forward to continuing to serve your investment needs with even greater
strength and scale as the new BlackRock.
Sincerely,
/s/ Robert C. Doll, Jr.
Robert C. Doll, Jr.
President and Chief Investment Officer
Merrill Lynch Investment Managers
* $1.039 trillion in assets under management as of March 31, 2006.
Data, including assets under management, are as of March 31, 2006.
SEMI-ANNUAL REPORTS APRIL 30, 2006 3
A Discussion With Your Funds' Portfolio Managers
The Funds outperformed their benchmark for the six-month period,
benefiting from their relatively long spread durations and our use of hedging
strategies, which we employed in an effort to reduce the negative effects of
rising interest rates.
Describe the market and economic environment during the period.
The yield curve did not change significantly during the past six months,
remaining relatively flat. The spread between two-year and 10-year U.S. Treasury
notes was 20 basis points (.20%) at April 30, 2006, just three basis points more
than six months ago. The yield on the two-year note rose from 4.40% at October
31, 2005, to 4.87% at period-end, while the yield on the 10-year note rose from
4.57% to 5.07% over the same period. The Federal Reserve Board (the Fed)
increased short-term interest rates in four increments of .25% during the
period, pushing the target federal funds rate to 4.75% at April 30, 2006.
Shortly after the end of the period, the Fed increased short-term interest rates
by another .25%, bringing the target rate to 5%.
Record-high oil prices and strong gross domestic product (GDP) growth continued
to stoke fears of increased inflation. GDP expanded at an estimated annualized
rate of 4.8% in the first quarter of 2006, up significantly from the 1.7% and
3.5% annualized growth rates in the fourth quarter and full year 2005,
respectively. Although core inflation remained moderate during the period,
energy prices were volatile, falling sharply in the fourth quarter of 2005, then
climbing significantly during the first quarter of 2006.
How did the Funds perform during the period?
For the six-month period ended April 30, 2006, the Common Stock of Merrill Lynch
Preferred Income Strategies Fund, Inc. had net annualized yields of 7.62% and
8.68%, based on a period-end per share net asset value of $21.67 and a per share
market price of $19.02, respectively, and $.819 per share income dividends. For
the same period, the total investment return on the Fund's Common Stock was
+1.57%, based on a change in per share net asset value from $22.26 to $21.67,
and assuming reinvestment of all distributions.
The Common Stock of Merrill Lynch Preferred and Corporate Income Strategies
Fund, Inc. had net annualized yields of 7.87% and 8.64% during the past six
months, based on a period-end per share net asset value of $21.87 and a per
share market price of $19.91, respectively, and $.853 per share income
dividends. The total investment return on the Fund's Common Stock was +2.11% for
the six-month period, based on a change in per share net asset value from $22.36
to $21.87, and assuming reinvestment of all distributions.
For the same period, the Funds' benchmark, the Merrill Lynch Preferred Stock
Fixed Rate Index, returned +.86%, while the broader-market Merrill Lynch U.S.
Corporate Master Index and the Merrill Lynch U.S. Treasury/Agency Master Index
returned +.04% and +.15%, respectively.
For a description of the Funds' total investment returns based on a change in
the per share market value of the Funds' Common Stock (as measured by the
trading price of the Funds' shares on the New York Stock Exchange), and assuming
reinvestment of dividends, please refer to the Financial Highlights section of
this report. As closed-end funds, the Funds' shares may trade in the secondary
market at a premium or discount to the Funds' net asset values. As a result,
total investment returns based on changes in the market value of the Funds'
Common Stock can vary significantly from total investment returns based on
changes in the Funds' net asset values.
What factors most influenced the Funds' performance?
The credit markets were strong during the period as yield spreads tightened
versus Treasury issues. In addition, long-duration corporate bonds outperformed
their short-duration counterparts. Therefore, the Funds' overweight positions in
longer-duration credits helped to drive their outperformance of the benchmark.
The Funds' long spread durations relative to the benchmark also had a positive
effect on performance. Spread duration is a measurement of the effect of a 100
basis point increase or reduction in the yield spread of a fixed income security
versus U.S. Treasury issues of comparable maturities.
In addition, the Funds' performance for the period benefited considerably from
our use of net asset value hedges to shorten the portfolios' durations in an
effort to reduce the risk of loss in value associated with rising interest
rates. We maintained our view that the Fed would continue to raise short-term
interest rates gradually, forcing long-term rates higher.
The portfolios' underweight positions in short-term callable trust-preferred
securities (TruPS), which performed well during the period, detracted somewhat
from performance. TruPS are fixed income securities that have characteristics
4 SEMI-ANNUAL REPORTS APRIL 30, 2006
of both stocks and bonds. They have early redemption features, make quarterly
fixed interest payments and mature at face value. A company creates TruPS by
establishing a trust and issuing debt to the new entity. The company may realize
significant federal income tax benefits because the interest paid to the trust
is tax deductible.
What changes were made to the portfolios during the period?
We reduced the portfolios' durations -- which already were shorter than that of
their benchmark -- by approximately five years. However, we maintained the
Funds' relatively long spread durations. We also continued to trim the Funds'
exposure to the banking sector as the yield curve remained relatively flat.
Banks earn profits on the spreads between the interest rates they pay to
depositors and the rates they charge for loans. Therefore, a flat or narrow
yield curve squeezes their profit margins.
In addition, we trimmed our holdings in dividends received deduction (DRD)
preferred securities, which pay dividends that qualify for the lower maximum
federal income tax rate of 15%. (Dividends earned from other types of preferred
securities are taxed at an investor's marginal income tax rate, which can be as
high as 33%.) Under the DRD provision of the federal tax code, eligible U.S.
corporations that receive qualified dividends from other U.S. corporations may
deduct 70% of the total U.S. corporate dividends received from their federal
taxable income. DRDs offer lower nominal yields than taxable securities of
comparable maturities because of their tax advantages. Consequently, we reduced
our exposure to these issues in an effort to increase the gross yields of the
Funds.
How would you characterize the Funds' positioning at the close of the period?
We continued to position the Funds in an effort to mitigate the decline in their
net asset values resulting from the negative effects of rising interest rates.
The preferred stock market has significant exposure to securities issued by
financial companies. Therefore, we retained the Funds' sizeable allocations to
the financial sector, although the portfolios are underweight relative to the
benchmark in these securities. Our largest absolute weightings at the end of the
period were in banking and insurance issues, which comprised approximately 47%
and 39% of the net assets of Preferred Income Strategies Fund and Preferred and
Corporate Income Strategies Fund, respectively. The portfolios are well
diversified among issuers, and we intend to maintain this diversification.
At April 30, 2006, Preferred Income Strategies Fund and Preferred and Corporate
Income Strategies Fund each had a leveraged position of approximately 37%. (For
a more complete explanation of the benefits and risks of leveraging, see page 2
of this report to shareholders.) Also at period-end, each Fund carried an
average credit rating of Baa1 from Moody's Investors Service, unchanged from the
rating at October 31, 2005.
John Burger
Vice President and Portfolio Manager
Thomas Musmanno
Vice President and Portfolio Manager
May 10, 2006
SEMI-ANNUAL REPORTS APRIL 30, 2006 5
Schedule of Investments
Preferred and Corporate Income Strategies Fund, Inc. (in U.S. dollars)
==============================================================================================
Preferred Securities
----------------------------------------------------------------------------------------------
Face
Amount Capital Trusts Value
==============================================================================================
Commercial Banks--13.1%
$ 2,000,000 Cullen/Frost Capital Trust I, 6.37% due 3/01/2034 (a) $ 2,036,080
8,000,000 Dresdner Funding Trust I, 8.151% due 6/30/2031 (c) 9,132,528
5,000,000 First Chicago NBD Institutional Capital I, 5.699% due
2/01/2027 (a) 4,754,150
910,000 First Empire Capital Trust II, 8.277% due 6/01/2027 967,238
450,000 First Security Capital I, 8.41% due 12/15/2026 474,995
1,400,000 Firstar Capital Trust I Series B, 8.32% due 12/15/2026 1,479,667
3,000,000 Hubco Capital Trust I Series B, 8.98% due 2/01/2027 3,194,736
1,500,000 Hubco Capital Trust II Series B, 7.65% due 6/15/2028 1,575,000
3,500,000 Mizuho JGB Investment LLC, 9.87% (a)(b)(c) 3,786,143
2,000,000 SB Treasury Co. LLC, 9.40% (a)(b)(c) 2,144,712
--------------
29,545,249
==============================================================================================
Consumer Finance--0.4%
910,000 MBNA Capital A, 8.278% due 12/01/2026 958,552
==============================================================================================
Diversified Financial Services--3.0%
3,000,000 Farm Credit Bank of Texas Series 1, 7.561% (a)(b) 3,146,340
3,335,000 Sun Life Canada US Capital Trust, 8.526% (b)(c) 3,550,741
--------------
6,697,081
==============================================================================================
Electric Utilities--1.6%
4,060,000 Comed Financing III, 6.35% due 3/15/2033 3,601,675
==============================================================================================
Gas Utilities--4.2%
9,000,000 AGL Capital Trust I Series B, 8.17% due 6/01/2037 9,536,949
==============================================================================================
Insurance--27.6%
6,990,000 AON Corp., 8.205% due 1/01/2027 7,734,295
9,000,000 AXA, 8.60% due 12/15/2030 11,117,016
8,510,000 Ace Capital Trust II, 9.70% due 4/01/2030 10,948,694
9,110,000 Farmers Exchange Capital, 7.05% due 7/15/2028 (c) 8,849,919
6,000,000 Mangrove Bay Pass-Through Trust, 6.102% due 7/15/2033 (a)(c) 5,754,060
10,000,000 Markel Capital Trust I Series B, 8.71% due 1/01/2046 10,407,230
