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 811-21506
Name of Fund: Capital and 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, Capital and 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: 12/31/05
Date of reporting period: 01/01/05 - 06/30/05
Item 1 - Report to Stockholders
Capital and Income
Strategies Fund, Inc.
Semi-Annual Report
June 30, 2005
(BULL LOGO) Merrill Lynch Investment Managers
www.mlim.ml.com
Mercury Advisors
A Division of Merrill Lynch Investment Managers
www.mercury.ml.com
Capital and Income Strategies Fund, Inc. seeks to provide shareholders with
current income and capital appreciation. The Fund seeks to achieve its
investment objectives by investing in a portfolio of equity and debt
securities of U.S. and foreign issuers.
This report, including the financial information herein, is transmitted to
shareholders of Capital and Income Strategies Fund, Inc. for their information.
It is not a prospectus. The Fund leverages its Common Stock to provide Common
Stock shareholders with a potentially higher rate of return. Leverage creates
risk for Common Stock shareholders, including the likelihood of greater
volatility of net asset value and market price of Common Stock shares, and the
risk that fluctuations in short-term interest rates may reduce the Common
Stock's yield. Past performance results shown in this report should not be
considered a representation of future performance. Statements and other
information herein are as dated and are subject to change.
A description of the policies and procedures that the Fund uses to determine
how to vote proxies relating to portfolio securities is available (1) without
charge, upon request, by calling toll-free 1-800-MER-FUND (1-800-637-3863);
(2) at www.mutualfunds.ml.com; and (3) on the Securities and Exchange
Commission's Web site at http://www.sec.gov. Information about how the
Fund voted proxies relating to securities held in the Fund's portfolio
during the most recent 12-month period ended June 30 is available (1) at
www.mutualfunds.ml.com and (2) on the Securities and Exchange Commission's
Web site at http://www.sec.gov.
Capital and Income Strategies Fund, Inc.
Box 9011
Princeton, NJ
08543-9011
(GO PAPERLESS LOGO)
It's Fast, Convenient, & Timely!
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Capital and Income Strategies Fund, Inc.
The Benefits and Risks of Leveraging
Capital and Income Strategies Fund, Inc. utilizes leveraging through
borrowings or issuance of short-term debt securities or shares of Preferred
Stock. The concept of leveraging is based on the premise that the cost of
assets to be obtained from leverage will be based on short-term interest or
dividend rates, which normally will be lower than the income earned by the
Fund on its longer-term portfolio investments. To the extent that the total
assets of the Fund (including the assets obtained from leverage) are invested
in higher-yielding portfolio investments, the Fund's Common Stock shareholders
are the beneficiaries of the incremental yield.
Leverage creates risks for holders of Common Stock including the likelihood of
greater net asset value and market price volatility. In addition, there is the
risk that fluctuations in interest rates on borrowings (or in the dividend
rates on any Preferred Stock, if the Fund were to issue the Preferred Stock)
may reduce the Common Stock's yield and negatively impact its net asset value
and market price. If the income derived from securities purchased with assets
received from leverage exceeds the cost of leverage, the Fund's net income
will be greater than if leverage had not been used. Conversely, if the income
from the securities purchased is not sufficient to cover the cost of leverage,
the Fund's net income will be less than if leverage had not been used, and
therefore the amount available for distribution to Common Stock shareholders
will be reduced.
Portfolio Information as of June 30, 2005
Percent of
Total
Asset Mix Investments
Common Stocks 56.3%
Fixed Income Securities 18.5
Preferred Stocks 18.5
Capital Trusts 3.8
Trust Preferred 1.2
Other* 1.7
* Includes portfolio holdings in short-term investments and options.
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
A Letter From the President
Dear Shareholder
The financial markets continued to face a number of crosscurrents over the
past several months. On June 30, 2005, the Federal Reserve Board (the Fed)
increased the federal funds rate for the ninth consecutive time since June
2004, bringing the target short-term interest rate to 3.25%. During the same
week, first quarter 2005 U.S. gross domestic product growth was revised upward
to 3.8% - behind the 4.4% annualized growth rate recorded for all of 2004 but
ahead of many economists' expectations. Signs of a slowing economy, coupled
with easing inflationary fears, have prompted some observers to believe that
the Fed may soon end its monetary tightening campaign.
After ending 2004 in a strong rally, U.S. equity markets have struggled to
record meaningful gains in 2005. Continued high oil prices and Fed interest
rate hikes have exerted downward pressure on stocks. Offsetting this somewhat
have been surprisingly strong corporate earnings and lower long-term bond
yields. Outside U.S. borders, results have been mixed. Several European
markets have been performing well despite ongoing economic problems. In Asia,
many markets have benefited from higher economic growth rates and relatively
attractive valuations, although Japanese stocks have struggled as a result of
slowing exports and high oil prices.
In the bond markets, the yield curve flattening "conundrum" continued. As
short-term yields increased in concert with Fed interest rate hikes, yields on
longer-term bonds declined (as their prices, which move opposite yields,
increased). Over the past year, the two-year Treasury yield rose 96 basis
points (.96%) while the 10-year Treasury yield declined 68 basis points. At
period-end, the spread between two-year and 10-year Treasury yields was just
28 basis points.
Amid these conditions, the major market benchmarks posted six-month and
12-month returns as follows:
Total Returns as of June 30, 2005 6-month 12-month
U.S. equities (Standard & Poor's 500 Index) -0.81% + 6.32%
Small-cap U.S. equities (Russell 2000 Index) -1.25% + 9.45%
International equities (MSCI Europe Australasia Far East Index) -1.17% +13.65%
Fixed income (Lehman Brothers Aggregate Bond Index) +2.51% + 6.80%
Tax-exempt fixed income (Lehman Brothers Municipal Bond Index) +2.89% + 8.24%
High yield bonds (Credit Suisse First Boston High Yield Index) +0.77% +10.10%
Entering the second half of 2005, we expect more of the same type of "muddle
through" environment that has befallen financial markets in the first half of
the year. Nevertheless, opportunities do exist and we encourage you to work
with your financial advisor to diversify your portfolio among a variety of
asset types. This can help to diffuse risk while also tapping into the
potential benefits of a broader range of investment alternatives. We thank you
for trusting Merrill Lynch Investment Managers with your investment assets,
and we look forward to serving you in the months and years ahead.
Sincerely,
(Robert C. Doll, Jr.)
Robert C. Doll, Jr.
President and Director
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
A Discussion With Your Fund's Portfolio Managers
The Fund was able to provide shareholders with an attractive level of income
while striving to protect investor principal in a volatile investing
environment.
How did the Fund perform during the period in light of the existing market and
economic conditions?
Consistent with its stated investment objective, the Fund has been able to
provide investors with current income while also seeking capital appreciation.
The Fund's shareholders realize a predictable level of cash flow, which is
paid as $.30 per share, per quarter.
Over the past six months, the U.S. financial markets generally paused amid
fears of a slowing economy and a series of Federal Reserve Board (the Fed)
interest rate increases. The Fed, in an ongoing effort to maintain a healthy
pace of economic activity while also controlling inflationary pressures,
continued its "measured" program of monetary tightening with four 25 basis
point interest rate hikes during the six-month period. This brought the
federal funds rate to 3.25% as of June 30, 2005, up from a historic low of 1%
a year earlier. A weak dollar in 2004, rising energy prices, and widening
budget and trade deficits all played a role in the perceived economic
slowdown. Gross domestic product, a measure of economic expansion, grew at an
annualized rate of 4.4% for all of 2004 and 3.8% in the first quarter of 2005.
Despite the aforementioned headwinds, the economy has shown incredible
resilience against a backdrop of $60 per barrel oil prices and rising short-
term interest rates. We believe healthy corporate balance sheets flush with
cash, low absolute levels of interest rates and subdued inflation are positive
indicators for the equity markets. The major theme in the fixed income markets
has been the continued flattening of the Treasury yield curve. As short-term
interest rates increased along with the Fed interest rate hikes, long-term
bond yields actually declined. The result has been a pronounced flattening of
the curve, with long-term bonds outperforming shorter-term issues.
For the six-month period ended June 30, 2005, the Common Stock of Capital and
Income Strategies Fund, Inc. had net annualized yields of 6.03% and 6.89%,
based on a period-end per share net asset value of $20.06 and a per share
market price of $17.57, respectively, and $.600 per share income dividends.
Over the same period, the total investment return on the Fund's Common Stock
was -.07%, based on a change in per share net asset value from $20.76 to
$20.06, and assuming reinvestment of all distributions.
For the same period, the Fund's composite benchmark returned +1.04%,* while
its comparable Lipper category of Income and Preferred Stock Funds had an
average return of +3.06%. (Funds in this Lipper category normally seek a high
level of current income through investing in income-producing stocks, bonds
and money market instruments, or funds in the category may invest primarily in
preferred securities, often considering tax-code implications.)
* The Fund's composite benchmark is a blend of the Merrill Lynch Preferred
Stock, DRD Eligible Index; the JP Morgan Emerging Markets Bond Global
Index; three-month LIBOR; and the S&P 500 Barra Value Index.
