UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-06179
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FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED
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(Exact name of registrant as specified in charter)
301 E. Colorado Boulevard, Suite 720
PASADENA, CA 91101
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(Address of principal executive offices) (Zip code)
Donald F. Crumrine
Flaherty & Crumrine Inc.
301 E. Colorado Boulevard, Suite 720
PASADENA, CA 91101
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(Name and address of agent for service)
Registrant's telephone number, including area code: 626-795-7300
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Date of fiscal year end: NOVEMBER 30, 2004
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Date of reporting period: MAY 31, 2004
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FLAHERTY & CRUMRINE PREFERRED INCOME FUND
Dear Shareholder:
During Flaherty & Crumrine Preferred Income Fund's ("PFD") recently
concluded 2nd fiscal quarter, the biggest challenge we faced was holding on to
the impressive returns of the 1st quarter. In this regard, we can report
success. Although the Fund's total return on Net Asset Value ("NAV") DECLINED
3.9%(1) during the three month period ending May 31st, results over the first
six months of fiscal 2004 INCREASED 1.2%(1).
As can be seen from the table below, over longer time periods, the Fund has
produced consistently strong results. For comparison purposes, we have included
the average return on all funds in the Lipper Domestic Investment Grade Bond
Fund category. Although the investment strategies that we use in the Fund
typically differ significantly from those of the bond funds, we believe that PFD
provides a superior way of accomplishing a similar investment objective.
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AVERAGE TOTAL RETURN PER YEAR FOR PERIODS ENDING MAY 31, 2004(1)
ONE FIVE TEN LIFE OF
YEAR YEARS YEARS FUND(2)
---- ----- ----- -------
Flaherty & Crumrine Preferred Income
Fund's Return on Net Asset Value ........................... 6.9% 8.5% 9.4% 12.1%
Lipper Domestic Investment Grade Bond Funds(3) ................ 2.1% 7.0% 7.6% 7.8%
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(1) Based on monthly 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.
(2) Since inception on January 31, 1991.
(3) Includes all U.S. Government bond, mortgage bond and term trust and
investment grade bond funds in Lipper's closed-end fund database at each
point in time.
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The NAV performance during the second fiscal quarter was mainly the result
of rising interest rates (the Fund incurs the cost of falling into the "safety
net" of the hedge), as well as relatively weak performance of preferred
securities.
In early April, we learned that the economy had finally begun to experience
job growth consistent with an expanding economy. As a result, investors stopped
wondering IF the Federal Reserve would raise interest rates, and instead simply
asked WHEN. From a low of 3.7% in mid-March, the yield on the benchmark ten-year
U.S. Treasury had risen a full percentage point by the end of May.
Of course, the Fund's hedging strategy is intended to protect the NAV
against substantial increases in interest rates. So, how did it work? As
expected, the hedge significantly cushioned the decline (without the hedge, the
total return for the quarter would have been -5.3% instead of -3.9%).
Recall that our hedge positions are analogous to an insurance policy. We
make regular "premium" payments to buy protection against rising interest rates.
In order to keep the cost of these payments down, we typically structure the
hedge with a "deductible," meaning some portion of the loss must be absorbed by
the Fund before we can collect on the policy. (For those familiar with options,
we are purchasing OUT-OF-THE-MONEY PUT OPTIONS on the U.S. Treasury Bond future
contract.) During the most recent quarter, the Fund absorbed the entire amount
of the deductible. If long-term interest rates continue to climb, the current
hedge position should neutralize more of the decline in the value of preferred
positions.
Also working against the Fund's NAV was a modest, adverse move in the
relationship between the preferred securities market and U.S. Treasuries. Simply
stated, the price of a typical preferred security fell by more than the price of
a corresponding Treasury bond during the quarter. Since our hedge positions are
tied to Treasuries, this meant the appreciation in the Fund's hedge position
didn't quite keep up with the decline in the value of the preferred securities.
In early April, the MARKET PRICE of PFD fell almost 15% in just two days.
Needless to say, this had a lot of people scratching their heads, including us.
We address this more completely in the Question and Answer section, but the drop
can be attributed primarily to two factors--a concern about rising interest
rates and technical factors in the market. For some owners of PFD as well as
other closed-end income funds, the attitude appeared to be "sell now, ask
questions later." Such across-the-board selling ignores the fundamental
differences between PFD and most other funds, especially its hedging strategy.
As the chart below demonstrates, the relationship of the market price of the
Fund's shares to the NAV has been a bit erratic over time. We'd like to see the
price track the NAV more closely, but obviously that has not been the case.
FLAHERTY & CRUMRINE PREFERRED INCOME FUND
PREMIUM/DISCOUNT OF MARKET PRICE TO NAV
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS
DATE PREMIUM/DISCOUNT
5/28/04 0.1405
5/21/04 0.0682
5/14/04 0.0206
5/7/04 -0.0108
4/30/04 0.0107
4/23/04 0.0119
4/16/04 0.0453
4/9/04 0.0637
4/2/04 0.181
3/26/04 0.2086
3/19/04 0.1859
3/12/04 0.169
3/5/04 0.1749
2/27/04 0.1588
2/20/04 0.1633
2/13/04 0.1366
2/6/04 0.134
1/30/04 0.1306
1/23/04 0.1599
1/16/04 0.1418
1/9/04 0.1432
1/2/04 0.155
12/26/03 0.1471
12/19/03 0.1348
12/12/03 0.1321
12/5/03 0.1202
11/28/03 0.1136
11/21/03 0.0882
11/14/03 0.0413
11/7/03 0.0076
10/31/03 0.0314
10/24/03 -0.022
10/17/03 -0.0309
10/10/03 -0.0196
10/3/03 -0.0233
9/26/03 -0.0393
9/19/03 -0.0151
9/12/03 -0.0051
9/5/03 0.0026
8/29/03 -0.0019
8/22/03 -0.0148
8/15/03 -0.023
8/8/03 -0.0206
8/1/03 -0.0282
7/25/03 0.002
7/18/03 0.009
7/11/03 0.0217
7/4/03 0.0605
6/27/03 0.0483
6/20/03 0.0453
6/13/03 0.0336
6/6/03 0.0286
5/30/03 0.0701
5/23/03 0.0371
5/16/03 0.0373
5/9/03 0.0459
5/2/03 0.0749
4/25/03 0.1251
4/18/03 0.1384
4/11/03 0.1382
4/4/03 0.1478
3/28/03 0.1098
3/21/03 0.1146
3/14/03 0.1508
3/7/03 0.1442
2/28/03 0.1285
2/21/03 0.145
2/14/03 0.1544
2/7/03 0.1483
1/31/03 0.1557
1/24/03 0.1461
1/17/03 0.1459
1/10/03 0.0859
1/3/03 0.1149
12/27/02 0.1129
12/20/02 0.1085
12/13/02 0.0917
12/6/02 0.1217
11/29/02 0.1005
11/22/02 0.055
11/15/02 0.1113
11/8/02 0.1039
11/1/02 0.0724
10/25/02 0.0914
10/18/02 0.0412
10/11/02 0.1724
10/4/02 0.111
9/27/02 0.0932
9/20/02 0.0948
9/13/02 0.0972
9/6/02 0.1169
8/30/02 0.1209
8/23/02 0.1103
8/16/02 0.1032
8/9/02 0.0865
8/2/02 0.1051
7/26/02 0.1241
7/19/02 0.1276
7/12/02 0.0545
7/5/02 0.0691
6/28/02 0.087
6/21/02 0.0478
6/14/02 0.0505
6/7/02 0.0704
5/31/02 0.0543
5/24/02 0.0542
5/17/02 0.0434
5/10/02 0.0408
5/3/02 0.0468
4/26/02 0.0312
4/19/02 0.0539
4/12/02 0.0423
4/5/02 0.0246
3/29/02 0.0212
3/22/02 0.0212
3/15/02 0.0437
3/8/02 0.0395
3/1/02 0.1186
2/22/02 0.1158
2/15/02 0.0755
2/8/02 0.0924
2/1/02 0.0754
1/25/02 0.0608
1/18/02 0.0447
1/11/02 0.0323
1/4/02 0.0437
12/28/01 0.0271
12/21/01 0.043
12/14/01 0.0152
12/7/01 0.0138
11/30/01 -0.0096
11/23/01 0.022
11/16/01 0.0178
11/9/01 0.0034
11/2/01 0.0089
10/26/01 0.0275
10/19/01 -0.009
10/12/01 0.023
10/5/01 0.0069
9/28/01 -0.012
9/21/01 -0.0173
9/14/01 -0.0007
9/7/01 -0.0007
8/31/01 -0.0475
8/24/01 -0.0221
8/17/01 -0.0282
8/10/01 -0.0473
8/3/01 -0.0175
7/27/01 0.0308
7/20/01 0.0021
7/13/01 -0.041
7/6/01 0.0064
6/29/01 -0.0258
6/22/01 -0.0503
6/15/01 -0.0405
6/8/01 -0.0215
6/1/01 0.018
5/25/01 -0.016
5/18/01 0.0029
5/11/01 -0.0146
5/4/01 0.0072
4/27/01 -0.0088
4/20/01 -0.0229
4/13/01 0.0117
4/6/01 -0.0094
3/30/01 -0.0203
3/23/01 -0.0288
3/16/01 -0.0586
3/9/01 -0.0517
3/2/01 0.0007
2/23/01 -0.0321
2/16/01 -0.0314
2/9/01 -0.029
2/2/01 -0.0414
1/26/01 -0.036
1/19/01 -0.0285
1/12/01 0.0028
1/5/01 -0.0328
12/29/00 -0.0965
12/22/00 -0.0939
12/15/00 -0.1171
