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
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Date of reporting period: MAY 31, 2006
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Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
unless the Form displays a currently valid Office of Management and Budget
("OMB") control number. Please direct comments concerning the accuracy of the
information collection burden estimate and any suggestions for reducing the
burden to Secretary, Securities and Exchange Commission, 100 F Street, NE,
Washington, DC 20549. The OMB has reviewed this collection of information under
the clearance requirements of 44 U.S.C. ss. 3507.
ITEM 1. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
[GRAPHIC OMITTED]
LIGHTHOUSE
FLAHERTY & CRUMRINE
=====================
PREFERRED INCOME FUND
SEMI-ANNUAL
REPORT
MAY 31, 2006
www.preferredincome.com
FLAHERTY & CRUMRINE PREFERRED INCOME FUND
To the Shareholders of the Flaherty & Crumrine Preferred Income Fund ("PFD"):
The investment environment has been challenging during the first half of
fiscal 2006 as long-term interest rates increased substantially. Despite this
challenging environment, we are pleased to report the Fund's interest rate
hedging strategy has brought the Fund through the weak bond market to date in
relatively good shape. During the most recent fiscal quarter ended May 31st, the
Fund's total return on Net Asset Value ("NAV") declined 1.4%(1). Viewed over the
first two fiscal quarters of 2006, the total return on NAV increased by a
respectable 2.4%(1). For a further discussion of the Fund's recent NAV
performance, please see the following Q&A section.
As shown in the table below, over longer time periods the Fund has
produced consistently strong results based on NAV. For comparison purposes, we
have included the average total return earned on all funds in the Lipper
Domestic Investment Grade Bond Funds category(3). Because the investment
strategies including the interest rate hedge we use in the Fund typically differ
significantly from those of the bond funds, we believe that PFD provides a
superior way of accomplishing a similar income objective.
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TOTAL RETURN PER YEAR ON NET ASSET VALUE(1)
FOR PERIODS ENDED MAY 31, 2006
ONE THREE FIVE TEN LIFE OF
YEAR YEARS YEARS YEARS FUND(2)
---- ----- ----- ----- -------
Flaherty & Crumrine Preferred Income Fund ............. 0.8% 6.5% 9.7% 8.6% 11.4%
Lipper Domestic Investment Grade Bond Funds(3) ........ 1.6% 3.9% 6.0% 6.8% 7.4%
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(1) Based on data published by Lipper Inc. in each calendar month during the
relevant periods. 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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Long-term interest rates have been on the rise since last September, but
the trend accelerated during the past fiscal quarter. We began the quarter with
yields on long-term U.S. Treasury bonds hovering around 4.6%; by the end of May,
these yields were above 5.3%. When interest rates move like this, the impact on
bond prices is dramatic - the price of long-term Treasuries declined by more
than 9% during the quarter.
It is precisely for times like these that the Fund employs its "safety
net" hedging strategy. Rising long-term interest rates cause the value of the
Fund's investments to decline, but the Fund's interest rate hedges help moderate
the impact, limiting the net decline in the Fund's NAV.
Recall that our hedge positions are analogous to an insurance policy. We
make regular "premium" payments to buy protection against rising long-term
interest rates. In order to keep the cost of these payments down, we typically
structure the hedge with a "deductible," meaning some portion of the loss must
be absorbed by the Fund before we can collect on the policy. If long-term
interest rates increase
significantly, the hedge position will help offset the decline in the value of
the portfolio. This was the experience during the 2nd fiscal quarter.
In addition to helping protect the value of the portfolio in a weak
fixed-income market, the hedging strategy also helps support the Fund's dividend
through reinvestment of the hedge profits in income-producing securities. Please
see the following Q&A section for more on how the hedging strategies affect the
Fund's NAV and distributable income.
Good news for Fund shareholders arrived in the recently adopted tax bill,
which extended the 15% and 5% tax brackets on "Qualified Dividend Income"
("QDI") and long-term capital gains through 2010. Recall that over the last
several years, a significant percentage of the Fund's income has been eligible
as QDI. While we can't predict that this percentage will remain as high in the
future, extension of these lower brackets will certainly benefit shareholders.
Neither fish nor fowl, with characteristics of both debt and equity,
preferred securities can serve a wide range of financing needs. At the same
time, these mixed characteristics leave room for differing opinions on how to
view preferreds. Whether investor or issuer, credit agency or regulator,
accountants or the IRS; all have different approaches for treating preferred
securities. For a discussion of these mixed characteristics and how we attempt
to benefit from them, please take a look at the update on the preferred market
in the following Q&A section.
We hope investors will 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. In addition, some of the topics mentioned above are
analyzed in greater depth in the Frequently Asked Questions section of the
website.
Sincerely,
/s/ Donald F. Crumrine /s/ Robert M. Ettinger
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
July 10, 2006
2
QUESTIONS & ANSWERS
WHAT WERE THE COMPONENTS OF THE FUND'S TOTAL RETURN ON NET ASSET VALUE?
One method we have used in the past to better communicate the Fund's net
asset value (NAV) performance is to begin with the total return on the Fund's
securities portfolio, and progressively adjust for the impact of hedging,
expenses and leverage to arrive at the total return based on NAV (which includes
all of these factors). As mentioned in the shareholder's letter, the bond market
weakened significantly over the three months ended May 31st, accelerating the
sell off which began last year. While preferred securities performed much better
than long-term U.S. Treasuries and many other sectors of the fixed-income
market, the Fund's unhedged securities portfolio still produced a negative total
return of -2.3% during the recent fiscal quarter, and only +1.5% over the fiscal
year-to-date.
The bright spot so far this fiscal year has been the degree to which the
interest rate hedge helped insulate the Fund's portfolio from a more significant
decline due to the recent rise in long-term interest rates. During the Fund's
2nd fiscal quarter, the hedge improved results by +2.0%. During the Fund's 1st
fiscal quarter, long-term interest rates actually declined and the interest rate
hedge cost the Fund money. Consequently, over the full fiscal year-to-date, the
hedge improved results by +1.4%.
The benefit of leverage and the cost of the Fund's expenses generally
offset each other to some extent, and they have again this year. However, as the
cost of the Fund's leverage has increased over the past two years (see the Q&A
regarding leverage below), less incremental income on the Fund's leveraged
investments is available to offset the expense burden. In both the 2nd fiscal
quarter and fiscal year-to-date, this was true. The total returns on NAV of
-1.4% for the quarter and +2.4% for the fiscal year-to-date discussed in the
shareholders' letter were below those of the hedged investment portfolio because
the total returns on NAV include the impact of leverage and expenses.
COULD YOU REMIND ME AGAIN THE PURPOSE OF THE INTEREST RATE HEDGE?
The interest rate hedge has two purposes. The first is to help offset a
decline in the value of the Fund's securities portfolio (and therefore its NAV)
caused by a significant rise in long-term interest rates. The Fund purchases
out-of-the-money put options on US Treasury futures whose price movements are
correlated (albeit not perfectly) with those of the Fund's securities portfolio.
During a period of rising long-term interest rates, the Fund will
initially experience a reduction in NAV, as the hedge tightens and only
partially offsets the decline in the value of the securities portfolio. However,
if interest rates continue to increase, the put options and/or related
derivatives would be expected to appreciate in value and offset an increasing
proportion of the decline in the value of the Fund's investments. As with
insurance premiums paid on a house, these types of hedging instruments expire
worthless if long-term interest rates either fall or do not change much,
analogous to paying for insurance when the house doesn't burn down.
The second purpose of the safety-net hedge is to generate additional
income following a significant increase in long-term interest rates. This can be
achieved by investing realized gains from the interest rate hedge in additional
income producing securities. If long-term interest rates increase sufficiently,
the additional income received helps support and possibly increase the Fund's
monthly dividend rate.
3
PLEASE UPDATE ME ON DEVELOPMENTS IN THE PREFERRED MARKET.
As we have previously discussed with readers, the preferred market
consists of two main segments -"traditional" preferred stock that pays dividends
eligible as Qualified Dividend Income ("QDI") and taxable or "hybrid" preferred
securities that pay fully taxable interest. These two preferred market segments
have always existed in a grey area on an issuer's balance sheet between debt and
equity, and differing viewpoints over their status have been a constant theme as
far back as we can remember. Early last year, Moody's Investors Services
attempted to reduce the confusion by clarifying their credit rating treatment
for securities issued in each segment. Their doing so prompted significant
growth in the preferred market, but confusion returned as various regulators
(representing both issuers and purchasers) have applied different approaches to
characterizing these newer preferreds. The result has been a great deal of
volatility in preferred securities' prices.
There is nothing unusual going on here. As long as clever Wall Street
bankers continue to cook up variants on the two basic segments, confusion will
persist. And in confusion lies opportunity, as the turmoil contributes to the
preferred market's inefficiency and allows us to attempt to benefit from these
inefficiencies to add value to the Fund. Recently, we've taken advantage of this
confusion (and its impact on market valuation relationships) to scale back the
allocation to traditional preferreds and increase our holdings of hybrid
preferreds. We look forward to being able to continue to take advantage of the
preferred market's inefficiencies in the future.
