UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-06179
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FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED
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(Exact name of registrant as specified in charter)
301 E. Colorado Boulevard, Suite 720
PASADENA, CA 91101
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(Address of principal executive offices) (Zip code)
Donald F. Crumrine
Flaherty & Crumrine Inc.
301 E. Colorado Boulevard, Suite 720
PASADENA, CA 91101
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(Name and address of agent for service)
registrant's telephone number, including area code: 626-795-7300
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Date of fiscal year end: NOVEMBER 30, 2004
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Date of reporting period: NOVEMBER 30, 2004
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 450 Fifth Street, NW,
Washington, DC 20549-0609. The OMB has reviewed this collection of information
under the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FLAHERTY & CRUMRINE PREFERRED INCOME FUND
Dear Shareholder:
In retrospect, Fiscal 2004 was a pretty uneventful year for the Flaherty &
Crumrine Preferred Income Fund ("PFD"). The preferred securities in the
portfolio produced respectable returns as long-term interest rates fell modestly
and credit spreads generally narrowed. However, since interest rates moved
within a relatively narrow range throughout the year, the Fund's hedges were a
drag on performance. During the fourth fiscal quarter ended November 30, 2004,
the Fund produced +1.4%(1) total return on net asset value ("NAV"). For the full
fiscal year, the total return on NAV was +5.3%(1). As the table below
demonstrates, the longer-term record of the Fund continues to be excellent.
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TOTAL RETURN PER YEAR ON NET ASSET VALUE(1)
FOR PERIODS ENDING NOVEMBER 30, 2004
ONE FIVE TEN LIFE OF
YEAR YEARS YEARS FUND(2)
------- ------- ------- -------
Flaherty & Crumrine Preferred Income Fund 5.3% 10.2% 10.4% 12.0%
Lipper Domestic Investment Grade Bond Funds(3) 6.2% 7.9% 8.2% 7.9%
----------------
(1) Based on monthly data provided by Lipper Inc. Distributions are assumed to
be reinvested at NAV in accordance with Lipper's practice, which differs
from the procedures used elsewhere in this report.
(2) Since inception on January 31, 1991.
(3) Includes all U.S. Government bond, mortgage bond and term trust and
investment grade bond funds in Lipper's closed-end fund database at each
point in time.
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There was also some good news on the dividend in 2004. In addition to the
regular monthly dividend in December, the Fund made a one-time extra
distribution of $0.065 per share, paid December 31st to holders of record on
December 24, 2004. We have more to say about the dividend in the Question and
Answer section.
For investors in fixed income securities, the past year has turned out to
be one of the more perplexing periods in recent memory. Signs of a pick-up in
domestic economic activity were tempered by high oil (and other commodity)
prices, the declining value of the U.S. dollar, and the U.S. "twin deficits" (of
the government budget and the trade balance). After 31/2 years of lowering
short-term interest rates, the Federal Reserve reversed course in June and began
raising them. By the end of 2004, the Federal Funds rate (the rate controlled by
the Federal Reserve to set the level of short-term interest rates) stood at
2.25%, up from the low of 1.00%. Despite the rise in short-term rates, long-term
rates actually fell by about 25 basis points in 2004, finishing the year at
4.82%. This marks the first time in more than 30 years that long-tem interest
rates fell in the early stages of Fed tightening.
By increasing the Fed Funds rate, the Fed hopes to prevent the economy from
expanding too quickly, which in turn could result in an undesirable increase in
the rate of inflation. At the same time, the Fed does not want to raise rates
too quickly and derail the economy, which in turn would have negative
consequences for corporate credit quality. Because credit quality and inflation
represent the biggest risks to the prices of the long-term fixed income
securities held in the Fund's portfolio, its performance is strongly impacted by
Fed policy.
Although the interest rate environment proved challenging for our hedging
strategy, the markets for preferred securities and corporate bonds continue to
have a favorable tone. We have observed steady improvement in the financial
condition of most U.S. corporations for some time now. As an issuer's quality
improves, the prices for its debt and preferred securities typically outperform
the prices of other benchmark securities, such as U.S. Treasury Bonds. We expect
credit quality will continue to improve in 2005, although we are cautious on the
outlook for corporate yields, which already reflect much of the balance sheet
improvement that companies have achieved.
The composition of the investment portfolio has not changed much during the
past year. The list of top ten holdings (by issuer) looks pretty similar to last
November. The Fund does have a meaningful exposure to the insurance industry (9%
as of November 30th). These positions are well diversified, but the entire
industry has been under careful scrutiny since late October when the New York
State Attorney General's office announced it was investigating the practices of
certain companies. The prices of most debt and preferred securities issued by
insurance companies took a beating when the announcement was made, although they
have since recovered a portion of the decline.
We encourage you to read the following Question and Answer section. We go
into greater detail on several topics mentioned above. In addition, please take
advantage of the Fund's website, WWW.PREFERREDINCOME.COM. It contains a wide
range of useful and up-to-date information about the Fund.
Sincerely,
/S/ DONALD F. CRUMRINE /S/ ROBERT M. ETTINGER
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
January 21, 2005
2
QUESTIONS & ANSWERS
WHERE DID THE FUND GET THE MONEY TO PAY AN EXTRA DIVIDEND IN DECEMBER?
We try to set a monthly dividend rate that results in all of the Fund's net
investment income getting fully distributed. To quote our former Chairman Bob
Flaherty, "We simply ran out of YEAR before we ran out of INCOME." The low cost
of the Fund's leverage during the first half of the year enabled the Fund to
accumulate some extra income. We didn't increase the dividend at the time
because it seemed unlikely that short-term rates would remain so low. That extra
income comprised most of the special distribution in December.
WHAT IS THE OUTLOOK FOR THE FUND'S DIVIDEND IN 2005?
PFD is not immune to the factors which have led many income oriented funds
to reduce their monthly dividends. If short-term interest rates continue to
rise, the cost of the Fund's leverage will certainly go up, eating into the
Fund's income available for dividends. If long-term interest rates go up, the
Fund's hedges should make money that can be used to buy more income producing
securities. And finally, changes in the difference between long and short-term
rates will affect the cost of the Fund's hedging strategy. It is hard enough to
predict just one of the factors, let alone all three!
WHY DOESN'T THE FUND LOCK-IN THE COST OF ITS LEVERAGE IF SHORT-TERM INTEREST
RATES ARE HEADING UP?
There are a variety of techniques the Fund could employ to lock-in a rate,
but it is not possible to do so at rates as low as the Fund is currently paying.
Each of these alternative strategies is ultimately a bet that the rate the Fund
could lock-in for an extended period would end up being less than the average
rate paid over successive shorter periods.
For example, say the Fund's leverage currently costs 2% (at an annual rate)
but is subject to change every seven weeks. Alternatively, the Fund could lock
in its leverage cost at 3% for one year. Assuming that the cost of the leverage
goes up steadily over the year, the rate would have to DOUBLE to more than 4%
for the Fund to be better off locking-in the 3% rate at the beginning of the
year. Thus, any attempt to lock-in is simply saying that we think short-term
rates are going to rise faster and higher than the consensus of the market.
When it comes to predicting interest rates, we don't think we have any
competitive advantage over the market. Moreover because we hedge 100% of the
assets in the portfolio, the Fund already has a substantial degree of protection
against higher rates. Finally, there are additional costs entailed in
locking-in. In short, we monitor these opportunities, but to date we don't
believe it has made sense.
HOW DID THE PREFERRED SECURITIES IN THE FUND'S PORTFOLIO PERFORM?
The Fund's holdings of preferred securities have continued to produce very
respectable returns. One technique for measuring the performance is to look at
the total return on the investment portfolio before the impact of expenses,
leverage and hedging. In fiscal 2004, this number was just under 8.5% for PFD.
For comparison, an investor in the 30 year U.S. Treasury Bond would have earned
roughly 6.8% for the same period. Recall that total return is comprised of
income and principal change. In 2004, each of these components contributed about
the same amount to the performance differential. PFD is all about income, so
anytime principal change goes our way, it's icing on the cake!
3
As we mentioned earlier, the costs of the Fund's hedges offset some of this
return, but it's important to remember a basic principle of the Fund: IT IS
BETTER TO HAVE THE HEDGE "INSURANCE" AND NOT NEED IT THAN TO NEED THE HEDGE
"INSURANCE" AND NOT HAVE IT.
For long-time followers of the Fund's portfolio, this report is a bit of a
watershed. After the market closed this past November 30th, JP Morgan Chase
announced its intent to retire three series of adjustable rate preferred stock
("ARPS"). As some may remember, the Fund got its start investing primarily in
ARPS. In fact, the unusual features of these securities helped us shape the
Fund's income objective. The ARPS universe has shrunk dramatically over the
years as new and different types of preferreds have been developed.
When JP Morgan announced the call of ARPS, it was a mixed blessing for the
Fund. One of the issues called was the largest holding in the Fund (5.7%). The
call price was roughly a 10% premium to the closing market price, so there was
an immediate boost to the Fund's NAV. However, finding suitable replacements
will take some time. We typically try to avoid exposing the Fund to this type of
re-investment risk by owning securities that offer call protection--either
because the issuer can't call them for some period of time, or because the
security is trading well below the call price. In the case of the JP Morgan
ARPS, despite the premium of the call price over the market price, the company
still found it prudent to call the issue.
WHAT PORTION OF THE 2004 DISTRIBUTIONS WILL BE QUALIFIED DIVIDEND INCOME?
For individual investors in PFD, 78.15% of the distribution made by the
Fund in CALENDAR YEAR 2004 was qualified dividend income (QDI). For corporate
investors, 77.92% was eligible for the inter-corporate dividends received
deduction (DRD). It is important to remember the composition of the portfolio
and the income distributions are likely to change from one year to the next.
Shareholders should not assume that the QDI or DRD portions of next year's
distributions will be the same (or even similar) to this year's.
HAS THE FUND MADE ANY CHANGES TO ITS INVESTMENT POLICIES?
The Fund regularly updates investment policies to reflect changes in the
market. For example, the Board approved a higher limit on securities of foreign
issuers in April 2004 in response to sizable issuance - at attractive yields -
by those issuers. Similarly, in the Semiannual Report to Shareholders, we
indicated that the Fund was considering the ability to purchase credit
protection through the use of credit derivatives. In July, that investment
policy change was approved by the Board, although to date the Fund has not
purchased credit derivatives.