12/8/00 -0.0877
12/1/00 -0.0864
11/24/00 -0.1379
11/17/00 -0.0991
11/10/00 -0.0734
11/3/00 -0.0571
10/27/00 -0.0695
10/20/00 -0.0845
10/13/00 -0.0872
10/6/00 -0.0866
9/29/00 -0.1071
9/22/00 -0.0905
9/15/00 -0.0858
9/8/00 -0.0794
9/1/00 -0.0681
8/25/00 -0.0851
8/18/00 -0.0672
8/11/00 -0.0865
8/4/00 -0.0851
7/28/00 -0.0816
7/21/00 -0.0842
7/14/00 -0.0755
7/7/00 -0.0807
6/30/00 -0.08
6/23/00 -0.0678
6/16/00 -0.067
6/9/00 -0.0639
6/2/00 -0.0482
5/26/00 -0.0407
5/19/00 -0.0438
5/12/00 -0.0608
5/5/00 -0.0591
4/28/00 -0.0757
4/21/00 -0.0868
4/14/00 -0.0904
4/7/00 -0.0782
3/31/00 -0.1052
3/24/00 -0.1058
3/17/00 -0.0706
3/10/00 -0.0526
3/3/00 -0.0585
2/25/00 -0.0812
2/18/00 -0.0872
2/11/00 -0.0641
2/4/00 -0.0511
1/28/00 -0.1392
1/21/00 -0.1203
1/14/00 -0.0451
1/7/00 -0.0771
12/31/99 -0.1084
12/24/99 -0.1624
12/17/99 -0.1277
12/10/99 -0.1164
12/3/99 -0.1115
11/26/99 -0.1207
11/19/99 -0.1078
11/12/99 -0.1373
11/5/99 -0.1368
10/29/99 -0.1431
10/22/99 -0.1279
10/15/99 -0.1442
10/8/99 -0.0727
10/1/99 -0.0703
9/24/99 -0.0788
9/17/99 -0.1065
9/10/99 -0.0892
9/3/99 -0.1071
8/27/99 -0.0911
8/20/99 -0.0946
8/13/99 -0.0963
8/6/99 -0.0792
7/30/99 -0.0751
7/23/99 -0.0747
7/16/99 -0.1037
7/9/99 -0.0938
7/2/99 -0.0979
6/25/99 -0.1031
6/18/99 -0.0927
6/11/99 -0.0991
6/4/99 -0.1014
5/28/99 -0.1048
5/21/99 -0.1146
5/14/99 -0.0928
5/7/99 -0.0962
4/30/99 -0.0946
4/23/99 -0.0957
4/16/99 -0.1003
4/9/99 -0.0969
4/2/99 -0.0802
3/26/99 -0.106
3/19/99 -0.0935
3/12/99 -0.0747
3/5/99 -0.0826
2/26/99 -0.1014
2/19/99 -0.0647
2/12/99 -0.0687
2/5/99 -0.0536
1/29/99 -0.0557
1/22/99 -0.0557
1/15/99 -0.0372
1/8/99 -0.0182
1/1/99 -0.0106
12/25/98 -0.0127
12/18/98 -0.0355
12/11/98 -0.0212
12/4/98 -0.0373
11/27/98 -0.0267
11/20/98 -0.0394
11/13/98 -0.0423
11/6/98 -0.014
10/30/98 -0.0091
10/23/98 -0.0117
10/16/98 -0.0228
10/9/98 -0.0249
10/2/98 -0.0379
9/25/98 -0.0367
9/18/98 -0.0326
9/11/98 -0.0379
9/4/98 -0.0448
8/28/98 -0.0448
8/21/98 -0.075
8/14/98 -0.0779
8/7/98 -0.0614
7/31/98 -0.0503
7/24/98 -0.0645
7/17/98 -0.0565
7/10/98 -0.0558
7/3/98 -0.0496
6/26/98 -0.0479
6/19/98 -0.0599
6/12/98 -0.0586
6/5/98 -0.0556
5/29/98 -0.0496
5/22/98 -0.0702
5/15/98 -0.0681
5/8/98 -0.0589
5/1/98 -0.0422
4/24/98 -0.0663
4/17/98 -0.058
4/10/98 -0.0509
4/3/98 -0.0645
3/27/98 -0.0518
3/20/98 -0.0437
3/13/98 -0.0595
3/6/98 -0.048
2/27/98 -0.0446
2/20/98 -0.0466
2/13/98 -0.0474
2/6/98 -0.0364
1/30/98 -0.0358
1/23/98 -0.0431
1/16/98 -0.0012
1/9/98 -0.0211
1/2/98 -0.009
12/26/97 -0.0621
12/19/97 -0.0632
12/12/97 -0.0519
12/5/97 -0.0431
11/28/97 -0.0313
11/21/97 -0.067
11/14/97 -0.0554
11/7/97 -0.0425
10/31/97 -0.0517
10/24/97 -0.0558
10/17/97 -0.0477
10/10/97 -0.0385
10/3/97 -0.0299
9/26/97 -0.0604
9/19/97 -0.0651
9/12/97 -0.0623
9/5/97 -0.0595
8/29/97 -0.0469
8/22/97 -0.0739
8/15/97 -0.0708
8/8/97 -0.0583
8/1/97 -0.0498
7/25/97 -0.0519
7/18/97 -0.0583
7/11/97 -0.0537
7/4/97 -0.0308
6/27/97 -0.0429
6/20/97 -0.0486
6/13/97 -0.0486
6/6/97 -0.051
5/30/97 -0.0541
5/23/97 -0.0554
5/16/97 -0.0529
5/9/97 -0.0578
5/2/97 -0.0451
4/25/97 -0.0852
4/18/97 -0.0976
4/11/97 -0.0881
4/4/97 -0.0627
3/28/97 -0.0584
3/21/97 -0.0752
3/14/97 -0.0637
3/7/97 -0.0584
2/28/97 -0.055
2/21/97 -0.0539
2/14/97 -0.0544
2/7/97 -0.0675
1/31/97 -0.0459
1/24/97 -0.041
1/17/97 -0.0465
1/10/97 -0.0291
1/3/97 -0.0242
12/27/96 -0.075
12/20/96 -0.0749
12/13/96 -0.0831
12/6/96 -0.0667
11/29/96 -0.0606
11/22/96 -0.0653
11/15/96 -0.0833
11/8/96 -0.0831
11/1/96 -0.0778
10/25/96 -0.0858
10/18/96 -0.1077
10/11/96 -0.0941
10/4/96 -0.0861
9/27/96 -0.1106
9/20/96 -0.1186
9/13/96 -0.0756
9/6/96 -0.0824
8/30/96 -0.0669
8/23/96 -0.0705
8/16/96 -0.0714
8/9/96 -0.0574
8/2/96 -0.1105
7/26/96 -0.1077
7/19/96 -0.1071
7/12/96 -0.098
7/5/96 -0.095
6/28/96 -0.1049
6/21/96 -0.1129
6/14/96 -0.1003
6/7/96 -0.118
5/31/96 -0.1111
5/24/96 -0.1432
5/17/96 -0.1363
5/10/96 -0.1452
5/3/96 -0.1477
4/26/96 -0.1488
4/19/96 -0.1402
4/12/96 -0.1477
4/5/96 -0.1343
3/29/96 -0.1464
3/22/96 -0.1564
3/15/96 -0.1521
3/8/96 -0.1332
3/1/96 -0.1118
2/23/96 -0.1281
2/16/96 -0.136
2/9/96 -0.1238
2/2/96 -0.1244
1/26/96 -0.1251
1/19/96 -0.1379
1/12/96 -0.1354
1/5/96 -0.1365
12/29/95 -0.1313
12/22/95 -0.1337
12/15/95 -0.1244
12/8/95 -0.1192
12/1/95 -0.1071
11/24/95 -0.1043
11/17/95 -0.1117
11/10/95 -0.1146
11/3/95 -0.1151
10/27/95 -0.121
10/20/95 -0.1048
10/13/95 -0.1094
10/6/95 -0.0974
9/29/95 -0.0816
9/22/95 -0.0978
9/15/95 -0.0968
9/8/95 -0.0816
9/1/95 -0.0698
8/25/95 -0.0832
8/18/95 -0.0942
8/11/95 -0.0935
8/4/95 -0.0888
7/28/95 -0.0917
7/21/95 -0.0976
7/14/95 -0.0995
7/7/95 -0.0844
6/30/95 -0.0753
6/23/95 -0.0884
6/16/95 -0.0759
6/9/95 -0.0608
6/2/95 -0.0259
5/26/95 -0.087
5/19/95 -0.041
5/12/95 -0.0178
5/5/95 -0.0398
4/28/95 -0.0271
4/21/95 -0.0439
4/14/95 -0.0217
4/7/95 -0.0256
3/31/95 -0.029
3/24/95 -0.0568
3/17/95 -0.0666
3/10/95 -0.0445
3/3/95 0.0035
2/24/95 -0.0004
2/17/95 -0.0419
2/10/95 -0.0289
2/3/95 0.0061
1/27/95 -0.0697
1/20/95 -0.0525
1/13/95 -0.0134
1/6/95 -0.0201
12/30/94 -0.0836
12/23/94 -0.0822
12/16/94 -0.0554
12/9/94 -0.0508
12/2/94 -0.0593
11/25/94 -0.0788
11/18/94 -0.0951
11/11/94 -0.0912
11/4/94 -0.0783
10/28/94 -0.0732
10/21/94 -0.1416
10/14/94 -0.1089
10/7/94 -0.1141
9/30/94 -0.0565
9/23/94 -0.0273
9/16/94 -0.0293
9/9/94 -0.0232
9/2/94 -0.0379
8/26/94 -0.0439
8/19/94 -0.0263
8/12/94 -0.0215
8/5/94 -0.0161
7/29/94 -0.0082
7/22/94 -0.0084
7/15/94 0.0188
7/8/94 0.0299
7/1/94 0.0006
6/24/94 0.0175
6/17/94 -0.0037
6/10/94 0.0146
6/3/94 -0.0289
5/27/94 -0.0397
5/20/94 -0.0409
5/13/94 -0.0635
5/6/94 -0.0581
4/29/94 -0.0863
4/22/94 -0.0598
4/15/94 -0.0596
4/8/94 -0.0713
4/1/94 -0.0466
3/25/94 -0.0505
3/18/94 -0.0379
3/11/94 -0.027
3/4/94 -0.0092
2/25/94 -0.0539
2/18/94 -0.0741
2/11/94 -0.0224
2/4/94 -0.0196
1/28/94 -0.0316
1/21/94 -0.0126
1/14/94 0.0149
1/7/94 0.0093
12/31/93 -0.0287
12/24/93 -0.0051
12/17/93 0.0323
12/10/93 -0.0103
12/3/93 -0.0175
11/26/93 0.003
11/19/93 -0.0316
11/12/93 0.0019
11/5/93 0.0095
10/29/93 -0.0075
10/22/93 0.0048
10/15/93 0.0173
10/8/93 0.011
10/1/93 0.0293
9/24/93 0.0321
9/17/93 0.0467
9/10/93 0.0361
9/3/93 0.045
8/27/93 0.0434
8/20/93 0.0377
8/13/93 0.0484
8/6/93 0.079
7/30/93 0.0598
7/23/93 0.0576
7/16/93 0.049
7/9/93 0.0541
7/2/93 0.0451
6/25/93 0.0703
6/18/93 0.056
6/11/93 0.0388
6/4/93 0.0497
5/28/93 0.074
5/21/93 0.07
5/14/93 0.0779
5/7/93 0.0918
4/30/93 0.0677
4/23/93 0.0764
4/16/93 0.0671
4/9/93 0.0764
4/2/93 0.0806
3/26/93 0.0638
3/19/93 0.0248
3/12/93 0.0538
3/5/93 0.0909
2/26/93 0.0628
2/19/93 0.0434
2/12/93 0.0452
2/5/93 0.053
1/29/93 0.076
1/22/93 0.1021
1/15/93 0.1145
1/8/93 0.0987
1/1/93 0.0739
12/25/92 0.0618
12/18/92 0.0582
12/11/92 0.0601
12/4/92 0.068
11/27/92 0.0506
11/20/92 0.0349
11/13/92 0.059
11/6/92 0.0378
10/30/92 0.0707
10/23/92 0.0378
10/16/92 0.0417
10/9/92 0.0417
10/2/92 0.065
9/25/92 0.0339
9/18/92 0.0489
9/11/92 0.0356
9/4/92 0.0228
8/28/92 0.025
8/21/92 0.0306
8/14/92 0.0389
8/7/92 0.0601
7/31/92 0.058
7/24/92 0.0712
7/17/92 0.057
7/10/92 0.0593
7/3/92 0.0491
6/26/92 0.0491
6/19/92 0.0227
6/12/92 0.0239
6/5/92 0.0302
5/29/92 0.0039
5/22/92 0.0083
5/15/92 0.0347
5/8/92 0.0382
5/1/92 0.0523
4/24/92 0.0423
4/17/92 0.0464
4/10/92 0.0452
4/3/92 0.0357
3/27/92 0.0327
3/20/92 0.0387
3/13/92 0.0447
3/6/92 0.0339
2/28/92 0.0381
2/21/92 0.0417
2/14/92 0.0613
2/7/92 0.0478
1/31/92 0.0417
1/24/92 0.0912
1/17/92 0.0978
1/10/92 0.1116
1/3/92 0.1091
12/27/91 0.1136
12/20/91 0.0839
12/13/91 0.0791
12/6/91 0.0716
11/29/91 0.0807
11/22/91 0.065
11/15/91 0.0801
11/8/91 0.0827
11/1/91 0.0693
10/25/91 0.0662
10/18/91 0.0719
10/11/91 0.0745
10/4/91 0.0764
9/27/91 0.0682
9/20/91 0.0651
9/13/91 0.0883
9/6/91 0.057
8/30/91 0.0314
8/23/91 0.0648
8/16/91 0.0449
8/9/91 0.054
8/2/91 0.0678
7/26/91 0.0549
7/19/91 0.0643
7/12/91 0.0659
7/5/91 0.0726
6/28/91 0.0659
6/21/91 0.0536
6/14/91 0.0417
6/7/91 0.0423
5/31/91 0.051
5/24/91 0.0219
5/17/91 0.0146
5/10/91 0.0199
5/3/91 0.023
4/26/91 0.0268
4/19/91 0.0314
4/12/91 0.0196
4/5/91 0.0149
3/29/91 0.023
3/22/91 0.0201
3/15/91 0.0151
3/8/91 0.0183
3/1/91 0.0424
2/22/91 0.0395
2/15/91 0.0438
2/8/91 0.0842
2
PFD is all about income, and as the chart below shows, the Fund's income
(represented by the solid line) has performed remarkably well. Income has held
up pretty well when the interest rate on long-term Treasury bonds (the broken
line) has gone down. In contrast, when the Treasury interest rate has increased,
the Fund has typically reflected a large part of the increase. This is the
objective of the Fund, and for over thirteen years, the strategy has been
successful.