The Fund's Common Stock and emerging market components slightly underperformed
their respective benchmarks during the period, although the emerging market
component contributed positive absolute returns and income. The portfolio's
preferred allocation outperformed its benchmark for the six-month period.
For a description of the Fund's total investment return based on a change in
the per share market value of the Fund's Common Stock (as measured by the
trading price of the Fund's shares on the New York Stock Exchange), and
assuming reinvestment of dividends, please refer to the Financial Highlights
section of this report. As a closed-end fund, the Fund's shares may trade in
the secondary market at a premium or discount to the Fund's net asset value.
As a result, total investment returns based on changes in the market value of
the Fund's Common Stock can vary significantly from total investment returns
based on changes in the Fund's net asset value.
What changes were made to the portfolio during the period?
The Fund was created with the following strategic allocation: 55% common stock,
30% preferred stock (eligible for the dividends-received deduction - DRD), 10%
short-term investment grade bonds, and 5% emerging market bonds. The Fund has
the flexibility to vary the asset allocation from time to time based on market
and economic conditions or relative valuation and yield considerations.
Reflecting our fundamental view that the economy will continue to grow at least
at its current trend rate and that long-term interest rates will ultimately
rise somewhat, we reduced the Fund's allocation to preferred securities from
30% of net assets to 25%, in favor of value-oriented equities. The Fund remains
neutral to its intermediate-term/long-term emerging market bond allocation and
has increased its allocation to short-term emerging market debt.
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
In the domestic equity markets, we believe corporate earnings growth rates
have peaked for the year. Within the equity portion of the portfolio, the Fund
is overweight relative to the composite benchmark in the consumer staples,
information technology, energy, industrials and utilities sectors and is
underweight in financials, consumer discretionary, telecommunications and
health care.
Within the preferred portion of the portfolio, we shifted from an underweight
position in utilities and banks to a neutral allocation relative to the
benchmark. The preferred portfolio also is underweight the agency and
brokerage sectors and overweight energy and industrials. Throughout the
period, we expected Treasury rates to rise. As a result, the preferred portion
of the portfolio maintained a short duration relative to its benchmark.
(Duration is a measure of interest rate sensitivity. The shorter an
investment's duration, the less sensitive it is to changes in interest rates.)
We believe the relatively short duration will help to limit the portfolio's
volatility and protect its net asset value from the negative price impact
associated with higher interest rates. At period-end, the effective duration
of the portfolio was 5.57 years, with an average credit quality of Baa1.
At June 30, 2005, the Fund was approximately 30% leveraged. For a complete
discussion of the benefits and risks of leveraging, see page 2 of this report
to shareholders.
How would you characterize the Fund's position at the close of the period?
While U.S. economic and corporate earnings growth may have reached their peaks
in the current cycle, this may not signal the end of the stock market uptrend.
Hence, the Fund had a 57% allocation to common stock at period-end, with a
bias toward dividend-paying stocks.
Generally speaking, we anticipate modestly higher Treasury yields for the
remainder of 2005 and foresee a continued favorable domestic and international
credit environment. At period-end, the Fund maintained a 25% allocation to
preferred securities. Within the preferred portion of the portfolio, we ended
the period with a short duration position relative to the benchmark given our
expectation for rising rates. In addition, the preferred allocation is more
diversified in sectors relative to the benchmark.
In emerging market bonds, we expect favorable credit trends, tighter spreads
and declining cross-country correlations to remain in place. However, emerging
market bonds continue to be vulnerable to episodes of global risk aversion, as
we witnessed in mid-March when the markets struggled with fears of inflation
and accelerated Fed monetary tightening. The current strengthening of the
individual sovereign credit implies that market downturns will be shallower,
providing buying opportunities for investors with medium-term views. Emerging
market bond issuance has continued at a healthy pace, and it is reported that
foreign governments are close to completing their financing programs for 2005,
putting the market in an excellent technical position for the second half of
the year. Based on this scenario, the Fund remains neutral in its intermediate-
term - long-term emerging market bond allocation and has increased its
allocation to short-term emerging market debt.
We will continue to monitor market and economic conditions in an effort to
make the most effective use of any strategic allocations.
Brian Fullerton
Vice President and Co-Portfolio Manager
Kevin Rendino
Vice President and Co-Portfolio Manager, Equity Investments
Robert J. Martorelli
Vice President and Co-Portfolio Manager, Equity Investments
John Burger
Vice President and Co-Portfolio Manager,
Fixed Income Investments
Romualdo Roldan
Vice President and Co-Portfolio Manager,
Fixed Income Investments
Patrick Maldari
Vice President and Co-Portfolio Manager,
Fixed Income Investments
July 25, 2005
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Schedule of Investments (in U.S. dollars)
Preferred Securities
Face
Industry++ Amount Capital Trusts Value
Commercial Banks--2.1% $ 1,000,000 Dresdner Funding Trust I, 8.151% due 6/30/2031 (a) $ 1,275,174
2,000,000 Lloyds TSB Bank Plc, 6.90% (d) 2,089,800
2,000,000 Westpac Capital Trust III, 5.819% (a)(c)(d) 2,121,740
-------------
5,486,714
Diversified Financial 3,000,000 Mizuho JGB Investment LLC, 9.87% (a)(c)(d) 3,398,637
Services--3.2% 3,000,000 SB Treasury Co. LLC, 9.40% (a)(c)(d) 3,362,664
1,500,000 Svensk Exportkredit AB, 6.375% (a)(d) 1,557,195
-------------
8,318,496
Total Capital Trusts (Cost--$13,383,186)--5.3% 13,805,210
Shares
Held Preferred Stocks
Capital Markets--1.6% 80,000 Goldman Sachs Group, Inc. Series A, 3.91% 1,993,600
40,000 Lehman Brothers Holdings, Inc., 6.50% 1,038,000
40,000 Lehman Brothers Holdings, Inc. Series G, 3% 967,500
-------------
3,999,100
Commercial Banks--3.1% 60,000 Banco Santander Central Hispano SA, 6.41% 1,519,620
9,662 First Republic Bank, 6.25% 250,910
1,674 First Tennessee Bank NA, 3.90% (a) 1,645,751
80,000 HSBC USA, Inc., 3.50% 1,995,000
20,000 Royal Bank of Scotland Group Plc Series L, 5.75% 486,400
2,000 SG Preferred Capital II, 6.302% 2,168,000
-------------
8,065,681
Consumer Finance--1.6% 162,001 MBNA Corp. Series B, 5.50% 4,074,325
Electric Utilities--3.4% 11,109 Connecticut Light & Power, 5.28% 584,959
11,394 Delmarva Power & Light, 4.20% 1,036,498
11,250 Delmarva Power & Light, 4.28% 1,042,734
40,000 Duquesne Light Co., 6.50% 2,084,000
40,000 Interstate Power & Light Co. Series B, 8.375% 1,336,000
10,000 Peco Energy Co. Series D, 4.68% 850,500
20,000 Southern California Edison Co., 5.349% 2,003,126
-------------
8,937,817
Food Products--2.8% 4,000 General Mills, Inc., 4.50% 3,884,000
30 HJ Heinz Finance Co., 6.226% (a) 3,183,750
-------------
7,067,750
Gas Utilities--0.4% 35,000 Southern Union Co., 7.55% 931,000
Insurance--6.0% 80,000 ACE Ltd. Series C, 7.80% 2,144,000
120,000 Aegon NV, 6.375% 3,037,500
30,000 Genworth Financial, Inc. Series A, 5.25% 1,579,689
72,000 Metlife, Inc. Series B, 6.50% 1,809,000
80,000 Prudential Plc, 6.75% 2,100,000
60,000 RenaissanceRe Holdings Ltd. Series C, 6.08% 1,443,000
3,200 Zurich RegCaPS Funding Trust, 6.58% (a) 3,401,000
