N-30B-2 1 pfd.txt PREFERRED INCOME N30 B2 FLAHERTY & CRUMRINE PREFERRED INCOME FUND Dear Shareholder: The Flaherty & Crumrine Preferred Income Fund ("PFD") delivered very respectable results during the most recently concluded fiscal quarter. For the three month period ending February 28, 2005, the Fund produced a total return on net asset value ("NAV") of 5.8%(1). All segments of the investment portfolio performed well during the period; however, the Adjustable Rate Preferred securities in the Fund (approximately 8% of the portfolio at the beginning of the quarter) were exceptionally strong. The Fund's hedges were a modest drag on investment results, as long-term interest rates declined during the period. In recent letters, we have indicated that the Fund is susceptible to the same factors that have forced many other income-oriented funds to reduce their dividend distributions. In April, the Fund's monthly dividend was set at $0.0905 per share, a 4.7% reduction from the prior month. As is the case with other leveraged funds, rising short-term interest rates have increased the amount the Fund must pay on its Money Market Cumulative PreferredTM Stock ("MMP(R)"). Typically, rising short-term interest rates are accompanied by rising long-term rates, which should increase the value of the Fund's hedges. The gains on the hedges can then be invested in additional securities, which in turn increase the Fund's income, and, on balance, help keep the Fund's dividend relatively stable. [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC Maturity 4/30/04 2/28/05 0.25 0.97 2.74 0.50 1.14 2.97 2.00 2.31 3.58 3.00 2.75 3.75 5.00 3.61 3.99 10.00 4.50 4.36 30.00 5.28 4.71 As the above chart shows, current market conditions are anything but typical--since the Federal Reserve signaled its intent to raise short-term interest rates last April, short-term interest rates have increased by approximately 175 basis points, while long-term interest rates have FALLEN by over 50 basis points! As a result, the Fund's MMP(R) expense is significantly higher, but the hedges have not enabled us to produce more income. While we do not expect these conditions to persist for long periods, at this time it is necessary to adjust the monthly distribution to a more sustainable amount. Over the longer term, a "flatter" yield curve (as measured by the difference in short- and long-term interest rates) is not a bad thing for the Fund. Obviously, the cost of the Fund's leverage will go up, but at the same time, the cost of the Fund's hedging strategy should go down. This effect can be significant -------------------------- (1) Based on monthly data provided by Lipper Inc. Distributions are assumed to be reinvested at NAV in accordance with Lipper's practice. since the leverage comprises roughly 33% of the Fund's assets, while the ENTIRE portfolio is hedged. The impact of the higher leverage cost occurs almost immediately, while the benefits of lower hedging costs take a bit longer to impact the Fund's income. The mathematics of all this can be a bit daunting, but over the long run, these two effects have tended to offset each other. As a rule, we don't comment on the market price of the Fund's common shares; however, recent market activity certainly does warrant some observations. Over the long run, the market price SHOULD track the net asset value. From time to time we expect to see some deviation due to factors or circumstances unique to the Fund. For example, most investors cannot replicate PFD's investment portfolio, hedging strategy, or leverage, and therefore may be willing to pay a premium to the NAV. The chart below plots the recent market price and net asset value of PFD. For most of this period, the market price traded at a premium to the NAV. We attributed this in part to the Fund's long history and successful track record, plus an attractive dividend rate which may be taxed at favorable rates for certain investors. During late February of this year, shares were trading around $183/4; as of this writing, they are trading around $16.00. During the same period, the net asset value declined less than $0.15! [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC Flaherty & Crumrine Preferred Income Fund Market Price vs. Net Asset Value MARKET PRICE NAV 2/6/04 18.45 16.27 2/13/04 18.55 16.32 2/20/04 18.88 16.23 2/27/04 18.97 16.37 3/5/04 19.28 16.41 3/12/04 19.3 16.51 3/19/04 19.58 16.51 3/26/04 19.7 16.3 4/2/04 19.12 16.19 4/9/04 17.2 16.17 4/16/04 16.83 16.1 4/23/04 