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
----------------------------
FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED
--------------------------------------------------------------------------------
(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 Incorporated
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
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Date of reporting period: MAY 31, 2007
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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, 100 F Street, NE,
Washington, DC 20549. 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
To the Shareholders of the Flaherty & Crumrine Preferred Income Fund ("PFD"):
The following table summarizes the Fund's performance in its most recent
fiscal quarter and over longer time periods compared with the average return of
investment-grade, fixed-income closed-end funds:
--------------------------------------------------------------------------------
TOTAL RETURN ON NET ASSET VALUE(1)
FOR PERIODS ENDED MAY 31, 2007
ACTUAL RETURNS AVERAGE ANNUALIZED RETURNS
----------------------- ---------------------------------
THREE SIX ONE THREE FIVE TEN LIFE OF
MONTHS MONTHS YEAR YEARS YEARS YEARS FUND(2)
-------- -------- ------ ------ ------ ------ ------
Flaherty & Crumrine Preferred
Income Fund .................. -2.3% -0.7% 7.5% 6.7% 9.5% 7.9% 11.1%
Lipper Domestic Investment
Grade Funds(3) ............... 0.3% 1.9% 8.4% 6.0% 6.3% 6.7% 7.5%
----------------
(1) Based on monthly data provided by Lipper Inc. in each calendar month during
the relevant period. Distributions are assumed to be reinvested at NAV in
accordance with Lipper's practice, which differs from the methodology used
elsewhere in this report.
(2) Since inception on January 31, 1991.
(3) Includes all closed-end funds in Lipper's U.S. Government, U.S. Mortgage and
Corporate Debt BBB Rated categories in each month during the period.
Although the investment strategies used by the Fund differ significantly
from the strategies used by these other fixed-income funds, the Fund seeks
to achieve a similar income goal.
--------------------------------------------------------------------------------
While the Fund did not perform as well as the Lipper group of funds during
recent periods, it has outperformed this group over all longer time periods. The
Fund's performance was impacted by a number of factors, and we've discussed in
greater detail the total return for the most recent six-month period in the
Questions and Answers section that follows. Stated in short, primarily due to
rising long-term interest rates over the six-month period, the Fund's securities
portfolio only had a modest positive return, which was reduced by its use of
leverage and the overall expenses of operating the Fund. Over longer time
periods, the Fund's use of leverage has benefited its common shareholders, not
only by offsetting the Fund's expenses, but by increasing the total return.
These days we spend a lot of time assessing the likelihood of a company
being purchased in a leveraged buyout (LBO). Billions of dollars are in the
hands of LBO firms, fueled by their ability to borrow at historically low rates.
As discussed in greater detail in the Questions and Answers section that
follows, the economics of these buyouts have changed over the years, and many
more companies - including issuers of preferred securities - are now potential
targets.
Another type of risk receiving a lot of attention these days is fallout
from weakness in the housing sector. We've discussed this in previous letters,
but recently the market has refocused on subprime loans. Suffice it to say, the
Fund continues to have no direct exposure to subprime lenders. While some of the
bank and financial companies we invest in will certainly be impacted by weakness
in the housing sector, in each case the impact still appears to be manageable.
Our investment process relies heavily on in-depth credit research -
understanding as much as we can about the companies we invest in, from the
financial statements to the philosophy of management to more current risks like
LBOs and subprime exposure. That being said, we don't mind taking risk in our
portfolio as long as we understand it and feel we are being adequately
compensated.
The universe of preferred stock eligible for the dividends received
deduction (DRD) remains in relatively tight supply. We do see new issues from
time to time, but the general trend continues to be shrinkage in this market
segment. Of course, this makes the DRD issues owned by the Fund a bit more
precious, but it also makes it difficult to find new securities to buy. We don't
expect this segment to disappear, but relative to the broader preferred market,
it should continue to contract. DRD issues continue to be among the best
performers in the fixed-income markets.
In contrast to the DRD market, the market for fully-taxable preferreds is
in full bloom. There are often two or three new issues a week, and they tend to
be pretty sizable. The lion's share of these new issues has been the "enhanced"
variety we've discussed in the past (and described more fully on the Fund's
website). In the two years since this structure was developed, close to one
hundred new issues, with a market value of roughly $75 billion, have been
created. It's harder to generalize about performance of the taxable preferred
sector because of the wide variety of issuers and issue types, but it has mostly
been a mixed bag. The Fund's portfolio has generally mirrored the overall
market, but we think it should outperform over time.
Since preferred securities are connected at the hip to the U.S. Treasury
market, a quick recap of that market is useful. Over the three months ended May
31st, the Treasury "curve" (the plot of yields versus maturity) twisted, as
shorter-term rates fell modestly and intermediate and long-term rates increased.
With intermediate and long-term rates continuing to increase since May 31st, the
curve now has a more "normal" shape, with rates on longer maturity issues above
those of shorter issues. Since March, intermediate and long-term rates have
risen as a result of a combination of factors, including: a resurging domestic
economy following a weak first quarter, increasing interest rates
internationally and subsequent reduced investment flows from overseas, and the
market's declining expectation of the Federal Reserve lowering short-term
interest rates.
Sometimes the ride can be a little bumpy when the yield curve goes through
a transition like this, but in the long run, the Fund should benefit. In the
short run, we anticipate that the Fund's "safety net" hedging strategy should
make the Fund's investment portfolio progressively less sensitive to further
increases in long-term interest rates. In addition, higher interest rates also
reduce the exposure of the Fund's holdings to early redemption, as the issuer's
cost of funding these calls increases. In turn, this reduced exposure to early
redemption enhances the Fund's ability to pay its current dividend.
2
The Questions and Answers section that follows and the Fund's website at
www.preferredincome.com have more complete discussions of a number of topics
that may interest you. The topics on the website include our overall assessment
of the state of the economy and interest rates (in our Second Quarter Economic
Update) and an archive of frequently-asked questions which remain relevant today
- including an in-depth discussion of the risks of subprime mortgages, our
interest-rate hedging strategy and our use of leverage. We believe an informed
shareholder can be one of the strongest assets of any company, and we encourage
you to explore the website for a wide range of additional information about your
Fund.
Sincerely,
/S/DONALD F. CRUMRINE /S/ROBERT M. ETTINGER
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
July 17, 2007
3
QUESTIONS & ANSWERS
WHAT WERE THE COMPONENTS OF THE FUND'S TOTAL RETURN ON NET ASSET VALUE?
PFD's investment objective is to produce high current income consistent
with preservation of capital. While shareholder returns are more directly tied
to the market price of the Fund's shares, we believe that shareholders can
assess whether the Fund's investment objective is being met by better
understanding the Fund's total return on net asset value (NAV).
As a closed-end fund, PFD utilizes a variety of investment tools to meet
its objective, namely: (a) investing in a portfolio of securities; (b) hedging
that portfolio of securities against significant increases in long-term interest
rates; and (c) issuing an auction-rate preferred stock to leverage and enhance
returns to Common Stock shareholders. The table below reviews the performance of
each of those tools over the Fund's fiscal year-to-date and then adjusts for the
impact of the Fund's expenses to arrive at a total return on NAV (which factors
in all of these items).
COMPONENTS OF PFD'S TOTAL RETURN ON NAV
FOR SIX MONTHS ENDED MAY 31, 2007
--------------------------------------------------------------------------------
Total Return on Securities Portfolio (including principal and income)... 0.9%
Return from Interest Rate Hedging Strategy ............................. (0.1)%
Impact of Leverage ..................................................... (0.8)%
Expenses ............................................................... (0.7)%
--------------------------------------------------------------------------------
TOTAL RETURN ON NAV (0.7)%
Intermediate and long-term U.S. Treasury bond yields increased - and
consequently, their market value decreased - during the first half of the Fund's
fiscal year. Like all fixed-income securities, the value of preferred stocks
typically moves in relation to U.S. Treasury bonds and this is what happened
during the past six months, with the Fund's securities portfolio losing some
principal value. Nonetheless, the portfolio did have a positive total return
through the income produced by its securities portfolio. Since interest rates
did not increase significantly until the very end of this period, the Fund's
interest-rate hedging strategy had a minimal negative effect on the portfolio's
results.
While leverage had a modest negative impact on the Fund's returns during
this six-month period, over longer time periods leverage has made a significant
positive contribution to the Fund's Common Stock shareholders. The Fund
continues to have approximately the same expense ratio as it has had
historically, which results in the Fund having a slightly negative return on NAV
during this six-month period.
HOW DOES THE FUND MANAGE THE RISK OF LEVERAGED BUYOUTS?
Leveraged buyouts (LBOs) and management buyouts (MBOs) have long presented
risks to investment-grade fixed-income investors. However, buyouts had been
relatively rare among the largest preferred issuers, namely financial
institutions (because they are already inherently leveraged) and utilities
(because they are heavily regulated with only modest returns on equity).