-------------
15,514,189
Multi-Utilities--1.3% 80,000 Pacific Gas & Electric Co. Series A, 6% 2,148,000
12,400 Public Service Electric & Gas Series E, 5.28% 1,174,900
-------------
3,322,900
Oil, Gas & Consumable 19,500 Apache Corp. Series B, 5.68% (f) 2,021,298
Fuels--0.8%
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Schedule of Investments (continued) (in U.S. dollars)
Preferred Securities (concluded)
Shares
Industry++ Held Preferred Stocks Value
Real Estate--0.5% 52,000 Alexandria Real Estate Equities, Inc. Series C, 8.375% $ 1,372,280
Thrifts & Mortgage 45,000 Fannie Mae, 7% 2,496,096
Finance--4.9% 25,000 Fannie Mae Series I, 5.375% 1,156,000
59,350 Fannie Mae Series L, 5.125% 2,611,400
150,000 Freddie Mac, 3.93% 6,337,500
-------------
12,600,996
Total Preferred Stocks (Cost--$65,977,073)--26.4% 67,907,336
Face
Amount Trust Preferreds
Commercial $ 2,000,000 ABN AMRO North America Capital Funding Trust I, 6.968%
Banks--0.9% due 9/15/2010 (a)(c) 2,182,066
Gas Utilities--0.8% 2,000,000 Southwest Gas Capital II, 7.70% due 9/15/2043 2,107,581
Total Trust Preferreds (Cost--$4,156,472)--1.7% 4,289,647
Total Preferred Securities (Cost--$83,516,731)--33.4% 86,002,193
Fixed Income Securities
Automotive--0.5% 1,200,000 Hyundai Motor Manufacturing Alabama LLC, 5.30% due 12/19/2008 1,213,440
Beverages--0.1% 250,000 Coca-Cola Femsa SA de CV, 8.95% due 11/01/2006 264,687
Commercial Banks--3.9% Banco Nacional de Desenvolvimento Economico e Social:
1,000,000 11.25% due 9/20/2005 1,012,500
750,000 5.83% due 6/16/2008 (c) 759,375
450,000 Bancomext Trust Division, 11.25% due 5/30/2006 480,600
700,000 Bangko Sentral ng Pilipinas, 9% due 11/14/2005 754,250
1,350,000 Bangkok Bank Public Co. Ltd. (Hong Kong), 8.75% due 3/15/2007 1,436,070
700,000 The Export-Import Bank of Korea, 4.25% due 11/27/2007 698,075
550,000 ICICI Bank Ltd., 4.75% due 10/22/2008 545,071
572,000 Industrial Bank of Korea, 3.50% due 9/26/2005 571,821
Korea Development Bank:
575,000 5.25% due 11/16/2006 583,370
465,000 7.25% due 5/15/2006 477,904
1,080,000 MDM Bank,10.75% due 12/16/2005 1,107,000
1,070,000 Sberbank, 4.92% due 10/24/2006 (c) 1,081,663
465,000 Siam Commercial Bank Public Co. of Singapore, 7.50% due 3/15/2006 474,294
-------------
9,981,993
Diversified Financial 900,000 AC International Finance Ltd., 8.125% due 2/21/2008 945,864
Services--1.8% 750,000 Aries Vermoegensverwaltungs GmbH, 9.60% due 10/25/2014 (a) 972,188
560,000 Morgan Stanley (Gazprom), 9.625% due 3/01/2013 685,440
1,920,000 Salomon Brothers AG (Gazprom OAO), 9.125% due 4/25/2007 2,061,888
-------------
4,665,380
Diversified Telecommunication 175,000 Excelcomindo Finance Company BV, 8% due 1/27/2009 182,000
Services--1.1% 1,410,000 Philippine Long Distance Telephone, 9.25% due 6/30/2006 1,466,400
500,000 Telefonica de Argentina SA, 9.875% due 7/01/2006 523,750
300,000 Telefonos de Mexico SA de CV, 8.25% due 1/26/2006 307,274
430,000 Telekom Malaysia Berhad, 7.125% due 8/01/2005 432,833
-------------
2,912,257
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Schedule of Investments (continued) (in U.S. dollars)
Face
Industry++ Amount Fixed Income Securities Value
Foreign Government $ 580,000 Argentina Government International Bond, 3.01% due 8/03/2012 $ 524,610
Obligations--16.9% Brazilian Government International Bond:
140,000 10.25% due 1/11/2006 144,340
1,670,000 10% due 1/16/2007 1,786,900
3,015,000 11.50% due 3/12/2008 3,462,728
725,000 14.50% due 10/15/2009 942,500
290,000 10% due 8/07/2011 331,615
597,067 3.125% due 4/15/2012 574,318
585,000 10.125% due 5/15/2027 677,723
200,000 8.25% due 1/20/2034 195,600
475,000 11% due 8/17/2040 571,425
260,000 Bulgaria Government International Bond, 8.25% due 1/15/2015 327,366
Chile Government International Bond:
1,000,000 5.625% due 7/23/2007 1,028,400
230,000 6.875% due 4/28/2009 250,700
Colombia Government International Bond:
740,000 10.50% due 6/13/2006 778,850
1,420,000 8.625% due 4/01/2008 1,565,550
290,000 9.75% due 4/23/2009 333,790
280,000 10% due 1/23/2012 326,200
965,000 Indonesia Government International Bond, 7.75% due 8/01/2006 996,362
180,000 Malaysia Government Bond, 8.75% due 6/01/2009 208,682
Mexico Government International Bond:
1,170,000 9.875% due 1/15/2007 1,275,885
70,000 8.625% due 3/12/2008 77,525
870,000 3.84% due 1/13/2009 (c) 882,180
435,000 9.875% due 2/01/2010 526,133
500,000 8.375% due 1/14/2011 582,000
360,000 6.375% due 1/16/2013 386,460
200,000 5.875% due 1/15/2014 208,700
390,000 8.30% due 8/15/2031 485,550
100,000 7.50% due 4/08/2033 114,750
500,000 Series A, 6.625% due 3/03/2015 550,250
Panama Government International Bond:
975,000 8.25% due 4/22/2008 1,062,750
435,000 8.875% due 9/30/2027 518,737
Peru Government International Bond:
1,090,000 9.125% due 1/15/2008 1,204,450
240,000 9.125% due 2/21/2012 280,800
138,600 5% due 3/07/2017 130,977
Philippine Government International Bond:
1,000,000 4.129%* due 10/03/2005 986,500
250,000 5.625% due 11/19/2006 253,678
720,000 8.875% due 4/15/2008 781,200
435,000 9.875% due 3/16/2010 482,850
175,000 9.875% due 1/15/2019 189,219
65,000 10.625% due 3/16/2025 72,719
750,000 9.50% due 2/02/2030 765,375
Russia Government International Bond:
500,000 8.75% due 7/24/2005 501,100
500,000 10% due 6/26/2007 550,400
2,095,000 10% due 6/26/2007 (Regulation S) 2,306,176
775,000 11% due 7/24/2018 (Regulation S) (g) 1,156,068
580,000 5% due 3/31/2030 647,512
793,000 Santa Fe de Bogota DC, 9.50% due 12/12/2006 836,615
225,000 South Africa Government International Bond, 7.375% due 4/25/2012 258,750
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Schedule of Investments (continued) (in U.S. dollars)
Face
Industry++ Amount Fixed Income Securities Value
Foreign Government Obligations Turkey Government International Bond:
(concluded) $ 650,000 11.375% due 11/27/2006 $ 710,125
1,080,000 10% due 9/19/2007 1,183,788
1,000,000 10% due 9/19/2007 (a) 1,098,750
580,000 11.50% due 1/23/2012 740,950
250,000 11% due 1/14/2013 315,625
500,000 7.375% due 2/05/2025 495,300
500,000 8% due 2/14/2034 518,750
Ukraine Government International Bond:
1,381,395 11% due 3/15/2007 1,457,510
200,000 6.875% due 3/04/2011 210,780
250,000 7.65% due 6/11/2013 (a) 275,625
310,000 7.65% due 6/11/2013 (Regulation S) (a) 341,775
264,000 Uruguay Government International Bond, 7.875% due 1/15/2033 (h) 240,240
Venezuela Government International Bond:
1,230,000 9.125% due 6/18/2007 1,297,650
476,167 3.625% due 12/18/2007 474,977
725,000 10.75% due 9/19/2013 848,613
175,000 8.50% due 10/08/2014 (g) 181,738
-------------
43,495,164
Media--0.1% 250,000 Grupo Televisa SA, 8.625% due 8/08/2005 250,937
Metals & Mining--0.1% 320,000 Companhia Siderurgica Pa, 7.25% due 11/07/2006 331,200
Oil, Gas & Consumable 610,000 Petrobras Energia SA, 9% due 1/30/2007 640,500
Fuels--0.7% 325,000 Petroliam Nasional Berhad, 7.75% due 8/15/2015 399,971
750,000 YPF SA Series A, 7.75% due 8/27/2007 789,750
-------------
1,830,221
Paper & Forest Products--0.1% 250,000 SINO-FOREST Corp., 9.125% due 8/17/2011 (a) 273,125
Real Estate--0.1% 250,000 SM Investments Corp., 8% due 10/16/2007 258,723
Road & Rail--0.1% 294,000 MTR Corp., 7.25% due 10/01/2005 296,480
Wireless Telecommunication-- 750,000 Cellco Finance NV,12.75% due 8/01/2005 753,750
0.9% 1,425,000 Total Access Communication Public Co. Ltd., 8.375% due 11/04/2006 1,495,929
-------------
2,249,679
Total Fixed Income Securities
(Cost--$66,164,914)--26.4% 68,023,286
Shares
Held Common Stocks
Aerospace & Defense--3.8% 93,300 Honeywell International, Inc. 3,417,579
33,400 Lockheed Martin Corp. 2,166,658
105,400 Raytheon Co. 4,123,248
-------------
9,707,485
Beverages--1.0% 115,000 Coca-Cola Enterprises, Inc. 2,531,150
Capital Markets--3.8% 138,700 The Bank of New York Co., Inc. 3,991,786
73,100 Mellon Financial Corp. 2,097,239
69,600 Morgan Stanley 3,651,912
-------------
9,740,937
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Schedule of Investments (continued) (in U.S. dollars)
Shares
Industry++ Held Common Stocks Value
Chemicals--1.5% 87,100 E.I. du Pont de Nemours & Co. $ 3,746,171
