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