<PAGE>
THE PREFERRED INCOME MANAGEMENT FUND
Dear Shareholder:
The Preferred Income Management Fund continues on a steady course despite
tumultuous economic and political conditions around the world. Total return on
net asset value, including both income and principal change, was 0.9% for the
quarter ended August 31, 1998 and 7.2% for the first three quarters of fiscal
1998.
Tumbling common stock prices in this country and near economic collapse in
Russia and parts of Asia have resulted in a classic "flight to safety." The
yields of U.S. Treasury bonds have fallen, causing their prices to rise strongly
while, at the same time, the markets for junk bonds and emerging market debt are
in shambles. Better quality domestic corporate bonds and preferreds, in which
the Fund invests, have been caught in the middle, sharing neither the prosperity
of Treasuries nor the misery of distressed markets.
Our strategy of hedging by purchasing put options on Treasury bond futures
was up to the challenge of these difficult markets. We expect the Fund to lose
money on its hedges when the price of long term Treasury bonds rise. However,
the maximum loss on purchased put options is limited to the comparatively small
amount paid for the options, which kept our hedge losses under control. Thus,
even though the Fund's preferred stock holdings did not match the strength in
Treasuries, we were still able to produce positive returns after hedging. "All's
well that ends well."
A chaotic investment climate usually helps patient investors once the smoke
clears. We believe select hybrid preferreds now present exceptional
opportunities, even for corporate investors that normally favor traditional
preferreds eligible for the Dividend Received Deduction. In response, we have
roughly doubled the Fund's position in hybrids over the course of the current
fiscal year to approximately 45% of the portfolio.
Adjustable rate preferreds (ARPs) have been a welcome source of cash for
adding to hybrids. In part, this has been due to redemptions of ARPs by issuers
at prices that we were happy to get. ARPs now account for roughly 13% of the
Fund's portfolio, down from approximately 26% at the start of the current fiscal
year and a high of 37% less than two years ago.
In view of the Horejsi family group's ownership of approximately 42% of the
Fund's common stock, it now seems inevitable that a change in control of the
Fund's Board of Directors will occur no later than the next Annual Meeting. In
order to make the transition as smooth as possible, all of the Fund's directors,
except for Mr. Horejsi and Mr. Duff, and all of its principal officers have
resigned effective January 15, 1999. As shareholders will recall, Mr. Horejsi
and Mr. Duff were elected to the Board last spring as a result of a proxy
contest between the Fund's management and the Horejsi group. Mr. Horejsi has
indicated that he would like Flaherty & Crumrine Incorporated to continue
indefinitely as investment adviser for the Fund's preferred stock portfolio and
that he will shortly be communicating to the shareholders concerning his
thoughts about the Fund's future policies.
Sincerely yours,
/s/ Robert T. Flaherty
Robert T. Flaherty
Chairman of the Board
October 7, 1998
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Management Fund Incorporated
SUMMARY OF INVESTMENTS
AUGUST 31, 1998 (UNAUDITED)
- ----------------------------------------------
<TABLE>
<CAPTION>
PERCENT OF
VALUE TOTAL NET
(000'S) ASSETS
-------- ----------
<S> <C> <C>
ADJUSTABLE RATE PREFERRED STOCKS
Utilities.............................................. $ 11,579 5.0%
Banking................................................ 18,873 8.2
-------- -----
Total Adjustable Rate............................. 30,452 13.2
-------- -----
FIXED RATE PREFERRED STOCKS AND SECURITIES
Utilities.............................................. 79,534 34.5
Banking................................................ 41,414 17.9
Financial Services..................................... 35,774 15.5
Industrial............................................. 9,447 4.1
Insurance.............................................. 21,525 9.3
-------- -----
Total Fixed Rate.................................. 187,694 81.3
-------- -----
TOTAL PREFERRED STOCKS AND SECURITIES....................... 218,146 94.5
COMMON STOCKS
Utilities.............................................. 8,822 3.8
REPURCHASE AGREEMENT........................................ 1,839 0.8
PURCHASED PUT OPTIONS....................................... 332 0.1
-------- -----
TOTAL INVESTMENTS........................................... 229,139 99.2
OTHER ASSETS AND LIABILITIES (NET).......................... 1,728 0.8
-------- -----
TOTAL NET ASSETS.................................. $230,867 100.0%
======== =====
</TABLE>
FINANCIAL DATA
PER SHARE OF COMMON STOCK (UNAUDITED)
- -------------------------------------------------
<TABLE>
<CAPTION>
DIVIDEND
DIVIDEND NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE Price(1)
-------- --------- ------------- ------------
<S> <C> <C> <C> <C>
December 31, 1997............................... $0.470 $16.15 $15.9375 $16.14
January 31, 1998................................ 0.081 16.22 15.6250 15.69
February 28, 1998............................... 0.081 16.22 15.1875 15.18
March 31, 1998.................................. 0.081 16.33 14.1875 14.44
April 30, 1998.................................. 0.081 16.27 14.0625 14.19
May 31, 1998.................................... 0.081 16.39 14.5000 14.52
June 30, 1998................................... 0.081 16.49 14.5625 14.63
July 31, 1998................................... 0.081 16.25 14.5625 14.38
August 31, 1998................................. 0.081 16.27 14.1875 14.36
</TABLE>
- ---------------
(1) Whenever the net asset value per share of the Fund's common stock is less
than or equal to the market price per share on the payment date, new shares
issued will be valued at the higher of net asset value or 95% of the then
current market price. Otherwise, the reinvestment shares of common stock
will be purchased in the open market.