16.12 15.93 4/30/04 16.11 15.94 5/7/04 15.52 15.69 5/14/04 15.83 15.51 5/21/04 16.45 15.4 5/28/04 17.62 15.45 6/4/04 17.25 15.43 6/11/04 17.5 15.36 6/18/04 17.65 15.42 6/25/04 17.54 15.28 7/2/04 17.45 15.32 7/9/04 17.23 15.29 7/16/04 17.19 15.42 7/23/04 17.03 15.24 7/30/04 16.78 15.28 8/6/04 17.07 15.43 8/13/04 17.35 15.49 8/20/04 17.93 15.41 8/27/04 17.93 15.44 9/3/04 18.03 15.4 9/10/04 18.24 15.56 9/17/04 18.33 15.73 9/24/04 18 15.86 10/1/04 17.85 15.67 10/8/04 18.39 15.73 10/15/04 18.47 15.83 10/22/04 18.48 15.77 10/29/04 18.3 15.74 11/5/04 18.08 15.65 11/12/04 18.18 15.65 11/19/04 18.32 15.65 11/26/04 18.27 15.67 12/3/04 17.26 15.72 12/10/04 17.35 15.89 12/17/04 17.77 15.91 12/24/04 18.1 15.74 12/31/04 18.25 15.89 1/7/05 18.27 15.83 1/14/05 18.13 16.05 1/21/05 18.33 16.1 1/28/05 18.43 16.08 2/4/05 18.39 16.27 2/11/05 18.67 16.27 2/18/05 18.77 16.06 2/25/05 18.64 16.1 3/4/05 18.25 16.15 3/11/05 17.7 15.98 3/18/05 16.08 15.97 3/25/05 15.6 15.78 4/4/05 16.03 15.99 Unlike open-end mutual funds, investors in closed-end funds should have a longer investment horizon in order to weather swings in the relationship between market price and NAV. In that same vein, investors with a long-term investment horizon should stay focused on the NAV performance and dividend history of the Fund. We plan to stay the course and hopefully will continue to meet and exceed the objectives of the Fund. As was evident in its recent Proxy Statement, 2005 represents a year of transition in the individuals representing the Fund's shareholders. Martin Brody, who has served as a Director since the inception of the Fund, will not stand for reelection at the upcoming Shareholder's Meeting. Martin brought a wealth of wisdom and experience to the board, and will be missed. Karen Hogan has been nominated by the Board to replace Martin. Karen brings an extensive financial and investment banking background to the Board; her knowledge will certainly benefit Shareholders. In addition, to comply with recent SEC rule amendments requiring that independent directors constitute 75% of the Board, Robert Ettinger has resigned as a Director. However, Bob will continue to be very involved with the management of the Fund, continuing to serve as President of both the Fund and Flaherty & Crumrine Incorporated, the Fund's Investment Adviser. Please take advantage of the Fund's website, WWW.PREFERREDINCOME.COM. It contains a wide range of useful and up-to-date information about the Fund. We have also addressed in greater detail many of the topics discussed in this letter. Sincerely, /S/ DONALD F. CRUMRINE /S/ ROBERT M. ETTINGER Donald F. Crumrine Robert M. Ettinger Chairman of the Board President April 5, 2005 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OVERVIEW FEBRUARY 28, 2005 (UNAUDITED) ----------------------------------------------------- FUND STATISTICS ON 2/28/05 --------------------------------------------- Net Asset Value $ 16.03 Market Price $ 18.77 Premium 17.09% Yield on Market Price 6.07% Common Shares Outstanding 10,300,010 MOODY'S RATINGS % OF PORTFOLIO --------------------------------------------- Aaa 0.5% Aa 9.7% A 23.6% Baa 39.7% Ba 14.5% Not Rated 6.3% --------------------------------------------- Below Investment Grade* 13.8% * BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P. INDUSTRY CATEGORIES % OF PORTFOLIO ------------------------------------------------------ [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC Utilities 42% Banks 25% Financial Services 15% Insurance 9% Oil and Gas 4% Other 4% REITs 1% TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO ------------------------------------------------- Interstate Power 5.3% Lehman Brothers 4.8% Citigroup 4.6% Alabama Power 4.2% Fannie Mae 3.8% North Fork Bancorporation 3.6% ABN Amro 3.4% Zurich RegCaPS 3.3% Xcel Energy 3.0% SLM Corporation 2.9%
% OF PORTFOLIO** --------------------------------------------------------------------------------------------------------------------- Holdings Generating Qualified Dividend Income (QDI) for Individuals 77% Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD) 76% --------------------------------------------------------------------------------------------------------------------- ** THIS DOES NOT REFLECT YEAR-END RESULTS OR ACTUAL TAX CATEGORIZATION OF FUND DISTRIBUTIONS. THESE PERCENTAGES CAN, AND DO, CHANGE, PERHAPS SIGNIFICANTLY, DEPENDING ON MARKET CONDITIONS. INVESTORS SHOULD CONSULT THEIR TAX ADVISOR REGARDING THEIR PERSONAL SITUATION.
