<PAGE>
PREFERRED INCOME FUND
INCORPORATED
Dear Shareholder:
The last year was a tough one that most income investors would rather
forget. The Preferred Income Fund took its share of the lumps that were being
handed out, although we think we fought a good rear guard action. At the end of
Fiscal 1999, the Fund was still at the top of Morningstar's scale with an
overall rating of "Five Stars" (as discussed in greater detail in the following
Question & Answer section).
Our "report card" in the following table shows the total returns earned by
the Fund on net asset value ("NAV") for various periods through November 30,
1999, the end of our fiscal year. For comparison purposes, we have also shown
the results of a composite of over 50 higher quality closed-end bond funds
compiled from Lipper's database. That comparison seems appropriate since the
Preferred Income Fund is designed to provide income investors with an
alternative to such bond funds, even though it is not a bond fund itself. The
bond funds were tough competition in the last year, but we have much to crow
about over the longer pull.
- --------------------------------------------------------------------------------
TOTAL RETURN PER YEAR ON NET ASSET VALUE*
FOR PERIODS ENDED 11/30/99
<TABLE>
<CAPTION>
ONE FIVE LIFE OF
YEAR YEARS FUND
----- ----- -------
<S> <C> <C> <C>
Preferred Income Fund....................................... -2.1% 10.5% 13.0%
Lipper Composite of Investment Grade Bond Funds**........... 0.3% 8.6% 7.9%
</TABLE>
- ---------------
* Based on data provided by Lipper Inc. Distributions are assumed to be
reinvested at NAV in accordance with Lipper's practice, which differs from
the procedures used elsewhere in this report.
** Includes all U.S. Government bond, mortgage bond and term trust, and
investment grade bond funds in Lipper's closed-end fund database.
- --------------------------------------------------------------------------------
The rise in the interest rates in the year ended November 30, 1999 was, at
best, a mixed blessing for the Fund. The yields on long term Treasury bonds
increased from approximately 5% at the start of the fiscal year to about 6 1/4%
at the end, which caused a sharp decline in the prices of bonds and preferreds
generally. Our put option hedges, which typically create a "safety net" somewhat
below the market, offset only part of the price declines; and the market
weakness hurt the Fund's net asset value and total return on balance. However,
the gains that our hedges did produce allowed the Fund to add to its holdings of
preferreds and to boost its income. The pay off was an increase at mid-year in
the dividend rate on the Fund's shares.
As Fiscal 1999 progressed, many preferreds showed even greater price
weakness than Treasury bonds. The blame was generally put on concerns about the
Y2K computer bug. The supply of corporate bonds and preferreds weighed heavily
on the market as numerous corporations "played it safe" by financing ahead of
schedule. Meanwhile, the buyers went on strike, choosing to hang back to see
what would happen. The effect was to throw a wet blanket on the preferred
market.
<PAGE>
They say, "It's an ill wind that blows no one any good." Because preferreds
underperformed Treasury bonds last year, they are starting out Fiscal 2000 at
historically generous yields compared to Treasuries. If this causes preferreds
to produce better returns than Treasuries in the future, it will create a
favorable "tail wind" for our hedged portfolio.
For the year as a whole, traditional preferreds eligible for the Dividends
Received Deduction ("DRD") available to corporate investors typically
outperformed hybrid preferreds. However, relationships within the preferred
market produced more zigs and zags than real trends. (See the Q&A section for a
refresher course on the differences between the two types of preferreds.) As the
pie chart shows, there were no substantial changes versus the previous year-end
in the breakdown of the portfolio among the major sectors of the preferred
market. Each time the market zigged or zagged, so did we. In the end, the
percentage breakdown of the portfolio wound up pretty much where it started.
[PREFERRED INCOME FUND - PIE CHART]
PREFERRED INCOME FUND
<TABLE>
<CAPTION>
11/30/98 11/30/99
-------- --------
<S> <C> <C>
Adjustable Rates 17.8% 15.3%
Traditional Fixed Rates 35.8% 37.2%
Common Stock 0.8% 0.5%
Hybrids 42.2% 40.3%
Cash & Other 3.4% 6.7%
</TABLE>
We are doing our best to take advantage of some opportunities that we see
in the market now. In particular, we think some bargains are available among
certain traditional (DRD) preferreds, including some new issues that have
recently come to market. In addition, hybrid preferreds owned primarily by
individual investors also seem severely depressed by year-end tax selling. It's
fun to go shopping at these levels!
On December 30, 1999, the Fund paid to shareholders a special distribution
of $0.56 per share, which was mostly due to the realization of capital gains
during Fiscal 1999. Given market conditions, our hedges were clearly the main
source of gains last year. The Fund has paid a special year-end distribution in
every year but one since its inception, even though we manage its portfolio with
the goal of high current income, not capital gains.
Effective in January, 2000, the Fund's monthly dividend rate per share will
be reduced slightly from $0.0845 to $0.0820 to adjust for the reduction in the
Fund's earning assets caused by the special year-end distribution. This is
similar to the adjustments made in previous years for such distributions. We
anticipate that shareholders that reinvest the year-end distribution through the
Fund's Dividend Reinvest-
2
<PAGE>
ment Plan (affectionately called the "DRIP") will not experience any reduction
in total income in dollars. The Q&A section explains this further and
illustrates graphically the Fund's income record.
Finally, we want to put in a plug for WWW.PREFERREDINCOME.COM, the new web
site for the Preferred Income Group of closed-end funds. You can find current
information there on market prices, net asset values, discounts, yields,
dividends, performance and portfolio holdings, as well as news items and general
information about the Fund. We expect to improve the site from time to time, but
we need to know what would be helpful to you. Please let us hear from you.
Sincerely,
/s/ Robert T. Flaherty
Robert T. Flaherty
Chairman of the Board
December 15, 1999
QUESTIONS & ANSWERS
WHAT ARE THE FUND'S MORNINGSTAR RATINGS?
Preferred Income Fund had an "overall" rating of five stars at the end of
Fiscal 1999 on November 30, 1999. It was rated five stars for the last five
fiscal years and fours stars for the latest three fiscal years.
Morningstar's proprietary ratings are based upon a fund's historical risk
adjusted performance on net asset value versus the returns on 90 day U.S.
Treasury bills. Certain adjustments are made for fees, and a risk penalty is
assessed for returns below Treasury bills. The Preferred Income Fund is ranked
against the universe of closed-end taxable bond funds, including 128 funds for
both the three and five-year periods. The top 10% of the funds receive five
stars, while 22.5% receive four stars, 35% get three stars, 22.5% get two stars
and 10% receive one star. The ratings are subject to change every month.
You can check our up-to-date ratings at any time by visiting our new web
site, WWW.PREFERREDINCOME.COM. You will find there a direct link to the page in
Morningstar's web site that displays our ratings.
OF COURSE, PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
3
<PAGE>
HOW HAS THE FUND USUALLY DONE IN WEAK MARKETS?
Typically, we have done very well in tough times. This is consistent with
our Morningstar ratings, which pay particular attention to risk. Further
confirmation is provided by the following bar chart.
[PREFERRED INCOME DOUBLE LINE CHART]
<TABLE>
<CAPTION>
LIPPER COMPOSITE OF INVESTMENT
GRADE BOND FUNDS PREFERRED INCOME FUND
------------------------------ ---------------------
<S> <C> <C>
Weak Markets -8.2% 0.0%
Strong Markets 18.1% 21.0%
All Markets 7.9% 13.0%
</TABLE>
THE DATA, PROVIDED BY LIPPER INC., SHOW THE AVERAGE ANNUALIZED TOTAL RETURNS IN
THE 106 MONTHS ENDED 11/30/99, INCLUDING 38 WEAK MARKETS AND 68 STRONG MARKETS.
The chart breaks down the Fund's historical total returns, on a month by
month basis, between strong and weak markets based upon whether the Lipper
composite of higher quality bond funds managed to beat the total return on
Treasury bills. As the chart indicates, we have generally done reasonably well
in good markets and extremely well in bad markets, which has produced
outstanding results overall.
WAS SOMETHING DIFFERENT ABOUT THIS YEAR'S DOWN MARKET?
Very definitely! To begin with, the Fund's performance was not as
outstanding as we have come to expect in a down market. As detailed on the
following page, the explanation lies in the particular reasons behind the
weakness in the preferred market in Fiscal 1999.