Recently, the Board expanded the Fund's investment policies to allow it to
make use of a wider range of derivative instruments. The new policies give the
investment adviser additional tools to manage the Fund's interest rate hedges
and credit exposure. For readers interested in a more detailed discussion, we
have outlined the specific changes below and summarized the benefits and risks
of these strategies to the Fund.
While these investment policy changes are extensive, none of them represent
a wholesale shift in the way the Fund intends to manage the portfolio. Moreover,
the fact that the policies are in place does not necessarily mean we will use
them right away; we simply want to be prepared to take advantage of
opportunities as they present themselves now or in the future. Viewed in that
light, the changes are a natural evolution of the Fund's investment policies in
response to a changing marketplace.
4
WHAT ARE THE BENEFITS OF PARTICIPATING IN THE FUND'S DIVIDEND REINVESTMENT PLAN?
We all know the fable of the tortoise and the hare. The tortoise won simply
because he was persistent. For investors who are similarly inclined toward a
steady, reliable approach to building wealth, the Fund offers the Dividend
Reinvestment and Cash Purchase Plan, unglamorously nicknamed the "DRIP".
Why invest in the DRIP?
o Disciplined monthly investing in both good and bad markets
o When shares trade below the NAV, the Fund purchases shares in the market
o When shares trade above the NAV, shares are issued at the higher of NAV
or 95% of the current market price
To obtain information on the DRIP, contact your brokerage firm and ask if
they are set up to participate. For investors who hold their shares in
certificate form, contact the DRIP's agent, PFPC Inc., at 1-800-331-1710.
5
INVESTMENT POLICY MODIFICATIONS
SUMMARY OF RISKS AND BENEFITS
The Board approved the use of interest rate swaps, swap futures and
Eurodollar futures contracts for interest rate hedging purposes. The new policy
will allow the Fund to further diversify potential hedging instruments beyond
Treasury-based contracts, potentially improving hedge performance or lowering
cost.
The Board also approved the sale of credit derivatives as an alternative to
buying a corporate security, up to a limit of one-third of Fund assets. This
will allow the Fund to pursue various "synthetic asset" strategies, whereby it
can acquire exposure to particular credits and manage its interest rate exposure
more efficiently than it could dealing only in cash securities. In essence,
there may be times when we can sell credit protection via credit derivatives at
wider spreads (or with better call protection) than where we can purchase a
portfolio security, resulting in higher returns for shareholders. We will not
use credit derivatives to LEVERAGE credit exposure, but rather as an ALTERNATIVE
to buying a security of a particular issuer. The ability to buy and sell
synthetic assets offers another way for active management of the Fund to add
value to shareholders.
Of course, using derivative securities entails risks. There are
counterparty risks on over-the-counter derivatives and exchange-traded futures
contracts. These risks are limited by proper documentation, collateralization,
daily valuation, and the high credit standing of approved swap counterparties
and the futures exchanges, but the Fund is exposed to valuation changes in a
contract between the time the collateral or margin requirement arises and when
it receives such collateral or margin payments. Second, there is basis risk
between the derivative contracts and the Fund's investments. LIBOR-based hedges
may or may not correlate with underlying portfolio assets as well as our current
Treasury-based hedges, possibly resulting in poorer hedge performance. Credit
derivatives may not perform in the same way as cash securities. In particular,
the timing of payments on a credit default swap and the events that trigger
those payments may be materially different than on a cash security, possibly
requiring the Fund to liquidate assets at disadvantageous prices or leaving the
Fund with additional interest rate risk. We intend to monitor and evaluate those
risks on an ongoing basis, but shareholders should be aware that they exist.
The Board approved rules to permit the Fund to buy or sell option spreads,
which may allow the Fund to reduce the cost of hedging or add total return in
periods of high implied volatility. The Fund has always had the ability to sell
options, but the new policy clarifies the special situation of selling options
when much or all of its risk is covered by a long position in another option.
However, the sale of any option may limit the return on an asset (for example,
in the case of a call spread) or reduce the protection from a hedge (for
example, in the case of a put spread), possibly resulting in poorer performance.
Finally, the Board authorized the Fund to engage in securities lending on
up to 15% of total assets. Certain securities held in the portfolio may be lent
profitably by the Fund. Proceeds from any securities loan will be invested in a
fund managed according to SEC guidelines applicable to money market funds.
Essentially, we would borrow money at a rate lower than where we would reinvest
the proceeds. We would not take incremental interest rate risk, as both the
borrowing and reinvestment would be short-term. There are risks to securities
lending, however. There is counterparty risk on the securities lending side of
the transaction. Although risk is limited since the loan is collateralized by
cash, the Fund could suffer losses if the counterparty fails to return
securities that have risen in value. There is also investment risk on the
proceeds from the securities loans: These monies are invested in short-term
investments, and if those investments lose value, the Fund will still owe the
amount borrowed. We intend to mitigate this risk by investing proceeds from
securities lending in a short-term fund managed according to SEC guidelines
applicable to money market funds.
6
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Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OVERVIEW (UNAUDITED)
NOVEMBER 30, 2004
------------------------------------------------------
FUND STATISTICS ON 11/30/04
------------------------------------------
Net Asset Value $ 15.49
Market Price $ 17.42
Premium 12.46%
Yield on Market Price 6.54%
Common Shares
Outstanding 10,269,304
MOODY'S RATINGS % OF PORTFOLIO
------------------------------------------
Aaa 0.5%
Aa 6.0%
A 32.2%
Baa 39.6%
Ba 14.5%
Not Rated 4.7%
------------------------------------------
Below Investment Grade* 13.8%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND
S&P.
INDUSTRY CATEGORIES % OF PORTFOLIO
-----------------------------------------------------
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS IN PRINTED GRAPHIC
Utilities ........... 43%
Banks ............... 29%
Financial Services .. 11%
Insurance ........... 9%
Oil and Gas ......... 4%
Other ............... 3%
REITs ............... 1%
TOP 10 HOLDINGS BY ISSUER % OF
(PARENT COMPANY) PORTFOLIO
-----------------------------------------------------
J.P. Morgan Chase 6.7%
Interstate Power 5.3%
Lehman Brothers 4.8%
Citigroup 4.7%
Duke Energy 3.8%
North Fork Bancorporation 3.7%
Alabama Power 3.4%
ABN AMRO 3.3%
Zurich RegCaPS 3.3%
SLM Corporation 2.9%
% OF PORTFOLIO**
---------------------------------------------------------------------------------------------------------------------
Holdings Generating Qualified Dividend Income (QDI) for Individuals 75%
Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD) 75%
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** 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. SEE ACCOMPANYING NOTES TO THE FINANCIAL
STATEMENTS FOR THE TAX CHARACTERIZATION OF 2004 DISTRIBUTIONS.
7
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Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 2004
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- 93.2%
BANKING -- 28.8%
---------------------------------------------------------------------------------------------------------------------
ABN AMRO North America, Inc.:
3,625 6.46% Pfd., 144A*** ............................................................. $ 3,754,104*
4,000 6.59% Pfd., 144A*** ............................................................. 4,188,960*
400 BancWest Capital I, 9.50% Pfd. 12/01/30 ........................................... 10,714(1)
$ 750,000 Barnett Capital II, 7.95% 12/01/26 Capital Security ............................... 822,615
$ 1,500,000 BT Preferred Capital Trust II, 7.875% 02/25/27 Capital Security ................... 1,639,357(1)
$ 250,000 Chase Capital I, 7.67% 12/01/26 Capital Security .................................. 270,417
Citigroup, Inc.:
123,927 5.864% Pfd., Series M ........................................................... 6,377,283*
9,876 6.213% Pfd., Series G ........................................................... 513,848*
51,500 6.231% Pfd., Series H ........................................................... 2,699,372*
31,850 6.365% Pfd., Series F ........................................................... 1,670,055*
Cobank, ACB:
50,000 7.00% Pfd., 144A*** ............................................................. 2,672,750*
75,000 Adj. Rate Pfd., 144A*** ......................................................... 4,204,500*
$ 500,000 Comerica (Imperial) Capital Trust I, 9.98% 12/31/26 Capital Security, Series B .... 596,437
$ 2,250,000 First Hawaiian Capital I, 8.343% 07/01/27 Capital Security, Series B .............. 2,510,123(1)
$ 1,500,000 First Union Capital II, 7.95% 11/15/29 Capital Security ........................... 1,822,148
$ 906,000 First Union Institutional Capital I, 8.04% 12/01/26 Capital Security .............. 990,403
$ 1,820,000 First Union Institutional Capital II, 7.85% 01/01/27 Capital Security ............. 1,994,538
$ 7,820,000 GreenPoint Capital Trust I, 9.10% 06/01/27 Capital Security ....................... 8,944,594
34,200 HSBC USA, Inc., $2.8575 Pfd. ...................................................... 1,768,995*
J.P. Morgan Chase & Co.:
37,500 6.625% Pfd., Series H ........................................................... 2,044,688*
147,775 Adj. Rate Pfd., Series A ........................................................ 13,595,300*
$ 270,000 Keycorp Institutional Capital B, 8.25% 12/15/26 Capital Security .................. 296,609
$ 674,000 NB Capital Trust II, 7.83% 12/15/26 Capital Security .............................. 738,323
16,500 Regions Financial Trust I, 8.00% Pfd. ............................................. 438,653
$ 2,635,000 Republic New York Capital II, 7.53% 12/04/26 Capital Security ..................... 2,840,148(1)
$ 1,200,000 Wachovia Capital Trust V, 7.965% 06/01/27 Capital Security, 144A*** ............... 1,321,452
7,500 Wachovia Preferred Funding, 7.25% Pfd., Series A .................................. 211,013
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68,937,399
----------------
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)
NOVEMBER 30, 2004
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
FINANCIAL SERVICES -- 11.0%
---------------------------------------------------------------------------------------------------------------------
The Bear Stearns Companies, Inc.:
63,100 5.49% Pfd., Series G ............................................................ $ 3,122,819*
62,540 5.72% Pfd., Series F ............................................................ 3,160,459*
Freddie Mac:
6,975 5.00% Pfd., Series F ............................................................ 297,170*
28,350 5.30% Pfd ....................................................................... 1,280,286*
Lehman Brothers Holdings, Inc.:
68,280 5.67% Pfd., Series D ............................................................ 3,283,244*
154,475 5.94% Pfd., Series C ............................................................ 7,716,799*
15,000 6.50% Pfd., Series F ............................................................ 395,775*
123,805 SLM Corporation, 6.97% Pfd., Series A ............................................. 7,017,886*
-------------------------------------------------------------------------------------------------------------------
