-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, V4AD9HMwZpNxAO6fb2OE4knAO/Jko3yMwLEXW16FTHCONvXPv+jVoExVT+eMMLsM PJJKUXvm1TGUaBQgmqf5Bg== 0000927405-96-000274.txt : 19960717 0000927405-96-000274.hdr.sgml : 19960717 ACCESSION NUMBER: 0000927405-96-000274 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960531 FILED AS OF DATE: 19960716 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREFERRED INCOME FUND INC CENTRAL INDEX KEY: 0000868578 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954305694 STATE OF INCORPORATION: MD FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: N-30D SEC ACT: 1940 Act SEC FILE NUMBER: 811-06179 FILM NUMBER: 96595181 BUSINESS ADDRESS: STREET 1: 301 E COLORADO BLVD STE 720 STREET 2: C/O FLAHERTY & CRUMRINE INC CITY: PASADENA STATE: CA ZIP: 91101 BUSINESS PHONE: 8187957300 MAIL ADDRESS: STREET 1: 301 COLORADO BLVD STREET 2: STE 720 CITY: PASADENA STATE: CA ZIP: 91101 N-30D 1 PREFERRED INCOME FUND INCORPORATED Dear Shareholder: The Preferred Income Fund enjoyed very good results in its fiscal second quarter that ended on May 31, 1996. The return on the net asset value ("NAV") of the Fund's shares was 3.7% for the quarter. Furthermore, the Fund was able to increase the dividend rate on its shares by 5.7% to a new monthly rate of $0.092 per share effective with the dividend payable May 31, 1996. The Fund's ongoing strategy of hedging against the risk of rising interest rates provided dramatic benefits in the second quarter. Long term interest rates surged throughout the quarter and caused sharp declines in the prices of both long term bonds and preferred stocks. In the case of the Preferred Income Fund, however, the decline in the value of its preferred stock holdings was only half of the story. The Fund also had substantial gains on put options on Treasury bond futures contracts purchased as a hedge. The overall result for the Fund was a relatively stable NAV. Hedging is also behind the increase in the Fund's dividend rate. As the gains on the put options held as hedges are converted into cash, the Fund is able to purchase additional holdings of preferred stocks for its portfolio. Of course, more preferred stocks in the portfolio produce more income. An important part of the Fund's income strategy is the expectation that income will increase in response to a significant increase in interest rates. The preferred stock market has now shrugged off the impact of the tax changes proposed by the Clinton Administration last December, which has also helped the Fund's performance. So far, Congress has taken no action on those proposals. Beyond that, congressional leaders have given their assurances that even if Congress should adopt any of the proposals, they would not be retroactive. Nonetheless, we can not lose sight of the fact that the risk of unfavorable tax legislation is always there. The "creeping scarcity" of traditional preferred stocks, which has previously been discussed in these letters, is accelerating as an indirect result of the Administration's tax proposals. That tax package includes restrictions on new issues of a hybrid preferred/debt type of security that has become widely used by corporations to gain possible tax advantages. Such hybrids have accounted for most new preferred financing in the last several years and have often been issued to refinance outstanding issues of traditional preferred stock. Issuers are now rushing ahead with new issues of such hybrids and redemptions of traditional preferreds before any changes in the tax rules can be enacted. Tighter supply has helped prop up the prices of traditional preferred stocks, which make up most of the Fund's portfolio. As is the case with most closed-end funds now, the Fund's shares continue to sell in the market at a discount from their NAV. Two positive developments during the last quarter may eventually help. First, two of the country's largest brokerage firms instituted research coverage of the Fund and published favorable reports. Second, the increase in the dividend rate has attracted some attention to the Fund's accomplishments. As we go to press, the current yield on the shares is 7.9%, but the discount is still around 10.0%. We urge you to read the Question and Answer section that follows. It responds to common questions about the nature of the Fund and its investment strategies. Sincerely, /s/ Robert T. Flaherty -------------------------------- Robert T. Flaherty Chairman of the Board June 14, 1996 - ------------------------------------------------------------------------------ Preferred Income Fund Incorporated QUESTION & ANSWER SECTION MAY 31, 1996 (UNAUDITED) - -------------------------------- HOW IS THE FUND PERFORMING? The Preferred Income Fund has performed very well in the face of a sharp turnaround in the trend of long term interest rates. Last year, interest rates fell, the prices of bonds and preferred stocks rose, and the Fund made lots of money. In the first half of this year, the markets have reversed themselves, and the Fund has been very successful in protecting the previous year's gains. When you put it all together over a period of time, it adds up to very good returns. The following chart shows the cumulative performance of the Fund's NAV, assuming that all monthly dividends and year-end distributions were reinvested at NAV. For the first half of the current fiscal year, the total return on NAV was 2.3%, which is the saw-toothed plateau at the right end of the graph line. For background, the total return on NAV was 24.7% in fiscal 1995, which ended last November 30, and it has been 16.5% per year since the inception of the Fund in early 1991. PREFERRED INCOME FUND NAV Performance INCREASE IN $1,000 OF FUND ASSETS THROUGH MAY 31, 1996 (Jan. 31, 1991 = $1,000) 1000.00 Jan '91 1369.00 Jan '92 1659.00 Jan '93 1892.00 Jan '94 1829.00 Jan '95 2206.00 Jan '96 2260.00 May '96 Past performance is not necessarily indicative of future performance. === All Distributions Reinvested The best indicator of the Fund's recent performance may be the 10.8% total return on NAV for the last twelve months through May 31, assuming again the reinvestment of all distributions at NAV. Long term interest rates followed a volatile path in that period, starting with a significant decline followed by an even sharper rise. As a result, the prices of investment grade long term bonds generally declined. We think the Fund's total return of 10.8% was a remarkable achievement under such turbulent conditions. Remember what the Preferred Income Fund is all about. It is intended to be an alternative to bond funds for investors who want less exposure to fluctuating interest rates than is normally associated with fixed income investments. WHAT ABOUT THE CLINTON ADMINISTRATION'S TAX PROPOSALS? HAVE THEY AFFECTED THE FUND'S PERFORMANCE? The Fund's portfolio would be affected most directly by the proposal to reduce the intercorporate Dividends Received Deduction ("DRD") from 70% to 50%. The DRD was originally designed to reduce multiple layers of corporate taxation as income generated by a corporation ultimately finds its way to non-corporate shareholders. Cutting the DRD would increase the effective corporate tax rate on dividends. That would make all stocks, including preferred stocks, less attractive to corporate investors and would probably have a negative impact on the prices of some preferreds. The proposals have not had a major lasting impact on the Fund's NAV. Preferred stock prices initially reacted unfavorably, but the market now appears to be giving little weight to the chance that