4
<PAGE>
The pressure on preferred prices in the last year can be divided into two
components:
1. The impact of the GENERAL INCREASE IN INTEREST RATES as represented by the
rising yields of Treasury bonds. Our hedges are designed to reduce the
Fund's exposure to this risk, and they worked very much as they have in the
past. We made good profits on our hedges in Fiscal 1999.
2. The UNDERPERFORMANCE OF PREFERREDS compared to Treasuries, which is
discussed in our opening letter. Since our hedges are based on Treasuries,
we do not expect them to offset the amount by which preferreds perform
better or worse than Treasuries. Fiscal 1999 would have been a much better
year if preferreds had just mirrored the performance of Treasuries.
Preferreds rarely track Treasuries in lockstep. In fact, preferreds often
become either expensive or cheap as they get "out of sync" with Treasuries,
although such tracking errors tend to balance out over longer time periods. Such
distortions are typically due to aberrations in supply factors, which can be
difficult to predict ahead of time. Our goal is to recognize such discrepancies
in valuations when they do occur and to adjust the Fund's portfolio to take
advantage of them over the longer term.
WILL THE SPECIAL YEAR-END DISTRIBUTION REDUCE THE VALUE OF MY INVESTMENT IN THE
FUND?
It depends on whether or not the distribution is reinvested. Let's use the
analogy of a savings account. Taking the distribution out is a withdrawal of
principal that will reduce the account's value. You can not get back to where
you started without reinvesting.
A good many of our shareholders reinvest all distributions, including the
monthly dividends, through the Fund's Dividend Reinvestment Plan. The DRIP is a
particularly efficient way to reinvest on a regular basis with a minimum of
hassle. If your shares are held in a brokerage account, ask your broker how to
participate in the Fund's DRIP. If you hold your shares in certificate form,
call the Plan's agent, PFPC Inc., at 1-800-331-1710 for more information.
Shareholders who wish to reinvest only now and then in amounts of their own
choosing can always acquire more shares of the Preferred Income Fund by calling
their brokers and purchasing shares in the market.
HOW WILL MY INCOME BE AFFECTED BY THE SPECIAL DISTRIBUTION?
The savings account analogy also applies to income. A shareholder's income
will actually increase ever so slightly if the special year-end distribution is
reinvested in additional shares. If the distribution is not reinvested, income
will be reduced by about 3%.
We have projected into January, 2000 the historical income data for the
Fund contained in the following chart, which has appeared in these reports many
times before. The solid blue line (measured on the left-hand scale) represents
the monthly dollar income received from an original investment in 1,000 shares
of the Fund. It is based on the assumption that the shareholder spent his or her
regular monthly income from the Fund and reinvested at net asset value just the
portion of each special year-end distribution that was "above and beyond" the
monthly dividends.
5
<PAGE>
[CHART]
<TABLE>
<CAPTION>
PREFERRED INCOME FUND MONTHLY DIVIDEND INCOME
On a 1,000 Share ($15,000) Initial Investment
Monthly Dividend Income 30 Year Treasury Yield
<S> <C> <C> <C>
Dec-90 Dec-90
Jan-91 Jan-91 8.16
Feb-91 Feb-91 8.2
Mar-91 Mar-91 8.22
Apr-91 122.5 Apr-91 8.18
May-91 122.5 May-91 8.26
Jun-91 122.5 Jun-91 8.4
Jul-91 122.5 Jul-91 8.34
Aug-91 125 Aug-91 8.06
Sep-91 125 Sep-91 7.81
Oct-91 125 Oct-91 7.91
Nov-91 125 Nov-91 7.94
Dec-91 126.46 Dec-91 7.4
Jan-92 126.46 Jan-92 7.76
Feb-92 126.46 Feb-92 7.79
Mar-92 126.46 Mar-92 7.96
Apr-92 126.46 Apr-92 8.03
May-92 126.46 May-92 7.84
Jun-92 126.46 Jun-92 7.78
Jul-92 126.46 Jul-92 7.46
Aug-92 126.46 Aug-92 7.41
Sep-92 126.46 Sep-92 7.38
Oct-92 126.46 Oct-92 7.62
Nov-92 126.46 Nov-92 7.6
Dec-92 127.87 Dec-92 7.39
Jan-93 127.87 Jan-93 7.19
Feb-93 127.87 Feb-93 6.9
Mar-93 127.87 Mar-93 6.92
Apr-93 127.87 Apr-93 6.93
May-93 127.87 May-93 6.98
Jun-93 127.87 Jun-93 6.67
Jul-93 127.87 Jul-93 6.56
Aug-93 127.87 Aug-93 6.09
Sep-93 127.87 Sep-93 6.02
Oct-93 127.87 Oct-93 5.97
Nov-93 127.87 Nov-93 6.3
Dec-93 121.76 Dec-93 6.35
Jan-94 121.76 Jan-94 6.24
Feb-94 121.76 Feb-94 6.66
Mar-94 121.76 Mar-94 7.09
Apr-94 121.76 Apr-94 7.3
May-94 128.67 May-94 7.43
Jun-94 128.67 Jun-94 7.61
Jul-94 128.67 Jul-94 7.39
Aug-94 128.67 Aug-94 7.48
Sep-94 128.67 Sep-94 7.82
Oct-94 128.67 Oct-94 7.96
Nov-94 133.06 Nov-94 7.94
Dec-94 132.51 Dec-94 7.88
Jan-95 132.51 Jan-95 7.73
Feb-95 132.51 Feb-95 7.55
Mar-95 132.51 Mar-95 7.43
Apr-95 132.51 Apr-95 7.33
May-95 132.51 May-95 6.63
Jun-95 125.21 Jun-95 6.54
Jul-95 125.21 Jul-95 6.9
Aug-95 125.21 Aug-95 6.61
Sep-95 125.21 Sep-95 6.5
Oct-95 125.21 Oct-95 6.36
Nov-95 125.21 Nov-95 6.08
Dec-95 117.63 Dec-95 5.95
Jan-96 117.63 Jan-96 6.05
Feb-96 117.63 Feb-96 6.36
Mar-96 117.63 Mar-96 6.67
Apr-96 117.63 Apr-96 6.83
May-96 124.39 May-96 7
Jun-96 124.39 Jun-96 6.95
Jul-96 124.39 Jul-96 7.01
Aug-96 124.39 Aug-96 7.12
Sep-96 124.39 Sep-96 6.9
Oct-96 124.39 Oct-96 6.81
Nov-96 124.39 Nov-96 6.51
Dec-96 123.32 Dec-96 6.6
Jan-97 123.32 Jan-97 6.79
Feb-97 123.32 Feb-97 6.8
Mar-97 123.32 Mar-97 7.09
Apr-97 123.32 Apr-97 6.89
May-97 123.32 May-97 6.98
Jun-97 123.32 Jun-97 6.74
Jul-97 123.32 Jul-97 6.45
Aug-97 123.32 Aug-97 6.61
Sep-97 123.32 Sep-97 6.3
Oct-97 123.32 Oct-97 6.15
Nov-97 123.32 Nov-97 6.04
Dec-97 117.47 Dec-97 5.95
Jan-98 117.47 Jan-98 5.9
Feb-98 117.47 Feb-98 6.02
Mar-98 117.47 Mar-98 5.93
Apr-98 117.47 Apr-98 5.95
May-98 117.47 May-98 5.8
Jun-98 117.47 Jun-98 5.62
Jul-98 117.47 Jul-98 5.72
Aug-98 117.47 Aug-98 5.26
Sep-98 117.47 Sep-98 4.98
Oct-98 117.47 Oct-98 5.15
Nov-98 117.47 Nov-98 5.07
Dec-98 118.77 Dec-98 5.09
Jan-99 118.77 Jan-99 5.09
Feb-99 118.77 Feb-99 5.58
Mar-99 118.77 Mar-99 5.62
Apr-99 118.77 Apr-99 5.66
May-99 118.77 May-99 5.82
Jun-99 127.85 Jun-99 5.97
Jul-99 127.85 Jul-99 6.1
Aug-99 127.85 Aug-99 6.06
Sep-99 127.85 Sep-99 6.05
Oct-99 127.85 Oct-99 6.16
Nov-99 127.85 Nov-99 6.29
Dec-99 127.85 Dec-99 6.48
Jan-00 128.36 Jan-00
Feb-00 128.36 Feb-00
Mar-00 Mar-00
Apr-00 Apr-00
May-00 May-00
All distributions in excess of regular monthly dividends are assumed to be
reinvested at NAV
</TABLE>
The chart's message is that the monthly income of shareholders that
reinvest has actually increased since the inception of the Fund. That increase
is rather remarkable in view of the substantial decline in the interest rates on
long term U.S. Treasury bonds (the dashed blue line measured on the right-hand
scale) from roughly 8% to about 6 3/8% now.