915,000 Oil Casualty Insurance Ltd., 8% due 9/15/2034 (c) 868,437
5,000,000 QBE Insurance Group Ltd., 5.647% due 7/01/2023 (a)(c) 4,772,395
1,400,000 Zurich Capital Trust I, 8.376% due 6/01/2037 (c) 1,494,430
--------------
61,946,476
==============================================================================================
Multi-Utilities--0.6%
1,200,000 Dominion Resources Capital Trust I, 7.83% due 12/01/2027 1,268,796
==============================================================================================
Oil, Gas & Consumable Fuels--5.6%
2,000,000 KN Capital Trust III, 7.63% due 4/15/2028 2,079,380
8,000,000 Pemex Project Funding Master Trust, 7.375% due 12/15/2014 8,480,000
2,000,000 Phillips 66 Capital Trust II, 8% due 1/15/2037 2,106,024
--------------
12,665,404
==============================================================================================
Thrifts & Mortgage Finance--8.5%
1,465,000 Dime Capital Trust I Series A, 9.33% due 5/06/2027 1,579,750
6,735,000 Greenpoint Capital Trust I, 9.10% due 6/01/2027 7,246,766
760,000 ML Capital Trust I, 9.875% due 3/01/2027 810,719
5,900,000 Sovereign Capital Trust, 9% due 4/01/2027 6,283,889
3,000,000 Webster Capital Trust I, 9.36% due 1/29/2027 (c) 3,198,000
--------------
19,119,124
----------------------------------------------------------------------------------------------
Total Capital Trusts (Cost--$143,948,738)--64.6% 145,339,306
==============================================================================================
Shares
Held Preferred Stocks
==============================================================================================
Capital Markets--3.4%
24,000 Goldman Sachs Group, Inc. Series A, 3.91% (a) 614,160
280,000 Lehman Brothers Holdings, Inc., 6.50% 7,112,000
--------------
7,726,160
==============================================================================================
Commercial Banks--1.2%
1,176 First Tennessee Bank NA, 3.90% (a)(c) 1,194,375
42,000 Provident Financial Group, Inc., 7.75% 1,089,375
12,000 Sovereign Bancorp, Inc. Series C, 7.30% (d) 300,000
--------------
2,583,750
==============================================================================================
Diversified Financial Services--3.2%
135,000 CIT Group, Inc. Series A, 6.35% 3,389,850
80,000 CoBank ACB, 7% (c) 3,718,480
--------------
7,108,330
==============================================================================================
Electric Utilities--2.6%
20,000 Duquesne Light Co., 6.50% 1,023,000
28,800 Entergy Arkansas, Inc., 6.45% 722,701
22,650 Entergy Louisiana LLC, 6.95% (c) 2,290,481
76,000 PPL Electric Utilities Corp., 6.25% 1,900,000
--------------
5,936,182
==============================================================================================
Gas Utilities--3.1%
270,000 Southern Union Co., 7.55% 6,966,000
==============================================================================================
Insurance--5.7%
120,000 ACE Ltd. Series C, 7.80% 3,102,000
35,000 Axis Capital Holdings Ltd. Series A, 7.25% 863,450
35,200 Endurance Specialty Holdings Ltd., 7.75% 830,720
318,000 MetLife, Inc. Series B, 6.50% 7,981,800
--------------
12,777,970
==============================================================================================
Real Estate--0.5%
40,000 Public Storage, Inc. Series I, 7.25% (d) 1,003,752
==============================================================================================
Thrifts & Mortgage Finance--7.5%
305,000 Fannie Mae, 7% (a) 16,641,563
6,000 Fannie Mae Series L, 5.125% 251,700
--------------
16,893,263
==============================================================================================
Wireless Telecommunication Services--1.4%
2,720 Centaur Funding Corp., 9.08% (c) 3,226,600
----------------------------------------------------------------------------------------------
Total Preferred Stocks (Cost--$62,745,831)--28.6% 64,222,007
==============================================================================================
6 SEMI-ANNUAL REPORTS APRIL 30, 2006
Schedule of Investments (continued)
Preferred and Corporate Income Strategies Fund, Inc. (in U.S. dollars)
==============================================================================================
Preferred Securities (concluded)
----------------------------------------------------------------------------------------------
Shares
Held Real Estate Investment Trusts Value
==============================================================================================
Real Estate--21.1%
63,800 Alexandria Real Estate Equities, Inc. Series C, 8.375% $ 1,652,420
400,000 CBL & Associates Properties, Inc. Series C, 7.75% 10,144,000
400,000 CarrAmerica Realty Corp. Series E, 7.50% 10,120,000
610 First Industrial Realty Trust, Inc., 6.236% (a) 609,619
HRPT Properties Trust:
425,000 Series B, 8.75% 10,867,250
125,000 Series C, 7.125% 3,054,687
192,000 Health Care Property Investors, Inc. Series F, 7.10% 4,790,400
44,000 Health Care REIT, Inc. Series F, 7.625% 1,116,500
120,000 iStar Financial, Inc. Series I, 7.50% 2,976,000
PS Business Parks, Inc.:
18,400 Series K, 7.95% 467,544
16,000 Series M, 7.20% 387,520
14,800 Regency Centers Corp., 7.25% 370,925
36,800 Vornado Realty Trust Series E, 7% 902,752
----------------------------------------------------------------------------------------------
Total Real Estate Investment Trusts (Cost--$47,764,750)--21.1% 47,459,617
==============================================================================================
Face
Amount Trust Preferred
==============================================================================================
Aerospace & Defense--0.9%
$ 2,050,000 RC Trust I, 7% due 5/15/2006 2,051,283
==============================================================================================
Gas Utilities--4.7%
10,000,000 Southwest Gas Capital II, 7.70% due 9/15/2043 10,505,905
==============================================================================================
Insurance--2.8%
4,000,000 ABN AMRO North America Capital Funding Trust II, 4.965%
(a)(b)(c) 4,053,660
2,250,000 Lincoln National Capital VI Series F, 6.75% due 9/11/2052 2,205,622
--------------
6,259,282
==============================================================================================
Thrifts & Mortgage Finance--2.3%
5,500,000 Countrywide Financial Corp., 1.50% due 4/01/2033 5,260,540
----------------------------------------------------------------------------------------------
Total Trust Preferred (Cost--$23,589,404)--10.7% 24,077,010
==============================================================================================
Total Preferred Securities (Cost--$278,048,723)--125.0% 281,097,940
==============================================================================================
Corporate Bonds
==============================================================================================
Automobiles--4.6%
9,000,000 DaimlerChrysler NA Holding Corp., 8.50% due 1/18/2031 10,433,079
==============================================================================================
Commercial Banks--0.6%
1,200,000 Royal Bank of Scotland Group Plc, 9.118% (b) 1,337,708
==============================================================================================
Containers & Packaging--2.2%
5,000,000 Sealed Air Corp., 6.875% due 7/15/2033 (c) 4,911,820
==============================================================================================
Diversified Financial Services--3.0%
2,000,000 Ford Motor Credit Co., 7% due 10/01/2013 1,759,756
5,000,000 Sigma Finance Corp., 7.249% due 8/15/2011 (e) 5,000,000
--------------
6,759,756
==============================================================================================
Diversified Telecommunication Services--2.2%
4,000,000 France Telecom SA, 8.50% due 3/01/2031 4,929,776
==============================================================================================
Electric Utilities--2.2%
5,000,000 Energy East Corp., 6.75% due 9/15/2033 5,021,240
==============================================================================================
Media--8.2%
3,000,000 Comcast Corp., 7.05% due 3/15/2033 3,067,311
8,000,000 Liberty Media Corp., 8.25% due 2/01/2030 7,666,224
2,000,000 TCI Communications, Inc., 8.75% due 8/01/2015 2,321,526
5,000,000 Time Warner, Inc., 7.625% due 4/15/2031 5,412,660
--------------
18,467,721
==============================================================================================
Wireless Telecommunication Services--5.6%
5,000,000 AT&T Wireless Services, Inc., 8.75% due 3/01/2031 6,285,010
5,000,000 Sprint Capital Corp., 8.75% due 3/15/2032 6,203,935
--------------
12,488,945
----------------------------------------------------------------------------------------------
Total Corporate Bonds (Cost--$64,718,596)--28.6% 64,350,045
==============================================================================================
Foreign Government Obligations
==============================================================================================
7,032,000 Mexico Government International Bond, 5.875% due 1/15/2014 6,954,648
----------------------------------------------------------------------------------------------
Total Foreign Government Obligations (Cost--$6,961,680)--3.1% 6,954,648
==============================================================================================
Beneficial
Interest Short-Term Securities
==============================================================================================
$ 3,035,755 Merrill Lynch Liquidity Series, LLC Cash Sweep
Series I, 4.75% (f)(g) 3,035,755
----------------------------------------------------------------------------------------------
Total Short-Term Securities (Cost--$3,035,755)--1.4% 3,035,755
==============================================================================================
Total Investments (Cost--$352,764,754*)--158.1% 355,438,388
Other Assets Less Liabilities--2.7% 6,005,708
Preferred Stock, at Redemption Value--(60.8%) (136,595,737)
--------------
Net Assets Applicable to Common Stock--100.0% $ 224,848,359
==============
SEMI-ANNUAL REPORTS APRIL 30, 2006 7
Schedule of Investments (concluded)
Preferred and Corporate Income Strategies Fund, Inc. (in U.S. dollars)
* The cost and unrealized appreciation (depreciation) of investments as of
April 30, 2006, as computed for federal income tax purposes, were as
follows:
Aggregate cost ....................................... $ 351,585,085
=============
Gross unrealized appreciation ........................ $ 9,088,780
Gross unrealized depreciation ........................ (5,235,477)
-------------
Net unrealized appreciation .......................... $ 3,853,303
=============
(a) Floating rate security.
(b) The security is a perpetual bond and has no definite maturity date.
(c) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(d) Depositary receipts.