the proposals will become law. A good portion of the decline in the Fund's NAV that occurred in the fiscal first quarter has since been recouped, and the remainder is easily explained by changes in interest rates over the period. The introduction of the tax proposals last December has not helped the market price of the Fund's shares. Following the announcement, the market price fell more than the NAV causing the discount from NAV to widen. Despite the subsequent recovery in the NAV, the greater discount has persisted. IS THERE ANYTHING NEW TO REPORT ON THE DISCOUNT FROM NAV? Not really! The increase in the dividend rate may have had some favorable effect on the discount, which we would expect. Also, the increased number of research analysts following the Fund's shares is a real positive. We hope that the stability of the NAV, the discount and the market price during the bond market's unhappy moments in the last few months will draw some attention to the Fund's record. It may be helpful to remind our shareholders that they can obtain the latest NAV for the Fund simply by calling the Fund's shareholder servicing agent, First Data Investor Services Group, Inc., at 1-800-331-1710. The NAV is also published each week in Barron's and in the Closed-End Funds section of the Monday edition of The Wall Street Journal. IS THE FUND'S PORTFOLIO ACTIVELY MANAGED? We believe that active management can make an important contribution to the performance of the portfolio. The preferred stock market is small and relatively illiquid by the standards of the capital markets. As a result, pricing can be highly inefficient which provides real opportunities for us given our constant presence in the market, day in and day out. The reasons behind the changes we make in the portfolio vary widely. Some moves reflect broad sector judgments, such as the relative valuations of banks versus utilities or fixed rate preferreds versus adjustable rate preferreds. Furthermore, our conclusions concerning the credit standing of individual issuers play a part in all transactions. We also find numerous opportunities to make trades just to take advantage of temporary mispricings of individual preferreds. We are not too proud to make a dollar any way we can. The turnover statistics appear on page 13 of this report. Typically, some positions in the portfolio will turn over several times in the course of a year while other holdings do not change at all. In the aggregate, however, transaction activity can add up to as much as the value of the entire portfolio. IS A SPECIAL YEAR-END DISTRIBUTION LIKELY THIS YEAR? With the fiscal year only half over, it is really too early to speculate on the amount of any year-end distribution. If our year were to end today, however, the Fund would definitely have significant net realized capital gains beyond the capital loss carryforwards available. If any long term gains were retained by the Fund, it would have to pay tax on them subject to some complex rules. The alternative would be to pay them out to shareholders, which we have always elected to do in the past. In that case, each shareholder would be taxed directly on the gains distributed. Most of the capital gains have come from put options that the Fund purchased as hedges. From a tax standpoint, it could be advantageous to offset those gains, but there are now relatively few significant unrealized losses among the Fund's holdings of preferreds. This scarcity of capital losses is, of course, a good thing. It is a tangible demonstration of the strong performance of the Fund's NAV over the years. WILL THE FUND'S DIVIDEND RATE BE REDUCED IF THERE IS A YEAR-END DISTRIBUTION? Yes! We make every effort to pay out the Fund's income through the monthly dividends. Distributions "above and beyond" those monthly dividends should properly be considered principal by our shareholders. Taking them in cash is much like making a withdrawal from a savings account. When money is taken out, there is less left to earn income. The result is that the dividend rate per share must decline if the special distribution is of any significant size. Shareholders can "beat the game," so to speak, by reinvesting any special distributions in additional shares. Assuming there is no change in the basic earning power of the portfolio, the reduction in the dividend rate per share would be offset by an increase in the total number of shares held. Total income in dollars would essentially be preserved. This reinvestment could be accomplished simply by buying shares in the market. Also, shareholders willing to reinvest all distributions every month can do this in a very efficient way by participating in the Fund's Dividend Reinvestment Plan (the "DRIP"). Information on the DRIP can be obtained from the Plan's agent, First Data Investor Services Group, Inc., at 1-800-331-1710. IF THE FUND HAS DONE SO WELL, WHY ARE MY SHARES UNDER WATER? It is an unpleasant fact of life that the performance of the market price of the Fund's shares has not kept up with returns on the NAV. Over the last three years, the market price has gone from a premium over NAV to a discount. Depending upon when a particular shareholder purchased the shares, this may have overwhelmed the strong returns earned by the Fund on NAV. I'VE BEEN IN THE FUND SINCE THE BEGINNING. WHY HAVEN'T I DONE BETTER? You have probably done better than you realize. As discussed in response to the first question, the return on NAV for the life of the Fund has been 16.5% per year. Furthermore, as covered in more detail below, the shareholders who have reinvested all distributions through the DRIP since the inception of the Fund have earned a return on market value of 12.5% per year despite the current discount on the shares. However, these favorable results are distorted if a long term shareholder merely compares the cost of his stock for tax purposes to its current market value. That comparison overlooks the special year-end distributions made by the Fund in past years. Look at the example of a shareholder that bought 1,000 shares of Preferred Income Fund at $15.00 in the initial public offering in early 1991. Assuming that all distributions were taken in cash, the statement of his account still shows that he holds 1,000 shares with a cost of $15,000. Furthermore, at the market price of $13.875 on May 31, 1996, the total market value of those shares was $13,875. Something must be missing. The missing ingredient is $5.01 per share, or over $5,000, that this shareholder received through special year-end distributions above and beyond the regular monthly dividends. In effect, he has been withdrawing principal from his investment as we discussed two questions earlier. This has to be taken into account in judging how the investment has done. Look at the example from a different angle. Assume that the same shareholder reinvested all distributions through the Fund's DRIP instead of taking them in cash. The number of shares held has increased by more than 100%, and the market value of those shares on May 31, 1996 was over $28,000. Yet, his brokerage account statement says the cost of the stock is over $31,000. What is going on here? It is important to remember that the original investment in the stock was $15,000 and its present value is over $28,000. That is the basis of the 12.5% per year total return on market value since the initial public offering in 1991. The cost for tax purposes has increased substantially because it includes all the reinvested distributions that produced that return. The market value is below the cost by roughly $3,000 because the market price of the shares has gone from a premium over NAV to a discount. If that had not happened, the shareholder could have earned even more than 12.5% per year on market value. If there is another significant year-end distribution in 1996, this phenomenon will be accentuated. Obviously, this is "a problem of prosperity" which is far better than not making money. - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS May 31, 1996 (Unaudited) - ------------------------------------------------- VALUE SHARES (NOTE 1) ------ -------- PREFERRED STOCK -- 93.2% ADJUSTABLE RATE PREFERRED STOCK -- 28.4% UTILITIES -- 7.4% 5,920 Arizona Public Service Company, Series Q, Adj. Rate Pfd. ...................... $ 520,960 28,800 ENSERCH Corporation, Series F, Adj. Rate Pfd. ...................... 