26,274,438
----------------
INSURANCE -- 8.2%
---------------------------------------------------------------------------------------------------------------------
$ 2,000,000 AON Capital Trust A, 8.205% 01/01/27 Capital Security ............................. 2,023,270
21,000 Everest Re Capital Trust II, 6.20% Pfd., Series B ................................. 500,535(1)
$ 5,150,000 MMI Capital Trust I, 7.625% 12/15/27 Capital Security, Series B ................... 5,647,593
18 Premium Assets, Series A, Zurich RegCaPS Variable Inverse Pfd., Pvt. .............. 1,900,372*
$ 4,000,000 Provident Financing Trust I, 7.405% 03/15/38 Capital Security ..................... 3,396,880
7,000 St. Paul Capital Trust I, 7.60% Pfd. .............................................. 184,030
Zurich RegCaPS Funding Trust:
2,850 6.01% Pfd., 144A*** ............................................................. 2,895,443*
2,950 6.58% Pfd., 144A*** ............................................................. 3,046,598*
-------------------------------------------------------------------------------------------------------------------
19,594,721
----------------
UTILITIES -- 38.5%
---------------------------------------------------------------------------------------------------------------------
Alabama Power Company:
300 4.52% Pfd. ...................................................................... 26,289*
5,734 4.72% Pfd. ...................................................................... 524,690*
34,100 5.20% Pfd. ...................................................................... 823,515*
275,000 5.30% Pfd. ...................................................................... 6,712,750*
10,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ......................... 1,044,750*
10,100 Boston Edison Company, 4.78% Pfd. ................................................. 946,420*
Central Hudson Gas & Electric Corporation:
5,000 4.35% Pfd., Series D, Pvt. ...................................................... 401,100*
900 4.96% Pfd., Series E, Pvt. ...................................................... 79,466*
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)
NOVEMBER 30, 2004
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
10,000 Central Illinois Light Company, 4.64% Pfd. ........................................ $ 900,300*
11,000 Central Illinois Public Service Corporation, 4.90% Pfd. ........................... 1,045,110*
22,239 Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt. ......... 2,313,523*
Connecticut Light & Power Company:
2,024 4.50% Pfd., Pvt. ................................................................ 79,958*
9,300 5.28% Pfd. ...................................................................... 435,194*
1,905 6.56% Pfd., Series 1968 ......................................................... 98,660*
15,778 $3.24 Pfd. ...................................................................... 802,390*
2,100 Consolidated Edison Company of New York, 4.65% Pfd., Series C ..................... 186,942*
2,886 Dayton Power and Light Company, 3.90% Pfd., Series C .............................. 197,503*
Duke Energy Corporation:
4,556 4.50% Pfd., Series C, Pvt. ...................................................... 381,542*
26,851 6.75%, Sinking Fund Pfd., Series X .............................................. 2,775,856*
519 7.04% Pfd., Series Y ............................................................ 53,582*
30,762 7.85% Pfd., Series S ............................................................ 3,189,558*
Duquesne Light Company:
7,675 4.10% Pfd. ...................................................................... 267,359*
6,330 4.15% Pfd. ...................................................................... 223,196*
910 4.20% Pfd. ...................................................................... 32,473*
25,775 6.50% Pfd. ...................................................................... 1,350,739*
5,490 $2.10 Pfd., Series A ............................................................ 195,911*
5,000 Energy East Capital Trust I, 8.25% Pfd. ........................................... 133,475
Entergy Arkansas, Inc.:
5,407 7.32% Pfd. ...................................................................... 564,680*
11,350 7.40% Pfd. ...................................................................... 1,181,365*
5,030 7.80% Pfd. ...................................................................... 526,314*
3,822 7.88% Pfd. ...................................................................... 399,036*
30,266 $1.96 Pfd. ...................................................................... 757,407*
4,555 Entergy Gulf States, Inc., 7.56% Pfd. ............................................. 463,950*
Entergy Louisiana, Inc.:
260 7.84% Pfd. ...................................................................... 27,197*
106,138 8.00% Pfd., Series 92 ........................................................... 2,677,862*
8,600 Entergy Mississippi, Inc., 7.44% Pfd. ............................................. 891,519*
10,800 Enterprise Capital Trust I, 7.44% Pfd., Series A .................................. 273,510
Florida Power Company:
17,769 4.58% Pfd. ...................................................................... 1,517,295*
5,157 4.60% Pfd. ...................................................................... 440,176*
18,535 4.75% Pfd. ...................................................................... 1,633,675*
The accompanying notes are an integral part of the financial statements.
10
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Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2004
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
170 Florida Power & Light Company, 4.50% Pfd., Series A, Pvt. ......................... $ 15,011*
50,000 Georgia Power Capital Trust V, 7.125% Pfd. ....................................... 1,347,000
2,010 Great Plains Energy, Inc., 4.50% Pfd. ............................................. 154,840*
$ 3,500,000 Houston Light & Power, Capital Trust II, 8.257%, 02/01/37 Capital Security ........ 3,745,560
8,000 Indiana Michigan Power Company, 6.875% Sinking Fund Pfd. .......................... 810,440*
32,650 Indianapolis Power & Light Company, 5.65% Pfd. .................................... 2,959,559*
384,000 Interstate Power & Light Company, 8.375% Pfd., Series B ........................... 12,543,360*
14,250 Narragansett Electric Company, 4.64% Pfd. ......................................... 620,516*
Northern Indiana Public Service Company:
3,905 7.44% Pfd. ...................................................................... 399,364*
7,465 Adj. Rate Pfd., Series A ........................................................ 379,222*
6,170 Ohio Edison Company, 4.44% Pfd. ................................................... 472,961*
1,724 Ohio Power Company, 5.90% Sinking Fund Pfd. ....................................... 172,391*
Pacific Enterprises:
27,430 $4.50 Pfd. ...................................................................... 2,259,683*
10,000 $4.75 Pfd., Series 53 ........................................................... 869,600*
PacifiCorp:
401 5.40% Pfd. ...................................................................... 39,869*
1,225 $4.56 Pfd. ...................................................................... 102,851*
14,542 $4.72 Pfd. ...................................................................... 1,263,845*
14,388 $7.48 Sinking Fund Pfd. ......................................................... 1,492,539*
5,000 PECO Energy Company, $4.40 Pfd., Series C ......................................... 413,875*
790 Pennsylvania Power Company, 7.75% Pfd. ............................................ 80,228*
11,194 Portland General Electric, 7.75% Sinking Fund Pfd. ................................ 1,149,288*
5,000 PPL Electric Utilities Corporation, 6.75% Pfd. .................................... 522,925*
10,000 Public Service Company of New Mexico, 4.58% Pfd., Series 1965 ..................... 750,650*
29,050 REI Trust I, 7.20% Pfd., Series C ................................................. 740,775
San Diego Gas & Electric Company:
1,200 4.40% Pfd. ...................................................................... 20,154*
700 4.50% Pfd. ...................................................................... 12,019*
67,000 $1.70 Pfd. ...................................................................... 1,746,690*
21,250 $1.7625 Sinking Fund Pfd. ....................................................... 542,406*
125,000 Savannah Electric & Power Company, 6.00% Pfd. ..................................... 3,278,125*
South Carolina Electric & Gas Company:
25,373 5.125% Purchase Fund Pfd., Pvt. ................................................. 1,306,202*
6,703 6.00% Purchase Fund Pfd., Pvt. .................................................. 341,786*
60,000 Southern Union Company, 7.55% Pfd. ................................................ 1,627,200*
The accompanying notes are an integral part of the financial statements.
11
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2004
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
$ 750,000 TXU Electric Capital V, 8.175% 01/30/37 Capital Security .......................... $ 824,284
TXU US Holdings Company:
10,000 $4.00 Pfd., Series TES .......................................................... 712,100*
5,700 $4.00 Pfd., Series TPL .......................................................... 405,897*
1,000 $4.84 Pfd. ...................................................................... 86,165*
Union Electric Company:
14,150 4.56% Pfd. ...................................................................... 1,244,776*
4,000 $7.64 Pfd. ...................................................................... 417,720*
12,500 Virginia Electric & Power Company, $7.05 Pfd. ..................................... 1,289,938*
Wisconsin Power & Light Company:
1,220 4.50% Pfd. ...................................................................... 107,397*
333 4.80% Pfd. ...................................................................... 30,966*
13,000 6.20% Pfd. ...................................................................... 1,334,710*
Xcel Energy, Inc.:
16,030 $4.08 Pfd., Series B ............................................................ 1,160,652*
26,200 $4.10 Pfd., Series C ............................................................ 1,906,312*
22,000 $4.11 Pfd., Series D ............................................................ 1,604,570*
17,750 $4.16 Pfd., Series E ............................................................ 1,310,394*
10,000 $4.56 Pfd., Series G ............................................................ 809,200*
-------------------------------------------------------------------------------------------------------------------
92,002,252
----------------
OIL AND GAS -- 4.2%
---------------------------------------------------------------------------------------------------------------------
17,200 Anadarko Petroleum Corporation, 5.46% Pfd. ........................................ 1,730,578*
7,000 Apache Corporation, 5.68% Pfd., Series B .......................................... 716,415*
5,985 EOG Resources, Inc., 7.195% Pfd., Series B ........................................ 6,480,019*
10,000 Lasmo America Limited, 8.15% Pfd., 144A*** ........................................ 1,124,750*
-------------------------------------------------------------------------------------------------------------------
10,051,762
----------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 0.9%
---------------------------------------------------------------------------------------------------------------------
40,000 Realty Income Corporation, 7.375%, Pfd., REIT, Series D ........................... 1,058,200
40,000 Regency Centers Corporation, 7.25% Pfd., REIT ..................................... 1,029,400
-------------------------------------------------------------------------------------------------------------------
2,087,600
----------------
The accompanying notes are an integral part of the financial statements.