FLAHERTY & CRUMINE PREFERRED INCOME FUND
MONTHLY DIVIDEND INCOME
On a 1,000 Share ($15,500) Initial Investment through 5/31/04
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
MONTHLY
DIVIDEND
DATE INCOME 30 YR TREASURY YIELD
Jan-91 8.16%
Feb-91 8.20
Mar-91 8.22
Apr-91 122.50 8.18
May-91 122.50 8.26
Jun-91 122.50 8.40
Jul-91 122.50 8.34
Aug-91 125.00 8.06
Sep-91 125.00 7.81
Oct-91 125.00 7.91
Nov-91 125.00 7.94
Dec-91 125.00 7.40
Jan-92 126.46 7.76
Feb-92 126.46 7.79
Mar-92 126.46 7.96
Apr-92 126.46 8.03
May-92 126.46 7.84
Jun-92 126.46 7.78
Jul-92 126.46 7.46
Aug-92 126.46 7.41
Sep-92 126.46 7.38
Oct-92 126.46 7.62
Nov-92 126.46 7.60
Dec-92 126.46 7.39
Jan-93 127.87 7.19
Feb-93 127.87 6.90
Mar-93 127.87 6.92
Apr-93 127.87 6.93
May-93 127.87 6.98
Jun-93 127.87 6.67
Jul-93 127.87 6.56
Aug-93 127.87 6.09
Sep-93 127.87 6.02
Oct-93 127.87 5.97
Nov-93 127.87 6.30
Dec-93 127.87 6.35
Jan-94 121.76 6.24
Feb-94 121.76 6.66
Mar-94 121.76 7.09
Apr-94 121.76 7.30
May-94 128.67 7.43
Jun-94 128.67 7.61
Jul-94 128.67 7.39
Aug-94 128.67 7.48
Sep-94 128.67 7.82
Oct-94 128.67 7.96
Nov-94 133.06 7.94
Dec-94 133.06 7.88
Jan-95 132.51 7.73
Feb-95 132.51 7.55
Mar-95 132.51 7.43
Apr-95 132.51 7.33
May-95 132.51 6.63
Jun-95 125.21 6.54
Jul-95 125.21 6.90
Aug-95 125.21 6.61
Sep-95 125.21 6.50
Oct-95 125.21 6.36
Nov-95 125.21 6.08
Dec-95 117.63 5.95
Jan-96 117.63 6.05
Feb-96 117.63 6.36
Mar-96 117.63 6.67
Apr-96 117.63 6.83
May-96 124.39 7.00
Jun-96 124.39 6.95
Jul-96 124.39 7.01
Aug-96 124.39 7.12
Sep-96 124.39 6.90
Oct-96 124.39 6.81
Nov-96 124.39 6.51
Dec-96 124.39 6.60
Jan-97 123.32 6.79
Feb-97 123.32 6.80
Mar-97 123.32 7.09
Apr-97 123.32 6.89
May-97 123.32 6.98
Jun-97 123.32 6.74
Jul-97 123.32 6.45
Aug-97 123.32 6.61
Sep-97 123.32 6.30
Oct-97 123.32 6.15
Nov-97 123.32 6.04
Dec-97 123.32 5.95
Jan-98 117.47 5.90
Feb-98 117.47 6.02
Mar-98 117.47 5.93
Apr-98 117.47 5.95
May-98 117.47 5.80
Jun-98 117.47 5.62
Jul-98 117.47 5.72
Aug-98 117.47 5.26
Sep-98 117.47 4.98
Oct-98 117.47 5.15
Nov-98 117.47 5.07
Dec-98 117.47 5.09
Jan-99 118.77 5.09
Feb-99 118.77 5.58
Mar-99 118.77 5.62
Apr-99 118.77 5.66
May-99 118.77 5.82
Jun-99 127.85 5.97
Jul-99 127.85 6.10
Aug-99 127.85 6.06
Sep-99 127.85 6.05
Oct-99 127.85 6.16
Nov-99 127.85 6.29
Dec-99 127.85 6.48
Jan-2000 128.38 6.49
Feb-2000 128.38 6.15
Mar-2000 128.38 5.84
Apr-2000 128.38 5.96
May-2000 128.38 6.02
Jun-2000 128.38 5.89
Jul-2000 128.38 5.79
Aug-2000 128.38 5.67
Sep-2000 128.38 5.88
Oct-2000 128.38 5.79
Nov-2000 128.38 5.59
Dec-2000 128.38 5.46
Jan-2001 128.38 5.53
Feb-2001 128.38 5.34
Mar-2001 128.38 5.46
Apr-2001 128.38 5.77
May-2001 128.38 5.77
Jun-2001 128.38 5.74
Jul-2001 128.38 5.50
Aug-2001 128.38 5.37
Sep-2001 128.38 5.41
Oct-2001 128.38 4.88
Nov-2001 128.38 5.26
Dec-2001 128.38 5.47
Jan-2002 129.11 5.43
Feb-2002 129.11 5.41
Mar-2002 129.11 5.80
Apr-2002 129.11 5.59
May-2002 129.11 5.61
Jun-2002 138.56 5.52
Jul-2002 138.56 5.30
Aug-2002 138.56 4.93
Sep-2002 138.56 4.66
Oct-2002 138.56 5.00
Nov-2002 138.56 5.04
Dec-2002 138.56 4.76
Jan-2003 145.43 4.85
Feb-2003 145.43 4.67
Mar-2003 145.43 4.83
Apr-2003 145.43 4.78
May-2003 145.43 4.36
Jun-2003 145.43 4.56
Jul-2003 145.43 5.41
Aug-2003 145.43 5.22
Sep-2003 145.43 4.89
Oct-2003 145.43 5.14
Nov-2003 145.43 5.13
Dec-2003 145.43 5.07
Jan-2004 151.37 4.97
Feb-2004 151.37 4.84
Mar-2004 151.37 4.78
Apr-2004 151.37 5.28
May-2004 151.37 5.35
In recent weeks, a number of investors have visited the new web site
created by the Fund's adviser, Flaherty & Crumrine. We think you'll find
www.preferredstockguide.com contains useful information about most of the issues
that make up the preferred securities universe. We hope you will also continue
to visit the Fund's web site at www.preferredincome.com.
Sincerely,
/S/DONALD F. CRUMRINE /S/ROBERT M. ETTINGER
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
July 23, 2004
3
QUESTIONS & ANSWERS
WHAT CAUSED THE FUND'S MARKET PRICE TO DROP IN APRIL?
It appears as though the drop can be attributed mainly to two things --
concerns about rising interest rates and a large number of stop-loss sell orders
for the Fund's shares.
In early April, the Department of Labor announced the economy had added
over 300,000 new non-farm jobs during March. In the preceding months, job
creation had been persistently below expectations despite other indications that
economic activity was picking up. The widespread belief was the Federal Reserve
would keep short-term interest rates low until there was sufficient evidence
employment conditions were improving. With the job growth in March, policymakers
began talking about the need to remove current policy accommodation and move
rates gradually back to "normal". A sharp market selloff ensued.
With concerns about rising interest rates, shareholders of income oriented
closed-end funds apparently began selling indiscriminately. Of course, selling
PFD simply due to concerns about rising interest rates seems to ignore the
Fund's hedging strategy. Nonetheless, for the sellers, the decision was sell
first, ask questions later.
Stop-loss orders apparently also contributed to the price decline. It is
impossible to get information on stop-loss orders since the NYSE keeps the data
private. But anecdotal evidence indicates that small bits of selling pressure
triggered stop-loss orders, which in turn led to more selling and more
stop-losses being triggered.
HOW DID PREFERRED SECURITIES PERFORM DURING THE QUARTER?
A large portion of the portfolio is comprised of traditional preferred
stock (issues that pay dividends as opposed to interest) and this market sector
underperformed other segments of the fixed-income market during the quarter.
This sector has been one of the strongest performers over the past year, so in
the long-run, a small correction is probably a good thing. By the end of the
quarter, preferred prices had stabilized, but relative to other market sectors
were still somewhat below where they started. We still think the positions we
hold in the Fund represent good long-term value, and we'll continue to hold them
until better opportunities come along.
WHAT IS THE IMPACT OF RISING INTEREST RATES ON THE FUND'S INCOME?
Rising rates can affect the income earned in the Fund in different ways.
On the plus side, if we make money on the hedge, we can purchase more
securities and produce more income. This should occur if long-term interest
rates rise. Increases in short-term rates, however, generally result in higher
costs, as the Fund will have to pay higher rates on its shares of Money Market
Cumulative PreferredTM Stock (MMP(R)).
4
Over time, changes in the slope of the yield curve (the difference between
long-term and short-term interest rates) will also impact the Fund's income.
When the differential is small (the yield curve is "flat"), the cost of leverage
is relatively high, but the Fund's hedging strategy should be less expensive. In
a steep yield curve environment (as we've seen over recent quarters), the
opposite occurs -- the cost of leverage is low but the cost of the hedge goes
up.
Over the long-run, changes in the cost of leverage and changes in the cost
of hedging should substantially offset one another. This is not by accident; the
Fund's leverage and hedging strategy have been carefully structured to maintain
this balance. In the near term, however, sharp increases in short-term interest
rates may adversely impact the Fund's dividend rate.
WHAT IS THE BREAKDOWN BETWEEN DIVIDENDS AND INTEREST THIS YEAR?