648,000 14,514 Entergy Gulf States Utilities Inc., Series A, Adj. Rate Pfd. ...................... 1,389,716 36,375 Georgia Power Company, Series 1993-2 L, Adj. Rate Pfd. ............... 818,437 52,000 Illinois Power Company, Series A, Adj. Rate Pfd. ...................... 2,288,000 Niagara Mohawk Power Corporation: 154,879 Series A, Adj. Rate Pfd. ...................... 2,516,784 32,455 Series B, Adj. Rate Pfd. ...................... 608,531 88,745 Series C, Adj. Rate Pfd. ...................... 1,547,491 Northern States Power Company: 4,150 Series A, Adj. Rate Pfd. ...................... 378,687 6,000 Series B, Adj. Rate Pfd. ...................... 547,500 14,600 Puget Sound Power & Light Company, Series B, Adj. Rate Pfd. ..................................... 330,325 45,700 Texas Utilities Electric Company, Series A, Adj. Rate Pfd. ...................... 4,144,419 ------------ TOTAL UTILITY ADJUSTABLE RATE PREFERRED STOCK ............................... 15,738,850 ------------ BANKING -- 21.0% Bank of Boston Corporation: 62,800 Series B, Adj. Rate Pfd. ...................... 2,669,000 30,400 Series C, Adj. Rate Pfd. ...................... 2,359,800 BankAmerica Corporation: 27,000 Series A, Adj. Rate Pfd. ...................... 1,255,500 71,600 Series B, Adj. Rate Pfd. ...................... 6,059,150 Bankers Trust New York Corporation: 30,000 Series Q, Adj. Rate Pfd. ...................... 667,500 249,600 Series R, Adj. Rate Pfd. ...................... 5,553,600 20,500 Chase Manhattan Corporation, Series N, Adj. Rate Pfd. ...................... 476,625 Citicorp: 75,350 Second Series, Adj. Rate Pfd. ................. 6,456,553 10,000 Third Series, Adj. Rate Pfd. .................. 952,500 15,950 Series 18, Adj. Rate Pfd. ..................... 364,856 12,055 Series 19, Adj. Rate Pfd. ..................... 275,758 67,925 First Chicago NBD, Series B, Adj. Rate Pfd. ...................... 5,620,794 59,285 First Union Corporation, Series D, Adj. Rate Pfd. ...................... 5,924,795 72,200 HSBC Americas Inc., Series A, Adj. Rate Pfd. ...................... 3,122,650 24,700 Morgan (J.P.) & Company Inc., Series A, Adj. Rate Pfd. ...................... 1,867,938 30,000 Republic New York Corporation, Series D, Adj. Rate Pfd. ...................... 678,750 ------------ TOTAL BANKING ADJUSTABLE RATE PREFERRED STOCK ............................... 44,305,769 ------------ TOTAL ADJUSTABLE RATE PREFERRED STOCK ............................... 60,044,619 ------------ FIXED RATE PREFERRED STOCK -- 64.8% UTILITIES -- 35.3% Alabama Power Company: 129,000 Class A, 6.40% Pfd. ........................... 2,854,125 12,000 Series 1992-1, 7.60% Pfd. ..................... 304,500 25,600 Series 1992-2, 7.60% Pfd. ..................... 649,600 19,700 Arizona Public Service Company, Series W, 7.25% Pfd. .......................... 485,113 Baltimore Gas & Electric Company: 31,000 Series 1993, 6.70% Pfd. ....................... 2,972,125 43,250 Series 1995, 6.99% Pfd. ....................... 4,303,375 5,000 Central Hudson Gas & Electric Corporation, Series D, 4.35% Pfd. .......................... 296,875 Consumers Power Company: 128,747 Class A, 8.32% Pfd. ........................... 3,266,955 2,850 Series G, $7.76 Pfd. .......................... 277,162 1,750 Delmarva Power & Light Company, 6.75% Pfd. .................................... 168,437 40,000 Detroit Edison Company, 7.75% Pfd. .................................... 1,020,000 Duke Power Company: 10,000 Series S, 7.85% Pfd. .......................... 1,058,750 23,375 Series W, 7.00% Pfd. .......................... 2,317,047 19,000 Series Y, 7.04% Pfd. .......................... 1,888,125 2,430 Entergy Gulf States Utilities Inc., $9.96 Pfd. .................................... 246,645 Entergy Louisiana Inc.: 40,610 8.00% Pfd. .................................... 1,016,265 46,900 9.68% Pfd. .................................... 1,201,813 Entergy Mississippi Inc.: 12,436 4.92% Pfd. .................................... 797,458 6,000 8.36% Pfd. .................................... 612,750 Florida Power & Light Company: 39,250 Series S, 6.98% Pfd. .......................... 3,866,125 38,350 Series T, 7.05% Pfd. .......................... 3,815,825 24,500 Series U, 6.75% Pfd. .......................... 2,345,875 8,000 Gulf Power Company, Series A, 7.00% Pfd. .......................... 197,800 4,250 Idaho Power Company, 7.07% Pfd. .................................... 423,406 Illinois Power Company: 7,950 Series D, 4.42% Pfd. .......................... 233,531 28,070 Series E, 4.70% Pfd. .......................... 877,188 20,000 MidAmerican Energy Company, $1.7375 Pfd. .................................. 482,500 20,000 Mississippi Power Company, 7.25% Pfd. .................................... 505,000 8,500 Monongahela Power Company, Series L, $7.73 Pfd. .......................... 896,750 7,900 Montana Power Company, $6.875 Pfd. ................................... 753,462 12,700 Nevada Power Company, Series A, 9.90% Sinking Fund Pfd. ............. 1,389,062 5,000 New York State Electric & Gas Corporation, 6.30% Sinking Fund Pfd. ....................... 493,750 Niagara Mohawk Power Corporation: 37,600 7.85% Sinking Fund Pfd. ....................... 902,400 58,135 9.50% Pfd. .................................... 1,207,755 3,500 Northern Indiana Public Service Company, 7.44% Pfd. .......................................... 342,562 Northern States Power Company: 2,510 Series H, $6.80 Pfd. .......................... 241,274 5,000 Series I, $7.00 Pfd. .......................... 495,000 6,170 Ohio Edison Company, 4.44% Pfd. .................................... 340,121 10,000 Pacificorp, 7.48% Sinking Fund Pfd. ....................... 1,066,250 18,400 Pennsylvania Power Company, 7.75% Pfd. .................................... 1,754,900 38,000 Pennsylvania Power & Light Company, $6.75 Pfd. .................................... 3,586,250 PSI Energy, Inc.: 4,850 6.875% Pfd. ................................... 461,963 102,782 7.44% Pfd. .................................... 2,595,246 10,000 Public Service Company of New Mexico, 4.58% PVT Pfd. .......................................... 480,000 Public Service Electric & Gas Company: 7,000 4.08% Pfd. .................................... 408,625 18,457 5.05% Pfd. .................................... 1,331,211 9,300 5.28% Pfd. .................................... 700,988 5,000 6.92% Pfd. .................................... 486,875 Puget Sound Power & Light Company: 30,150 7.75% Sinking Fund Pfd. ....................... 3,180,825 31,500 7.875% Pfd. ................................... 799,312 140,000 San Diego Gas & Electric Company, 6.80% Pfd. .................................... 3,391,500 Texas Utilities Electric Company: 8,600 $4.64 Pfd. .................................... 