-----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, Fy6WiKv/DcGpNFtxdVBJAcYfSFFCrzUP52auZlbYUvU4yH8nETCI8+Em+w79jSKE ExDudtg0OKm50hTg3Z2Hbg== 0000935069-01-500270.txt : 20010716 0000935069-01-500270.hdr.sgml : 20010716 ACCESSION NUMBER: 0000935069-01-500270 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20010531 FILED AS OF DATE: 20010713 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: SEC FILE NUMBER: 811-06179 FILM NUMBER: 1680470 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 prefinc.txt PREFERRED INCOME FUND SEMI-ANNUAL PREFERRED INCOME FUND INCORPORATED Dear Shareholder: The Preferred Income Fund continued to do well in a period that was rather challenging for many investors. Through May 31, 2001, total returns on the Fund's net asset value were 6.96% for the first half of fiscal 2001 and 17.08% for the trailing twelve months. The total returns on the market price of the shares were better since the market discount from NAV narrowed. Remember the ancient curse that says, "You shall live in interesting times!" Well, that's the way it has been in the preferred market lately. There were good places to be and also plenty of bad ones. Furthermore, that was true for broad market sectors as well as for individual preferreds within those sectors. The Fund is always seeking to take advantage of such market inefficiencies, and it has paid off. A good deal of the Fund's success has come from simply being in the right preferreds at the right time. The following pie chart shows the allocation of the Fund's portfolio among major market sectors. For those who have lives away from preferreds, we should explain the distinction between hybrid and traditional preferreds. Hybrids do not offer any special tax advantages to investors. In contrast, traditional preferreds qualify for the Dividends Received Deduction (the "DRD") that makes their dividends 70% tax-free to corporate investors. PORTFOLIO ALLOCATION AS OF 5/31/2001 [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC ADJUSTABLE RATES 17.2% TRADITIONAL FIXED RATES 40.2% HYBRID PREFERREDS 37.5% CASH & OTHER 5.1% Generally speaking, hybrids performed very well, while traditional DRD eligible preferreds lagged far behind. On the surface, this disparity appears to have created some very attractive values among traditional preferreds. However, the specific issues that we would most like to own are still hard to find in the market. We are constantly looking for opportunities resulting from this situation. The steps taken by the Federal Reserve to cut short-term interest rates helped us by reducing the cost of the Fund's leverage. The rate paid by the Fund on its outstanding shares of Money Market Cumulative Preferred(TRADE MARK) stock is adjusted to the current level of short-term rates every 49 days through an auction process. Typically, the cost to the Fund comes down as short-term rates fall. That's good for the holders of our common stock. In contrast, the Fed's shift toward easier money did not have much of an effect on long-term interest rates. A decline in those rates last winter was effectively reversed by a spurt in the spring. Although the ride was occasionally exciting, long-term interest rate shifts and the Fund's hedges did not play a major role in the results for the first half of fiscal 2001. The following Questions & Answers section covers several additional key points concerning the Fund. We urge you to read it carefully. For updated information on the Fund at any time, we also recommend visiting our web site at WWW.PREFERREDINCOME.COM. Sincerely, /S/ ROBERT T. FLAHERTY Robert T. Flaherty CHAIRMAN OF THE BOARD June 20, 2001 QUESTIONS & ANSWERS HOW WOULD MOVING MONEY FROM HYBRIDS INTO TRADITIONAL PREFERREDS AFFECT THE FUND'S INCOME? The impact on income of adding a reasonable amount of traditional preferreds to the Fund's portfolio could be less than you might think. Traditional preferreds typically do yield less than hybrid preferreds, although that yield sacrifice is quite small at the moment. Furthermore, there are some offsetting factors. Traditional preferreds qualify for the Dividends Received Deduction (the "DRD"), which reduces the cost of the Fund's leverage in a rather complicated way. In addition, the cost of that leverage has come down due to lower short-term interest rates. All things considered, we are presently comfortable with the Fund's existing dividend rate. In the long run, the best way to get more income is to have more money to invest. Our experience has shown that the best way to get more money is to buy the cheapest preferreds available. Realistically, the biggest challenge will probably be finding enough cheap traditional preferreds that fit well into the Fund's portfolio. 2 IS THE FUND INVOLVED IN THE CALIFORNIA UTILITY SITUATION? The Fund does not own any shares of the big California electric utilities that are flirting with bankruptcy. That is a good thing, too. California seems to be making the worst of a bad situation. We work hard on analyzing the creditworthiness of major utilities. After all, that's our job given the large concentration of utility preferreds in the Fund's portfolio. We probably won't be right every time, but we did understand the problem in California long before the market saw it coming. This brings to mind the saying often attributed to Ben Hogan. "Golf is a game of luck, and the more you practice, the luckier you get." IS THERE ANYTHING NEW CONCERNING THE FUND'S HEDGING STRATEGIES? Economics have favored continuing to hedge by purchasing put options on Treasury bond futures contracts as we have in the past. As previously discussed in these reports, we believe that the purchase of options on interest rate swaps (called "swaptions") could also be a very suitable part of our hedging strategy. We have been waiting for the "right price" for swaptions, and our patience has been well rewarded so far. No hedge can be any better than the price that you pay for it. We have been willing to accept somewhat more exposure to the risk of rising long-term interest rates in return for reducing the potential cost of the hedge. This has seemed appropriate in view of the weakness in the economy, the demonstrated uncertainty in the common stock market, and the Federal Reserve's determined effort to lower interest rates. It is analogous to buying an insurance policy with a slightly larger deductible in order to save money on the premium. We would still expect the hedge to provide some welcome relief should long-term interest rates suddenly soar. IS THE SHRINKING SIZE OF THE TREASURY BOND MARKET STILL A PROBLEM FOR THE FUND? Not at the moment! The Treasury continues to use the federal budget surplus to buy back and retire some of its outstanding bonds. Nonetheless, the market has adjusted to this situation, much as we have previously suggested in these reports. Treasury bonds have resumed their role as lead dog, pointing the way for other fixed income securities. This has made hedging the Fund's portfolio much less difficult. The battles in Washington over the recently enacted tax cuts and the competing proposals for spending the rest of the expected federal budget