4 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS FEBRUARY 28, 2005 (UNAUDITED) -----------------------------------------------------
SHARES/$ PAR VALUE ------------ ------- PREFERRED SECURITIES -- 92.6% BANKING -- 25.0% ------------------------------------------------------------------------------------------------------------------------------------ ABN AMRO North America, Inc.: 3,625 6.46% Pfd., 144A**** ........................................................... $ 3,745,948* 4,500 6.59% Pfd., 144A**** ........................................................... 4,687,560* 400 BancWest Capital I, 9.50% Pfd. 12/01/30 .......................................... 10,420(1) $ 750,000 Barnett Capital II, 7.95% 12/01/26 Capital Security .............................. 822,214 $ 1,500,000 BT Preferred Capital Trust II, 7.875% 02/25/27 Capital Security .................. 1,639,042(1) $ 250,000 Chase Capital I, 7.67% 12/01/26 Capital Security ................................. 271,486 Citigroup, Inc.: 113,427 5.864% Pfd., Series M .......................................................... 5,844,893* 9,876 6.213% Pfd., Series G .......................................................... 516,070* 26,200 6.231% Pfd., Series H .......................................................... 1,379,692* 65,350 6.365% Pfd., Series F .......................................................... 3,469,431* Cobank, ACB: 50,000 7.00% Pfd., 144A**** ........................................................... 2,778,750* 75,000 Adj. Rate Pfd., 144A**** ....................................................... 4,227,750* $ 500,000 Comerica (Imperial) Capital Trust I, 9.98% 12/31/26 Capital Security, Series B ... 584,522 $ 2,250,000 First Hawaiian Capital I, 8.343% 07/01/27 Capital Security, Series B ............. 2,498,344(1) $ 1,500,000 First Union Capital II, 7.95% 11/15/29 Capital Security .......................... 1,890,188 $ 906,000 First Union Institutional Capital I, 8.04% 12/01/26 Capital Security ............. 994,172 $ 1,820,000 First Union Institutional Capital II, 7.85% 01/01/27 Capital Security ............ 1,985,101 $ 7,820,000 GreenPoint Capital Trust I, 9.10% 06/01/27 Capital Security ...................... 8,839,220 $ 2,500,000 HBOS Capital Funding LP, 6.85% Pfd. .............................................. 2,638,613(1) 34,200 HSBC USA, Inc., $2.8575 Pfd. ..................................................... 1,749,501* 37,500 J.P. Morgan Chase & Co., 6.625% Pfd., Series H ................................... 1,933,875* $ 270,000 Keycorp Institutional Capital B, 8.25% 12/15/26 Capital Security ................. 297,100 $ 674,000 NB Capital Trust II, 7.83% 12/15/26 Capital Security ............................. 737,990 $ 1,700,000 RBS Capital Trust B, 6.80% Pfd. .................................................. 1,784,176**(1) 16,500 Regions Financial Trust I, 8.00% Pfd. ............................................ 432,713 $ 2,635,000 Republic New York Capital II, 7.53% 12/04/26 Capital Security .................... 2,848,369(1) 10 Roslyn Real Estate, 8.95% Pfd., Pvt., Series C, 144A**** ......................... 1,079,875 $ 1,200,000 Wachovia Capital Trust V, 7.965% 06/01/27 Capital Security, 144A**** ............. 1,325,124 7,500 Wachovia Preferred Funding, 7.25% Pfd., Series A ................................. 217,350 ------------------------------------------------------------------------------------------------------------------- 61,229,489 ---------------- FINANCIAL SERVICES -- 14.5% ------------------------------------------------------------------------------------------------------------------------------------ The Bear Stearns Companies, Inc.: 63,100 5.49% Pfd., Series G ........................................................... 3,171,090* 49,040 5.72% Pfd., Series F ........................................................... 2,558,662*
5 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) FEBRUARY 28, 2005 (UNAUDITED) ------------------------------------------------------
SHARES/$ PAR VALUE ------------ ------- PREFERRED SECURITIES -- (CONTINUED) FINANCIAL SERVICES -- (CONTINUED) ------------------------------------------------------------------------------------------------------------------------------------ Fannie Mae: 60,000 4.75% Pfd., Series M ........................................................... $ 2,516,400* 120,000 Adj. Rate Pfd. ................................................................. 6,756,000* Freddie Mac: 6,975 5.00% Pfd., Series F ........................................................... 308,121* 28,350 5.30% Pfd ...................................................................... 1,327,489* Lehman Brothers Holdings, Inc.: 68,280 5.67% Pfd., Series D ........................................................... 3,493,205* 154,475 5.94% Pfd., Series C ........................................................... 7,926,112* 15,000 6.50% Pfd., Series F ........................................................... 401,325* 123,805 SLM Corporation, 6.97% Pfd., Series A ............................................ 