543,950 8,300 $7.98 Pfd. .................................... 894,325 5,200 Union Electric Company, $7.64 Pfd. .................................... 539,500 Virginia Electric & Power Company: 17,700 $6.98 Pfd. .................................... 1,745,663 26,260 $7.05 Pfd. .................................... 2,606,305 98,200 Washington Natural Gas Company, Series II, 7.45% Pfd. ......................... 2,479,550 ------------ TOTAL UTILITY FIXED RATE PREFERRED STOCK ............................... 74,599,744 ------------ BANKING -- 20.7% 58,600 Ahmanson (H.F.) & Company, Series C, 8.40% Pfd. .......................... 1,508,950 50,771 Bank of Boston Corporation, Series E, 8.60% Pfd. .......................... 1,297,834 67,300 Bank of New York Company, Inc., Series B, 8.60% Pfd. .......................... 1,737,181 BankAmerica Corporation: 68,900 Series L, 8.16% Pfd. .......................... 1,756,950 29,100 Series M, 7.875% Pfd. ......................... 736,594 8,600 Series N, 8.50% Pfd. .......................... 221,987 Chase Manhattan Corporation: 5,000 Series A, 10.50% Pfd. ......................... 143,750 25,600 Series B, 9.76% Pfd. .......................... 726,400 142,089 Series C, 10.84% Pfd. ......................... 4,236,028 14,150 Series F, 8.32% Pfd. .......................... 367,016 5,000 Series G, 10.96% Pfd. ......................... 149,375 158,200 Series I, 7.92% Pfd. .......................... 4,063,763 260,455 Series J, 7.58% Pfd. .......................... 6,592,767 70,850 Citicorp, Series 22, 7.75% Pfd. ......................... 1,824,387 12,500 First Chicago NBD, Series E, 8.45% Pfd. .......................... 326,562 Fleet Financial Group, Inc.: 69,700 Series VI, 6.75% Pfd. ......................... 3,293,325 37,600 Series VII, 6.60% Pfd. ........................ 1,818,900 8,200 Series B, 10.12% Pfd. ......................... 217,300 20,000 Series E, 9.35% Pfd. .......................... 547,500 99,800 Great Western Financial Corporation, 8.30% Pfd. .................................... 2,563,612 45,000 KeyCorp, Series A, 10.00% Pfd. ......................... 1,144,688 97,375 MBNA Corporation, Series A, 7.50% Pfd. .......................... 2,422,203 91,000 Morgan (J.P.) & Company Inc., Series H, 6.625% Pfd. ......................... 4,299,750 24,900 Republic New York Corporation, Series C, $1.9375 Pfd. ........................ 636,506 Wells Fargo & Company: 15,000 Series F, 9.875% Pfd. ......................... 392,813 26,005 Series G, 9.00% Pfd. .......................... 685,882 ------------ TOTAL BANKING FIXED RATE PREFERRED STOCK ............................... 43,712,023 ------------ FINANCIAL SERVICES -- 4.1% Household International, Inc.: 20,200 Series 1992 A, 8.25% Pfd. ..................... 541,612 149,400 Series 1993 A, 7.35% Pfd. ..................... 3,716,325 95,498 Lehman Brothers Holdings Inc., 5.00% Conv. Pfd. .............................. 2,313,439 69,600 Merrill Lynch & Company, Inc., Series A, 9.00% Pfd. .......................... 1,987,950 ------------ TOTAL FINANCIAL SERVICES FIXED RATE PREFERRED STOCK ............................... 8,559,326 ------------ INDUSTRIAL -- 3.0% 25,000 Coastal Corporation, Series H, $2.125 Pfd. ......................... 631,250 9,520 Dial Corporation, $4.75 Sinking Fund Pfd. ....................... 554,540 132,800 Ford Motor Company, Series B, 8.25% Pfd. .......................... 3,560,700 65,700 James River Corporation, Series O, 8.25% Pfd. .......................... 1,634,288 ------------ TOTAL INDUSTRIAL FIXED RATE PREFERRED STOCK ............................... 6,380,778 ------------ INSURANCE -- 1.7% 116,000 AON Corporation, 8.00% Pfd. .................................... 2,965,250 25,000 Berkley (W.R.) Corporation, Series A, 7.375% Pfd. ......................... 611,875 ------------- TOTAL INSURANCE FIXED RATE PREFERRED STOCK ............................... 3,577,125 ------------ TOTAL FIXED RATE PREFERRED STOCK ............................... 136,828,996 ------------ TOTAL PREFERRED STOCK (Cost $193,269,191) ........................... 196,873,615 ------------ OTHER SECURITIES -- 3.3% 43,500 Duquesne Capital, Series A, 8.375% MIPS ......................... 1,055,963 106,700 MCI Capital, Series A, 8.00% QUIPS ......................... 2,563,468 TU Capital: 29,050 Series M, 8.25% TOPRS ......................... 715,356 8,000 Series N, 9.00% TOPRS ......................... 203,000 30,500 Series O, 8.00% QUIPS ......................... 741,913 Travelers/Aetna Property & Casualty Capital: 21,200 Series A, 8.08% TOPRS ......................... 520,725 49,700 Series B, 8.00% TOPRS ......................... 1,208,331 ------------- TOTAL OTHER SECURITIES (Cost $7,137,630) ............................. 7,008,756 ------------ MISCELLANEOUS SECURITIES -- 2.3% (Cost $4,113,856) Put Options on U.S. Treasury Bond Futures 4,779,622 ------------ PRINCIPAL VALUE AMOUNT (NOTE 1) ------ -------- REPURCHASE AGREEMENT -- 0.6% (Cost $1,355,000) $ 1,355,000 Agreement with UBS Securities Inc., 5.28% dated 5/31/96, to be repurchased at $1,355,596 on 6/3/96, collateralized by $1,370,000 U.S. Treasury Note, 6.00% due 8/31/97 (value $1,390,122) ............................ $ 1,355,000 ------------ TOTAL INVESTMENTS (Cost $205,875,677*) .................. 99.4% 210,016,993 OTHER ASSETS AND LIABILITIES (Net) ....................... 0.6 1,312,597 ---- ------------ NET ASSETS ..............................................100.0% $211,329,590 ====== ============ - ---------- * Aggregate cost for Federal tax purposes. ABBREVIATIONS: MIPS -- Monthly Income Preferred Shares (Note 7) QUIPS -- Quarterly Income Preferred Shares (Note 7) TOPRS -- Trust Originated Preferred Securities (Note 7) - ------------------------------------------------------------------------------ See Notes to Financial Statements. Preferred Income Fund Incorporated STATEMENT OF ASSETS AND LIABILITIES MAY 31, 1996 (UNAUDITED) - ----------------------------------- ASSETS: Investments, at value (Cost $205,875,677) (Note 1) See accompanying schedule .................... $210,016,993 Receivable for securities sold ................. 3,785,606 Dividends and interest receivable .............. 1,337,190 Prepaid expense ................................ 82,504 ------------ Total Assets ............................... 215,222,293 LIABILITIES: Payable for securities purchased ............... $ 3,285,743 Dividends payable .............................. 357,360 Investment advisory fee payable (Note 2) ....... 99,814 Accrued expenses and other payables ............ 149,786 ----------- Total Liabilities .......................... 3,892,703 ------------ NET ASSETS ......................................... $211,329,590 ============ NET ASSETS consist of: Undistributed net investment income (Note 1) ... $ 332,555 Accumulated net realized gain on investments sold (Note 1) ................................ 7,482,609 Unrealized appreciation of investments (Note 3) ..................................... 4,141,316 Par value of Common Stock ...................... 98,386 Paid-in capital in excess of par value of Common Stock ................................. 141,774,724 Money Market Cumulative Preferred(TM) Stock (Note 5) ..................................... 57,500,000 ------------ Total Net Assets ........................... $211,329,590 ============ PER SHARE --------- NET ASSETS AVAILABLE TO: Money Market Cumulative Preferred(TM) Stock (575 shares outstanding) redemption value ........................................ $100,000.00 $ 57,500,000 Accumulated undeclared dividends on Money Market Cumulative Preferred(TM) Stock ........ 100.00 57,500 ----------- ------------ $100,100.00 57,557,500 =========== Common Stock (9,838,571 shares outstanding) .... $15.63 153,772,090 ====== ------------ TOTAL NET ASSETS ................................... $211,329,590 ============ - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED MAY 31, 1996 (UNAUDITED) -------------------------------------------------- INVESTMENT INCOME: Dividends ..................................... $ 7,733,449 Interest ...................................... 103,751 ------------ Total Investment Income ................... 7,837,200 EXPENSES: Investment advisory fee (Note 2) .............. $588,088 Administration fee (Note 2) ................... 199,713 Money Market Cumulative Preferred(TM) broker commissions and Auction Agent fees .......... 73,078 Shareholder servicing agent fees (Note 2) ..... 60,568 Insurance expense ............................. 49,186 Economic consulting fee (Note 2) .............. 37,500 Legal and audit fees .......................... 34,751 Custodian fees (Note 2) ....................... 30,516 Directors' fees and expenses (Note 2) ......... 18,770 Amortization of deferred organization costs (Note 6) .................................... 3,833 Other ......................................... 60,752 -------- Total Expenses ............................ 1,156,755 ------------ NET INVESTMENT INCOME ............................. 6,680,445 ------------ REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS (Notes 1 and 3): Net realized gain on investments sold during the period .................................. 8,527,619 Change in net unrealized appreciation/ (depreciation) of investments during the period ........................... (10,440,322) ------------ NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS ... (1,912,703) ------------ NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ...................................... $ 4,767,742 ============ See Notes to Financial Statements. - ------------------------------------------------------------------------------- Preferred Income Fund Incorporated STATEMENT OF CHANGES IN NET ASSETS - ------------------------------------------ SIX MONTHS ENDED YEAR ENDED MAY 31, 1996 NOVEMBER 30, (UNAUDITED) 1995 ----------- -------------- OPERATIONS: Net investment income ................... $ 6,680,445 $ 14,633,331 Net realized gain/(loss) on investments sold during the period ................ 8,527,619 (2,440,261) Change in net unrealized appreciation/ (depreciation) of investments during the period ..................... (10,440,322) 22,527,612 ------------ ------------ Net increase in net assets resulting from operations ....................... 4,767,742 34,720,682 DISTRIBUTIONS: Dividends paid from net investment income to Money Market Cumulative Preferred(TM) Stock Shareholders (Note 5) ........... (1,306,463) (2,572,041) Distributions paid from net realized capital gains to Money Market Cumulative Preferred(TM) Stock Shareholders (Note 5) ........... -- (87,731) Dividends paid from net investment income to Common Stock Shareholders .......... (5,184,924) (13,352,608) Distributions paid from net realized capital gains to Common Stock Shareholders .......................... -- (8,002,477) FUND SHARE TRANSACTIONS: Increase from Common Stock transactions (Note 4) .............................. -- 2,961,204 ------------ ------------ NET INCREASE/(DECREASE) IN NET ASSETS FOR THE PERIOD (1,723,645) 13,667,029 NET ASSETS: Beginning of period ..................... 213,053,235 199,386,206 ------------ ------------ End of period (including undistributed net investment income of $332,555 and $143,497, respectively) ........... $211,329,590 $213,053,235 ============ ============ See Notes to Financial Statements. - ------------------------------------------------------------------------------- Preferred Income Fund Incorporated FINANCIAL HIGHLIGHTS FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD. ------------------------------------------------------ Contained below is per share operating performance data, total investment returns, ratios to average net assets and other supplemental data. This information has been derived from information provided in the financial statements and market price data for the Fund's shares.
SIX MONTHS ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED MAY 31, 1996 NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, (UNAUDITED) 1995 1994 1993 1992 1991* ----------------------------------------------------------------------------------- OPERATING PERFORMANCE Net asset value, beginning of period ......... $ 15.80 $ 14.74 $ 18.39 $ 18.59 $ 16.56 $ 13.95 -------- -------- -------- -------- -------- -------- Net investment income ........................ 0.68 1.48 1.42 1.48 1.75 1.43 Net realized and unrealized gain/(loss) on investments ............................. (0.20) 2.05 (2.06) 1.37 2.82 2.67 -------- -------- -------- -------- -------- -------- Net increase/(decrease) in net asset value resulting from investment operations ................................. 0.48 3.53 (0.64) 2.85 4.57 4.10 Offering costs and Money Market Cumulative Preferred(TM) Stock underwriting commissions charged to paid-in capital ..... -- -- -- -- -- (0.27) DISTRIBUTIONS: Dividends paid from net investment income to Money Market Cumulative Preferred(TM) Stock Shareholders ........... (0.13) (0.26) (0.16) (0.12) (0.17) (0.15) Distributions paid from net realized capital gains to Money Market Cumulative Preferred(TM) Stock Shareholders ........... -- (0.01) (0.07) (0.07) (0.09) (0.04) Dividends paid from net investment income to Common Stock Shareholders ........ (0.53) (1.36) (1.15) (1.34) (1.72) (0.99) Distributions paid from net realized capital gains to Common Stock Shareholders ............................... -- (0.83) (1.64) (1.51) (0.59) -- Change in accumulated undeclared dividends on Money Market Cumulative Preferred(TM) Stock ........................ 0.01 (0.01) 0.01 (0.01) 0.03 (0.04) -------- -------- -------- -------- -------- -------- Total distributions .......................... (0.65) (2.47) (3.01) (3.05) (2.54) (1.22) -------- -------- -------- -------- -------- -------- Net asset value, end of period ............... $ 15.63 $ 15.80 $ 14.74 $ 18.39 $ 18.59 $ 16.56 ======== ======== ======== ======== ======== ======== Market value, end of period .................. $ 13.875 $ 14.125 $ 13.500 $ 18.375 $ 19.625 $ 17.875 ======== ======== ======== ======== ======== ======== Total investment return based on net asset ... 2.85% 25.13% (5.22)% 15.54% 27.70% 26.16% ==== ===== ===== ===== ===== ===== Total investment return based on market value*** 2.12% 22.14% (13.12)% 9.33% 24.89% 26.68% ==== ===== ====== ==== ===== ===== Net assets, end of period (in 000's) ......... $211,330 $213,053 $199,386 $225,896 $214,593 $187,928 ======== ======== ======== ======== ======== ======== RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS/SUPPLEMENTAL DATA: Net investment income ...................... 7.17%** 8.33% 7.55% 7.33% 8.58% 9.18%** Operating expenses ......................... 1.52%** 1.55% 1.52% 1.50% 1.63% 1.67%** Portfolio turnover rate .................... 42% 94% 98% 110% 86% 90% RATIO TO TOTAL AVERAGE NET ASSETS (WHICH INCLUDES MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK): Operating expenses (unaudited) .......... 1.10%** 1.11% 1.11% 1.11% 1.17% 1.23%** - ------------ *The Fund commenced operations on January 31, 1991. **Annualized. ***Assumes reinvestment of distributions.