The composition of distributions made by the Fund cannot be determined
until the end of the fiscal year on November 30th. Once the books are closed, we
add up dividends and interest earned, short- and long-term realized gains (or
losses), and expenses incurred by the Fund. Only then are we able to compute the
breakdown between qualified dividend income (eligible for lower tax treatment)
and other income.
A review of the portfolio holdings in this report shows that as of May
31st, 73.3% of the portfolio's value was in issues that pay qualified dividends.
THIS IS NOT THE PERCENTAGE OF INCOME THAT IS DIVIDENDS. The amount of dividend
paying securities held in the portfolio correlates well with the composition of
the portfolio's income, but there are a number of additional things (such as
realized gains and losses) that factor into the breakdown. Of course, the
composition of the portfolio's holdings may change over the balance of the year.
HAVE THERE BEEN RECENT CHANGES IN THE WAY THE FUND IS REGULATED?
In a word, yes. Over the past several quarters a number of meaningful new
regulations have been imposed on the mutual fund industry. As we have discussed
in the past, while every fiduciary breach has occurred in open-end funds, most
of the new rules also apply to closed-end funds, such as PFD. Shareholders
should be aware that, as a result, the Fund's regulatory expenses continue to
increase.
The deadline for implementation of the most recently adopted rules is
October, 2004. The Fund will have a Chief Compliance Officer ("CCO") reporting
directly to the Board of Directors. The CCO will oversee development and
implementation of all aspects of regulatory compliance.
One significant change you will notice will be in the August quarterly
report. Beginning with this report, all of the Fund's quarterly reports will
contain a complete listing of the portfolio's investments. Other changes may not
be as apparent, but we'll do our best to keep you informed about the most
significant ones.
WHAT WAS THE RECENT CHANGE REGARDING INVESTMENTS IN FOREIGN SECURITIES?
The Board of Directors has recently amended the investment policies to
raise the authorized maximum percentage investment in DOLLAR-DENOMINATED
SECURITIES OF FOREIGN ISSUERS in the Fund to 30% of total assets. The change was
approved at the regular Board meeting held on April 23, 2004.
5
The percentage limitation does not include the portion of the Fund's assets
that can be invested in high quality money market obligations of foreign banks
or foreign branches of U.S. banks, which remains at 25% of total assets.
The change was undertaken in consideration of the significant cumulative
growth in the amount of U.S. dollar-denominated foreign preferred securities
outstanding. A significant portion of these securities pay income that is
characterized as Qualified Dividend Income pursuant to the Federal Jobs and
Growth Tax Act of 2003. In the opinion of the Fund's Adviser, the income and
return available from foreign securities often exceeds that of comparably
situated U.S. issuers.
Investments by the Fund in these securities are subject to the same
restrictions on credit quality and diversification that apply to U.S. domestic
debt and preferred securities. The Fund's Adviser has stated that investing a
greater portion of the Fund's assets in non-U.S. securities is not expected to
adversely impact the effectiveness of the Fund's hedging strategies.
Investors are cautioned that, although U.S. dollar-denominated foreign
securities are not subject to currency risk, they may be subject to risks
different from U.S. investments. In particular, the prices of foreign securities
may be affected by political and economic conditions, less stringent regulation,
and higher volatility. In addition, many foreign securities may be less liquid
and more volatile than U.S. securities.
DOES THE FUND USE CREDIT DERIVATIVES?
Not at this time, but the Fund is currently considering the ability to
purchase protection against both an issuer's deteriorating credit quality and
adverse interest rate spread changes through the use of credit derivatives.
While we attempt to manage credit risk primarily through diversification
and the sale of securities holdings before an issuer's credit quality
deteriorates significantly, the Fund is considering from time to time managing
the credit risk of its securities holdings by entering into credit derivative
contracts, such as credit default swaps. At the risk of oversimplification, as a
buyer of such credit protection the Fund would be entitled to receive the par
value of a preferred or debt security from a counterparty in the event of a
default by the issuer, offsetting some or all of the corresponding loss on the
underlying security. In return, the Fund would pay to the counterparty a
periodic stream of payments over the term of the contract, provided that no
event of default has occurred. Of course, if no default occurs, the Fund would
have spent the stream of payments and received no benefit from entering into the
contract.
6
To protect against an adverse interest rate spread change (such as an
adverse change in the yield spread between preferred securities and a benchmark
Treasury security), the Fund is also considering from time to time purchasing
options on market spread swaps. In the typical market spread swap, two
counterparties agree to exchange payments at future dates based on the yield
spread between a reference rate and a benchmark rate. Options on such swaps,
which are analogous to interest rate swaptions, would give the Fund as the buyer
the right, but not the obligation, to buy or sell the market spread between the
reference and benchmark rate at a fixed price from the seller. At each future
payment date, if the spread between the reference and benchmark rates were above
(or below depending on the contract) the contract spread, the Fund would receive
from the seller the difference between the current spread and the contracted
spread. Of course, if the current spread were below (or above) the contract
spread, the Fund would receive no benefit from entering into the contract for
that payment date.
Because the Fund has paid the option premium for both credit derivative
transactions being considered, the financial risk of the transactions is
initially limited to the amount of the premium paid and to the marked-to-market
value of the option at a future. In addition to the option expiring worthless,
there are various other ways for financial risk to occur in such derivatives.
Even though major financial and broker/dealer organizations are the usual
counterparties, anyone entering into such agreements must carefully consider the
other party's credit worthiness and its ability to perform its obligations. In
addition, because credit derivatives are highly specialized investments and are
not traded on any securities exchange, market liquidity may also be a risk at
certain times. Further, such derivatives are not regulated by either the
Commodities Futures Trading Commission or the Securities and Exchange
Commission. Nonetheless, the liquidity and transparency of credit derivatives
has increased significantly over the past several years, and we believe that
having the ability to use them is in the best interest of shareholders.
7
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL DATA
PER SHARE OF COMMON STOCK
------------------------------------------------------
TOTAL DIVIDEND
DIVIDENDS NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE (1)
--------- --------- ------------- ------------
December 31, 2003 Extra ..... $0.0400 $15.90 $18.40 $17.48
December 31, 2003 ........... 0.0950 15.90 18.40 17.48
January 31, 2004 ............ 0.0950 16.23 18.35 17.43
February 29, 2004 ........... 0.0950 16.37 18.97 18.02
March 31, 2004 .............. 0.0950 16.36 19.62 18.64
April 30, 2004 .............. 0.0950 15.94 16.11 15.94
May 31, 2004 ................ 0.0950 15.45 17.62 16.74
-------------------
(1) Whenever the net asset value per share of the Fund's common stock is less
than or equal to the market price per share on the payment date, new shares
issued will be valued at the higher of net asset value or 95% of the then
current market price. Otherwise, the reinvestment shares of common stock
will be purchased in the open market.
The accompanying notes are an integral part of the financial statements.
8
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 2004 (UNAUDITED)
------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 1)
------------ --------
PREFERRED SECURITIES -- 91.1%
ADJUSTABLE RATE PREFERRED SECURITIES -- 8.5%
BANKING -- 8.4%
75,000 Cobank, ACB,
Adj. Rate Pfd., 144A**** .................. $ 4,144,125*
J.P. Morgan Chase & Co.:
62,900 Adj. Rate Pfd. ............................. 3,178,023*
136,675 Series A, Adj. Rate Pfd. ................... 12,608,269*
------------
TOTAL BANKING ADJUSTABLE RATE
PREFERRED SECURITIES ........................ 19,930,417
------------
UTILITIES -- 0.1%
7,465 Northern Indiana Public Service Company,
Series A, Adj. Rate Pfd. ................... 390,046*
------------
TOTAL ADJUSTABLE RATE PREFERRED
SECURITIES .................................. 20,320,463
------------
FIXED RATE PREFERRED SECURITIES -- 81.7%
BANKING -- 21.1%
ABN AMRO North America, Inc.:
3,625 6.46% Pfd., 144A**** ....................... 3,759,487*
4,000 6.59% Pfd., 144A**** ....................... 4,222,500*
BNP Paribas:
400 BancWest Capital I,
9.50% 12/01/30 QUIPS ....................... 10,888
$2,250,000 First Hawaiian Capital I,
8.343% 07/01/27 Capital Security,
Series B ................................... 2,503,012
Bank of America Corporation:
$750,000 Barnett Capital II,
7.95% 12/01/26 Capital Security ............ 811,327
$674,000 NB Capital Trust II,
7.83% 12/15/26 Capital Security ............ 732,092
Citigroup, Inc.:
128,927 5.864% Pfd., Series M ...................... 6,316,778*
12,676 6.213% Pfd., Series G ...................... 639,441*
48,500 6.231% Pfd., Series H ...................... 2,465,983*
21,350 6.365% Pfd., Series F ...................... 1,094,508*
50,000 Cobank, ACB,
7.00% Pfd., 144A**** ....................... 2,659,250*
VALUE
SHARES/$ PAR (NOTE 1)
------------ --------
$500,000 Comerica (Imperial) Capital Trust I,
9.98% 12/31/26 Capital Security,
Series B ................................... $ 601,123
Deutsche Bank,
$1,500,000 BT Preferred Capital Trust II,
7.875% 02/25/27 Capital Security ........... 1,607,790
GreenPoint Financial Corporation,
$7,820,000 GreenPoint Capital Trust I,
9.10% 06/01/27 Capital Security ............ 8,921,877
HSBC USA, Inc.:
34,200 $2.8575 Pfd. ............................... 1,698,714*
$2,635,000 Republic New York Capital II,
7.53% 12/04/26 Capital Security,
STOPS ...................................... 2,799,819
37,500 J.P. Morgan Chase & Co.,
6.625% Pfd., Series H ...................... 2,004,188*
$270,000 Keycorp Institutional Capital B,
8.25% 12/15/26 Capital Security ............ 297,342
16,500 Regions Financial Trust I,
8.00% Pfd. ................................. 438,818
Wachovia Corporation:
$1,500,000 First Union Capital II,
7.95% 11/15/29 Capital Security ............ 1,742,790
$906,000 First Union Institutional Capital I,
8.04% 12/01/26 Capital Security ............ 987,481
$1,820,000 First Union Institutional Capital II,
7.85% 01/01/27 Capital Security ............ 1,962,606
$1,500,000 Wachovia Capital Trust V,
7.965% 06/01/27 Capital Security,
144A**** ................................... 1,623,570
7,500 Wachovia Preferred Funding,
7.25% Pfd., REIT, Series A ................. 200,700
------------
TOTAL BANKING FIXED RATE
PREFERRED SECURITIES ........................ 50,102,084
------------
FINANCIAL SERVICES -- 9.7%
Bear Stearns Companies, Inc.:
53,700 5.49% Pfd., Series G ....................... 2,499,466*
62,540 5.72% Pfd., Series F ....................... 2,973,464*
Lehman Brothers Holdings, Inc.:
65,400 5.67% Pfd., Series D ....................... 3,098,652*
151,275 5.94% Pfd., Series C ....................... 7,385,246*
20,000 6.50% Pfd., Series F ....................... 516,900*
The accompanying notes are an integral part of the financial statements.