(e) Restricted security as to resale, representing approximately 2.2% of net
assets, was as follows:
--------------------------------------------------------------------------
Acquisition
Issue Date Cost Value
--------------------------------------------------------------------------
Sigma Finance Corp., 7.249%
due 8/15/2011 2/13/2004 $5,000,000 $5,000,000
--------------------------------------------------------------------------
(f) Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as
follows:
--------------------------------------------------------------------------
Net Interest
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $3,035,755 $29,389
--------------------------------------------------------------------------
(g) Represents the current yield as of 4/30/2006.
o For Fund compliance purposes, the Fund's industry classifications refer to
any one or more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for purposes of
this report, which may combine industry sub-classifications for reporting
ease. Industries are shown as a percent of net assets.
o Financial futures contracts sold as of April 30, 2006 were as follows:
--------------------------------------------------------------------------
Number of Expiration Face Unrealized
Contracts Issue Date Value Appreciation
--------------------------------------------------------------------------
813 10-Year U.S.
Treasury Notes June 2006 $87,504,076 $1,669,060
--------------------------------------------------------------------------
o Swaps outstanding as of April 30, 2006 were as follows:
--------------------------------------------------------------------------
Notional Unrealized
Amount Appreciation
--------------------------------------------------------------------------
Sold credit default protection on a basket of
preferred securities and receive 2.03%
Broker, Lehman Brothers Special Finance
Expires September 2007 $ 9,000,000 $ 118,557
Pay a fixed rate of 5.2687% and receive a
floating rate based on 3-month LIBOR
Broker, HSBC Bank USA
Expires March 2016 $20,000,000 448,774
Pay a fixed rate of 5.117% and receive a
floating rate based on 3-month LIBOR
Broker, Lehman Brothers Special Finance
Expires March 2036 $18,000,000 1,549,317
--------------------------------------------------------------------------
Total $ 2,116,648
===========
See Notes to Financial Statements.
8 SEMI-ANNUAL REPORTS APRIL 30, 2006
Schedule of Investments
Preferred Income Strategies Fund, Inc. (in U.S. dollars)
==============================================================================================
Preferred Securities
----------------------------------------------------------------------------------------------
Face
Amount Capital Trusts Value
==============================================================================================
Commercial Banks--20.3%
$12,035,000 ABN AMRO North America Holding Preferred Capital Repackaging
Trust I, 6.523% (a)(b)(c) $ 12,318,472
2,000,000 Bank One Capital III, 8.75% due 9/01/2030 2,504,078
1,000,000 Chase Capital I Series A, 7.67% due 12/01/2026 1,047,250
16,455,000 Chase Capital II Series B, 5.649% due 2/01/2027 (b) 15,661,244
34,000,000 Dresdner Funding Trust I, 8.151% due 6/30/2031 (a) 38,813,244
3,630,000 First Empire Capital Trust II, 8.277% due 6/01/2027 3,858,323
1,820,000 First Security Capital I, 8.41% due 12/15/2026 1,921,092
5,600,000 Firstar Capital Trust I Series B, 8.32% due 12/15/2026 5,918,668
2,000,000 HSBC America Capital Trust I, 7.808% due 12/15/2026 (a) 2,100,998
15,835,000 HSBC Capital Funding LP/Jersey Channel Islands, 10.176%
(a)(b)(c) 22,240,495
7,300,000 HSBC Finance Capital Trust IX, 5.911% due 11/30/2035 (b) 7,052,493
12,275,000 Hubco Capital Trust II Series B, 7.65% due 6/15/2028 12,888,750
2,000,000 Lloyds TSB Bank Plc, 6.90% (c) 1,970,000
13,500,000 Mizuho JGB Investment LLC, 9.87% (a)(b)(c) 14,603,693
18,470,000 NationsBank Capital Trust III, 5.618% due 1/15/2027 (b) 17,791,394
2,000,000 Republic New York Corp., 7.53% due 12/04/2026 2,090,968
10,000,000 SB Treasury Co. LLC, 9.40% (a)(b)(c) 10,723,560
4,500,000 ST George Funding Co. LLC, 8.485% (a)(c) 4,647,532
--------------
178,152,254
==============================================================================================
Consumer Finance--0.6%
4,630,000 MBNA Capital A, 8.278% due 12/01/2026 4,877,029
==============================================================================================
Diversified Financial Services--5.4%
15,000,000 AgFirst Farm Credit Bank, 8.393% due 12/15/2016 (b) 16,236,945
10,000,000 CIT Capital Trust I, 7.70% due 2/15/2027 10,476,110
9,000,000 Farm Credit Bank of Texas Series 1, 7.561% (b)(c) 9,439,020
998,000 JPM Capital Trust I, 7.54% due 1/15/2027 1,044,406
10,000,000 Sun Life Canada US Capital Trust, 8.526% (a)(c) 10,646,900
--------------
47,843,381
==============================================================================================
Electric Utilities--2.3%
14,950,000 HL&P Capital Trust II Series B, 8.257% due 2/01/2037 15,697,500
5,000,000 SWEPCO Capital I, 5.25% due 10/01/2043 (b) 4,924,150
--------------
20,621,650
==============================================================================================
Gas Utilities--0.6%
5,000,000 AGL Capital Trust I Series B, 8.17% due 6/01/2037 5,298,305
==============================================================================================
Insurance--18.8%
24,175,000 AON Corp., 8.205% due 1/01/2027 26,749,154
21,300,000 Ace Capital Trust II, 9.70% due 4/01/2030 27,403,898
23,725,000 Axa, 8.60% due 12/15/2030 29,305,689
15,000,000 Farmers Exchange Capital, 7.05% due 7/15/2028 (a) 14,571,765
10,000,000 GE Global Insurance Holding Corp., 7.75% due 6/15/2030 11,573,040
1,000,000 GenAmerica Capital I, 8.525% due 6/30/2027 (a) 1,068,123
6,066,000 ING Capital Funding Trust III, 8.439% (b)(c) 6,704,841
1,000,000 Markel Capital Trust I Series B, 8.71% due 1/01/2046 1,040,723
3,605,000 Oil Casualty Insurance Ltd., 8% due 9/15/2034 (a) 3,421,549
6,325,000 Principal Life Insurance Co., 8% due 03/01/2044 6,504,605
14,000,000 QBE Insurance Group Ltd., 5.647% due 7/01/2023 (a)(b) 13,362,706
6,225,000 Transamerica Capital III, 7.625% due 11/15/2037 6,687,810
15,600,000 Zurich Capital Trust I, 8.376% due 6/01/2037 (a) 16,652,220
--------------
165,046,123
==============================================================================================
Multi-Utilities--3.1%
10,000,000 Dominion Resources Capital Trust I, 7.83% due 12/01/2027 10,573,300
15,000,000 Dominion Resources Capital Trust III, 8.40% due 1/15/2031 16,789,080
--------------
27,362,380
==============================================================================================
Oil, Gas & Consumable Fuels--2.0%
5,000,000 KN Capital Trust I Series B, 8.56% due 4/15/2027 5,295,510
1,750,000 KN Capital Trust III, 7.63% due 4/15/2028 1,819,458
9,850,000 Phillips 66 Capital Trust II, 8% due 1/15/2037 10,372,168
--------------
17,487,136
==============================================================================================
Thrifts & Mortgage Finance--4.6%
Astoria Capital Trust I:
1,000,000 9.75% due 11/01/2029 (a) 1,143,000
5,000,000 Series B, 9.75% due 11/01/2029 5,765,000
5,760,000 Dime Capital Trust I Series A, 9.33% due 5/06/2027 6,211,169
12,765,000 GreenPoint Capital Trust I, 9.10% due 6/01/2027 13,734,961
3,005,000 ML Capital Trust I, 9.875% due 3/01/2027 3,205,542
9,775,000 Webster Capital Trust I, 9.36% due 1/29/2027 (a) 10,420,150
--------------
40,479,822
----------------------------------------------------------------------------------------------
Total Capital Trusts (Cost--$501,398,952)--57.7% 507,168,080
==============================================================================================
Shares
Held Preferred Stocks
==============================================================================================
Capital Markets--2.0%
96,000 Goldman Sachs Group, Inc. Series A, 3.91% (b) 2,456,640
600,000 Lehman Brothers Holdings, Inc., 6.50% 15,240,000
--------------
17,696,640
==============================================================================================
Commercial Banks--7.3%
435,200 Banco Santander Central Hispano SA, 6.41% 10,575,360
137,579 First Republic Bank, 6.25% 3,413,679
4,650 First Tennessee Bank NA, 3.90% (a)(b) 4,722,656
166,800 Provident Financial Group, Inc., 7.75% 4,326,375
750,000 Royal Bank of Scotland Group Plc Series L, 5.75% 16,530,000
23,000 SG Preferred Capital II, 6.302% (b) 23,558,900
48,000 Sovereign Bancorp, Inc. Series C, 7.30% (d) 1,200,000
--------------
64,326,970
==============================================================================================
SEMI-ANNUAL REPORTS APRIL 30, 2006 9
Schedule of Investments (continued)
Preferred Income Strategies Fund, Inc. (in U.S. dollars)
==============================================================================================
Preferred Securities (continued)
----------------------------------------------------------------------------------------------
Shares
Held Preferred Stocks Value
==============================================================================================
Diversified Financial Services--4.1%
855,000 CIT Group, Inc. Series A, 6.35% $ 21,469,050
320,000 CoBank ACB, 7% (a) 14,873,920
--------------
36,342,970
==============================================================================================
Electric Utilities--3.0%
14,000 Alabama Power Co., 5.83% 330,400
80,000 Duquesne Light Co., 6.50% 4,092,000
114,400 Entergy Arkansas, Inc., 6.45% 2,870,731
89,850 Entergy Louisiana LLC, 6.95% (a) 9,086,081
80,000 Interstate Power & Light Co. Series B, 8.375% 2,544,000
304,000 PPL Electric Utilities Corp., 6.25% 7,600,000
--------------
26,523,212
==============================================================================================
Gas Utilities--1.6%
556,000 Southern Union Co., 7.55% 14,344,800
==============================================================================================
Insurance--8.5%
880,000 ACE Ltd. Series C, 7.80% 22,748,000
140,000 Axis Capital Holdings Ltd. Series A, 7.25% 3,453,800
139,200 Endurance Specialty Holdings Ltd., 7.75% 3,285,120