surpluses have only reinforced our view of Treasury bonds. "The idea that the folks in Washington can keep their fingers out of this fiscal cookie jar strains credibility. Furthermore, the projections assume away the possibility of recessions that could sharply reduce the expected surpluses. Before Treasury bonds dry up and blow away, new forces could easily come into play." The previous quotation is from our semi-annual report last year. The more things change, the more they stay the same! WHERE DO THINGS STAND NOW ON THE PROPOSED CHANGES IN MOODY'S RATING SYSTEM AND ITS EFFECT ON THE FUND? As mentioned in the Fund's November 30, 2000 annual report, Moody's Investors Service intends to restructure the scale on which it rates preferred stocks in order to make those ratings more consistent with its ratings on bonds. In response, we have obtained the necessary approval from Moody's of some changes in the Fund's corporate articles governing its outstanding shares of Money Market Cumulative 3 Preferred(TRADE MARK) stock ("MMP"). We currently expect that these changes, which will become effective when Moody's actually changes its rating scale, will help us avoid the unintended, but potentially substantial, negative effects of Moody's restructuring on the Fund's MMP. We are now awaiting the publication of Moody's rating changes, which could happen fairly soon. HOW IS THE MARKET PRICE OF THE FUND'S SHARES TRACKING THEIR NET ASSET VALUE? The following graph tells the story. Clearly, the premiums and discounts bounce around from week to week, reflecting changes in both the market price and the NAV. The best source of up-to-date data is our web site at www.preferredincome.com. PREFERRED INCOME FUND PREMIUM/DISCOUNT OF MARKET PRICE TO NAV [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC Date Premium/Discount 12/28/1990 1/4/1991 1/11/1991 1/18/1991 1/25/1991 2/1/1991 2/8/91 0.0842 2/15/91 0.0438 2/22/91 0.0395 3/1/91 0.0424 3/8/91 0.0183 3/15/91 0.0151 3/22/91 0.0201 3/29/91 0.023 4/5/91 0.0149 4/12/91 0.0196 4/19/91 0.0314 4/26/91 0.0268 5/3/91 0.023 5/10/91 0.0199 5/17/91 0.0146 5/24/91 0.0219 5/31/91 0.051 6/7/91 0.0423 6/14/91 0.0417 6/21/91 0.0536 6/28/91 0.0659 7/5/91 0.0726 7/12/91 0.0659 7/19/91 0.0643 7/26/91 0.0549 8/2/91 0.0678 8/9/91 0.054 8/16/91 0.0449 8/23/91 0.0648 8/30/91 0.0314 9/6/91 0.057 9/13/91 0.0883 9/20/91 0.0651 9/27/91 0.0682 10/4/91 0.0764 10/11/91 0.0745 10/18/91 0.0719 10/25/91 0.0662 11/1/91 0.0693 11/8/91 0.0827 11/15/91 0.0801 11/22/91 0.065 11/29/91 0.0807 12/6/91 0.0716 12/13/91 0.0791 12/20/91 0.0839 12/27/91 0.1136 1/3/92 0.1091 1/10/92 0.1116 1/17/92 0.0978 1/24/92 0.0912 1/31/92 0.0417 2/7/92 0.0478 2/14/92 0.0613 2/21/92 0.0417 2/28/92 0.0381 3/6/92 0.0339 3/13/92 0.0447 3/20/92 0.0387 3/27/92 0.0327 4/3/92 0.0357 4/10/92 0.0452 4/17/92 0.0464 4/24/92 0.0423 5/1/92 0.0523 5/8/92 0.0382 5/15/92 0.0347 5/22/92 0.0083 5/29/92 0.0039 6/5/92 0.0302 6/12/92 0.0239 6/19/92 0.0227 6/26/92 0.0491 7/3/92 0.0491 7/10/92 0.0593 7/17/92 0.057 7/24/92 0.0712 7/31/92 0.058 8/7/92 0.0601 8/14/92 0.0389 8/21/92 0.0306 8/28/92 0.025 9/4/92 0.0228 9/11/92 0.0356 9/18/92 0.0489 9/25/92 0.0339 10/2/92 0.065 10/9/92 0.0417 10/16/92 0.0417 10/23/92 0.0378 10/30/92 0.0707 11/6/92 0.0378 11/13/92 0.059 11/20/92 0.0349 11/27/92 0.0506 12/4/92 0.068 12/11/92 0.0601 12/18/92 0.0582 12/25/92 0.0618 1/1/93 0.0739 1/8/93 0.0987 1/15/93 0.1145 1/22/93 0.1021 1/29/93 0.076 2/5/93 0.053 2/12/93 0.0452 2/19/93 0.0434 2/26/93 0.0628 3/5/93 0.0909 3/12/93 0.0538 3/19/93 0.0248 3/26/93 0.0638 4/2/93 0.0806 4/9/93 0.0764 4/16/93 0.0671 4/23/93 0.0764 4/30/93 0.0677 5/7/93 0.0918 5/14/93 0.0779 5/21/93 0.07 5/28/93 0.074 6/4/93 0.0497 6/11/93 0.0388 6/18/93 0.056 6/25/93 0.0703 7/2/93 0.0451 7/9/93 0.0541 7/16/93 0.049 7/23/93 0.0576 7/30/93 0.0598 8/6/93 0.079 8/13/93 0.0484 8/20/93 0.0377 8/27/93 0.0434 9/3/93 0.045 9/10/93 0.0361 9/17/93 0.0467 9/24/93 0.0321 10/1/93 0.0293 10/8/93 0.011 10/15/93 0.0173 10/22/93 0.0048 10/29/93 -0.0075 11/5/93 0.0095 11/12/93 0.0019 11/19/93 -0.0316 11/26/93 0.003 12/3/93 -0.0175 12/10/93 -0.0103 12/17/93 0.0323 12/24/93 -0.0051 12/31/93 -0.0287 1/7/94 0.0093 1/14/94 0.0149 1/21/94 -0.0126 1/28/94 -0.0316 2/4/94 -0.0196 2/11/94 -0.0224 2/18/94 -0.0741 2/25/94 -0.0539 3/4/94 -0.0092 3/11/94 -0.027 3/18/94 -0.0379 3/25/94 -0.0505 4/1/94 -0.0466 4/8/94 -0.0713 4/15/94 -0.0596 4/22/94 -0.0598 4/29/94 -0.0863 5/6/94 -0.0581 5/13/94 -0.0635 5/20/94 -0.0409 5/27/94 -0.0397 6/3/94 -0.0289 6/10/94 0.0146 6/17/94 -0.0037 6/24/94 0.0175 7/1/94 0.0006 7/8/94 0.0299 7/15/94 0.0188 7/22/94 -0.0084 7/29/94 -0.0082 8/5/94 -0.0161 8/12/94 -0.0215 8/19/94 -0.0263 8/26/94 -0.0439 9/2/94 -0.0379 9/9/94 -0.0232 9/16/94 -0.0293 9/23/94 -0.0273 9/30/94 -0.0565 10/7/94 -0.1141 10/14/94 -0.1089 10/21/94 -0.1416 10/28/94 -0.0732 11/4/94 -0.0783 11/11/94 -0.0912 11/18/94 -0.0951 11/25/94 -0.0788 12/2/94 -0.0593 12/9/94 -0.0508 12/16/94 -0.0554 12/23/94 -0.0822 12/30/94 -0.0836 1/6/95 -0.0201 1/13/95 -0.0134 1/20/95 -0.0525 1/27/95 -0.0697 2/3/95 0.0061 2/10/95 -0.0289 2/17/95 -0.0419 2/24/95 -0.0004 3/3/95 0.0035 3/10/95 -0.0445 3/17/95 -0.0666 3/24/95 -0.0568 3/31/95 -0.029 4/7/95 -0.0256 4/14/95 -0.0217 4/21/95 -0.0439 4/28/95 -0.0271 5/5/95 -0.0398 5/12/95 -0.0178 5/19/95 -0.041 5/26/95 -0.087 6/2/95 -0.0259 6/9/95 -0.0608 6/16/95 -0.0759 6/23/95 -0.0884 6/30/95 -0.0753 7/7/95 -0.0844 7/14/95 -0.0995 7/21/95 -0.0976 7/28/95 -0.0917 8/4/95 -0.0888 8/11/95 -0.0935 8/18/95 -0.0942 8/25/95 -0.0832 9/1/95 -0.0698 9/8/95 -0.0816 9/15/95 -0.0968 9/22/95 -0.0978 9/29/95 -0.0816 10/6/95 -0.0974 10/13/95 -0.1094 10/20/95 -0.1048 10/27/95 -0.121 11/3/95 -0.1151 11/10/95 -0.1146 11/17/95 -0.1117 11/24/95 -0.1043 12/1/95 -0.1071 12/8/95 -0.1192 12/15/95 -0.1244 12/22/95 -0.1337 12/29/95 -0.1313 1/5/96 -0.1365 1/12/96 -0.1354 1/19/96 -0.1379 1/26/96 -0.1251 2/2/96 -0.1244 2/9/96 -0.1238 2/16/96 -0.136 2/23/96 -0.1281 3/1/96 -0.1118 3/8/96 -0.1332 3/15/96 -0.1521 3/22/96 -0.1564 3/29/96 -0.1464 4/5/96 -0.1343 4/12/96 -0.1477 4/19/96 -0.1402 4/26/96 -0.1488 5/3/96 -0.1477 5/10/96 -0.1452 5/17/96 -0.1363 5/24/96 -0.1432 5/31/96 -0.1111 6/7/96 -0.118 6/14/96 -0.1003 6/21/96 -0.1129 6/28/96 -0.1049 7/5/96 -0.095 7/12/96 -0.098 7/19/96 -0.1071 7/26/96 -0.1077 8/2/96 -0.1105 8/9/96 -0.0574 8/16/96 -0.0714 8/23/96 -0.0705 8/30/96 -0.0669 9/6/96 -0.0824 9/13/96 -0.0756 9/20/96 -0.1186 9/27/96 -0.1106 10/4/96 -0.0861 10/11/96 -0.0941 10/18/96 -0.1077 10/25/96 -0.0858 11/1/96 -0.0778 11/8/96 -0.0831 11/15/96 -0.0833 11/22/96 -0.0653 11/29/96 -0.0606 12/6/96 -0.0667 12/13/96 -0.0831 12/20/96 -0.0749 12/27/96 -0.075 1/3/97 -0.0242 1/10/97 -0.0291 1/17/97 -0.0465 1/24/97 -0.041 1/31/97 -0.0459 2/7/97 -0.0675 2/14/97 -0.0544 2/21/97 -0.0539 2/28/97 -0.055 3/7/97 -0.0584 3/14/97 -0.0637 3/21/97 -0.0752 3/28/97 -0.0584 4/4/97 -0.0627 4/11/97 -0.0881 4/18/97 -0.0976 4/25/97 -0.0852 5/2/97 -0.0451 5/9/97 -0.0578 5/16/97 -0.0529 5/23/97 -0.0554 5/30/97 -0.0541 6/6/97 -0.051 6/13/97 -0.0486 6/20/97 -0.0486 6/27/97 -0.0429 7/4/97 -0.0308 7/11/97 -0.0537 7/18/97 -0.0583 7/25/97 -0.0519 8/1/97 -0.0498 8/8/97 -0.0583 8/15/97 -0.0708 8/22/97 -0.0739 8/29/97 -0.0469 9/5/97 -0.0595 9/12/97 -0.0623 9/19/97 -0.0651 9/26/97 -0.0604 10/3/97 -0.0299 10/10/97 -0.0385 10/17/97 -0.0477 10/24/97 -0.0558 10/31/97 -0.0517 11/7/97 -0.0425 11/14/97 -0.0554 11/21/97 -0.067 11/28/97 -0.0313 12/5/97 -0.0431 12/12/97 -0.0519 12/19/97 -0.0632 12/26/97 -0.0621 1/2/98 -0.009 1/9/98 -0.0211 1/16/98 -0.0012 1/23/98 -0.0431 1/30/98 -0.0358 2/6/98 -0.0364 2/13/98 -0.0474 2/20/98 -0.0466 2/27/98 -0.0446 3/6/98 -0.048 3/13/98 -0.0595 3/20/98 -0.0437 3/27/98 -0.0518 4/3/98 -0.0645 4/10/98 -0.0509 4/17/98 -0.058 4/24/98 -0.0663 5/1/98 -0.0422 5/8/98 -0.0589 5/15/98 -0.0681 5/22/98 -0.0702 5/29/98 -0.0496 6/5/98 -0.0556 6/12/98 -0.0586 6/19/98 -0.0599 6/26/98 -0.0479 7/3/98 -0.0496 7/10/98 -0.0558 7/17/98 -0.0565 7/24/98 -0.0645 7/31/98 -0.0503 8/7/98 -0.0614 8/14/98 -0.0779 8/21/98 -0.075 8/28/98 -0.0448 9/4/98 -0.0448 9/11/98 -0.0379 9/18/98 -0.0326 9/25/98 -0.0367 10/2/98 -0.0379 10/9/98 -0.0249 10/16/98 -0.0228 10/23/98 -0.0117 10/30/98 -0.0091 11/6/98 -0.014 11/13/98 -0.0423 11/20/98 -0.0394 11/27/98 -0.0267 12/4/98 -0.0373 12/11/98 -0.0212 12/18/98 -0.0355 12/25/98 -0.0127 1/1/99 -0.0106 1/8/99 -0.0182 1/15/99 -0.0372 1/22/99 -0.0557 1/29/99 -0.0557 2/5/99 -0.0536 2/12/99 -0.0687 2/19/99 -0.0647 2/26/99 -0.1014 3/5/99 -0.0826 3/12/99 -0.0747 3/19/99 -0.0935 3/26/99 -0.106 4/2/99 -0.0802 4/9/99 -0.0969 4/16/99 -0.1003 4/23/99 -0.0957 4/30/99 -0.0946 5/7/99 -0.0962 5/14/99 -0.0928 5/21/99 -0.1146 5/28/99 -0.1048 6/4/99 -0.1014 6/11/99 -0.0991 6/18/99 -0.0927 6/25/99 -0.1031 7/2/99 -0.0979 7/9/99 -0.0938 7/16/99 -0.1037 7/23/99 -0.0747 7/30/99 -0.0751 8/6/99 -0.0792 8/13/99 -0.0963 8/20/99 -0.0946 8/27/99 -0.0911 9/3/99 -0.1071 9/10/99 -0.0892 9/17/99 -0.1065 9/24/99 -0.0788 10/1/99 -0.0703 10/8/99 -0.0727 10/15/99 -0.1442 10/22/99 -0.1279 10/29/99 -0.1431 11/5/99 -0.1368 11/12/99 -0.1373 11/19/99 -0.1078 11/26/99 -0.1207 12/3/99 -0.1115 12/10/99 -0.1164 12/17/99 -0.1277 12/24/99 -0.1624 12/31/99 -0.1084 1/7/00 -0.0771 1/14/00 -0.0451 1/21/00 -0.1203 1/28/00 -0.1392 2/4/00 -0.0511 2/11/00 -0.0641 2/18/00 -0.0872 2/25/00 -0.0812 3/3/00 -0.0585 3/10/00 -0.0526 3/17/00 -0.0706 3/24/00 -0.1058 3/31/00 -0.1052 4/7/00 -0.0782 4/14/00 -0.0904 4/21/00 -0.0868 4/28/00 -0.0757 5/5/00 -0.0591 5/12/00 -0.0608 5/19/00 -0.0438 5/26/00 -0.0407 6/2/00 -0.0482 6/9/00 -0.0639 6/16/00 -0.067 6/23/00 -0.0678 6/30/00 -0.08 7/7/00 -0.0807 7/14/00 -0.0755 7/21/00 -0.0842 7/28/00 -0.0816 8/4/00 -0.0851 8/11/00 -0.0865 8/18/00 -0.0672 8/25/00 -0.0851 9/1/00 -0.0681 9/8/00 -0.0794 9/15/00 -0.0858 9/22/00 -0.0905 9/29/00 -0.1071 10/6/00 -0.0866 10/13/00 -0.0872 10/20/00 -0.0845 10/27/00 -0.0695 11/3/00 -0.0571 11/10/00 -0.0734 11/17/00 -0.0991 11/24/00 -0.1379 12/1/00 -0.0864 12/8/00 -0.0877 12/15/00 -0.1171 12/22/00 -0.0939 12/29/00 -0.0965 1/5/01 -0.0328 1/12/01 0.0028 1/19/01 -0.0285 1/26/01 -0.036 2/2/01 -0.0414 2/9/01 -0.029 2/16/01 -0.0314 2/23/01 -0.0321 3/2/01 0.0007 3/9/01 -0.0517 3/16/01 -0.0586 3/23/01 -0.0288 3/30/01 -0.0203 4/6/01 -0.0094 4/13/01 0.0117 4/20/01 -0.0229 4/27/01 -0.0088 5/4/01 0.0072 5/11/01 -0.0146 5/18/01 0.0029 5/25/01 -0.016 6/1/01 0.018 IS A SPECIAL YEAR-END DISTRIBUTION BY THE FUND LIKELY THIS YEAR? We doubt it. Significant year-end special distributions typically come from net capital gains realized by the Fund. The Fund has a capital loss carryforward from last year, which is likely to offset for tax purposes any gains that might be realized in the current fiscal year. We know that this isn't as much fun as getting a big year-end check, but it may also keep our shareholders from paying taxes unnecessarily. 4 - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated FINANCIAL DATA PER SHARE OF COMMON STOCK (UNAUDITED) ------------------------------------- DIVIDEND DIVIDENDS NET ASSET NYSE REINVESTMENT PAID VALUE CLOSING PRICE PRICE (1) --------- --------- ------------- ------------ December 31, 1999 ......... $0.5600 $13.74 $12.2500 $12.64 January 31, 2000 .......... 0.0820 13.65 12.0000 12.62 February 29, 2000 ......... 0.0820 13.45 12.5000 12.49 March 31, 2000 ............ 0.0820 13.62 12.1875 12.28 April 30, 2000 ............ 0.0820 13.05 12.0625 12.08 May 31, 2000 .............. 0.0820 12.75 12.0625 12.22 June 30, 2000 ............. 0.0820 13.18 12.1250 12.24 July 31, 2000 ............. 0.0820 13.28 12.3125 12.29 August 31, 2000 ........... 0.0820 13.50 12.3750 12.47 September 30, 2000 ........ 0.0820 13.51 12.0625 12.23 October 31, 2000 .......... 0.0820 13.27 12.3750 12.38 November 30, 2000 ......... 0.0820 13.41 12.1250 12.12 December 31, 2000 ......... 0.0820 13.42 12.1250 12.77 January 31, 2001 .......... 0.0820 13.68 13.0000 13.29 February 28, 2001 ......... 0.0820 13.87 13.5000 13.66 March 31, 2001 ............ 0.0820 13.78 13.5000 13.57 April 30, 2001 ............ 0.0820 13.69 13.6500 13.69 May 31, 2001 .............. 0.0820 13.83 13.8800 13.83 - -------------------------------------------------------------------------------- (1) Whenever the net asset value per share of the Fund's common stock is less than or equal to the market price per share on the payment date, new shares issued will be valued at the higher of net asset value or 95% of the then current market price. Otherwise, the reinvestment shares of common stock will be purchased in the open market. See Notes to Financial Statements. 5 - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS MAY 31, 2001 (UNAUDITED) - ---------------------------------- VALUE SHARES/$ PAR (NOTE 1) - ------------ -------- PREFERRED STOCKS AND SECURITIES -- 94.9% ADJUSTABLE RATE PREFERRED STOCKS -- 17.2% BANKING -- 12.2% Bank One Corporation: 107,775 Series B, Adj. Rate Pfd. ..... $ 9,645,862* 4,900 Series C, Adj. Rate Pfd. ..... 472,850* Citigroup Inc.: 45,000 Series Q, Adj. Rate Pfd. ..... 959,062* 102,850 Series R, Adj. Rate Pfd. ..... 2,191,991* J.P. Morgan Chase & Co.: 20,050 Series A, Adj. Rate Pfd. ..... 1,553,875* 26,000 Series L, Adj. Rate Pfd. ..... 2,216,500* 30,000 Series N, Adj. Rate Pfd. ..... 652,500* 134,850 Wells Fargo & Company, Series B, Adj. Rate Pfd. ............... 5,933,400* ------------ TOTAL BANKING ADJUSTABLE RATE PREFERRED STOCKS .............. 23,626,040 ------------ UTILITIES-- 5.0% 37,000 Delmarva Power & Light, Adj. Rate Pfd. ............... 3,302,250* Niagara Mohawk Power Corporation: 154,879 Series A, Adj. Rate Pfd. ..... 3,600,937* 29,674 Series B, Adj. Rate Pfd. ..... 734,431* 88,745 Series C, Adj. Rate Pfd. ..... 2,196,439* ------------ TOTAL UTILITIES ADJUSTABLE RATE PREFERRED STOCKS .............. 9,834,057 ------------ TOTAL ADJUSTABLE RATE PREFERRED STOCKS .............. 33,460,097 ------------ FIXED RATE PREFERRED STOCKS AND SECURITIES -- 77.7% BANKING -- 21.2% 200 ABN AMRO North America., 6.59% Pfd., Series 144A ...... 191,921* BancWest Corporation: $6,500,000 First Hawaiian Capital I, 8.343% 7/1/27 Capital Security, Series B ... 6,391,060 Citigroup Inc.: 132,377 5.864% Pfd., Series M ........ 5,698,168* 21,850 6.231% Pfd., Series H ........ 995,158* VALUE SHARES/$ PAR (NOTE 1) ------------ -------- First Union Corporation: $1,500,000 First Union Capital II, 7.95% 11/15/29 Capital Security ............. $ 1,512,967 $1,750,000 First Union Institutional Capital II, 7.85% 1/1/27 Capital Security 1,702,391 $2,500,000 First Union Institutional Capital I, 8.04% 12/1/26 Capital Security 2,483,137 2,800 Firstar Realty LLC, 8.875% Pfd. REIT, 144A*** .... 