9
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2004 (UNAUDITED)
------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 1)
------------ --------
PREFERRED SECURITIES -- (CONTINUED)
FIXED RATE PREFERRED SECURITIES -- (CONTINUED)
FINANCIAL SERVICES (CONTINUED)
123,805 SLM Corporation,
6.97% Pfd., Series A ....................... $ 6,587,664*
------------
TOTAL FINANCIAL SERVICES FIXED
RATE PREFERRED SECURITIES ................... 23,061,392
------------
INSURANCE -- 7.0%
11,000 Everest Re Capital Trust II,
6.20% Pfd. Series B ........................ 244,530
The St. Paul Companies, Inc.:
$5,800,000 MMI Capital Trust I,
7.625% 12/15/27 Capital Security,
Series B ................................... 6,036,930
12,000 St. Paul Capital Trust I,
7.60% Pfd. ................................. 306,660
UnumProvident Corporation,
$4,000,000 Provident Financing Trust I,
7.405% 03/15/38 Capital Security ........... 3,256,840
Zurich RegCaPS Fund Trust I:
4,250 6.01% Pfd., 144A**** ....................... 4,342,480*
2,450 6.58% Pfd., Pvt., 144A**** ................. 2,478,530*
------------
TOTAL INSURANCE FIXED RATE
PREFERRED SECURITIES ........................ 16,665,970
------------
UTILITIES -- 38.8%
Alabama Power Company:
300 4.52% Pfd. ................................. 24,931*
5,734 4.72% Pfd. ................................. 497,597*
41,100 5.20% Pfd. ................................. 973,659*
275,000 5.30% Pfd. ................................. 6,528,500*
2,049 Appalachian Power Company,
5.92% Sinking Fund Pfd. .................... 206,109*
26,125 Avista Corporation,
$6.95 Sinking Fund Pfd., Series K .......... 2,596,041*
10,100 Boston Edison Company,
4.78% Pfd. ................................. 872,993*
CenterPoint Energy, Inc.:
$3,500,000 Houston Light & Power, Capital Trust II,
8.257%, 02/01/37 Capital Security,
Series B ................................... 3,482,500
VALUE
SHARES/$ PAR (NOTE 1)
------------ --------
29,050 REI Trust I,
7.20% TOPrS, Series C ...................... $ 686,451
Central Hudson Gas & Electric Corporation:
5,000 4.35% Pfd., Series D, Pvt. ................. 375,025*
900 4.96% Pfd., Series E, Pvt. ................. 76,333*
Central Illinois Light Company:
10,000 4.64% Pfd. ................................. 832,250*
7,000 5.85% Sinking Fund Pfd. .................... 707,175*
11,000 Central Illinois Public Service Corporation,
4.90% Pfd. ................................. 966,020*
22,239 Central Vermont Public Service Corporation,
8.30% Pvt. Sinking Fund Pfd. ............... 2,315,302*
Connecticut Light & Power Company:
500 4.50% Pfd., 144A**** ....................... 17,510*
9,300 5.28% Pfd. ................................. 414,687*
1,905 6.56% Pfd., Series 1968 .................... 98,717*
15,778 $3.24 Pfd. ................................. 774,384*
2,100 Consolidated Edison Company of New York,
4.65% Pfd., Series C ....................... 174,363*
Constellation Energy Group,
10,000 Baltimore Gas & Electric Company,
6.70% Pfd., Series 1993 .................... 1,047,900*
Duke Energy Corporation:
4,556 4.50% Pfd., Series C, Pvt. ................. 359,036*
31,965 6.75%, Series X, Sinking Fund Pfd. ......... 3,306,779*
519 7.04% Pfd., Series Y ....................... 53,662*
30,762 7.85% Pfd., Series S ....................... 3,194,172*
Duquesne Light Company:
7,675 4.10% Pfd. ................................. 249,284*
6,330 4.15% Pfd. ................................. 208,130*
910 4.20% Pfd. ................................. 30,280*
31,650 6.50% Pfd. ................................. 1,568,257*
5,490 $2.10 Pfd., Series A ....................... 182,680*
5,000 Energy East Capital Trust I,
8.25% TOPrS ................................ 129,750
Entergy Arkansas, Inc.:
5,407 7.32% Pfd. ................................. 565,059*
11,350 7.40% Pfd. ................................. 1,182,159*
3,822 7.88% Pfd. ................................. 399,265*
30,266 $1.96 Pfd. ................................. 768,756*
The accompanying notes are an integral part of the financial statements.
10
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2004 (UNAUDITED)
------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 1)
------------ --------
PREFERRED SECURITIES -- (CONTINUED)
FIXED RATE PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
4,440 Entergy Gulf States, Inc.,
7.56% Pfd. ................................. $ 452,414*
Entergy Louisiana, Inc.:
260 7.84% Pfd. ................................. 27,213*
106,138 8.00% Pfd., Series 92 ...................... 2,679,454*
8,600 Entergy Mississippi, Inc.,
7.44% Pfd. ................................. 891,949*
Florida Power Company:
17,769 4.58% Pfd. ................................. 1,428,272*
5,157 4.60% Pfd. ................................. 414,494*
18,535 4.75% Pfd., Pvt. ........................... 1,538,405*
170 Florida Power & Light Company,
4.50% Pfd., Series A, Pvt. ................. 14,084*
50,000 Georgia Power Capital Trust V,
7.125% Pfd. ................................ 1,295,000
2,010 Great Plains Energy, Inc.,
4.50% Pfd. ................................. 146,449*
Hawaiian Electric Company, Inc.,
110,000 HECO Capital Trust III,
6.50% Pfd. ................................. 2,740,650
2,717 Idaho Power Company,
7.68% Pfd., Series 1 ....................... 281,006*
8,000 Indiana Michigan Power Company,
6.875% Sinking Fund Pfd. ................... 811,160*
32,650 Indianapolis Power & Light Company,
5.65% Pfd. ................................. 2,810,512*
384,000 Interstate Power & Light Company,
8.375% Pfd., Series B ...................... 11,784,960*
14,250 Narragansett Electric Company,
4.64% Pfd. ................................. 584,179*
3,905 Northern Indiana Public Service Company,
7.44% Pfd. ................................. 399,521*
6,170 Ohio Edison Company,
4.44% Pfd. ................................. 447,726*
1,724 Ohio Power Company,
5.90% Sinking Fund Pfd. .................... 172,512*
5,000 PECO Energy Company,
$4.40 Pfd., Series C ....................... 383,125*
VALUE
SHARES/$ PAR (NOTE 1)
------------ --------
5,000 PPL Electric Utilities Corporation,
6.75% Pfd. ................................. $ 523,275*
PacifiCorp:
200 5.40% Sinking Fund Pfd. .................... 18,748*
1,225 $4.56 Pfd. ................................. 96,971*
14,542 $4.72 Pfd. ................................. 1,191,499*
16,444 $7.48 Sinking Fund Pfd. .................... 1,707,216*
Pacific Enterprises:
27,430 $4.50 Pfd. ................................. 2,116,224*
10,000 $4.75 Pfd., Series 53 ...................... 814,350*
790 Pennsylvania Power Company,
7.75% Pfd. ................................. 80,260*
12,722 Portland General Electric,
7.75% Sinking Fund Pfd. .................... 1,310,366*
Potomac Electric Power Company:
5,000 $2.44 Pfd., Series 1957 .................... 214,875*
19,209 $3.40 Sinking Fund Pfd. .................... 962,179*
10,000 Public Service Company of New Mexico,
4.58% Pfd., Series 1965 .................... 691,000*
Public Service Enterprise Group, Inc.,
10,800 Enterprise Capital Trust I,
7.44% TOPrS, Series A ...................... 267,084
San Diego Gas & Electric Company:
1,200 4.40% Pfd. ................................. 18,984*
700 4.50% Pfd. ................................. 11,323*
21,250 $1.7625 Sinking Fund Pfd. .................. 543,575*
40,000 $1.70 Pfd .................................. 1,045,800*
South Carolina Electric & Gas Company:
25,373 5.125% Purchase Fund Pfd., Pvt. ............ 1,241,755*
6,703 6.00% Purchase Fund Pfd., Pvt. ............. 342,054*
60,000 Southern Union Company,
7.55% Pfd. ................................. 1,582,800*
TXU US Holdings Company:
10,000 $4.00 Pfd., Series TES ..................... 666,950*
5,700 $4.00 Pfd., Series TPL ..................... 380,162*
1,000 $4.84 Pfd. ................................. 80,700*
$ 750,000 TXU Electric Capital V,
8.175% 01/30/37 Capital Security ........... 816,188
14,150 Union Electric Company,
4.56% Pfd. ................................. 1,180,747*
12,500 Virginia Electric & Power,
$7.05 Pfd. ................................. 1,291,625*
The accompanying notes are an integral part of the financial statements.
11
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2004 (UNAUDITED)
------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 1)
------------ --------
PREFERRED SECURITIES-- (CONTINUED)
FIXED RATE PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
Wisconsin Power & Light:
1,220 4.50% Pfd. ................................. $ 100,772*
333 4.80% Pfd. ................................. 29,073*
13,000 6.20% Pfd. ................................. 1,335,490*
Xcel Energy, Inc.:
16,030 $4.08 Pfd., Series B ....................... 1,096,212*
26,200 $4.10 Pfd., Series C ....................... 1,800,464*
22,000 $4.11 Pfd., Series D ....................... 1,515,580*
17,750 $4.16 Pfd., Series E ....................... 1,237,708*
10,000 $4.56 Pfd., Series G ....................... 764,300*
------------
TOTAL UTILITIES FIXED RATE
PREFERRED SECURITIES ........................ 92,245,110
------------
OIL AND GAS -- 3.4%
17,200 Anadarko Petroleum Corporation,
5.46% Pfd. ................................. 1,719,914*
ENI, S.p.A.,
10,000 Lasmo America Limited,
8.15% Pfd., 144A**** ....................... 1,129,500*
4,985 EOG Resources, Inc.,
7.195% Pfd., Series B ...................... 5,364,757*
------------
TOTAL OIL AND GAS FIXED RATE
PREFERRED SECURITIES ........................ 8,214,171
------------
MISCELLANEOUS INDUSTRIES-- 1.7%
13,600 E.I. Du Pont de Nemours and Company,
$4.50 Pfd., Series B ....................... 1,140,156*
36,200 Farmland Industries, Inc.,
8.00% Pfd., 144A**** ....................... 27,150*+
33,250 Ocean Spray Cranberries, Inc.,
6.25% Pfd., 144A**** ....................... 2,568,729*
26,000 Touch America Holdings,
$6.875 Pfd. ................................ 364,000*+
------------
TOTAL MISCELLANEOUS INDUSTRIES
FIXED RATE PREFERRED SECURITIES ............. 4,100,035
------------
TOTAL FIXED RATE PREFERRED
SECURITIES ................................... 194,388,762
------------
VALUE
SHARES/$ PAR (NOTE 1)
------------ --------
INVERSE FLOATING RATE PREFERRED -- 0.9%
18 Premium Assets, Series A,
Zurich Financial Reg. Capital .............. $ 2,077,915*
------------
TOTAL PREFERRED SECURITIES
(Cost $202,820,037) ......................... 216,787,140
------------
CORPORATE DEBT SECURITY -- 0.5% (COST $1,107,375)
45,000 Northern States Power Company,
8.00% PINES ................................ 1,197,225
------------
COMMON STOCK AND CONVERTIBLE SECURITIES-- 4.6%
107,500 Duke Energy Corporation ...................... 2,150,537*
109,500 FPL Group, Inc.,
8.50% Pfd., Mandatory Convertible
02/16/05 ................................... 5,990,198
30,000 TXU Corporation,
8.75% Pfd., Mandatory Convertible
11/16/05 ................................... 1,333,500
50,000 UnumProvident Corporation,
8.25% Pfd., Mandatory Convertible
05/16/06 ................................... 1,536,500
------------
TOTAL COMMON STOCK AND
CONVERTIBLE SECURITIES
(Cost $11,120,313) .......................... 11,010,735
------------
OPTION CONTRACTS-- 2.1% (COST $6,483,264)
1,499 Put Option on U.S. Treasury Bond,
September Futures, Expiring 08/27/04 ....... 4,894,453+
------------
The accompanying notes are an integral part of the financial statements.