1,260,000 MetLife, Inc. Series B, 6.50% 31,626,000
140,000 Prudential Plc, 6.50% 3,374,000
9,800 Zurich RegCaPS Funding Trust, 6.58% (a)(b) 10,143,000
--------------
74,629,920
==============================================================================================
Multi-Utilities--0.4%
140,000 Pacific Gas & Electric Co. Series A, 6% 3,535,000
==============================================================================================
Real Estate--0.5%
160,000 Public Storage, Inc. Series I, 7.25% (d) 4,015,008
==============================================================================================
Thrifts & Mortgage Finance--8.8%
1,210,000 Fannie Mae, 7% (b) 66,020,625
264,650 Fannie Mae Series L, 5.125% 11,102,067
--------------
77,122,692
==============================================================================================
Wireless Telecommunication Services--0.3%
2,423 Centaur Funding Corp., 9.08% (a) 2,874,284
----------------------------------------------------------------------------------------------
Total Preferred Stocks (Cost--$320,540,869)--36.5% 321,411,496
==============================================================================================
Real Estate Investment Trusts
==============================================================================================
Real Estate--21.8%
251,400 Alexandria Real Estate Equities, Inc. Series C, 8.375% 6,511,260
400,000 CBL & Associates Properties, Inc. Series C, 7.75% 10,144,000
600,000 CarrAmerica Realty Corp. Series E, 7.50% 15,180,000
680,000 Developers Diversified Realty Corp., 8% 17,408,000
80,000 Duke Realty Corp. Series K, 6.50% 1,878,400
2,390 First Industrial Realty Trust, Inc., 6.236% (b) 2,388,506
4,000 Firstar Realty LLC, 8.875% (a) 4,955,000
768,000 Health Care Property Investors, Inc. Series F, 7.10% 19,161,600
172,800 Health Care REIT, Inc. Series F, 7.625% 4,384,800
684,700 Kimco Realty Corp. Series F, 6.65% 16,562,893
1,600,000 New Plan Excel Realty Trust Series E, 7.625% 40,576,000
PS Business Parks, Inc.:
72,000 Series K, 7.95% 1,829,520
64,000 Series M, 7.20% 1,550,080
320,000 Public Storage, Inc. Series X, 6.45% 7,164,800
58,000 Regency Centers Corp., 7.25% 1,453,625
607,550 Regency Centers Corp., 7.45% 15,383,166
11,857 Sovereign Real Estate Investment Corp., 12% (a) 16,006,950
145,000 Vornado Realty Trust Series E, 7% 3,557,038
130,000 Wachovia Preferred Funding Corp. Series A, 7.25% 3,484,000
96,000 Weingarten Realty Investors Series D, 6.75% 2,370,240
----------------------------------------------------------------------------------------------
Total Real Estate Investment Trusts
(Cost--$192,765,535)--21.8% 191,949,878
==============================================================================================
Face
Amount Trust Preferred
==============================================================================================
Aerospace & Defense--3.1%
$27,450,000 RC Trust I, 7% due 5/15/2006 27,467,184
==============================================================================================
Capital Markets--0.1%
875,000 Lehman Brothers Holdings Capital Trust III Series K, 1.558%
due 3/15/2052 817,981
==============================================================================================
Communications Equipment--0.2%
2,000,000 Corporate-Backed Trust Certificates, 8.375% due 11/15/2028 2,027,997
==============================================================================================
Electric Utilities--1.5%
4,750,000 Georgia Power Co. Series O, 1.475% due 4/15/2033 4,278,726
3,000,000 HECO Capital Trust III, 6.50% due 3/18/2034 3,001,258
5,000,000 National Rural Utilities Cooperative Finance Corp., 6.75%
due 2/15/2043 4,907,063
950,000 Virginia Power Capital Trust II, 1.844% due 7/30/2042 952,264
--------------
13,139,311
==============================================================================================
Gas Utilities--0.7%
500,000 Dominion CNG Capital Trust I, 1.95% due 10/31/2041 500,765
5,750,000 Southwest Gas Capital II, 7.70% due 9/15/2043 6,040,895
--------------
6,541,660
==============================================================================================
Insurance--3.3%
16,000,000 ABN AMRO North America Capital Funding Trust II, 4.965%
(a)(b)(c) 16,214,638
7,375,000 Berkley W R Capital Trust, 6.75% due 7/26/2045 6,894,502
1,000,000 Everest Re Capital Trust, 1.963% due 11/15/2032 1,005,118
5,000,000 Lincoln National Capital VI Series F, 6.75% due 9/11/2052 4,901,382
--------------
29,015,640
==============================================================================================
Multi-Utilities--0.1%
397,425 PSEG Funding Trust II, 8.75% due 12/31/2032 412,870
==============================================================================================
10 SEMI-ANNUAL REPORTS APRIL 30, 2006
Schedule of Investments (continued)
Preferred Income Strategies Fund, Inc. (in U.S. dollars)
==============================================================================================
Preferred Securities (concluded)
----------------------------------------------------------------------------------------------
Face
Amount Trust Preferred Value
==============================================================================================
Thrifts & Mortgage Finance--3.6%
$27,000,000 Countrywide Financial Corp., 1.50% due 4/01/2033 $ 25,824,469
6,000,000 Dime Community Capital I, 7% due 4/14/2034 5,850,000
--------------
31,674,469
----------------------------------------------------------------------------------------------
Total Trust Preferred (Cost--$112,462,744)--12.6% 111,097,112
==============================================================================================
Total Preferred Securities (Cost--$1,127,168,100)--128.6% 1,131,626,566
==============================================================================================
Corporate Bonds
==============================================================================================
Automobiles--3.4%
22,500,000 DaimlerChrysler NA Holding Corp., 8.50% due 1/18/2031 26,082,698
5,000,000 Ford Motor Co., 7.45% due 7/16/2031 3,650,000
--------------
29,732,698
==============================================================================================
Commercial Banks--3.5%
5,000,000 HBOS Plc, 5.92% (a)(b)(c) 4,755,010
20,000,000 Resona Preferred Global Securities Ltd., 7.191% (a)(b)(c) 20,561,840
4,800,000 Royal Bank of Scotland Group Plc, 9.118% (c) 5,350,829
--------------
30,667,679
==============================================================================================
Diversified Financial Services--2.5%
8,000,000 Ford Motor Credit Co., 7% due 10/01/2013 7,039,024
15,000,000 Sigma Finance Corp., 7.249% due 8/15/2011 (e) 15,000,000
--------------
22,039,024
==============================================================================================
Diversified Telecommunication Services--3.6%
25,500,000 France Telecom SA, 8.50% due 3/01/2031 31,427,322
==============================================================================================
Electric Utilities--1.2%
10,000,000 FirstEnergy Corp. Series B, 6.45% due 11/15/2011 10,312,230
==============================================================================================
Independent Power Producers & Energy Traders--2.2%
16,575,000 Duke Energy Field Services LLC, 8.125% due 8/16/2030 19,667,746
==============================================================================================
Media--3.4%
5,000,000 Comcast Corp., 7.05% due 3/15/2033 5,112,185
Time Warner, Inc.:
5,000,000 7.625% due 4/15/2031 5,412,660
18,000,000 7.70% due 5/01/2032 19,671,066
--------------
30,195,911
==============================================================================================
Road & Rail--0.4%
3,750,000 BNSF Funding Trust I, 6.613% due 12/15/2055 (b) 3,603,698
==============================================================================================
Thrifts & Mortgage Finance--0.9%
8,000,000 Roslyn Real Estate Asset Corp. Series D, 8.629% (b)(c) 8,000,000
==============================================================================================
Wireless Telecommunication Services--6.2%
18,000,000 AT&T Wireless Services, Inc., 8.75% due 3/01/2031 22,626,036
Sprint Capital Corp.:
2,000,000 6.90% due 5/01/2019 2,116,514
24,000,000 8.75% due 3/15/2032 29,778,888
--------------
54,521,438
----------------------------------------------------------------------------------------------
Total Corporate Bonds (Cost--$236,767,908)--27.3% 240,167,746
==============================================================================================
Beneficial
Interest Short-Term Securities
==============================================================================================
$35,886,321 Merrill Lynch Liquidity Series, LLC Cash Sweep
Series I, 4.75% (f)(g) 35,886,321
----------------------------------------------------------------------------------------------
Total Short-Term Securities (Cost--$35,886,321)--4.1% 35,886,321
==============================================================================================
Total Investments (Cost--$1,399,822,329*)--160.0% 1,407,680,633
Other Assets Less Liabilities--2.6% 22,756,021
Preferred Stock, at Redemption Value--(62.6%) (550,500,938)
--------------
Net Assets Applicable to Common Stock--100.0% $ 879,935,716
==============
SEMI-ANNUAL REPORTS APRIL 30, 2006 11
Schedule of Investments (concluded)
Preferred Income Strategies Fund, Inc. (in U.S. dollars)
* The cost and unrealized appreciation (depreciation) of investments as of
April 30, 2006, as computed for federal income tax purposes, were as
follows:
Aggregate cost ...................................... $ 1,393,592,544
===============
Gross unrealized appreciation ....................... $ 42,464,910
Gross unrealized depreciation ....................... (28,376,821)
---------------
Net unrealized appreciation ......................... $ 14,088,089
===============
(a) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(b) Floating rate security.
(c) The security is a perpetual bond and has no definite maturity date.
(d) Depositary receipts.