2,947,238 GreenPoint Financial Corporation: $2,725,000 GreenPoint Capital Trust I, 9.10% 6/1/27 Capital Security 2,545,818 HSBC USA, Inc.: 60,600 $2.8575 Pfd. ................. 2,763,360* $2,635,000 Republic New York Capital II, 7.53% 12/4/26 STOPS .......... 2,514,093 62,189 J.P. Morgan Chase & Co. Pfd.10.84% ............. 1,593,282* Keycorp: $1,870,000 Keycorp Institutional Capital B, 8.25% 12/15/26 Capital Security ............. 1,889,317 $1,000,000 Keycorp Institutional Capital II, 6.875% 3/17/29 Capital Security 879,840 Bank of America Corporation: $3,160,000 NB Capital Trust IV 8.25%, 4/15/27 Capital Security ..... 3,209,533 Fleet Boston Financial Corporation: $1,000,000 Summit Capital Trust I, 8.40% 3/15/27 Capital Security, Series B ..................... 1,037,280 $2,750,000 Washington Mutual, Inc., 8.375% 6/1/27 Capital Security 2,770,982 ------------ TOTAL BANKING FIXED RATE PREFERRED STOCKS AND SECURITIES ................ 41,125,545 ------------ FINANCIAL SERVICES-- 15.0% Bear Stearns Companies, Inc.: 218,840 5.49% Pfd., Series G ......... 8,446,130* 11,790 5.72% Pfd., Series F ......... 474,017* 7,733 6.15% Pfd., Series E ......... 334,298* $3,972,000 Countrywide Credit Capital I, 8.00% 12/15/26 Capital Security 3,845,134 See Notes to Financial Statements. 6 - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31, 2001 (UNAUDITED) ------------------------------------ VALUE SHARES/$ PAR (NOTE 1) - ------------ -------- PREFERRED STOCKS AND SECURITIES (CONTINUED) FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED) FINANCIAL SERVICES (CONTINUED) 2,500 Heller Financial, Inc., 6.95% Pfd., Series D ......... $ 239,600* Household International, Inc.: 10,000 $4.30 Pfd. ................... 596,600* 2,405 5.00% Pfd. ................... 81,542* Lehman Brothers Holdings, Inc.: 50,650 5.67%, Series D .............. 2,058,416* 121,050 5.94% Pfd., Series C ......... 5,117,994* 165,055 USA Education, Inc., 6.97% Pfd., Series A ......... 8,000,216* ------------ TOTAL FINANCIAL SERVICES FIXED RATE PREFERRED STOCKS AND SECURITIES ................ 29,193,947 ------------ INSURANCE -- 10.3% Allstate Corporation: $1,900,000 Allstate Financing II, 7.83% 12/1/45 Capital Security 1,816,048 AON Corporation: $3,120,000 AON Capital Trust A, 8.205% 1/1/27 Capital Security 3,055,182 Conseco, Inc.: 14,850 Conseco Financing Trust I, 9.16% TOPrS .................. 327,368 75,000 Conseco Financing Trust VI, 9.00% TOPrS .................. 1,612,875 29,350 Conseco Financing Trust V, 8.70% TOPrS .................. 630,438 21 Prudential Human Resources Management Company, Inc., 6.30% Private Placement, Sinking Fund Pfd., Series A .......... 2,044,689* SAFECO Corporation: $2,480,000 SAFECO Capital Trust I, 8.072% 7/15/37 Capital Security 2,108,397 The St. Paul Companies, Inc.: $4,700,000 MMI Capital Trust I, 7.625% 12/15/27 Capital Security, Series B ..................... 4,444,343 VALUE SHARES/$ PAR (NOTE 1) - ------------ -------- UnumProvident Corporation: $4,000,000 Provident Financing Trust I, 7.405% 3/15/38 Capital Security ............. $ 3,390,780 Zurich Financial Services AG: 500 Zurich Registered Caps II, 6.58% ........................ 510,847* ------------ TOTAL INSURANCE FIXED RATE PREFERRED STOCKS AND SECURITIES ................ 19,940,967 ------------ OIL AND GAS-- 3.6% 3,700 Anadarko Petroleum Corporation, 5.46% Pfd. ................... 312,668* 41,300 Apache Corporation, 5.68% Pfd., Series B ......... 3,586,079* Coastal Corporation,: 42,800 Coastal Finance I, 8.375% TOPrS ................. 1,092,256 1,860 EOG Resources, Inc., 7.195% Pfd., Series B ........ 1,929,145* ------------ TOTAL OIL AND GAS FIXED RATE PREFERRED STOCKS AND SECURITIES ................ 6,920,148 ------------ MISCELLANEOUS INDUSTRIES -- 2.0% 5 BHP Operations, 6.76% Pfd. 144A*** ........... 512,145* 7,500 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B ......... 528,225* 57,600 Farmland Industries, Inc., 8.00% Pfd. 144A*** ........... 1,276,128* 6,000 Ocean Spray Cranberries, 6.25% Pfd. 144A*** ........... 486,270* 9,520 Viad Corporation, $4.75 Sinking Fund Pfd. ...... 522,981* Worldcom Inc.: 22,500 Corts Worldcom, 7.60% Pfd. CorTS ............. 547,425 ------------ TOTAL MISCELLANEOUS INDUSTRIES FIXED RATE PREFERRED STOCKS AND SECURITIES ................ 3,873,174 ------------ See Notes to Financial Statements. 7 - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31, 2001 (UNAUDITED) - ------------------------------------ VALUE SHARES/$ PAR (NOTE 1) - ------------ -------- PREFERRED STOCKS AND SECURITIES (CONTINUED) FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED) UTILITIES-- 25.6% 97,500 Alabama Power Company, 5.20% Pfd. ................... $ 1,925,137* 76,450 Appalachian Power Company, 8.00% QUIDS, Series B ........ 1,910,103 6,250 Avista Corporation, $6.95 Pfd., Series K ......... 572,406* 15,000 Baltimore Gas & Electric Company, 6.99% Pfd., Series 1995 ...... 1,548,600* 10,000 Boston Edison Company, 4.78% Pfd. ................... 704,850* Central Hudson Gas & Electric Corporation: 5,000 4.35% Pfd., Series D, Pvt. ... 324,800* 750 4.96% Pfd., Series E, Pvt. ... 54,758* 12,450 Columbus Southern Power Company, 7.92%, Jr. Sub. Debt., Series B 309,258 Connecticut Light and Power Company: 885 $2.06 Pfd. ................... 24,740* 5,073 $3.24 Pfd. ................... 221,462* 2,000 4.50% Pfd. ................... 61,070* 9,300 5.28% Pfd. ................... 335,172* 6,870 Dayton Power and Light Company, 3.90% Pfd., Series C ......... 398,254* Duke Energy Corporation: 5,550 4.50% Pfd., Series C ......... 376,956* 6,412 7.85% Pfd., Series S ......... 675,761* Entergy Arkansas, Inc.: 2,800 7.32% Pfd. ................... 260,554* 11,350 7.40% Pfd. ................... 1,067,695* 1,147 7.88% Pfd. ................... 119,879* 4,440 Entergy Gulf States Inc., 7.56% Pfd. ................... 400,199* Entergy Louisiana, Inc.: 260 7.84% Pfd. ................... 26,072* 106,138 8.00% Pfd., Series 92 ........ 2,600,912* 8,500 Entergy Mississippi, Inc., 7.44% Pfd. ................... 819,103* 5,350 Florida Power & Light Company, 4.35% Pfd., Series E, Pvt. ... 336,087* VALUE SHARES/$ PAR (NOTE 1) - ------------ -------- 5,000 Green Mountain Power, 7.32% Pfd., Series 1 ........ $ 393,225* Hawaiian Electric Company, Inc.: 20,000 HECO Capital Trust I, 8.05% QUIPS .................. 497,800 Illinois Power Company: 4,530 4.08% Pfd., Series A ......... 128,856* 8,960 4.42% Pfd., Series D ......... 276,058* 29,370 4.70% Pfd., Series E ......... 962,308* 785 7.75% Pfd. ................... 39,450* 10,000 Indiana Michigan Power Company, 8.00% Pfd., Series A TOPrS ... 251,850 12,000 Indianapolis Power & Light Company, 5.65% Pfd. ................... 955,860* 6,429 Jersey Central Power & Light Company, 7.52% Sinking Fund Pfd., Series K ..................... 665,659* 1,810 Kansas City Power & Light Company, 4.50% Pfd. ................... 113,605* 8,500 Monongahela Power Company, $7.73 Pfd., Series L ......... 891,310* 11,000 Montana Power Co., $6.875 Pfd. .................. 