Commercial Banks--4.9% 86,300 Bank of America Corp. 3,936,143
46,000 Wachovia Corp. 2,281,600
104,400 Wells Fargo & Co. 6,428,952
-------------
12,646,695
Communications 136,200 3Com Corp. (b) 495,768
Equipment--1.5% 179,800 Motorola, Inc. 3,283,148
-------------
3,778,916
Computers & 158,500 Hewlett-Packard Co. 3,726,335
Peripherals--3.8% 55,500 International Business Machines Corp. 4,118,100
485,600 Sun Microsystems, Inc. (b) 1,811,288
-------------
9,655,723
Diversified Financial 80,290 Citigroup, Inc. 3,711,807
Services--4.1% 194,772 JPMorgan Chase & Co. 6,879,347
-------------
10,591,154
Diversified Telecommunication 112,500 BCE, Inc. 2,664,000
Services--5.0% 79,700 BellSouth Corp. 2,117,629
173,600 SBC Communications, Inc. 4,123,000
116,400 Verizon Communications, Inc. 4,021,620
-------------
12,926,249
Electric Utilities--3.6% 52,600 Consolidated Edison, Inc. 2,463,784
67,800 FPL Group, Inc. 2,851,668
112,700 The Southern Co. 3,907,309
-------------
9,222,761
Electronic Equipment 86,300 Agilent Technologies, Inc. (b) 1,986,626
& Instruments--0.8%
Energy Equipment & Services-- 42,500 BJ Services Co. 2,230,400
4.9% 50,300 Diamond Offshore Drilling 2,687,529
132,700 GlobalSantaFe Corp. 5,414,160
48,000 Halliburton Co. 2,295,360
-------------
12,627,449
Food Products--3.8% 53,000 General Mills, Inc. 2,479,870
77,600 Kraft Foods, Inc. 2,468,456
96,000 Sara Lee Corp. 1,901,760
44,900 Unilever NV (f) 2,910,867
-------------
9,760,953
Health Care Equipment & 68,500 Baxter International, Inc. 2,541,350
Supplies--1.0%
Hotels, Restaurants & 91,400 McDonald's Corp. 2,536,350
Leisure--1.0%
Household Durables--1.0% 102,200 Koninklijke Philips Electronics NV 2,574,418
Household Products--1.7% 68,100 Kimberly-Clark Corp. 4,262,379
IT Services--0.3% 137,400 Unisys Corp. (b) 869,742
Industrial Conglomerates-- 105,500 General Electric Co. 3,655,575
3.0% 136,200 Tyco International Ltd. 3,977,040
-------------
7,632,615
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Schedule of Investments (continued) (in U.S. dollars)
Shares
Industry++ Held Common Stocks Value
Insurance--5.1% 27,100 The Allstate Corp. $ 1,619,225
61,400 American International Group, Inc. 3,567,340
82,500 Genworth Financial, Inc. Class A 2,493,975
24,400 Hartford Financial Services Group, Inc. 1,824,632
93,100 The St. Paul Travelers Cos., Inc. 3,680,243
-------------
13,185,415
Machinery--1.1% 43,900 Deere & Co. 2,875,011
Media--6.3% 65,000 Comcast Corp. Special Class A (b) 1,946,750
208,300 Interpublic Group of Cos., Inc. (b) 2,537,094
285,900 Liberty Media Corp. Class A (b) 2,913,321
295,400 Time Warner, Inc. (b) 4,936,134
37,300 Viacom, Inc. Class B 1,194,346
111,400 Walt Disney Co. 2,805,052
-------------
16,332,697
Metals & Mining--0.9% 92,600 Alcoa, Inc. 2,419,638
Multi-Utilities--1.5% 18,600 Dominion Resources, Inc. 1,365,054
91,700 Energy East Corp. 2,657,466
-------------
4,022,520
Oil, Gas & Consumable 24,700 Anadarko Petroleum Corp. 2,029,105
Fuels--5.3% 148,900 Exxon Mobil Corp. 8,557,283
48,500 Royal Dutch Petroleum Co. (f) 3,147,650
-------------
13,734,038
Paper & Forest Products--1.3% 114,300 International Paper Co. 3,453,003
Pharmaceuticals--4.6% 38,200 Abbott Laboratories 1,872,182
51,000 AstraZeneca Group Plc (f) 2,104,260
66,000 GlaxoSmithKline Plc (f) 3,201,660
74,900 Pfizer, Inc. 2,065,742
134,700 Schering-Plough Corp. 2,567,382
-------------
11,811,226
Semiconductors & Semiconductor 110,200 Applied Materials, Inc. 1,783,036
Equipment--2.1% 79,000 Fairchild Semiconductor International, Inc. (b) 1,165,250
270,800 LSI Logic Corp. (b) 2,299,092
-------------
5,247,378
Specialty Retail--0.8% 105,100 The Gap, Inc. 2,075,725
Thrifts & Mortgage 36,800 Fannie Mae 2,149,120
Finance--0.8%
Total Common Stocks (Cost--$200,249,328)--80.3% 206,644,894
Beneficial
Interest Short-Term Securities
$6,448,701 Merrill Lynch Liquidity Series, LLC Cash Sweep Series I (e) 6,448,701
Total Short-Term Securities (Cost--$6,448,701)--2.5% 6,448,701
Total Investments (Cost--$356,379,674)--142.6% 367,119,074
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Schedule of Investments (concluded) (in U.S. dollars)
Number of
Contracts Options Written Value
Call Options Written--0.0% Morgan Stanley:
49 expiring July 2005 at USD 55, Broker Deutsche Bank Inc., NY $ (1,470)
16 expiring July 2005 at USD 55, Broker Morgan Stanley & Co.
Incorporated (480)
184 expiring July 2005 at USD 55, Broker UBS Securities LLC (5,520)
Total Options Written (Premiums Received--$25,835)--0.0% (7,470)
Total Investments, Net of Options Written (Cost--$356,353,839**)--142.6% 367,111,604
Liabilities in Excess of Other Assets--(42.6%) (109,755,476)
-------------
Net Assets--100.0% $ 257,356,128
=============
++ For Fund compliance purposes, "Industry" means any one or more of the
industry sub-classifications used by one or more widely recognized
market indexes or ratings group indexes, and/or as defined by Fund
management. This definition may not apply for purposes of this report
which may combine such industry sub-classifications for reporting ease.
* Represents a zero coupon bond; the interest rate shown reflects the
effective yield at the time of purchase of the Fund.
** The cost and unrealized appreciation (depreciation) of investments as
of June 30, 2005, as computed for federal income tax purposes, were
as follows:
Aggregate cost $ 356,399,678
===============
Gross unrealized appreciation $ 19,695,651
Gross unrealized depreciation (8,983,725)
---------------
Net unrealized appreciation $ 10,711,926
===============
(a) The security may be offered and sold to "qualified institutional buyers"
under Rule 144A of the Securities Act of 1933.
(b) Non-income producing security.
(c) Floating rate note.
(d) The security is a perpetual bond and has no definite maturity date.
(e) Investments in companies considered to be an affiliate of the Fund
(such companies are defined as "Affiliated Companies" in Section
2(a)(3) of the Investment Company Act of 1940) were as follows:
Net Interest
Affiliate Activity Income
Merrill Lynch Liquidity Series, LLC
Cash Sweep Series I $4,888,978 $65,354
(f) Depositary Receipts.
(g) Brady Bonds are securities which have been issued to refinance
commercial bank loans and other debt. The risk associated with these
instruments is the amount of any uncollateralized principal or interest
payments since there is a high default rate of commercial bank loans
by countries issuing these securities.
(h) Represents a pay-in-kind security that may pay interest/dividends in
additional face/shares.
See Notes to Financial Statements.
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Statement of Assets, Liabilities and Capital
As of June 30, 2005
Assets
Investments in unaffiliated securities, at value (identified cost--$349,930,973) $ 360,670,373
Investments in affiliated securities, at value (identified cost--$6,448,701) 6,448,701
Receivables:
Interest (including $541 from affiliates) $ 1,533,010
Dividends 502,103 2,035,113
---------------
Prepaid expenses 5,370
---------------
Total assets 369,159,557
---------------
Liabilities
Loans 109,000,000
Options written, at value (premiums received--$25,835) 7,470
Payables:
Securities purchased 1,243,823
Dividends to shareholders 1,148,133
Investment adviser 214,882
Interest on loans 62,253
Custodian bank 57,548
Other affiliates 2,653
Distributor 52 2,729,344
---------------
Accrued expenses and other liabilities 66,615
---------------
Total liabilities 111,803,429
---------------
Net Assets
Net assets $ 257,356,128
===============
Capital
Common Stock, $.10 par value; 200,000,000 shares authorized $ 1,283,024
Paid-in capital in excess of par 243,115,117
Accumulated distributions in excess of investment income--net $ (4,472,692)
Undistributed realized capital gains--net 6,672,914
Unrealized appreciation--net 10,757,765
---------------
Total accumulated earnings--net 12,957,987
---------------
Total capital--Equivalent to $20.06 per share based on 12,830,236 shares of
capital stock outstanding (market price--$17.57) $ 257,356,128
===============
See Notes to Financial Statements.