Recently, the risk of higher leverage resulting from an LBO or MBO has expanded
into these industries. For example, among utilities, Duquesne Light Holdings was
acquired by a buyout fund and Texas Utilities has agreed to be purchased by a
consortium of private-equity firms. Among financial companies, SLM Corporation,
or Sallie Mae, also has agreed to a buyout. These transactions have heightened
the LBO risks for preferred and debt investors in industries that previously had
been considered largely "immune" to LBOs.
4
There are many reasons why the reach of leveraged buyouts has expanded in
recent years. First, LBO funds are much larger now than in the past. They can
buy larger companies and more of them. Second, as they have grown in size, the
marginal return required by the funds appears to have declined. This has put "in
play" companies that previously would have been rejected as offering inadequate
equity returns. Third, the regulatory environment has turned decidedly more
"laissez-faire" over the past decade. Buyouts that most likely would have been
rejected by regulators ten years ago now stand a good chance of approval as long
as buyers can demonstrate that consumers (rather than holders of preferred or
debt securities) will not be harmed.
In a typical LBO, the new owner - often a private entity such as a
private-equity fund - buys out existing common shareholders at a premium to the
company's pre-deal market value. The purchase price is financed by a combination
of equity contributed by the buyer and new debt issued to investors. As
indicated by the name "leveraged buyout," debt comprises the majority of the
buyout financing. In most cases, existing debt and preferreds at the target
company are assumed by the new, now much more highly leveraged entity. This is
clearly bad news for existing preferred holders. Most or all of the newly issued
debt will be senior to preferreds in the company's capital structure. The same
thing may be true for existing senior debt as well, if the LBO sponsor decides
to issue senior secured debt ahead of the senior unsecured debt. No matter how
the deal is structured, the combination of higher leverage and potentially
greater subordination typically leaves existing debt and preferred holders with
riskier securities. Issues that might have been rated BBB+ could easily drop to
BB or even B. Naturally, investors require higher yields for the additional
credit risk in the lower-rated securities, so existing debt and preferred issues
must fall in price - to the detriment of owners of those securities.
We take these risks very seriously, and there are several ways we address
them in the Fund's portfolios. Some preferred and debt issues contain "change of
control" provisions that require the company either to redeem the security at a
predetermined price or to pay a significantly higher coupon if the company is
acquired and its ratings fall below a certain level (typically investment
grade). Given the heightened LBO risk in recent months, more new issues contain
this provision than in the past, although they are still very much in the
minority. As much as we like these provisions, few older issues contain them,
especially among the bank, finance, and utility securities that make up the
majority of the Fund's holdings. As a result, it would be impossible to assemble
a diversified - not to mention attractively priced - portfolio of securities
comprised solely of such issues.
The most important ways we manage LBO risk are the same ways we manage
credit risk in general: We do rigorous credit analysis on the companies whose
securities we own or would consider owning, and we diversify our holdings by
industry, business line, and company. As the reach of buyout firms has extended
into the sectors in which we are preferred investors, we are undertaking a
thorough review of the credits in the Fund's portfolio, with a particular eye to
LBO risk.
We ask ourselves, "Can this company be leveraged to produce higher returns
to equity holders?" The answer to this question requires an analysis of a
company's assets, earnings and cash flow, capital structure, regulatory
environment and market valuation. Our judgments about these matters guide us to
an assessment of LBO risk for a particular issuer. Combining that with the terms
of a particular security leads us to an assessment of that security's LBO risk.
If we conclude that an issuer is an attractive LBO candidate and that its
preferred securities would be unprotected in the event of an LBO, we would seek
to sell (or avoid buying) the preferred securities of that issuer or utilize
other measures to mitigate the LBO risk in owning that particular security.
Indeed, we have sold preferred securities positions where we think LBO risk is
5
uncomfortably high. Of course, if the Fund had a common stock investment
strategy, we might make the opposite decision given that common stock investors
are typically rewarded in the event of an LBO.
Fund shareholders should be aware that this sort of analysis is not a
science. We cannot plug variables into an equation and arrive at a conclusive
measurement of LBO risk; we cannot say with certainty that an issue that we
judge to be at low risk of LBO will not be subject to a leveraged buyout in the
future. There are too many variables - many of which are unobservable - to
construct such an analysis. Nonetheless, we believe this credit-driven approach
will help us to reduce the risk of LBOs to the Fund's holdings, and it has
become an important element of our portfolio management process.
6
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OVERVIEW
MAY 31, 2007 (UNAUDITED)
------------------------------------------------------
FUND STATISTICS ON 5/31/07
----------------------------------
Net Asset Value $ 15.18
Market Price $ 16.00
Premium 5.40%
Yield on Market Price 6.45%
Common Stock Shares
Outstanding 10,508,993
INDUSTRY CATEGORIES % OF PORTFOLIO
-------------------------------------------
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
Banking 33%
Utilities 33%
Insurance 13%
Financial
Services 9%
Energy 7%
REITs 3%
Other 2%
MOODY'S RATINGS % OF PORTFOLIO
----------------------------------
AAA 0.0%
AA 8.2%
A 17.6%
BBB 50.4%
BB 11.3%
Not Rated 10.0%
----------------------------------
Below Investment Grade* 14.4%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND
S&P.
TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO
----------------------------------------------
Interstate Power & Light 4.8%
Banco Santander 4.0%
FBOP Corporation 3.9%
Liberty Mutual Group 3.8%
HSBC 3.7%
First Republic Bank 3.4%
SLM Corp 3.0%
Xcel Energy 3.0%
Cobank 2.7%
Goldman Sachs 2.7%
% OF PORTFOLIO**
----------------------------------------------------------------------------------------------
Holdings Generating Qualified Dividend Income (QDI) for Individuals 63%
Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD) 53%
----------------------------------------------------------------------------------------------
** THIS DOES NOT REFLECT YEAR-END RESULTS OR ACTUAL TAX CATEGORIZATION OF FUND
DISTRIBUTIONS. THESE PERCENTAGES CAN, AND DO, CHANGE, PERHAPS SIGNIFICANTLY,
DEPENDING ON MARKET CONDITIONS. INVESTORS SHOULD CONSULT THEIR TAX ADVISOR
REGARDING THEIR PERSONAL SITUATION.
7
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 2007 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------- -------
PREFERRED SECURITIES -- 94.6%
BANKING -- 32.6%
-----------------------------------------------------------------------------------------------------------------
$ 3,000,000 Astoria Capital Trust I, 9.75% 11/01/29, Series B .............................. $ 3,372,384
54,700 BAC Capital Trust I, 7.00% Pfd. 12/15/31 ....................................... 1,394,850(2)
7,700 BAC Capital Trust II, 7.00% Pfd. 02/01/32 ...................................... 194,425
Banco Santander:
25,000 Adj. Rate Pfd., 144A**** .................................................... 588,000**(1)
301,200 6.50% Pfd., 144A**** ........................................................ 7,382,412**(1)
63,200 6.80% Pfd., 144A**** ........................................................ 1,586,320**(1)
$ 2,000,000 Capital One Capital III, 7.686% ................................................ 2,143,268
$ 3,500,000 CBG Florida REIT Corporation, 7.114%, 144A**** ................................. 3,481,100
71,300 Citigroup Capital VIII, 6.95% Pfd. 09/15/31 .................................... 1,813,694
19,648 Citizens Funding Trust I, 7.50% Pfd. 09/15/66 .................................. 509,007
Cobank, ACB:
50,000 7.00% Pfd., 144A**** ........................................................ 2,516,100*
75,000 7.814% Pfd., 144A**** ....................................................... 3,957,375*
$ 1,600,000 Comerica Capital Trust II, 6.576% 02/20/37 ..................................... 1,538,781
$ 500,000 Comerica (Imperial) Capital Trust I, 9.98% 12/31/26, Series B .................. 527,424
9,000 FBOP Corporation, Adj. Rate Pfd., 144A**** ..................................... 9,258,750*
$ 2,250,000 First Hawaiian Capital I, 8.343% 07/01/27, Series B ............................ 2,347,164(1)
First Republic Bank:
200,000 6.25% Pfd. .................................................................. 5,106,260*
53,700 6.70% Pfd. .................................................................. 1,386,131*
1,000 First Republic Preferred Capital Corporation, 10.50% Pfd., 144A**** ............ 1,124,400
22,500 First Republic Preferred Capital Corporation II, 8.75% Pfd., Series B, 144A**** 581,850
$ 1,500,000 First Union Capital II, 7.95% 11/15/29 ......................................... 1,784,944
5,000 Fleet Capital Trust VIII, 7.20% Pfd. 03/15/32 .................................. 127,344
$ 600,000 HBOS PLC, 6.657%,144A**** ...................................................... 586,500**(1)
5,000 HSBC Series II, Variable Inverse Pfd., Pvt. .................................... 5,675,000*
HSBC USA, Inc.:
120,000 6.50% Pfd., Series H ........................................................ 3,161,256*
2,500 $2.8575 Pfd. ................................................................ 126,016*
120,000 Keycorp Capital IX, 6.75% Pfd. 12/15/66 ........................................ 3,030,000
15,000 National City Capital Trust II, 6.625% Pfd. 11/15/36 ........................... 371,719
$ 674,000 NB Capital Trust II, 7.83% 12/15/26 ............................................ 700,610
16,000 PFGI Capital Corporation, 7.75% Pfd. ........................................... 412,480
$ 650,000 RBS Capital Trust B, 6.80% ..................................................... 640,705**(1)
$ 1,400,000 Regions Financing Trust II, 6.625% 05/15/47 .................................... 1,367,397
10 Roslyn Real Estate, 8.95% Pfd., Series C, 144A**** ............................. 1,073,577
77,600 Sovereign Bancorp, 7.30% Pfd., Series C ........................................ 2,104,900*
The accompanying notes are an integral part of the financial statements.