7,025,934* ------------------------------------------------------------------------------------------------------------------- 35,484,338 ---------------- INSURANCE -- 8.4% ------------------------------------------------------------------------------------------------------------------------------------ $ 2,000,000 AON Capital Trust A, 8.205% 01/01/27 Capital Security ............................ 2,290,780 21,000 Everest Re Capital Trust II, 6.20% Pfd. Series B ................................. 515,550(1) $ 5,150,000 MMI Capital Trust I, 7.625% 12/15/27 Capital Security, Series B .................. 5,814,144 18 Premium Assets, Series A, Zurich RegCaPS Variable Inverse Pfd., Pvt. ............. 2,049,026* $ 4,000,000 Provident Financing Trust I, 7.405% 03/15/38 Capital Security .................... 3,858,100 7,000 St. Paul Capital Trust I, 7.60% Pfd. ............................................. 184,030 Zurich RegCaPS Funding Trust: 2,850 6.01% Pfd., 144A**** ........................................................... 2,889,629* 2,950 6.58% Pfd., 144A**** ........................................................... 3,116,277* ------------------------------------------------------------------------------------------------------------------- 20,717,536 ---------------- UTILITIES -- 37.7% ------------------------------------------------------------------------------------------------------------------------------------ Alabama Power Company: 300 4.52% Pfd. ..................................................................... 27,918* 5,734 4.72% Pfd. ..................................................................... 557,201* 111,600 5.20% Pfd. ..................................................................... 2,797,812* 275,000 5.30% Pfd. ..................................................................... 7,026,250* 10,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ........................ 1,044,050* Central Hudson Gas & Electric Corporation: 5,000 4.35% Pfd., Series D, Pvt. ..................................................... 424,625* 900 4.96% Pfd., Series E, Pvt. ..................................................... 83,947* 10,000 Central Illinois Light Company, 4.64% Pfd. ....................................... 938,050* 11,000 Central Illinois Public Service Corporation, 4.90% Pfd. .......................... 1,057,705* 16,679 Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt. ........ 1,734,533*
6 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) FEBRUARY 28, 2005 (UNAUDITED) ------------------------------------------------------
SHARES/$ PAR VALUE ------------ ------- PREFERRED SECURITIES -- (CONTINUED) UTILITIES -- (CONTINUED) ------------------------------------------------------------------------------------------------------------------------------------ Connecticut Light & Power Company: 2,024 4.50% Pfd., Pvt. ............................................................... $ 83,419* 9,300 5.28% Pfd. ..................................................................... 453,840* 1,905 6.56% Pfd., Series 1968 ........................................................ 98,603* 15,778 $3.24 Pfd. ..................................................................... 828,108* 2,100 Consolidated Edison Company of New York, 4.65% Pfd., Series C .................... 196,381* 2,886 Dayton Power and Light Company, 3.90% Pfd., Series C ............................. 212,511* Duke Energy Corporation: 4,556 4.50% Pfd., Series C, Pvt. ..................................................... 400,655* 519 7.04% Pfd., Series Y ........................................................... 53,569* 30,762 7.85% Pfd., Series S ........................................................... 3,188,635* Duquesne Light Company: 7,675 4.10% Pfd. ..................................................................... 284,167* 6,330 4.15% Pfd. ..................................................................... 237,217* 910 4.20% Pfd. ..................................................................... 34,512* 25,775 6.50% Pfd. ..................................................................... 1,407,444* 5,490 $2.10 Pfd., Series A ........................................................... 208,208* 5,000 Energy East Capital Trust I, 8.25% Pfd. 131,975 Entergy Arkansas, Inc.: 5,574 7.32% Pfd. ..................................................................... 581,898* 11,350 7.40% Pfd. ..................................................................... 1,180,911* 5,030 7.80% Pfd. ..................................................................... 526,113* 3,822 7.88% Pfd. ..................................................................... 398,883* 30,266 $1.96 Pfd. ..................................................................... 757,407* 4,555 Entergy Gulf States, Inc., 7.56% Pfd. ............................................ 463,790* Entergy Louisiana, Inc.: 260 7.84% Pfd. ..................................................................... 27,187* 106,138 8.00% Pfd., Series 92 .......................................................... 