WHAT IS THE DIFFERENCE BETWEEN TRADITIONAL PREFERREDS AND HYBRID PREFERREDS?
It is basically a matter of corporate taxes. In all other respects,
traditional and hybrid preferreds are really very similar. The markets for these
two kinds of preferreds relate to each other in rather complicated ways, which
occasionally provide opportunities for us to make some money for the Fund by
taking advantage of pricing disparities.
Traditional preferreds are treated for tax purposes just like common stock
or any other equity security. The corporations that issue them do not get a tax
deduction for the dividends that they pay. On the other hand, traditional
preferreds are particularly appealing to corporate investors to whom the
dividends on such issues are 70% tax-free. That is the result of the Dividends
Received Deduction that was included in the federal tax laws many years ago to
offset some of the double taxation of these dollars that would otherwise occur
at the corporate level.
6
<PAGE>
Hybrid preferreds were created about six years ago for the purpose of
allowing issuers to get a deduction for the dividend payments they make on
preferreds, just as they would deduct interest payments on debt securities.
Since the issuer pays no tax, there is no double tax to avoid and,
correspondingly, no DRD available to a corporate holder of hybrids. Initially,
individual investors were the primary purchasers of hybrids, but the market has
now broadened to include institutions as well.
WHAT IS THE DISCOUNT FROM NET ASSET VALUE ON THE FUND'S SHARES?
As this is being written, the discount of the market value of the Fund's
shares from their net asset value is approximately 12%. As shown by the
following graph, the discount has recently fluctuated rather consistently
between the high single digits and the low teens. Weekly updates of the graph of
the discount are included in our web site at WWW.PREFERREDINCOME.COM.
[CHART]
<TABLE>
<CAPTION>
Preferred Income Fund
Premium/Discount of Market Price to NAV
DATE PREM/DISC
- ---- ---------
<S> <C>
Dec-90
Jan-91
Jan-91
Jan-91
Jan-91
Feb-91
Feb-91 0.0842
Feb-91 0.0438
Feb-91 0.0395
Mar-91 0.0424
Mar-91 0.0183
Mar-91 0.0151
Mar-91 0.0201
Mar-91 0.023
Apr-91 0.0149
Apr-91 0.0196
Apr-91 0.0314
Apr-91 0.0268
May-91 0.023
May-91 0.0199
May-91 0.0146
May-91 0.0219
May-91 0.051
Jun-91 0.0423
Jun-91 0.0417
Jun-91 0.0536
Jun-91 0.0659
Jul-91 0.0726
Jul-91 0.0659
Jul-91 0.0643
Jul-91 0.0549
Aug-91 0.0678
Aug-91 0.054
Aug-91 0.0449
Aug-91 0.0648
Aug-91 0.0314
Sep-91 0.057
Sep-91 0.0883
Sep-91 0.0651
Sep-91 0.0682
Oct-91 0.0764
Oct-91 0.0745
Oct-91 0.0719
Oct-91 0.0662
Nov-91 0.0693
Nov-91 0.0827
Nov-91 0.0801
Nov-91 0.065
Nov-91 0.0807
Dec-91 0.0716
Dec-91 0.0791
Dec-91 0.0839
Dec-91 0.1136
Jan-92 0.1091
Jan-92 0.1116
Jan-92 0.0978
Jan-92 0.0912
Jan-92 0.0417
Feb-92 0.0478
Feb-92 0.0613
Feb-92 0.0417
Feb-92 0.0381
Mar-92 0.0339
Mar-92 0.0447
Mar-92 0.0387
Mar-92 0.0327
Apr-92 0.0357
Apr-92 0.0452
Apr-92 0.0464
Apr-92 0.0423
May-92 0.0523
May-92 0.0382
May-92 0.0347
May-92 0.0083
May-92 0.0039
Jun-92 0.0302
Jun-92 0.0239
Jun-92 0.0227
Jun-92 0.0491
Jul-92 0.0491
Jul-92 0.0593
Jul-92 0.057
Jul-92 0.0712
Jul-92 0.058
Aug-92 0.0601
Aug-92 0.0389
Aug-92 0.0306
Aug-92 0.025
Sep-92 0.0228
Sep-92 0.0356
Sep-92 0.0489
Sep-92 0.0339
Oct-92 0.065
Oct-92 0.0417
Oct-92 0.0417
Oct-92 0.0378
Oct-92 0.0707
Nov-92 0.0378
Nov-92 0.059
Nov-92 0.0349
Nov-92 0.0506
Dec-92 0.068
Dec-92 0.0601
Dec-92 0.0582
Dec-92 0.0618
Jan-93 0.0739
Jan-93 0.0987
Jan-93 0.1145
Jan-93 0.1021
Jan-93 0.076
Feb-93 0.053
Feb-93 0.0452
Feb-93 0.0434
Feb-93 0.0628
Mar-93 0.0909
Mar-93 0.0538
Mar-93 0.0248
Mar-93 0.0638
Apr-93 0.0806
Apr-93 0.0764
Apr-93 0.0671
Apr-93 0.0764
Apr-93 0.0677
May-93 0.0918
May-93 0.0779
May-93 0.07
May-93 0.074
Jun-93 0.0497
Jun-93 0.0388
Jun-93 0.056
Jun-93 0.0703
Jul-93 0.0451
Jul-93 0.0541
Jul-93 0.049
Jul-93 0.0576
Jul-93 0.0598
Aug-93 0.079
Aug-93 0.0484
Aug-93 0.0377
Aug-93 0.0434
Sep-93 0.045
Sep-93 0.0361
Sep-93 0.0467
Sep-93 0.0321
Oct-93 0.0293
Oct-93 0.011
Oct-93 0.0173
Oct-93 0.0048
Oct-93 -0.0075
Nov-93 0.0095
Nov-93 0.0019
Nov-93 -0.0316
Nov-93 0.003
Dec-93 -0.0175
Dec-93 -0.0103
Dec-93 0.0323
Dec-93 -0.0051
Dec-93 -0.0287
Jan-94 0.0093
Jan-94 0.0149
Jan-94 -0.0126
Jan-94 -0.0316
Feb-94 -0.0196
Feb-94 -0.0224
Feb-94 -0.0741
Feb-94 -0.0539
Mar-94 -0.0092
Mar-94 -0.027
Mar-94 -0.0379
Mar-94 -0.0505
Apr-94 -0.0466
Apr-94 -0.0713
Apr-94 -0.0596
Apr-94 -0.0598
Apr-94 -0.0863
May-94 -0.0581
May-94 -0.0635
May-94 -0.0409
May-94 -0.0397
Jun-94 -0.0289
Jun-94 0.0146
Jun-94 -0.0037
Jun-94 0.0175
Jul-94 0.0006
Jul-94 0.0299
Jul-94 0.0188
Jul-94 -0.0084
Jul-94 -0.0082
Aug-94 -0.0161
Aug-94 -0.0215
Aug-94 -0.0263
Aug-94 -0.0439
Sep-94 -0.0379
Sep-94 -0.0232
Sep-94 -0.0293
Sep-94 -0.0273
Sep-94 -0.0565
Oct-94 -0.1141
Oct-94 -0.1089
Oct-94 -0.1416
Oct-94 -0.0732
Nov-94 -0.0783
Nov-94 -0.0912
Nov-94 -0.0951
Nov-94 -0.0788
Dec-94 -0.0593
Dec-94 -0.0508
Dec-94 -0.0554
Dec-94 -0.0822
Dec-94 -0.0836
Jan-95 -0.0201
Jan-95 -0.0134
Jan-95 -0.0525