1,084,270* 3,500 Northern Indiana Public Service Company, 7.44% Pfd. ................... 358,033* 6,170 Ohio Edison Company, 4.44% Pfd. ................... 368,164* Ohio Power Company: 36,200 7.375% Sr. Notes ............. 888,348 15,500 7.92% QUIDS, Series B ........ 386,958 33,600 8.16% Pfd., Series A ......... 847,728 PacifiCorp: 260 $4.56 Pfd. ................... 17,317* 6,158 $4.72 Pfd. ................... 424,563* 900 Pacificorp Capital 8.25% Quips . 22,055 PECO Energy Company: 5,000 $4.40 Pfd., Series C ......... 317,225* $1,050,000 Capital Trust III, $7.38 4/6/28 Capital Security, Series D ..................... 911,274 7,500 $7.48 Pfd. ................... 770,775* 5,000 PPL Electric Utilities Corporation, 6.75% Pfd. ................... 473,225* See Notes to Financial Statements. 8 - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31, 2001 (UNAUDITED) ------------------------------------ VALUE SHARES/$ PAR (NOTE 1) - ------------ -------- PREFERRED STOCKS AND SECURITIES (CONTINUED) FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED) UTILITIES (CONTINUED) 9,410 PSI Energy, Inc., 4.32% Pfd. ................... $ 149,995* 10,000 Public Service Company of New Mexico, 4.58% Private Pfd. ........... 614,400* Public Service Enterprise Group Inc.: 26,000 Enterprise Capital Trust I, 7.44% TOPrS, Series A ........ 611,260 Puget Sound Energy, Inc.: 82,200 7.45% Pfd., Series II ........ 2,080,482* 10,190 7.75% Sinking Fund Pfd. ...... 1,057,111* Reliant Energy, Inc.: 45,000 HL&P Capital Trust I, 8.125% QUIPS ................. 1,127,700 $3,500,000 Houston Light & Power, Capital Trust II, 8.257%, 2/1/37 Capital Security, Series B ..................... 3,310,335 57,750 REI Trust I, 7.20% TOPrS, Series C ........ 1,348,751 4,984 Rochester Gas & Electric Corporation, 4.10% Pfd., Series H ......... 291,664* Sierra Pacific Resources: 30,000 Sierra Pacific Power, 7.80% Pfd., Series 1 ......... 736,650* 30,000 NVP Capital III, 7.75% TIPS ................... 652,200 27,860 NVP Capital I, 8.20% QUIPS, Series A ........ 633,954 South Carolina Electric & Gas Company: 26,311 5.125% Purchase Fund Pfd. .... 1,037,706* 6,703 6.00% Purchase Fund Pfd. ..... 307,198* VALUE SHARES/$ PAR (NOTE 1) - ------------ -------- Southern Union Company: 64,700 Southern Union Financing I, 9.48% TOPrS .................. $ 1,652,438 7,050 TransCanada PipeLines Ltd., 8.25% ........................ 179,775 10 TXU Corporation, 7.24% Pfd., Series B ......... 1,046,136* Union Electric Power Company: 3,500 $7.64 Pfd. ................... 369,058* $3,800,000 7.69% 12/15/36 Capital Security, Series A ..................... 3,514,791 XCEL Energy, Inc.: 14,200 $4.10 Pfd., Series C ......... 866,058* 38,000 PSCO Capital Trust I, 7.60% TOPrS .................. 939,170 ------------ TOTAL UTILITIES FIXED RATE PREFERRED STOCKS AND SECURITIES ................ 49,646,576 ------------ TOTAL FIXED RATE PREFERRED STOCKS AND SECURITIES ................ 150,700,357 ------------ TOTAL PREFERRED STOCKS AND SECURITIES (Cost $182,673,432) ........... 184,160,454 ------------ COMMON STOCKS-- 0.4% (Cost $561,856) 27,500 Wisconsin Energy Corporation ... 640,063* ------------ PUT OPTION-- 0.4% (Cost $932,384) 1,200 Put Options on U.S. Treasury: Bond September Futures, Expiring 8/25/01+ ............ 839,063 ------------ See Notes to Financial Statements. 9 - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) MAY 31, 2001 (UNAUDITED) - ------------------------------------ PRINCIPAL VALUE AMOUNT (NOTE 1) --------- -------- COMMERCIAL PAPER-- 0.4% (Cost $789,000) $ 789,000 General Electric Commercial Paper 4.12% ........................ $ 789,000 ------------ TOTAL INVESTMENTS (Cost $184,956,672**) 96.1% 186,428,580 OTHER ASSETS AND LIABILITIES (Net) .. 3.9 7,624,935 ----- ----------- NET ASSETS .......................... 100.0% $194,053,515 ===== ============ - ---------------------- * Securities eligible for the Dividends Received Deduction. ** Aggregate cost of securities held. *** Securities exempt from registration under Rule 144A of the Securities Act of 1933. These securities may be resold in transactions exempt from registration to qualified institutional buyers. + Non-income producing. ABBREVIATIONS (Note 6): QUIDS -- Quarterly Income Debt Securities QUIPS -- Quarterly Income Preferred Securities REIT -- Real Estate Investment Trust STOPS -- Semi-Annual Trust Originated Pass Through Securities TIPS -- Trust Issued Preferred Securities TOPrS -- Trust Originated Preferred Securities CorTS -- Corporate Backed Trust Securities Capital Securities are considered debt instruments for financial statement purposes and the amounts shown in the Shares/$ Par column are dollar amounts of par value. See Notes to Financial Statements. 10 - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated STATEMENT OF ASSETS AND LIABILITIES MAY 31, 2001 (UNAUDITED) -----------------------------------
ASSETS: Investments, at value (Cost $184,956,672) (Note 1) See accompanying schedule ............................................. $186,428,580 Receivable for investments sold ......................................... 5,952,309 Dividends and interest receivable ....................................... 1,878,162 Prepaid expenses ........................................................ 133,047 ------------ Total Assets .................................................... 194,392,098 LIABILITIES: Dividends payable to Common Shareholders ................................ $ 160,561 Investment advisory fee payable (Note 2) ................................ 92,823 Professional fees payable ............................................... 24,662 Accrued expenses and other payables ..................................... 60,537 ----------- Total Liabilities ............................................... 338,583 ------------ NET ASSETS ................................................................. $194,053,515 ============ NET ASSETS CONSIST OF: Undistributed net investment income (Note 1) ............................ $ 216,241 Accumulated net realized loss on investments sold (Note 1) .............. (7,150,965) Unrealized appreciation of investments (Note 3) ......................... 1,471,908 Par value of Common Stock ............................................... 98,520 Paid-in capital in excess of par value of Common Stock .................. 141,917,811 Money Market Cumulative Preferred(TRADE MARK) Stock (Note 5) ............ 57,500,000 ------------ Total Net Assets ................................................ $194,053,515 ============ PER SHARE --------- NET ASSETS AVAILABLE TO: Money Market Cumulative Preferred(TRADE MARK) Stock (575 shares outstanding) redemption value ......................................... $100,000.00 $ 57,500,000 Accumulated undeclared dividends on Money Market Cumulative Preferred(TRADE MARK) Stock (Note 9) ....................... 509.11 292,736 ----------- ------------ $100,509.11 57,792,736 =========== Common Stock (9,852,037 shares outstanding) ............................. $13.83 136,260,779 ====== ------------ TOTAL NET ASSETS ........................................................... $194,053,515 ============