- -------------------------------------------------------------------------------- Preferred Income Fund Incorporated FINANCIAL HIGHLIGHTS (CONTINUED) - ----------------------------------------------- The table below sets out information with respect to Money Market Cumulative Preferred(TM) Stock currently outstanding.
INVOLUNTARY AVERAGE ASSET LIQUIDATING MARKET TOTAL SHARES COVERAGE PREFERENCE VALUE OUTSTANDING PER SHARE PER SHARE (1) PER SHARE (1) & (2) ----------- --------- ------------- ------------------- 5/31/96 575 $367,530 $100,000 $100,000 11/30/95 575 370,527 100,000 100,000 11/30/94 575 346,759 100,000 100,000 11/30/93 575 392,862 100,000 100,000 11/30/92 575 373,205 100,000 100,000 11/30/91 575 326,832 100,000 100,000 - ------------ (1) Excludes accumulated undeclared dividends. (2) See Note 5.
- -------------------------------------------------------------------------------- Preferred Income Fund Incorporated NOTES TO FINANCIAL STATEMENTS (UNAUDITED) ----------------------------------------- 1. SIGNIFICANT ACCOUNTING POLICIES Preferred Income Fund Incorporated (the "Fund") is a diversified, closed-end management investment company organized as a Maryland corporation on September 28, 1990 and is registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940, as amended. The Fund commenced operations on January 31, 1991. The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates. The policies described below are followed consistently by the Fund in the preparation of its financial statements in conformity with generally accepted accounting principles. Portfolio valuation: The net asset value of the Fund's Common Stock is determined by the Fund's administrator no less frequently than on the last business day of each week and month. It is determined by dividing the value of the Fund's net assets attributable to common shares by the number of shares of Common Stock outstanding. The value of the Fund's net assets attributable to common shares is deemed to equal the value of the Fund's total assets less (i) the Fund's liabilities, (ii) the aggregate liquidation value of the outstanding Money Market Cumulative Preferred(TM) Stock and (iii) accumulated and unpaid dividends on the outstanding Money Market Cumulative Preferred(TM) Stock. Securities listed on a national securities exchange are valued on the basis of the last sale on such exchange on the day of valuation. In the absence of sales of listed securities and with respect to securities for which the most recent sale prices are not deemed to represent fair market value and unlisted securities (other than money market instruments), securities are valued at the mean between the closing bid and asked prices when quoted prices for investments are readily available. Investments 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 reference to valuations of other securities which are considered comparable in quality, maturity and type. Investments in money market instruments, which mature in 60 days or less, are valued at amortized cost. Securities transactions and investment income: Securities transactions are recorded as of the trade date. Realized gains and losses from securities sold are recorded on the identified cost basis. Dividend income is recorded on ex-dividend dates. Interest income is recorded on the accrual basis. Option accounting principles: Upon the purchase of a put option by the Fund, the total purchase price paid is recorded as an investment. The market valuation is determined as set forth in the second preceding paragraph. When the Fund enters into a closing sale transaction, the Fund will record a gain or loss depending on the difference between the purchase and sale price. The risks associated with purchasing options and the maximum loss the Fund would incur are limited to the purchase price originally paid. Repurchase Agreements: The Fund may engage in repurchase agreement transactions. The Fund's Board of Directors reviews and approves periodically the eligibility of the banks and dealers with which the Fund enters into repurchase agreement transactions. The value of the collateral underlying such transactions is at least equal at all times to the total amount of the repurchase obligations, including interest. The Fund maintains possession of the collateral and, in the event of counterparty default, the Fund has the right to use the collateral to offset losses incurred. There is the possibility of loss to the Fund in the event the Fund is delayed or prevented from exercising its rights to dispose of the collateral securities. Dividends and distributions to shareholders: The Fund expects to declare dividends on a monthly basis to shareholders of Common Stock. The shareholders of Money Market Cumulative Preferred(TM) Stock are entitled to receive cumulative cash dividends as declared by the Fund's Board of Directors. Distributions to shareholders are recorded on the ex-dividend date. Any net realized short-term capital gains will be distributed to shareholders at least annually. Any net realized long-term capital gains may be distributed to shareholders at least annually or may be retained by the Fund as determined by the Fund's Board of Directors. Capital gains retained by the Fund are subject to tax at the corporate tax rate. Any taxes paid by the Fund on such net realized long-term gains may be used by the Fund's Common Stock Shareholders as a credit against their own tax liabilities subject to the Fund qualifying as a regulated investment company as described in the following paragraph. Federal income taxes: The Fund intends to qualify as a regulated investment company by complying with the requirements under subchapter M of the Internal Revenue Code of 1986, as amended, applicable to regulated investment companies and intends to distribute substantially all of its taxable net investment income to its shareholders. Therefore, no Federal income tax provision is required. Income distributions and capital gain distributions are determined in accordance with income tax regulations which may differ from generally accepted accounting principals. These differences are primarily due to differing treatments of income and gains on various investment securities held by the Fund, timing differences and the differing characterization of distributions made by the Fund. 2. INVESTMENT ADVISORY FEE, DIRECTORS' FEES, ECONOMIC CONSULTING FEE, ADMINISTRATION FEE AND TRANSFER AGENT FEE Flaherty & Crumrine Incorporated (the "Adviser") serves as the Fund's Investment Adviser. The Fund pays the Adviser a monthly fee at an annual rate of 0.625% of the value of the Fund's average monthly net assets up to $100 million and 0.50% of the value of the Fund's average monthly net assets in excess of $100 million. The Fund currently pays each Director who is not a director, officer or employee of the Adviser a fee of $9,000 per annum, plus $500 for each in-person meeting of the Board of Directors or any committee and $100 for each telephone meeting. In addition, the Fund will reimburse all Directors for travel and out-of-pocket expenses incurred in connection with such meetings. Lehman Brothers Global Economics ("Global Economics") (formerly Economic Advisors, Inc.), a department of Lehman Brothers Inc., serves as the Fund's Economic Consultant. The Fund pays Global Economics an annual fee equal to $75,000 for services provided. First Data Investor Services Group, Inc. ("FDISG"), a wholly owned subsidiary of First Data Corporation, serves as the Fund's Administrator and Transfer Agent. As Administrator, FDISG calculates the net asset value of the Fund's shares and generally assists in all aspects of the Fund's administration and operation. As compensation for FDISG's services as Administrator, the Fund currently pays FDISG a monthly fee at an annual rate of 0.19% of the value of the Fund's average monthly net assets. Boston Safe Deposit and Trust Company ("Boston Safe"), a wholly owned subsidiary of Mellon Bank Corporation, serves as the Fund's Custodian. As compensation for Boston Safe's services as Custodian, the Fund currently pays Boston Safe a monthly fee at an annual rate of 0.02% of the value of the Fund's average monthly net assets. FDISG also serves as the Fund's common stock servicing agent (transfer agent), dividend-paying agent and registrar, and as compensation for FDISG's services as transfer agent, the Fund currently pays FDISG a fee at an annual rate of 0.04% of the value of the Fund's average monthly net assets plus certain out-of-pocket expenses. If, however, the net assets of the Fund fall below $166,000,000, the fee will increase to an annual rate of 0.05% of the value of the Fund's average monthly net assets. Chase Manhattan Bank ("Auction Agent") serves as the Fund's Money Market Cumulative Preferred(TM) Stock transfer agent, registrar, dividend disbursing agent and redemption agent. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities for the six months ended May 31, 1996, excluding short-term investments, aggregated $88,705,867 and $86,312.471, respectively. At May 31, 1996, aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost was $8,639,541 and aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value was $4,498,225. 4. COMMON STOCK At May 31, 1996, 240,000,000 shares of $0.01 par value Common Stock were authorized. Common Stock transactions were as follows:
SIX MONTHS ENDED YEAR ENDED 5/31/96 11/30/95 ------------------------------ -------------------------------- SHARES AMOUNT SHARES AMOUNT ------ ------ ------ ------ Issued as reinvestment of dividends under the Dividend Reinvestment and Cash Purchase Plan .............. 0 $ 0 214,425 $2,961,204 ===== ===== ======= ==========
5. MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK The Fund's Articles of Incorporation authorize the issuance of up to 10,000,000 shares of $0.01 par value preferred stock. On April 17, 1991, the Fund received proceeds from the public offering of 575 shares of Money Market Cumulative Preferred(TM) Stock of $57,500,000 before offering costs of $234,375 and underwriting discounts and commissions paid directly to Lehman Brothers Inc. of $1,006,250. The Money Market Cumulative Preferred(TM) Stock is senior to the Common Stock and results in the financial leveraging of the Common Stock. Such leveraging tends to magnify both the risks and opportunities to Common Stock Shareholders. Dividends on shares of Money Market Cumulative Preferred(TM) Stock are cumulative. The Fund is required to meet certain asset coverage tests with respect to the Money Market Cumulative Preferred(TM) Stock. If the Fund fails to meet these requirements and does not correct such failure, the Fund may be required to redeem, in part or in full, Money Market Cumulative Preferred(TM) Stock at a redemption price of $100,000 per share plus an amount equal to the accumulated and unpaid dividends on such shares in order to meet these requirements. Additionally, failure to meet the foregoing asset requirements could restrict the Fund's ability to pay dividends to Common Stock Shareholders and could lead to sales of portfolio securities at inopportune times. If the Fund allocates any net gains or income ineligible for the Dividends Received Deduction to shares of the Money Market Cumulative Preferred(TM) Stock, the Fund may be required to make additional distributions to Money Market Cumulative Preferred(TM) Stock Shareholders or to pay a higher dividend rate in amounts needed to provide a return, net of tax, equal to the return had such originally paid distributions been eligible for the Dividends Received Deduction. An auction of the Money Market Cumulative Preferred(TM) Stock is generally held every 49 days. Existing shareholders may submit an order to hold, bid or sell such shares at par value on each auction date. Money Market Cumulative Preferred(TM) Stock Shareholders may also trade shares in the secondary market between auction dates. At May 31, 1996, 575 shares of Money Market Cumulative Preferred(TM) Stock were outstanding at the annual rate of 4.000%. The dividend rate, as set by the auction process, is generally expected to vary with short-term interest rates. These rates may vary in a manner unrelated to the income received on the Fund's assets, which could have either a beneficial or detrimental impact on net investment income and gains available to Common Stock Shareholders. While the Fund expects to structure the portfolio holdings and hedging transactions to lessen such risks to Common Stock Shareholders, there can be no assurance that such results will be attained. 6. ORGANIZATION COSTS Costs incurred by the Fund in connection with its organization and initial public offering of Common Stock and Money Market Cumulative Preferred(TM) Stock were $75,000 and $20,000, respectively, and were being amortized on a straight-line basis over a five year period beginning January 31, 1991 (the date of the Fund's commencement of investment operations) and April 17, 1991 (the date of the issuance of the Fund's Money Market Cumulative Preferred(TM) Stock), respectively. As of May 31, 1996, all such costs have been fully amortized. 7. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY The Fund invests primarily in adjustable and fixed rate preferred stocks. Under normal market conditions, the Fund invests at least 25% of its assets in securities issued by utilities and at least 25% of its assets in securities issued by companies in the banking industry. The Fund's portfolio may therefore be subject to greater risk and market fluctuation than a portfolio of securities representing a broader range of investment alternatives. The risks could adversely affect the ability and inclination of companies in these industries to declare and pay dividends or interest and the ability of holders of securities of such companies to realize any value from the assets of the issuer upon liquidation or bankruptcy. The Fund may invest up to 15% of its assets at the time of purchase in securities rated below investment grade, provided that no such investment may be rated below both "Ba" by Moody's Investors Service, Inc. and "BB" by Standard & Poor's Rating Group judged to be comparable in quality at the time of purchase; however, any such securities must be issued by an issuer having an outstanding class of senior debt rated investment grade. The Fund's investment policy regarding debt securities was amended on July 21, 1995. The amended policy allows the Fund to invest up to 35% of its assets in Monthly Income Preferred Shares ("MIPS"), Quarterly Income Debt Securities ("QUIDS"), Quarterly Income Preferred Shares ("QUIPS"), Trust Originated Preferred Securities ("TOPRS"), and similarly-structured instruments, subject to the quality standards set forth above. 8. SPECIAL INVESTMENT TECHNIQUES The Fund may employ certain investment techniques in accordance with its fundamental investment policies. These may include the use of when-issued and delayed delivery transactions. Securities purchased or sold on a when-issued or delayed delivery basis may be settled within 45 days after the date of the transaction. Such transactions may expose the Fund to credit and market valuation risk greater than that associated with regular trade settlement procedures. The Fund may also enter into transactions, in accordance with its fundamental investment policies, involving any or all of the following: lending of portfolio securities, short sales of securities, futures contracts, options on futures contracts, and options on securities. With the exception of purchasing securities on a when-issued or delayed delivery basis or lending portfolio securities, these transactions are used for hedging or other appropriate risk-management purposes or, under certain other circumstances, to increase income. As of May 31, 1996, the Fund owned put options on U.S. Treasury bond futures contracts. No assurance can be given that such transactions will achieve their desired purposes or will result in an overall reduction of risk to the Fund. 9. CAPITAL LOSS CARRYFORWARD At November 30, 1995, the Fund had available capital loss carryforwards of $1,725,143 to offset future realized net gains through the fiscal year ending November 30, 2003. - ------------------------------------------------------------------------------- Preferred Income Fund Incorporated QUARTERLY RESULTS OF INVESTMENT OPERATIONS (UNAUDITED) - -------------------------------------------------------------------------------
AVAILABLE TO COMMON STOCK SHAREHOLDERS ------------------------------------------------------------------------------- NET REALIZED AND NET UNREALIZED INCREASE/(DECREASE) INVESTMENT NET INVESTMENT GAIN/(LOSS) IN NET ASSETS FROM INCOME INCOME ON INVESTMENTS OPERATIONS ------------------------ ------------------------ -------------------------- ------------------------- QUARTER PER PER PER PER ENDED TOTAL SHARE* TOTAL SHARE* TOTAL SHARE* TOTAL SHARE* ------- ----- ------ ----- ------ ----- ------ ----- ------ 02/28/94 $3,991,490 $0.42 $2,775,369 $0.28 $ (479,581) $(0.04) $ 2,295,788 $0.24 05/31/94 3,806,205 0.40 2,772,065 0.28 (6,664,814) (0.69) (3,892,749) (0.41) 08/31/94 4,548,300 0.47 3,443,817 0.35 (2,282,276) (0.23) 1,161,541 0.12 11/30/94 3,896,667 0.40 2,781,099 0.29 (10,601,819) (1.10) (7,820,720) (0.81) 02/28/95 4,037,295 0.41 2,650,172 0.27 4,919,585 0.50 7,569,757 0.77 05/31/95 4,359,693 0.44 3,125,100 0.31 9,197,708 0.94 12,322,808 1.25 08/31/95 4,334,243 0.44 3,102,458 0.32 851,550 0.09 3,954,008 0.41 11/30/95 4,151,157 0.42 3,032,814 0.31 5,118,508 0.52 8,151,322 0.83 02/28/96 3,825,761 0.39 2,608,007 0.27 (4,650,657) (0.47) (2,042,650) (0.20) 05/31/96 4,011,439 0.41 2,859,221 0.29 2,737,954 0.27 5,597,175 0.56 - ---------- * Per share of common stock.