2,677,331* Entergy Mississippi, Inc.: 5,000 4.92% Pfd. ..................................................................... 427,250* 8,600 7.44% Pfd. ..................................................................... 891,218* 10,800 Enterprise Capital Trust I, 7.44% Pfd., Series A ................................. 274,590 Florida Power Company: 17,769 4.58% Pfd. ..................................................................... 1,608,805* 5,157 4.60% Pfd. ..................................................................... 466,605* 18,535 4.75% Pfd. ..................................................................... 1,731,725* 50,000 Georgia Power Capital Trust V, 7.125% Pfd. ...................................... 1,331,250 2,010 Great Plains Energy, Inc., 4.50% Pfd. ............................................ 163,433* $ 3,500,000 Houston Light & Power, Capital Trust II, 8.257%, 02/01/37 Capital Security ....... 3,840,217
7 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) FEBRUARY 28, 2005 (UNAUDITED) ------------------------------------------------------
SHARES/$ PAR VALUE ------------ ------- PREFERRED SECURITIES -- (CONTINUED) UTILITIES -- (CONTINUED) ------------------------------------------------------------------------------------------------------------------------------------ 32,650 Indianapolis Power & Light Company, 5.65% Pfd. ................................... $ 3,108,770* 384,000 Interstate Power & Light Company, 8.375% Pfd., Series B .......................... 12,963,840* 14,250 Narragansett Electric Company, 4.64% Pfd. ........................................ 658,136* Northern Indiana Public Service Company: 3,905 7.44% Pfd. ..................................................................... 399,228* 7,465 Adj. Rate Pfd., Series A ....................................................... 379,222* 6,170 Ohio Edison Company, 4.44% Pfd. .................................................. 498,783* Pacific Enterprises: 27,430 $4.50 Pfd. ..................................................................... 2,464,860* 10,000 $4.75 Pfd., Series 53 .......................................................... 948,500* PacifiCorp: 451 5.40% Pfd. ..................................................................... 47,964* 1,225 $4.56 Pfd. ..................................................................... 110,011* 14,542 $4.72 Pfd. ..................................................................... 1,351,752* 14,388 $7.48 Sinking Fund Pfd. ........................................................ 1,540,379* 5,000 PECO Energy Company, $4.40 Pfd., Series C ........................................ 406,850* 790 Pennsylvania Power Company, 7.75% Pfd. ........................................... 80,197* 11,194 Portland General Electric, 7.75% Sinking Fund Pfd. ............................... 1,134,232* 5,000 PPL Electric Utilities Corporation, 6.75% Pfd. ................................... 522,775* 10,000 Public Service Company of New Mexico, 4.58% Pfd., Series 1965 .................... 789,600* San Diego Gas & Electric Company: 1,200 4.40% Pfd. ..................................................................... 21,192* 700 4.50% Pfd. ..................................................................... 12,645* 67,000 $1.70 Pfd. ..................................................................... 1,746,020* 18,750 $1.7625 Sinking Fund Pfd. ...................................................... 483,844* 125,000 Savannah Electric & Power Company, 6.00% Pfd. .................................... 3,248,750* South Carolina Electric & Gas Company: 25,373 5.125% Purchase Fund Pfd., Pvt. ................................................ 1,305,695* 6,703 6.00% Purchase Fund Pfd., Pvt. ................................................. 341,652* 54,100 Southern California Edison, 4.08% Pfd. ........................................... 1,054,138* 75,000 Southern Union Company, 7.55% Pfd. ............................................... 2,072,625* $ 750,000 TXU Electric Capital V, 8.175% 01/30/37 Capital Security ......................... 825,244 TXU US Holdings Company: 10,000 $4.00 Pfd., Series TES ......................................................... 745,750* 5,700 $4.00 Pfd., Series TPL ......................................................... 425,077* 1,000 $4.84 Pfd. ..................................................................... 90,230* Union Electric Company: 14,150 4.56% Pfd. ..................................................................... 1,309,158* 4,000 $7.64 Pfd. ..................................................................... 417,580*
8 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) FEBRUARY 28, 2005 (UNAUDITED) ------------------------------------------------------
