<PAGE>
THE PREFERRED INCOME FUND
Dear Shareholder:
The Preferred Income Fund produced very strong total returns on net asset
value ("NAV") of 4.7% in the fiscal third quarter and 19.2% for the 12 months
through August 31, 1997. The total return on market price for the 12 months was
even better at 21.7% reflecting a narrowing of the discount of the market price
from NAV.
The Fund's hedging strategies worked like clockwork in the third quarter.
Wide swings in interest rates caused bond and preferred stock prices first to
rise sharply and then to give up a good portion of those gains. NAV increased
when prices were rising, as the appreciation in the Fund's portfolio easily
outdistanced the decline in the value of our put option hedges. When the market
reversed itself, our hedges helped stabilize the NAV against decline. Combined
with some successful "mid-course adjustments" in the hedge along the way, this
produced very good results overall.
Active portfolio management in the trenches also paid off in the third
quarter. Some sectors of the preferred market performed well while others
lagged, which put a premium on being in the right place at the right time. When
the smoke cleared, all areas of the Fund's preferred portfolio produced strong
returns for the quarter.
There were no unpleasant surprises in the tax package finally enacted in
Washington. It did not include the Administration's previous proposals to reduce
the Dividends Received Deduction ("DRD") for corporate investors and to restrict
newer forms of hybrid preferreds, which look very much like traditional
preferreds but do not qualify for the DRD. In the eyes of the market, this has
officially "blessed" the tax law interpretations that have led to the increasing
scarcity of traditional preferred stocks eligible for the DRD and the rapid
growth of the hybrid market.
The Fund's portfolio reflects the changing nature of the preferred market.
We continue to buy traditional preferreds when they are attractive relative to
hybrids. In some instances, however, their prices do not make sense, even for
corporate investors taking the DRD into account, and we opt for more attractive
hybrid preferreds. At quarter's end, hybrids accounted for roughly 21% of the
Fund's portfolio.
We are pleased with the accomplishments of the Fund and hope that our
shareholders share that sense of satisfaction.
Sincerely yours,
/s/ Robert T. Flaherty
Robert T. Flaherty
Chairman of the Board
September 18, 1997
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
SUMMARY OF INVESTMENTS
AUGUST 31, 1997 (UNAUDITED)
- ---------------------------
<TABLE>
<CAPTION>
PERCENT OF
VALUE TOTAL NET
(000'S) ASSETS
-------- ----------
<S> <C> <C>
ADJUSTABLE RATE PREFERRED STOCKS
Utilities.............................................................. $ 15,231 6.9%
Banking................................................................ 58,337 26.6
Financial Services..................................................... 328 0.1
-------- -----
Total Adjustable Rate............................................. 73,896 33.6
-------- -----
FIXED RATE PREFERRED STOCKS AND SECURITIES
Utilities.............................................................. 77,333 35.2
Banking................................................................ 23,475 10.7
Financial Services..................................................... 27,575 12.6
Industrial............................................................. 8,323 3.8
Insurance.............................................................. 3,756 1.7
-------- -----
Total Fixed Rate.................................................. 140,462 64.0
-------- -----
TOTAL PREFERRED STOCKS AND SECURITIES....................................... 214,358 97.6
COMMON STOCK
Utilities.............................................................. 834 0.4
REPURCHASE AGREEMENT........................................................ 1,292 0.6
PURCHASED PUT OPTIONS....................................................... 1,893 0.9
-------- -----
TOTAL INVESTMENTS........................................................... 218,377 99.5
OTHER ASSETS AND LIABILITIES (NET).......................................... 1,325 0.5
-------- -----
TOTAL NET ASSETS.................................................. $219,702 100.0%
======== =====
</TABLE>
FINANCIAL DATA
PER SHARE OF COMMON STOCK (UNAUDITED)
- -------------------------------------
<TABLE>
<CAPTION>
DIVIDEND
DIVIDEND NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE (1)
-------- --------- ------------- ------------
<S> <C> <C> <C> <C>
December 31, 1996.............................. $0.840 $ 15.57 $ 14.7500 $15.23
January 31, 1997............................... 0.087 15.46 14.7500 14.73
February 28, 1997.............................. 0.087 15.74 14.7500 14.88
March 31, 1997................................. 0.087 15.95 15.1250 15.16
April 30, 1997................................. 0.087 15.84 14.8750 14.94
May 31, 1997................................... 0.087 15.99 15.2500 15.27
June 30, 1997.................................. 0.087 16.12 15.5625 15.59
July 31, 1997.................................. 0.087 16.55 15.9375 16.03
August 31, 1997................................ 0.087 16.47 15.6875 15.86
</TABLE>
- ---------------
(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.