12
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2004
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
MISCELLANEOUS INDUSTRIES -- 1.6%
-------------------------------------------------------------------------------------------------------------------
13,600 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B ......................... $ 1,198,704*
36,200 Farmland Industries, Inc., 8.00% Pfd., 144A*** .................................... 18,100*+
33,250 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A*** ................................ 2,645,869*
26,000 Touch America Holdings, $6.875 Pfd. ............................................... --*+
-------------------------------------------------------------------------------------------------------------------
3,862,673
----------------
TOTAL PREFERRED SECURITIES
(Cost $204,027,120) ............................................................. 222,810,845
----------------
CORPORATE DEBT SECURITY -- 0.5%
UTILITIES -- 0.5%
---------------------------------------------------------------------------------------------------------------------
45,000 Northern States Power Company, 8.00% .............................................. 1,238,400
---------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE DEBT SECURITY
(Cost $1,107,375) ............................................................... 1,238,400
----------------
COMMON STOCK AND CONVERTIBLE SECURITIES -- 4.5%
INSURANCE -- 0.7%
---------------------------------------------------------------------------------------------------------------------
50,000 UnumProvident Corporation, 8.25% Mandatory Convertible, 05/16/06 .................. 1,607,000
-------------------------------------------------------------------------------------------------------------------
1,607,000
----------------
UTILITIES -- 3.8%
---------------------------------------------------------------------------------------------------------------------
107,500 Duke Energy Corporation ........................................................... 2,727,812*
109,500 FPL Group, Inc., 8.50% Mandatory Convertible, Series A, 02/16/05 .................. 6,349,358
-------------------------------------------------------------------------------------------------------------------
9,077,170
----------------
TOTAL COMMON STOCK AND CONVERTIBLE SECURITIES
(Cost $10,319,386) .............................................................. 10,684,170
----------------
OPTION CONTRACTS -- 0.8%
1,450 March Put Options on March U.S. Treasury Bond Futures, Expiring 02/19/05 .......... 1,992,969+
-------------------------------------------------------------------------------------------------------------------
TOTAL OPTION CONTRACTS
(Cost $1,317,283) ............................................................... 1,992,969
----------------
The accompanying notes are an integral part of the financial statements.
13
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2004
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
MONEY MARKET FUND -- 0.5%
1,107,043 BlackRock Provident Institutional, TempFund $ 1,107,043
-------------------------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost $1,107,043) ............................................................... 1,107,043
----------------
TOTAL INVESTMENTS (Cost $217,878,207**) ........................................... 99.5% 237,833,427
OTHER ASSETS AND LIABILITIES (Net) ................................................ 0.5% 1,267,575
--------- ----------------
TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK .......................... 100.0%++ $ 239,101,002
--------- ----------------
MONEY MARKET CUMULATIVE PREFERRED STOCK(TM)(MMP(R)) REDEMPTION VALUE ............................ (80,000,000)
----------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ...................................................... $ 159,101,002
================
-----------------------------
* Securities eligible for the Dividends Received Deduction and distributing
Qualified Dividend Income.
** Aggregate cost of securities held.
*** Securities exempt from registration under Rule 144A of the Securities Act of
1933. These securities may by resold in transactions exempt from
registration to qualified institutional buyers.
(1) Foreign Issuer.
+ Non-income producing.
++ The percentage shown for each investment category is the total value of that
category as a percentage of net assets available to Common and Preferred
Stock.
ABBREVIATIONS:
REIT -- Real Estate Investment Trust
PFD. -- Preferred Securities
PVT. -- Private Placement Securities
Capital Securities are treated as debt instruments for financial
statement purposes and the amounts shown in the Shares/$ Par column
are dollar amounts of par value.
The accompanying notes are an integral part of the financial statements.
14
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2004
------------------------------------------------------
ASSETS:
Investments, at value (Cost $217,878,207)
(See accompanying Portfolio of Investments) ................. $237,833,427
Dividends and interest receivable .............................. 1,998,376
Prepaid expenses ............................................... 86,617
------------
Total Assets ........................................... 239,918,420
LIABILITIES:
Payable for Investments purchased .............................. $ 271,028
Dividends payable to Common Shareholders ....................... 144,168
Investment advisory fee payable ................................ 108,959
Administration, Transfer Agent and Custodian fees and
expenses payable ............................................. 33,586
Professional fees payable ...................................... 56,662
Directors' fees payable ........................................ 1,532
Accrued expenses and other payables ............................ 39,908
Accumulated undeclared distributions to Money Market Cumulative
Preferred(TM) Stock Shareholders ............................. 161,575
----------
Total Liabilities ...................................... 817,418
------------
MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (800 SHARES OUTSTANDING)
REDEMPTION VALUE ............................................... 80,000,000
------------
NET ASSETS AVAILABLE TO COMMON STOCK .............................. $159,101,002
============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
Undistributed net investment income ............................ $ 1,323,474
Accumulated net realized loss on investments sold .............. (10,073,930)
Unrealized appreciation of investments ......................... 19,955,220
Par value of Common Stock ...................................... 102,693
Paid-in capital in excess of par value of Common Stock ......... 147,793,545
------------
Total Net Assets Available to Common Stock ............. $159,101,002
============
NET ASSET VALUE PER SHARE OF COMMON STOCK:
Common Stock (10,269,304 shares outstanding) ................. $ 15.49
============
The accompanying notes are an integral part of the financial statements.
15
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 2004
------------------------------------------------------
INVESTMENT INCOME:
Dividends++ ........................................................ $12,131,104
Interest ........................................................... 2,938,613
-----------
Total Investment Income ....................................... 15,069,717
EXPENSES:
Investment advisory fee ............................................ $1,333,030
Administrator's fee ................................................ 222,268
Money Market Cumulative Preferred(TM)Stock broker commissions
and auction agent fees .......................................... 215,846
Professional fees .................................................. 125,431
Insurance expense .................................................. 177,674
Shareholder servicing agent fees and expenses ...................... 79,185
Directors' fees and expenses ....................................... 78,194
Custodian fees and expenses ........................................ 27,484
Chief Compliance Officer fees and expenses ......................... 15,477
Other .............................................................. 107,622
----------
Total Expenses ................................................ 2,382,211
-----------
NET INVESTMENT INCOME ................................................... 12,687,506
-----------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
Net realized loss on investments sold during the year .............. (2,229,089)
Change in unrealized depreciation of investments during the year ... (1,053,489)
-----------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS ......................... (3,282,578)
-----------
DISTRIBUTIONS TO MONEY MARKET CUMULATIVE PREFERRED(TM)
STOCK SHAREHOLDERS:
From net investment income (including changes in accumulated
undeclared distributions) ....................................... (1,159,026)
-----------
NET INCREASE IN NET ASSETS TO COMMON STOCK RESULTING
FROM OPERATIONS ...................................................... $ 8,245,902
===========
-------------------------
++ For Federal income tax purposes, a significant portion of this amount does
not qualify for the Inter-corporate dividends received deduction ("DRD")
or as Qualified Dividend Income ("QDI") for individuals.
The accompanying notes are an integral part of the financial statements.
16
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
----------------------------------------------------------------
YEAR ENDED YEAR ENDED
NOVEMBER 30, 2004 NOVEMBER 30, 2003
----------------- -----------------
OPERATIONS:
Net investment income ..................................................... $ 12,687,506 $ 13,047,887
Net realized (loss)/gain on investments sold during the year .............. (2,229,089) 3,098,132
Change in net unrealized (depreciation)/appreciation of
investments held during the year ....................................... (1,053,489) 19,645,164
Distributions to Money Market Cumulative Preferred(TM) Stock Shareholders
from net investment income, including changes in
accumulated undeclared distributions ................................... (1,159,026) (1,055,700)
------------ ------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ...................... 8,245,902 34,735,483
DISTRIBUTIONS:
Dividends paid from net investment income to Common
Stock Shareholders(1) .................................................. (12,055,522) (12,392,105)
------------ ------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS .......................... (12,055,522) (12,392,105)
FUND SHARE TRANSACTIONS:
Increase from Common Stock transactions ................................... 1,986,451 1,830,875
Decrease due to Money Market Cumulative Preferred(TM) Stock
transactions (see Note 6) .............................................. -- (6,318)
------------ ------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING
FROM FUND SHARE TRANSACTIONS ........................................... 1,986,451 1,824,557
NET (DECREASE)/INCREASE IN NET ASSETS AVAILABLE TO
------------ ------------
COMMON STOCK FOR THE YEAR .................................................. $ (1,823,169) $ 24,167,935
============ ============
-------------------------------------------------------------------------------------------------- --------------
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of year ......................................................... $160,924,171 $136,756,236
Net (decrease)/increase during the year ................................... (1,823,169) 24,167,935
------------ ------------
End of year (including undistributed net investment income of
$1,323,474 and $660,652, respectively) ................................. $159,101,002 $160,924,171
============ ============
----------------------------
(1) Includes income earned, but not paid out, in prior fiscal year.
The accompanying notes are an integral part of the financial statements.
17
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH PERIOD.
------------------------------------------------------
Contained below is per share operating performance data, total investment
returns, ratios to average net assets and other supplemental data. This
information has been derived from information provided in the financial
statements and market price data for the Fund's shares.
YEAR ENDED NOVEMBER 30,
------------------------------------------------------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
OPERATING PERFORMANCE:
Net asset value, beginning of period .................................... $ 15.85 $ 13.63 $ 14.62 $ 13.41 $ 14.41
-------- -------- -------- -------- --------
INVESTMENT OPERATIONS:
Net investment income ................................................... 1.24 1.28 1.29 1.23 1.32
Net realized and unrealized (loss)/gain on investments .................. (0.31) 2.27 (1.01) 1.19 (0.56)
DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS:
From net investment income .............................................. (0.11) (0.10) (0.12) (0.23) (0.29)
From net realized capital gains ......................................... -- -- -- -- (0.01)
-------- -------- -------- -------- --------
Total from investment operations ........................................ 0.82 3.45 0.16 2.19 0.46
-------- -------- -------- -------- --------
Cost of Issuance of Additional MMP(R)* (Note 6) ......................... -- -- (0.05) -- --
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income .............................................. (1.18) (1.23) (1.10) (0.98) (1.04)
From net realized capital gains ......................................... -- -- -- -- (0.42)
-------- -------- -------- -------- --------
Total distributions to Common Shareholders .............................. (1.18) (1.23) (1.10) (0.98) (1.46)
-------- -------- -------- -------- --------
Net asset value, end of period .......................................... $ 15.49 $ 15.85 $ 13.63 $ 14.62 $ 13.41
======== ======== ======== ======== ========
Market value, end of period ............................................. $ 17.42 $ 17.65 $ 15.00 $ 14.47 $ 12.13
======== ======== ======== ======== ========
Total investment return based on net asset value** ...................... 4.73% 25.87% 0.58% 17.01% 4.55%
======== ======== ======== ======== ========
Total investment return based on market value ** ........................ 5.76% 27.35% 11.84% 28.02% 6.88%
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
TO COMMON STOCK SHAREHOLDERS:
Total net assets, end of period (in 000's) ......................... $159,101 $160,924 $136,756 $144,650 $131,892
Operating expenses ................................................. 1.48% 1.51% 1.48% 1.42% 1.41%
Net Investment Income + ............................................ 7.14% 7.84% 8.32% 7.21% 7.58%
-------------------------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate ............................................ 27% 28% 30% 39% 66%
Total net assets available to Common and Preferred Stock,
end of period (in 000's) ......................................... $239,101 $240,992 $216,974 $202,412 $189,983
Ratio of operating expenses to total average net assets available to
Common and Preferred Stock ....................................... 0.99% 0.99% 0.99% 1.00% 0.98%
----------------------------
* Money Market Cumulative Preferred(TM) Stock.