(e) Restricted security as to resale, representing approximately 1.7% of net
assets, was as follows:
--------------------------------------------------------------------------
Acquisition
Issue Date Cost Value
--------------------------------------------------------------------------
Sigma Finance Corp., 7.249%
due 8/15/2011 2/13/2004 $15,000,000 $15,000,000
--------------------------------------------------------------------------
(f) Investments in companies considered to be an affiliate of the Fund, for
purposes of Section 2(a)(3) of the Investment Company Act of 1940, were as
follows:
--------------------------------------------------------------------------
Net Interest
Affiliate Activity Income
--------------------------------------------------------------------------
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $35,886,321 $368,202
--------------------------------------------------------------------------
(g) Represents the current yield as of 4/30/2006.
o For Fund compliance purposes, the Fund's industry classifications refer to
any one or more of the industry sub-classifications used by one or more
widely recognized market indexes or ratings group indexes, and/or as
defined by Fund management. This definition may not apply for purposes of
this report, which may combine industry sub-classifications for reporting
ease. Industries are shown as a percent of net assets.
o Financial futures contracts sold as of April 30, 2006 were as follows:
--------------------------------------------------------------------------
Number of Expiration Face Unrealized
Contracts Issue Date Value Appreciation
--------------------------------------------------------------------------
2,885 10-Year U.S.
Treasury Notes June 2006 $310,505,140 $5,912,250
--------------------------------------------------------------------------
o Swaps outstanding as of April 30, 2006 were as follows:
--------------------------------------------------------------------------
Notional Unrealized
Amount Appreciation
--------------------------------------------------------------------------
Sold credit default protection on a basket of
preferred securities and receive 2.03%
Broker, Lehman Brothers Special Finance
Expires September 2007 $36,000,000 $ 474,228
Pay a fixed rate of 5.2687% and receive a
floating rate based on 3-month LIBOR
Broker, HSBC Bank USA
Expires March 2016 $80,000,000 1,781,946
Pay a fixed rate of 5.117% and receive a
floating rate based on 3-month LIBOR
Broker, Lehman Brothers Special Finance
Expires March 2036 $72,000,000 6,196,642
--------------------------------------------------------------------------
Total $ 8,452,816
===========
See Notes to Financial Statements.
12 SEMI-ANNUAL REPORTS APRIL 30, 2006
Statements of Net Assets
Preferred and Preferred
Corporate Income Income
Strategies Strategies
As of April 30, 2006 Fund, Inc. Fund, Inc.
===================================================================================================================================
Assets
-----------------------------------------------------------------------------------------------------------------------------------
Investments in unaffiliated securities, at value* ...................................... $ 352,402,633 $1,371,794,312
Investments in affiliated securities, at value** ....................................... 3,035,755 35,886,321
Cash on deposit for financial futures contracts ........................................ 738,750 2,681,250
Unrealized appreciation on swaps ....................................................... 2,116,648 8,452,816
Interest receivable .................................................................... 4,633,586 17,743,308
Dividends receivable ................................................................... 320,266 963,102
Receivable for swaps ................................................................... 20,807 85,260
Prepaid expenses ....................................................................... 11,709 68,071
---------------------------------
Total assets ........................................................................... 363,280,154 1,437,674,440
---------------------------------
===================================================================================================================================
Liabilities
-----------------------------------------------------------------------------------------------------------------------------------
Payable for securities purchased ....................................................... 1,300,000 5,200,000
Dividends payable to Common Stock shareholders ......................................... 169,451 627,371
Payable for variation margin ........................................................... 139,734 506,837
Payable for swaps ...................................................................... 14,467 44,092
Payable to investment adviser .......................................................... 166,498 660,619
Payable for other affiliates ........................................................... 4,403 17,488
Accrued expenses and other liabilities ................................................. 41,505 181,379
---------------------------------
Total liabilities ...................................................................... 1,836,058 7,237,786
---------------------------------
===================================================================================================================================
Preferred Stock
-----------------------------------------------------------------------------------------------------------------------------------
Preferred Stock, at redemption value, par value $.10 per share+ of AMPS@ at $25,000
per share liquidation preference ...................................................... 136,595,737 550,500,938
---------------------------------
===================================================================================================================================
Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock .................................................. $ 224,848,359 $ 879,935,716
=================================
SEMI-ANNUAL REPORTS APRIL 30, 2006 13
Statements of Net Assets (concluded)
Preferred and Preferred
Corporate Income Income
Strategies Strategies
As of April 30, 2006 Fund, Inc. Fund, Inc.
===================================================================================================================================
Analysis of Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------------------
Undistributed (accumulated distributions in excess of) investment income--net .......... $ 36,018 $ (4,823,811)
Accumulated realized capital losses--net ............................................... (25,125,149) (100,334,461)
Unrealized appreciation--net ........................................................... 6,459,342 22,223,370
---------------------------------
Total accumulated losses--net .......................................................... (18,629,789) (82,934,902)
---------------------------------
Common Stock, par value $.10 per share++ ............................................... 1,027,919 4,060,654
Paid-in capital in excess of par ....................................................... 242,450,229 958,809,964
---------------------------------
Net Assets ............................................................................. $ 224,848,359 $ 879,935,716
=================================
Net asset value per share of Common Stock .............................................. $ 21.87 $ 21.67
---------------------------------
Market price ........................................................................... $ 19.91 $ 19.02
---------------------------------
* Identified cost on unaffiliated securities ........................................ $ 349,728,999 $1,363,936,008
=================================
** Identified cost on affiliated securities .......................................... $ 3,035,755 $ 35,886,321
=================================
+ Preferred Stock authorized, issued and outstanding:
Series M7 Shares ................................................................ 2,730 2,800
---------------------------------
Series T7 Shares ................................................................ 2,730 2,800
---------------------------------
Series W7 Shares ................................................................ -- 2,800
---------------------------------
Series TH7 Shares ............................................................... -- 2,800
---------------------------------
Series F7 Shares ................................................................ -- 2,800
---------------------------------
Series W28 Shares ............................................................... -- 4,000
---------------------------------
Series TH28 Shares .............................................................. -- 4,000
---------------------------------
++ Common Stock issued and outstanding ............................................... 10,279,189 40,606,540
=================================
@ Auction Market Preferred Stock
See Notes to Financial Statements.
14 SEMI-ANNUAL REPORTS APRIL 30, 2006
Statements of Operations
Preferred and Preferred
Corporate Income Income
Strategies Strategies
For the Six Months Ended April 30, 2006 Fund, Inc. Fund, Inc.
===================================================================================================================================
Investment Income
-----------------------------------------------------------------------------------------------------------------------------------
Interest* .............................................................................. $ 8,828,045 $ 30,448,883
Dividends .............................................................................. 3,242,495 13,596,629
---------------------------------
Total income ........................................................................... 12,070,540 44,045,512
---------------------------------
===================================================================================================================================
Expenses
-----------------------------------------------------------------------------------------------------------------------------------
Investment advisory fees ............................................................... 1,088,050 4,315,581
Commission fees ........................................................................ 173,025 698,687
Accounting services .................................................................... 64,636 202,151
Transfer agent fees .................................................................... 31,138 79,378
Professional fees ...................................................................... 32,534 46,170
Custodian fees ......................................................................... 9,649 31,689
Printing and shareholder reports ....................................................... 8,287 32,203
Directors' fees and expenses ........................................................... 17,822 58,080
Pricing fees ........................................................................... 3,921 4,329
Listing fees ........................................................................... 8,199 12,568
Other .................................................................................. 21,840 30,553
---------------------------------
Total expenses ......................................................................... 1,459,101 5,511,389
---------------------------------
Investment income--net ................................................................. 10,611,439 38,534,123
---------------------------------
===================================================================================================================================
Realized & Unrealized Gain (Loss)--Net
-----------------------------------------------------------------------------------------------------------------------------------
Realized gain (loss) on:
Investments--net .................................................................... (1,160,833) 4,374,084
Futures contracts and swaps--net .................................................... (7,198,937) (22,144,749)
---------------------------------
Total realized loss--net ............................................................... (8,359,770) (17,770,665)
---------------------------------
Change in unrealized appreciation/depreciation on:
Investments--net .................................................................... (5,891,858) (32,812,765)
Futures contracts and swaps--net .................................................... 10,688,983 35,165,344
---------------------------------
Total change in unrealized appreciation/depreciation--net .............................. 4,797,125 2,352,579
---------------------------------
Total realized and unrealized loss--net ................................................ (3,562,645) (15,418,086)
---------------------------------
===================================================================================================================================
Dividends to Preferred Stock Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ................................................................. (2,938,077) (12,232,858)
---------------------------------
Net Increase in Net Assets Resulting from Operations ................................... $ 4,110,717 $ 10,883,179
=================================
* Interest from affiliates ............................................................ $ 29,389 $ 368,202
=================================
See Notes to Financial Statements.
SEMI-ANNUAL REPORTS APRIL 30, 2006 15
Statements of Changes in Net Assets
Preferred and Corporate Income Strategies Fund, Inc.
For the Six For the
Months Ended Year Ended
April 30, October 31,
Increase (Decrease) in Net Assets: 2006 2005
===================================================================================================================================
Operations
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ................................................................. $ 10,611,439 $ 22,229,255
Realized loss--net ..................................................................... (8,359,770) (4,799,532)
Change in unrealized appreciation/depreciation--net .................................... 4,797,125 (6,400,859)
Dividends to Preferred Stock shareholders .............................................. (2,938,077) (4,112,800)
---------------------------------
Net increase in net assets resulting from operations ................................... 4,110,717 6,916,064
---------------------------------
===================================================================================================================================
Dividends to Common Stock Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ................................................................. (9,112,049) (20,558,419)
---------------------------------
Net decrease in net assets resulting from dividends to Common Stock shareholders ....... (9,112,049) (20,558,419)
---------------------------------
===================================================================================================================================
Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------------------
Total decrease in net assets applicable to Common Stock ................................ (5,001,332) (13,642,355)
Beginning of period .................................................................... 229,849,691 243,492,046
---------------------------------
End of period* ......................................................................... $ 224,848,359 $ 229,849,691
=================================
* Undistributed investment income--net .............................................. $ 36,018 $ 1,474,705
=================================
See Notes to Financial Statements.
16 SEMI-ANNUAL REPORTS APRIL 30, 2006
Statements of Changes in Net Assets Preferred Income Strategies Fund, Inc.
