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[Preferred Income Management Fund Logo]
DIRECTORS
Richard I. Barr
James G. Duff
Stewart R. Horejsi
OFFICERS
Stephen C. Miller
President
Carl D. Johns
Vice President and Treasurer
Laura Rhodenbaugh
Secretary
Stephanie Kelley
Assistant Secretary
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.
Quarterly Report February 28, 1999
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Dear Shareholder:
As you can see, the format for this quarterly report has changed. In
fact, Preferred Income Management Fund Incorporated (the "Fund") has seen a
number of changes in the past few months. Already, we've seen a change in the
Board of Directors, including a decrease in the number of Board seats, as well
as changes in the officers of the Fund.
Also, related to the January 15, 1999 resignation of the officers who
were affiliated with Flaherty & Crumrine Incorporated ("F&C"), the Board of
Directors recently voted to engage Boulder Administrative Services, LLC ("BAS")
to provide certain essential administrative services to the Fund. These services
had been previously provided by F&C, but necessarily relinquished when the F&C
officers tendered their resignations. BAS will not only provide various services
to the Fund, but will also employ the officers of the Fund, and provide the
Fund's principal offices. BAS is owned by affiliates of Stewart Horejsi, a
director of the Fund, as well as the representative for entities who control 42%
of the Fund's common stock. The Fund will not see a significant increase in
administrative expenses as a result of this engagement. The net increase to the
Fund is less than 0.03% of the Fund's average net assets per annum. Most of the
fee which will be paid to BAS for its services will be offset by a decrease in
fees paid to F&C.
Hopefully, by now, you have received, read, and voted your proxy for the
Fund's directors and auditors. As we mentioned in the recent letter accompanying
your proxy statement, we expect that shortly after the Annual Shareholders
Meeting on April 21, 1999, Stewart Horejsi will make a formal proposal to the
Board to make additional changes to the Fund. If the Board approves such
changes, they will be submitted to all shareholders for approval. Furthermore,
if approved, these changes are expected to broaden the objective of the Fund
from "income" to "total return". With "total return" as an objective, it is
expected that the Fund will eventually allocate a portion of its assets to
common stocks, and thus eventually reduce its dividend payout. The primary
effect of any change to the Fund's objective would be to broaden the universe of
the Fund's available investments, giving it greater flexibility, and the
opportunity for potentially greater returns. Along with any change in investment
objective, it is likely the Fund will also change its name (and stock ticker
symbol) in order to more fairly reflect its new investment objective. The Fund
will continue to trade on the New York Stock Exchange.
The Fund's net asset value ("NAV") as of March 19, 1999 was $15.19 per
share and the market price was 12 3/16 per share. The Fund's monthly dividend
rate of $0.077 gives an annual yield of 7.6% at current market. The Fund's total
return based on NAV was 0.7% for the first quarter and -4.3% based on market
price. A short discussion from the Fund's adviser follows.
Sincerely,
/s/ Stephen C. Miller,
Stephen C. Miller,
PRESIDENT
March 23, 1999
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Preferred Income Management Fund Incorporated
SUMMARY OF INVESTMENTS
FEBRUARY 28, 1999 (UNAUDITED)
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<TABLE>
<CAPTION>
PERCENT OF
VALUE TOTAL NET
(000'S) ASSETS
-------- ----------
<S> <C> <C>
ADJUSTABLE RATE PREFERRED STOCKS
Banking ...................................................................... $ 22,656 10.3%
Utilities .................................................................... 6,621 3.0
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Total Adjustable Rate .................................................... 29,277 13.3
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FIXED RATE PREFERRED STOCKS AND SECURITIES
Utilities .................................................................... 66,068 30.0
Banking ...................................................................... 47,377 21.5
Financial Services ........................................................... 29,371 13.3
Insurance .................................................................... 19,517 8.8
Miscellaneous Industries ..................................................... 14,713 6.7
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Total Fixed Rate ......................................................... 177,046 80.3
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TOTAL PREFERRED STOCKS AND SECURITIES ........................................... 206,323 93.6
COMMON STOCKS
Utilities .................................................................... 237 0.1
REPURCHASE AGREEMENT ............................................................. 7,319 3.3
PURCHASED PUT OPTIONS ............................................................ 5,409 2.4
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TOTAL INVESTMENTS ................................................................ 219,288 99.4
OTHER ASSETS AND LIABILITIES (NET) ............................................... 1,288 0.6
-------- -----
TOTAL NET ASSETS ............................................................. $220,576 100.0%
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</TABLE>
FINANCIAL DATA
PER SHARE OF COMMON STOCK (UNAUDITED)
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<TABLE>
<CAPTION>
DIVIDEND
DIVIDEND NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE(1)
-------- --------- ------------- ------------
<S> <C> <C> <C> <C>
December 31, 1998 ........................... $0.8200 $15.27 $13.1250 $13.22
January 31, 1999 ............................ 0.0770 15.17 12.0000 12.08
February 28, 1999 ........................... 0.0770 15.19 12.1875 12.22
</TABLE>
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(1) Whenever the net asset value per share of the Fund's common stock is less
than or equal to the market price per share on the payment date, new shares
issued will be valued at the higher of net asset value or 95% of the then
current market price. Otherwise, the reinvestment shares of common stock
will be purchased in the open market.