** Assumes reinvestment of distributions at the price obtained by the Fund's
Dividend Reinvestment Plan.
+ The net investment income ratios reflect income net of operating expenses
and payments to MMP(R)* Shareholders.
++ Information presented under heading Supplemental Data includes MMP(R)*.
The accompanying notes are an integral part of the financial statements.
18
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
PER SHARE OF COMMON STOCK
------------------------------------------------------
TOTAL DIVIDEND
DIVIDENDS NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE (1)
--------- --------- ------------- ------------
December 31, 2003 - EXTRA ......... $0.0400 $15.90 $18.40 $17.48
December 31, 2003 ................. 0.0950 15.90 18.40 17.48
January 31, 2004 .................. 0.0950 16.23 18.35 17.43
February 29, 2004 ................. 0.0950 16.37 18.97 18.02
March 31, 2004 .................... 0.0950 16.36 19.62 18.64
April 30, 2004 .................... 0.0950 15.94 16.11 15.94
May 31, 2004 ...................... 0.0950 15.45 17.62 16.74
June 30, 2004 ..................... 0.0950 15.29 17.03 16.18
July 31, 2004 ..................... 0.0950 15.28 16.78 15.94
August 31, 2004 ................... 0.0950 15.56 17.90 17.01
September 30, 2004 ................ 0.0950 15.72 17.96 17.06
October 31, 2004 .................. 0.0950 15.74 18.30 17.39
November 30, 2004 ................. 0.0950 15.49 17.42 16.55
December 31, 2004 - EXTRA ......... 0.0650 15.89 18.25 17.34
December 31, 2004 ................. 0.0950 15.89 18.25 17.34
-------------
(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.
19
--------------------------------------------------------------------------------
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)
---------- --------------- ------------- ------------- -------------------
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
11/30/01 575 352,021 100,000 100,000
11/30/00 575 330,404 100,000 100,000
11/30/99 575 347,588 100,000 100,000
11/30/98 575 381,562 100,000 100,000
--------------
(1) See note 6.
(2) Calculated by subtracting the Fund's total liabilities (excluding the
MMP(R)) from the Fund's total assets and dividing that amounT by the number
of MMP(R) shares outstanding.
(3) Excludes accumulated undeclared dividends.
The accompanying notes are an integral part of the financial statements.
20
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------
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 financial statements is in conformity with accounting principles
generally accepted in the United States of America and requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities in the financial statements and the reported amounts of increases
and decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
PORTFOLIO VALUATION: The net asset value of the Fund's Common Stock is
determined by the Fund's Administrator no less frequently than on the last
business day of each week and month. It is determined by dividing the value of
the Fund's net assets attributable to Common Stock by the number of shares of
Common Stock outstanding. The value of the Fund's net assets available to Common
Stock is deemed to equal the value of the Fund's total assets less (i) the
Fund's liabilities, and (ii) the aggregate liquidation value of the outstanding
Money Market Cumulative Preferred(TM) Stock (MMP(R)).
Securities listed on a national securities exchange are valued on the basis
of the last sale on such exchange on the day of valuation, except as described
hereafter. In the absence of sales of listed securities and with respect to (a)
securities for which the most recent sale prices are not deemed to represent
fair market value and (b) unlisted securities (other than money market
instruments), securities are valued at the mean between the closing bid and
asked prices when quoted prices for investments are readily available.
Investments in over-the-counter derivative instruments, such as interest rate
swaps and options thereon ("swaptions"), are valued at the prices obtained from
the broker/dealer or bank that is the counterparty to such instrument, subject
to comparison of such valuation with a valuation obtained from a broker/dealer
or bank that is not a counterparty to the particular derivative instrument.
Investments for which market quotations are not readily available or for which
management determines that the prices are not reflective of current market
conditions are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund, including reference to
valuations of other securities which are comparable in quality, maturity and
type. Investments in money market instruments, which mature in 60 days or less,
are valued at amortized cost. Investments in money market funds are valued at
the net asset value of such funds.
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
21
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
also amortizes premiums and accretes discounts on those fixed income securities,
including capital securities and bonds, which trade and are quoted on an
"accrued income" basis.
OPTIONS: Upon the purchase of an option by the Fund, the total purchase
price paid is recorded as an investment. The market valuation is determined as
set forth in the preceding portfolio valuation paragraph. When the Fund enters
into a closing sale transaction, the Fund will record a gain or loss depending
on the difference between the purchase and sale price. The risks associated with
purchasing options and the maximum loss the Fund would incur are limited to the
purchase price originally paid.
REPURCHASE AGREEMENTS: The Fund may engage in repurchase agreement
transactions. The Fund's investment adviser reviews and approves the eligibility
of the banks and dealers with which the Fund may enter into repurchase agreement
transactions. The value of the collateral underlying such transactions is at
least equal at all times to the total amount of the repurchase obligations,
including interest. The Fund maintains possession of the collateral through its
custodian and, in the event of counterparty default, the Fund has the right to
use the collateral to offset losses incurred. There is the possibility of loss
to the Fund in the event the Fund is delayed or prevented from exercising its
rights to dispose of the collateral securities.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Fund expects to declare
dividends on a monthly basis to shareholders of Common Stock ("Shareholders").
The Shareholders of MMP(R) are entitled to receive cumulative cash dividends as
declared by the Fund's Board oF Directors. Distributions to Shareholders are
recorded on the ex-dividend date. Any net realized short-term capital gains will
be distributed to Shareholders at least annually. Any net realized long-term
capital gains may be distributed to Shareholders at least annually or may be
retained by the Fund as determined by the Fund's Board of Directors. Capital
gains retained by the Fund are subject to tax at the capital gains corporate tax
rate. Subject to the Fund's qualifying as a regulated investment company, any
taxes paid by the Fund on such net realized long-term gains may be used by the
Fund's Shareholders as a credit against their own tax liabilities.
FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company by complying with the requirements under subchapter
M of the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and intends to distribute substantially all of its taxable
net investment income to its shareholders. Therefore, no Federal income tax
provision is required.
Income and capital gain distributions are determined and characterized in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to (1) differing
treatments of income and gains on various investment securities held by the
Fund, including timing differences, (2) the attribution of expenses against
certain components of taxable investment income, and (3) federal regulations
requiring proportionate allocation of income and gains to all classes of
shareholders.
Distributions from net realized gains for book purposes may include
short-term capital gains, which
22
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
are included as ordinary income for tax purposes, and may exclude amortization
of premium on "accrued income" securities, which are not reflected in ordinary
income for tax purposes. The tax character of distributions paid, including
changes in accumulated undeclared distributions to MMP(R) shareholders, during
2004 and 2003 was as follows:
DISTRIBUTIONS PAID IN FISCAL YEAR 2004 DISTRIBUTIONS PAID IN FISCAL YEAR 2003
-------------------------------------- --------------------------------------
ORDINARY INCOME LONG-TERM CAPITAL GAINS ORDINARY INCOME LONG-TERM CAPITAL GAINS
--------------- ----------------------- --------------- -----------------------
Common $12,055,522 $-- $12,392,105 $--
Preferred $1,159,026 $-- $ 1,055,700 $--
As of November 30, 2004, 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)
--------------------------- --------------- -------------- ---------------------------
$(8,723,351) $1,728,652 $-- $18,604,640
At November 30, 2004, the composition of the Fund's $8,723,351 accumulated
realized capital losses was $4,444,626, $513,821, $755,160 and $3,009,744 in
2000, 2001, 2002 and 2004, respectively. These losses may be carried forward and
offset against any future capital gains through 2008, 2009, 2010 and 2012,
respectively.
EXCISE TAX: The Internal Revenue Code of 1986, as amended, imposes a 4%
nondeductible excise tax on the Fund to the extent the Fund does not distribute
by the end of any calendar year at least (1) 98% of the sum of its net
investment income for that year and its capital gains (both long term and short
term) for its fiscal year and (2) certain undistributed amounts from previous
years. The Fund is subject to payment of an estimated $40,000 of Federal excise
taxes attributable to calendar year 2004. During the fiscal year ending November
30, 2004, the Fund paid $21,162 of Federal excise taxes attributable to calendar
year 2003.
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.
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
and Preferred Stock and generally assists in all aspects of the Fund's
23
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
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, 0.01% of the next
$350 million of the Fund's average weekly net assets attributable to Common
Stock, 0.005% of the next $500 million of the Fund's average weekly net assets
attributable to Common Stock and 0.0025% of the Fund's average weekly net assets
attributable to Common Stock above $1 billion, plus certain out of pocket
expenses. For the purpose of calculating such fee, the Fund's average weekly net
assets attributable to Common Stock will be deemed to be the average weekly
value of the Fund's total assets minus the sum of the Fund's liabilities, and
accumulated dividends, if any, on Preferred Stock. For this calculation, the
Fund's liabilities are deemed to include the aggregate liquidation preference of
any outstanding Fund preferred shares.
PFPC Trust Company ("PFPC Trust") serves as the Fund's Custodian. PFPC
Trust is an indirect subsidiary of PNC Financial Services. As compensation for
PFPC Trust's services as custodian, the Fund pays PFPC Trust a monthly fee at
the annual rate of 0.010% of the first $200 million of the Fund's average weekly
total managed assets, 0.008% of the next $300 million of the Fund's average
weekly total managed assets, 0.006% of the next $500 million of the Fund's
average weekly total managed assets and 0.005% of the Fund's average weekly
total managed assets above $1 billion.