8
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Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2007 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------- -------
PREFERRED SECURITIES -- (CONTINUED)
BANKING -- (CONTINUED)
-----------------------------------------------------------------------------------------------------------------
30,600 Sovereign Capital Trust V, 7.75% Pfd. 05/22/36 ................................. $ 801,338
$ 1,000,000 Sovereign Capital Trust VI, 7.908% 06/13/36 .................................... 1,102,130
U.S. Bancorp, Auction Pass-Through Trust, Cl. B:
11 Series 2006-5, Variable Rate Pfd., 144A**** ................................. 350,350*
11 Series 2006-6, Variable Rate Pfd., 144A**** ................................. 350,350*
96,700 USB Capital VIII, 6.35% Pfd. 12/29/65 .......................................... 2,393,567
7,300 USB Capital XI, 6.60% Pfd. 09/15/66 ............................................ 185,128
40,000 Zions Capital Trust B, 8.00% Pfd. 09/01/32 ..................................... 1,010,000
-----------------------------------------------------------------------------------------------------------------
78,165,006
--------------
FINANCIAL SERVICES -- 9.0%
-----------------------------------------------------------------------------------------------------------------
35,000 Cabco Trust For Goldman Sachs Capital I, Adj. Rate Pfd. 02/15/34 ............... 843,937
$ 1,000,000 CIT Group, Inc., 6.10% ......................................................... 937,112
100,000 Deutsche Bank Contingent Capital Trust II, 6.55% Pfd. .......................... 2,537,500**(1)
Goldman Sachs:
25 Pass-Through Certificates, Class B, 144A**** ................................ 2,764,000*
2,500 STRIPES Custodial Receipts, Pvt. ............................................ 2,752,500*
3,000 Merrill Lynch Series II STRIPES Custodial Receipts, Pvt. ....................... 3,096,000*
48,000 Merrill Lynch & Company, Adj. Rate Pfd., Series 5 .............................. 1,215,000*
5,870 Morgan Stanley Capital Trust VI, 6.60% Pfd. .................................... 148,034
SLM Corporation:
136,855 6.97% Pfd., Series A ........................................................ 6,912,546*
3,000 Adj. Rate Pfd., Series B .................................................... 264,000*
-----------------------------------------------------------------------------------------------------------------
21,470,629
--------------
INSURANCE -- 10.6%
-----------------------------------------------------------------------------------------------------------------
15,000 ACE Ltd., 7.80% Pfd., Series C ................................................. 386,250**(1)
$ 3,250,000 AON Capital Trust A, 8.205% 01/01/27 ........................................... 3,557,177
Arch Capital Group Ltd.:
10,000 7.875% Pfd., Series B ....................................................... 260,625**(1)
40,000 8.00% Pfd., Series A ........................................................ 1,055,000**(1)
$ 2,500,000 AXA 6.463%, 144A**** ........................................................... 2,406,908**(1)
14,400 Axis Capital Holdings, 7.50% Pfd., Series B .................................... 1,486,080(1)
27,000 Berkley W.R. Capital Trust II, 6.75% Pfd. 07/26/45 ............................. 679,220
50,000 Delphi Financial Group, 7.376% Pfd. 05/15/37 ................................... 1,239,065
6,250 Everest Re Capital Trust II, 6.20% Pfd., Series B .............................. 148,516
$ 1,040,000 Everest Reinsurance Holding Inc, 6.60% 05/15/37 ................................ 1,021,623
The accompanying notes are an integral part of the financial statements.
9
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Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2007 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------- -------
PREFERRED SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
-----------------------------------------------------------------------------------------------------------------
$ 4,500,000 Liberty Mutual Group, 7.80% 03/15/37, 144A**** ................................. $ 4,387,590
21,800 Principal Financial Group, 6.518% Pfd. ......................................... 604,270*
$ 357,000 Provident Financing Trust I, 7.405% 03/15/38 ................................... 359,323
105,000 Renaissancere Holdings Ltd., 6.60% Pfd., Series D .............................. 2,559,900**(1)
119,500 Scottish Re Group Ltd., 7.25% Pfd. ............................................. 2,815,719**(1)
$ 750,000 USF&G Capital, 8.312% 07/01/46, 144A**** ....................................... 907,050
XL Capital Ltd.:
$ 1,000,000 6.50%, Series E ............................................................. 961,590(1)
22,850 8.00% Pfd., Series A ........................................................ 583,390**(1)
-----------------------------------------------------------------------------------------------------------------
25,419,296
--------------
UTILITIES -- 32.0%
-----------------------------------------------------------------------------------------------------------------
Alabama Power Company:
300 4.52% Pfd. .................................................................. 24,600*
5,734 4.72% Pfd. .................................................................. 490,945*
10,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ...................... 1,036,250*
103,200 Calenergy Capital Trust III, 6.50% Pfd. 09/01/27 ............................... 4,978,368
Central Hudson Gas & Electric Corporation:
5,000 4.35% Pfd., Series D, Pvt. .................................................. 386,400*
900 4.96% Pfd., Series E, Pvt. .................................................. 76,662*
8,340 Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt. ...... 866,359*
Connecticut Light & Power Company:
12,124 4.50% Pfd., Series 1963, Pvt. ............................................... 465,804*
34,300 5.28% Pfd., Series 1967 ..................................................... 1,561,336*
1,905 6.56% Pfd., Series 1968 ..................................................... 98,565*
15,778 $3.24 Pfd. .................................................................. 826,452*
2,100 Consolidated Edison Company of New York, 4.65% Pfd., Series C .................. 178,038*
2,886 Dayton Power and Light Company, 3.90% Pfd., Series C ........................... 187,330*
$ 1,500,000 Dominion Resources Capital Trust III, 8.40% 01/15/31 ........................... 1,794,042
Duquesne Light Company:
7,675 4.10% Pfd. .................................................................. 258,340*
9,190 4.15% Pfd. .................................................................. 313,103*
910 4.20% Pfd. .................................................................. 31,377*
5,490 $2.10 Pfd., Series A ........................................................ 189,295*
100,000 Entergy Arkansas, Inc., 6.45% Pfd. ............................................. 2,574,000*
4,555 Entergy Gulf States, Inc., 7.56% Pfd. .......................................... 437,827*
36,000 Entergy Louisiana, Inc., 6.95% Pfd. ............................................ 3,661,200*
The accompanying notes are an integral part of the financial statements.
10
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Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2007 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------- -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
-----------------------------------------------------------------------------------------------------------------
5,000 Entergy Mississippi, Inc., 4.92% Pfd. .......................................... $ 392,050*
Florida Power Company:
5,157 4.60% Pfd. .................................................................. 423,699*
18,535 4.75% Pfd. .................................................................. 1,572,509*
48,300 FPC Capital I, 7.10% Pfd., Series A ............................................ 1,213,900
69,250 FPL Group Capital, Inc., 6.60% Pfd. 10/01/66, Series A ......................... 1,766,741
13,100 Georgia Power Capital Trust, 6.125% Pfd. ....................................... 333,002*
50,000 Georgia Power Capital Trust V, 7.125% Pfd. 03/31/42 ........................... 1,271,875
2,010 Great Plains Energy, Inc., 4.50% Pfd. .......................................... 161,282*
50,000 Hawaiian Electric Company, Inc., 5.25% Pfd., Series H, Pvt. .................... 895,315*
32,650 Indianapolis Power & Light Company, 5.65% Pfd. ................................. 3,001,188*
384,000 Interstate Power & Light Company, 8.375% Pfd., Series B ........................ 11,558,400*
Pacific Enterprises:
27,430 $4.50 Pfd. .................................................................. 2,241,580*
10,000 $4.75 Pfd., Series 53 ....................................................... 862,600*
Pacific Gas & Electric Co.:
7,600 4.50% Pfd., Series H ........................................................ 151,392*
41,500 5.00% Pfd., Series D ........................................................ 887,270*
79,086 5.00% Pfd., Series E ........................................................ 1,720,911*
PacifiCorp:
1,095 5.40% Pfd. .................................................................. 110,902*
1,225 $4.56 Pfd. .................................................................. 97,338*
14,542 $4.72 Pfd. .................................................................. 1,195,934*
10,278 $7.48 Sinking Fund Pfd. ..................................................... 1,046,751*
$ 500,000 PECO Energy Capital Trust III, 7.38% 04/06/28, Series D ........................ 523,200
8,137 Portland General Electric, 7.75% Sinking Fund Pfd. ............................. 822,651*
5,000 PPL Electric Utilities Corporation, 6.75% Pfd. ................................. 525,156*
10,000 Public Service Company of New Mexico, 4.58% Pfd., Series 1965 .................. 755,400*
San Diego Gas & Electric Company:
1,200 4.40% Pfd. .................................................................. 19,092*
700 4.50% Pfd. .................................................................. 11,389*
77,000 $1.70 Pfd. .................................................................. 2,016,438*
South Carolina Electric & Gas Company:
24,924 5.125% Purchase Fund Pfd., Pvt. ............................................. 1,280,844*
6,703 6.00% Purchase Fund Pfd., Pvt. .............................................. 341,250*
10,600 Southern California Edison, 6.00% Pfd. ......................................... 1,052,156*
The accompanying notes are an integral part of the financial statements.