Jan-95 -0.0697
Feb-95 0.0061
Feb-95 -0.0289
Feb-95 -0.0419
Feb-95 -0.0004
Mar-95 0.0035
Mar-95 -0.0445
Mar-95 -0.0666
Mar-95 -0.0568
Mar-95 -0.029
Apr-95 -0.0256
Apr-95 -0.0217
Apr-95 -0.0439
Apr-95 -0.0271
May-95 -0.0398
May-95 -0.0178
May-95 -0.041
May-95 -0.087
Jun-95 -0.0259
Jun-95 -0.0608
Jun-95 -0.0759
Jun-95 -0.0884
Jun-95 -0.0753
Jul-95 -0.0844
Jul-95 -0.0995
Jul-95 -0.0976
Jul-95 -0.0917
Aug-95 -0.0888
Aug-95 -0.0935
Aug-95 -0.0942
Aug-95 -0.0832
Sep-95 -0.0698
Sep-95 -0.0816
Sep-95 -0.0968
Sep-95 -0.0978
Sep-95 -0.0816
Oct-95 -0.0974
Oct-95 -0.1094
Oct-95 -0.1048
Oct-95 -0.121
Nov-95 -0.1151
Nov-95 -0.1146
Nov-95 -0.1117
Nov-95 -0.1043
Dec-95 -0.1071
Dec-95 -0.1192
Dec-95 -0.1244
Dec-95 -0.1337
Dec-95 -0.1313
Jan-96 -0.1365
Jan-96 -0.1354
Jan-96 -0.1379
Jan-96 -0.1251
Feb-96 -0.1244
Feb-96 -0.1238
Feb-96 -0.136
Feb-96 -0.1281
Mar-96 -0.1118
Mar-96 -0.1332
Mar-96 -0.1521
Mar-96 -0.1564
Mar-96 -0.1464
Apr-96 -0.1343
Apr-96 -0.1477
Apr-96 -0.1402
Apr-96 -0.1488
May-96 -0.1477
May-96 -0.1452
May-96 -0.1363
May-96 -0.1432
May-96 -0.1111
Jun-96 -0.118
Jun-96 -0.1003
Jun-96 -0.1129
Jun-96 -0.1049
Jul-96 -0.095
Jul-96 -0.098
Jul-96 -0.1071
Jul-96 -0.1077
Aug-96 -0.1105
Aug-96 -0.0574
Aug-96 -0.0714
Aug-96 -0.0705
Aug-96 -0.0669
Sep-96 -0.0824
Sep-96 -0.0756
Sep-96 -0.1186
Sep-96 -0.1106
Oct-96 -0.0861
Oct-96 -0.0941
Oct-96 -0.1077
Oct-96 -0.0858
Nov-96 -0.0778
Nov-96 -0.0831
Nov-96 -0.0833
Nov-96 -0.0653
Nov-96 -0.0606
Dec-96 -0.0667
Dec-96 -0.0831
Dec-96 -0.0749
Dec-96 -0.075
Jan-97 -0.0242
Jan-97 -0.0291
Jan-97 -0.0465
Jan-97 -0.041
Jan-97 -0.0459
Feb-97 -0.0675
Feb-97 -0.0544
Feb-97 -0.0539
Feb-97 -0.055
Mar-97 -0.0584
Mar-97 -0.0637
Mar-97 -0.0752
Mar-97 -0.0584
Apr-97 -0.0627
Apr-97 -0.0881
Apr-97 -0.0976
Apr-97 -0.0852
May-97 -0.0451
May-97 -0.0578
May-97 -0.0529
May-97 -0.0554
May-97 -0.0541
Jun-97 -0.051
Jun-97 -0.0486
Jun-97 -0.0486
Jun-97 -0.0429
Jul-97 -0.0308
Jul-97 -0.0537
Jul-97 -0.0583
Jul-97 -0.0519
Aug-97 -0.0498
Aug-97 -0.0583
Aug-97 -0.0708
Aug-97 -0.0739
Aug-97 -0.0469
Sep-97 -0.0595
Sep-97 -0.0623
Sep-97 -0.0651
Sep-97 -0.0604
Oct-97 -0.0299
Oct-97 -0.0385
Oct-97 -0.0477
Oct-97 -0.0558
Oct-97 -0.0517
Nov-97 -0.0425
Nov-97 -0.0554
Nov-97 -0.067
Nov-97 -0.0313
Dec-97 -0.0431
Dec-97 -0.0519
Dec-97 -0.0632
Dec-97 -0.0621
Jan-98 -0.009
Jan-98 -0.0211
Jan-98 -0.0012
Jan-98 -0.0431
Jan-98 -0.0358
Feb-98 -0.0364
Feb-98 -0.0474
Feb-98 -0.0466
Feb-98 -0.0446
Mar-98 -0.048
Mar-98 -0.0595
Mar-98 -0.0437
Mar-98 -0.0518
Apr-98 -0.0645
Apr-98 -0.0509
Apr-98 -0.058
Apr-98 -0.0663
May-98 -0.0422
May-98 -0.0589
May-98 -0.0681
May-98 -0.0702
May-98 -0.0496
Jun-98 -0.0556
Jun-98 -0.0586
Jun-98 -0.0599
Jun-98 -0.0479
Jul-98 -0.0496
Jul-98 -0.0558
Jul-98 -0.0565
Jul-98 -0.0645
Jul-98 -0.0503
Aug-98 -0.0614
Aug-98 -0.0779
Aug-98 -0.075
Aug-98 -0.0448
Sep-98 -0.0448
Sep-98 -0.0379
Sep-98 -0.0326
Sep-98 -0.0367
Oct-98 -0.0379
Oct-98 -0.0249
Oct-98 -0.0228
Oct-98 -0.0117
Oct-98 -0.0091
Nov-98 -0.014
Nov-98 -0.0423
Nov-98 -0.0394
Nov-98 -0.0267
Dec-98 -0.0373
Dec-98 -0.0212
Dec-98 -0.0355
Dec-98 -0.0127
Jan-99 -0.0106
Jan-99 -0.0182
Jan-99 -0.0372
Jan-99 -0.0557
Jan-99 -0.0557
Feb-99 -0.0536
Feb-99 -0.0687
Feb-99 -0.0647
Feb-99 -0.1014
Mar-99 -0.0826
Mar-99 -0.0747
Mar-99 -0.0935
Mar-99 -0.106
Apr-99 -0.0802
Apr-99 -0.0969
Apr-99 -0.1003
Apr-99 -0.0957
Apr-99 -0.0946
May-99 -0.0962
May-99 -0.0928
May-99 -0.1146
May-99 -0.1048
Jun-99 -0.1014
Jun-99 -0.0991
Jun-99 -0.0927
Jun-99 -0.1031
Jul-99 -0.0979
Jul-99 -0.0938
Jul-99 -0.1037
Jul-99 -0.0747
Jul-99 -0.0751
Aug-99 -0.0792
Aug-99 -0.0963
Aug-99 -0.0946
Aug-99 -0.0911
Sep-99 -0.1071
Sep-99 -0.0892
Sep-99 -0.1065
Sep-99 -0.0788
Oct-99 -0.0703
Oct-99 -0.0727
Oct-99 -0.1442
Oct-99 -0.1279
Oct-99 -0.1431
Nov-99 -0.1368
Nov-99 -0.1373
Nov-99 -0.1078
Nov-99 -0.1207
Dec-99 -0.1145
Dec-99 -0.1195
Dec-99 -0.1307
Dec-99 -0.1624
Dec-99 -0.1084
</TABLE>
7
<PAGE>
[This page intentionally left blank]
8
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
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, 1998.................................. $0.7600 $15.73 $15.5625 $15.54
January 31, 1999................................... 0.0785 15.62 14.7500 14.87
February 28, 1999.................................. 0.0785 15.65 14.0625 14.23
March 31, 1999..................................... 0.0785 15.57 14.3125 14.28
April 30, 1999..................................... 0.0785 15.60 14.1250 14.07
May 31, 1999....................................... 0.0785 15.50 13.8750 13.84
June 30, 1999...................................... 0.0845 15.36 13.6875 13.89
July 31, 1999...................................... 0.0845 15.07 13.9375 13.76
August 31, 1999.................................... 0.0845 14.94 13.7500 13.52
September 30, 1999................................. 0.0845 14.80 13.6250 13.76
October 31, 1999................................... 0.0845 14.66 12.5625 12.76
November 30, 1999.................................. 0.0845 14.41 12.7500 12.77
December 31, 1999.................................. 0.5600 13.74 12.2500 N.A.