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.
On July 23, 2004, the Board of Directors designated Peter C. Stimes as
Chief Compliance Officer ("CCO") of the Fund. The Fund currently pays Mr.
Stimes, in his capacity as CCO, $37,500 per annum plus out-of-pocket expenses
incurred in connection with his role as CCO.
4. PURCHASES AND SALES OF SECURITIES
For the year ended November 30, 2004, the cost of purchases and proceeds
from sales of securities excluding short-term investments, aggregated
$63,194,479 and $66,996,002, respectively.
At November 30, 2004, the aggregate cost of securities for federal income
tax purposes was $219,228,787, the aggregate gross unrealized appreciation for
all securities in which there is an excess of value over tax cost was
$23,711,068 and aggregate gross unrealized depreciation for all securities in
24
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
which there is an excess of tax cost over value was $5,106,428.
5. COMMON STOCK
At November 30, 2004, 240,000,000 shares of $0.01 par value Common Stock
were authorized.
Common Stock Transactions were as follows:
YEAR ENDED YEAR ENDED
11/30/04 11/30/03
------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
Issued as reinvestment of dividends under the Dividend
Reinvestment and Cash Purchase Plan ....................... 116,588 $1,986,451 120,171 $1,830,875
------- ---------- ------- ----------
6. MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (MMP(R))
The Fund's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of $0.01 par value preferred stock. The MMP(R) is senior to
the Common Stock and results in the financial leveraging of the Common Stock.
Such leveraging tends to magnify botH the risks and opportunities to Common
Stock Shareholders. Dividends on shares of MMP(R) are cumulative.
The Fund is required to meet certain asset coverage tests with respect to
the MMP(R). If the Fund fails to meet these requirementS and does not correct
such failure, the Fund may be required to redeem, in part or in full, MMP(R) at
a redemption price of $100,000 peR share plus an amount equal to the accumulated
and unpaid dividends on such shares in order to meet the asset coverage test
requirements. Additionally, failure to meet the foregoing asset requirements
could restrict the Fund's ability to pay dividends to Common Stock Shareholders
and could lead to sales of portfolio securities at inopportune times.
If the Fund allocates any net gains or income ineligible for the Dividends
Received Deduction to shares of the MMP(R), the Fund iS required to make
additional distributions to MMP(R) Shareholders or to pay a higher dividend rate
in amounts needed to provide A return, net of tax, equal to the return had such
originally paid distributions been eligible for the Dividends Received
Deduction.
An auction of the MMP(R) is generally held every 49 days. Existing
shareholders may submit an order to hold, bid or sell sucH shares at par value
on each auction date. MMP(R) Shareholders may also trade shares in the secondary
market between auction dates.
On June 4, 2002, the Fund issued 225 shares of additional MMP(R) with an
initial dividend rate equal to 2.04%. These newly issueD shares are identical to
the previously outstanding 575 shares in all respects on and after their first
auction date, which was June 5, 2002. Consequently, the Fund now has 800 shares
of MMP(R) outstanding in one series, which represents a par value of $80
million.
25
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
The newly issued shares were underwritten by Lehman Brothers. The
underwriter's discount of 1.25% of the $22.5 million face value totaled $281,250
and was immediately charged to common equity capital upon completion of the
offering.
Costs of the issue, including legal, printing, registration, rating fees,
etc. of $219,027 were charged against common equity capital. The sum of
underwriters discount and cost of the issue totaled $500,277.
At November 30, 2004, 800 shares of MMP(R) were outstanding at the annual
rate of 1.899%. The dividend rate, as set by the auctioN process, is generally
expected to vary with short-term interest rates. These rates may vary in a
manner unrelated to the income received on the Fund's assets, which could have
either a beneficial or detrimental impact on net investment income and gains
available to Common Stock Shareholders. While the Fund expects to structure its
portfolio holdings and hedging transactions to lessen such risks to Common Stock
Shareholders, there can be no assurance that such results will be attained.
7. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY
The Fund invests primarily in traditional DRD-eligible preferred securities
(i.e., adjustable and fixed rate preferred and preference stocks) and similar
hybrid (i.e., fully taxable) preferred securities. Under normal market
conditions, at least 80% of the value of the Fund's net assets will be invested
in preferred securities. Also, under normal market conditions, the Fund invests
at least 25% of its assets in securities issued by utilities and at least 25% of
its assets in securities issued by companies in the banking industry. The Fund's
portfolio may therefore be subject to greater risk and market fluctuation than a
portfolio of securities representing a broader range of investment alternatives.
The risks could adversely affect the ability and inclination of companies in
these industries to declare and pay dividends or interest and the ability of
holders of securities of such companies to realize any value from the assets of
the issuer upon liquidation or bankruptcy.
The Fund may invest up to 25% of its assets at the time of purchase in
securities rated below investment grade. These securities must be rated at least
either "Ba3" by Moody's Investors Service, Inc. or "BB-" by Standard & Poor's or
judged to be comparable in quality, in either case, at the time of purchase;
however, these securities must be issued by an issuer having a class of senior
debt rated investment grade outstanding.
The Fund may invest up to 15% of its assets in common stocks and, under
normal market conditions, up to 20% of its assets in debt securities. Certain of
its investments in hybrid, i.e., fully taxable, preferred securities 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.
26
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------
The Fund may invest up to 30% of its total assets in the securities, other
than money market securities, of companies organized or having their principal
place of business outside the United States. All foreign securities held by the
Fund will be denominated in U.S. dollars. The percentage limitation was
instituted by the Fund's Board of Directors at its regular board meeting of
April 23, 2004.
8. SPECIAL INVESTMENT TECHNIQUES
The Fund may employ certain investment techniques in accordance with its
fundamental investment policies. These may include the use of when-issued and
delayed delivery transactions. Securities purchased or sold on a when-issued or
delayed delivery basis may be settled within 45 days after the date of the
transaction. Such transactions may expose the Fund to credit and market
valuation risk greater than that associated with regular trade settlement
procedures. The Fund may also enter into transactions, in accordance with its
investment policies, involving any or all of the following: lending of portfolio
securities, short sales of securities, futures contracts, interest rate swaps,
options on futures contracts, options on securities, 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. As of November 30, 2004, the Fund owned put options on U.S. Treasury
bond futures contracts. No assurance can be given that such transactions will
achieve their desired purposes or will result in an overall reduction of risk to
the Fund.
27
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Flaherty & Crumrine Preferred Income Fund Incorporated:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of the Flaherty & Crumrine Preferred
Income Fund Incorporated, as of November 30, 2004, and the related statement of
operations for the year then ended, the statements of changes in net assets for
each of the years in the two-year period then ended, and the financial
highlights for each of the years in the four-year period then ended. These
financial statements and financial highlights are the responsibility of the
Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of November 30, 2004 by correspondence with
the custodian and brokers. As to the securities purchased but not yet received,
we performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Flaherty & Crumrine Preferred Income Fund Incorporated, as of November 30, 2004,
the results of its operations, changes in its net assets and financial
highlights for each of the years described above in conformity with accounting
principles generally accepted in the United States of America.
[GRAPHIC OMITTED]
KPMG LOGO
Boston, Massachusetts
January 21, 2005
28
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
SUPPLEMENTARY TAX INFORMATION (UNAUDITED)
------------------------------------------------------
For fiscal year 2004, the distributions attributable both to Common Stock
and MMP(R) are characterized as follows for purposes oF Federal income taxes:
for individual investors, 78.92% consisted of Qualified Dividend Income ("QDI")
eligible for the maximum 15% personal tax rate while 21.08% consisted of
ordinary income taxable at regular personal tax rates. For corporate investors,
78.69% consisted of income eligible for the inter-corporate Dividends Received
Deduction ("DRD") while 21.31% consisted of ordinary income taxable at regular
corporate rates.
For calendar year 2004, the distributions to Common Stock are characterized
as follows for purposes of Federal income taxes: for individual investors,
78.15% consisted of Qualified Dividend Income ("QDI") eligible for the maximum
15% personal tax rate while 21.85% consisted of ordinary income taxable at
regular personal tax rates. For corporate investors, 77.92% consisted of income
eligible for the inter-corporate Dividends Received Deduction ("DRD") while
22.08% consisted of ordinary income taxable at regular corporate rates.
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 his own name will have all
distributions reinvested automatically by PFPC Inc. as agent under the Plan,
unless the shareholder elects to receive cash. Distributions with respect to
shares registered in the name of a broker-dealer or other nominee (that is, in
"street name") may be reinvested by the broker or nominee in additional shares
under the Plan, but only if the service is provided by the broker or nominee,
unless the shareholder elects to receive distributions in cash. A shareholder
who holds Common Stock registered in the name of a broker or other nominee may
not be able to transfer the Common Stock to another broker or nominee and
continue to participate in the Plan. Investors who own Common Stock registered
in street name should consult their broker or nominee for details regarding
reinvestment.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price per share of the Fund's Common Stock is equal to or exceeds the
net asset value per share on the valuation date, participants in the Plan will
be issued new shares valued at the higher of net asset value or 95% of the then
current market value. Otherwise, PFPC Inc. will buy shares of the Fund's Common
Stock in the open market, on the New York Stock Exchange or elsewhere, on or
shortly after the payment date of the dividend or distribution and continuing
until the ex-dividend date of the Fund's next distribution to holders of the
Common Stock or until it has expended for such purchases all of the cash that
would otherwise be payable to the participants. The number of purchased shares
that will then be credited to the participants' accounts will be based on the
average per share purchase price of the shares so purchased, including brokerage
commissions. If PFPC Inc. commences purchases in the open market and the then
current market price of the shares (plus any estimated brokerage commissions)
subsequently exceeds their net asset value most recently determined before the
completion of the purchases, PFPC Inc. will attempt to terminate purchases in
the open market and cause the Fund to issue the remaining dividend or
distribution in shares. In this case, the number of shares received by the
participant will be based on the weighted average of prices paid for shares
purchased in the open market and the price at which the Fund issues the
remaining shares. These remaining shares will be issued by the Fund at the
higher of net asset value or 95% of the then current market value.