ARE THERE ANY FEDERAL TAX ADVANTAGES TO INVESTING IN PREFERRED SECURITIES?
Yes, and these benefits have been recently extended until 2010. The Jobs
and Growth Tax Relief Reconciliation Act of 2003 lowered the maximum rate paid
by individuals on QDI to 15% or 5% (depending on an individual's income). As
mentioned in the shareholder's letter, the recently adopted Tax Increase
Protection and Reconciliation Act of 2005 extends these lowered QDI rates from
2008 until 2010. Prior to 2003, dividend income was typically taxed at the same
rate as ordinary income.
To be eligible for the lower tax rate as QDI, the dividend must be paid
from a company's after-tax income. For this reason, it is important to
understand the difference between taxable (or "hybrid") preferred securities and
traditional preferred stock. Hybrid preferreds pay interest, which the issuer
can deduct from revenue in determining its taxable income. Traditional
preferreds pay dividends, which are distributed from income after corporate
taxes have been paid. Because of the different tax treatment, hybrid preferred
securities normally have a higher yield than traditional preferred stocks.
For the investor, interest from hybrids is taxed as ordinary income, while
dividends from traditional preferreds may be taxed at the new, lower rate. As a
result, an investor in a low tax bracket or an IRA investor is more likely to
purchase taxable preferreds for the higher pre-tax income, while an investor in
a high tax bracket may prefer the QDI issue for the higher after-tax income. But
this isn't always the case. The market tends to offset the tax impact pretty
effectively, and securities that pay QDI will usually yield less (before taxes)
than those that pay interest.
Of course, it is important to remember the composition of the portfolio
and the income distributions can change from one year to the next, and the QDI
portions of one year's distributions may not be the same (or even similar) to
another year's.
4
DOES LEVERAGE BENEFIT THE FUND EVEN WHEN THE U.S. TREASURY YIELD CURVE IS FLAT
OR INVERTED?
Yes, as long as short-term U.S. Treasury interest rates are not
dramatically above long-term rates, the Fund continues to benefit from the use
of leverage in a flat or inverted yield curve.
Leverage is the use of borrowed funds to improve one's rate of return from
an investment with a corresponding increase in risk. PFD acquires its additional
funds to enhance the total return of the portfolio through the issuance of Money
Market Cumulative PreferredTM Stock (MMP(R)).
Generally, the rate paid on the MMP(R) is well below the rate the Fund can
earn on the investment portfolio and, due to a tax advantage for qualified
MMP(R) investors, the rate the Fund pays on the MMP(R) is relatively low
compared with other means of financing. The additional cash flow generated by
leverage enhances the income available for distribution to Common Stock
Shareholders.
The incremental income is greatest when the "spread" between the income
generated by the portfolio and the rate paid on the MMP(R) is wide. However, the
converse is also true; as the U.S Treasury yield curve "flattens" (short-term
rates and long-term rates approach equality), the amount of additional income
generated by the leverage will decrease. The Fund still benefits from additional
income generated by the leverage, just not as much as when the Treasury yield
curve is steeper. Of course, nothing is that simple. The Fund's income is
determined by several factors, the cost of leverage being only one.
In the case of an inverted U.S. Treasury yield curve (short-term rates are
higher than long-term rates) the Fund should continue to benefit from the use of
leverage. Preferred securities generally trade at yields higher than the
Treasury yields, commonly referred to as the "credit spread". So, although the
Treasury curve may be inverted, the preferred securities in the portfolio will
ordinarily continue to have a higher return than the short-term rates the Fund
pays for its leverage.
CAN I REINVEST DIVIDENDS DIRECTLY INTO THE FUND AND IS THERE ANY BENEFIT OVER
PURCHASING SHARES IN THE OPEN MARKET?
The answer to both questions is yes. The Fund's Dividend Reinvestment Plan
(the "DRIP") provides a means of acquiring additional shares of the Fund without
paying the full market premium, if any. When the market price is above NAV, new
shares will be issued to participants in the Plan at the higher of NAV or 95% of
the then current market price. Participating shareholders can therefore receive
a discount on their reinvested shares of up to 5% of the market price.
If the market price of the shares is below the NAV, the Plan purchases
shares in the open market. The brokerage commission charged for acquiring these
shares is competitive with most "discount" brokers.
Shareholders should be aware that not all broker-dealers participate in
the Fund's dividend reinvestment plan. If your shares are held in a brokerage
account, ask your broker if his/her firm is set up to participate. If you hold
your shares in certificate form, or if you would just like more information,
call PFPC Inc., at 1-800-331-1710.
PLEASE VISIT THE FREQUENTLY ASKED QUESTIONS SECTION ON THE FUND'S WEBSITE AT
WWW.PREFERREDINCOME.COM FOR FURTHER DISCUSSION ON THE ABOVE TOPICS AS WELL AS
OTHER INFORMATION ABOUT THE FUND.
5
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Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OVERVIEW
MAY 31, 2006 (UNAUDITED)
------------------------------------------------------
FUND STATISTICS ON 05/31/06
--------------------------------------------------------------------------------
Net Asset Value $ 15.10
Market Price $ 15.55
Premium 2.98%
Yield on Market Price 6.64%
Common Shares Outstanding 10,420,904
INDUSTRY CATEGORIES % OF PORTFOLIO
--------------------------------------------------------------------------------
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
Utilities 35%
Banks 30%
Insurance 13%
Financial Services 10%
Oil and Gas 4%
REITs 4%
Other 4%
MOODY'S RATINGS % OF PORTFOLIO
--------------------------------------------------------------------------------
AAA 0.4%
AA 4.4%
A 19.9%
BBB 45.7%
BB 16.3%
Not Rated 11.6%
--------------------------------------------------------------------------------
Below Investment Grade* 18.5%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P.
% OF
TOP 10 HOLDINGS BY ISSUER PORTFOLIO
--------------------------------------------------------------------------------
Interstate Power & Light 5.0%
FBOP Corporation 3.8%
Lehman Brothers 3.8%
North Fork Bancorporation 3.5%
SLM Corporation 3.4%
HSBC 3.4%
Xcel Energy 2.9%
First Republic Bank 2.8%
Entergy Louisiana 2.8%
Cobank 2.8%
% OF PORTFOLIO**
---------------------------------------------------------------------------------------------------------------------
Holdings Generating Qualified Dividend Income (QDI) for Individuals 67%
Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD) 62%
---------------------------------------------------------------------------------------------------------------------
** 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.
6
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Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 2006 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- 95.4%
BANKING -- 30.4%
---------------------------------------------------------------------------------------------------------------------
$ 3,000,000 Astoria Capital Trust I, 9.75% 11/01/29 Capital Security, Series B ............... $ 3,441,750
Auction Pass-Through Trust, Cl. B:
11 Series 2006-5, Variable Rate Pfd., 144A**** ................................... 294,250*
11 Series 2006-6, Variable Rate Pfd., 144A**** ................................... 294,250*
54,700 BAC Capital Trust I, 7.00% Pfd. 12/15/31 ......................................... 1,380,628
46,900 BAC Capital Trust II, 7.00% Pfd. 02/01/32 ........................................ 1,180,004
$ 800,000 Barnett Capital II, 7.95% 12/01/26 Capital Security .............................. 837,716
74,700 Citigroup Capital VIII, 6.95% Pfd. 09/15/31 ...................................... 1,870,488
Cobank, ACB:
50,000 7.00% Pfd., 144A**** .......................................................... 2,569,000*
75,000 Adj. Rate Pfd., 144A**** ...................................................... 4,064,250*
Comerica (Imperial) Capital Trust I:
5,000 7.60% Pfd. 07/01/50 ........................................................... 126,750
$ 500,000 9.98% 12/31/26 Capital Security, Series B ..................................... 543,195
$ 1,500,000 Dime Capital Trust I, 9.33% 05/06/27 Capital Security, Series A .................. 1,598,265
9,000 FBOP Corporation, Adj. Rate Pfd., 144A**** ....................................... 9,067,500*
$ 2,250,000 First Hawaiian Capital I, 8.343% 07/01/27 Capital Security, Series B ............. 2,388,240(1)
First Republic Bank:
200,000 6.25% Pfd. .................................................................... 4,852,000*
53,700 6.70% Pfd. .................................................................... 1,321,020*
22,500 First Republic Preferred Capital Corporation II, 8.75% Pfd., Series B, 144A**** .. 584,775
$ 1,500,000 First Union Capital II, 7.95% 11/15/29 Capital Security .......................... 1,747,567
16,500 Fleet Capital Trust VII, 7.20% Pfd. 12/15/31 ..................................... 418,852
10,000 Fleet Capital Trust VIII, 7.20% Pfd. 03/15/32 .................................... 254,950
$ 7,820,000 GreenPoint Capital Trust I, 9.10% 06/01/27 Capital Security ...................... 8,366,931
$ 3,000,000 HBOS Capital Funding LP, 6.85% Pfd. .............................................. 2,926,410(1)
5,000 HSBC Series II, Variable Inverse Pfd., Pvt. ...................................... 5,570,000*
HSBC USA, Inc.:
90,000 6.50% Pfd., Series H .......................................................... 2,259,000*
3,250 $2.8575 Pfd. .................................................................. 146,884*
6,100 JPMorgan Chase Capital X, 7.00% Pfd. 02/15/32, Series J .......................... 152,866
$ 270,000 Keycorp Institutional Capital B, 8.25% 12/15/26 Capital Security ................. 283,864
$ 674,000 NB Capital Trust II, 7.83% 12/15/26 Capital Security ............................. 706,082
16,000 PFGI Capital Corporation, 7.75% Pfd. ............................................. 412,320
$ 1,700,000 RBS Capital Trust B, 6.80% Pfd. .................................................. 1,662,591**(1)
10 Roslyn Real Estate, 8.95% Pfd., Series C, 144A**** ............................... 1,040,969
8,700 Royal Bank of Scotland Group PLC, 7.25% Pfd., Series H ........................... 219,980**(1)
The accompanying notes are an integral part of the financial statements.