11
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2007 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------- -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
-----------------------------------------------------------------------------------------------------------------
Southern Union Company:
$ 200,000 7.20% 11/01/66 .............................................................. $ 202,033
64,800 7.55% Pfd. .................................................................. 1,662,768*
$ 750,000 TXU Electric Capital V, 8.175% 01/30/37 ........................................ 734,400
Union Electric Company:
14,150 4.56% Pfd. .................................................................. 1,087,003*
18,800 $7.64 Pfd. .................................................................. 1,929,632*
12,500 Virginia Electric & Power Company, $7.05 Pfd. .................................. 1,263,673*
23,500 Virginia Power Capital Trust, 7.375% Pfd. 07/30/42 ............................. 597,781
$ 1,900,000 Wisconsin Energy Corporation, 6.25% 05/15/67 ................................... 1,853,725
Wisconsin Power & Light Company:
1,220 4.50% Pfd. .................................................................. 99,332*
546 4.80% Pfd. .................................................................. 47,420*
13,000 6.20% Pfd. .................................................................. 1,334,532*
Xcel Energy, Inc.:
16,030 $4.08 Pfd., Series B ........................................................ 1,211,067*
26,200 $4.10 Pfd., Series C ........................................................ 1,989,104*
22,000 $4.11 Pfd., Series D ........................................................ 1,674,200*
17,750 $4.16 Pfd., Series E ........................................................ 1,367,283*
10,000 $4.56 Pfd., Series G ........................................................ 836,800*
-----------------------------------------------------------------------------------------------------------------
76,579,261
--------------
ENERGY -- 5.7%
-----------------------------------------------------------------------------------------------------------------
8,000 Devon Energy Corporation, 6.49% Pfd., Series A ................................. 812,500*
Enterprise Products Partners:
$ 2,600,000 7.034%, 01/15/68 ............................................................ 2,583,838
$ 1,500,000 8.375%, 08/01/66 ............................................................ 1,633,560
5,985 EOG Resources, Inc., 7.195% Pfd., Series B ..................................... 6,338,175*
$ 1,225,000 KN Capital Trust III, 7.63% 04/15/28 ........................................... 1,200,010
10,000 Lasmo America Limited, 8.15% Pfd., 144A**** .................................... 1,055,400*(1)
-----------------------------------------------------------------------------------------------------------------
13,623,483
--------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 2.8%
-----------------------------------------------------------------------------------------------------------------
40,000 BRE Properties, Inc., 8.08% Pfd., Series B ..................................... 1,021,252
1,000 Equity Residential Properties, 8.29% Pfd., Series K ............................ 57,940
The accompanying notes are an integral part of the financial statements.
12
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2007 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------- -------
PREFERRED SECURITIES -- (CONTINUED)
REAL ESTATE INVESTMENT TRUST (REIT) -- (CONTINUED)
-----------------------------------------------------------------------------------------------------------------
Public Storage, Inc.:
146,370 6.45% Pfd., Series F ........................................................ $ 3,540,324
61,400 6.625% Pfd., Series M ....................................................... 1,521,572
1,800 6.75% Pfd., Series E ........................................................ 45,450
10,000 7.25% Pfd., Series K ........................................................ 257,813
10,000 Realty Income Corp., 6.75% Pfd., Series E ...................................... 251,563
-----------------------------------------------------------------------------------------------------------------
6,695,914
--------------
MISCELLANEOUS INDUSTRIES -- 1.9%
-----------------------------------------------------------------------------------------------------------------
13,600 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B ...................... 1,151,648*
40,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ............................ 3,483,200*
-----------------------------------------------------------------------------------------------------------------
4,634,848
--------------
TOTAL PREFERRED SECURITIES
(Cost $217,164,562) ......................................................... 226,588,437
--------------
CORPORATE DEBT SECURITIES -- 4.0%
INSURANCE -- 2.3%
-----------------------------------------------------------------------------------------------------------------
$ 900,000 Farmers Exchange Capital, 7.20% 07/15/48, 144A**** ............................. 905,400
$ 4,729,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** ............................ 4,709,138
-----------------------------------------------------------------------------------------------------------------
5,614,538
--------------
UTILITIES -- 0.5%
-----------------------------------------------------------------------------------------------------------------
5,000 Entergy Louisiana LLC, 7.60% 04/01/32 .......................................... 127,969
45,000 Northern States Power Company, 8.00% ........................................... 1,147,500
-----------------------------------------------------------------------------------------------------------------
1,275,469
--------------
ENERGY -- 1.2%
-----------------------------------------------------------------------------------------------------------------
$ 2,450,000 KN Energy, Inc., 7.45% 03/01/98 ................................................ 2,370,108
15,000 Nexen, Inc., 7.35% Subordinated Notes .......................................... 380,157(1)
-----------------------------------------------------------------------------------------------------------------
2,750,265
--------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $9,255,884) ........................................................... 9,640,272
--------------
The accompanying notes are an integral part of the financial statements.
13
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2007 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------- -------
COMMON STOCK -- 0.5%
BANKING -- 0.5%
-----------------------------------------------------------------------------------------------------------------
68,921 New York Community Bancorp, Inc. ............................................... $ 1,204,739*
-----------------------------------------------------------------------------------------------------------------
1,204,739
--------------
TOTAL COMMON STOCK
(Cost $1,135,835) .............................................................. 1,204,739
--------------
OPTION CONTRACTS -- 0.3%
110 September Call Options on September U.S. Treasury Bond Futures,
Expiring 08/24/07 ........................................................... 10,313+
1,540 September Put Options on September U.S. Treasury Bond Futures,
Expiring 08/24/07 ........................................................... 606,250+
-----------------------------------------------------------------------------------------------------------------
TOTAL OPTION CONTRACTS
(Cost $464,965) ................................................................ 616,563
--------------
MONEY MARKET FUND -- 0.4%
1,047,858 BlackRock Provident Institutional, TempFund .................................... 1,047,858
-----------------------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost $1,047,858) .............................................................. 1,047,858
--------------
TOTAL INVESTMENTS (Cost $229,069,104***) .............................................. 99.8% 239,097,869
OTHER ASSETS AND LIABILITIES (Net) .................................................... 0.2% 383,744
------ --------------
TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK .............................. 100.0%++ $ 239,481,613
------ --------------
MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (MMP(R)) REDEMPTION VALUE .......................... (80,000,000)
--------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ..................................................... $ 159,481,613
==============
-------------------------
* 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 be resold in transactions exempt from
registration to qualified institutional buyers. These securities have been
determined to be liquid under the guidelines established by the Board of
Directors.
(1) Foreign Issuer.
(2) All or a portion of this security has been pledged as collateral for
written option positions.
+ 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.
The accompanying notes are an integral part of the financial statements.
14
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2007 (UNAUDITED)
------------------------------------------------------
ABBREVIATIONS:
PFD. -- Preferred Securities
PVT. -- Private Placement Securities
OPEN OPTION CONTRACTS WRITTEN
CONTRACTS CONTRACT DESCRIPTION VALUE
----------- -------------------- ---------
110 September Call Options on September U.S. Treasury Bond Futures,
Expiring 08/24/07, Strike Price 110 .......................... $ (92,813)+
----------------------------------------------------------------------------------------
TOTAL OPEN OPTION CONTRACTS WRITTEN (premiums received: $100,884) (92,813)
----------
The accompanying notes are an integral part of the financial statements.