SHARES/$ PAR VALUE ------------ ------- PREFERRED SECURITIES -- (CONTINUED) UTILITIES -- (CONTINUED) ------------------------------------------------------------------------------------------------------------------------------------ 12,500 Virginia Electric & Power Company, $7.05 Pfd. .................................... $ 1,289,500* Wisconsin Power & Light Company: 1,220 4.50% Pfd. ..................................................................... 111,978* 394 4.80% Pfd. ..................................................................... 38,184* 13,000 6.20% Pfd. ..................................................................... 1,334,255* Xcel Energy, Inc.: 16,030 $4.08 Pfd., Series B ........................................................... 1,237,516* 26,200 $4.10 Pfd., Series C ........................................................... 2,032,596* 22,000 $4.11 Pfd., Series D ........................................................... 1,710,830* 17,750 $4.16 Pfd., Series E ........................................................... 1,397,191* 10,000 $4.56 Pfd., Series G ........................................................... 862,850* ------------------------------------------------------------------------------------------------------------------- 92,379,547 ---------------- OIL AND GAS -- 4.4% ------------------------------------------------------------------------------------------------------------------------------------ 17,200 Anadarko Petroleum Corporation, 5.46% Pfd. ....................................... 1,764,720* 7,000 Apache Corporation, 5.68% Pfd., Series B ......................................... 730,450* 8,000 Devon Energy Corporation, 6.49% Pfd., Series A ................................... 847,360* 5,985 EOG Resources, Inc., 7.195% Pfd., Series B ....................................... 6,386,953* 10,000 Lasmo America Limited, 8.15% Pfd., 144A**** ...................................... 1,104,650* ------------------------------------------------------------------------------------------------------------------- 10,834,133 ---------------- REAL ESTATE INVESTMENT TRUST (REIT) -- 0.9% ------------------------------------------------------------------------------------------------------------------------------------ 40,000 Realty Income Corporation, 7.375%, Pfd., REIT, Series D .......................... 1,067,800 40,000 Regency Centers Corporation, 7.25% Pfd., REIT .................................... 1,041,400 ------------------------------------------------------------------------------------------------------------------- 2,109,200 ---------------- MISCELLANEOUS INDUSTRIES -- 1.7% ------------------------------------------------------------------------------------------------------------------------------------ 13,600 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B ........................ 1,269,220* 36,200 Farmland Industries, Inc., 8.00% Pfd., 144A**** .................................. 18,100*+ 33,250 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** .............................. 2,796,491* 26,000 Touch America Holdings, $6.875 Pfd. .............................................. --*+ ------------------------------------------------------------------------------------------------------------------- 4,083,811 ---------------- TOTAL PREFERRED SECURITIES (Cost $204,979,528) ............................................................ 226,838,054 ----------------
9 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) FEBRUARY 28, 2005 (UNAUDITED) ------------------------------------------------------
SHARES/$ PAR VALUE ------------ ------- CORPORATE DEBT SECURITY -- 0.5% UTILITIES -- 0.5% ------------------------------------------------------------------------------------------------------------------------------------ 45,000 Northern States Power Company, 8.00% ............................................. $ 1,231,650 ------------------------------------------------------------------------------------------------------------------- TOTAL CORPORATE DEBT SECURITY (Cost $1,107,375) .............................................................. 1,231,650 ---------------- COMMON STOCKS AND CONVERTIBLE SECURITIES -- 5.1% BANKING -- 0.4% ------------------------------------------------------------------------------------------------------------------------------------ 50,000 New York Community Bancorp, Inc. ................................................. 913,750* ------------------------------------------------------------------------------------------------------------------- 913,750 ---------------- INSURANCE -- 0.7% ------------------------------------------------------------------------------------------------------------------------------------ 50,000 UnumProvident Corporation, 8.25% Mandatory Convertible, 05/16/06 ................. 1,715,750 ------------------------------------------------------------------------------------------------------------------- 1,715,750 ---------------- UTILITIES -- 4.0% ------------------------------------------------------------------------------------------------------------------------------------ 107,500 Duke Energy Corporation .......................................................... 2,905,188* 88,278 FPL Group, Inc. .................................................................. 7,015,894* ------------------------------------------------------------------------------------------------------------------- 9,921,082 ---------------- TOTAL COMMON STOCKS AND CONVERTIBLE SECURITIES (Cost $11,227,229) ............................................................. 12,550,582 ---------------- OPTION CONTRACTS -- 0.9% 1,425 June Put Options on June U.S. Treasury Bond Futures, Expiring 05/20/05 ........... 2,317,578+ ------------------------------------------------------------------------------------------------------------------- TOTAL OPTION CONTRACTS (Cost $1,693,679) .............................................................. 2,317,578 ----------------