See Notes to Financial Statements. 11 - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated STATEMENT OF OPERATIONS FOR THE SIX MONTHS ENDED MAY 31, 2001 (UNAUDITED) - -------------------------------------------------
INVESTMENT INCOME: Dividends .......................................................... $ 4,713,528 Interest ........................................................... 2,346,085 ----------- Total Investment Income ....................................... 7,059,613 EXPENSES: Investment advisory fee (Note 2) ................................... $541,293 Administration fee (Note 2) ........................................ 114,951 Money Market Cumulative Preferred(TRADE MARK) broker commissions and Auction Agent fees .............................................. 78,793 Insurance premiums ................................................. 50,526 Legal and audit fees ............................................... 54,989 Shareholder servicing agent fees and expenses (Note 2) ............. 37,054 Directors' fees and expenses (Note 2) .............................. 36,078 Custodian fees and expenses (Note 2) ............................... 14,219 Other .............................................................. 34,201 -------- Total Expenses ................................................ 962,104 ----------- NET INVESTMENT INCOME ................................................... 6,097,509 ----------- REALIZED AND UNREALIZED GAIN(LOSS) ON INVESTMENTS (Notes 1 and 3): Net realized loss on investments sold during the period ............ (1,610,883) Change in net unrealized appreciation of investments during the period ............................................... 5,951,700 ----------- NET REALIZED LOSSAND UNREALIZED GAIN ON INVESTMENTS ..................... 4,340,817 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS .................... $10,438,326 ===========
See Notes to Financial Statements. 12 - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated STATEMENT OF CHANGES IN NET ASSETS ----------------------------------
SIX MONTHS ENDED MAY 31, 2001 YEAR ENDED (UNAUDITED) NOVEMBER 30, 2000 ---------------- ----------------- INCREASE / (DECREASE) IN NET ASSETS OPERATIONS: Net investment income .................................................. $ 6,097,509 $ 12,986,217 Net realized loss on investments sold during the period ................ (1,610,883) (4,274,778) Change in net unrealized appreciation (depreciation) of investments during the period .................................... 5,951,700 (1,234,988) ------------ ------------ Net increase in net assets resulting from operations ................... 10,438,326 7,476,451 DISTRIBUTIONS: Dividends paid from net investment income to Money Market Cumulative Preferred(TRADE MARK) Stock Shareholders (Note 5) ........ (1,709,682) (2,821,469) Distributions paid from net realized capital gains to Money Market Cumulative Preferred(TRADE MARK) Stock Shareholders (Note 5) -- (151,753) Dividends paid from net investment income to Common Stock Shareholders ........................................................ (4,841,811) (10,268,842) Distributions paid from net realized capital gains to Common Stock Shareholders ........................................................ -- (4,115,149) ------------ ------------ Total Distributions .................................................... (6,551,493) (17,357,213) ------------ ------------ FUND SHARE TRANSACTIONS: Increase from Common Stock transactions ................................ 184,149 -- ------------ ------------ NET INCREASE(DECREASE) IN NET ASSETS FOR THE PERIOD ......................... 4,070,982 (9,880,762) NET ASSETS: Beginning of period .................................................... 189,982,533 199,863,295 ------------ ------------ End of period (including undistributed net investment income of $216,241 and $670,224, respectively) ................................ $194,053,515 $189,982,533 ============ ============
See Notes to Financial Statements. 13 - -------------------------------------------------------------------------------- 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 NOVEMBER 30, MAY 31, 2001 -------------------------------------------------------- (UNAUDITED) 2000 1999 1998 1997 1996 ------------ -------- -------- -------- -------- -------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of year .................... $ 13.41 $ 14.41 $ 16.43 $ 16.71 $ 16.50 $ 15.80 -------- -------- -------- -------- -------- -------- INVESTMENT OPERATIONS: Net investment income. ................................ 0.62 1.32 1.29 1.28 1.27 1.37 Net realized and unrealized gain/(loss) on investments 0.44 (0.56) (1.35) 0.05 1.00 0.65 -------- -------- -------- -------- -------- -------- Total from investment operations ...................... 1.06 0.76 (0.06) 1.33 2.27 2.02 -------- -------- -------- -------- -------- -------- DISTRIBUTIONS: Dividends paid from net investment income to MMP* Shareholders ................................... (0.17) (0.29) (0.20) (0.17) (0.22) (0.15) Distributions paid from net realized capital gains to MMP* Shareholders ................................... -- (0.01) (0.08) (0.07) (0.06) (0.08) Dividends paid from net investment income to Common Stock Shareholders. ....................................... (0.49) (1.04) (1.12) (1.05) (1.15) (1.08) Distributions paid from net realized capital gains to Common Stock Shareholders .................................. -- (0.42) (0.53) (0.30) (0.65) -- Change in accumulated undeclared dividends on MMP* .... 0.02 + (0.00)+ (0.03)+ (0.02) 0.02 (0.01) -------- -------- -------- -------- -------- -------- Total distributions ................................... (0.64) (1.76) (1.96) (1.61) (2.06) (1.32) -------- -------- -------- -------- -------- -------- Net asset value, end of period. ....................... $ 13.83 $ 13.41 + $ 14.41 + $ 16.43 $ 16.71 $ 16.50 ======== ======== ======== ======== ======== ======== Market value, end of period ........................... $ 13.880 $ 12.125 $ 12.750 $ 15.938 $ 16.188 $ 15.500 ======== ======== ======== ======== ======== ======== Total investment return based on net asset value** .... 6.96% 4.55% (1.81)% 6.91% 13.65% 12.78% ======== ======== ======== ======== ======== ======== Total investment return based on market value** ....... 18.67% 6.88% (10.43)% 7.05% 17.20% 18.50% ======== ======== ======== ======== ======== ======== RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS: Operating expenses ............................... 1.43%*** 1.41% 1.37% 1.32% 1.34% 1.51% Net investment income**** ........................ 6.98%*** 7.58% 6.66% 6.13% 6.22% 7.22% - ------------------------------------------------ SUPPLEMENTAL DATA:++ Portfolio turnover rate .......................... 13% 66% 65% 87% 74% 98% Net assets, end of period (in 000's) ............. $194,054 $189,983 $199,863 $219,398 $221,990 $220,088 Ratio of operating expenses to total average net assets ...................... 1.00%*** 0.98% 0.99% 0.97% 0.99% 1.10% * Money Market Cumulative Preferred(TRADE MARK) Stock. ** Assumes reinvestment of distributions at the price obtained by the Fund's Dividend Reinvestment Plan. *** Annualized. **** The net investment income ratios reflect income net of operating expenses and payments to MMP* Shareholders. + Includes effect of additional distribution available to MMP* Shareholders ($0.03 per Common Share in 2000 and $0.05 per Common Share in 1999). (See Note 5 to the Financial Statements.) ++ Information presented under heading Supplemental Data includes MMP*.