- -------------------------------------------------------------------------------
Preferred Income Fund Incorporated FINANCIAL DATA PER SHARE OF COMMON STOCK (UNAUDITED) - ------------------------------------- DIVIDEND DIVIDEND NET ASSET NYSE REINVESTMENT PAID VALUE CLOSING PRICE PRICE (1) -------- --------- ------------- ------------ December 29, 1995 ..................................... $0.087 $15.54 $13.500 $13.48 January 31, 1996 ...................................... 0.087 15.61 13.625 13.74 February 29, 1996 ..................................... 0.087 15.33 13.625 13.65 March 29, 1996 ........................................ 0.087 15.45 13.125 13.22 April 30, 1996 ........................................ 0.087 15.43 13.250 13.20 May 31, 1996 .......................................... 0.092 15.63 13.875 13.80
- ---------- (1) See ADDITIONAL INFORMATION; Dividend Reinvestment and Cash Purchase Plan on pages 21 and 22 of this report. - ------------------------------------------------------------------------------- Preferred Income Fund Incorporated ADDITIONAL INFORMATION (UNAUDITED) --------------------------------------- DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"), a shareholder whose Common Stock is registered in his own name will have all distributions reinvested automatically by FDISG as agent under the Plan, unless the shareholder elects to receive cash. Distributions with respect to shares registered in the name of a broker-dealer or other nominee (that is, in "street name") may be reinvested by the broker or nominee in additional shares under the Plan, but only if the service is provided by the broker or nominee, unless the shareholder elects to receive distributions in cash. A shareholder who holds Common Stock registered in the name of a broker or other nominee may not be able to transfer the Common Stock to another broker or nominee and continue to participate in the Plan. Investors who own Common Stock registered in street name should consult their broker or nominee for details regarding reinvestment. The number of shares of Common Stock distributed to participants in the Plan in lieu of a cash dividend is determined in the following manner. Whenever the market price per share of the Fund's Common Stock is equal to or exceeds the net asset value per share on the valuation date, participants in the Plan will be issued new shares valued at the higher of net asset value or 95% of the then current market value. Otherwise, FDISG will buy shares of the Fund's Common Stock in the open market, on the New York Stock Exchange or elsewhere, on or shortly after the payment date of the dividend or distribution and continuing until the ex-dividend date of the Fund's next distribution to holders of the Common Stock or until it has expended for such purchases all of the cash that would otherwise be payable to the participants. The number of purchased shares that will then be credited to the participants' accounts will be based on the average per share purchase price of the shares so purchased, including brokerage commissions. If FDISG commences purchases in the open market and the then current market price of the shares (plus any estimated brokerage commissions) subsequently exceeds their net asset value most recently determined before the completion of the purchases, FDISG will attempt to terminate purchases in the open market and cause the Fund to issue the remaining dividend or distribution in shares. In this case, the number of shares received by the participant will be based on the weighted average of prices paid for shares purchased in the open market and the price at which the Fund issues the remaining shares. These remaining shares will be issued by the Fund at the higher of net asset value or 95% of the then current market value. Plan participants are not subject to any charge for reinvesting dividends or capital gains distributions. Each Plan participant will, however, bear a proportionate share of brokerage commissions incurred with respect to FDISG's open market purchases in connection with the reinvestment of dividends or capital gains distributions. For the six months ended May 31, 1996, $4,720 in brokerage commissions were incurred. The automatic reinvestment of dividends and capital gains distributions will not relieve Plan participants of any income tax that may be payable on the dividends or capital gains distributions. A participant in the Plan will be treated for Federal income tax purposes as having received, on the dividend payment date, a dividend or distribution in an amount equal to the cash that the participant could have received instead of shares. In addition to acquiring shares of Common Stock through the reinvestment of cash dividends and distributions, a shareholder may invest any further amounts from $100 to $3,000 semi-annually at the then current market price in shares purchased through the Plan. Such semi-annual investments are subject to any brokerage commission charges incurred. A shareholder whose Common Stock is registered in his or her own name may terminate participation in the Plan at any time by notifying FDISG in writing, by completing the form on the back of the Plan account statement and forwarding it to FDISG or by calling FDISG directly. A termination will be effective immediately if notice is received by FDISG not less than 10 days before any dividend or distribution record date. Otherwise, the termination will be effective, and only with respect to any subsequent dividends or distributions, on the first day after the dividend or distribution has been credited to the participant's account in additional shares of the Fund. Upon termination and according to a participant's instructions, FDISG will either (a) issue certificates for the whole shares credited to the shareholder's Plan account and a check representing any fractional shares or (b) sell the shares in the market. Shareholders who hold common stock registered in the name of a broker or other nominee should consult their broker or nominee to terminate participation. The Plan is described in more detail in the Fund's Plan brochure. Information concerning the Plan may be obtained from FDISG at 1-800-331-1710. DIRECTORS PREFERRED Martin Brody INCOME Donald F. Crumrine, CFA FUND Robert T. Flaherty, CFA Morgan Gust Semi-Annual Robert F. Wulf Report May 31, 1996 OFFICERS Robert T. Flaherty, CFA Chairman of the Board and President Donald F. Crumrine, CFA Vice President and Secretary Robert M. Ettinger, CFA Vice President Peter C. Stimes, CFA Vice President and Treasurer Carl D. Johns Assistant Treasurer INVESTMENT ADVISER Flaherty & Crumrine Incorporated QUESTIONS CONCERNING YOUR SHARES OF PREFERRED INCOME FUND? * If your shares are held in a Brokerage Account, contact your Broker. * If you have physical possession of your shares in certificate form, contact the Fund's Transfer Agent & Shareholder Servicing Agent -- First Data Investor Services Group, Inc. P.O. Box 1376 Boston, MA 02104 1-800-331-1710 THIS REPORT IS SENT TO SHAREHOLDERS OF PREFERRED INCOME FUND INCORPORATED FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR OF ANY SECURITIES MENTIONED IN THIS REPORT. -----END PRIVACY-ENHANCED MESSAGE-----