10 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) FEBRUARY 28, 2005 (UNAUDITED) ------------------------------------------------------
SHARES/$ PAR VALUE ------------ ------- MONEY MARKET FUND -- 0.5% 1,159,750 BlackRock Provident Institutional, TempFund ...................................... $ 1,159,750 ------------------------------------------------------------------------------------------------------------------- TOTAL MONEY MARKET FUND (Cost $1,159,750) .............................................................. 1,159,750 ---------------- TOTAL INVESTMENTS (Cost $220,167,561***) ......................................... 99.6% 244,097,614 OTHER ASSETS AND LIABILITIES (NET) ............................................... 0.4% 983,537 --------- ---------------- TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK ......................... 100.0%++ $ 245,081,151 --------- ---------------- MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (MMP(R)) REDEMPTION VALUE .......................... (80,000,000) ---------------- TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ..................................................... $ 165,081,151 ================ ----------------------------- * Securities eligible for the Dividends Received Deduction and distributing Qualified Dividend Income. ** Securities distributing Qualified Dividend Income only. *** 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. (1) Foreign Issuer. + Non-income producing. ++ The percentage shown for each investment category is the total value of that category as a percentage of net assets available to Common and Preferred Stock. ABBREVIATIONS: REIT -- Real Estate Investment Trust PFD. -- Preferred Securities PVT. -- Private Placement Securities Capital Securities are treated as debt instruments for financial statement purposes and the amounts shown in the Shares/$ Par column are dollar amounts of par value.
11 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Fund Incorporated STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1) FOR THE PERIOD FROM DECEMBER 1, 2004 THROUGH FEBRUARY 28, 2005 (UNAUDITED) --------------------------------------------------------------------------------
VALUE ------- OPERATIONS: Net investment income ...................................................................... $ 3,192,856 Net realized gain on investments sold during the period .................................... 2,324,693 Change in net unrealized appreciation of investments held during the period ................ 3,974,833 Distributions to Money Market Cumulative PreferredTM Stock Shareholders from net investment income, including changes in accumulated undeclared distributions ............................................................... (437,500) ---------------- NET INCREASE IN NET ASSETS FROM OPERATIONS ............................................. 9,054,882 DISTRIBUTIONS: Dividends paid from net investment income to Common Stock Shareholders(2) .................. (3,600,705) ---------------- TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ....................................... (3,600,705) FUND SHARE TRANSACTIONS: Increase from Common Stock Transactions .................................................... 525,972 ---------------- NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING FROM FUND SHARE TRANSACTIONS ........................................................... 525,972 NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK ---------------- FOR THE PERIOD ......................................................................... $ 5,980,149 ================ ------------------------------------------------------------------------------------------------------------------------------------ NET ASSETS AVAILABLE TO COMMON STOCK: Beginning of period ........................................................................ $ 159,101,002 Net increase during the period ............................................................. 5,980,149 ---------------- End of period .............................................................................. $ 165,081,151 ================ -------------------------------------------------------- (1) These tables summarize the three months ended February 28, 2005 and should be read in conjunction with the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30, 2004. (2) Includes income earned, but not paid out, in prior fiscal year.