12
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2004 (UNAUDITED)
------------------------------------------------------
VALUE
SHARES/$ PAR (NOTE 1)
------------ --------
MONEY MARKET FUND -- 0.9% (Cost $2,049,332)
2,049,332 BlackRock Provident Institutional
TempFund, 0.91% ............................. $ 2,049,332
------------
TOTAL INVESTMENTS (Cost $223,580,321***) ..... 99.2% 235,938,885
OTHER ASSETS AND LIABILITIES (NET) ........... 0.8% 1,949,580
----- ------------
TOTAL NET ASSETS AVAILABLE TO COMMON
AND PREFERRED STOCK .......................... 100.0%++ $237,888,465
----- ------------
MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK
(MMP(R)) REDEMPTION VALUE (80,000,000)
ACCUMULATED UNDECLARED DISTRIBUTIONS TO
MMP(R) (118,366)
------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK $157,770,099
============
--------------
* Securities eligible for the Dividends Received Deduction and distributing
Qualified Dividend Income.
** Securities distributing Qualified Dividend Income only.
*** Aggregate cost of securities held.
**** Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may by resold in transactions exempt from
registration to qualified institutional buyers.
+ Non-income producing.
++ The percentage shown for each investment category is the total value of
that category as a percentage of net assets available to Common and
Preferred Stock.
ABBREVIATIONS (Note 7):
PINES -- Public Income Notes
QUIPS -- Quarterly Income Preferred Securities
REIT -- Real Estate Investment Trust
STOPS -- Semi-Annual Trust Originated Pass Through Securities
TOPRS -- Trust Originated Preferred Securities
PFD. -- Preferred Securities
PVT. -- Private Placement Securities
Capital Securities are treated as debt instruments for financial statement
purposes and the amounts shown in the Shares/$ Par column are dollar amounts of
par value.
The accompanying notes are an integral part of the financial statements.
13
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2004 (UNAUDITED)
------------------------------------------------------
ASSETS:
Investments, at value (Cost $223,580,321)
(See accompanying Portfolio of Investments) .............. $235,938,885
Receivable for Investments sold ............................. 95,551
Dividends and interest receivable ........................... 2,168,328
Prepaid expenses ............................................ 181,813
------------
Total Assets ........................................ 238,384,577
LIABILITIES:
Payable for Investments purchased ........................... $ 99,425
Dividends payable to Common Shareholders .................... 158,472
Investment advisory fee payable ............................. 111,597
Administration, Transfer Agent and Custodian fees and
expenses payable .......................................... 57,095
Professional fees payable ................................... 33,274
Directors' fees payable ..................................... 858
Accrued expenses and other payables ......................... 35,391
Accumulated undeclared distributions to Money Market
Cumulative Preferred(TM)Stock ............................. 118,366
--------
Total Liabilities ................................... 614,478
------------
MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (800 SHARES
OUTSTANDING) REDEMPTION VALUE ............................... 80,000,000
------------
NET ASSETS AVAILABLE TO COMMON STOCK ........................... $157,770,099
============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
Undistributed net investment income ......................... $ 301,490
Accumulated net realized loss on investments sold ........... (1,894,181)
Unrealized appreciation of investments ...................... 12,358,564
Par value of Common Stock ................................... 102,141
Paid-in capital in excess of par value of Common Stock ...... 146,902,085
------------
Total Net Assets Available to Common Stock .......... $157,770,099
============
NET ASSET VALUE PER SHARE OF COMMON STOCK:
Common Stock (10,214,082 shares outstanding) .............. $ 15.45
============
The accompanying notes are an integral part of the financial statements.
14
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2004 (UNAUDITED)
------------------------------------------------------
INVESTMENT INCOME:
Dividends++ ......................................................... $ 5,931,702
Interest ............................................................ 1,601,966
-----------
Total Investment Income ........................................ 7,533,668
EXPENSES:
Investment advisory fee ............................................. $672,478
Administrator's fee ................................................. 108,824
Money Market Cumulative Preferred(TM)Stock broker commissions
and auction agent fees ........................................... 107,430
Professional fees ................................................... 57,850
Insurance expense ................................................... 120,385
Shareholder servicing agent fees and expenses ....................... 40,189
Directors' fees and expenses ........................................ 37,450
Custodian fees and expenses ......................................... 13,470
Other ............................................................... 46,706
--------
Total Expenses ................................................. 1,204,782
-----------
NET INVESTMENT INCOME .................................................... 6,328,886
-----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net realized gain on investments sold during the period ............. 4,790,523
Change in unrealized depreciation of investments during the period .. (8,650,145)
-----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS .......................... (3,859,622)
-----------
DISTRIBUTIONS TO MONEY MARKET CUMULATIVE PREFERRED(TM)
STOCK SHAREHOLDERS:
From net investment income (including changes in accumulated
undeclared distributions) ........................................ (473,369)
-----------
NET INCREASE IN NET ASSETS TO COMMON STOCK
RESULTING FROM OPERATIONS ............................................. $ 1,995,895
===========
------------------
++ For Federal income tax purposes, a significant portion of this amount does
not qualify for the Inter-corporate dividends received deduction ("DRD")
or as Qualified Dividend Income ("QDI") for individuals.
The accompanying notes are an integral part of the financial statements.
15
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENTS OF CHANGES IN NET ASSETS
------------------------------------------------------
SIX MONTHS ENDED
MAY 31, 2004 PERIOD ENDED
(UNAUDITED) NOVEMBER 30, 2003
------------ -----------------
OPERATIONS:
Net investment income ................................................... $ 6,328,886 $ 13,047,887
Net realized gain on investments sold during the period ................. 4,790,523 3,098,132
Change in net unrealized appreciation/(depreciation)
of investments sold during the period ................................ (8,650,145) 19,645,164
Distributions to Money Market Cumulative Preferred(TM) Stock
Shareholders from net investment income, including changes in
accumulated undeclared distributions ................................. (473,369) (1,055,700)
------------ ------------
Net increase in net assets resulting from operations .................... 1,995,895 34,735,483
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock
Shareholders ......................................................... (6,214,679) (12,392,105)
Distributions paid from net realized capital gains to Common Stock
Shareholders ......................................................... -- --
------------ ------------
Total Distributions to Common Stock Shareholders ........................ (6,214,679) (12,392,105)
FUND SHARE TRANSACTIONS:
Increase from Common Stock transactions ................................. 1,064,712 1,830,875
Decrease due to Money Market Cumulative Preferred(TM)Stock
transactions (see Note 6) ............................................ -- (6,318)
------------ ------------
Net increase in net assets available to Common Stock resulting
from Fund share transactions ......................................... 1,064,712 1,824,557
NET INCREASE/(DECREASE) IN NET ASSETS AVAILABLE TO
COMMON STOCK FOR THE PERIOD .............................................. (3,154,072) 24,167,935
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ..................................................... 160,924,171 136,756,236
------------ ------------
End of period (including undistributed net investment income of
$301,490 and $660,652, respectively) ................................. $157,770,099 $160,924,171
============ ============
The accompanying notes are an integral part of the financial statements.
16
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
------------------------------------------------------
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.
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 2004 ---------------------------------------------------
(UNAUDITED) 2003 2002 2001 2000 1999
-------- -------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................. $ 15.85 $ 13.63 $ 14.62 $ 13.41 $ 14.41 $ 16.43
-------- -------- -------- -------- -------- --------
INVESTMENT OPERATIONS:
Net investment income ................................ 0.62 1.28 1.29 1.23 1.32 1.29
Net realized and unrealized gain/(loss) on investments (0.37) 2.27 (1.01) 1.19 (0.56) (1.35)
DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS:
From net investment income ........................... (0.04) (0.10) (0.12) (0.23) (0.29) (0.23)
From net realized capital gains ...................... -- -- -- -- (0.01) (0.08)
-------- -------- -------- -------- -------- --------
Total from investment operations ..................... 0.21 3.45 0.16 2.19 0.46 (0.37)
-------- -------- -------- -------- -------- --------
Cost of Issuance of Additional MMP(R)* (Note 6) ...... -- -- (0.05) -- -- --
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income ........................... (0.61) (1.23) (1.10) (0.98) (1.04) (1.12)
From net realized capital gains ...................... -- -- -- -- (0.42) (0.53)
-------- -------- -------- -------- -------- --------
Total distributions to Common Shareholders ........... (0.61) (1.23) (1.10) (0.98) (1.46) (1.65)
-------- -------- -------- -------- -------- --------
Net asset value, end of period ....................... $ 15.45 $ 15.85 $ 13.63 $ 14.62 $ 13.41 $ 14.41
======== ======== ======== ======== ======== ========
Market value, end of period .......................... $ 17.62 $ 17.65 $ 15.00 $ 14.47 $ 12.13 $ 12.75
======== ======== ======== ======== ======== ========
Total investment return based on net asset value**** . 0.96%*** 25.87% 0.58% 17.01% 4.55% (1.81)%
======== ======== ======== ======== ======== ========
Total investment return based on market value**** .... 3.39%*** 27.35% 11.84% 28.02% 6.88% (10.43)%
======== ======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
TO COMMON STOCK SHAREHOLDERS:
Total net assets, end of period (in 000's) . .... $157,770 $160,924 $136,756 $144,650 $131,892 $141,802
Operating expenses .............................. 1.47%** 1.51% 1.48% 1.42% 1.41% 1.37%
Net investment income+ .......................... 7.09%** 7.84% 8.32% 7.21% 7.58% 6.66%
--------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate. ........................ 18%*** 28% 30% 39% 66% 65%
Total net assets available to Common and
Preferred Stock,
end of period (in 000's) ...................... $237,770 $240,992 $216,974 $202,412 $189,983 $199,863
Ratio of operating expenses to total average net
assets available to Common and Preferred Stock 0.99%** 0.99% 0.99% 1.00% 0.98% 0.99%
* Money Market Cumulative Preferred(TM) Stock.
** Annualized.
*** Not annualized.
**** 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(R)* Shareholders.
++ Information presented under heading Supplemental Data includes MMP(R)*.
The accompanying notes are an integral part of the financial statements.
17
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------------------------------------------
The table below sets out information with respect to Money Market
Cumulative Preferred(TM) Stock currently outstanding.
INVOLUNTARY AVERAGE
ASSET LIQUIDATING MARKET
TOTAL SHARES COVERAGE PREFERENCE VALUE
DATE OUTSTANDING (1) PER SHARE (3) PER SHARE (2) PER SHARE (1) & (2)
-------- --------------- ------------- ------------- -------------------
05/31/04* 800 $297,361 $100,000 $100,000
11/30/03 800 301,240 100,000 100,000
11/30/02 800 271,218 100,000 100,000
11/30/01 575 352,021 100,000 100,000
11/30/00 575 330,404 100,000 100,000
11/30/99 575 347,588 100,000 100,000
11/30/98 575 381,562 100,000 100,000
---------------
(1) See Note 6.