</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.
9
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1999
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES -- 92.7%
ADJUSTABLE RATE PREFERRED STOCKS -- 15.3%
UTILITIES -- 3.5 %
Niagara Mohawk Power Corporation:
154,879 Series A, Adj. Rate Pfd. ...... $ 3,881,655*
30,601 Series B, Adj. Rate Pfd. ...... 768,850*
88,745 Series C, Adj. Rate Pfd. ...... 2,229,718*
------------
TOTAL UTILITY ADJUSTABLE RATE
PREFERRED STOCKS............... 6,880,223
------------
BANKING -- 11.5%
30,175 Bank One Corporation,
Series B, Adj. Rate Pfd. ...... 2,889,256*
72,275 Chase Manhattan Corporation,
Series L, Adj. Rate Pfd. ...... 6,902,263*
Citigroup Inc.:
75,000 Series Q, Adj. Rate Pfd. ...... 1,757,813*
102,850 Series R, Adj. Rate Pfd. ...... 2,410,547*
Deutsche Bank AG:
105,800 Bankers Trust New York
Corporation, Series Q, Adj.
Rate Pfd. ..................... 2,479,688*
110,200 Bankers Trust New York
Corporation, Series R, Adj.
Rate Pfd. ..................... 2,582,813*
5,000 J.P. Morgan & Company, Inc.,
Series A, Adj. Rate Pfd. ...... 386,875*
8,200 Republic New York Corporation,
Series D, Adj. Rate Pfd. ...... 195,775*
79,000 Wells Fargo & Company, Series B,
Adj. Rate Pfd. ................ 3,456,250*
------------
TOTAL BANKING ADJUSTABLE RATE
PREFERRED STOCKS............... 23,061,280
------------
FINANCIAL SERVICES -- 0.3%
12,500 Student Loan Marketing
Association, Series A, Adj.
Rate Pfd. ..................... 584,375*
------------
TOTAL ADJUSTABLE RATE PREFERRED
STOCKS......................... 30,525,878
------------
FIXED RATE PREFERRED STOCKS AND SECURITIES -- 77.4%
UTILITIES -- 27.3%
Alabama Power Company:
55,000 5.83% Pfd. .................... 1,171,225*
40,000 Alabama Power Capital Trust II,
7.60% TOPrS.................... 921,400
13,000 Appalachian Power Company,
8.00% QUIDS, Series B.......... $ 309,920
Baltimore Gas & Electric Company:
4,750 6.70% Pfd., Series 1993........ 510,103*
11,000 6.99% Pfd., Series 1995........ 1,203,675*
10,000 Boston Edison Company,
4.78% Pfd. .................... 772,650*
5,000 Central Hudson Gas & Electric
Corporation,
4.35% Pfd., Series D........... 356,075*
Central Power and Light Company:
139,950 CPL Capital,
8.00% QUIPS, Series A.......... 3,242,641
12,450 Columbus Southern Power Company,
7.92% Jr. Sub. Debt, Series
B.............................. 291,143
Connecticut Light and Power:
885 2.06% Pfd. .................... 25,789*
459 3.24% Pfd. .................... 21,153*
6,870 Dayton Power and Light Company,
3.90% Pfd., Series C........... 430,199*
Duke Energy Corporation:
5,550 4.50% Pfd., Series C........... 407,897*
3,412 7.85% Pfd., Series S........... 371,209*
565 7.00% Pfd., Series W........... 60,215*
Duquesne Light Company:
20,000 7.375% QIB, Series E........... 431,400
54,000 Duquesne Capital,
8.375% MIPS, Series A.......... 1,294,650
10,900 El Paso Tennessee Pipeline
Company, 8.25% Pfd., Series A.. 572,795*
Entergy Arkansas Inc.:
2,800 7.32% Pfd. .................... 276,038*
3,850 7.40% Pfd. .................... 381,227*
Florida Power & Light Company:
42,747 6.98% Pfd., Series S........... 4,563,883*
13,000 7.05% Pfd., Series T........... 1,394,055*
Florida Progress Corporation:
86,300 FPC Capital,
7.10% QUIPS, Series A.......... 1,824,813
4,000 Georgia Power Capital Trust I,
7.75% Series T................. 91,940
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
---------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
Hawaiian Electric Company:
20,000 HECO Capital Trust I, 8.05%
QUIPS.......................... $ 459,600
Illinois Power Company:
4,530 4.08% Pfd., Series A........... 147,044*
8,960 4.42% Pfd., Series D........... 315,078*
29,370 4.70% Pfd., Series E........... 1,098,144*
10,000 Indiana Michigan Power Company,
8.00% Pfd., Series A........... 234,350
7,538 Jersey Central Power & Light
Company, 7.52% Sinking Fund
Pfd., Series K................. 789,002*
22,000 MidAmerican Energy Financing I,
7.98% QUIPS, Series A.......... 509,520
Monongahela Power Company:
8,500 $7.73 Pfd., Series L........... 925,777*
23,500 8% QUIDS, Series A............. 574,223
Nevada Power Company:
27,860 NVP Capital I,
8.20% QUIPS, Series A.......... 633,815
5,000 New York State Electric & Gas
Corporation,
6.30% Sinking Fund Pfd. ....... 518,050*
Niagara Mohawk Power Corporation:
15,080 7.85% Sinking Fund Pfd. ....... 383,183*
45,000 6.905% Pfd. ................... 2,270,925*
3,500 Northern Indiana Public Service
Company,
7.44% Pfd...................... 357,578*
6,170 Ohio Edison Company,
4.44% Pfd. .................... 406,079*
Ohio Power Company:
33,600 8.16% Pfd., Series A........... 802,200
15,500 7.92% QUIDS, Series B.......... 353,555
36,300 7.375% Sr. Note................ 791,159
PacifiCorp:
5,700 $7.48 Sinking Fund Pfd. ....... 623,523*
5,000 $4.72 Pfd. .................... 389,975*
PECO Energy:
5,000 $4.40 Pfd., Series C........... $ 299,375*
1,050,000 Capital Trust III,
$7.38 4/6/28 Capital Security,
Series D....................... 922,540
PP&L Resources, Inc.:
124,700 PP&L Capital Trust II,
8.10% TOPrS.................... 2,947,285
48,000 Public Service Company of
Colorado Capital Trust I,
7.60% TOPrS.................... 1,062,480
10,000 Public Service Company of New
Mexico, 4.58% Private Pfd. .... 657,900*
Public Service Enterprise Group
Incorporated:
53,500 Enterprise Capital Trust I,
7.44% TOPrS, Series A.......... 1,084,713
Puget Sound Energy Inc.:
11,620 7.75% Sinking Fund Pfd. ....... 1,216,846*
92,200 7.45% Pfd., Series II.......... 2,465,889*
Reliant Energy, Inc.:
34,000 REI Trust I,
7.20% TOPrS, Series C.......... 704,310
4,884 Rochester Gas & Electric
Corporation, 4.10% Pfd., Series
H.............................. 312,503*
36,700 San Diego Gas & Electric Company,
6.80% Pfd. .................... 958,054*
South Carolina Electric & Gas
Company:
14,034 5.125% Purchase Fund Pfd. ..... 601,567*
86,200 SCE&G Trust I,
7.55%, Series A................ 1,989,927
5,000 Southern Indiana Gas & Electric,
4.75% Pfd. Pvt. ............... 376,100*
5,000 Southwestern Public Service
Capital I, 7.85%, Series A..... 115,775
TransCanada PipeLines Ltd.:
37,000 TransCanada Capital,
8.75% TOPrS.................... 906,130
3,800,000 Union Electric Company,
7.69% 12/15/36 Capital
Security, Series A............. 3,446,467
1,916 Virginia Electric & Power
Company, $6.98 Pfd. ........... 203,843*
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
Wisconsin Energy Corporation:
35,000 WEC Capital Trust I,
6.85%.......................... $ 726,950
------------
TOTAL UTILITY FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 54,507,529
------------
BANKING -- 22.2%
ABN Amro North America:
1,000 6.59% Pfd. 144A***............. 964,080*
1,480 LaSalle National Corporation,
6.46% Pfd. 144A***............. 1,398,696*
BancWest Corporation:
6,500,000 First Hawaiian Capital I,
8.343% 7/1/27 Capital Security,