15
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2007 (UNAUDITED)
------------------------------------------------------
ASSETS:
Investments, at value (Cost $229,069,104) ........................ $ 239,097,869
Dividends and interest receivable ................................ 1,464,984
Prepaid expenses ................................................. 152,038
-------------
Total Assets ................................................ 240,714,891
LIABILITIES:
Payable for Investments purchased ................................ $ 500,000
Dividends payable to Common Stock Shareholders ................... 110,456
Investment advisory fee payable .................................. 113,759
Administration, Transfer Agent and Custodian fees payable ........ 38,045
Professional fees payable ........................................ 64,480
Directors' fees payable .......................................... 2,828
Accrued expenses and other payables .............................. 33,990
Accumulated undeclared distributions to Money Market Cumulative
Preferred(TM) Stock Shareholders ............................... 276,907
Outstanding options written, at value (premiums received $100,884) 92,813
-----------
Total Liabilities ........................................... 1,233,278
-------------
MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (800 SHARES
OUTSTANDING) REDEMPTION VALUE .................................... 80,000,000
-------------
NET ASSETS AVAILABLE TO COMMON STOCK ............................... $ 159,481,613
=============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
Distributions in excess of net investment income ................. $ (796,948)
Accumulated net realized loss on investments sold ................ (1,449,629)
Unrealized appreciation of investments ........................... 10,036,836
Par value of Common Stock ........................................ 105,090
Paid-in capital in excess of par value of Common Stock ........... 151,586,264
-------------
Total Net Assets Available to Common Stock .................. $ 159,481,613
=============
NET ASSET VALUE PER SHARE OF COMMON STOCK:
Common Stock (10,508,993 shares outstanding) ..................... $ 15.18
=============
The accompanying notes are an integral part of the financial statements.
16
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2007 (UNAUDITED)
------------------------------------------------------
INVESTMENT INCOME:
Dividends+ ....................................................... $ 6,090,283
Interest ......................................................... 2,092,390
-------------
Total Investment Income ..................................... 8,182,673
EXPENSES:
Investment advisory fee .......................................... $ 669,898
Administrator's fee .............................................. 110,261
Money Market Cumulative Preferred(TM) Stock broker commissions
and auction agent fees ......................................... 105,117
Professional fees ................................................ 66,976
Insurance expense ................................................ 77,000
Transfer agent fees .............................................. 42,940
Directors' fees .................................................. 38,391
Custodian fees ................................................... 14,502
Compliance fees .................................................. 20,433
Other ............................................................ 56,128
----------
Total Expenses .............................................. 1,201,646
-------------
NET INVESTMENT INCOME .............................................. 6,981,027
-------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net realized gain/(loss) on investments sold during the period ... (424,030)
Change in net unrealized appreciation/depreciation of investments
held during the period ......................................... (5,871,941)
-------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS .................... (6,295,971)
-------------
DISTRIBUTIONS TO MONEY MARKET CUMULATIVE PREFERRED(TM)
STOCK SHAREHOLDERS:
From net investment income (including changes in accumulated
undeclared distributions) ...................................... (1,829,505)
-------------
NET DECREASE IN NET ASSETS TO COMMON STOCK RESULTING
FROM OPERATIONS ................................................... $ (1,144,449)
=============
-----------------
+ For Federal income tax purposes, a significant portion of this amount may 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.
17
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
----------------------------------------------------------------
SIX MONTHS ENDED
MAY 31, 2007 YEAR ENDED
(UNAUDITED) NOVEMBER 30, 2006
---------------- -----------------
OPERATIONS:
Net investment income .................................................. $ 6,981,027 $ 13,495,031
Net realized gain/(loss) on investments sold during the period ......... (424,030) 3,864,722
Change in net unrealized appreciation/depreciation of investments
held during the period ............................................... (5,871,941) 2,445,387
Distributions to MMP(R)* Shareholders from net investment income,
including changes in accumulated undeclared distributions ............ (1,829,505) (3,280,255)
---------------- ---------------
NET INCREASE/(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ........ (1,144,449) 16,524,885
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock
Shareholders(1) ...................................................... (5,413,666) (10,898,373)
---------------- ---------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ....................... (5,413,666) (10,898,373)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment
and Cash Purchase Plan ............................................... 564,643 1,571,205
---------------- ---------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK
RESULTING FROM FUND SHARE TRANSACTIONS ............................... 564,643 1,571,205
NET INCREASE/(DECREASE) IN NET ASSETS AVAILABLE TO ---------------- ---------------
COMMON STOCK FOR THE period ............................................ $ (5,993,472) $ 7,197,717
================ ===============
-------------------------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period .................................................... $ 165,475,085 $ 158,277,368
Net increase/(decrease) in net assets during the period ................ (5,993,472) 7,197,717
---------------- ---------------
End of period (including distributions in excess of net investment
income of ($796,948) and ($534,804), respectively) ................... $ 159,481,613 $ 165,475,085
================ ===============
---------------
* Money Market Cumulative PreferredTM Stock.
(1) May include income earned, but not paid out, in prior fiscal year.
The accompanying notes are an integral part of the financial statements.
18
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS
FOR A COMMON STOCK 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, 2007 ----------------------------------------------------
(UNAUDITED) 2006 2005 2004 2003 2002
-------------- --------- -------- ------- ------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year .................... $ 15.80 $ 15.26 $ 15.49 $ 15.85 $ 13.63 $ 14.62
------------- -------- --------- -------- -------- ---------
INVESTMENT OPERATIONS:
Net investment income ................................. 0.67 1.29 1.22 1.24 1.28 1.29
Net realized and unrealized gain/(loss) on investments (0.60) 0.62 (0.07) (0.31) 2.27 (1.01)
DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS:
From net investment income ............................ (0.17) (0.32) (0.21) (0.11) (0.10) (0.12)
------------- -------- --------- -------- -------- ---------
Total from investment operations ...................... (0.10) 1.59 0.94 0.82 3.45 0.16
------------- -------- --------- -------- -------- ---------
Cost of Issuance of Additional MMP(R)* (Note 6) ....... -- -- -- -- (0.05)
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income ............................ (0.52) (1.05) (1.17) (1.18) (1.23) (1.10)
------------- -------- --------- -------- -------- ---------
Total distributions to Common Stock Shareholders ...... (0.52) (1.05) (1.17) (1.18) (1.23) (1.10)
------------- -------- --------- -------- -------- ---------
Net asset value, end of year .......................... $ 15.18 $ 15.80 $ 15.26 $ 15.49 $ 15.85 $ 13.63
============= ======== ========= ======== ======== =========
Market value, end of year ............................. $ 16.00 $ 16.98 $ 16.44 $ 17.42 $ 17.65 $ 15.00
============= ======== ========= ======== ======== =========
Total investment return based on net asset value** .... (0.78%)**** 10.74% 5.78% 4.73% 25.87% 0.58%
============= ======== ========= ======== ======== =========
Total investment return based on market value ** ...... (2.69%)**** 10.47% 1.33% 5.76% 27.35% 11.84%
============= ======== ========= ======== ======== =========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
TO COMMON STOCK SHAREHOLDERS:
Total net assets, end of year (in 000's) .......... $ 159,482 $165,475 $ 158,277 $159,101 $160,924 $ 136,756
Operating expenses ................................ 1.47%*** 1.49% 1.48% 1.48% 1.51% 1.48%
Net investment income + ........................... 6.31%*** 6.39% 6.38% 7.14% 7.84% 8.32%
-------------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate ........................... 37%**** 71% 54% 27% 28% 30%
Total net assets available to Common and Preferred
Stock, end of year (in 000's) ................... $ 239,482 $245,475 $238,277 $239,101 $240,992 $216,974
Ratio of operating expenses to total average net assets
available to Common and Preferred Stock ......... 0.99%*** 0.99% 0.99% 0.99% 0.99% 0.99%
* Money Market Cumulative Preferred(TM) Stock.
** Assumes reinvestment of distributions at the price obtained by the
Fund's Dividend Reinvestment and Cash Purchase Plan.
*** Annualized.
**** Not Annualized.
+ 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.
19
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
PER SHARE OF COMMON STOCK (UNAUDITED)
------------------------------------------------------
TOTAL DIVIDEND
DIVIDENDS NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE (1)
-------- --------- ------------- ------------
December 31, 2006 .............. $0.0860 $15.56 $16.86 $16.02
January 31, 2007 ............... 0.0860 15.61 17.20 16.34
February 28, 2007 .............. 0.0860 15.80 17.25 16.39
March 31, 2007 ................. 0.0860 15.45 17.09 16.24
April 30, 2007 ................. 0.0860 15.44 16.64 15.81
May 31, 2007 ................... 0.0860 15.18 16.00 15.20
------------
(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.
20
--------------------------------------------------------------------------------
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 (2) PER SHARE (3) PER SHARE (1)(3)
--------- --------------- ------------- ------------- ----------------
05/31/07* 800 $299,698 $100,000 $100,000
11/30/06 800 307,433 100,000 100,000
11/30/05 800 298,367 100,000 100,000
11/30/04 800 299,078 100,000 100,000
11/30/03 800 301,240 100,000 100,000
11/30/02 800 271,218 100,000 100,000
------------
(1) See note 6.