Plan participants are not subject to any charge for reinvesting dividends
or capital gains distributions. Each Plan participant will, however, bear a
proportionate share of brokerage commissions incurred with respect to PFPC
Inc.'s open market purchases in connection with the reinvestment of dividends or
capital gains distributions. For the year ended November 30, 2004, 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 initial Form N-PX with the Securities and Exchange Commissions ("SEC") on
August 18, 2004. 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, (ii) on the Fund's website at
WWW.PREFERREDINCOME.COM and (iii) on the SEC's website at WWW.SEC.GOV.
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 first of which was recently
filed for the quarter ended August 31, 2004. The Fund's Form N-Q is available on
the SEC 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 Room 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, Stimes, Stone and Chadwick. The professional
backgrounds of each member of the management team are included in the
"Information about Fund Directors and Officers" section of this report beginning
on page 33.
31
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
CERTIFICATIONS
Donald F. Crumrine, as the Fund's Chief Executive Officer, has certified to
the New York Stock Exchange that, as of May 20, 2004, 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-CSRS 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.
32
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
INFORMATION ABOUT FUND DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under the direction of the
Fund's Board of Directors. Information pertaining to the Directors and officers
of the Fund is set forth below.
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
-------------- -------------- -------------- ------------- --------------- -------------------
NON-INTERESTED
DIRECTORS:
MARTIN BRODY Director Class I Director Retired 4 Director, Jaclyn, Inc.
c/o HMK Associates since 1991 (luggage and
30 Columbia Turnpike accessories). Director
Florham Park, NJ 07932 Emeritus, Smith Barney
Age: 83 Mutual Funds (18 Funds).
Director, Flaherty &
Crumrine Preferred
Income Opportunity Fund,
Flaherty & Crumrine/
Claymore Preferred
Securities Income Fund
and Flaherty & Crumrine/
Claymore Total Return
Fund.
DAVID GALE Director Class I Director President & CEO of 4 Director, Golden State
Delta Dividend Group, Inc. since 1997 Delta Dividend Vintners, Inc. (wine
220 Montgomery Street Group, Inc. (investments). pressing). Director,
Suite 426 Flaherty & Crumrine
San Francisco, CA 94104 Preferred Income
Age: 55 Opportunity Fund,
Flaherty & Crumrine/
Claymore Preferred
Securities Income Fund
and Flaherty & Crumrine/
Claymore Total Return
Fund.
-------------------------------
* The Fund's Board of Directors is divided into three classes, each class
having a term of three years. Each year the term of office of one class
expires and the successor or successors elected to such class serve for a
three year term. The three year term for each class expires as follows:
CLASS I DIRECTORS - three year term expires at
the Fund's 2005 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS II DIRECTORS - three year term expires at
the Fund's 2006 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS III DIRECTORS - three year term expires
at the Fund's 2007 Annual Meeting of
Shareholders; directors may continue in office
until their successors are duly elected and
qualified.
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:
MORGAN GUST+ Director Class III Director From March 2002, 4 Director, Flaherty &
Giant Industries, Inc. since 1991 President of Giant Crumrine Preferred
23733 N. Scottsdale Road Industries, Inc. (petroleum Income Opportunity
Scottsdale, AZ 85255 refining and marketing) Fund, Flaherty
Age: 57 and, for more than five & Crumrine/Claymore
years prior thereto, Preferred Securities
Executive Vice President, Income Fund and
and various other Vice Flaherty & Crumrine/
President positions at Claymore Total Return
Giant Industries, Inc. Fund.
ROBERT F. WULF Director Class II Director Financial Consultant; 4 Director, Flaherty &
3560 Deerfield Drive South since 1991 Trustee, University of Crumrine Preferred
Salem, OR 97302 Oregon Foundation; Income Opportunity
Age: 67 Trustee, San Francisco Fund, Flaherty
Theological Seminary. & Crumrine/Claymore
Preferred Securities
Income Fund and
Flaherty & Crumrine/
Claymore Total Return
Fund.
--------------------------------
* The Fund's Board of Directors is divided into three classes, each class
having a term of three years. Each year the term of office of one class
expires and the successor or successors elected to such class serve for a
three year term. The three year term for each class expires as follows:
CLASS I DIRECTORS - three year term expires at
the Fund's 2005 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS II DIRECTORS - three year term expires at
the Fund's 2006 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS III DIRECTORS - three year term expires
at the Fund's 2007 Annual Meeting of
Shareholders; directors may continue in office
until their successors are duly elected and
qualified.
+ As a Director, represents holders of shares of the Fund's Money Market
Cumulative PreferredTM Stock.
34
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
-------------- -------------- -------------- ------------- --------------- -------------------
INTERESTED
DIRECTORS:
DONALD F. CRUMRINE+, ++ Director, Class II Director Chairman of the Board 4 Director, Flaherty
301 E. Colorado Boulevard Chairman since 1991 Director of Flaherty & & Crumrine
Suite 720 of the Board Crumrine Incorporated. Preferred Income
Pasadena, CA 91101 and Chief Opportunity Fund,
Age: 57 Executive Officer Flaherty & Crumrine/
Claymore Preferred
Securities Income Fund
and Flaherty &
Crumrine/Claymore
Total Return Fund.
ROBERT M. ETTINGER++ Director, Class III Director President and Director of 2 Director, Flaherty &
301 E. Colorado Boulevard President since 2002 Flaherty & Crumrine Crumrine Preferred
Suite 720 Incorporated. Income Opportunity
Pasadena, CA 91101 Fund.
Age: 46
--------------------------------
* The Fund's Board of Directors is divided into three classes, each class
having a term of three years. Each year the term of office of one class
expires and the successor or successors elected to such class serve for a
three year term. The three year term for each class expires as follows:
CLASS I DIRECTORS - three year term expires at
the Fund's 2005 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS II DIRECTORS - three year term expires at
the Fund's 2006 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS III DIRECTORS - three year term expires
at the Fund's 2007 Annual Meeting of
Shareholders; directors may continue in office
until their successors are duly elected and
qualified.
+ As a Director, represents holders of shares of the Fund's Money Market
Cumulative PreferredTM Stock.
++ "Interested person" of the Fund as defined in the Investment Company Act of
1940. Messrs. Crumrine and Ettinger are each considered an "interested
person" because of their affiliation with Flaherty & Crumrine Incorporated
which acts as the Fund's investment adviser.
35
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
-------------- -------------- -------------- ------------- --------------- -------------------
OFFICERS:
R. ERIC CHADWICK Chief Financial Since Vice President of -- --
301 E. Colorado Boulevard Officer, Vice October 2002 Flaherty & Crumrine
Suite 720 President, Incorporated since
Pasadena, CA 91101 Treasurer and August 2001, and
Age: 29 Secretary previously (since
January 1999)
portfolio manager
of Flaherty &
Crumrine Incorporated.
PETER C. STIMES Chief Compliance Since 1991 Vice President of -- --
301 E. Colorado Boulevard Officer, and Flaherty & Crumrine
Suite 720 Vice President Incorporated.
Pasadena, CA 91101
Age: 49
BRADFORD S. STONE Vice President Since Since May 2003, Vice -- --
392 Springfield Avenue and Assistant July 2003 President of Flaherty &
Mezzanine Suite Treasurer Crumrine Incorporated;
Summit, NJ 07901 from June 2001 to
Age: 45 April 2003, Director of
U.S. Market Strategy
at Barclays Capital;
from February 1987 to
June 2001 Vice
President of Goldman,
Sachs & Company as
Director of U.S.
Interest Rate
Strategy and,
previously, Vice
President of Interest
Rate Product Sales.
LAURIE C. LODOLO Assistant Since Since August 2004, -- --
301 E. Colorado Boulevard Compliance July 2004 Assistant Compliance
Suite 720 Officer, Assistant Officer of Flaherty &
Pasadena, CA 91101 Treasurer and Crumrine Incorporated;
Age: 41 Assistant Secretary since February 2004,
Secretary of Flaherty &
Crumrine Incorporated;
Account Administrator of
Flaherty & Crumrine
Incorporated.
36
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[This page intentionally left blank]
DIRECTORS
Martin Brody
Donald F. Crumrine, CFA
Robert M. Ettinger, CFA
David Gale
Morgan Gust
Robert F. Wulf, CFA
OFFICERS
Donald F. Crumrine, CFA
Chairman of the Board
and Chief Executive Officer
Robert M. Ettinger, CFA
President
R. Eric Chadwick, CFA
Chief Financial Officer,
Vice President, Treasurer
and Secretary
Peter C. Stimes, CFA
Chief Compliance
Officer and Vice President
Bradford S. Stone
Vice President
Laurie 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 ART
FLAHERTY & Crumrine
=====================
PREFERRED INCOME FUND
ANNUAL
REPORT
NOVEMBER 30, 2004
WEB SITE: WWW.PREFERREDINCOME.COM
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant
or a third party.
(c) There have been no amendments, during the period covered by this
report, to a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are employed
by the registrant or a third party, and that relates to any element of
the code of ethics description.
(d) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are employed
by the registrant or a third party, that relates to one or more of the
items set forth in paragraph (b) of this item's instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the registrant's board of
directors has determined that David Gale and Robert F. Wulf are each qualified
to serve as an audit committee financial expert serving on its audit committee
and that they both are "independent," as defined by the Securities and Exchange
Commission.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES
(a) The aggregate fees billed for each of the last two fiscal years
for professional services rendered by the principal accountant for
the audit of the registrant's annual financial statements or
services that are normally provided by the accountant in
connection with statutory and regulatory filings or engagements
for those fiscal years are $36,500 for 2004 and $34,500 for 2003.
AUDIT-RELATED FEES
(b) The aggregate fees billed in each of the last two fiscal years for
assurance and related services by the principal accountant that
are reasonably related to the performance of the audit of the
registrant's financial statements and are not reported under
paragraph (a) of this Item are $0 for 2004 and $0 for 2003.
TAX FEES
(c) The aggregate fees billed in each of the last two fiscal years for
professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning are $6,400 for 2004 and
$6,000 for 2003.
ALL OTHER FEES
(d) The aggregate fees billed in each of the last two fiscal years for
products and services provided by the principal accountant, other
than the services reported in paragraphs (a) through (c) of this
Item are $12,400 for 2004 and $11,200 for 2003.