See Notes to Financial Statements. 14 - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated FINANCIAL HIGHLIGHTS (CONTINUED) ---------------------------------- The table below sets out information with respect to Money Market Cumulative Preferred(TRADE MARK) Stock currently outstanding. INVOLUNTARY AVERAGE ASSET LIQUIDATING MARKET TOTAL SHARES COVERAGE PREFERENCE VALUE OUTSTANDING PER SHARE PER SHARE (1) PER SHARE (1) & (2) ------------ --------- ------------- ------------------- 05/31/01* 575 $337,484 $100,000 $100,000 11/30/00 575 330,404 100,000 100,000 11/30/99 575 347,588 100,000 100,000 11/30/98 575 381,562 100,000 100,000 11/30/97 575 386,070 100,000 100,000 11/30/96 575 382,762 100,000 100,000 - ------------------------- (1) Excludes accumulated undeclared dividends. (2) See Note 5. * Unaudited. See Notes to Financial Statements. 15 - -------------------------------------------------------------------------------- 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 and is registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940, as amended. 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(TRADE MARK) Stock and (iii) accumulated and unpaid dividends on the outstanding Money Market Cumulative Preferred(TRADE MARK) 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 in over-the-counter derivative instruments, such as interest rate swaps and options thereon (i.e., "swaptions") are valued at the prices obtained from the broker/dealer or bank that is the counterparty to such instrument, subject to comparison of such valuation with a valuation obtained from a broker/dealer or bank that is not a counterparty to the particular derivative instrument. Investments for which market quotations are not readily available or for which management determines that the prices are not reflective of current market conditions 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 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. In November 2000, a revised AICPA Audit and Accounting Guide, AUDITS OF INVESTMENT COMPANIES, was issued, and is effective for fiscal years beginning after December 15, 2000. The revised Guide will require the Fund to amortize premium and discount on bonds and notes. Upon initial adoption, the Fund will be required to adjust the cost of its bonds and notes by the cumulative amount of amortization that would have been recognized had amortization been in effect from the purchase date of each holding. Adopting this accounting principle will not affect the Fund's net asset value, but will change the classification of certain amounts between interest income and realized and unrealized gain/loss in the 16 - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ----------------------------------------------------- Statement of Operations. The Fund has not at this time undertaken to quantify the impact, if any, resulting from the adoption of this principle on the financial statements. OPTION ACCOUNTING PRINCIPLES: Upon the purchase of an option by the Fund, the total purchase price paid is recorded as an investment. The market valuation is determined as set forth in the preceding portfolio valuation 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 Investment Adviser reviews and approves the eligibility of the banks and dealers with which the Fund may enter 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 through its custodian 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(TRADE MARK) 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. Subject to the Fund qualifying as a regulated investment company, any taxes paid by the Fund on such net realized long-term gains may be used by the Fund's Shareholders as a credit against their own tax liabilities. FEDERAL INCOME TAXES: The Fund intends to continue 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 and capital gain distributions are determined and characterized in accordance with income tax regulations which may differ from generally accepted accounting principles. These differences are primarily due to (1) differing treatments of income and gains on various investment securities held by the Fund, including timing differences, (2) the attribution of expenses against certain components of taxable investment income, and (3) federal regulations requiring proportional allocation of income and gains to all classes of Shareholders. 17 - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - ----------------------------------------------------- The Internal Revenue Code of 1986, as amended, imposes a 4% nondeductible excise tax on the Fund to the extent the Fund does not distribute by the end of any calendar year at least (1) 98% of the sum of its net investment income for that year and its capital gains (both long term and short term) for its fiscal year and (2) certain undistributed amounts from previous years. OTHER: 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. 2. INVESTMENT ADVISORY FEE, DIRECTORS' FEES, 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. PFPC Inc., a member of the PNC Financial Services Group ("PNC Financial Services"), serves as the Fund's Administrator and Transfer Agent. As Administrator, PFPC Inc. 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 PFPC Inc.'s services as Administrator, the Fund pays PFPC Inc. a monthly fee at an annual rate of 0.12% of the Fund's average monthly net assets. PFPC Inc. also serves as the Fund's Common Stock servicing agent (transfer agent), dividend-paying agent and registrar and, as compensation for PFPC Inc.'s services as such, the Fund pays PFPC Inc. a fee at an annual rate of 0.02% of the Fund's average monthly net assets plus certain out-of-pocket expenses. PFPC Trust Company ("PFPC Trust") began serving as the Fund's Custodian on April 9, 2001. PFPC Trust is an indirect subsidiary of PNC Financial Services. As compensation for PFPC Trust's services as custodian, the Fund pays PFPC Trust a monthly fee at the annual rate of 0.01% of the Fund's average monthly net assets. Prior to April 9, 2001, Boston Safe Deposit and Trust Company ("Boston Safe"), a wholly-owned subsidiary of Mellon Bank Corporation, served as the Fund's Custodian. Bankers Trust Corporate & Agency Services, a wholly-owned subsidiary of Deutsche Bank, AG ("Auction Agent"), serves as the Fund's Money Market Cumulative Preferred(TRADE MARK) Stock transfer agent, registrar, dividend disbursing agent and redemption agent. 18 - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ----------------------------------------------------- 3. PURCHASE AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities for the period ended May 31, 2001, excluding short-term investments, aggregated $25,029,557 and $32,447,311, respectively. At May 31, 2001, aggregate gross unrealized appreciation for all securities in which there is an excess of value over cost was $6,859,296 and aggregate gross unrealized depreciation for all securities in which there is an excess of cost over value was $5,387,388. 