7
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Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2006 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
BANKING -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
40,100 Sovereign Bancorp, 7.30% Pfd., Series C .......................................... $ 1,027,563*
68,100 Sovereign Capital Trust V, 7.75% Pfd. 05/22/36 ................................... 1,712,715
1,100 SunTrust Capital V, 7.05% Pfd. 12/15/31 .......................................... 27,726
5,000 USB Capital V, 7.25% Pfd. 12/15/31 ............................................... 126,750
16,000 USB Capital VII, 5.875% Pfd. 08/15/35 ............................................ 349,600
96,700 USB Capital VIII, 6.35% Pfd. 12/29/65 ............................................ 2,281,637
7,300 USB Capital X, 6.50% Pfd. 04/12/66 ............................................... 174,397
$ 2,900,000 Washington Mutual Preferred Funding, Variable Rate Pfd., 144A**** ................ 2,784,740
40,000 Zions Capital Trust B, 8.00% Pfd. 09/01/32 ....................................... 1,022,400
-------------------------------------------------------------------------------------------------------------------
72,090,875
----------------
FINANCIAL SERVICES -- 9.5%
---------------------------------------------------------------------------------------------------------------------
Lehman Brothers Holdings, Inc.:
36,280 5.67% Pfd., Series D .......................................................... 1,682,122*
154,475 5.94% Pfd., Series C .......................................................... 7,351,465*
3,000 Merrill Lynch Series II STRIPES Custodial Receipts, Pvt. ......................... 2,973,000*
9,200 Morgan Stanley Capital Trust IV, 6.25% Pfd. ...................................... 213,394
86,970 Morgan Stanley Capital Trust VI, 6.60% Pfd. ...................................... 2,104,239
SLM Corporation:
136,855 6.97% Pfd., Series A .......................................................... 7,381,275*
7,500 Adj. Rate Pfd., Series B ...................................................... 783,750*
-------------------------------------------------------------------------------------------------------------------
22,489,245
----------------
INSURANCE -- 11.9%
---------------------------------------------------------------------------------------------------------------------
40,000 ACE Ltd., 7.80% Pfd., Series C ................................................... 1,024,400**(1)
Aegon NV:
40,000 6.375% Pfd. ................................................................... 945,000**(1)
25,000 6.50% Pfd. .................................................................... 598,875**(1)
Arch Capital Group Ltd.:
10,000 7.875% Pfd., Series B ......................................................... 244,950**(1)
29,750 8.00% Pfd. .................................................................... 742,114**(1)
Axis Capital Holdings:
44,500 7.25% Pfd., Series A .......................................................... 1,087,135**(1)
9,300 Variable Rate Pfd., Series B .................................................. 927,489(1)
27,000 Berkley W.R. Capital Trust II, 6.75% Pfd. 07/26/45 ............................... 626,535
22,000 Endurance Specialty Holdings, 7.75% Pfd. ......................................... 524,590**(1)
The accompanying notes are an integral part of the financial statements.
8
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Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2006 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
21,000 Everest Re Capital Trust II, 6.20% Pfd., Series B ................................ $ 446,670(1)
10,000 Lincoln National Corporation, 6.75% Pfd. 04/20/66 ................................ 237,150
140,000 MetLife Inc., 6.50% Pfd., Series B ............................................... 3,454,500*
13,900 PartnerRe Capital Trust I, 7.90% Pfd. 12/31/31 ................................... 354,450**(1)
2,010 PartnerRe Ltd., 6.75% Pfd., Series C ............................................. 46,873**(1)
236,800 Principal Financial Group, 6.518% Pfd. ........................................... 6,297,696*
$ 4,000,000 Provident Financing Trust I, 7.405% 03/15/38 Capital Security .................... 3,711,300
$ 1,000,000 Renaissancere Capital Trust, 8.54% 03/01/27 Capital Security, Series B ........... 1,052,880(1)
Renaissancere Holdings Ltd.:
25,200 6.08% Pfd., Series C .......................................................... 530,460**(1)
6,300 7.30% Pfd., Series B .......................................................... 153,342**(1)
6,100 8.10% Pfd., Series A .......................................................... 152,805**(1)
119,500 Scottish Re Group Ltd., 7.25% Pfd. ............................................... 2,987,500**(1)
7,500 St. Paul Capital Trust I, 7.60% Pfd. 10/15/50 .................................... 189,525
$ 1,250,000 USF&G Capital, 8.312% 07/01/46 Capital Security, 144A**** ........................ 1,443,531
22,850 XL Capital Ltd., 8.00% Pfd., Series A ............................................ 585,874**(1)
-------------------------------------------------------------------------------------------------------------------
28,365,644
----------------
UTILITIES -- 34.0%
---------------------------------------------------------------------------------------------------------------------
Alabama Power Company:
300 4.52% Pfd. .................................................................... 23,928*
5,734 4.72% Pfd. .................................................................... 477,585*
200,000 5.30% Pfd. .................................................................... 4,520,000*
10,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ........................ 1,039,450*
Central Hudson Gas & Electric Corporation:
5,000 4.35% Pfd., Series D, Pvt. .................................................... 388,400*
900 4.96% Pfd., Series E, Pvt. .................................................... 75,118*
11,119 Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt. ........ 1,154,986*
Connecticut Light & Power Company:
12,124 4.50% Pfd., Series 1963, Pvt. ................................................. 439,253*
34,300 5.28% Pfd., Series 1967 ....................................................... 1,484,675*
1,905 6.56% Pfd., Series 1968 ....................................................... 98,412*
15,778 $3.24 Pfd. .................................................................... 825,505*
2,100 Consolidated Edison Company of New York, 4.65% Pfd., Series C .................... 177,786*
2,886 Dayton Power and Light Company, 3.90% Pfd., Series C ............................. 179,697*
The accompanying notes are an integral part of the financial statements.
9
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Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2006 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
$ 1,500,000 Dominion Resources Capital Trust III, 8.40% 01/15/31 Capital Security ............ $ 1,679,505
Duquesne Light Company:
7,675 4.10% Pfd. .................................................................... 257,995*
9,190 4.15% Pfd. .................................................................... 312,690*
910 4.20% Pfd. .................................................................... 31,336*
40,575 6.50% Pfd. .................................................................... 2,068,311*
5,490 $2.10 Pfd., Series A .......................................................... 189,048*
5,000 Energy East Capital Trust I, 8.25% Pfd. .......................................... 126,575
100,000 Entergy Arkansas, Inc., 6.45% Pfd. ............................................... 2,529,000*
4,555 Entergy Gulf States, Inc., 7.56% Pfd. ............................................ 419,265*
Entergy Louisiana, Inc.:
36,000 6.95% Pfd., 144A**** .......................................................... 3,655,080*
260 7.84% Pfd. .................................................................... 27,208*
113,888 8.00% Pfd., Series 92 ......................................................... 2,871,116*
5,000 Entergy Mississippi, Inc., 4.92% Pfd. ............................................ 374,400*
Florida Power Company:
5,157 4.60% Pfd. .................................................................... 419,470*
18,535 4.75% Pfd. .................................................................... 1,556,847*
50,000 Georgia Power Capital Trust V, 7.125% Pfd. 03/31/42 .............................. 1,271,000
2,010 Great Plains Energy, Inc., 4.50% Pfd. ............................................ 152,961*
24,000 Gulf Power Company, 6.00% Pfd., Series 1 ......................................... 2,364,720*
50,000 Hawaiian Electric Company, Inc., 5.25% Pfd., Series H, Pvt. ...................... 878,250*
$ 3,500,000 Houston Light & Power Capital Trust II, 8.257% 02/01/37 Capital Security ......... 3,669,715
32,650 Indianapolis Power & Light Company, 5.65% Pfd. ................................... 2,840,060*
384,000 Interstate Power & Light Company, 8.375% Pfd., Series B .......................... 11,982,720*
6,170 Ohio Edison Company, 4.44% Pfd. .................................................. 448,806*
Pacific Enterprises:
27,430 $4.50 Pfd. .................................................................... 2,195,086*
10,000 $4.75 Pfd., Series 53 ......................................................... 844,650*
Pacific Gas & Electric Co.:
7,600 4.50% Pfd., Series H .......................................................... 141,322*
41,500 5.00% Pfd., Series D .......................................................... 864,445*
79,086 5.00% Pfd., Series E .......................................................... 1,689,277*
The accompanying notes are an integral part of the financial statements.