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Statement of Operations
For the Six Months Ended June 30, 2005
Investment Income
Dividends (net of $51,711 foreign withholding tax) $ 4,173,589
Interest (including $65,354 from affiliates) 2,600,444
---------------
Total income 6,774,033
---------------
Expenses
Loan interest expense $ 1,628,547
Investment advisory fees 1,541,775
Asset securitization fees 93,008
Professional fees 60,704
Accounting services 52,005
Custodian fees 41,997
Printing and shareholder reports 31,071
Transfer agent fees 21,015
Directors' fees and expenses 11,935
Listing fees 10,301
Pricing services 5,247
Other 6,677
---------------
Total expenses 3,504,282
---------------
Investment income--net 3,269,751
---------------
Realized & Unrealized Gain (Loss)--Net
Realized gain on:
Investments--net 8,474,699
Options written--net 42,404 8,517,103
---------------
Change in unrealized appreciation on:
Investments--net (13,095,914)
Options written--net 18,365 (13,077,549)
--------------- ---------------
Total realized and unrealized loss--net (4,560,446)
---------------
Net Decrease in Net Assets Resulting from Operations $ (1,290,695)
===============
See Notes to Financial Statements.
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Statements of Changes in Net Assets
For the Six For the Period
Months Ended April 30, 2004++
June 30, to December 31,
Increase (Decrease) in Net Assets: 2005 2004
Operations
Investment income--net $ 3,269,751 $ 5,973,557
Realized gain (loss)--net 8,517,103 (356,050)
Change in unrealized appreciation--net (13,077,549) 23,835,314
--------------- ---------------
Net increase (decrease) in net assets resulting from operations (1,290,695) 29,452,821
--------------- ---------------
Dividends & Distributions to Shareholders
Investment income--net (7,698,142) (6,210,003)
Realized gain--net -- (1,295,994)
Tax return of capital -- (192,145)
--------------- ---------------
Net decrease in net assets resulting from dividends and distributions
to shareholders (7,698,142) (7,698,142)
--------------- ---------------
Capital Stock Transactions
Proceeds from issuance of Common Stock -- 244,957,500
Offering costs resulting from the issuance of Common Stock -- (467,222)
--------------- ---------------
Net increase in net assets resulting from capital stock transactions -- 244,490,278
--------------- ---------------
Net Assets
Total increase (decrease) in net assets (8,988,837) 266,244,957
Beginning of period 266,344,965 100,008
--------------- ---------------
End of period* $ 257,356,128 $ 266,344,965
=============== ===============
* Accumulated distributions in excess of investment income--net $ (4,472,692) $ (44,301)
=============== ===============
++ Commencement of operations.
See Notes to Financial Statements.
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Statement of Cash Flows
For the Six Months Ended June 30, 2005
Cash Provided by Operating Activities
Net decrease in net assets resulting from operations $ (1,290,695)
Adjustments to reconcile net decrease in net assets resulting from operations to net cash
provided by operating activities:
Increase in receivables (162,479)
Decrease in other liabilities (286,393)
Realized and unrealized loss--net 4,667,512
Amortization of premium 778,922
Proceeds from sales of long-term investments 139,162,212
Purchases of long-term investments (130,174,290)
Purchases of short-term investments--net (4,888,978)
---------------
Net cash provided by operating activities 7,805,811
---------------
Cash Used for Financing Activities
Dividends paid to shareholders (7,843,828)
---------------
Net cash used for financing activities (7,843,828)
---------------
Cash
Net decrease in cash (38,017)
Cash at beginning of period 38,017
---------------
Cash at end of period $ --
===============
Cash Flow Information
Cash paid for interest $ 1,642,130
===============
See Notes to Financial Statements.
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Financial Highlights
For the Six For the Period
Months Ended April 30, 2004++
The following per share data and ratios have been derived June 30, to December 31,
from information provided in the financial statements. 2005 2004
Per Share Operating Performance
Net asset value, beginning of period $ 20.76 $ 19.10
--------------- ---------------
Investment income--net .25+++ .46
Realized and unrealized gain (loss)--net (.35) 1.84
--------------- ---------------
Total from investment operations (.10) 2.30
--------------- ---------------
Less dividends and distributions:
Investment income--net (.60) (.48)
Realized gain--net -- (.11)
Tax return of capital -- (.01)
--------------- ---------------
Total dividends and distributions (.60) (.60)
--------------- ---------------
Offering costs resulting from the issuance of Common Stock -- (.04)
--------------- ---------------
Net asset value, end of period $ 20.06 $ 20.76
=============== ===============
Market price per share, end of period $ 17.57 $ 18.32
=============== ===============
Total Investment Return**
Based on net asset value per share (.07%)+++++ 12.30%+++++
=============== ===============
Based on market price per share (.81%)+++++ (5.36%)+++++
=============== ===============
Ratios to Average Net Assets
Expenses, net of waiver and excluding interest expense 1.47%* 1.20%*
=============== ===============
Expenses, net of waiver 2.75%* 1.96%*
=============== ===============
Expenses 2.75%* 2.19%*
=============== ===============
Investment income--net 2.57%* 3.52%*
=============== ===============
Leverage
Amount of borrowings outstanding, end of period (in thousands) $ 109,000 $ 109,000
=============== ===============
Average amount of borrowings outstanding during the period (in thousands) $ 109,000 $ 98,750
=============== ===============
Average amount of borrowings outstanding per share during the period+++ $ 8.50 $ 7.70
=============== ===============
Supplemental Data
Net assets, end of period (in thousands) $ 257,356 $ 266,345
=============== ===============
Portfolio turnover 36.12% 19.88%
=============== ===============
* Annualized.
** Total investment returns based on market price, which can be significantly greater
or lesser than the net asset value, may result in substantially different returns.
Total investment returns exclude the effects of sales charges.
++ Commencement of operations.
+++ Based on average shares outstanding.
+++++ Aggregate total investment return.
See Notes to Financial Statements.
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Notes to Financial Statements
1. Significant Accounting Policies:
Capital and Income Strategies Fund, Inc. (the "Fund") is registered under the
Investment Company Act of 1940, as amended, as a diversified, closed-end
management investment company. The Fund's financial statements are prepared in
conformity with U.S. generally accepted accounting principles, which may
require the use of management accruals and estimates. Actual results may
differ from these estimates. These unaudited financial statements reflect all
adjustments, which are, in the opinion of management, necessary to present a
fair statement of the results for the interim period. All such adjustments are
of a normal, recurring nature. The Fund determines and makes available for
publication the net asset value of its Common Stock on a daily basis. The
Fund's Common Stock shares are listed on the New York Stock Exchange ("NYSE")
under the symbol CII. The following is a summary of significant accounting
policies followed by the Fund.
(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 markets or on the basis of values as obtained by a pricing service.
Pricing services use valuation matrixes that incorporate both dealer-supplied
valuations and valuation models. The procedures of the pricing service and its
valuations are reviewed by the officers of the Fund under the general
direction of the Board of Directors. Such valuations and procedures will be
reviewed periodically by the Board of Directors of the Fund. Financial futures
contracts and options thereon, which are traded on exchanges, are valued at
their closing prices as of the close of such exchanges. Options written or
purchased are valued at the last sale price in the case of exchange-traded
options. In the case of options traded in the OTC market, valuation is the
last asked price (options written) or the last bid price (options purchased).
Swap agreements are valued by quoted fair valuations received daily by the
Fund from the counterparty. Short-term investments with a remaining maturity
of 60 days or less are valued at amortized cost, which approximates market
value, under which method the investment is valued at cost and any premium or
discount is amortized on a straight line basis to maturity. Repurchase
agreements are valued at cost plus accrued interest. The Fund employs pricing
services to provide certain securities prices for the Fund. Securities and
assets for which market quotations are not readily available are valued at
fair value as determined in good faith by or under the direction of the Board
of Directors of the Fund, including valuations furnished by the pricing
services retained by the Fund, which may utilize a matrix system for
valuations.
Equity securities that are held by the Fund, 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 Fund. Long
positions traded in the OTC market, Nasdaq Small Cap or Bulletin Board are
valued at the last available bid price or yield equivalent obtained from one
or more dealers or pricing services approved by the Board of Directors of the
Fund. Short positions traded in the OTC market are valued at the last
available asked price. Portfolio securities that are traded both in the OTC
market and on a stock exchange are valued according to the broadest and most
representative market.
Generally, trading in foreign securities, as well as U.S. government
securities and money market instruments, is substantially completed each day
at various times prior to the close of business on the NYSE. The values of
such securities used in computing the net asset value of the Fund's shares are
determined as of such times. Foreign currency exchange rates also are
generally determined prior to the close of business on the NYSE. Occasionally,
events affecting the values of such securities and such exchange rates may
occur between the times at which they are determined and the close of business
on the NYSE that may not be reflected in the computation of the Fund's net
asset value. If events (for example, a company announcement, market volatility
or a natural disaster) occur during such periods that are expected to
materially affect the value of such securities, those securities may be valued
at their fair value as determined in good faith by the Fund's Board of
Directors or by the Investment Adviser using a pricing service and/or
procedures approved by the Fund's Board of Directors.