Series B....................... 6,164,243
Bank of America Corporation:
2,135,000 NationsBank Capital Trust II,
7.83% 12/15/26 Capital
Security....................... 2,039,533
900,000 Bank of New York Company, Inc.,
7.78% 12/1/26 Capital Security
144A***........................ 848,056
Chase Manhattan Corporation:
62,189 10.84% Pfd., Series C.......... 1,759,327*
5,000 10.96% Pfd., Series G.......... 137,350*
Citigroup Inc.:
46,550 6.213% Pfd., Series G.......... 2,159,920*
92,550 5.864% Pfd., Series M.......... 4,104,130*
Deutsche Bank AG:
3,300,000 BT Capital Trust B,
7.90% 1/15/27 Capital
Security....................... 3,100,861
First Union Corporation:
1,750,000 First Union Institutional Capital
II, 7.85% 1/1/27 Capital
Security....................... 1,644,037
1,500,000 First Union Capital II,
7.95% 11/15/29 Capital
Security....................... 1,471,395
FleetBoston Financial
Corporation:
1,200,000 BankBoston Capital Trust I,
8.250% 12/15/26 Capital
Security....................... $ 1,171,458
1,000,000 BankBoston Capital Trust II,
7.75% 12/15/26 Capital
Security, Series B............. 926,445
31,100 Fleet Financial Group, Inc.,
6.75% Pfd., Series VI.......... 1,659,185*
GreenPoint Financial Corporation:
2,500,000 GreenPoint Capital Trust I,
9.10% 6/1/27 Capital
Security....................... 2,346,612
J.P. Morgan & Company Inc.:
1,500,000 JPM Capital Trust I,
7.54% 1/15/27 Capital
Security....................... 1,378,335
1,120,000 JPM Capital Trust II,
7.95% 2/1/27 Capital
Security....................... 1,071,969
1,000,000 Keycorp Institutional Capital II,
6.875% 3/17/29 Capital
Security....................... 854,570
Republic New York Corporation:
4,900 5.715% Pfd. ................... 215,306*
5,250,000 Republic NY Capital Trust II,
7.53% 12/4/26 Capital
Security....................... 4,688,959
Summit Bancorp:
1,000,000 Summit Capital Trust I,
8.40% 3/15/27 Capital Security,
Series B....................... 987,155
500,000 Suntrust Capital Trust II,
7.90%, 6/15/27 Capital
Security....................... 477,927
2,125,000 Washington Mutual, Inc.,
8.375% 6/1/27 Capital
Security....................... 2,074,892
750,000 Wells Fargo & Company, Capital I,
7.96% 12/15/26 Capital
Security....................... 726,563
------------
TOTAL BANKING FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 44,371,004
------------
FINANCIAL SERVICES -- 15.1%
Bear Stearns Companies, Inc. The:
14,000 6.15% Pfd., Series E........... 622,440*
45,000 5.72% Pfd., Series F........... 1,868,625*
52,450 5.49% Pfd., Series G........... 2,096,427*
2,500,000 Countrywide Credit Capital I,
8.00% 12/15/26 Capital
Security....................... 2,313,987
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
---------------------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
FINANCIAL SERVICES (CONTINUED)
Donaldson, Lufkin & Jenrette,
Inc.:
11,600 DLJ Capital Trust,
8.42%.......................... $ 279,618
19,000 Freddie Mac,
5.10%, Series H................ 773,585*
Heller Financial, Inc.:
13,200 6.687% Pfd., Series C.......... 1,274,262*
8,600 6.95% Pfd., Series D........... 862,838*
Household International, Inc.:
133,300 Household Capital Trust II,
8.70%.......................... 3,252,520
70,000 Household Capital Trust IV,
7.25%.......................... 1,453,550
Lehman Brothers Holdings Inc.:
229,748 5.00% Convertible Pfd., Series
B.............................. 6,445,580*
71,200 5.94% Pfd., Series C........... 2,965,124*
22,400 5.67% Pfd., Series D........... 894,208*
Merrill Lynch & Co., Inc.:
24,900 ML Capital Trusts,
8.00% TOPrS.................... 621,629
90,000 SLM Holding Corporation,
6.97% Pfd. .................... 4,442,400*
------------
TOTAL FINANCIAL SERVICES FIXED
RATE PREFERRED STOCKS AND
SECURITIES..................... 30,166,793
------------
INSURANCE -- 7.1%
Allstate Corporation:
1,900,000 Allstate Financing II,
7.83% 12/1/45 Capital
Security....................... 1,790,740
Hartford Financial Services
Group, Inc.:
55,066 Hartford Capital II,
8.35% QUIPS, Series B.......... 1,340,582
MMI Companies, Inc.:
4,700,000 MMI Capital Trust I,
7.625% 12/15/27 Capital
Security, Series B............. 3,126,440
Provident Companies, Inc.:
1,900,000 Provident Financing Trust I,
7.405% 3/15/38 Capital
Security....................... 1,611,380
21 Prudential Human Resources
Management Company, Inc.,
6.30% Private Placement,
Sinking Fund Pfd., Series A.... $ 2,079,661*
SAFECO Corporation:
4,980,000 SAFECO Capital Trust I,
8.072% 7/15/37 Capital
Security....................... 4,368,431
------------
TOTAL INSURANCE FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 14,317,234
------------
MISCELLANEOUS INDUSTRIES -- 5.7%
41,327 Anadarko Petroleum Corporation,
5.46% Pfd. .................... 3,332,816*
Coastal Corporation, The:
69,400 Coastal Finance I,
8.375% TOPrS................... 1,640,616
57,600 Farmland Industries Inc.,
8.00% Pfd. 144A***............. 2,634,912*
30,000 LASMO America Ltd.,
8.15% Pfd. 144A***............. 3,213,300*
9,520 Viad Corporation,
$4.75 Sinking Fund Pfd. ....... 550,780*
------------
TOTAL MISCELLANEOUS INDUSTRIES
FIXED RATE PREFERRED STOCKS AND
SECURITIES..................... 11,372,424
------------
TOTAL FIXED RATE PREFERRED STOCKS
AND SECURITIES................. 154,734,984
------------
TOTAL PREFERRED STOCKS AND
SECURITIES
(Cost $188,995,598)............ 185,260,862
------------
COMMON STOCKS -- 0.5%
UTILITIES -- 0.5%
47,250 Avista Corporation $1.24
RECONS......................... 727,886*
8,900 WPS Resources Corporation........ 232,780*
------------
TOTAL UTILITY COMMON STOCKS
(Cost $1,084,376).............. 960,666
------------
OPTION CONTRACTS -- 1.8% (Cost $3,008,643)
March Put Options on U.S.
Treasury Bond Futures, expiring
2/20/00+....................... 3,622,285
------------
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
- ---------------------------------------------------------------
<TABLE>
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 1)
- --------- --------
<C> <S> <C>
REPURCHASE AGREEMENT -- 3.4% (Cost $6,896,000)
$6,896,000 Agreement with Warburg Dillon
Read, 5.650% dated 11/30/99,
to be repurchased at
$6,897,082 on 12/1/99,
collateralized by $4,798,000
U.S. Treasury Note, 11.250%
due 2/15/15 (value
$7,035,068)................... $ 6,896,000
------------
TOTAL INVESTMENTS (Cost $199,984,617**). 98.4% 196,739,813
OTHER ASSETS AND LIABILITIES (Net)..... 1.6 3,123,482
---- -----------
NET ASSETS............................ 100.0% $199,863,295
==== ============
</TABLE>
- ---------------
* Securities eligible for the Dividends Received Deduction.
** Aggregate cost for federal tax purposes is $200,818,066.
*** Security exempt from registration under Rule 144A of the Securities Act of
1933. These securities may be resold in transactions exempt from
registration to qualified institutional buyers.
+ Non-income producing.
