PREFERRED INCOME FUND INCORPORATED
Dear Shareholder:
It all came together for the Preferred Income Fund in the fiscal third
quarter that ended August 31, 2000. The result was a very strong total return of
8.0% on the Fund's net asset value. This more than offset the disappointing
results in the first half of the year and resulted in a positive total return of
3.2% for fiscal 2000 to date.
The Fund's success in the most recent fiscal quarter was the cumulative
result of several factors, none of which was really big news on its own:
(BULLET) Yields on long-term Treasury bonds declined somewhat. This helped
the value of the Fund's preferred portfolio, but it hurt the
results on our hedges. On balance, it did us more good than harm.
(BULLET) The preferred market moderately outperformed the long-term
Treasury bonds on which our hedges are based. Although
preferreds only recovered a small portion of the beating that
they had taken versus Treasuries in previous quarters, we were
happy to have this extra boost.
(BULLET) Through active management of the Fund's portfolio, we were
able to take advantage of out-of-line values in various sectors
of the preferred market that were created by the general stress
in the fixed income markets. This added a significant layer of
"frosting" to the cake.
The rewards for being in the right place at the right time within the
preferred market have been particularly great this year. For example, look at
the gyrations of "retail hybrid preferreds", i.e. $25 par value issues that are
typically designed to be sold to individual investors. Those preferreds
generally got quite cheap relative to other preferreds in December of 1999 (tax
selling!), recovered a few months later, became cheap again in the late spring
of 2000, and recently recovered again. The Fund's results in the last quarter
underscored the benefits of exploiting moves like this, but the groundwork was
really laid in previous months.
The Fund's Board of Directors recently approved the purchase of options on
interest rate swaps (called "swaptions") as an additional hedging tool that the
Fund may use depending on market conditions. Traditionally, the Fund has hedged
solely by purchasing put options on Treasury bond futures contracts. In view of
the potential shrinkage of the Treasury bond market due to federal budget
surpluses, however, we may need greater flexibility going forward. A more
detailed discussion of our hedging strategies appears in the Fund's most recent
semi-annual report, which is available on our web site at
WWW.PREFERREDINCOME.COM
The market price of the Fund's shares has stayed within a fairly narrow
range as the net asset value has increased in recent months. As a result, the
discount of the market from NAV has increased slightly to roughly 9% at the
moment. Our web site at WWW.PREFERREDINCOME.COM also contains continually
updated data on the discount.
Sincerely,
/S/ SIGNATURE - Robert T. Flaherty
Robert T. Flaherty
CHAIRMAN OF THE BOARD
September 22, 2000
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Preferred Income Fund Incorporated
SUMMARY OF INVESTMENTS
AUGUST 31, 2000 (UNAUDITED)
-------------------------------------
PERCENT
VALUE OF TOTAL
(000's) NET ASSETS
-------- ----------
ADJUSTABLE RATE PREFERRED STOCKS
Utilities ................................ $ 9,700 5.1%
Banking .................................. 21,034 11.0
-------- ----------
Total Adjustable Rate ................ 30,734 16.1
-------- ----------
FIXED RATE PREFERRED STOCKS AND SECURITIES
Utilities ................................ 57,449 30.1
Banking .................................. 37,673 19.7
Financial Services ....................... 28,181 14.8
Insurance ................................ 15,273 8.0
Oil and Gas .............................. 13,019 6.8
Miscellaneous Industries ................. 2,492 1.3
-------- ----------
Total Fixed Rate ..................... 154,087 80.7
-------- ----------
TOTAL PREFERRED STOCKS AND SECURITIES ........ 184,821 96.8
COMMON STOCKS
Utilities ................................ 2,237 1.2
COMMERCIAL PAPER .............................. 2,200 1.2
PURCHASED PUT OPTIONS ......................... 639 0.3
-------- ----------
TOTAL INVESTMENTS ............................. 189,897 99.5
OTHER ASSETS AND LIABILITIES (Net) ............ 1,037 0.5
-------- ----------
TOTAL NET ASSETS ......................... $190,934 100.0%
======== ==========
FINANCIAL DATA
PER SHARE OF COMMON STOCK (UNAUDITED)
-------------------------------------
<TABLE>
DIVIDEND
DISTRIBUTION NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE (1)
------------ --------- ------------- ------------
<S> <C> <C> <C> <C>
December 31, 1999 ..................... $0.5600 $13.74 $12.2500 $12.64
January 31, 2000 ...................... 0.0820 13.65 12.0000 12.62