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Notes to Financial Statements (continued)
(b) Derivative financial instruments--The Fund may engage in various portfolio
investment strategies both to increase the return of the Fund and to hedge, or
protect its exposure to interest rate movements and movements in 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.
* Options--The Fund may write and purchase call and put options. When the Fund
writes an option, an amount equal to the premium received by the Fund is
reflected as an asset and an equivalent liability. The amount of the liability
is subsequently marked-to-market to reflect the current market value of the
option written. When a security is purchased or sold through an exercise of an
option, the related premium paid (or received) is added to (or deducted from)
the basis of the security acquired or deducted from (or added to) the proceeds
of the security sold. When an option expires (or the Fund enters into a
closing transaction), the Fund realizes a gain or loss on the option to the
extent of the premiums received or paid (or gain or loss to the extent the
cost of the closing transaction exceeds the premium paid or received).
Written and purchased options are non-income producing investments.
* Financial futures contracts--The Fund may purchase or sell financial futures
contracts and options on such futures contracts. Futures contracts are
contracts for delayed delivery of securities at a specific future date and at
a specific price or yield. Upon entering into a contract, the Fund deposits
and maintains as collateral such initial margin as required by the exchange on
which the transaction is effected. Pursuant to the contract, the Fund agrees
to receive from or pay to the broker an amount of cash equal to the daily
fluctuation in value of the contract. Such receipts or payments are known as
variation margin and are recorded by the Fund as unrealized gains or losses.
When the contract is closed, the Fund records a realized gain or loss equal to
the difference between the value of the contract at the time it was opened and
the value at the time it was closed.
* Swaps--The Fund may enter into swap agreements, which are over-the-counter
contracts in which the Fund and a counterparty agree to make periodic net
payments on a specified notional amount. The net payments can be made for a
set period of time or may be triggered by a predetermined credit event. The
net periodic payments may be based on a fixed or variable interest rate; the
change in market value of a specified security, basket of securities, or
index; or the return generated by a security. These periodic payments received
or made by the Fund are recorded in the accompanying Statement of Operations
as realized gains or losses, respectively. Gains or losses are realized upon
termination of the swap agreements. Swaps are marked-to-market daily based on
dealer-supplied valuations 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 the Fund's policy to comply with the requirements of
the Internal Revenue Code applicable to regulated investment companies and to
distribute substantially all of its taxable income to its shareholders.
Therefore, no federal income tax provision is required. Under the applicable
foreign tax law, a withholding tax may be imposed on interest, dividends and
capital gains at various rates.
(d) Security transactions and investment income--Security transactions are
recorded on the dates the transactions are entered into (the trade dates).
Realized gains and losses on security transactions are determined on the
identified cost basis. Dividend income is recorded on the ex-dividend dates.
Interest income is recognized on the accrual basis. The Fund amortizes all
premiums and discounts on debt securities.
(e) Offering expenses--Direct expenses relating to the public offering of the
Fund's Common Stock were charged to capital at the time of issuance of the
shares.
(f) Dividends and distributions--Dividends from net investment income are
declared and paid quarterly. Distributions of capital gains are recorded on
the ex-dividend dates.
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Notes to Financial Statements (continued)
(g) Securities lending--The Fund may lend securities to financial institutions
that provide cash or securities issued or guaranteed by the U.S. government as
collateral, which will be maintained at all times in an amount equal to at
least 100% of the current market value of the loaned securities. The market
value of the loaned securities is determined at the close of business of the
Fund and any additional required collateral is delivered to the Fund on the
next business day. Where the Fund receives securities as collateral for the
loaned securities, it collects a fee from the borrower. The Fund typically
receives the income on the loaned securities but does not receive the income
on the collateral. Where the Fund receives cash collateral it may invest such
collateral and retain the amount earned on such investment, net of any amount
rebated to the borrower. Loans of securities are terminable at any time and
the borrower, after notice, is required to return the 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.
(h) Custodian bank--The Fund recorded an amount payable to the custodian bank
reflecting an overnight overdraft, which resulted from a failed trade that
settled the next day.
2. Investment Advisory Agreement and Transactions with Affiliates:
The 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 the Fund's portfolio and provides the
necessary personnel, facilities, equipment and certain other services
necessary to the operations of the Fund. For such services, the Fund pays a
monthly fee at an annual rate of .85% of the Fund's average daily net assets,
including the proceeds of any outstanding borrowings used for leverage.
The Fund has received an exemptive order from the Securities and Exchange
Commission permitting it to lend portfolio securities to Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("MLPF&S"), an affiliate of FAM, or its
affiliates. Pursuant to that order, the Fund also has retained Merrill Lynch
Investment Managers, LLC ("MLIM, LLC"), an affiliate of FAM, as the securities
lending agent for a fee based on a share of the returns on investment of cash
collateral. MLIM, LLC may, on behalf of the Fund, invest cash collateral
received by the Fund for such loans, among other things, in a private
investment company managed by MLIM, LLC or in registered money market funds
advised by FAM or its affiliates.
For the six months ended June 30, 2005, the Fund reimbursed FAM $2,675 for
certain accounting services.
In addition, MLPF&S received $32,119 in commissions on the execution of
portfolio security transactions for the Fund for the six months ended
June 30, 2005.
Certain officers and/or directors of the Fund are officers and/or directors of
FAM, PSI, ML & Co., and/or MLIM, LLC.
3. Investments:
Purchases and sales (including paydowns) of investments, excluding short-term
securities, for the six months ended June 30, 2005 were $131,418,113 and
$138,399,529, respectively.
Transactions in options written for the six months ended June 30, 2005 were as
follows:
Number of Premiums
Call Options Written Contracts Received
Outstanding call options written,
beginning of period -- --
Options written 549 $ 68,239
Options expired (300) (42,404)
-------------- --------------
Outstanding call options written,
end of period 249 $ 25,835
============== ==============
4. Capital Share Transactions:
The Fund is authorized to issue 200,000,000 shares of capital stock, par value
$.10 per share, all of which were initially classified as Common Stock. The
Board of Directors is authorized, however, to reclassify any unissued shares
of stock without approval of holders of Common Stock.
Common Stock
Shares issued and outstanding during the six months ended June 30, 2005
remained constant and for the period April 30, 2004 to December 31, 2004
increased 12,825,000 from shares sold.
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Notes to Financial Statements (concluded)
5. Short-Term Borrowings:
On May 24, 2005, the Fund renewed its revolving credit and security agreement
funded by a commercial paper asset securitization program with Citicorp North
America, Inc. ("Citicorp") as Agent, certain secondary backstop lenders, and
certain asset securitization conduits as lenders (the "Lenders"). The
agreement was renewed for one year and has a maximum limit of $135,000,000.
Under the Citicorp program, the conduits will fund advances to the Fund
through the issuance of highly rated commercial paper. As security for its
obligations to the Lenders under the revolving securitization facility, the
Fund has granted a security interest in substantially all of its assets to and
in favor of the Lenders. The interest rate on the Fund's borrowings is based
on the interest rate carried by the commercial paper plus a program fee. The
Fund pays additional borrowing costs including a backstop commitment fee.
The weighted average annual interest rate was 3.01% and the average borrowing
was $109,000,000 for the six months ended June 30, 2005.
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Managed Distribution Policy
The Fund has adopted a policy of paying regular distributions on its Common
Stock (the "Managed Distribution Policy"). The Fund's Board of Directors has
initially determined to pay quarterly distributions at an annualized rate of
6% of the initial public offering price per share ($.30 per share, per
quarter). The Fund's Board of Directors has determined to pay additional
distributions on an annual basis equal to any income earned by the Fund in
excess of the quarterly distributions as may be necessary to distribute
substantially all of the Fund's net investment company taxable income for that
year.
The Fund generally is not permitted to distribute net realized long-term
capital gains more than once per year without exemptive relief from the
Securities and Exchange Commission. As a result, the Fund has applied for an
exemption that will permit the Fund to make periodic distributions of realized
long-term capital gains to its stockholders. Until such time, if any, as the
exemptive relief is granted, the Fund intends to make distributions from its
net investment income on a quarterly basis and from its net realized long-term
capital gains, if any, on an annual basis. If such exemptive relief is
granted, the Fund intends to make distributions from its net investment income
and its realized long-term capital gains, if any, on a quarterly basis.
If the total distributions paid by the Fund to its stockholders for any
calendar year exceed the Fund's net investment company taxable income and net
realized capital gain for that year, the excess will generally be treated as a
tax-free return of capital up to the amount of a shareholder's tax basis in
his or her stock. Any distributions that constitute tax-free return of capital
will reduce a stockholder's tax basis in his or her stock. In effect, a return
of capital is the return of a stockholder's investment in the Fund and will
result in a corresponding decline in the Fund's net asset value. Return of
capital distributions also may have the effect of increasing the Fund's
operating expense ratio. Any amounts distributed to a stockholder in excess of
such stockholder's tax basis in his or her stock will generally be taxable to
the stockholder as capital gain.