<TABLE>
<S> <C>
ABBREVIATIONS (Note 6):
TOPrS -- Trust Originated Preferred Securities
QUIPS -- Quarterly Income Preferred Securities
MIPS -- Monthly Income Preferred Securities
QUIDS -- Quarterly Income Debt Securities
RECONS -- Return Enhanced Convertible Securities
Capital Securities are considered debt instruments for
financial statement purposes and the amounts shown in the
Shares/Par column are dollar amounts of par value.
</TABLE>
See Notes to Financial Statements.
14
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1999
-------------------------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $199,984,617) (Note 1)
See accompanying schedule.............................. $196,739,813
Cash...................................................... 25
Dividends and interest receivable......................... 2,145,072
Receivable for securities sold............................ 1,428,327
Prepaid expenses.......................................... 24,047
------------
Total Assets...................................... 200,337,284
LIABILITIES:
Dividends payable to Common Shareholders.................. $ 209,447
Investment advisory fee payable (Note 2).................. 93,218
Professional fees payable................................. 56,913
Accrued expenses and other payables....................... 114,411
-----------
Total Liabilities................................. 473,989
------------
NET ASSETS.................................................. $199,863,295
============
NET ASSETS consist of:
Undistributed net investment income (Note 1).............. $ 804,614
Accumulated net realized gain on investments sold
(Note 1)................................................ 2,955,248
Unrealized depreciation of investments (Note 3)........... (3,244,804)
Par value of Common Stock................................. 98,386
Paid-in capital in excess of par value of Common Stock.... 141,749,851
Money Market Cumulative Preferred(TM) Stock (Note 5)...... 57,500,000
------------
Total Net Assets.................................. $199,863,295
============
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 (Note 9)................ 975.55 560,942
----------- ------------
$100,975.55 58,060,942
===========
Common Stock (9,838,571 shares outstanding)............... $14.41 141,802,353
====== ------------
TOTAL NET ASSETS............................................ $199,863,295
============
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1999
- -----------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends.............................................. $ 10,228,437
Interest............................................... 4,526,531
------------
Total Investment Income........................... 14,754,968
EXPENSES:
Investment advisory fee (Note 2)....................... $1,167,583
Administration fee (Note 2)............................ 250,220
Money Market Cumulative Preferred(TM) broker
commissions and Auction Agent fees................... 158,256
Insurance expense...................................... 96,195
Professional fees...................................... 92,014
Directors' fees and expenses (Note 2).................. 78,398
Shareholder servicing agent fees and expenses
(Note 2)............................................. 75,436
Economic consulting fee (Note 2)....................... 42,223
Custodian fees and expenses (Note 2)................... 29,772
Other.................................................. 80,706
----------
Total Expenses.................................... 2,070,803
------------
NET INVESTMENT INCOME....................................... 12,684,165
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(Notes 1 and 3):
Net realized gain on investments sold during the
year................................................. 2,426,942
Change in net unrealized appreciation of investments
during the year...................................... (15,491,387)
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS............. (13,064,445)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ (380,280)
============
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS
---------------------------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
NOVEMBER 30, 1999 NOVEMBER 30, 1998
----------------- -----------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................. $ 12,684,165 $ 12,592,124
Net realized gain on investments sold during the
year................................................. 2,426,942 6,366,022
Change in net unrealized appreciation of investments
during the year...................................... (15,491,387) (5,855,394)
------------ ------------
Net increase/(decrease) in net assets resulting from
operations........................................... (380,280) 13,102,752
DISTRIBUTIONS:
Dividends paid from net investment income to Money
Market Cumulative Preferred(TM) Stock Shareholders
(Note 5)............................................. (2,011,963) (1,660,954)
Distributions paid from net realized capital gains to
Money Market Cumulative Preferred(TM) Stock
Shareholders (Note 5)................................ (815,122) (742,118)
Dividends paid from net investment income to Common
Stock Shareholders................................... (11,066,234) (10,376,977)
Distributions paid from net realized capital gains to
Common Stock Shareholders............................ (5,261,030) (2,914,933)
------------ ------------
NET DECREASE IN NET ASSETS FOR THE YEAR..................... (19,534,629) (2,592,230)
NET ASSETS:
Beginning of year...................................... 219,397,924 221,990,154
------------ ------------
End of year (including undistributed net investment
income of $804,614 and $1,254,377, respectively)..... $199,863,295 $219,397,924
============ ============
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH YEAR.
- -------------------------------------------------------------------
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>
YEAR ENDED NOVEMBER 30,
---------------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.......................... $ 16.43 $ 16.71 $ 16.50 $ 15.80 $ 14.74
--------- -------- -------- -------- --------
INVESTMENT OPERATIONS:
Net investment income....................................... 1.29 1.28 1.27 1.37 1.48
Net realized and unrealized gain/(loss) on investments...... (1.35) 0.05 1.00 0.65 2.05
--------- -------- -------- -------- --------
Total from investment operations............................ (0.06) 1.33 2.27 2.02 3.53
--------- -------- -------- -------- --------
DISTRIBUTIONS:
Dividends paid from net investment income to MMP*
Shareholders............................................... (0.20) (0.17) (0.22) (0.15) (0.26)
Distributions paid from net realized capital gains to MMP*
Shareholders............................................... (0.08) (0.07) (0.06) (0.08) (0.01)
Dividends paid from net investment income to Common Stock
Shareholders............................................... (1.12) (1.05) (1.15) (1.08) (1.36)
Distributions paid from net realized capital gains to Common
Stock Shareholders......................................... (0.53) (0.30) (0.65) -- (0.83)
Change in accumulated undeclared dividends on MMP*.......... (0.03)+ (0.02) 0.02 (0.01) (0.01)
--------- -------- -------- -------- --------
Total distributions......................................... (1.96) (1.61) (2.06) (1.32) (2.47)
--------- -------- -------- -------- --------
Net asset value, end of year................................ $ 14.41+ $ 16.43 $ 16.71 $ 16.50 $ 15.80
========= ======== ======== ======== ========
Market value, end of year................................... $ 12.750 $ 15.938 $ 16.188 $ 15.500 $ 14.125
========= ======== ======== ======== ========
Total investment return based on net asset value**.......... (1.81)% 6.91% 13.65% 12.78% 25.13%
========= ======== ======== ======== ========
Total investment return based on market value**............. (10.43)% 7.05% 17.20% 18.50% 22.14%
========= ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK
SHAREHOLDERS:
Operating expenses....................................... 1.37% 1.32% 1.34% 1.51% 1.55%
Net investment income***................................. 6.66% 6.13% 6.22% 7.22% 8.33%
SUPPLEMENTAL DATA:
Portfolio turnover rate.................................. 65% 87% 74% 98% 94%
Net assets, end of year (in 000's)(total Fund)........... $ 199,863 $219,398 $221,990 $220,088 $213,053
- ------------------------------------------------------------
Ratio of operating expenses to total average net assets
including MMP*............................................. 0.99% 0.97% 0.99% 1.10% 1.11%
</TABLE>
* Money Market Cumulative Preferred(TM) Stock.
** Assumes reinvestment of distributions at the price obtained by the Fund's
Dividend Reinvestment Plan.
*** The net investment income ratios reflect income net of operating expenses
and payments to MMP* Shareholders.
+ Includes effect of additional distribution available to MMP* Shareholders
($0.05 per Common share). (See Notes 5 and 9 to the Financial Statements.)
See Notes to Financial Statements.
18
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------------------
The table below sets out information with respect to Money Market
Cumulative Preferred(TM) Stock currently outstanding. (See Note 5 to the
Financial Statements.)
<TABLE>
<CAPTION>
INVOLUNTARY AVERAGE
ASSET LIQUIDATING MARKET
TOTAL SHARES COVERAGE PREFERENCE VALUE
OUTSTANDING PER SHARE PER SHARE(1) PER SHARE(1)
------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
11/30/99 575 $347,588 $100,000 $100,000
11/30/98 575 381,562 100,000 100,000
11/30/97 575 386,070 100,000 100,000
11/30/96 575 382,762 100,000 100,000
11/30/95 575 370,527 100,000 100,000
</TABLE>
- ---------------
(1) Excludes accumulated undeclared dividends.
See Notes to Financial Statements.