2
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Preferred Income Management Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS(1)
THREE MONTHS ENDED FEBRUARY 28, 1999 (UNAUDITED)
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<TABLE>
<S> <C>
OPERATIONS:
Net investment income ..................................................................... $ 3,206,852
Net realized gain on investments sold ..................................................... 376,828
Net unrealized depreciation of investments during the period .............................. (1,180,814)
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Net increase in net assets from operations ............................................ 2,402,866
DISTRIBUTIONS:
Dividends paid from net investment income to MMP* shareholders ............................ (1,230,141)
Distributions paid from net realized capital gains to MMP* Shareholders(3) ................ (254,263)
Dividends paid from net investment income to Common Stock Shareholders(2) ................. (4,194,217)
Distributions paid from net realized capital gains to Common Stock Shareholders(3) ........ (4,977,690)
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Net decrease in net assets ................................................................ (8,253,445)
NET ASSETS:
Beginning of period ....................................................................... 228,829,064
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End of period ............................................................................. $220,575,619
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</TABLE>
FINANCIAL HIGHLIGHTS(1)
THREE MONTHS ENDED FEBRUARY 28, 1999 (UNAUDITED)
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD.
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<TABLE>
<S> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period ...................................................... $ 16.06
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Net investment income ..................................................................... 0.34
Net realized gain and unrealized depreciation on investments .............................. (0.08)
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Net increase in net asset value resulting from investment operations ...................... 0.26
DISTRIBUTIONS:
Dividends paid from net investment income to MMP* Shareholders ............................ (0.13)
Distributions paid from net realized capital gains to MMP* Shareholders(3) ................ (0.03)
Dividends paid from net investment income to Common Stock Shareholders(2) ................. (0.45)
Distributions paid from net realized capital gains to Common Stock Shareholders(3) ........ (0.53)
Change in accumulated undeclared dividends on MMP* ........................................ 0.01
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Total distributions ....................................................................... (1.13)
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Net asset value, end of period ............................................................ $ 15.19
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Market value, end of period ............................................................... $ 12.1875
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Common shares outstanding, end of period .................................................. 9,416,743
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RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income ..................................................................... 5.03%**
operating expenses ........................................................................ 1.58%**
SUPPLEMENTAL DATA:
Portfolio turnover rate ................................................................... 14%
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Ratio of operating expenses to total average net assets including MMP* .................... 1.03%**
</TABLE>
(1) These tables summarize the three months ended February 28, 1999 and should
be read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 1998.
(2) Includes dividends earned, but not paid out, in prior fiscal year.
(3) Paid from capital gains realized, but not paid out, in prior fiscal year.
* Money Market Cumulative Preferred(TM) Stock.
** Annualized.
3
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REPORT FROM THE ADVISER
The bottom line for the fiscal first quarter ending February 28, 1999
was that the Preferred Income Management Fund's preferred portfolio made money
in a market that most fixed income investors found difficult.
Interest rates have again demonstrated their ability to confound the
so-called experts. Just when everyone "knew" that rates would go down, interest
rates spiked up in February, returning roughly to the levels of last summer.
This time the surprise was the strength in the domestic economy, which pushed
aside the market's previous preoccupation with depressed economic conditions
elsewhere around the world. Perhaps all this proves is that the crystal ball is
basically an inferior tool for dealing with interest rate fluctuations.
Rising interest rates caused the prices of most bonds and preferreds to
fall, but there was little visible impact on the Fund because of the gains on
its hedges. As a reminder, the Fund typically hedges by purchasing put options
on Treasury futures and creating a "safety net" that is initially somewhat below
the level of the market. For the hedge to pay off, rising interest rates must
push market values down enough to reach that safety net.
That is exactly what happened in February.
Strange as it may seem, it helps the Fund when interest rates move
suddenly in either direction. Throughout its history, the Preferred Income
Management Fund has typically turned in strong performance in good markets and
held up well in weak markets. This is at least partially due to the combination
of leverage and hedging used by the Fund. The Fund actually distinguishes itself
least in flat, boring markets, but markets like that, fortunately, never seem to
last very long!
The preferred market also provided a helping hand in the fiscal first
quarter by generally outperforming Treasury bonds on which the Fund's hedges are
based. This made it possible to regain some of the ground lost last year when
preferreds trailed Treasuries during the "flight to quality" caused by
international financial fears. Market activity has improved significantly since
then, and there are many interesting investment opportunities to choose from.