(2) Excludes accumulated undeclared dividends.
(3) Calculated by subtracting the Fund's total liabilities (excluding the
MMP(R)) from the Fund's total assets and dividing that amount by the number
of MMP(R) shares outstanding.
* Unaudited.
The accompanying notes are an integral part of the financial statements.
18
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
1. ORGANIZATION
Flaherty & Crumrine Preferred Income Fund Incorporated (the "Fund",
formerly known as Preferred Income Fund Incorporated) was incorporated as a
Maryland corporation on September 28, 1990, and commenced operations on January
31, 1991 as a diversified, closed-end management investment company under the
Investment Company Act of 1940, as amended. The Fund's investment objective is
to provide its common shareholders with high current income consistent with the
preservation of capital.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with accounting principles
generally accepted in the United States of America and requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities in the financial statements and the reported amounts of increases
and decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
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 Stock by the number of shares of
Common Stock outstanding. The value of the Fund's net assets available to Common
Stock 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 ("MMP(R)") and (iii) accumulated and
unpaid dividends on the outstanding MMP(R).
Securities listed on a national securities exchange are valued on the basis
of the last sale on such exchange on the day of valuation, except as described
hereafter. In the absence of sales of listed securities and with respect to (a)
securities for which the most recent sale prices are not deemed to represent
fair market value and (b) 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 in over-the-counter derivative instruments, such as interest rate
swaps and options thereon ("swaptions"), are valued at the prices obtained from
the broker/dealer or bank that is the counterparty to such instrument, subject
to comparison of such valuation with a valuation obtained from a broker/dealer
or bank that is not a counterparty to the particular derivative instrument.
Investments for which market quotations are not readily available or for which
management determines that the prices are not reflective of current market
conditions 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 comparable in quality, maturity and
type. Investments in money market instruments, which mature in 60 days or less,
are valued at amortized cost. Investments in money market funds are valued at
the net asset value of such funds.
19
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
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 an accrual basis. The Fund
also amortizes premiums and accretes discounts on those fixed income securities,
including capital securities and bonds, which trade and are quoted on an
"accrued income" basis.
OPTIONS: Upon the purchase of an option by the Fund, the total purchase
price paid is recorded as an investment. The market valuation is determined as
set forth in the preceding portfolio valuation 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 through its
custodian and, in the event of counterparty default, the Fund has the right to
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 ("Shareholders").
The Shareholders of MMP(R) 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 capital gains corporate tax
rate. Subject to the Fund's 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 proportionate allocation of income and gains to all classes of
shareholders.
20
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
Distributions from net realized gains for book purposes may include
short-term capital gains, which are included as ordinary income for tax
purposes, and may exclude amortization of premium on "accrued income"
securities, which are not reflected in ordinary income for tax purposes. The tax
character of distributions paid, including changes in accumulated undeclared
distributions to MMP(R) Shareholders, during 2003 and year-to date was as
follows:
DISTRIBUTIONS PAID IN FISCAL YEAR 2004 DISTRIBUTIONS PAID IN FISCAL YEAR 2003
-------------------------------------- --------------------------------------
ORDINARY INCOME LONG-TERM CAPITAL GAINS ORDINARY INCOME LONG-TERM CAPITAL GAINS
--------------- ----------------------- --------------- -----------------------
Common N/A N/A $12,392,105 --
Preferred N/A N/A $ 1,055,700 --
As of November 30, 2003, the components of distributable earnings (i.e.,
ordinary income and capital gain/loss) available to Common and Preferred Stock
Shareholders, on a tax basis were as follows:
UNDISTRIBUTED UNDISTRIBUTED UNREALIZED
CAPITAL (LOSS) CARRYFORWARD ORDINARY INCOME LONG-TERM GAIN APPRECIATION/(DEPRECIATION)
--------------------------- --------------- -------------- ---------------------------
$(5,713,607) $1,035,610 -- $20,037,612
At November 30, 2003, the composition of the Fund's $5,713,607 accumulated
realized capital losses was $4,444,626, $513,821 and $755,160 in 2000, 2001 and
2002, respectively. These losses may be carried forward and offset against any
future capital gains through 2008, 2009 and 2010, respectively.
EXCISE TAX: 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. The Fund paid $21,162 of Federal excise taxes attributable to calendar
year 2003 in March of 2004.
3. INVESTMENT ADVISORY FEE, DIRECTORS' FEES, ADMINISTRATION FEE, TRANSFER
AGENT FEE AND CUSTODIAN 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 monthly total net assets available to
Common and Preferred Stock up to $100 million and 0.50% of the value of the
Fund's average monthly total net assets available to Common and Preferred Stock
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 $150 for each telephone
meeting. The Audit Committee Chairman receives an additional annual fee of
$2,500. In addition, the Fund reimburses all Directors for travel and
out-of-pocket expenses incurred in connection with such meetings.
21
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
PFPC Inc., a member of the PNC Financial Services Group, Inc. ("PNC
Financial Services"), serves as the Fund's Administrator and Transfer Agent. As
Administrator, PFPC Inc. calculates the net asset value of the Fund's shares
attributable to Common and Preferred Stock and generally assists in all aspects
of the Fund's administration and operation. As compensation for PFPC Inc.'s
services as Administrator, the Fund pays PFPC Inc. a monthly fee at an annual
rate of 0.10% of the first $200 million of the Fund's average weekly total
managed assets, 0.04% of the next $300 million of the Fund's average weekly
total managed assets, 0.03% of the next $500 million of the Fund's average
weekly total managed assets and 0.02% of the Fund's average weekly total managed
assets above $1 billion.
PFPC Inc. also serves as the Fund's Common Stock Servicing Agent (Transfer
Agent), dividend-paying agent and registrar and, as compensation for PFPC Inc.'s
services as such, the Fund pays PFPC Inc. a fee at an annual rate of 0.02% of
the first $150 million of the Fund's average weekly net assets attributable to
Common Stock, 0.01% of the next $350 million of the Fund's average weekly net
assets attributable to Common Stock, 0.005% of the next $500 million of the
Fund's average weekly net assets attributable to Common Stock and 0.0025% of the
Fund's average weekly net assets attributable to Common Stock above $1 billion,
plus certain out-of-pocket expenses. For the purpose of calculating such fee,
the Fund's average weekly net assets attributable to Common Stock will be deemed
to be the average weekly value of the Fund's total assets minus the sum of the
Fund's liabilities and accumulated dividends, if any, on Preferred Stock. For
this calculation, the Fund's liabilities are deemed to include the aggregate
liquidation preference of any outstanding Fund preferred shares.
PFPC Trust Company ("PFPC Trust") serves as the Fund's custodian. PFPC
Trust is an indirect subsidiary of PNC Financial Services. As compensation for
PFPC Trust's services as custodian, the Fund pays PFPC Trust a monthly fee at
the annual rate of 0.010% of the first $200 million of the Fund's average weekly
total managed assets, 0.008% of the next $300 million of the Fund's average
weekly total managed assets, 0.006% of the next $500 million of the Fund's
average weekly total managed assets, and 0.005% of the Fund's average weekly
total managed assets above $1 billion.
4. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities for the six months
ended May 31, 2004, excluding short-term investments, aggregated $43,918,322 and
$46,392,160 respectively.
At May 31, 2004, aggregate gross unrealized appreciation for all securities
in which there is an excess of value over tax cost was $19,579,076 and aggregate
gross unrealized depreciation for all securities in which there is an excess of
tax cost over value was $7,220,512.
22
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
5. COMMON STOCK
At May 31, 2004, 240,000,000 shares of $0.01 par value Common Stock were
authorized.
Common Stock Transactions were as follows:
SIX MONTHS ENDED YEAR ENDED
5/31/04 11/30/03
------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Issued as reinvestment of dividends under the Dividend
Reinvestment and Cash Purchase Plan ........................ 61,366 $1,064,712 120,171 $1,830,875
------ ---------- ------- ----------
6. MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (MMP(R))
The Fund's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of $0.01 par value preferred stock. The MMP(R) 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 MMP(R) are cumulative.
The Fund is required to meet certain asset coverage tests with respect to
the MMP(R). 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, MMP(R) 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 MMP(R), the Fund is required to make
additional distributions to MMP(R) 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.
An auction of the MMP(R) 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. MMP(R) Shareholders may also trade shares in the secondary
market between auction dates.
On June 4, 2002, the Fund issued 225 shares of additional MMP(R) with an
initial dividend rate equal to 2.04%. These newly issued shares are identical to
the previously outstanding 575 shares in all respects on and after their first
auction date, which was June 5, 2002. Consequently, the Fund now has 800 shares
of MMP(R) outstanding in one series, which represents a par value of $80
million.
The newly issued shares were underwritten by Lehman Brothers. The
underwriter's discount of 1.25% of the $22.5 million face value totaled $281,250
and was immediately charged to common equity capital upon completion of the
offering.
23
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
Costs of the issue, including legal, printing, registration, rating agency
fees, etc. of $219,027 were charged against common equity capital. The sum of
underwriters discount and cost of the issue totaled $500,277.
At May 31, 2004, 800 shares of MMP(R) were outstanding at the annual rate
of 1.10%. Additionally, on June 9, 2004 the auction rate was 1.42%. 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 its portfolio holdings and
hedging transactions to lessen such risks to Common Stock Shareholders, there
can be no assurance that such results will be attained.
7. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY
The Fund invests primarily in traditional DRD-eligible preferred securities
(i.e., adjustable and fixed rate preferred and preference stocks) and similar
hybrid, i.e., fully taxable, preferred securities. Under normal market
conditions, at least 80% of the value of the Fund's net assets will be invested
in preferred securities. Also, 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 25% of its assets at the time of purchase in
securities rated below investment grade. These securities must be rated at least
either "Ba3" by Moody's Investors Service, Inc. or "BB-" by Standard & Poor's or
judged to be comparable in quality, in either case, at the time of purchase;
however, these securities must be issued by an issuer having a class of senior
debt rated investment grade outstanding.
The Fund may invest up to 15% of its assets in common stocks and, under
normal market conditions, up to 20% 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, STOPS, CorTS, REIT, Capital
Securities, and other similar or related investments, will be subject to the
foregoing 20% limitation to the extent that, in the opinion of the Adviser, such
investments are deemed to be debt-like in key characteristics. Typically, a
security will not be considered debt-like if (a) an issuer can defer
24
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
payment of income for eighteen months or more without triggering an event of
default and (b) such issue is a junior and fully subordinated liability of an
issuer or its ultimate guarantor.
The Fund may invest up to 30% of its total assets in the securities, other
than money market securities, of companies organized or having their principal
place of business outside the United States. All foreign securities held by the
Fund will be denominated in U.S. dollars. The percentage limitation was
instituted by the Fund's Board of Directors at its regular board meeting on
April 23, 2004.
8. 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, interest
rate swaps, options on futures contracts, options on securities and swaptions.
As in the case of when-issued securities, the use of over-the-counter
derivatives, such as interest rate swaps and swaptions, may expose the Fund to
greater credit, operations, and market value risk than is the case with
regulated, exchange traded futures and options. 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 May 31, 2004, 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.