19
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Preferred Income Fund Incorporated (the "Fund") is a diversified,
closed-end management investment company organized as a Maryland corporation and
is registered with the Securities and Exchange Commission ("SEC") under the
Investment Company Act of 1940, as amended. 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 Investment Adviser reviews and approves the eligibility
of the banks and dealers with which the Fund may enter 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
20
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------
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. Subject to the Fund qualifying as a regulated
investment company, any taxes paid by the Fund on such net realized long-term
gains may be used by the Fund's Shareholders as a credit against their own tax
liabilities.
Federal income taxes: The Fund intends to continue 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 and capital gain distributions are determined and characterized in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to (1) differing
treatments of income and gains on various investment securities held by the
Fund, including timing differences, (2) the attribution of expenses against
certain components of taxable investment income, and (3) federal regulations
requiring proportional allocation of income and gains to all classes of
Shareholders.
The Internal Revenue Code of 1986, as amended, imposes a 4% nondeductible
excise tax on the Fund to the extent the Fund does not distribute by the end of
any calendar year at least (1) 98% of the sum of its net investment income for
that year and its capital gains (both long term and short term) for its fiscal
year and (2) certain undistributed amounts from previous years.
Other: 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.
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
21
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------------------------
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.
Primark Decision Economics Inc. ("Primark") serves as the Fund's Economic
Consultant. Effective October 8, 1999, the Fund revised its agreement with
Primark and now pays Primark an annual fee equal to $25,000 for services
provided.
First Data Investor Services Group, Inc. ("Investor Services Group"), a
wholly-owned subsidiary of First Data Corporation, serves as the Fund's
Administrator and Transfer Agent. As Administrator, Investor Services Group
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 Investor
Services Group's services as Administrator, the Fund pays Investor Services
Group a monthly fee at an annual rate of 0.12% 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 pays Boston Safe
a monthly fee at an annual rate of 0.01% of the Fund's average monthly net
assets. Investor Services Group also serves as the Fund's Common Stock servicing
agent (transfer agent), dividend-paying agent and registrar, and as compensation
for Investor Services Group's services as transfer agent, the Fund pays Investor
Services Group a fee at an annual rate of 0.02% of the Fund's average monthly
net assets plus certain out-of-pocket expenses. (See Note 9.)
Chase Manhattan Bank ("Auction Agent") served as the Fund's Money Market
Cumulative Preferred(TM) Stock transfer agent, registrar, dividend disbursing
agent and redemption agent during the year. (See Note 9.)
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities for the year ended
November 30, 1999, excluding short-term investments, aggregated $130,108,967 and
$138,720,688, respectively.
At November 30, 1999, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $5,967,161 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $10,045,414.
22
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------
4. COMMON STOCK
At November 30, 1999, 240,000,000 shares of $0.01 par value Common Stock
were authorized. There were no Common Stock transactions for the years ended
November 30, 1999 and 1998.
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. 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 is 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. Net
assets available to Money Market Cumulative Preferred(TM) Stock at November 30,
1999 includes such an additional distribution of $471,678, which was declared on
December 20, 1999. (See Note 9.) In prior years, additional distributions were
not reported as available to Money Market Cumulative Preferred(TM) Stock until
declared by the Board of Directors.
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 November 30, 1999, 575 shares of Money Market Cumulative Preferred(TM)
Stock were outstanding at the annual rate of 4.299%. 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.
23
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ------------------------------------------------------------------------
6. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY
The Fund invests primarily in adjustable and fixed rate preferred stocks
and similar hybrid, i.e., fully taxable, preferred securities. 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 or 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 may invest up
to 15% of its assets in common stock. Under normal conditions, the Fund may
invest up to 35% of its assets in debt securities. Certain of its investments in
hybrid, i.e., fully taxable, preferred securities, such as TOPrS, TIPS, QUIPS,
MIPS, QUIDS, QUICS, QIB's, Capital Securities, and other similar or related
investments, will be subject to the foregoing 35% limitation to the extent that,
in the opinion of the Fund's Adviser, such investments are deemed to be
debt-like in key characteristics.
7. 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 November 30, 1999, 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.
24
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
-------------------------------------------------------------------------
8. SIGNIFICANT SHAREHOLDERS
At November 30, 1999, the Commerce Group, Inc. owned approximately 21.8% of
the Fund's outstanding Common Stock.
9. SUBSEQUENT EVENTS
On December 1, 1999, PFPC Trust Company, a wholly-owned subsidiary of PFPC
Worldwide, Inc. and an indirect wholly-owned subsidiary of PNC Bank Corporation,
acquired all of the outstanding stock of Investor Services Group (the
"Transaction"). On that same date and as part of the Transaction, PFPC Inc., an
indirect wholly-owned subsidiary of PNC Bank Corporation, was merged into
Investor Services Group, which then changed its name to PFPC Inc.
Bankers Trust Company, a wholly-owned subsidiary of Deutsche Bank, AG
("Auction Agent"), began serving as the Fund's Money Market Cumulative
Preferred(TM) Stock transfer agent, registrar, dividend disbursing agent and
redemption agent, effective December 1, 1999.
On December 13, 1999, the Fund declared a distribution of $0.56 per share
(of which for tax purposes $0.1965 per share represents a dividend from ordinary
income and $0.3635 per share represents a dividend from realized long term
capital gains) to Common Stock Shareholders of record December 23, 1999, payable
December 30, 1999.
As a result of the gains and income realized by the Fund that did not
qualify for the Corporate Dividends Received Deduction ("DRD"), a portion of the
distributions paid to the Fund's Money Market Cumulative Preferred(TM) Stock
Shareholders from January 1, 1999 through November 30, 1999 has been designated
as being from capital gains and other non-DRD income, as required by Internal
Revenue Service Ruling 89-81 with respect to the Internal Revenue Code of 1986,
as amended. On December 20, 1999, the Fund declared an additional distribution
of $471,678 payable December 22, 1999 to Money Market Cumulative Preferred(TM)
Stock Shareholders as required by the Fund's Articles Supplementary. This
additional distribution is required to reflect the fact that less than 100% of
the original distributions qualified for the DRD.
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Preferred Income Fund Incorporated:
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Preferred Income Fund Incorporated
(the "Fund") at November 30, 1999, and the results of its operations for the
year then ended, the changes in its net assets for each of the two years in the
period then ended and the financial highlights for each of the five years in the
period then ended, in conformity with generally accepted accounting principles.
These financial statements and financial highlights (hereafter referred to as
"financial statements") are the responsibility of the Fund's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits, which included confirmation of securities at
November 30, 1999 by correspondence with the custodian, provide a reasonable
basis for the opinion expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
January 12, 2000
26
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Fund Incorporated
TAX INFORMATION (UNAUDITED)
----------------------------------------------
For the fiscal year ended November 30, 1999, the Fund realized and, by
December 31, 1999, had distributed long term capital gains to both Common Stock
Shareholders and Money Market Cumulative Preferred(TM) Stock Shareholders of
$4,295,977. The amount may differ from those shown elsewhere in this annual
report due to differences in the calculation of long term gains for tax purposes
as compared with SEC financial reporting requirements. Of the total
distributions attributable to the fiscal year ended November 30, 1999, including
the Additional Distribution to Money Market Cumulative Preferred(TM) Stock
Shareholders, 41.20% qualified for the Dividends Received Deduction for eligible
corporate investors. (See Note 9.)
For the calendar year ended December 31, 1999, 40.57% of all distributions
paid to Common Stock Shareholders qualified for the Dividends Received Deduction
for eligible corporate investors. Shareholders should refer to Form 1099
accompanying additional information and the information contained herein when
preparing their tax returns to determine the appropriate tax characterization of
the distributions they received from the Fund in calendar year 1999. (See Note
9.)
27
<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 PFPC Inc. 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, PFPC Inc. 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 PFPC Inc. 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, PFPC Inc. 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 PFPC's
open market purchases in connection with the reinvestment of dividends or
capital gains distributions. For the year ended November 30, 1999, $9,293 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
28
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Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
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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 PFPC Inc. in
writing, by completing the form on the back of the Plan account statement and
forwarding it to PFPC Inc. or by calling PFPC Inc. directly. A termination will
be effective immediately if notice is received by PFPC Inc. 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, PFPC Inc. 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 PFPC Inc. at
1-800-331-1710.
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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
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: [email protected]
web site: www.preferredincome.com
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 --
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.
[PREFERRED INCOME FUND]
Annual
Report
November 30, 1999