4. COMMON STOCK At May 31, 2001, 240,000,000 shares of $0.01 par value Common Stock were authorized. Common Stock transactions were as follows: SIX MONTHS ENDED 5/31/01 -------------------- SHARES AMOUNT ------ ------ Issued as reinvestment of dividends under the Dividend Reinvestment and Cash Purchase Plan ............... 13,466 $184,189 ====== ======== There were no Common Stock transactions for the year ended November 30, 2000. 5. MONEY MARKET CUMULATIVE PREFERRED(TRADE MARK) STOCK The Fund's Articles of Incorporation authorize the issuance of up to 10,000,000 shares of $0.01 par value preferred stock. The Money Market Cumulative Preferred(TRADE MARK) 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(TRADE MARK) Stock are cumulative. The Fund is required to meet certain asset coverage tests with respect to the Money Market Cumulative Preferred(TRADE MARK) 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(TRADE MARK) 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(TRADE MARK) Stock, the Fund is required to make additional distributions to Money Market Cumulative Preferred(TRADE MARK) 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. Prior to November 30, 1999, additional distributions 19 - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) - ----------------------------------------------------- were not reported as available to Money Market Cumulative Preferred(TRADE MARK) Stock until declared by the Board of Directors. The amount of additional distributions payable for any year may be highly uncertain and will not be known until after a fiscal year has been completed. An auction of the Money Market Cumulative Preferred(TRADE MARK) 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(TRADE MARK) Stock Shareholders may also trade shares in the secondary market between auction dates. At May 31, 2001, 575 shares of Money Market Cumulative Preferred(TRADE MARK) Stock were outstanding at the annual rate of 3.22%. 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 its 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. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY The Fund invests primarily in adjustable and fixed rate preferred stocks and similar hybrid, i.e., fully taxable, preferred securities. 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 or 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 may invest up to 15% of its assets in common stock. Under normal conditions, the Fund may invest up to 35% of its assets in debt securities. Certain of its investments in hybrid, i.e., fully taxable, preferred securities, such as TOPrS, TIPS, QUIPS, MIPS, QUIDS, QUICS, QIB's, STOPS, CorTS, REIT, Capital Securities, and other similar or related investments, will be subject to the foregoing 35% limitation to the extent that, in the opinion of the Fund's Adviser, such investments are deemed to be debt-like in key characteristics. 7. 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 20 - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) ----------------------------------------------------- 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, interest rate swaps, options on futures contracts, options on securities and options on interest rate swaps, i.e., swaptions. As in the case of when-issued securities, the use of over-the-counter derivatives, such as interest rate swaps and swaptions, may expose the Fund to greater credit, operations, and market value risk than is the case with regulated, exchange traded futures and options. 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, 2001, 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. 8. SIGNIFICANT SHAREHOLDERS At May 31, 2001, the Commerce Group, Inc. owned approximately 30.1% of the Fund's outstanding Common Stock, according to a Schedule 13D filing dated December 1, 2000. 21 - -------------------------------------------------------------------------------- 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 PFPC Inc. 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, PFPC Inc. 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 PFPC Inc. 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, PFPC Inc. 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 PFPC Inc.'s open market purchases in connection with the reinvestment of dividends or capital gains distributions. For the six months ended May 31, 2001, $1,855 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 22 - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED) ---------------------------------------------- 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 PFPC Inc. in writing, by completing the form on the back of the Plan account statement and forwarding it to PFPC Inc. or by calling PFPC Inc. directly. A termination will be effective immediately if notice is received by PFPC Inc. 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, PFPC Inc. 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 PFPC Inc. at 1-800-331-1710. 23 [This page intentionally left blank] - -------------------------------------------------------------------------------- Preferred Income Fund Incorporated ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED) - ---------------------------------------------- MEETING OF SHAREHOLDERS On April 27, 2001, the Fund held its Annual Meeting of Shareholders (the "Meeting") to (1) elect two Directors of the Fund ("Proposal 1") and (2) ratify the selection of PricewaterhouseCoopers LLP as independent accountants for the Fund for the fiscal year ending November 30, 2001 ("Proposal 2"). The results of each proposal are as follows: PROPOSAL 1: ELECTION OF DIRECTORS. NAME FOR WITHHELD - ---- --- -------- Common Stock Robert T. Flaherty ...................... 6,327,410 63,548 Preferred Stock Morgan Gust ............................. 575 -- Martin Brody, Donald F. Crumrine, David Gale and Robert F. Wulf continue to serve in their capacities as Directors of the Fund. PROPOSAL 2: RATIFY THE SELECTION OF PRICEWATERHOUSECOOPERS LLP AS INDEPENDENT AUDITORS. FOR AGAINST ABSTAINED --- ------- --------- Common Stock and Preferred Stock (voting together as a single class) Voted ............................... 6,293,193 18,319 80,021 25 [This page intentionally left blank] [This page intentionally left blank] DIRECTORS Martin Brody Donald F. Crumrine, CFA Robert T. Flaherty, CFA David Gale Morgan Gust Robert F. Wulf, CFA 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 INVESTMENT ADVISER Flaherty & Crumrine Incorporated e-mail: flaherty@fin-mail.com QUESTIONS CONCERNING YOUR SHARES OF PREFERRED INCOME FUND? (BULLET) If your shares are held in a Brokerage Account, contact your Broker. (BULLET) If you have physical possession of your shares in certificate form, contact the Fund's Transfer Agent & Shareholder Servicing Agent -- PFPC 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. [LOGO OMITTED - PREFERRED INCOME FUND] Semi-Annual Report May 31, 2001 web site: www.preferredincome.com -----END PRIVACY-ENHANCED MESSAGE-----