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PREFERRED INCOME FUND INCORPORATED
Dear Shareholder:
The Preferred Income Fund stayed on an even course in its fiscal first
quarter despite an unsettled interest rate environment. The Fund earned total
returns on net asset value ("NAV") of 1.8% in the fiscal quarter and 16.1% in
the twelve months ending February 28, 1997. The shares' market performance was
helped by a steady to improving discount from NAV, which was around 6% at the
end of the quarter.
The bulk of the Fund's return in the first quarter came from its preferred
stock portfolio. The "creeping scarcity" of traditional preferred stocks that
qualify for the intercorporate Dividends Received Deduction (the "DRD")
accelerated due to a surge in retirements of traditional preferreds, either
through redemptions or tender offers. Market levels for the remaining issues
strengthened as investors sought to reinvest and, perhaps, to anticipate further
redemptions.
Retirements of outstanding traditional preferred stocks reflect a scramble
by issuers to capture tax benefits by refinancing those preferreds with a newer
type of hybrid preferred that is similar in some respects, but not eligible for
the DRD. The trend was accentuated after the Federal Reserve decided last
October to allow banks to count hybrid preferreds issued by them as basic equity
capital for regulatory purposes. The Fund has been able to take advantage of
some attractive trading opportunities produced by all this activity in hybrid
preferreds.
The Fund has also benefited from increasing its position in undervalued
adjustable rate preferred stocks ("ARPs"). On February 28, 1997, ARPs accounted
for 43% of our portfolio, compared to 27% a year earlier. It now appears that
the market is anticipating "redemption fever" spilling over into ARPs, many of
which are selling at discounts to their redemption prices.
The Fund made money on its hedges in the last quarter due to the decline in
Treasury bond prices caused by an increase in long term interest rates of over
3/8%. However, that was just the frosting on the cake. Our hedges included
"out-of-the-money" put options on Treasury bond futures, which are analogous to
an insurance policy with a deductible. Consequently, a somewhat greater rise in
interest rates and a larger decline in bond prices would have been needed to
produce really big hedging gains.
Much of the activity in the preferred market now is tax related, which is
both an opportunity and a risk. All of the Administration's tax proposals
affecting both traditional and hybrid preferreds, which we have previously
discussed in these letters, have been included in its fiscal 1998 budget. We are
watching the debate in Congress closely.
We want to welcome a new addition to the Fund's Board of Directors, David
Gale. He brings special expertise to this assignment by virtue of having headed
up the preferred stock departments at two major Wall Street firms over the
course of his career. We look forward to working with him.
Sincerely,
Robert T. Flaherty
CHAIRMAN OF THE BOARD
March 13, 1997
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Preferred Income Fund Incorporated
SUMMARY OF INVESTMENTS
FEBRUARY 28, 1997 (UNAUDITED)
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<TABLE>
<CAPTION>
PERCENT OF
VALUE TOTAL NET
(000'S) ASSETS
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<S> <C> <C>
ADJUSTABLE RATE PREFERRED STOCKS
Utilities................................................................................. $ 18,331 8.6%
Banking................................................................................... 72,054 33.9
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Total Adjustable Rate................................................................. 90,385 42.5
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FIXED RATE PREFERRED STOCKS AND SECURITIES
Utilities................................................................................. 73,182 34.4
Banking................................................................................... 10,349 4.9
Financial Services........................................................................ 16,508 7.8
Industrial................................................................................ 10,940 5.1
Insurance................................................................................. 4,791 2.3
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Total Fixed Rate...................................................................... 115,770 54.5
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TOTAL PREFERRED STOCKS AND SECURITIES......................................................... 206,155 97.0
REPURCHASE AGREEMENT.......................................................................... 3,468 1.6
PURCHASED PUT OPTIONS......................................................................... 2,573 1.2
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TOTAL INVESTMENTS............................................................................. 212,196 99.8
OTHER ASSETS AND LIABILITIES (NET)............................................................ 354 0.2
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TOTAL NET ASSETS...................................................................... $ 212,550 100.0%
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</TABLE>
FINANCIAL DATA
PER SHARE OF COMMON STOCK (UNAUDITED)
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<TABLE>
<CAPTION>
DIVIDEND
DIVIDEND NET ASSET NYSE CLOSING REINVESTMENT
PAID VALUE PRICE PRICE (1)
----------- ----------- ------------- -------------
<S> <C> <C> <C> <C>
December 31, 1996................................................ $ 0.840 $ 15.57 $ 14.750 $ 15.23
January 31, 1997................................................. 0.087 15.46 14.750 14.73
February 28, 1997................................................ 0.087 15.74 14.750 14.88
</TABLE>
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(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
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Preferred Income Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS(1)
THREE MONTHS ENDED FEBRUARY 28, 1997 (UNAUDITED)
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<TABLE>
<S> <C>
OPERATIONS:
Net investment income................................................................................ $ 2,922,773
Net realized gain on investments sold................................................................ 787,386
Net unrealized depreciation of investments during the period......................................... (422,147)
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Net increase in net assets from operations....................................................... 3,288,012
DISTRIBUTIONS:
Dividends paid from net investment income to MMP* Shareholders....................................... (755,733)
Distributions paid from net realized capital gains to MMP* Shareholders.............................. (93,525)
Dividends paid from net investment income to Common Stock Shareholders............................... (3,589,527)
Distributions paid from net realized capital gains to Common Stock Shareholders...................... (6,386,813)
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Net decrease in net assets....................................................................... (7,537,586)
NET ASSETS:
Beginning of period.................................................................................. 220,087,941
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End of period........................................................................................ $ 212,550,355
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</TABLE>
FINANCIAL HIGHLIGHTS(1)
THREE MONTHS ENDED FEBRUARY 28, 1997 (UNAUDITED)
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD.
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<TABLE>
<S> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period................................................................. $ 16.50
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Net investment income................................................................................ 0.30
Net realized gain and unrealized depreciation on investments......................................... 0.03
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Net increase in net asset value resulting from investment operations................................. 0.33
DISTRIBUTIONS:
Dividends declared to MMP* Shareholders.............................................................. (0.08)
Distributions paid from net realized capital gains to MMP* Shareholders.............................. (0.01)
Dividends paid from net investment income(2)......................................................... (0.37)
Distributions paid from net realized capital gains(3)................................................ (0.64)
Change in accumulated undeclared dividends on MMP* Shareholders...................................... 0.01
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Total from distributions............................................................................. (1.09)
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Net asset value, end of period....................................................................... $ 15.74
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Market value, end of period.......................................................................... $ 14.750
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Net assets, end of period............................................................................ $ 212,550,355
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Common shares outstanding, end of period............................................................. 9,838,571
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RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS/SUPPLEMENTAL DATA:
Net investment income................................................................................ 6.18%**
Operating expenses................................................................................... 1.42%**
Portfolio turnover rate.............................................................................. 14%
</TABLE>
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(1) These tables summarize the three months ended February 28, 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.
** Annualized.
3
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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.
(FDISG)
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.
3201-QI
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Quarterly
Report
February 28, 1997
