PREFERRED
INCOME
FUND
Quarterly
Report
February 29, 2000
<PAGE>
PREFERRED INCOME FUND INCORPORATED
Dear Shareholder:
In the face of unusually difficult market conditions, the Preferred Income
Fund produced a total return of -1.3% on net asset value in the first fiscal
quarter ending February 29, 2000. This made us feel like the prizefighter that,
after being punched around for twelve rounds, figured he had won because he was
hardly bleeding.
For starters, preferred yields rose over the course of the quarter, causing
their prices to decline. The Fund's preferred portfolio actually produced a
positive total return after taking income into account. This was a small
victory, however, which left us still in need of help from our hedges -- help
that we did not get.
Treasury bonds with longer maturity dates took a very different path during
the quarter with yields falling and prices rising. When we hedge the Fund's
preferred portfolio, we set ourselves up to benefit from lower Treasury bond
prices. Since Treasuries went the other way, the Fund lost money on its hedges.
This more than offset the small amount we made on our preferreds.
Our hedging strategies do not depend on preferreds and Treasuries marching
in lockstep, but we do expect that they will both reflect major changes in
interest rates over time. It is unusual for them to move in opposite directions
as they did in the last fiscal quarter. Precisely because the unusual does
occasionally happen, however, we limit the Fund's exposure to the Treasury bond
market going against us by hedging with purchased put options (on Treasury bond
futures contracts). The potential losses on such purchased puts, even in truly
awful markets, is limited to the amount the Fund pays for them.
Long term Treasury bonds were inspired to go off on their own by the
prospect of large buy-backs of such issues in the market funded by anticipated
federal budget surpluses. This is hardly new news, but conflicting statements by
Treasury officials in January may have led investors to wonder whether the
buy-backs would be handled as delicately as previously supposed. Whatever the
cause may have been, Treasuries soared thereafter, leaving in the dust other
sectors of the fixed income markets, including preferreds. It is ironic that
this occurred just as the Y2K bug and the flight to Treasuries caused by it in
the last half of 1999 were starting to fade from memory.
We believe that the recent cross currents have created some bargains.
Traditional preferreds eligible for the Dividends Received Deduction available
to corporate investors are quite attractive compared to their valuations in
recent years. Also, $25 par value hybrid preferreds originally marketed to
individual investors have never really recovered from the extremes created by
year-end tax loss selling. Our prizefighter is still on his feet and looking for
opportunities.
We are getting lots of activity on our new web site,
WWW.PREFERREDINCOME.COM. Please check it out and let us know what you think.
Sincerely,
/s/ signature omitted
Robert T. Flaherty
CHAIRMAN OF THE BOARD
March 14, 2000
<PAGE>
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Preferred Income Fund Incorporated
SUMMARY OF INVESTMENTS
FEBRUARY 29, 2000 (UNAUDITED)
- -------------------------------
PERCENT
VALUE OF TOTAL
(000's) NET ASSETS
------- ------------
ADJUSTABLE RATE PREFERRED STOCKS
Utilities ................................ $ 6,729 3.5%
Banking .................................. 16,603 8.8
Financial Services ....................... 166 0.1
-------- -----
Total Adjustable Rate ................ 23,498 12.4
-------- -----
FIXED RATE PREFERRED STOCKS AND SECURITIES
Utilities ................................ 50,822 26.7
Banking .................................. 45,892 24.2
Financial Services ....................... 26,698 14.1
Insurance ................................ 15,673 8.2
Oil and Gas .............................. 10,977 5.8
Miscellaneous Industries ................. 3,033 1.6
-------- -----
Total Fixed Rate ..................... 153,095 80.6
-------- -----
TOTAL PREFERRED STOCKS AND SECURITIES 176,593 93.0
COMMON STOCKS
Utilities ................................ 3,406 1.8
REPURCHASE AGREEMENT .......................... 8,437 4.4
PURCHASED PUT OPTIONS ......................... 1,675 0.9
-------- -----
TOTAL INVESTMENTS ............................. 190,111 100.1
OTHER ASSETS AND LIABILITIES (NET) ............ (112) (0.1)
-------- -----
TOTAL NET ASSETS ......................... $189,999 100.0%
======== =====
FINANCIAL DATA
PER SHARE OF COMMON STOCK (UNAUDITED)
- -------------------------------------
DIVIDEND
DIVIDEND NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE (1)
-------- --------- ------------- ------------
December 31, 1999 ..... $0.5600 $13.74 $12.25 $12.64
January 31, 2000 ...... 0.0820 13.65 12.00 12.62
February 29, 2000 ..... 0.0820 13.45 12.50 12.49
- --------------------
(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>
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<TABLE>
<CAPTION>
Preferred Income Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS(1)
THREE MONTHS ENDED FEBRUARY 29, 2000 (UNAUDITED)
------------------------------------------------
<S> <C>
OPERATIONS:
Net investment income .............................................................. $ 3,154,786
Net realized gain on investments sold .............................................. 473,194
Net unrealized depreciation of investments during the period ....................... (5,228,679)
-------------
Net decrease in net assets from operations ..................................... (1,600,699)
DISTRIBUTIONS:
Dividends paid from net investment income to MMP* Shareholders ..................... (989,001)
Distributions paid from net realized capital gains to MMP* Shareholders (3) ........ (151,753)
Dividends paid from net investment income to Common Stock Shareholders (2) ......... (3,007,976)
Distributions paid from net realized capital gains to Common Stock Shareholders (3) (4,115,149)
NET DECREASE IN NET ASSETS: ............................................................. (9,864,578)
NET ASSETS:
Beginning of period ................................................................ 199,863,295
-------------
End of period ..................................................................... $ 189,998,717
=============
<CAPTION>
FINANCIAL HIGHLIGHTS(1)
THREE MONTHS ENDED FEBRUARY 29, 2000 (UNAUDITED)
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD.
-----------------------------------------------------
OPERATING PERFORMANCE:
Net asset value, beginning of period ............................................... $ 14.41
----------
Net investment income .............................................................. 0.32
Net realized gain and unrealized depreciation on investments ....................... (0.47)
----------
Net decrease in net asset value resulting from investment operations ............... (0.15)
DISTRIBUTIONS:
Dividends paid from net investment income to MMP* Shareholders ..................... (0.10)
Distributions paid from net realized capital gains to MMP* Shareholders (3) ........ (0.02)
Dividends paid from net investment income to Common Stock Shareholders (2) ......... (0.31)
Distributions paid from net realized capital gains to Common Stock Shareholders (3) (0.42)
Change in accumulated undeclared dividends on MMP* ................................. 0.04
----------
Total distributions ................................................................ (0.81)
----------
Net asset value, end of period ..................................................... $ 13.45
==========
Market value, end of period ........................................................ $ 12.50
==========
Common shares outstanding, end of period ........................................... 9,838,571
==========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income .............................................................. 7.18%**
Operating expenses ................................................................. 1.29%**
SUPPLEMENTAL DATA:
Portfolio turnover rate ........................................................ 17%
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Ratio of operating expenses to total average net assets including MMP* ............. 0.91%**
<FN>
(1) These tables summarize the three months ended February 29, 2000 and should be read in conjunction with
the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30, 1999.
(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 (trademark) Stock.
** Annualized.
</FN>
</TABLE>
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
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: [email protected]
web site: www.preferredincome.com
QUESTIONS CONCERNING YOUR SHARES OF 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 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.