12 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Fund Incorporated FINANCIAL HIGHLIGHTS(1) FOR THE PERIOD FROM DECEMBER 1, 2004 THROUGH FEBRUARY 28, 2005(UNAUDITED) FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD. ------------------------------------------------------
PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period ....................................................... $ 15.49 ---------------- INVESTMENT OPERATIONS: Net investment income ...................................................................... 0.31 Net realized and unrealized gain on investments ............................................ 0.62 DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS: From net investment income ................................................................. (0.04) From net realized capital gains ............................................................ -- --------------- Total from investment operations ........................................................... 0.89 --------------- DISTRIBUTIONS TO COMMON SHAREHOLDERS: From net investment income ................................................................. (0.35) From net realized capital gains ............................................................ -- --------------- Total distributions to Common Shareholders ................................................. (0.35) --------------- Net asset value, end of period ............................................................. $ 16.03 =============== Market value, end of period ................................................................ $ 18.77 =============== Common shares outstanding, end of period ................................................... 10,300,010 =============== RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS: Net investment income + .................................................................... 6.70%** Operating expenses ......................................................................... 1.52%** -------------------------------------------------------- SUPPLEMENTAL DATA:++ Portfolio turnover rate .................................................................... 10%*** Total net assets available to Common and Preferred Stock, end of period (in 000's) ......... $ 245,081 Ratio of operating expenses to total average net assets available to Common and Preferred Stock ............................................................. 1.03%** (1) These tables summarize the three months ended February 28, 2005 and should be read in conjunction with the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30, 2004. * Money Market Cumulative PreferredTM Stock. ** Annualized. *** Not Annualized. + The net investment income ratios reflect income net of operating expenses and payments to MMP(R)* Shareholders. ++ Information presented under heading Supplemental Data includes MMP(R)*. --------------------------------------------------------------------------------
13 -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Fund Incorporated FINANCIAL HIGHLIGHTS (CONTINUED) PER SHARE OF COMMON STOCK (UNAUDITED) ------------------------------------------------------
TOTAL DIVIDEND DIVIDENDS NET ASSET NYSE REINVESTMENT PAID VALUE CLOSING PRICE PRICE(1) --------- --------- ------------- ------------ December 31, 2004 - EXTRA ......................... $0.0650 $15.89 $18.25 $17.34 December 31, 2004 ................................. 0.0950 15.89 18.25 17.34 January 31, 2005 .................................. 0.0950 16.12 18.30 17.39 February 28, 2005 ................................. 0.0950 16.03 18.77 17.83 -------------------- (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.
14 [This page intentionally left blank] DIRECTORS Martin Brody Donald F. Crumrine, CFA Robert M. Ettinger, CFA David Gale Morgan Gust Robert F. Wulf, CFA OFFICERS Donald F. Crumrine, CFA Chairman of the Board and Chief Executive Officer Robert M. Ettinger, CFA President R. Eric Chadwick, CFA Chief Financial Officer, Vice President, Treasurer and Secretary Peter C. Stimes, CFA Chief Compliance Officer and Vice President Bradford S. Stone Vice President Laurie Lodolo Assistant Compliance Officer, Assistant Treasurer and Assistant Secretary INVESTMENT ADVISER Flaherty & Crumrine Incorporated e-mail: flaherty@pfdincome.com QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY & CRUMRINE PREFERRED INCOME FUND? o If your shares are held in a Brokerage Account, contact your Broker. o 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 43027 Providence, RI 02940-3027 1-800-331-1710 THIS REPORT IS SENT TO SHAREHOLDERS OF FLAHERTY & CRUMRINE 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. [GRAPHIC OMITTED] LIGHTHOUSE LOGO ART FLAHERTY & CRUMRINE ===================== PREFERRED INCOME FUND Quarterly Report February 28, 2005 web site: www.preferredincome.com