2
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS(1)
NINE MONTHS ENDED AUGUST 31, 1997 (UNAUDITED)
---------------------------------------------
<TABLE>
<S> <C>
OPERATIONS:
Net investment income................................................................................. $ 9,338,792
Net realized gain on investments sold................................................................. 4,082,797
Net unrealized appreciation of investments during the period.......................................... 3,416,078
------------
Net increase in net assets from operations........................................................ 16,837,667
DISTRIBUTIONS:
Dividends paid from net investment income to MMP* Shareholders........................................ (2,017,501)
Distributions paid from net realized capital gains to MMP* Shareholders............................... (93,525)
Dividends paid from net investment income to Common Stock Shareholders................................ (8,725,313)
Distributions paid from net realized capital gains to Common Stock Shareholders....................... (6,386,813)
------------
Net decrease in net assets........................................................................ (385,485)
NET ASSETS:
Beginning of period................................................................................... 220,087,941
------------
End of period......................................................................................... $219,702,456
============
</TABLE>
FINANCIAL HIGHLIGHTS(1)
NINE MONTHS ENDED AUGUST 31, 1997 (UNAUDITED)
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD.
-----------------------------------------------------
<TABLE>
<S> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period.................................................................. $ 16.50
------------
Net investment income................................................................................. 0.95
Net realized gain and unrealized appreciation on investments.......................................... 0.77
------------
Net increase in net asset value resulting from investment operations.................................. 1.72
DISTRIBUTIONS:
Dividends declared to MMP* Shareholders............................................................... (0.21)
Distributions paid from net realized capital gains to MMP* Shareholders............................... (0.01)
Dividends paid from net investment income(2).......................................................... (0.89)
Distributions paid from net realized capital gains(3)................................................. (0.65)
Change in accumulated undeclared dividends on MMP* Shareholders....................................... 0.01
------------
Total from distributions.............................................................................. (1.75)
------------
Net asset value, end of period........................................................................ $ 16.47
============
Market value, end of period........................................................................... $ 15.6875
============
Net assets, end of period............................................................................. $219,702,456
============
Common shares outstanding, end of period.............................................................. 9,838,571
============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS/SUPPLEMENTAL DATA:
Net investment income................................................................................. 6.22%**
Operating expenses.................................................................................... 1.34%**
Portfolio turnover rate............................................................................... 55%
EXPENSE RATIO TO TOTAL AVERAGE NET ASSETS (WHICH INCLUDES MMP*)
Operating expenses.................................................................................... 0.98%**
</TABLE>
- ---------------
(1) These tables summarize the nine months ended August 31, 1997 and should be
read in conjunction with the Fund's audited financial statements, including
footnotes, in its Annual Report dated November 30, 1996.
(2) Includes dividends earned, but not paid out, in prior fiscal year.
(3) Paid from capital gains realized, but not paid out, in prior fiscal year.
* Money Market Cumulative Preferred(TM)Stock Shareholders.
** Annualized.
3
<PAGE>
DIRECTORS
Martin Brody
Donald F. Crumrine, CFA
Robert T. Flaherty, CFA
David Gale
Morgan Gust
Robert F. Wulf, CFA
OFFICERS
Robert T. Flaherty, CFA
Chairman of the Board
and President
Donald F. Crumrine, CFA
Vice President
and Secretary
Robert M. Ettinger, CFA
Vice President
Peter C. Stimes, CFA
Vice President
and Treasurer
Carl D. Johns
Assistant Treasurer
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: [email protected]
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.
[PREFERRED INCOME FUND LOGO]
Quarterly
Report
August 31, 1997