(2) Calculated by subtracting the Fund's total liabilities (excluding the MMP(R)
and accumulated undeclared distributions to MMP(R)) from the Fund's total
assets and dividing that amount by the number of MMP(R) shares outstanding.
(3) Excludes accumulated undeclared dividends.
* Unaudited.
The accompanying notes are an integral part of the financial statements.
21
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
1. ORGANIZATION
Flaherty & Crumrine Preferred Income Fund Incorporated (the "Fund") 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
"1940 Act"). 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 the financial statements is in conformity with U.S. generally
accepted accounting principles ("US GAAP") 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 and (ii) the aggregate liquidation value of the outstanding
Money Market Cumulative Preferred(TM) Stock ("MMP(R)").
The Fund's preferred and debt securities are valued on the basis of current
market quotations provided by independent pricing services or dealers approved
by the Board of Directors of the Fund. Each quotation is based on the mean of
the bid and asked prices of a security. In determining the value of a particular
preferred or debt security, a pricing service or dealer may use information with
respect to transactions in such investments, quotations, market transactions in
comparable investments, various relationships observed in the market between
investments, and/or calculated yield measures based on valuation technology
commonly employed in the market for such investments. Common stocks that are
traded on stock exchanges are valued at the last sale price or official close
price on the exchange, as of the close of business on the day the securities are
being valued or, lacking any sales, at the last available mean price. Futures
contracts and option contracts on futures contracts are valued on the basis of
the settlement price for such contracts on the primary exchange on which they
trade. Investments in over-the-counter derivative instruments, such as interest
rate swaps and options thereon ("swaptions"), are valued using prices supplied
by a pricing service, or if such prices are unavailable, prices provided by a
single broker or dealer that is not the counterparty or, if no such prices are
available, at a price at which the counterparty to the contract would repurchase
the instrument or terminate the contract. 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 and all debt and preferred securities which mature in 60 days
22
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
or less are valued at amortized cost. Investments in money market funds are
valued at the net asset value of such funds.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Realized gains and losses from securities sold
are recorded on the identified cost basis. Dividend income is recorded on
ex-dividend dates. Interest income is recorded on the accrual basis. The Fund
also amortizes premiums and accretes discounts on fixed income securities.
OPTIONS: Purchases of options are recorded as an investment, the value of
which is marked-to-market at each valuation date. 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.
When the Fund writes an option, an amount equal to the premium received by
the Fund is recorded as a liability, the value of which is marked-to-market at
each valuation date. When a written option expires, the Fund realizes a gain
equal to the amount of the premium originally received. When the Fund enters
into a closing purchase transaction, the Fund realizes a gain (or loss if the
cost of the closing purchase transaction exceeds the premium received when the
option was written) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a call option is exercised, the Fund realizes a gain or loss from the sale
of the underlying security and the proceeds from such sale are increased by the
amount of the premium originally received. When a put option is exercised, the
amount of the premium originally received will reduce the cost of the security
which the Fund purchased upon exercise.
The risk in writing a call option is that the Fund may forego the
opportunity for profit if the market price of the underlying security increases
and the option is exercised. The risk in writing a put option is that the Fund
may incur a loss if the market price of the underlying security decreases and
the option is exercised.
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.
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.
23
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Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Fund expects to declare
dividends on a monthly basis to shareholders of Common Stock ("Shareholders").
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 qualifying as a
regulated investment company, any taxes paid by the Fund on such net realized
long-term capital gains may be used by the Fund's Shareholders as a credit
against their own tax liabilities.
Income and capital gain distributions are determined and characterized in
accordance with income tax regulations which may differ from the standards of
the US GAAP. 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.
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 certain fixed 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 2007 and 2006 was as follows:
DISTRIBUTIONS PAID IN FISCAL YEAR 2007 DISTRIBUTIONS PAID IN FISCAL YEAR 2006
ORDINARY INCOME LONG-TERM CAPITAL GAINS ORDINARY INCOME LONG-TERM CAPITAL GAINS
Common N/A N/A $10,898,373 $0
Preferred N/A N/A $3,280,255 $0
As of November 30, 2006, 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 NET UNREALIZED
CAPITAL (LOSS) CARRYFORWARD ORDINARY INCOME LONG-TERM GAIN APPRECIATION/(DEPRECIATION)
($778,250) $251,601 $0 $15,661,428
At November 30, 2006, the Fund had accumulated realized capital losses of
$778,250 in 2004. These losses may be carried forward and offset against any
future capital gains through 2012.
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 $3,286 of Federal excise taxes attributable to calendar
year 2006 in March 2007.
24
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
ADDITIONAL ACCOUNTING STANDARDS: In June 2006, the Financial Accounting
Standards Board ("FASB") issued FASB Interpretation 48 ("FIN 48"), "Accounting
for Uncertainty in Income Taxes." This standard defines the threshold for
recognizing the benefits of tax-return positions in the financial statements as
"more-likely-than-not" to be sustained by the taxing authority and requires
measurement of a tax position meeting the more-likely-than-not criterion, based
on the largest benefit that is more than 50 percent likely to be realized. FIN
48 is effective as of the beginning of the first fiscal year beginning after
December 15, 2006, with early application permitted if no interim financial
statements have been issued. At adoption, companies must adjust their financial
statements to reflect only those tax positions that are more-likely-than-not to
be sustained as of the adoption date.
In addition, in September 2006, Statement of Financial Accounting Standards
No. 157 FAIR VALUE MEASUREMENTS ("SFAS 157") was issued and is effective for
fiscal years beginning after November 15, 2007. SFAS 157 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements.
Management is currently evaluating the impact the adoption of FIN 48 and
SFAS 157 will have on the Fund's financial statements.
3. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE, TRANSFER AGENT FEE, CUSTODIAN
FEE, DIRECTORS' FEES AND CHIEF COMPLIANCE OFFICER 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.
For purposes of calculating the fees payable to the Adviser, Administrator
and Custodian, the Fund's average weekly total managed assets means the total
assets of the Fund minus the sum of accrued liabilities. For purposes of
determining total managed assets, the liquidation preference of any preferred
shares issued by the Fund is not treated as a liability.
PFPC Inc., a member of the PNC Financial Services Group, Inc. ("PNC
Financial Services"), serves as the Fund's Administrator. As Administrator, PFPC
Inc. calculates the net asset value of the Fund's shares attributable to Common
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 dividend-paying agent and
registrar (Transfer Agent). As compensation for PFPC Inc.'s services, 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, 0.0075% of the
next $350 million of the Fund's average weekly net assets attributable to Common
Stock,
25
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Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
and 0.0025% of the Fund's average weekly net assets attributable to Common
Stock above $500 million, plus certain out of pocket expenses. For the purpose
of calculating such fee, the Fund's average weekly net assets attributable to
Common Stock are deemed to be the average weekly value of the Fund's total
assets minus the sum of the Fund's liabilities. 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.
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. The Fund also reimburses all Directors for travel and out-of-pocket
expenses incurred in connection with such meetings.
The Fund currently pays the Adviser a fee of $37,500 per annum for Chief
Compliance Officer services and reimburses out-of-pocket expenses incurred in
connection with providing services in this role.
4. PURCHASES AND SALES OF SECURITIES
For the six months ended May 31, 2007, the cost of purchases and proceeds
from sales of securities excluding short-term investments, aggregated
$91,112,559 and $91,030,712, respectively.
At May 31, 2007, the aggregate cost of securities for federal income tax
purposes was $229,316,453, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $11,654,298
and the aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $1,872,882.
Written option transactions during the six months ended May 31, 2007, are
summarized as follows:
CONTRACT PREMIUMS
AMOUNTS RECEIVED
Written options outstanding at beginning of year ......... 0 $ 0
--------------------------------------------------------------------------------
Options Opened ........................................... 110 100,884
Options Exercised ........................................ 0 0
Options Expired .......................................... 0 0
Options Closed ........................................... 0 0
--------------------------------------------------------------------------------
Written options outstanding at end of period ............. 110 $100,884
26
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
5. COMMON STOCK
At May 31, 2007, 240,000,000 shares of $0.01 par value Common Stock were
authorized.
Common Stock Transactions were as follows:
SIX MONTHS ENDED YEAR ENDED
05/31/07 11/30/06
---------------- -----------------
SHARES AMOUNT SHARES AMOUNT
------- ------ ------- ------
Shares issued under the Dividend Reinvestment and
Cash Purchase Plan .................................. 34,943 $564,643 101,308 $1,571,205
------- -------- ------- ----------
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 MMP(R)
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, if any, between auction dates.
At May 31, 2007, 800 shares of MMP(R) were outstanding at the annualized
rate of 4.08%. 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.