For the Six For the
Months Ended Year Ended
April 30, October 31,
Increase (Decrease) in Net Assets: 2006 2005
===================================================================================================================================
Operations
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ................................................................. $ 38,534,123 $ 84,655,484
Realized loss--net ..................................................................... (17,770,665) (17,048,362)
Change in unrealized appreciation/depreciation--net .................................... 2,352,579 (19,461,483)
Dividends to Preferred Stock shareholders .............................................. (12,232,858) (16,331,142)
---------------------------------
Net increase in net assets resulting from operations ................................... 10,883,179 31,814,497
---------------------------------
===================================================================================================================================
Dividends to Common Stock Shareholders
-----------------------------------------------------------------------------------------------------------------------------------
Investment income--net ................................................................. (34,849,683) (81,186,307)
---------------------------------
Net decrease in net assets resulting from dividends to Common Stock shareholders ....... (34,849,683) (81,186,307)
---------------------------------
===================================================================================================================================
Common Stock Transactions
-----------------------------------------------------------------------------------------------------------------------------------
Value of shares issued to Common Stock shareholders in reinvestment to dividends ....... 301,458 --
---------------------------------
Net increase in net assets derived from Common Stock transactions ...................... 301,458 --
---------------------------------
===================================================================================================================================
Net Assets Applicable to Common Stock
-----------------------------------------------------------------------------------------------------------------------------------
Total decrease in net assets applicable to Common Stock ................................ (23,665,046) (49,371,810)
Beginning of period .................................................................... 903,600,762 952,972,572
---------------------------------
End of period* ......................................................................... $ 879,935,716 $ 903,600,762
=================================
* Undistributed (accumulated distributions in excess of) investment income--net ..... $ (4,823,811) $ 3,724,607
=================================
See Notes to Financial Statements.
SEMI-ANNUAL REPORTS APRIL 30, 2006 17
Financial Highlights Preferred and Corporate Income Strategies Fund, Inc.
For the Six For the Year Ended For the Period
Months Ended October 31, August 1, 2003+
The following per share data and ratios have been derived April 30, --------------------- to October 31,
from information provided in the financial statements. 2006 2005 2004 2003
====================================================================================================================================
Per Share Operating Performance
------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period .................................... $ 22.36 $ 23.69 $ 24.38 $ 23.88
---------------------------------------------------
Investment income--net .................................................. 1.03@@ 2.16 2.19 .39
Realized and unrealized gain (loss)--net ................................ (.34) (1.09) (.70) .67
Dividends to Preferred Stock shareholders from investment income--net ... (.29) (.40) (.18) (.03)
---------------------------------------------------
Total from investment operations ........................................ .40 .67 1.31 1.03
---------------------------------------------------
Less dividends to Common Stock shareholders from investment income--net . (.89) (2.00) (2.00) (.33)
---------------------------------------------------
Offering costs resulting from the issuance of Common Stock .............. -- -- -- (.04)
---------------------------------------------------
Offering and underwriting costs resulting from the issuance of
Preferred Stock ........................................................ -- -- -- (.16)
---------------------------------------------------
Net asset value, end of period .......................................... $ 21.87 $ 22.36 $ 23.69 $ 24.38
===================================================
Market price per share, end of period ................................... $ 19.91 $ 21.03 $ 22.84 $ 23.60
===================================================
====================================================================================================================================
Total Investment Return**
------------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ...................................... 2.11%@ 3.25% 5.86% 3.53%@
===================================================
Based on market price per share ......................................... (1.17%)@ .73% 5.44% (4.33%)@
===================================================
====================================================================================================================================
Ratios Based on Average Net Assets of Common Stock
------------------------------------------------------------------------------------------------------------------------------------
Total expenses, net of waiver*** ........................................ 1.28%* 1.26% 1.26% .49%*
===================================================
Total expenses*** ....................................................... 1.28%* 1.26% 1.27% 1.11%*
===================================================
Total investment income--net*** ......................................... 9.34%* 9.23% 9.04% 6.79%*
===================================================
Amount of dividends to Preferred Stock shareholders ..................... 2.59%* 1.71% .76% .50%*
===================================================
Investment income--net, to Common Stock shareholders .................... 6.75%* 7.52% 8.28% 6.29%*
===================================================
====================================================================================================================================
Ratios Based on Average Net Assets of Preferred Stock
------------------------------------------------------------------------------------------------------------------------------------
Dividends to Preferred Stock shareholders ............................... 4.34%* 3.01% 1.39% 1.11%*
===================================================
18 SEMI-ANNUAL REPORTS APRIL 30, 2006
Financial Highlights (concluded)
Preferred and Corporate Income Strategies Fund, Inc.
For the Six For the Year Ended For the Period
Months Ended October 31, August 1, 2003+
The following per share data and ratios have been derived April 30, --------------------- to October 31,
from information provided in the financial statements. 2006 2005 2004 2003
====================================================================================================================================
Supplemental Data
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock, end of period (in thousands) ..... $224,848 $229,850 $243,492 $250,631
===================================================
Preferred Stock outstanding, end of period (in thousands) ............... 136,500 $136,500 $136,500 $136,500
===================================================
Portfolio turnover ...................................................... 4.10% 25.44% 27.11% 11.51%
===================================================
====================================================================================================================================
Leverage
------------------------------------------------------------------------------------------------------------------------------------
Asset coverage per $1,000 ............................................... $ 2,647 $ 2,684 $ 2,784 $ 2,836
===================================================
====================================================================================================================================
Dividends Per Share on Preferred Stock Outstanding++
------------------------------------------------------------------------------------------------------------------------------------
Series M7--Investment income--net ....................................... $ 539 $ 747 $ 347 $ 55
===================================================
Series T7--Investment income--net ....................................... $ 537 $ 759 $ 346 $ 50
===================================================
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
dif ferent returns. Total investment returns exclude the effects of sales
charges.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on August 26, 2003.
@ Aggregate total investment return.
@@ Based on average shares outstanding.
See Notes to Financial Statements.
SEMI-ANNUAL REPORTS APRIL 30, 2006 19
Financial Highlights Preferred Income Strategies Fund, Inc.
For the Six For the Year Ended For the Period
Months Ended October 31, March 28, 2003+
The following per share data and ratios have been derived April 30, -------------------- to October 31,
from information provided in the financial statements. 2006 2005 2004 2003
====================================================================================================================================
Per Share Operating Performance
------------------------------------------------------------------------------------------------------------------------------------
Net asset value, beginning of period .................................... $ 22.26 $ 23.48 $ 24.53 $ 23.88
---------------------------------------------------
Investment income--net .................................................. .95@@ 2.09@@ 2.14@@ 1.14
Realized and unrealized gain (loss)--net ................................ (.39) (.91) (.78) .61
Dividends and distributions to Preferred Stock shareholders:
Investment income--net ............................................... (.29) (.40) (.18) (.07)
Realized gain--net ................................................... -- -- (.01) --
---------------------------------------------------
Total from investment operations ........................................ .27 .78 1.17 1.68
---------------------------------------------------
Less dividends and distributions to Common Stock shareholders:
Investment income--net ............................................... (.86) (2.00) (2.13) (.87)
Realized gain--net ................................................... -- -- (.09) --
---------------------------------------------------
Total dividends and distributions to Common Stock shareholders .......... (.86) (2.00) (2.22) (.87)
---------------------------------------------------
Offering costs resulting from the issuance of Common Stock .............. -- -- -- (.01)
---------------------------------------------------
Offering and underwriting costs resulting from the issuance of
Preferred Stock ........................................................ -- -- -- (.15)
---------------------------------------------------
Net asset value, end of period .......................................... $ 21.67 $ 22.26 $ 23.48 $ 24.53
===================================================
Market price per share, end of period ................................... $ 19.02 $ 21.20 $ 22.87 $ 23.69
===================================================
====================================================================================================================================
Total Investment Return**
------------------------------------------------------------------------------------------------------------------------------------
Based on net asset value per share ...................................... 1.57%@ 3.73% 5.22% 6.47%@
===================================================
Based on market price per share ......................................... (6.39%)@ 1.43% 6.12% (1.80%)@
===================================================
====================================================================================================================================
Ratios Based on Average Net Assets of Common Stock
------------------------------------------------------------------------------------------------------------------------------------
Total expenses, net of waiver*** ........................................ 1.23%* 1.20% 1.19% .79%*
===================================================
Total expenses*** ....................................................... 1.23%* 1.20% 1.19% 1.05%*
===================================================
Total investment income--net*** ......................................... 8.63%* 8.96% 8.93% 8.31%*
===================================================
Amount of dividends to Preferred Stock shareholders ..................... 2.74%* 1.73% .74% .49%*
===================================================
Investment income--net, to Common Stock shareholders .................... 5.89%* 7.23% 8.19% 7.82%*
===================================================
====================================================================================================================================
Ratios Based on Average Net Assets of Preferred Stock
------------------------------------------------------------------------------------------------------------------------------------
Dividends to Preferred Stock shareholders ............................... 4.49%* 2.97% 1.32% 1.05%*
===================================================
20 SEMI-ANNUAL REPORTS APRIL 30, 2006
Financial Highlights (concluded) Preferred Income Strategies Fund, Inc.
For the Six For the Year Ended For the Period
Months Ended October 31, March 28, 2003+
The following per share data and ratios have been derived April 30, -------------------- to October 31,
from information provided in the financial statements. 2006 2005 2004 2003
====================================================================================================================================
Supplemental Data
------------------------------------------------------------------------------------------------------------------------------------
Net assets applicable to Common Stock, end of period (in thousands) ..... $879,936 $903,601 $952,973 $995,722
===================================================
Preferred Stock outstanding, end of period (in thousands) ............... $550,000 $550,000 $550,000 $550,000
===================================================
Portfolio turnover ...................................................... 4.71% 27.96% 22.56% 27.31%
===================================================
====================================================================================================================================
Leverage
------------------------------------------------------------------------------------------------------------------------------------
Asset coverage per $1,000 ............................................... $ 2,600 $ 2,643 $ 2,733 $ 2,810
===================================================
====================================================================================================================================
Dividends Per Share on Preferred Stock Outstanding++
------------------------------------------------------------------------------------------------------------------------------------
Series M7--Investment income--net ....................................... $ 540 $ 744 $ 330 $ 127
===================================================
Series T7--Investment income--net ....................................... $ 535 $ 757 $ 329 $ 122
===================================================
Series W7--Investment income--net ....................................... $ 548 $ 734 $ 327 $ 122
===================================================
Series TH7--Investment income--net ...................................... $ 544 $ 737 $ 320 $ 184
===================================================
Series F7--Investment income--net ....................................... $ 541 $ 740 $ 326 $ 125
===================================================
Series W28--Investment income--net ...................................... $ 563 $ 751 $ 338 $ 105
===================================================
Series TH28--Investment income--net ..................................... $ 599 $ 733 $ 324 $ 95
===================================================
* Annualized.