The Fund currently expects that the amount of distributions made under the
Managed Distribution Policy generally will be independent of, and not
contingent upon, the Fund's performance in any of the first three quarters of
the Fund's fiscal year. Distribution rates under the Managed Distribution
Policy may be increased in the Fund's fourth fiscal quarter in light of the
Fund's performance for the fiscal year and to enable the Fund to comply with
the distribution requirements applicable to regulated investment companies. It
also is currently expected that the Fund's investment portfolio initially will
not produce sufficient dividend and interest income to fully fund
distributions under the Managed Distribution Policy. Consequently, if the Fund
does not realize sufficient short-term capital gains and long-term capital
gains to make up any shortfall, distributions to the Fund's common
stockholders will include returns of capital. Prior to receipt of the above-
referenced exemptive order, long-term capital gains will be available to make
up any shortfall in funding distributions only on an annual basis, thereby
increasing the likelihood that distributions will include returns of capital
to stockholders. The Fund is not required to maintain the Managed Distribution
Policy and such policy (including the amount of the quarterly distribution)
may be modified or terminated at any time without notice. Any such
modification or termination of the Managed Distribution Policy may have an
adverse effect on the market price of the Fund's common stock.
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Automatic Dividend Reinvestment Plan
The following description of the Fund's Automatic Dividend Reinvestment Plan
(the "Plan") is sent to you annually as required by federal securities laws.
Pursuant to the Fund's Plan, unless a holder of Common Stock otherwise elects,
all dividend and capital gains distributions will be automatically reinvested
by The Bank of New York (the "Plan Agent"), as agent for shareholders in
administering the Plan, in additional shares of Common Stock of the Fund.
Holders of Common Stock who elect not to participate in the Plan will receive
all distributions in cash paid by check mailed directly to the shareholder of
record (or, if the shares are held in street or other nominee name then to
such nominee) by The Bank of New York, as dividend paying agent. Such
participants may elect not to participate in the Plan and to receive all
distributions of dividends and capital gains in cash by sending written
instructions to The Bank of New York, as dividend paying agent, at the address
set forth below. Participation in the Plan is completely voluntary and may be
terminated or resumed at any time without penalty by written notice if
received by the Plan Agent not less than ten days prior to any dividend record
date; otherwise such termination will be effective with respect to any
subsequently declared dividend or distribution.
Whenever the Fund declares an income dividend or capital gains distribution
(collectively referred to as "dividends") payable either in shares or in cash,
non-participants in the Plan will receive cash and participants in the Plan
will receive the equivalent in shares of Common Stock. The shares will be
acquired by the Plan Agent for the participant's account, depending upon the
circumstances described below, either (i) through receipt of additional
unissued but authorized shares of Common Stock from the Fund ("newly issued
shares") or (ii) by purchase of outstanding shares of Common Stock on the open
market ("open-market purchases") on the American Stock Exchange or elsewhere.
If, on the payment date for the dividend, the net asset value per share of the
Common Stock is equal to or less than the market price per share of the Common
Stock plus estimated brokerage commissions (such conditions being referred to
herein as "market premium"), the Plan Agent will invest the dividend amount in
newly issued shares on behalf of the participant. The number of newly issued
shares of Common Stock to be credited to the participant's account will be
determined by dividing the dollar amount of the dividend by the net asset
value per share on the date the shares are issued, provided that the maximum
discount from the then current market price per share on the date of issuance
may not exceed 5%. If, on the dividend payment date, the net asset value per
share is greater than the market value (such condition being referred to
herein as "market discount"), the Plan Agent will invest the dividend amount
in shares acquired on behalf of the participant in open-market purchases.
In the event of a market discount on the dividend payment date, the Plan Agent
will have until the last business day before the next date on which the shares
trade on an "ex-dividend" basis or in no event more than 30 days after the
dividend payment date (the "last purchase date") to invest the dividend amount
in shares acquired in open-market purchases. It is contemplated that the Fund
will pay monthly income dividends. Therefore, the period during which open-
market purchases can be made will exist only from the payment date on the
dividend through the date before the next "ex-dividend" date, which typically
will be approximately ten days. If, before the Plan Agent has completed its
open-market purchases, the market price of a share of Common Stock exceeds the
net asset value per share, the average per share purchase price paid by the
Plan Agent may exceed the net asset value of the Fund's shares, resulting in
the acquisitions of fewer shares than if the dividend had been paid in newly
issued shares on the dividend payment date. Because of the foregoing
difficulty with respect to open-market purchases, the Plan provides that if
the Plan Agent is unable to invest the full dividend amount in open-market
purchases during the purchase period or if the market discount shifts to a
market premium during the purchase period, the Plan Agent will cease making
open-market purchases and will invest the uninvested portion of the dividend
amount in newly issued shares at the close of business on the last purchase
date determined by dividing the uninvested portion of the dividend by the net
asset value per share.
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
The Plan Agent maintains all shareholders' accounts in the Plan and furnishes
written confirmation of all transactions in the account, including information
needed by shareholders for tax records. Shares in the account of each Plan
participant will be held by the Plan Agent in non-certificated form in the
name of the participant, and each shareholder's proxy will include those
shares purchased or received pursuant to the Plan. The Plan Agent will forward
all proxy solicitation materials to participants and vote proxies for shares
held pursuant to the Plan in accordance with the instructions of the
participants.
In the case of shareholders such as banks, brokers or nominees which hold
shares of others who are the beneficial owners, the Plan Agent will administer
the Plan on the basis of the number of shares certified from time to time by
the record shareholders as representing the total amount registered in the
record shareholder's name and held for the account of beneficial owners who
are to participate in the Plan.
There will be no brokerage charges with respect to shares issued directly by
the Fund as a result of dividends or capital gains distributions payable
either in shares or in cash. However, each participant will pay a pro rata
share of brokerage commissions incurred with respect to the Plan Agent's open-
market purchases in connection with the reinvestment of dividends.
The automatic reinvestment of dividends and distributions will not relieve
participants of any federal, state or local income tax that may be payable (or
required to be withheld) on such dividends.
Shareholders participating in the Plan may receive benefits not available to
shareholders not participating in the Plan. If the market price plus
commissions of the Fund's shares is above the net asset value, participants in
the Plan will receive shares of the Fund at less than they could otherwise
purchase them and will have shares with a cash value greater than the value of
any cash distribution they would have received on their shares. If the market
price plus commissions is below the net asset value, participants will receive
distributions in shares with a net asset value greater than the value of any
cash distribution they would have received on their shares. However, there may
be insufficient shares available in the market to make distributions in shares
at prices below the net asset value. Also, since the Fund does not redeem
shares, the price on resale may be more or less than the net asset value.
The value of shares acquired pursuant to the Plan will generally be excluded
from gross income to the extent that the cash amount reinvested would be
excluded from gross income. If, when the Fund's shares are trading at a
premium over net asset value, the Fund issues shares pursuant to the Plan that
have a greater fair market value than the amount of cash reinvested, it is
possible that all or a portion of such discount (which may not exceed 5% of
the fair market value of the Fund's shares) could be viewed as a taxable
distribution. If the discount is viewed as a taxable distribution, it is also
possible that the taxable character of this discount would be allocable to all
the shareholders, including shareholders who do not participate in the Plan.
Thus, shareholders who do not participate in the Plan might be required to
report as ordinary income a portion of their distributions equal to their
allocable share of the discount.
Experience under the Plan may indicate that changes are desirable.
Accordingly, the Fund reserves the right to amend or terminate the Plan. There
is no direct service charge to participants in the Plan; however, the Fund
reserves the right to amend the Plan to include a service charge payable by
the participants.
All correspondence concerning the Plan should be directed to the Plan Agent at
The Bank of New York, Church Street Station, P.O. Box 11258, New York, NY
10286-1258, Telephone: 800-432-8224.
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Disclosure of Investment Advisory Agreement
Activities of and Composition of the Board of Directors
All but one member of the Board of Directors is an independent director whose
only affiliation with Fund Asset Management, L.P. (the "Investment Adviser")
or other Merrill Lynch affiliates is as a director of the Fund and certain
other funds advised by the Investment Adviser or its affiliates. The Chair of
the Board is also an independent director. New director nominees are chosen as
nominees by a Nominating Committee comprised of independent directors. All
independent directors also are members of the Board's Audit Committee and the
independent directors meet in executive session at each in-person Board
meeting. The Board and the Audit Committee meet in person for at least two
days each quarter and conduct other in-person and telephone meetings
throughout the year, some of which are formal board meetings, and some of
which are informational meetings. The independent counsel to the independent
directors attends all in-person Board and Audit Committee meetings and other
meetings at the independent directors' request.
Investment Advisory Agreement--Matters Considered by the Board
Every year, the Board considers approval of the Fund's investment advisory
agreement (the "Investment Advisory Agreement"). The Board assesses the
nature, scope and quality of the services provided to the Fund by the
personnel of the Investment Adviser and its affiliates, including
administrative services, shareholder services, oversight of fund accounting,
marketing services and assistance in meeting legal and regulatory
requirements. The Board also receives and assesses information regarding the
services provided to the Fund by certain unaffiliated service providers.