27
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
7. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY
The Fund invests primarily in a diversified portfolio of preferred
securities. This includes traditional preferred stocks eligible for the
inter-corporate dividends received deduction ("DRD") and 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 companies in the utility industry 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 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, if unrated, judged to be comparable in quality by the Adviser, in any 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 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 (a) if an issuer can
defer payment of income for eighteen months or more without triggering an event
of default and (b) if such issue is a junior and fully subordinated liability of
an issuer or its ultimate guarantor.
In addition to foreign money market securities, the Fund may invest up to
30% of its total assets in the 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.
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
investment policies, involving any or all of the following: short sales of
securities, futures contracts, interest rate swaps, swap futures, options on
futures contracts, options on securities, swaptions and certain credit
derivative transactions, including, but not limited to, the purchase and sale of
credit protection. As in the case of when-issued securities, the use of
over-the-counter derivatives, such as interest rate swaps, swaptions, and credit
default swaps may expose the Fund to greater credit, operations, liquidity, and
valuation risk than is the case with regulated, exchange traded futures and
options. These transactions are used for hedging or other appropriate
risk-management purposes, or, under certain other circumstances, to increase
return. No assurance can be
28
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Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
given that such transactions will achieve their desired purposes or will result
in an overall reduction of risk to the Fund.
9. SECURITIES LENDING
The Fund may lend up to 15% of its total assets (including the value of the
loan collateral) to certain qualified brokers in order to earn additional
income. The Fund receives compensation in the form of fees or interest earned on
the investment of any cash collateral received. The Fund also continues to
receive interest and dividends on the securities loaned. The Fund receives
collateral in the form of cash or securities with a market value at least equal
to the market value of the securities on loan, including accrued interest. In
the event of default or bankruptcy by the borrower, the Fund could experience
delays and costs in recovering the loaned securities or in gaining access to the
collateral. The Fund has the right under the lending agreement to recover the
securities from the borrower on demand.
29
--------------------------------------------------------------------------------
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 their 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 ("NYSE") 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 six months ended May 31, 2007, no brokerage
commissions were incurred.
The automatic reinvestment of dividends and capital gains distributions
will not relieve Plan participants of any income tax that may be payable on the
dividends or capital gains distributions. A participant in the Plan will be
treated for Federal income tax purposes as having received, on the dividend
payment date, a dividend or distribution in an amount equal to the cash that the
participant could have received instead of shares.
30
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
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 AND PROXY VOTING RECORD ON FORM N-PX
The Fund files Form N-PX with its complete proxy voting record for the 12
months ended June 30th no later than August 31st of each year. The Fund filed
its latest Form N-PX with the Securities and Exchange Commission ("SEC") on
August 16, 2006. This filing, as well as 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 and (ii) on the SEC's website at
WWW.SEC.GOV. In addition, the Fund's proxy voting policies and procedures are
available on the Fund's website at WWW.PREFERREDINCOME.COM.
PORTFOLIO SCHEDULE ON FORM N-Q
The Fund files a complete schedule of portfolio holdings with the SEC for
the first and third fiscal quarters on Form N-Q, the latest of which was filed
for the quarter ended February 28, 2007. The Fund's Form N-Q is available on the
SEC's website at WWW.SEC.GOV or may be viewed and obtained from the SEC's Public
Reference Room in Washington D.C. Information on the operation of the Public
Reference Section may be obtained by calling 1-800-SEC-0330.
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, 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.
31
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
CERTIFICATIONS
Included in the Annual Written Affirmation submitted to the NYSE, Donald F.
Crumrine, as the Fund's Chief Executive Officer, has certified that, as of May
16, 2007, he was not aware of any violation by the Fund of applicable NYSE
corporate governance listing standards. The Fund's reports to the SEC on Forms
N-CSR and N-Q contain certifications by the Fund's principal executive officer
and principal financial officer that relate to the Fund's disclosure in such
reports and that are required by Rule 30a-2(a) under the 1940 Act.
MEETING OF SHAREHOLDERS
On April 20, 2007, the Fund held its Annual Meeting of Shareholders (the
"Meeting") for the following purpose: election of Directors of the Fund
("Proposal 1"). The proposal was approved by the shareholders and the results of
the voting are as follows:
PROPOSAL 1: ELECTION OF DIRECTORS
NAME FOR WITHHELD
COMMON STOCK
Morgan Gust .............................................. 9,664,221 93,390
Donald F. Crumrine, David Gale, Karen H. Hogan and Robert F. Wulf continue
to serve in their capacities as Directors of the Fund.
32
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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:
DAVID GALE Director Class I Director President & CEO of 4 Metromedia International
Delta Dividend Group, Inc. since January 1997 Delta Dividend Group, Inc.
220 Montgomery Street Group, Inc. (investments) (telecommunications);
Suite 426 Flaherty & Crumrine
San Francisco, CA 94104 Preferred Income
Age: 58 Opportunity Fund;
Flaherty & Crumrine/
Claymore Preferred
Securities Income Fund;
and Flaherty & Crumrine/
Claymore Total Return
Fund
MORGAN GUST Director Class III Director Retired; Former 4 CoBiz, Inc. (financial
301 E. Colorado Boulevard since January 1991 President of Giant services); Flaherty &
Suite 720 Industries, Inc. (petroleum Crumrine Preferred
Pasadena, CA 91101 refining and marketing) Income Opportunity
Age: 60 since March 2002 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 2008 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 2009 Annual Meeting
of Shareholders; directors may continue in office until their successors are
duly elected and qualified.
CLASS III DIRECTOR - three year term expires at the Fund's 2010 Annual Meeting
of Shareholders; director may continue in office until his successor is duly
elected and qualified.
33
--------------------------------------------------------------------------------
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:
KAREN H. HOGAN+ Director Class I Director Retired; Community 4 Flaherty & Crumrine
301 E. Colorado Boulevard since April 2005 Volunteer; from September Preferred Income
Suite 720 1985 to January 1997, Opportunity Fund;
Pasadena, CA 91101 Senior Vice President of Flaherty & Crumrine/
Age: 46 Preferred Stock Origination Claymore Preferred
at Lehman Brothers and Securities Income
previously, Vice President of Fund; and Flaherty &
New Product Development Crumrine/Claymore
Total Return Fund
ROBERT F. WULF Director Class II Director Financial Consultant; 4 Flaherty & Crumrine
P.O. Box 753 since January 1991 Trustee, University of Preferred Income
Neskowin, Oregon 97149 Oregon Foundation; Opportunity Fund;
Age: 70 Trustee, San Francisco Flaherty & Crumrine/
Theological Seminary Claymore Preferred
Securities Income
Fund; and Flaherty &
Crumrine/Claymore
Total Return Fund
INTERESTED
DIRECTOR:
DONALD F. CRUMRINE+, ++ Director, Class II Director Chairman of the Board 4 Flaherty & Crumrine
301 E. Colorado Boulevard Chairman since January 1991 and Director of Flaherty & Preferred Income
Suite 720 of the Board Crumrine Incorporated Opportunity Fund;
Pasadena, CA 91101 and Chief Flaherty & Crumrine/
Age: 59 Executive Officer 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 2008 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 2009 Annual Meeting
of Shareholders; directors may continue in office until their successors are
duly elected and qualified.
CLASS III DIRECTOR - three year term expires at the Fund's 2010 Annual Meeting
of Shareholders; director may continue in office until his successor is duly
elected and qualified.
+ As a Director, represents holders of the Fund's Money Market Cumulative
Preferred(TM) Stock.
++ "Interested person" of the Fund as defined in the Investment Company Act of
1940, as amended. Mr. Crumrine is considered an "interested person" because
of his affiliation with Flaherty & Crumrine Incorporated, which acts as the
Fund's investment adviser.
34
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
PRINCIPAL
TERM OF OFFICE OCCUPATION(S)
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS
OFFICERS:
ROBERT M. ETTINGER President Since President and Director of
301 E. Colorado Boulevard October 2002 Flaherty & Crumrine
Suite 720 Incorporated
Pasadena, CA 91101
Age: 48
R. ERIC CHADWICK Chief Financial Since Director of Flaherty & Crumrine
301 E. Colorado Boulevard Officer, Vice October 2002 Incorporated since June 2006; Vice
Suite 720 President and President of Flaherty & Crumrine
Pasadena, CA 91101 Treasurer Incorporated since August 2001
Age: 32
CHAD C. CONWELL Chief Compliance Since Chief Compliance Officer of
301 E. Colorado Boulevard Officer, Vice July 2005 Flaherty & Crumrine Incorporated
Suite 720 President and since September 2005; Vice President of
Pasadena, CA 91101 Secretary Flaherty & Crumrine Incorporated since July
Age: 34 2005; Attorney with Paul, Hastings, Janofsky
& Walker LLP from September 1998
through June 2005
BRADFORD S. STONE Vice President Since Director of Flaherty & Crumrine
392 Springfield Avenue and Assistant July 2003 Incorporated since June 2006; Vice
Mezzanine Suite Treasurer President of Flaherty & Crumrine
Summit, NJ 07901 Incorporated since May 2003;
Age: 47 Director of U.S. Market Strategy at
Barclays Capital from June 2001 to
April 2003
LAURIE C. LODOLO Assistant Since
301 E. Colorado Boulevard Compliance July 2004 Assistant Compliance Officer of
Suite 720 Officer, Assistant Flaherty & Crumrine Incorporated
Pasadena, CA 91101 Treasurer and since August 2004; Secretary of
Age: 43 Assistant Secretary Flaherty & Crumrine Incorporated since
February 2004; Account Administrator
of Flaherty & Crumrine Incorporated
since January 1987
35
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF CONTINUANCE OF INVESTMENT ADVISORY
AGREEMENT
During the six month period ended May 31, 2007, the Board of Directors of
the Fund approved the continuation of the investment advisory agreement with the
Adviser (the "Agreement"). The following paragraphs summarize the material
information and factors considered by the Board, including the Independent
Directors, as well as their conclusions relative to such factors.