** Total investment returns based on market value, which can be significantly
greater or lesser than the net asset value, may result in substantially
dif ferent returns. Total investment returns exclude the effects of sales
charges.
*** Do not reflect the effect of dividends to Preferred Stock shareholders.
+ Commencement of operations.
++ The Fund's Preferred Stock was issued on May 16, 2003.
@ Aggregate total investment return.
@@ Based on average shares outstanding.
See Notes to Financial Statements.
SEMI-ANNUAL REPORTS APRIL 30, 2006 21
Notes to Financial Statements
1. Significant Accounting Policies:
Preferred and Corporate Income Strategies Fund, Inc. and Preferred Income
Strategies Fund, Inc. (the "Funds" or individually as the "Fund") are registered
under the Investment Company Act of 1940, as amended, as diversified, closed-end
management investment companies. The Funds' financial statements are prepared in
conformity with U.S. generally accepted accounting principles, which may require
the use of management accruals and estimates. Actual results may differ from
these estimates. These unaudited financial statements reflect all adjustments,
which are, in the opinion of management, necessary to present a fair statement
of the results for the interim period. All such adjustments are of a normal,
recurring nature. The Funds' Common Stock shares are listed on the New York
Stock Exchange ("NYSE") under the symbol PSW for Preferred and Corporate Income
Strategies Fund, Inc. and PSY for Preferred Income Strategies Fund, Inc. The
following is a summary of significant accounting policies followed by the Funds.
(a) Valuation of investments -- Debt securities are traded primarily in the
over-the-counter ("OTC") markets and are valued at the last available bid price
in the OTC market or on the basis of values obtained by a pricing service.
Pricing services use valuation matrixes that incorporate both dealer-supplied
valuations and valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Funds under the general direction
of the Board of Directors. Such valuations and procedures will be reviewed
periodically by the Board of Directors of the Funds. Financial futures contracts
and options thereon, which are traded on exchanges, are valued at their closing
prices as of the close of such exchanges. Options written or purchased are
valued at the last sales price in the case of exchange-traded options. In the
case of options traded in the OTC market, valuation is the last asked price
(options written) or the last bid price (options purchased). Swap agreements are
valued based upon quoted fair valuations received daily by each Fund from a
pricing service or counterparty. Short-term investments with a remaining
maturity of 60 days or less are valued at amortized cost, which approximates
market value, under which method the investment is valued at cost and any
premium or discount is amortized on a straight line basis to maturity. Valuation
of other short-term investment vehicles is generally based on the net asset
value of the underlying investment vehicle or amortized cost. Repurchase
agreements are valued at cost plus accrued interest. Investments in open-end
investment companies are valued at their net asset value each business day.
Securities and other assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Funds.
Equity securities that are held by the Funds, which are traded on stock
exchanges or the Nasdaq National Market, are valued at the last sale price or
official close price on the exchange, as of the close of business on the day the
securities are being valued or, lacking any sales, at the last available bid
price for long positions, and at the last available asked price for short
positions. In cases where equity securities are traded on more than one
exchange, the securities are valued on the exchange designated as the primary
market by or under the authority of the Board of Directors of the Funds. Long
positions traded in the OTC market, Nasdaq Small Cap or Bulletin Board are
valued at the last available bid price obtained from one or more dealers or
pricing services approved by the Board of Directors of the Funds. Short
positions traded in the OTC market are valued at the last available asked price.
Portfolio securities that are traded both in the OTC market and on a stock
exchange are valued according to the broadest and most representative market.
Generally, trading in foreign securities is substantially completed each day at
various times prior to the close of business on the NYSE. The values of such
securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates also are generally
determined prior to the close of business on the NYSE. Occasionally, events
affecting the values of such securities and such exchange rates may occur
between the times at which they are determined and the close of business on the
NYSE that may not be reflected in the computation in each of the Fund's net
asset value. If events (for example, a company announcement, market volatility
or a natural disaster) occur during such periods that are expected to materially
affect the value of such securities, those securities may be valued at their
fair value as determined in good faith by the Fund's Board of Directors or by
the Investment Adviser using a pricing service and/or procedures approved by the
Fund's Board of Directors.
(b) Derivative financial instruments -- Each Fund may engage in various
portfolio investment strategies both to increase the return of each Fund and to
hedge, or protect, its exposure to interest rate movements and movements in the
securities markets. Losses may arise due to changes in the value of the contract
or if the counterparty does not perform under the contract.
22 SEMI-ANNUAL REPORTS APRIL 30, 2006
Notes to Financial Statements (continued)
o Options -- Each Fund may write and purchase call and put options. When the
Fund writes an option, an amount equal to the premium received by the Fund
is reflected as an asset and an equivalent liability. The amount of the
liability is subsequently marked-to-market to reflect the current market
value of the option written. When a security is purchased or sold through
an exercise of an option, the related premium paid (or received) is added
to (or deducted from) the basis of the security acquired or deducted from
(or added to) the proceeds of the security sold. When an option expires
(or the Fund enters into a closing transaction), the Fund realizes a gain
or loss on the option to the extent of the premiums received or paid (or
gain or loss to the extent the cost of the closing transaction exceeds the
premium paid or received).
Written and purchased options are non-income producing investments.
o Financial futures contracts -- Each Fund may purchase or sell financial
futures contracts and options on such futures contracts. Futures contracts
are contracts for delayed delivery of securities at a specific future date
and at a specific price or yield. Upon entering into a contract, the Fund
deposits and maintains as collateral such initial margin as required by
the exchange on which the transaction is effected. Pursuant to the
contract, the Fund agrees to receive from or pay to the broker an amount
of cash equal to the daily fluctuation in value of the contract. Such
receipts or payments are known as variation margin and are recorded by the
Fund as unrealized gains or losses. When the contract is closed, the Fund
records a realized gain or loss equal to the difference between the value
of the contract at the time it was opened and the value at the time it was
closed.
o Swaps -- Each Fund may enter into swap agreements, which are
over-the-counter contracts in which the Fund and a counterparty agree to
make periodic net payments on a specified notional amount. The net
payments can be made for a set period of time or may be triggered by a
predetermined credit event. The net periodic payments may be based on a
fixed or variable interest rate; the change in market value of a specified
security, basket of securities, or index; or the return generated by a
security. These periodic payments received or made by the Fund are
recorded in the accompanying Statement of Operations as realized gains or
losses, respectively. Gains or losses are also realized upon termination
of the swap agreements. Swaps are marked-to-market daily and changes in
value are recorded as unrealized appreciation (depreciation). Risks
include changes in the returns of the underlying instruments, failure of
the counterparties to perform under the contracts' terms and the possible
lack of liquidity with respect to the swap agreements.
(c) Income taxes -- It is each Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required.
(d) Security transactions and investment income -- Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Funds amortize all
premiums and discounts on debt securities.
(e) Dividends and distributions -- Dividends from net investment income are
declared and paid monthly. Distributions of capital gains are recorded on the
ex-dividend dates.
(f) Securities lending -- Each Fund may lend securities to financial
institutions that provide cash or securities issued or guaranteed by the U.S.
government as collateral, which will be maintained at all times in an amount
equal to at least 100% of the current market value of the loaned securities. The
market value of the loaned securities is determined at the close of business of
the Fund and any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral for the
loaned securities, it collects a fee from the borrower. The Fund typically
receives the income on the loaned securities but does not receive the income on
the collateral. Where the Fund receives cash collateral, it may invest such
collateral and retain the amount earned on such investment, net of any amount
rebated to the borrower. Loans of securities are terminable at any time and the
borrower, after notice, is required to return borrowed securities within five
business days. The Fund may pay reasonable finder's, lending agent,
administrative and custodial fees in connection with its loans. In the event
that the borrower defaults on its obligation to return borrowed securities
because of insolvency or for any other reason, the Fund could experience delays
and costs in gaining access to the collateral. The Fund also could suffer a loss
where the value of the collateral falls below the market value of the borrowed
securities, in the event of borrower default or in the event of losses on
investments made with cash collateral.
SEMI-ANNUAL REPORTS APRIL 30, 2006 23
Notes to Financial Statements (continued)
2. Investment Advisory Agreement and Transactions with Affiliates:
Each Fund has entered into an Investment Advisory Agreement with Fund Asset
Management, L.P. ("FAM"). The general partner of FAM is Princeton Services, Inc.
("PSI"), an indirect, wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML
& Co."), which is the limited partner.
FAM is responsible for the management of each Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services necessary
to the operations of the Fund. For such services, each Fund pays a monthly fee
at an annual rate of .60% of the Fund's average daily (for Preferred and
Corporate Income Strategies Fund, Inc.) and weekly (for Preferred Income
Strategies Fund, Inc.) net assets (including proceeds from the issuance of
Preferred Stock) plus the proceeds of any outstanding borrowings used for
leverage.
The Funds have received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("MLPF&S"), an affiliate of FAM, or its affiliates.
Pursuant to that order, the Fund also has retained Merrill Lynch Investment
Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities lending
agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private investment
company managed by MLIM, LLC or in registered money market funds advised by
Merrill Lynch Investment Managers, L.P. ("MLIM"), an affiliate of FAM.