10
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2006 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
PacifiCorp:
1,095 5.40% Pfd. .................................................................... $ 110,896*
1,225 $4.56 Pfd. .................................................................... 93,216*
14,542 $4.72 Pfd. .................................................................... 1,145,401*
12,333 $7.48 Sinking Fund Pfd. ....................................................... 1,258,459*
9,666 Portland General Electric, 7.75% Sinking Fund Pfd. ............................... 986,850*
5,000 PPL Electric Utilities Corporation, 6.75% Pfd. ................................... 522,075*
10,000 Public Service Company of New Mexico, 4.58% Pfd., Series 1965 .................... 725,100*
San Diego Gas & Electric Company:
1,200 4.40% Pfd. .................................................................... 18,540*
700 4.50% Pfd. .................................................................... 11,060*
77,000 $1.70 Pfd. .................................................................... 1,997,380*
13,100 Savannah Electric & Power Company, 6.00% Pfd. .................................... 332,544*
South Carolina Electric & Gas Company:
24,924 5.125% Purchase Fund Pfd., Pvt. ............................................... 1,280,844*
6,703 6.00% Purchase Fund Pfd., Pvt. ................................................ 341,250*
54,100 Southern California Edison, 4.08% Pfd. ........................................... 941,881*
75,000 Southern Union Company, 7.55% Pfd. ............................................... 1,947,375*
$ 750,000 TXU Electric Capital V, 8.175% 01/30/37 Capital Security ......................... 779,269
Union Electric Company:
14,150 4.56% Pfd. .................................................................... 1,142,542*
4,000 $7.64 Pfd. .................................................................... 414,340*
12,500 Virginia Electric & Power Company, $7.05 Pfd. .................................... 1,279,063*
11,200 Virginia Power Capital Trust, 7.375% Pfd. 07/30/42 ............................... 281,736
Wisconsin Power & Light Company:
1,220 4.50% Pfd. .................................................................... 96,636*
546 4.80% Pfd. .................................................................... 46,132*
13,000 6.20% Pfd. .................................................................... 1,332,435*
Xcel Energy, Inc.:
16,030 $4.08 Pfd., Series B .......................................................... 1,177,243*
26,200 $4.10 Pfd., Series C .......................................................... 1,933,560*
22,000 $4.11 Pfd., Series D .......................................................... 1,627,560*
17,750 $4.16 Pfd., Series E .......................................................... 1,329,120*
10,000 $4.56 Pfd., Series G .......................................................... 820,800*
-------------------------------------------------------------------------------------------------------------------
80,718,960
----------------
The accompanying notes are an integral part of the financial statements.
11
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2006 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
PREFERRED SECURITIES -- (CONTINUED)
OIL AND GAS -- 4.0%
---------------------------------------------------------------------------------------------------------------------
8,000 Devon Energy Corporation, 6.49% Pfd., Series A ................................... $ 803,680*
5,985 EOG Resources, Inc., 7.195% Pfd., Series B ....................................... 6,218,295*
$ 1,675,000 KN Capital Trust III, 7.63% 04/15/28 Capital Security ............................ 1,506,646
10,000 Lasmo America Limited, 8.15% Pfd., 144A**** ...................................... 1,069,500*(1)
-------------------------------------------------------------------------------------------------------------------
9,598,121
----------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 3.8%
---------------------------------------------------------------------------------------------------------------------
21,400 BRE Properties, Inc., 8.08% Pfd., REIT, Series B ................................. 544,951
Duke Realty Corporation:
12,400 6.50% Pfd., REIT, Series K .................................................... 286,998
20,000 6.625% Pfd., REIT, Series J ................................................... 470,500
10,000 Equity Office Property Trust, 7.75% Pfd., REIT, Series G ......................... 251,500
1,000 Equity Residential Properties, 8.29% Pfd., REIT, Series K ........................ 57,870
50,000 HRPT Properties Trust, 7.125% Pfd., REIT, Series C ............................... 1,218,250
16,000 PS Business Parks, Inc., 7.00% Pfd., REIT, Series H .............................. 382,880
Public Storage, Inc.:
19,000 6.18% Pfd., REIT, Series D .................................................... 411,635
120,770 6.45% Pfd., REIT, Series F .................................................... 2,740,875
10,000 6.45% Pfd., REIT, Series X .................................................... 226,450
5,300 6.75% Pfd., REIT, Series E .................................................... 125,398
3,500 7.125% Pfd., REIT ............................................................. 85,750
40,000 Realty Income Corporation, 7.375% Pfd., REIT, Series D ........................... 1,008,600
Regency Centers Corporation:
7,600 6.70% Pfd., REIT .............................................................. 175,560
40,000 7.25% Pfd., REIT .............................................................. 983,400
-------------------------------------------------------------------------------------------------------------------
8,970,617
----------------
MISCELLANEOUS INDUSTRIES -- 1.8%
---------------------------------------------------------------------------------------------------------------------
13,600 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B ........................ 1,082,900*
40,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** .............................. 3,086,800*
26,000 Touch America Holdings, $6.875 Pfd. .............................................. --*+
-------------------------------------------------------------------------------------------------------------------
4,169,700
----------------
TOTAL PREFERRED SECURITIES
(Cost $219,721,017) ............................................................ 226,403,162
----------------
The accompanying notes are an integral part of the financial statements.
12
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2006 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
CORPORATE DEBT SECURITIES -- 2.6%
FINANCIAL SERVICES -- 0.3%
---------------------------------------------------------------------------------------------------------------------
36,300 Saturns-GS, 6.00% 02/15/33, Series GS ............................................ $ 805,860
---------------------------------------------------------------------------------------------------------------------
INSURANCE -- 1.2%
---------------------------------------------------------------------------------------------------------------------
$ 900,000 Farmers Exchange Capital, 7.20% 07/15/48, 144A**** ............................... 861,615
$ 1,950,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** .............................. 1,843,442
-------------------------------------------------------------------------------------------------------------------
2,705,057
----------------
UTILITIES -- 0.9%
---------------------------------------------------------------------------------------------------------------------
$ 1,000,000 Duquesne Light Holdings, 6.25% 08/15/35 .......................................... 900,755
5,000 Entergy Louisiana LLC, 7.60% 04/01/32 ............................................ 127,125
45,000 Northern States Power Company, 8.00% ............................................. 1,165,500
-------------------------------------------------------------------------------------------------------------------
2,193,380
----------------
OIL AND GAS -- 0.2%
---------------------------------------------------------------------------------------------------------------------
15,000 Nexen, Inc., 7.35% Subordinated Notes ............................................ 377,175(1)
---------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $6,283,923) .............................................................. 6,081,472
----------------
OPTION CONTRACTS -- 1.2%
1,525 September Put Options on September U.S. Treasury Bond Futures, Expiring
08/25/06 ...................................................................... 2,855,735+
-------------------------------------------------------------------------------------------------------------------
TOTAL OPTION CONTRACTS
(Cost $3,123,641) .............................................................. 2,855,735
----------------
The accompanying notes are an integral part of the financial statements.
13
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 2006 (UNAUDITED)
------------------------------------------------------
SHARES/$ PAR VALUE
------------ -------
MONEY MARKET FUND -- 0.3%
853,215 BlackRock Provident Institutional, TempFund ................................. $ 853,215
-------------------------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost $853,215) ........................................................... 853,215
----------------
TOTAL INVESTMENTS (Cost $229,981,796***) ....................................... 99.5% 236,193,584
--------- ----------------
OTHER ASSETS AND LIABILITIES (Net) ............................................. 0.5% 1,144,014
--------- ----------------
TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK ....................... 100.0%++ $ 237,337,598
--------- ----------------
MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (MMP(R)) REDEMPTION VALUE ...................... (80,000,000)
----------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ................................................. $ 157,337,598
================
----------
* Securities eligible for the Dividends Received Deduction and distributing
Qualified Dividend Income.
** Securities distributing Qualified Dividend Income only.
*** Aggregate cost of securities held.
**** Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration to qualified institutional buyers. These securities have been
determined to be liquid under the guidelines established by the Board of
Directors.
(1) Foreign Issuer.
+ 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:
PFD. -- Preferred Securities
PVT. -- Private Placement Securities
REIT -- Real Estate Investment Trust
The accompanying notes are an integral part of the financial statements.