2
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Management Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS(1)
NINE MONTHS ENDED AUGUST 31, 1998 (UNAUDITED)
------------------------------------------------------------------
<TABLE>
<S> <C>
OPERATIONS:
Net investment income................................... $ 9,151,041
Net realized gain on investments sold................... 8,200,510
Net unrealized depreciation of investments during the
period................................................. (4,737,533)
------------
Net increase in net assets from operations.......... 12,614,018
DISTRIBUTIONS:
Dividends paid from net investment income to MMP*
Shareholders........................................... (2,741,867)
Distributions paid from net realized capital gains to
MMP* Shareholders(3)................................... (49,227)
Dividends paid from net investment income to Common
Stock Shareholders(2).................................. (7,792,356)
Distributions paid from net realized capital gains to
Common Stock Shareholders(3)........................... (2,735,564)
------------
Net decrease in net assets.......................... (704,996)
NET ASSETS:
Beginning of period..................................... 231,571,604
------------
End of period........................................... $230,866,608
============
</TABLE>
FINANCIAL HIGHLIGHTS(1)
NINE MONTHS ENDED AUGUST 31, 1998 (UNAUDITED)
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD.
-------------------------------------------------------------------
<TABLE>
<S> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period.................... $ 16.33
------------
Net investment income................................... 0.97
Net realized gain and unrealized depreciation on
investments............................................ 0.37
------------
Net increase in net asset value resulting from
investment operations.................................. 1.34
DISTRIBUTIONS:
Dividends declared to MMP* Shareholders................. (0.29)
Distributions paid from net realized capital gains to
MMP* Shareholders(3)................................... (0.01)
Dividends paid from net investment income to Common
Stock Shareholders(2).................................. (0.83)
Distributions paid from net realized capital gains to
Common Stock Shareholders(3)........................... (0.29)
Change in accumulated undeclared dividends on MMP*
Shareholders........................................... 0.02
------------
Total distributions..................................... (1.40)
------------
Net asset value, end of period.......................... $ 16.27
============
Market value, end of period............................. $ 14.1875
============
Common shares outstanding, end of period................ 9,416,743
============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK
SHAREHOLDERS:
Net investment income................................... 5.65%**
Operating expenses...................................... 1.93%**
SUPPLEMENTAL DATA:
Portfolio turnover rate................................. 71%
- ------------------------------------------------------------
Ratio of operating expenses to Total Average Net Assets
including MMP*............................................ 1.29%**
</TABLE>
(1) These tables summarize the nine months ended August 31, 1998 and should be
read in conjunction with the Fund's audited financial statements, including
footnotes, in its Annual Report dated November 30, 1997.
(2) Includes dividends earned, but not paid out, in prior fiscal year.
(3) Paid from capital gains realized, but not paid out, in prior fiscal year.
* Money Market Cumulative Preferred(TM) Stock.
** Annualized.
3
<PAGE>
DIRECTORS
Donald F. Crumrine, CFA
James G. Duff
Robert T. Flaherty, CFA
Morgan Gust
Stewart R. Horejsi
Robert F. Wulf, CFA
OFFICERS
Robert T. Flaherty, CFA
Chairman of the Board
and President
Donald F. Crumrine, CFA
Vice President
and Secretary
Robert M. Ettinger, CFA
Vice President
Peter C. Stimes, CFA
Vice President
and Treasurer
Carl D. Johns
Assistant Treasurer
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: [email protected]
QUESTIONS CONCERNING YOUR SHARES OF PREFERRED
INCOME MANAGEMENT FUND?
- If your shares are held in a Brokerage
Account, contact your Broker.
- If you have physical possession of your shares in certificate
form, contact the Fund's Transfer Agent & Shareholder Servicing
Agent --
First Data Investor Services Group, Inc.
P.O. Box 1376
Boston, MA 02104
1-800-331-1710
THIS REPORT IS SENT TO SHAREHOLDERS OF PREFERRED INCOME MANAGEMENT
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.
[LOGO]
Quarterly
Report
August 31, 1998