For the six months ended April 30, 2006, each Fund reimbursed FAM for certain
accounting services. The reimbursements were as follows:
--------------------------------------------------------------------------------
Reimbursement
--------------------------------------------------------------------------------
Preferred and Corporate Income Strategies Fund, Inc. ............ $ 3,801
Preferred Income Strategies Fund, Inc. .......................... $15,761
--------------------------------------------------------------------------------
Certain officers and/or directors of the Funds are officers and/or directors of
FAM, PSI, ML & Co., MLIM, and/or MLIM, LLC.
In February 2006, ML & Co. and BlackRock, Inc. entered into an agreement to
contribute ML & Co.'s investment management business, including FAM, to the
investment management business of BlackRock, Inc. The transaction is expected to
close in the third quarter of 2006.
3. Investments:
Purchases and sales of investments, excluding short-term securities, for the six
months ended April 30, 2006 were as follows:
--------------------------------------------------------------------------------
Preferred and Preferred
Corporate Income Income
Strategies Strategies
Fund, Inc. Fund, Inc.
--------------------------------------------------------------------------------
Total Purchases .................... $14,653,235 $67,314,115
Total Sales ........................ $20,588,477 $94,905,969
--------------------------------------------------------------------------------
4. Stock Transactions:
Each Fund is authorized to issue 200,000,000 shares of stock, including
Preferred Stock, par value $.10 per share, all of which were initially
classified as Common Stock. The Board of Directors is authorized, however, to
reclassify any unissued shares of stock without approval of holders of Common
Stock.
Preferred & Corporate Income Strategies Fund, Inc.
Shares issued and outstanding for the six months ended April 30, 2006 and the
year ended October 31, 2005 remained constant.
Preferred Income Strategies Fund, Inc.
Shares issued and outstanding for the six months ended April 30, 2006 increased
by 13,470 as a result of dividend reinvestment. Shares issued and outstanding
for the year ended October 31, 2005 remained constant.
Preferred Stock
Auction Market Preferred Stock are redeemable shares of Preferred Stock of the
Funds, with a par value of $.10 per share and liquidation preference of $25,000
per share, plus accrued and unpaid dividends, that entitle their holders to
receive cash dividends at an annual rate that may vary for the successive
dividend periods. The yields in effect at April 30, 2006 were as follows:
--------------------------------------------------------------------------------
Preferred and Preferred
Corporate Income Income
Strategies Strategies
Fund, Inc. Fund, Inc.
--------------------------------------------------------------------------------
Series M7 .............................. 4.60% 4.65%
Series T7 .............................. 4.72% 4.70%
Series W7 .............................. -- 4.65%
Series TH7 ............................. -- 4.75%
Series F7 .............................. -- 4.65%
Series W28 ............................. -- 4.79%
Series TH28 ............................ -- 4.85%
--------------------------------------------------------------------------------
24 SEMI-ANNUAL REPORTS APRIL 30, 2006
Notes to Financial Statements (concluded)
Each Fund pays commissions to certain broker-dealers at the end of each auction
at an annual rate ranging from .25% to .375%, calculated on the proceeds of each
auction. For the six months ended April 30, 2006, MLPF&S earned commissions as
follows:
--------------------------------------------------------------------------------
Commissions
--------------------------------------------------------------------------------
Preferred and Corporate Income Strategies Fund, Inc. ........... $136,378
Preferred Income Strategies Fund, Inc. ......................... $256,231
--------------------------------------------------------------------------------
5. Capital Loss Carryforward:
Preferred & Corporate Income Strategies Fund, Inc.
At October 31, 2005, the Fund had a net capital loss carryforward of
$16,578,662, of which $1,276,621 expires in 2011, $10,243,141 expires in 2012,
and $5,058,900 expires in 2013. These amounts will be available to offset like
amounts of any future taxable gains.
Preferred Income Strategies Fund, Inc.
At October 31, 2005, the Fund had a net capital loss carryforward of
$80,644,979, of which $62,733,648 expires in 2012 and $17,911,331 expires in
2013. These amounts will be available to offset like amounts of any future
taxable gains.
6. Subsequent Event:
Each Fund paid an ordinary income dividend to holders of Common Stock on May 31,
2006 to shareholders of record on May 15, 2006. The amount of the ordinary
income dividend per share was as follows:
--------------------------------------------------------------------------------
Per Share
Amount
--------------------------------------------------------------------------------
Preferred and Corporate Income Strategies Fund, Inc. ........... $.133333
Preferred Income Strategies Fund, Inc. ......................... $.127083
--------------------------------------------------------------------------------
SEMI-ANNUAL REPORTS APRIL 30, 2006 25
Officers and Directors
Robert C. Doll, Jr., President and Director
David O. Beim, Director
James T. Flynn, Director
W. Carl Kester, Director
Karen P. Robards, Director
Donald C. Burke, Vice President and Treasurer
John Burger, Vice President
Thomas Musmanno, Vice President
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
State Street Bank and Trust Company
P.O. Box 351
Boston, MA 02101
Transfer Agent
Common Stock:
Computershare Trust Company, N.A.
P.O. Box 43010
Providence, RI 02940-3010
1-800-426-5523
Preferred Stock:
The Bank of New York
101 Barclay Street -- 7 West
New York, NY 10286
Investment Objectives
NYSE Symbol Preferred and Corporate Income Strategies Fund, Inc. seeks to
PSW provide shareholders with high current income. The secondary
objective of the Fund is to seek to provide shareholders with
capital appreciation. The Fund seeks to achieve its objectives
by investing primarily in a portfolio of preferred securities
and debt securities, including convertible securities that may
be converted into common stock or other securities of the same
or a different issuer.
NYSE Symbol Preferred Income Strategies Fund, Inc. seeks to provide
PSY shareholders with high current income. The secondary objective
of the Fund is to seek to provide shareholders with capital
appreciation. The Fund seeks to achieve its objectives by
investing primarily in a portfolio of preferred securities,
including convertible preferred securities that may be
converted into common stock or other securities of the same or
a different issuer.
26 SEMI-ANNUAL REPORTS APRIL 30, 2006
Availability of Quarterly Schedules of Investments
The Funds file their complete schedules of portfolio holdings with the
Securities and Exchange Commission ("SEC") for the first and third quarters of
each fiscal year on Form N-Q. The Funds' Forms N-Q are available on the SEC's
Web site at http://www.sec.gov. The Funds' Forms N-Q may also be reviewed and
copied at the SEC's Public Reference Room in Washington, DC. Information on the
operation of the Public Reference Room may be obtained by calling
1-800-SEC-0330.
Electronic Delivery
The Funds offer electronic delivery of communications to their shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
SEMI-ANNUAL REPORTS APRIL 30, 2006 27
[LOGO] Merrill Lynch Investment Managers
www.mlim.ml.com
--------------------------------------------------------------------------------
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
These reports, including the financial information herein, are transmitted to
shareholders of Preferred and Corporate Income Strategies Fund, Inc. and
Preferred Income Strategies Fund, Inc. for their information. This is not a
prospectus. The Funds leverage their Common Stock to provide Common Stock
shareholders with potentially higher rates of return. Leverage creates risk for
Common Stock shareholders, including the likelihood of greater volatility of net
asset value and market price of Common Stock shares, and the risk that
fluctuations in short-term interest rates may reduce the Common Stock's yield.
Past performance results shown in these reports should not be considered a
representation of future performance. Statements and other information herein
are as dated and are subject to change.
A description of the policies and procedures that the Funds use to determine how
to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-637-3863; (2) at
www.mutualfunds.ml.com; and (3) on the Securities and Exchange Commission's Web
site at http://www.sec.gov. Information about how the Funds voted proxies
relating to securities held in the Funds' portfolios during the most recent
12-month period ended June 30 is available (1) at www.mutualfunds.ml.com and (2)
on the Securities and Exchange Commission's Web site at http://www.sec.gov.
Preferred and Corporate Income Strategies Fund, Inc.
Preferred Income Strategies Fund, Inc.
Box 9011
Princeton, NJ 08543-9011
#PCPIS -- 4/06
Item 2 - Code of Ethics - Not Applicable to this semi-annual report
Item 3 - Audit Committee Financial Expert - Not Applicable to this semi-annual
report
Item 4 - Principal Accountant Fees and Services - Not Applicable to this
semi-annual report
Item 5 - Audit Committee of Listed Registrants - Not Applicable to this
semi-annual report
Item 6 - Schedule of Investments - Not Applicable
Item 7 - Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies - Not Applicable to this semi-annual
report
Item 8 - Portfolio Managers of Closed-End Management Investment Companies - Not
Applicable to this semi-annual report
Item 9 - Purchases of Equity Securities by Closed-End Management Investment
Company and Affiliated Purchasers - Not Applicable
Item 10 - Submission of Matters to a Vote of Security Holders - Not Applicable
Item 11 - Controls and Procedures
11(a) - The registrant's certifying officers have reasonably designed such
disclosure controls and procedures to ensure material information
relating to the registrant is made known to us by others particularly
during the period in which this report is being prepared. The
registrant's certifying officers have determined that the registrant's
disclosure controls and procedures are effective based on our evaluation
of these controls and procedures as of a date within 90 days prior to
the filing date of this report.
11(b) - There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the Act (17 CFR
270.30a-3(d)) that occurred during the last fiscal half-year of the
period covered by this report that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting.
Item 12 - Exhibits attached hereto
12(a)(1) - Code of Ethics - Not Applicable to this semi-annual report
12(a)(2) - Certifications - Attached hereto
12(a)(3) - Not Applicable
12(b) - Certifications - Attached hereto
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Preferred Income Strategies Fund, Inc.
By: /s/ Robert C. Doll, Jr.
-------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Preferred Income Strategies Fund, Inc.
Date: June 22, 2006
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert C. Doll, Jr.
-------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Preferred Income Strategies Fund, Inc.
Date: June 22, 2006
By: /s/ Donald C. Burke
-------------------------------
Donald C. Burke,
Chief Financial Officer of
Preferred Income Strategies Fund, Inc.
Date: June 22, 2006