(e)(1) The Fund's Audit Committee Charter states that the Audit Committee
shall have the duty and power to pre-approve all audit and
non-audit services to be provided by the auditors to the Fund, and
all non-audit services to be provided by the auditors to the
Fund's investment adviser and any service providers controlling,
controlled by or under common control with the Fund's investment
adviser that provide ongoing services to the Fund, if the
engagement relates directly to the operations and financial
reporting of the Fund.
(e)(2) The percentage of services described in each of paragraphs (b)
through (d) of this Item that were approved by the audit committee
pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X
are as follows:
(b) 100%
(c) 100%
(d) 100%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most
recent fiscal year that were attributed to work performed by persons
other than the principal accountant's full-time, permanent employees
was 0%.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by,
or under common control with the adviser that provides ongoing services
to the registrant for each of the last two fiscal years of the
registrant was $0 for 2004 and $0 for 2003.
(h) The registrant's audit committee of the board of directors has
considered whether the provision of non-audit services that were
rendered to the registrant's investment adviser (not including any
sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen by another investment adviser), and any
entity controlling, controlled by, or under common control with the
investment adviser that provides ongoing services to the registrant
that were not
pre-approved pursuant to paragraph (c)(7)(ii) of Rule 2-01 of
Regulation S-X is compatible with maintaining the principal
accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The registrant has a separately designated audit committee consisting of all
the independent directors of the registrant. The members of the audit committee
are: Martin Brody, David Gale, Morgan Gust, and Robert F. Wulf.
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.
The Proxy Voting Policies are attached herewith.
FLAHERTY & CRUMRINE INCORPORATED (THE "ADVISER")
POLICIES AND PROCEDURES FOR VOTING PROXIES FOR CLIENTS
(The definition of clients includes Flaherty & Crumrine Preferred Income Fund
Incorporated, Flaherty & Crumrine Preferred Income
Opportunity Fund Incorporated, Flaherty & Crumrine/Claymore
Preferred Securities Income Fund Incorporated,
and Flaherty & Crumrine/Claymore Total Return Fund Incorporated
- collectively, the "Funds")
PURPOSE
These Policies and Procedures are designed to satisfy the Adviser's
duties of care and loyalty to its clients with respect to monitoring corporate
events and exercising proxy authority in the best interests of such clients.
In connection with this objective, these Policies and Procedures are
designed to deal with potential complexities which may arise in cases where the
Adviser's interests conflict or appear to conflict with the interests of its
clients.
These Policies and Procedures are also designed to communicate with
clients the methods and rationale whereby the Adviser exercises proxy authority.
This document is available to any client or Fund shareholder upon
request and the Adviser will make available to such clients and Fund
shareholders the record of the Adviser's votes promptly upon request and to the
extent required by Federal law and regulations.1
FUNDAMENTAL STANDARD
The Adviser will be guided by the principle that, in those cases where
it has discretion, it is bound to vote proxies and take such other corporate
actions consistent with the interest of its clients with regard to the objective
of wealth maximization.
GENERAL
The Adviser has divided its discussion in this document into two major
categories: voting with respect to common stock and voting with respect to
senior equity, e.g., preferred stock and similar securities. In those events
where the Adviser may have to take action with respect to debt, such as in the
case of amendments of covenants or in the case of default, bankruptcy,
reorganization, etc., the Adviser will apply the same principles as would apply
to common or preferred stock, MUTATIS MUTANDIS.
1
--------
1 This will include Fund web site reporting of proxy votes on Form N-PX no later
than 8/31/2004 for the twelve month period ended 6/30/2004.
These Policies and Procedures apply only where the client has granted
discretionary authority with respect to proxy voting of an issuer. Where the
Adviser does not have authority, it will keep appropriate written records
evidencing that such discretionary authority has not been granted.
The Adviser may choose not to keep written copies of proxy materials
that are subject to SEC regulation and maintained in the SEC's EDGAR database.
In other instances, the Adviser will keep appropriate written records in its
files or in reasonably accessible storage.
Similarly, the Adviser will keep in its files, or reasonably accessible
storage, work papers and other materials that were significant to the Adviser in
making a decision how to vote.
For purposes of decision making, the Adviser will assume that each
ballot for which it casts votes is the only security of an issuer held by the
client. Thus, when casting votes where the Adviser may have discretionary
authority with regard to several different securities of the same issuer, it may
vote securities "in favor" for those securities or classes where the Adviser has
determined the matter in question to be beneficial while, at the same time,
voting "against" for those securities or classes where the Adviser has
determined the matter to be adverse. Such cases occasionally arise, for example,
in those instances where a vote is required by both common and preferred
shareholders, voting as separate classes, for a change in the terms regarding
preferred stock issuance.
The Adviser will reach its voting decisions independently, after
appropriate investigation. It does not generally intend to delegate its decision
making or to rely on the recommendations of any third party, although it may
take such recommendations into consideration. The Adviser may consult with such
other experts, such as CPA's, investment bankers, attorneys, etc., as it regards
necessary to help it reach informed decisions.
Absent good reason to the contrary, the Adviser will generally give
substantial weight to management recommendations regarding voting. This is based
on the view that management is usually in the best position to know which
corporate actions are in the best interests of common shareholders as a whole.
With regard to those shareholder-originated proposals which are
typically described as "social, environmental, and corporate responsibility"
matters, the Adviser will typically give weight to management's recommendations
and vote against such shareholder proposals, particularly if the adoption of
such proposals would bring about burdens or costs not borne by those of the
issuer's competitors.
In cases where the voting of proxies would not justify the time and
costs involved, the Adviser may refrain from voting. From the individual
client's perspective, this would most typically come about in the case of small
holdings, such as might arise in
2
connection with spin-offs or other corporate reorganizations. From the
perspective of the Adviser's institutional clients, this envisions cases (1) as
more fully described below where preferred and common shareholders vote together
as a class or (2) other similar or analogous instances.
Ultimately, all voting decisions are made on a case-by-case basis,
taking relevant considerations into account.
VOTING OF COMMON STOCK PROXIES
The Adviser categorizes matters as either routine or non-routine, which
definition may or may not precisely conform to the definitions set forth by
securities exchanges or other bodies categorizing such matters. Routine matters
would include such things as the voting for directors and the ratification of
auditors and most shareholder proposals regarding social, environmental, and
corporate responsibility matters. Absent good reason to the contrary, the
Adviser normally will vote in favor of management's recommendations on these
routine matters.
Non-routine matters might include, without limitation, such things as
(1) amendments to management incentive plans, (2) the authorization of
additional common or preferred stock, (3) initiation or termination of barriers
to takeover or acquisition, (4) mergers or acquisitions, (5) changes in the
state of incorporation, (6) corporate reorganizations, and (7) "contested"
director slates. In non-routine matters, the Adviser, as a matter of policy,
will attempt to be generally familiar with the questions at issue. This will
include, without limitation, studying news in the popular press, regulatory
filings, and competing proxy solicitation materials, if any. Non-routine matters
will be voted on a case-by-case basis, given the complexity of many of these
issues.
VOTING OF PREFERRED STOCK PROXIES
Preferred stock, which is defined to include any form of equity senior
to common stock, generally has voting rights only in the event that the issuer
has not made timely payments of income and principal to shareholders or in the
event that a corporation desires to effectuate some change in its articles of
incorporation which might modify the rights of preferred stockholders. These are
non-routine in both form and substance.
In the case of non-routine matters having to do with the modification
of the rights or protections accorded preferred stock shareholders, the Adviser
will attempt, wherever possible, to quantify the costs and benefits of such
modifications and will vote in favor of such modifications only if they are in
the bests interests of preferred shareholders or if the issuer has offered
sufficient compensation to preferred stock shareholders to offset the reasonably
foreseeable adverse consequences of such modifications. A similar type of
analysis would be made in the case where preferred shares, as a class, are
entitled to vote on a merger or other substantial transaction.
In the case of the election of directors when timely payments to
preferred shareholders have not been made ("contingent voting"), the Adviser
will cast its votes on a case-by-case basis after investigation of the
qualifications and independence of the persons standing for election.
3
Routine matters regarding preferred stock are the exception, rather
than the rule, and typically arise when the preferred and common shareholders
vote together as a class on such matters as election of directors. The Adviser
will vote on a case-by-case basis, reflecting the principles set forth elsewhere
in this document. However, in those instances where the common shares of an
issuer are held by a holding company and where, because of that, the election
outcome is not in doubt, the Adviser does not intend to vote such proxies since
the time and costs would outweigh the benefits.
ACTUAL AND APPARENT CONFLICTS OF INTEREST
Potential conflicts of interest between the Adviser and the Adviser's
clients may arise when the Adviser's relationships with an issuer or with a
related third party conflict or appear to conflict with the best interests of
the Adviser's clients.
The Adviser will indicate in its voting records available to clients
whether or not a material conflict exists or appears to exist. In addition, the
Adviser will communicate with the client (which shall mean the independent
Directors or Director(s) they may so designate in the case of the Funds) in
instances when a material conflict of interest may be apparent. The Adviser
shall describe the conflict to the client and state the Adviser's voting
recommendation and the basis therefor. If the client considers there to be a
reasonable basis for the proposed vote notwithstanding the conflict or, in the
case of the Funds, that the recommendation was not affected by the conflict
(without considering the merits of the proposal), the Adviser shall vote in
accordance with the recommendation it had made to the client.
In all such instances, the Adviser will keep reasonable documentation
supporting its voting decisions and/or recommendations to clients.
AMENDMENT OF THE POLICIES AND PROCEDURES
These Policies and Procedures may be modified at any time by action of
the Board of Directors of the Adviser but will not become effective, in the case
of the Funds, unless they are approved by majority vote of the non-interested
Directors of the Funds. Any such modifications will be made to the Adviser's
clients by mail and/or other electronic means in a timely manner. These Policies
and Procedures, and any amendments thereto, will be posted on the Funds' webs
sites and will be disclosed in reports to shareholders as required by law.
Dated: 7/24/2003
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not yet applicable.
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 7(d)(2)(ii)(G) of Schedule 14A (17 CFR
240.14a-101), or this Item.
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) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(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(a) 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 JANUARY 27, 2005
----------------------------------------------------------------------------
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 JANUARY 27, 2005
----------------------------------------------------------------------------
By (Signature and Title)* /S/ R. ERIC CHADWICK
-------------------------------------------------------
R. Eric Chadwick, Chief Financial Officer, Treasurer,
Vice President and Secretary
(principal financial officer)
Date JANUARY 27, 2005
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.