At various times throughout the year, the Board also considers a range of
information in connection with its oversight of the services provided by the
Investment Adviser and its affiliates. Among the matters considered are: (a)
fees (in addition to management fees) paid to the Investment Adviser and its
affiliates by the Fund, such as transfer agency fees and fees for marketing
and distribution; (b) Fund operating expenses paid to third parties; (c) the
resources devoted to and compliance reports relating to the Fund's investment
objective, policies and restrictions, and its compliance with its Code of
Ethics and the Investment Adviser's compliance policies and procedures; and
(d) the nature, cost and character of non-investment management services
provided by the Investment Adviser and its affiliates.
The Board believes that the Investment Adviser is one of the most experienced
global asset management firms and considers the overall services provided by
the Investment Adviser to be generally of high quality. The Board also
believes that the Investment Adviser is financially sound and well managed and
notes that the Investment Adviser is affiliated with one of America's largest
financial firms. The Board works closely with the Investment Adviser in
overseeing the Investment Adviser's efforts to achieve good performance. As
part of this effort, the Board discusses portfolio manager effectiveness and,
when performance is not satisfactory, discusses with the Investment Adviser
taking steps such as changing investment personnel.
Annual Consideration of Approval by the Board of Directors
In the period prior to the Board meeting to consider renewal of the Investment
Advisory Agreement, the Board requests and receives materials specifically
relating to the Fund's Investment Advisory Agreement. These materials include
(a) information compiled by Lipper Inc. ("Lipper") on the fees and expenses
and the investment performance of the Fund as compared to a comparable group
of funds as classified by Lipper; (b) sales data for the Fund; (c) a
discussion by the Fund's portfolio management team of investment strategies
used by the Fund during its most recent fiscal year; (d) information on the
profitability to the Investment Adviser of the Investment Advisory Agreement
and other relationships with the Fund; and (e) information provided by the
Investment Adviser concerning investment advisory fees charged to other
clients, such as offshore funds under similar investment mandates and
generally to institutional clients. The Board also considers other matters it
deems important to the approval process such as payments made to the
Investment Adviser or its affiliates relating to the distribution of Fund
shares, services related to the valuation and pricing of Fund portfolio
holdings, allocation of Fund brokerage fees (including the related benefits to
the Investment Adviser of "soft dollars"), the Fund's portfolio turnover
statistics, and direct and indirect benefits to the Investment Adviser and its
affiliates from their relationship with the Fund.
Certain Specific Renewal Data
In connection with the most recent renewal of the Fund's Investment Advisory
Agreement in May 2005, the independent directors' and Board's review included
the following:
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Services Provided by the Investment Adviser--The Board reviewed the nature,
extent and quality of services provided by the Investment Adviser, including
the investment advisory services and the resulting performance of the Fund.
The Board focused primarily on the Investment Adviser's investment advisory
services and the Fund's investment performance, having concluded that the
other services provided to the Fund by the Investment Adviser were
satisfactory. The Board compared Fund performance - both including and
excluding the effects of the Fund's fees and expenses - to the performance
of a comparable group of funds, and the performance of a relevant index or
combination of indexes. While the Board reviews performance data at least
quarterly, consistent with the Investment Adviser's investment goals, the
Board attaches more importance to performance over relatively long periods of
time, typically three to five years or, for a fund in operation for less than
three years, the life of the fund. The Fund's performance after fees and
expenses ranked in the third quintile for the period from inception (April 30,
2004) through March 31, 2005. Considering these factors, the Board concluded
that the Fund's performance supported the continuation of the Investment
Advisory Agreement.
The Investment Adviser's Personnel and Investment Process--The Board reviews
at least annually the Fund's investment objectives and strategies. The Board
discusses with senior management of the Investment Adviser responsible for
investment operations and the senior management of the Investment Adviser's
investing group the strategies being used to achieve the stated objectives.
Among other things, the Board considers the size, education and experience of
the Investment Adviser's investment staff, its use of technology, and the
Investment Adviser's approach to training and retaining portfolio managers and
other research, advisory and management personnel. The Board also reviews the
Investment Adviser's compensation policies and practices with respect to the
Fund's portfolio managers. The Board also considered the experience of the
Fund's portfolio management team and noted that Brian Fullerton is responsible
for the overall asset allocation of the Fund's portfolio and he has more than
20 years experience in the financial industry. They noted that Kevin Rendino
and Robert J. Martorelli are co-portfolio managers responsible for the common
stock portion of the Fund's portfolio. Mr. Rendino has more than 15 years and
Mr. Martorelli has more than 20 years experience in portfolio management. They
then noted that John Burger, Romualdo Roldan and Patrick Maldari are the co-
portfolio managers responsible for the fixed income portion of the Fund's
portfolio. Mr. Burger, who focuses on preferred securities, has more than 15
years experience in portfolio management. Mr. Roldan, who focuses on emerging
market debt securities, has more than seven years experience in portfolio
management. Mr. Maldari, who focuses on other fixed income debt securities,
has more than 21 years experience in portfolio management. The Board noted
that the Investment Adviser and its investment staff have extensive experience
in analyzing and managing the types of investments used by the Fund. The Board
concluded that the Fund benefits from that expertise.
Management Fees and Other Expenses--The Board reviews the Fund's contractual
management fee rate and actual management fee rate as a percentage of total
assets at common asset levels - the actual rate includes advisory and
administrative service fees and the effects of any fee waivers - compared to
the other funds in its Lipper category. It also compares the Fund's total
expenses to those of other comparable funds. The Board considered the services
provided to and the fees charged by the Investment Adviser to other types of
clients, such as offshore funds, with similar investment mandates and noted
that the fees charged by the Investment Adviser in those cases typically
exceeded those being charged to the Fund. The Board also noted that, as a
general matter, fees charged to institutional clients were lower than the fees
charged to the Fund, but believed that less extensive services were being
provided to such clients. While the Fund's contractual management fee rate was
equal to the median of contractual management fees charged by comparable
funds, the Fund's actual management fee rate is slightly higher than the
median. The Board has concluded that the Fund's management fee and fee rate
and overall expense ratio are reasonable compared to those of other comparable
funds.
Profitability--The Board considers the cost of the services provided to the
Fund by the Investment Adviser, and the Investment Adviser's profits relating
to the management and distribution of the Fund and the MLIM/FAM-advised funds.
As part of its analysis, the Board reviewed the Investment Adviser's
methodology in allocating its costs to the management of the Fund and
concluded that there was a reasonable basis for the allocation. The Board
believes the Investment Adviser's profits are reasonable in relation to the
nature and quality of services provided.
Economies of Scale--The Board considered the extent to which economies of
scale might be realized as the assets of the Fund increase and whether there
should be changes in the management fee rate or structure in order to enable
the Fund to participate in these economies of scale. While there was no
evidence to date that the Fund's assets have reached a level where such
economies are effectively available, the Board will continue to seek
information relating to economies of scale.
Conclusion
After the independent directors deliberated in executive session, the entire
Board, including all of the independent directors, approved the renewal of the
existing Investment Advisory Agreement, concluding that the advisory fee was
reasonable in relation to the services provided and that a contract renewal
was in the best interests of the shareholders.
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
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 and Co-Portfolio Manager
Brian Fullerton, Vice President and Co-Portfolio Manager
Patrick Maldari, Vice President and Co-Portfolio Manager
Robert J. Martorelli, Vice President and Co-Portfolio
Manager
Kevin Rendino, Vice President and Co-Portfolio Manager
Romualdo Roldan, Vice President and Co-Portfolio Manager
Jeffrey Hiller, Chief Compliance Officer
Alice A. Pellegrino, Secretary
Custodian
Brown Brothers Harriman & Co.
40 Water Street
Boston, MA 02109
Transfer Agent
Common Stock:
The Bank of New York
100 Barclay Street - 11 East
New York, NY 10286
NYSE Symbol
CII
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
Availability of Quarterly Schedule of Investments
The Fund files its complete schedule of portfolio holdings with the Securities
and Exchange Commission ("SEC") for the first and third quarters of each fiscal
year on Form N-Q. The Fund's Forms N-Q are available on the SEC's Web site at
http://www.sec.gov. The Fund's Forms N-Q may also be reviewed and copied at the
SEC's Public Reference Room in Washington, DC. Information on the operation of
the Public Reference Room may be obtained by calling 1-800-SEC-0330.
Electronic Delivery
The Fund offers electronic delivery of communications to its shareholders. In
order to receive this service, you must register your account and provide us
with e-mail information. To sign up for this service, simply access this Web
site at http://www.icsdelivery.com/live and follow the instructions. When you
visit this site, you will obtain a personal identification number (PIN). You
will need this PIN should you wish to update your e-mail address, choose to
discontinue this service and/or make any other changes to the service. This
service is not available for certain retirement accounts at this time.
CAPITAL AND INCOME STRATEGIES FUND, INC. JUNE 30, 2005
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.
Capital and Income Strategies Fund, Inc.
By: /s/ Robert C. Doll, Jr.
-------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Capital and Income Strategies Fund, Inc.
Date: August 19, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ Robert C. Doll, Jr.
-------------------------------
Robert C. Doll, Jr.,
Chief Executive Officer of
Capital and Income Strategies Fund, Inc.
Date: August 19, 2005
By: /s/ Donald C. Burke
-------------------------------
Donald C. Burke,
Chief Financial Officer of
Capital and Income Strategies Fund, Inc.
Date: August 19, 2005