14
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 2006 (UNAUDITED)
------------------------------------------------------
ASSETS:
Investments, at value (Cost $229,981,796) ............................ $ 236,193,584
Dividends and interest receivable .................................... 1,763,418
Prepaid expenses ..................................................... 174,515
-------------
Total Assets ................................................. 238,131,517
LIABILITIES:
Dividends payable to Common Stock Shareholders ....................... $ 119,522
Investment advisory fee payable ...................................... 112,012
Administration, Transfer Agent and Custodian fees payable ............ 45,085
Professional fees payable ............................................ 42,347
Directors' fees payable .............................................. 4,573
Accrued expenses and other payables .................................. 39,222
Accumulated undeclared distributions to Money Market Cumulative
Preferred(TM) Stock Shareholders .................................. 431,158
-----------
Total Liabilities ............................................ 793,919
-------------
MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (800 SHARES
OUTSTANDING) REDEMPTION VALUE ........................................ 80,000,000
-------------
NET ASSETS AVAILABLE TO COMMON STOCK .................................... $ 157,337,598
=============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
Distributions in excess of net investment income ..................... $ (508,482)
Accumulated net realized gain on investments sold .................... 1,318,293
Unrealized appreciation of investments ............................... 6,211,788
Par value of Common Stock ............................................ 104,209
Paid-in capital in excess of par value of Common Stock ............... 150,211,790
-------------
Total Net Assets Available to Common Stock ................... $ 157,337,598
=============
NET ASSET VALUE PER SHARE OF COMMON STOCK:
Common Stock (10,420,904 shares outstanding) ....................... $ 15.10
=============
The accompanying notes are an integral part of the financial statements.
15
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 2006 (UNAUDITED)
------------------------------------------------------
INVESTMENT INCOME:
Dividends+ ............................................................ $ 6,297,872
Interest .............................................................. 1,501,907
------------
Total Investment Income .......................................... 7,799,779
EXPENSES:
Investment advisory fee ............................................... $661,018
Administrator's fee ................................................... 110,479
Money Market Cumulative Preferred(TM) Stock broker commissions
and auction agent fees ............................................. 113,617
Professional fees ..................................................... 65,065
Insurance expense ..................................................... 94,978
Transfer Agent fees ................................................... 42,812
Directors' fees ....................................................... 39,130
Custodian fees ........................................................ 13,446
Chief Compliance Officer fees ......................................... 19,694
Other ................................................................. 43,450
--------
Total Expenses ................................................... 1,203,689
------------
NET INVESTMENT INCOME ...................................................... 6,596,090
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net realized gain on investments sold during the period ............... 5,987,437
Change in net unrealized appreciation/depreciation of investments
held during the period ............................................. (7,251,602)
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS ............................ (1,264,165)
------------
DISTRIBUTIONS TO MONEY MARKET CUMULATIVE PREFERRED(TM)
STOCK SHAREHOLDERS:
From net investment income (including changes in accumulated
undeclared distributions) .......................................... (1,515,084)
------------
NET INCREASE IN NET ASSETS TO COMMON STOCK RESULTING
FROM OPERATIONS ......................................................... $ 3,816,841
============
----------
+ For Federal income tax purposes, a significant portion of this amount may
not qualify for the inter-corporate dividends received deduction ("DRD")
or as qualified dividend income ("QDI") for individuals.
The accompanying notes are an integral part of the financial statements.
16
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
----------------------------------------------------------------
SIX MONTHS ENDED
MAY 31, 2006 YEAR ENDED
(UNAUDITED) NOVEMBER 30, 2005
---------------- -----------------
OPERATIONS:
Net investment income .................................................. $ 6,596,090 $ 12,644,014
Net realized gain on investments sold during the period ................ 5,987,437 5,618,814
Change in net unrealized appreciation/depreciation of investments
held during the period .............................................. (7,251,602) (6,491,830)
Distributions to MMP(R)* Shareholders from net investment
income, including changes in accumulated undeclared distributions ... (1,515,084) (2,230,179)
---------------- -----------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS ................... 3,816,841 9,540,819
DISTRIBUTIONS:
Dividends paid from net investment income to Common
Stock Shareholders(1) ............................................... (5,507,171) (12,068,968)
---------------- -----------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ....................... (5,507,171) (12,068,968)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment
and Cash Purchase Plan .............................................. 750,560 1,704,515
---------------- -----------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK
RESULTING FROM FUND SHARE TRANSACTIONS .............................. 750,560 1,704,515
NET DECREASE IN NET ASSETS AVAILABLE TO COMMON ---------------- -----------------
STOCK FOR THE PERIOD ................................................... $ (939,770) $ (823,634)
================ =================
----------------------------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period .................................................... $ 158,277,368 $ 159,101,002
Net decrease in net assets during the period ........................... (939,770) (823,634)
---------------- -----------------
End of period (including distributions in excess of net investment
income of ($508,482) and ($82,317), respectively) ................... $ 157,337,598 $ 158,277,368
================ =================
----------
* Money Market Cumulative Preferred(TM) Stock
(1) May include income earned, but not paid out, in prior fiscal year.
The accompanying notes are an integral part of the financial statements.
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.
SIX MONTHS
ENDED YEAR ENDED NOVEMBER 30,
MAY 31, 2006 -----------------------------------------------------
(UNAUDITED) 2005 2004 2003 2002 2001
------------ --------- --------- --------- --------- ---------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ..................... $ 15.26 $ 15.49 $ 15.85 $ 13.63 $ 14.62 $ 13.41
--------- --------- --------- --------- --------- ---------
INVESTMENT OPERATIONS:
Net investment income .................................... 0.63 1.22 1.24 1.28 1.29 1.23
Net realized and unrealized gain/(loss) on investments ... (0.11) (0.07) (0.31) 2.27 (1.01) 1.19
DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS:
From net investment income ............................... (0.15) (0.21) (0.11) (0.10) (0.12) (0.23)
--------- --------- --------- --------- --------- ---------
Total from investment operations ......................... 0.37 0.94 0.82 3.45 0.16 2.19
--------- --------- --------- --------- --------- ---------
Cost of Issuance of Additional MMP(R)* (Note 6) .......... -- -- -- -- (0.05) --
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income ............................... (0.53) (1.17) (1.18) (1.23) (1.10) (0.98)
--------- --------- --------- --------- --------- ---------
Total distributions to Common Stock Shareholders ......... (0.53) (1.17) (1.18) (1.23) (1.10) (0.98)
--------- --------- --------- --------- --------- ---------
Net asset value, end of period ........................... $ 15.10 $ 15.26 $ 15.49 $ 15.85 $ 13.63 $ 14.62
========= ========= ========= ========= ========= =========
Market value, end of period .............................. $ 15.55 $ 16.44 $ 17.42 $ 17.65 $ 15.00 $ 14.47
========= ========= ========= ========= ========= =========
Total investment return based on net asset value** ....... 2.38%**** 5.78% 4.73% 25.87% 0.58% 17.01%
========= ========= ========= ========= ========= =========
Total investment return based on market value ** ......... (2.14)%**** 1.33% 5.76% 27.35% 11.84% 28.02%
========= ========= ========= ========= ========= =========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
TO COMMON STOCK SHAREHOLDERS:
Total net assets, end of period (in 000's) ......... $ 157,338 $ 158,277 $ 159,101 $ 160,924 $ 136,756 $ 144,650
Operating expenses ................................. 1.51%*** 1.48% 1.48% 1.51% 1.48% 1.42%
Net Investment Income + ............................ 6.35%*** 6.38% 7.14% 7.84% 8.32% 7.21%
----------------------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate ............................... 37%**** 54% 27% 28% 30% 39%
Total net assets available to Common and
Preferred Stock, end of period (in 000's) ....... $ 237,338 $ 238,277 $ 239,101 $ 240,992 $ 216,974 $ 202,412
Ratio of operating expenses to total average net
assets available to Common and Preferred Stock .. 1.00%*** 0.99% 0.99% 0.99% 0.99% 1.00%
* Money Market Cumulative Preferred(TM) Stock.
** Assumes reinvestment of distributions at the price obtained by the Fund's
Dividend Reinvestment and Cash Purchase Plan.
*** Annualized.
**** Not Annualized.
+ The net investment income ratios reflect income net of operating expenses
and payments to MMP(R)* Shareholders.
++ Information presented under heading Supplemental Data includes MMP(R)*.
The accompanying notes are an integral part of the financial statements.
18
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
PER SHARE OF COMMON STOCK (UNAUDITED)
------------------------------------------------------
TOTAL DIVIDEND
DIVIDENDS NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE (1)
--------- --------- ------------- ------------
December 31, 2005 ........................... $0.0905 $15.38 $16.09 $15.38
January 31, 2006 ............................ 0.0905 15.43 16.89 16.05
February 28, 2006 ........................... 0.0905 15.57 16.65 15.82
March 31, 2006 .............................. 0.0860 15.40 16.08 15.40
April 30, 2006 .............................. 0.0860 15.23 15.55 15.23
May 31, 2006 ................................ 0.0860 15.10 15.55 15.10
----------
(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)
--------- --------------- ------------- ------------- ----------------
05/31/06* 800 $297,211 $100,000 $100,000
11/30/05 800 298,367 100,000 100,000
11/30/04 800 299,078 100,000 100,000
11/30/03 800 301,240 100,000 100,000
11/30/02 800 271,218 100,000 100,000
11/30/01 575 352,021 100,000 100,000
----------
(1) See note 6. The Fund issued 225 shares of additional MMP(R) on June 4,
2002.
(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.
* Unaudited
The accompanying notes are an integral part of the financial statements.
20
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
------------------------------------------------------
1. ORGANIZATION
Flaherty & Crumrine Preferred Income Fund Incorporated (the "Fund") was
incorporated as a Maryland corporation on September 28, 1990, and commenced
operations on January 31, 1991 as a diversified, closed-end management
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act"). The Fund's investment objective is to provide its common
shareholders with high current income consistent with the preservation of
capital.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of 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
also amortizes premiums and accretes discounts on certain fixed income
securities.