February 29, 2000 ..................... 0.0820 13.45 12.5000 12.49
March 31, 2000 ........................ 0.0820 13.62 12.1875 12.28
April 30, 2000 ........................ 0.0820 13.05 12.0625 12.08
May 31, 2000 .......................... 0.0820 12.75 12.0625 12.22
June 30, 2000 ......................... 0.0820 13.18 12.1250 12.24
July 31, 2000 ......................... 0.0820 13.28 12.3125 12.29
August 31, 2000 ....................... 0.0820 13.50 12.3750 12.47
</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>
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Preferred Income Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS(1)
NINE MONTHS ENDED AUGUST 31, 2000 (UNAUDITED)
---------------------------------------------
<TABLE>
<S> <C>
OPERATIONS:
Net investment income ........................................................................ $ 9,773,265
Net realized loss on investments sold ........................................................ (4,178,144)
Net unrealized depreciation of investments during the period ................................. (336,177)
------------
Net increase in net assets from operations ............................................... 5,258,944
DISTRIBUTIONS:
Dividends paid from net investment income to MMP* hareholders ................................ (2,072,566)
Distributions paid from net realized capital gains to MMP* hareholders (3) ................... (151,753)
Dividends paid from net investment income to Common Stock hareholders (2) .................... (7,848,553)
Distributions paid from net realized capital gains to Common Stock Shareholders (3) .......... (4,115,149)
------------
Total Distributions ...................................................................... (14,188,021)
------------
NET DECREASE IN NET ASSETS: ....................................................................... (8,929,077)
NET ASSETS:
Beginning of period .......................................................................... 199,863,295
------------
End of period ................................................................................ $190,934,218
============
</TABLE>
FINANCIAL HIGHLIGHTS(1)
NINE MONTHS ENDED AUGUST 31, 2000 (UNAUDITED
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD.
-----------------------------------------------------
<TABLE>
<S> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period .................................................. $ 14.41
-------------
Net investment income ................................................................. 0.99
Net realized gain and unrealized depreciation on investments .......................... (0.46)
-------------
Net decrease in net asset value resulting from investment operations .................. 0.53
DISTRIBUTIONS:
Dividends paid from net investment income to MMP* Shareholders ........................ (0.21)
Distributions paid from net realized capital gains to MMP* Shareholders (3) ........... (0.01)
Dividends paid from net investment income to Common Stock Shareholders (2) ............ (0.79)
Distributions paid from net realized capital gains to Common Stock Shareholders (3) ... (0.42)
Change in accumulated undeclared dividends on MMP* .................................... (0.01)
-------------
Total distributions ................................................................... (1.44)
-------------
Net asset value, end of period ........................................................ $ 13.50
=============
Market value, end of period ........................................................... $ 12.375
=============
Common shares outstanding, end of period .............................................. 9,838,571
=============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income ................................................................. 7.59%**
Operating expenses .................................................................... 1.42%**
SUPPLEMENTAL DATA:
Portfolio turnover rate ............................................................ 53%
--------------------------------------------------------------------------------------------
Ratio of operating expenses to total average net assets including MMP* ................ 0.99%**
</TABLE>
(1) These tables summarize the nine months ended August 31, 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 income 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
<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 ADVISOR
Flaherty & Crumrine Incorporated
e-mail: [email protected]
QUESTIONS CONCERNING YOUR SHARES OF PREFERRED INCOME FUN?
(BULLET) If your shares are held in a Brokerage
Account, contact your broker.
(BULLET) 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.
[GRAPHIC OMITTED)
PREFERRED
INCOME
FUND
Quarterly
Report
August 31, 2000
web site: www.preferredincome.com