In considering whether to approve the Fund's Agreement, the Board members
considered and discussed a substantial amount of information and analysis
provided, at the Board's request, by the Adviser. The Board members also
considered detailed information regarding performance and expenses of other
investment companies thought to be generally comparable to the Fund. The Board
members discussed with management this and other information relating to the
Agreements during the Special Meeting held on January 12, 2007 for that specific
purpose and requested additional information about comparative expenses. In
reaching their determinations relating to continuance of the Agreement, the
Board members considered these discussions and all other factors they believed
relevant, including the factors discussed below. In their deliberations, the
Board members did not identify any particular information that was all-important
or controlling, and Board members may have attributed different weights to the
various factors. The Board members evaluated this information, and all other
information available to them, for the Fund, and their determinations were made
separately in respect of each other fund advised by the Adviser. In particular,
as they had in past years, the Board members focused on the following with
respect to the Fund.
NATURE, EXTENT AND QUALITY OF SERVICES
The Board members reviewed in detail the nature and extent of the services
provided by the Adviser and the quality of those services over the past year and
since inception. The Board members noted that these services included managing
the Fund's investment program, as well as providing significant administrative
services beyond what the Agreement required. The Board members noted that the
Adviser also provided, generally at its expense: office facilities for use by
the Fund; personnel responsible for supervising the performance of
administrative, accounting and related services; and investment compliance
monitoring. The Board members also considered the Adviser's sound financial
condition and the Adviser's commitment to its business, as evidenced by its
hiring additional personnel as the business has grown. The Board members
evaluated the Adviser's services based on their direct experience serving as
Directors for many years, focusing on (i) the Adviser's knowledge of the
preferred securities market generally and the sophisticated hedging strategies
the Fund employs and (ii) the Adviser's culture of compliance. The Board members
reviewed the personnel responsible for providing services to the Fund and
observed that, based on their experience and interaction with the Adviser: (1)
the Adviser's personnel exhibited a high level of personal integrity, diligence
and attention to detail in carrying out their responsibilities under the
Agreement; (2) the Adviser was responsive to requests of the Board and its
personnel were available between Board meetings to answer questions from Board
members; and (3) the Adviser had kept the Board apprised of developments
relating to the Fund. The Board members also considered the continued efforts
undertaken by the Adviser to maintain an effective
36
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
compliance program. The Board members concluded that the nature and extent
of the services provided were reasonable and appropriate in relation to the
Fund's investment goals and strategies, the corporate and regulatory environment
in which the Fund operates, and the level of services provided by the Adviser,
and that the quality of the Adviser's service continues to be high.
INVESTMENT PERFORMANCE
The Board members considered the Fund's performance since inception,
including its performance in recent fiscal periods, to determine whether the
Fund had met its investment objective. The Board members determined that the
Fund had done so, especially in light of existing extraordinary market
conditions, which include rising short-term rates and a relatively flat yield
curve, conditions that reduce hedging benefits. In reaching this conclusion, the
Board members reviewed the Fund's performance compared to relevant indices and
funds thought to be generally comparable to the Fund, considered the costs and
benefits of the Fund's hedging strategy in the relevant market environment and
examined the differences between the Fund and certain funds in the comparison
group, including the significant positions in common equities of a number of
preferred stock funds. The Board members noted the Fund's adherence to its
respective investment mandate. The Board members also considered that recent
relative underperformance was attributable largely to the Fund's stated hedging
strategies, which have been a central aspect of the Fund's investment program
since inception.
PROFITABILITY
The Board members considered the Adviser's methodology for determining its
profitability with respect to the Fund, and the Adviser's profit margin on an
after-tax basis attributable to managing the Fund. The Board members concluded
that the profitability to the Adviser was not excessive based on the
considerable services it provides to the Fund, the Fund's relative performance
over time, its success in meeting the Fund's investment objective and the Fund's
relatively low expense ratio compared to funds with similar investment
objectives and strategies. The Board members also considered that the Adviser
provided, at a lower cost, services to separate account clients and determined
that the difference was justified in light of the additional services and costs
associated with managing registered investment companies, such as the Fund. The
Board members accepted the Adviser's statement that it did not realize material
indirect benefits from its relationship with the Fund and did not obtain soft
dollar credits from securities trading.
ECONOMIES OF SCALE
The Board members noted that the Fund, as a closed-end investment company,
was not expected to increase materially in size; thus, the Adviser would not
benefit from economies of scale. The Board members considered whether economies
of scale could be realized because the Adviser advises other similar funds.
Based on their experience, the Board members accepted the Adviser's explanation
that significant economies of scale would not be realized because of the
complexity of managing preferred securities for separate funds and other
portfolios. Nonetheless, the Board members noted that the Fund's advisory fee
schedule declines as assets increase beyond a certain level (commonly known as a
"breakpoint"), and that breakpoints provide for a sharing with shareholders of
benefits derived as a
37
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
result of economies of scale arising from increased assets. Accordingly,
the Board members determined that the existing advisory fee levels reflect
possible economies of scale.
In light of their discussions and considerations as described above, the
Board members made the following determinations as to the Fund:
o the nature and extent and quality of the services provided by the Adviser
are reasonable and appropriate and the quality of the services is high;
o the Fund's overall performance was satisfactory, given market conditions;
o the fee paid to the Adviser was reasonable in light of (i) comparative
performance and expense and advisory fee information, (ii) the cost
of the services provided and profits to be realized, and (iii) the
benefits derived or to be derived by the Adviser from the relationship
with the Fund; and
o there were not at this time significant economies of scale to be realized
by the Adviser in managing the Fund's assets, and the fee was structured
to provide for a sharing of the benefits of economies of scale.
Based on these conclusions, the Board members determined that approval of
the Agreement was in the best interests of the Fund and its shareholders.
38
DIRECTORS
Donald F. Crumrine, CFA
Chairman of the Board
David Gale
Morgan Gust
Karen H. Hogan
Robert F. Wulf, CFA
OFFICERS
Donald F. Crumrine, CFA
Chief Executive Officer
Robert M. Ettinger, CFA
President
R. Eric Chadwick, CFA
Chief Financial Officer,
Vice President and Treasurer
Chad C. Conwell
Chief Compliance Officer,
Vice President and Secretary
Bradford S. Stone
Vice President and
Assistant Treasurer
Laurie C. Lodolo
Assistant Compliance Officer,
Assistant Treasurer and
Assistant Secretary
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@pfdincome.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
INCORPORATED FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR
REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR
OF ANY SECURITIES MENTIONED IN THIS REPORT.
[GRAPHIC OMITTED]
LIGHTHOUSE GRAPHIC
FLAHERTY & CRUMRINE
PREFERRED INCOME FUND
SEMI-ANNUAL
REPORT
MAY 31, 2007
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.
Schedule of Investments in securities of unaffiliated issuers as of the close of
the reporting period is included as part of the report to shareholders filed
under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
There has been no change, as of the date of this filing, in any of the portfolio
managers identified in response to paragraph (a)(1) of this Item in the
registrant's most recently filed annual report on Form N-CSR.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 407(c)(2)(iv) of Regulation S-K (17 CFR
229.407) (as required by Item 22(b)(15) of Schedule 14A (17 CFR 240.14a-101)),
or this
ITEM 11. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive and principal financial officers,
or persons performing similar functions, 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))) are effective, as of a date within
90 days of the filing date of the report that includes the disclosure
required by this paragraph, 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 second fiscal
quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. 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 23, 2007
----------------------------------------------------------------------------
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 23, 2007
----------------------------------------------------------------------------
By (Signature and Title)* /S/ R. ERIC CHADWICK
-------------------------------------------------------
R. Eric Chadwick, Chief Financial Officer, Treasurer
and Vice President
(principal financial officer)
Date JULY 23, 2007
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.