21
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
OPTIONS: Purchases of options are recorded as an investment, the value of
which is marked-to-market at each valuation date. When the Fund enters into a
closing sale transaction, the Fund will record a gain or loss depending on the
difference between the purchase and sale price. The risks associated with
purchasing options and the maximum loss the Fund would incur are limited to the
purchase price originally paid.
When the Fund writes an option, an amount equal to the premium received by
the Fund is recorded as a liability, the value of which is marked-to-market at
each valuation date. When a written option expires, the Fund realizes a gain
equal to the amount of the premium originally received. When the Fund enters
into a closing purchase transaction, the Fund realizes a gain (or loss if the
cost of the closing purchase transaction exceeds the premium received when the
option was written) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a call option is exercised, the Fund realizes a gain or loss from the sale
of the underlying security and the proceeds from such sale are increased by the
amount of the premium originally received. When a put option is exercised, the
amount of the premium originally received will reduce the cost of the security
which the Fund purchased upon exercise.
The risk in writing a call option is that the Fund may forego the
opportunity for profit if the market price of the underlying security increases
and the option is exercised. The risk in writing a put option is that the Fund
may incur a loss if the market price of the underlying security decreases and
the option is exercised.
REPURCHASE AGREEMENTS: The Fund may engage in repurchase agreement
transactions. The Fund's investment adviser reviews and approves the eligibility
of the banks and dealers with which the Fund may enter into repurchase agreement
transactions. The value of the collateral underlying such transactions is at
least equal at all times to the total amount of the repurchase obligations,
including interest. The Fund maintains possession of the collateral through its
custodian and, in the event of counterparty default, the Fund has the right to
use the collateral to offset losses incurred. There is the possibility of loss
to the Fund in the event the Fund is delayed or prevented from exercising its
rights to dispose of the collateral securities.
FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company by complying with the requirements under subchapter
M of the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and intends to distribute substantially all of its taxable
net investment income to its shareholders. Therefore, no federal income tax
provision is required.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Fund expects to declare
dividends on a monthly basis to shareholders of Common Stock ("Shareholders").
Distributions to Shareholders are recorded on the ex-dividend date. Any net
realized short-term capital gains will be distributed to Shareholders at least
annually. Any net realized long-term capital gains may be distributed to
Shareholders at least annually or may be retained by the Fund as determined by
the Fund's Board of Directors. Capital gains retained by the Fund are subject to
tax at the capital gains corporate tax rate. Subject to the Fund
22
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
qualifying as a regulated investment company, any taxes paid by the Fund on such
net realized long-term capital gains may be used by the Fund's Shareholders as a
credit against their own tax liabilities.
Income and capital gain distributions are determined and characterized in
accordance with income tax regulations which may differ from 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 are included as ordinary income for tax
purposes, and may exclude amortization of premium on certain fixed income
securities, which are not reflected in ordinary income for tax purposes. The tax
character of distributions paid, including changes in accumulated undeclared
distributions to MMP(R) shareholders, during 2006 and 2005 was as follows:
DISTRIBUTIONS PAID IN FISCAL YEAR 2006 DISTRIBUTIONS PAID IN FISCAL YEAR 2005
-------------------------------------- --------------------------------------
ORDINARY INCOME LONG-TERM CAPITAL GAINS ORDINARY INCOME LONG-TERM CAPITAL GAINS
--------------- ----------------------- --------------- -----------------------
Common N/A N/A $12,068,968 $0
Preferred N/A N/A $ 2,230,179 $0
As of November 30, 2005, 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)
--------------------------- --------------- -------------- ---------------------------
($4,384,186) $591,745 $0 $13,178,432
At November 30, 2005, the composition of the Fund's $4,384,186 accumulated
realized capital losses was $105,461, $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 paid $15,385 of Federal excise taxes attributable to
calendar year 2005 in March 2006.
23
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
3. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE, TRANSFER AGENT FEE, CUSTODIAN
FEE, DIRECTORS' FEES AND CHIEF COMPLIANCE OFFICER FEE
Flaherty & Crumrine Incorporated (the "Adviser") serves as the Fund's
investment adviser. The Fund pays the Adviser a monthly fee at an annual rate of
0.625% of the value of the Fund's average monthly total net assets available to
Common and Preferred Stock up to $100 million and 0.50% of the value of the
Fund's average monthly total net assets available to Common and Preferred Stock
in excess of $100 million.
For purposes of calculating the fees to the Adviser, Administrator and
Custodian, the Fund's average weekly total managed assets means the total assets
of the Fund minus the sum of accrued liabilities. For purposes of determining
total managed assets, the liquidation preference of any preferred shares issued
by the Fund is not treated as a liability.
PFPC Inc., a member of the PNC Financial Services Group, Inc. ("PNC
Financial Services"), serves as the Fund's Administrator. As Administrator, PFPC
Inc. calculates the net asset value of the Fund's shares attributable to Common
Stock and generally assists in all aspects of the Fund's administration and
operation. As compensation for PFPC Inc.'s services as Administrator, the Fund
pays PFPC Inc. a monthly fee at an annual rate of 0.10% of the first $200
million of the Fund's average weekly total managed assets, 0.04% of the next
$300 million of the Fund's average weekly total managed assets, 0.03% of the
next $500 million of the Fund's average weekly total managed assets and 0.02% of
the Fund's average weekly total managed assets above $1 billion.
PFPC Inc. also serves as the Fund's Common Stock dividend-paying agent and
registrar (Transfer Agent). As compensation for PFPC Inc.'s services, the Fund
pays PFPC Inc. a fee at an annual rate of 0.02% of the first $150 million of the
Fund's average weekly net assets attributable to Common Stock, 0.0075% of the
next $350 million of the Fund's average weekly net assets attributable to Common
Stock, and 0.0025% of the Fund's average weekly net assets attributable to
Common Stock above $500 million, plus certain out of pocket expenses. For the
purpose of calculating such fee, the Fund's average weekly net assets
attributable to Common Stock are deemed to be the average weekly value of the
Fund's total assets minus the sum of the Fund's liabilities and accumulated
dividends, if any, on Fund preferred shares. 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
24
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
committee and $150 for each telephone meeting. The Audit Committee Chairman
receives an additional annual fee of $2,500. The Fund also reimburses all
Directors for travel and out-of-pocket expenses incurred in connection with such
meetings.
The Fund currently pays the Adviser a fee of $37,500 per annum for Chief
Compliance Officer services and reimburses out-of-pocket expenses incurred in
connection with providing services in this role.
4. PURCHASES AND SALES OF SECURITIES
For the six months ended May 31, 2006, the cost of purchases and proceeds
from sales of securities excluding short-term investments, aggregated
$93,101,045 and $87,848,143, respectively.
At May 31, 2006, the aggregate cost of securities for federal income tax
purposes was $230,266,754, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $12,370,213
and the aggregate gross unrealized depreciation for all securities in which
there is an excess of tax cost over value was $6,443,383.
5. COMMON STOCK
At May 31, 2006, 240,000,000 shares of $0.01 par value Common Stock were
authorized.
Common Stock Transactions were as follows:
SIX MONTHS ENDED YEAR ENDED
5/31/06 11/30/05
-------------------- -----------------------
SHARES AMOUNT SHARES AMOUNT
------ -------- ------- ----------
Shares issued under the Dividend Reinvestment and
Cash Purchase Plan ....................................... 48,161 $750,560 103,438 $1,704,515
------ -------- ------- ----------
6. MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (MMP(R))
The Fund's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of $0.01 par value preferred stock. The MMP(R) is senior to
the Common Stock and results in the financial leveraging of the Common Stock.
Such leveraging tends to magnify both the risks and opportunities to Common
Stock Shareholders. Dividends on shares of MMP(R) are cumulative.
The Fund is required to meet certain asset coverage tests with respect to
the MMP(R). If the Fund fails to meet these requirements and does not correct
such failure, the Fund may be required to redeem, in part or in full, MMP(R) at
a redemption price of $100,000 per share plus an amount equal to the accumulated
and unpaid dividends on such shares in order to meet these requirements.
Additionally, failure to meet the foregoing asset requirements could restrict
the Fund's ability to pay dividends to Common Stock Shareholders and could lead
to sales of portfolio securities at inopportune times.
25
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
------------------------------------------------------
If the Fund allocates any net gains or income ineligible for the Dividends
Received Deduction to shares of the MMP(R), the Fund is required to make
additional distributions to MMP(R) Shareholders or to pay a higher dividend rate
in amounts needed to provide a return, net of tax, equal to the return had such
originally paid distributions been eligible for the Dividends Received
Deduction.
An auction of the MMP(R) is generally held every 49 days. Existing MMP(R)
Shareholders may submit an order to hold, bid or sell such shares at par value
on each auction date. MMP(R) Shareholders may also trade shares in the secondary
market, if any, between auction dates.