25
--------------------------------------------------------------------------------
Flaherty & Crumrine 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 or her 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
Inc.'s open market purchases in connection with the reinvestment of dividends or
capital gains distributions. For the period ended May 31, 2004, $190 in
brokerage commissions were incurred.
26
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
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
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 by PFPC Inc. under the Plan.
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.
PROXY VOTING POLICIES
The Fund's proxy voting policies and procedures are available (i) without
charge, upon request, by calling the Fund's transfer agent at 1-800-331-1710,
(ii) on the Fund's website at www.preferredincome.com and (iii) on the
Securities and Exchange Commission's website at www.sec.gov.
PORTFOLIO MANAGEMENT TEAM
In managing the day-to-day operations of the Fund, the Adviser relies on
the expertise of its team of money management professionals, consisting of
Messrs. Crumrine, Ettinger, Stimes, Stone and Chadwick. The professional
backgrounds of each member of the management team are included in the
"Information about Fund Directors and Officers" section of this report beginning
on page 29.
27
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
MEETING OF SHAREHOLDERS
On April 23, 2004, the Fund held its Annual Meeting of Shareholders (the
"Meeting") to elect two Directors of the Fund ("Proposal 1"). The results of the
proposal are as follows:
PROPOSAL 1: ELECTION OF DIRECTORS.
NAME FOR WITHHELD
---- ---- --------
COMMON STOCK
Robert M. Ettinger ......................... 9,381,782 77,383
FOR WITHHELD
---- --------
PREFERRED STOCK
Morgan Gust ................................ 580 --
Martin Brody, Donald F. Crumrine, David Gale and Robert F. Wulf continue to
serve in their capacities as Directors of the Fund.
28
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
INFORMATION ABOUT FUND DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Directors. Information pertaining to the Directors and officers
of the Fund is set forth below.
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
-------------- -------------- -------------- ------------- --------------- -------------------
NON-INTERESTED
DIRECTORS:
----------
MARTIN BRODY Director Class I Director Retired 4 Director, Jaclyn, Inc.
c/o HMK Associates since 1991 (luggage and
30 Columbia Turnpike accessories). Director
Florham Park, NJ 07932 Emeritus, Smith Barney
Age: 82 Mutual Funds (18 Funds).
Director, Flaherty &
Crumrine Preferred
Income Opportunity Fund,
Flaherty & Crumrine/Claymore
Preferred Securities Income
Fund and Flaherty &
Crumrine/Claymore Total
Return Fund.
DAVID GALE Director Class I Director President & CEO of 4 Director, Golden State
Delta Dividend Group, Inc. since 1997 Delta Dividend Vintners, Inc. (wine
220 Montgomery Street Group, Inc. (investments). pressing). Director,
Suite 426 Flaherty & Crumrine
San Francisco, CA 94104 Preferred Income
Age: 55 Opportunity Fund,
Flaherty & Crumrine/
Claymore Preferred
Securities Income Fund
and Flaherty & Crumrine/
Claymore Total Return
Fund.
--------------------------------
* The Fund's Board of Directors is divided into three classes, each class
having a term of three years. Each year the term of office of one class
expires and the successor or successors elected to such class serve for a
three year term. The three year term for each class expires as follows:
CLASS I DIRECTORS - three year term expires at
the Fund's 2005 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS II DIRECTORS - three year term expires at
the Fund's 2006 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS III DIRECTORS - three year term expires
at the Fund's 2007 Annual Meeting of
Shareholders; directors may continue in office
until their successors are duly elected and
qualified.
29
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
-------------- -------------- -------------- ------------- --------------- -------------------
NON-INTERESTED
DIRECTORS:
----------
MORGAN GUST+ Director Class III Director From March 2002, 4 Director, Flaherty &
Giant Industries, Inc. since 1991 President of Giant Crumrine Preferred
23733 N. Scottsdale Road Industries, Inc. (petroleum Income Opportunity
Scottsdale, AZ 85255 refining and marketing) Fund, Flaherty
Age: 57 and, for more than five & Crumrine/Claymore
years prior thereto, Preferred Securities
Executive Vice President, Income Fund and
and various other Vice Flaherty & Crumrine/
President positions at Claymore Total Return
Giant Industries, Inc. Fund.
ROBERT F. WULF Director Class II Director Financial Consultant; 4 Director, Flaherty &
3560 Deerfield Drive South since 1991 Trustee, University of Crumrine Preferred
Salem, OR 97302 Oregon Foundation; Income Opportunity
Age: 67 Trustee, San Francisco Fund, Flaherty
Theological Seminary. & Crumrine/Claymore
Preferred Securities
Income Fund and
Flaherty & Crumrine/
Claymore Total Return
Fund.
--------------------------------
* The Fund's Board of Directors is divided into three classes, each class
having a term of three years. Each year the term of office of one class
expires and the successor or successors elected to such class serve for a
three year term. The three year term for each class expires as follows:
CLASS I DIRECTORS - three year term expires at
the Fund's 2005 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS II DIRECTORS - three year term expires at
the Fund's 2006 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS III DIRECTORS - three year term expires
at the Fund's 2007 Annual Meeting of
Shareholders; directors may continue in office
until their successors are duly elected and
qualified.
+ As a Director, represents holders of shares of the Fund's Money Market
Cumulative PreferredTM Stock.
30
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
-------------- -------------- -------------- ------------- --------------- -------------------
INTERESTED
DIRECTORS:
----------
DONALD F. CRUMRINE+, ++ Director, Class II Director Chairman of the Board 4 Director, Flaherty
301 E. Colorado Boulevard Chairman since 1991 and Director of Flaherty & Crumrine
Suite 720 of the Board & Crumrine Incorporated. Preferred Income
Pasadena, CA 91101 and Chief Opportunity Fund,
Age: 56 Executive Officer Flaherty & Crumrine/
Claymore Preferred
Securities Income Fund
and Flaherty & Crumrine/
Claymore Total Return
Fund.
ROBERT M. ETTINGER++ Director, Class III Director President and Director of 2 Director, Flaherty &
301 E. Colorado Boulevard President since 2002 Flaherty & Crumrine Crumrine Preferred
Suite 720 Incorporated. Income Opportunity
Pasadena, CA 91101 Fund.
Age: 45
------------------------------------
* The Fund's Board of Directors is divided into three classes, each class
having a term of three years. Each year the term of office of one class
expires and the successor or successors elected to such class serve for a
three year term. The three year term for each class expires as follows:
CLASS I DIRECTORS - three year term expires at
the Fund's 2005 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS II DIRECTORS - three year term expires at
the Fund's 2006 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS III DIRECTORS - three year term expires
at the Fund's 2007 Annual Meeting of
Shareholders; directors may continue in office
until their successors are duly elected and
qualified.
+ As a Director, represents holders of shares of the Fund's Money Market
Cumulative PreferredTM Stock.
++ "Interested person" of the Fund as defined in the Investment Company Act of
1940. Messrs. Crumrine and Ettinger are each considered an "interested
person" because of their affiliation with Flaherty & Crumrine Incorporated
which acts as the Fund's investment adviser.
31
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
-------------- -------------- -------------- ------------- --------------- -------------------
OFFICERS:
---------
PETER C. STIMES Chief Financial Since 1991 Vice President of -- --
301 E. Colorado Boulevard Officer, Chief Flaherty & Crumrine
Suite 720 Accounting Officer, Incorporated.
Pasadena, CA 91101 Vice President, Treasurer,
Age: 48 and Assistant Secretary
BRADFORD S. STONE Vice President Since Since May 2003, Vice -- --
392 Springfield Avenue and Assistant July 2003 President of Flaherty &
Mezzanine Suite Treasurer Crumrine Incorporated;
Summit, NJ 07901 from June 2001 to April
Age: 44 2003, Director of US
Market Strategy at
Barclays Capital; from
February 1987 to June
2001, Vice President
of Goldman, Sachs &
Company as Director of
U.S. Interest Rate
Strategy and, previously,
Vice President of
Interest Rate Product
Sales.
R. ERIC CHADWICK Vice President, Since Vice President of -- --
301 E. Colorado Boulevard Secretary and October 2002 Flaherty & Crumrine
Suite 720 Assistant Incorporated since August
Pasadena, CA 91101 Treasurer 2001, and previously (since
Age: 29 January 1999) portfolio
manager of Flaherty &
Crumrine Incorporated.
32
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DIRECTORS
Martin Brody
Donald F. Crumrine, CFA
Robert M. Ettinger, CFA
David Gale
Morgan Gust
Robert F. Wulf, CFA
OFFICERS
Donald F. Crumrine, CFA
Chairman of the Board
and Chief Executive Officer
Robert M. Ettinger, CFA
President
Peter C. Stimes, CFA
Chief Financial Officer,
Chief Accounting Officer,
Vice President, Treasurer,
and Assistant Secretary
Bradford S. Stone
Vice President and
Assistant Treasurer
R. Eric Chadwick, CFA
Vice President, Secretary and
Assistant Treasurer
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@fin-mail.com
QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY & CRUMRINE PREFERRED INCOME FUND?
o If your shares are held in a brokerage
Account, contact your broker.
o If you have physical possession of your shares
in certificate form, contact the Fund's Transfer
Agent & Shareholder Servicing Agent --
PFPC Inc.
P.O. Box 43027
Providence, RI 02940-3027
1-800-331-1710
THIS REPORT IS SENT TO SHAREHOLDERS OF FLAHERTY & CRUMRINE PREFERRED INCOME FUND
FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR REPRESENTATION
INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR OF ANY
SECURITIES MENTIONED IN THIS REPORT.
[GRAPHIC OMITTED] FLAHERTY & Crumrine
LIGHTHOUSE GRAPHIC PREFERRED INCOME FUND
SEMI-ANNUAL
REPORT
MAY 31, 2004
web site: www.preferredincome.com
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS
Not yet applicable.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 9. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
ITEM 10. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers
have concluded that the registrant's disclosure controls and procedures
(as defined in Rule 30a-3(c) under the Investment Company Act of 1940,
as amended (the "1940 Act") (17 CFR 270.30a-3(c))) were effective, as
of a date within 90 days of the filing date of this report, based on
their evaluation of these controls and procedures required by Rule
30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b)
or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17
CFR 240.13a-15(b) or 240.15d-15(b)).
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17
CFR 270.30a-3(d)) that occurred during the registrant's last fiscal
half-year (the registrant's second fiscal half-year in the case of an
annual report) that have materially affected, or are reasonably likely
to materially affect, the registrant's internal control over financial
reporting.
ITEM 11. EXHIBITS.
(a)(1) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and
Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and
Section 906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED
--------------------------------------------------------------------
By (Signature and Title)* /S/ DONALD F. CRUMRINE
-------------------------------------------------------
Donald F. Crumrine, Director, Chairman of the Board
and Chief Executive Officer
(principal executive officer)
Date JULY 29, 2004
----------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /S/ DONALD F. CRUMRINE
-------------------------------------------------------
Donald F. Crumrine, Director, Chairman of the Board
and Chief Executive Officer
(principal executive officer)
Date JULY 29, 2004
----------------------------------------------------------------------------
By (Signature and Title)* /S/ PETER C. STIMES
-------------------------------------------------------
Peter C. Stimes, Chief Financial and Accounting
Officer, Vice President, Treasurer & Assistant
Secretary
(principal financial officer)
Date JULY 29, 2004
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.