At May 31, 2006, 800 shares of MMP(R) were outstanding at the annualized
rate of 3.73%. 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 a diversified portfolio of preferred
securities. This includes traditional preferred stocks eligible for the
inter-corporate dividends received deduction ("DRD") and fully taxable (hybrid)
preferred securities. Under normal markets conditions, at least 80% of the value
of the Fund's net assets will be invested in preferred securities. Also, under
normal market conditions, the Fund invests at least 25% of its assets in
securities issued by companies in the utility industry and at least 25% of its
assets in securities issued by companies in the banking industry. The Fund's
portfolio may therefore be subject to greater risk and market fluctuation than a
portfolio of securities representing a broader range of investment alternatives.
The Fund may invest up to 25% of its assets at the time of purchase in
securities rated below investment grade. These securities must be rated at least
either "Ba3" by Moody's Investors Service, Inc. or "BB-" by Standard & Poor's
or, if unrated, judged to be comparable in quality by the Adviser, in 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 (UNAUDITED) (CONTINUED)
------------------------------------------------------
In addition to foreign money market securities, the Fund may invest up to
30% of its total assets in the securities of companies organized or having their
principal place of business outside the United States. All foreign securities
held by the Fund will be denominated in U.S. dollars.
8. SPECIAL INVESTMENT TECHNIQUES
The Fund may employ certain investment techniques in accordance with its
fundamental investment policies. These may include the use of when-issued and
delayed delivery transactions. Securities purchased or sold on a when-issued or
delayed delivery basis may be settled within 45 days after the date of the
transaction. Such transactions may expose the Fund to credit and market
valuation risk greater than that associated with regular trade settlement
procedures. The Fund may also enter into transactions, in accordance with its
investment policies, involving any or all of the following: short sales of
securities, futures contracts, interest rate swaps, swap futures, options on
futures contracts, options on securities, swaptions and certain credit
derivative transactions, including, but not limited to, the purchase and sale of
credit protection. As in the case of when-issued securities, the use of
over-the-counter derivatives, such as interest rate swaps, swaptions, and credit
default swaps may expose the Fund to greater credit, operations, liquidity, and
valuation risk than is the case with regulated, exchange traded futures and
options. These transactions are used for hedging or other appropriate
risk-management purposes, or, under certain other circumstances, to increase
return. No assurance can be given that such transactions will achieve their
desired purposes or will result in an overall reduction of risk to the Fund.
9. SECURITIES LENDING
The Fund may lend up to 15% of its total assets (including the value of
the loan collateral) to certain qualified brokers in order to earn additional
income. The Fund receives compensation in the form of fees or interest earned on
the investment of any cash collateral received. The Fund also continues to
receive interest and dividends on the securities loaned. The Fund receives
collateral in the form of cash or securities with a market value at least equal
to the market value of the securities on loan, including accrued interest. In
the event of default or bankruptcy by the borrower, the Fund could experience
delays and costs in recovering the loaned securities or in gaining access to the
collateral. The Fund has the right under the lending agreement to recover the
securities from the borrower on demand.
27
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED)
------------------------------------------------------
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), a shareholder whose Common Stock is registered in their own name will
have all distributions reinvested automatically by PFPC Inc. as agent under the
Plan, unless the shareholder elects to receive cash. Distributions with respect
to shares registered in the name of a broker-dealer or other nominee (that is,
in "street name") may be reinvested by the broker or nominee in additional
shares under the Plan, but only if the service is provided by the broker or
nominee, unless the shareholder elects to receive distributions in cash. A
shareholder who holds Common Stock registered in the name of a broker or other
nominee may not be able to transfer the Common Stock to another broker or
nominee and continue to participate in the Plan. Investors who own Common Stock
registered in street name should consult their broker or nominee for details
regarding reinvestment.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price per share of the Fund's Common Stock is equal to or exceeds the
net asset value per share on the valuation date, participants in the Plan will
be issued new shares valued at the higher of net asset value or 95% of the then
current market value. Otherwise, PFPC Inc. will buy shares of the Fund's Common
Stock in the open market, on the New York Stock Exchange or elsewhere, on or
shortly after the payment date of the dividend or distribution and continuing
until the ex-dividend date of the Fund's next distribution to holders of the
Common Stock or until it has expended for such purchases all of the cash that
would otherwise be payable to the participants. The number of purchased shares
that will then be credited to the participants' accounts will be based on the
average per share purchase price of the shares so purchased, including brokerage
commissions. If PFPC Inc. commences purchases in the open market and the then
current market price of the shares (plus any estimated brokerage commissions)
subsequently exceeds their net asset value most recently determined before the
completion of the purchases, PFPC Inc. will attempt to terminate purchases in
the open market and cause the Fund to issue the remaining dividend or
distribution in shares. In this case, the number of shares received by the
participant will be based on the weighted average of prices paid for shares
purchased in the open market and the price at which the Fund issues the
remaining shares. These remaining shares will be issued by the Fund at the
higher of net asset value or 95% of the then current market value.
Plan participants are not subject to any charge for reinvesting dividends
or capital gains distributions. Each Plan participant will, however, bear a
proportionate share of brokerage commissions incurred with respect to PFPC
Inc.'s open market purchases in connection with the reinvestment of dividends or
capital gains distributions. For the six months ended May 31, 2006, 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.
28
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
In addition to acquiring shares of Common Stock through the reinvestment
of cash dividends and distributions, a shareholder may invest any further
amounts from $100 to $3,000 semi-annually at the then current market price in
shares purchased through the Plan. Such semi-annual investments are subject to
any brokerage commission charges incurred by PFPC Inc. under the Plan.
A shareholder whose Common Stock is registered in his or her own name may
terminate participation in the Plan at any time by notifying PFPC Inc. in
writing, by completing the form on the back of the Plan account statement and
forwarding it to PFPC Inc., or by calling PFPC Inc. directly. A termination will
be effective immediately if notice is received by PFPC Inc. not less than 10
days before any dividend or distribution record date. Otherwise, the termination
will be effective, and only with respect to any subsequent dividends or
distributions, on the first day after the dividend or distribution has been
credited to the participant's account in additional shares of the Fund. Upon
termination and according to a participant's instructions, PFPC Inc. will either
(a) issue certificates for the whole shares credited to the shareholder's Plan
account and a check representing any fractional shares or (b) sell the shares in
the market. Shareholders who hold Common Stock registered in the name of a
broker or other nominee should consult their broker or nominee to terminate
participation.
The Plan is described in more detail in the Fund's Plan brochure.
Information concerning the Plan may be obtained from PFPC Inc. at
1-800-331-1710.
PROXY VOTING POLICIES AND PROXY VOTING RECORD ON FORM N-PX
The Fund files Form N-PX with its complete proxy voting record for the 12
months ended June 30th no later than August 31st of each year. The Fund filed
its latest Form N-PX with the Securities and Exchange Commission ("SEC") on
August 17, 2005. This filing, as well as the Fund's proxy voting policies and
procedures, are available (i) without charge, upon request, by calling the
Fund's transfer agent at 1-800-331-1710 and (ii) on the SEC's website at
WWW.SEC.GOV. In addition, the Fund's proxy voting policies and procedures are
available on the Fund's website at WWW.PREFERREDINCOME.COM.
PORTFOLIO SCHEDULE ON FORM N-Q
The Fund files a complete schedule of portfolio holdings with the SEC for
the first and third fiscal quarters on Form N-Q, the latest of which was filed
for the quarter ended February 28, 2006. The Fund's Form N-Q is available on the
SEC's website at WWW.SEC.GOV or may be viewed and obtained from the SEC's Public
Reference Room in Washington D.C. Information on the operation of the Public
Reference Section may be obtained by calling 1-800-SEC-0330.
PORTFOLIO MANAGEMENT TEAM
In managing the day-to-day operations of the Fund, the Adviser relies on
the expertise of its team of money management professionals, consisting of
Messrs. Crumrine, Ettinger, Stone and Chadwick.
29
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
The professional backgrounds of each member of the management team are
included in the "Information about Fund Directors and Officers" section of this
report.
CERTIFICATIONS
Donald F. Crumrine, as the Fund's Chief Executive Officer, has certified
to the New York Stock Exchange that, as of May 22, 2006, he was not aware of any
violation by the Fund of applicable NYSE corporate governance listing standards.
The Fund's reports to the SEC on Forms N-CSR and N-Q contain certifications by
the Fund's principal executive officer and principal financial officer that
relate to the Fund's disclosure in such reports and that are required by rule
30a-2(a) under the 1940 Act.
MEETING OF SHAREHOLDERS
On April 21, 2006, the Fund held its Annual Meeting of Shareholders (the
"Meeting") for the following purposes: election of Directors of the Fund
("Proposal 1") and approval of an amendment to the Fund's Articles Supplementary
Creating and Fixing the Rights of the Money Market Cumulative Preferred(TM)
Stock ("Articles Supplementary") relating to the removal of the requirement that
potential buyers of the Fund's Money Market Cumulative Preferred(TM) Stock
execute a "Master Purchaser's Letter" ("Proposal 2"). All proposals were
approved by the shareholders and the results of the voting are as follows:
PROPOSAL 1: ELECTION OF DIRECTORS.
NAME FOR WITHHELD
---- --- --------
COMMON STOCK
Robert F. Wulf .................................. 9,488,358 180,984
FOR WITHHELD
--- --------
PREFERRED STOCK
Donald F. Crumrine .............................. 412 5
David Gale, Morgan Gust, and Karen H. Hogan continue to serve in their
capacities as Directors of the Fund.
PROPOSAL 2: AMENDMENT TO THE ARTICLES SUPPLEMENTARY RELATING TO THE REMOVAL OF
THE MASTER PURCHASER'S LETTER REQUIREMENT
NAME FOR AGAINST WITHHELD
---- --- ------- --------
COMMON STOCK ...................... 9,325,826 140,563 202,953
PREFERRED STOCK ................... 412 5 --
30
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
INFORMATION ABOUT FUND DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under the direction of
the Fund's Board of Directors. Information pertaining to the Directors and
officers of the Fund is set forth below.
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
------- -------------- -------------- ------------ --------------- -------------------
NON-INTERESTED
DIRECTORS:
DAVID GALE Director Class I Director President & CEO of 4 Metromedia International
Delta Dividend Group, Inc. since January 1997 Delta Dividend Group, Inc.
220 Montgomery Street Group, Inc. (investments). (telecommunications).
Suite 426 Flaherty & Crumrine
San Francisco, CA 94104 Preferred Income
Age: 57 Opportunity Fund,
Flaherty & Crumrine/
Claymore Preferred
Securities Income Fund
and Flaherty & Crumrine/
Claymore Total Return
Fund.
MORGAN GUST Director Class III Director President of Giant 4 CoBiz, Inc. (financial
Giant Industries, Inc. since January 1991 Industries, Inc. services); Flaherty &
23733 N. Scottsdale Road (petroleum refining and Crumrine Preferred
Scottsdale, AZ 85255 marketing) since March Income Opportunity Fund,
Age: 59 2002, and for more Flaherty & Crumrine/
than five years prior Claymore Preferred
thereto, Executive Vice Securities Income
President, and various Fund and Flaherty &
other Vice President Crumrine/Claymore
positions at Giant Total Return Fund.
Industries, Inc.
----------
* The Fund's Board of Directors is divided into three classes, each class having a term of three years. Each year the term of
office of one class expires and the successor or successors elected to such class serve for a three year term. The three year
term for each class expires as follows:
CLASS I DIRECTORS - three year term expires at the Fund's 2008 Annual Meeting of Shareholders;
directors may continue in office until their successors are duly elected and qualified.
CLASS II DIRECTORS - three year term expires at the Fund's 2009 Annual Meeting of Shareholders;
directors may continue in office until their successors are duly elected and qualified.
CLASS III DIRECTOR - three year term expires at the Fund's 2007 Annual Meeting of Shareholders;
director may continue in office until his successor is duly elected and qualified.
31
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Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
------- -------------- -------------- ------------- --------------- -------------------
NON-INTERESTED
DIRECTORS:
KAREN H. HOGAN+ Director Class I Director Retired; Community 4 Flaherty & Crumrine
301 E. Colorado Boulevard since April 2005 Volunteer; from September Preferred Income
Suite 720 1985 to January 1997, Opportunity Fund,
Pasadena, CA 91101 Senior Vice President of Flaherty & Crumrine/
Age: 45 Preferred Stock Origination Claymore Preferred
at Lehman Brothers and Securities Income
previously, Vice President Fund and Flaherty &
of New Product Development. Crumrine/Claymore
Total Return Fund.
ROBERT F. WULF Director Class II Director Financial Consultant; 4 Flaherty & Crumrine
3560 Deerfield Drive South since January 1991 Trustee, University of Preferred Income
Salem, OR 97302 Oregon Foundation; Opportunity Fund,
Age: 69 Trustee, San Francisco Flaherty & Crumrine/
Theological Seminary. Claymore Preferred
Securities Income
Fund and Flaherty &
Crumrine/Claymore
Total Return Fund.
----------
* The Fund's Board of Directors is divided into three classes, each class having a term of three years. Each year the term of
office of one class expires and the successor or successors elected to such class serve for a three year term. The three year
term for each class expires as follows:
CLASS I DIRECTORS - three year term expires at the Fund's 2008 Annual Meeting of Shareholders;
directors may continue in office until their successors are duly elected and qualified.
CLASS II DIRECTORS - three year term expires at the Fund's 2009 Annual Meeting of Shareholders;
directors may continue in office until their successors are duly elected and qualified.
CLASS III DIRECTOR - three year term expires at the Fund's 2007 Annual Meeting of Shareholders;
director may continue in office until his successor is duly elected and qualified.
+ As a Director, represents holders of shares of the Fund's Money Market Cumulative Preferred(TM) Stock.
32
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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
DIRECTOR:
DONALD F. CRUMRINE+, ++ Director, Class II Director Chairman of the Board 4 Flaherty & Crumrine
301 E. Colorado Boulevard Chairman since January 1991 and Director of Flaherty & Preferred Income
Suite 720 of the Board Crumrine Incorporated. Opportunity Fund,
Pasadena, CA 91101 and Chief Flaherty & Crumrine/
Age: 58 Executive Claymore Preferred
Officer Securities Income
Fund and Flaherty &
Crumrine/Claymore
Total Return Fund.
----------
* The Fund's Board of Directors is divided into three classes, each class having a term of three years. Each year the term of
office of one class expires and the successor or successors elected to such class serve for a three year term. The three year
term for each class expires as follows:
CLASS I DIRECTORS - three year term expires at the Fund's 2008 Annual Meeting of Shareholders;
directors may continue in office until their successors are duly elected and qualified.
CLASS II DIRECTORS - three year term expires at the Fund's 2009 Annual Meeting of Shareholders;
directors may continue in office until their successors are duly elected and qualified.
CLASS III DIRECTOR - three year term expires at the Fund's 2007 Annual Meeting of Shareholders;
director may continue in office until his successor is duly elected and qualified.
+ As a Director, represents holders of shares of the Fund's Money Market Cumulative Preferred(TM) Stock.
++ "Interested person" of the Fund as defined in the Investment Company Act of 1940. Mr. Crumrine is considered an "interested
person" because of his affiliation with Flaherty & Crumrine Incorporated which acts as the Fund's investment adviser.
33
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Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
PRINCIPAL
TERM OF OFFICE OCCUPATION(S)
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST
AND AGE HELD WITH FUND TIME SERVED FIVE YEARS
------- -------------- -------------- -------------
OFFICERS:
ROBERT M. ETTINGER President Since President and Director of
301 E. Colorado Boulevard October 2002 Flaherty & Crumrine
Suite 720 Incorporated.
Pasadena, CA 91101
Age: 47
R. ERIC CHADWICK Chief Financial Since Vice President and Director of
301 E. Colorado Boulevard Officer, Vice October 2002 Flaherty & Crumrine Incorporated;
Suite 720 President and prior to August 2001, portfolio
Pasadena, CA 91101 Treasurer manager of Flaherty & Crumrine
Age: 31 Incorporated.
CHAD C. CONWELL Chief Compliance Since Chief Compliance Officer of
301 E. Colorado Boulevard Officer, Vice July 2005 Flaherty & Crumrine Incorporated
Suite 720 President and since September 2005, and since
Pasadena, CA 91101 Secretary July 2005, Vice President of
Age: 33 Flaherty & Crumrine Incorporated;
from September 1998 through
June 2005, Attorney with Paul,
Hastings, Janofsky & Walker LLP.
BRADFORD S. STONE Vice President Since Vice President and Director of
392 Springfield Avenue and Assistant July 2003 Flaherty & Crumrine Incorporated;
Mezzanine Suite Treasurer from June 2001 to April 2003,
Summit, NJ 07901 Director of U.S. Market Strategy at
Age: 46 Barclays Capital.
CHRISTOPHER D. RYAN Vice President Since Vice President of Flaherty &
301 E. Colorado Boulevard April 2005 Crumrine Incorporated since
Suite 720 February 2004; October 2002 to
Pasadena, CA 91101 February 2004, Product Analyst
Age: 38 of Flaherty & Crumrine Incorporated.
From 1999 to 2002, graduate student.
LAURIE C. LODOLO Assistant Since
301 E. Colorado Boulevard Compliance July 2004 Assistant Compliance Officer of
Suite 720 Officer, Assistant Flaherty & Crumrine Incorporated
Pasadena, CA 91101 Treasurer and since August 2004; since February
Age: 42 Assistant Secretary 2004, Secretary of Flaherty & Crumrine
Incorporated; since January 1987,
Account Administrator of Flaherty &
Crumrine Incorporated.
34
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Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
BOARD CONSIDERATION AND APPROVAL OF CONTINUANCE OF INVESTMENT ADVISORY AGREEMENT
During the six month period ended May 31, 2006, the Board of Directors of
the Fund approved the continuation of the investment advisory agreement with the
Adviser (the "Agreement"). The following paragraphs summarize the material
information and factors considered by the Board, including the Independent
Directors, as well as their conclusions relative to such factors.
NATURE, EXTENT AND QUALITY OF SERVICES
The Board members reviewed in detail the nature and extent of the services
provided by the Adviser and the quality of those services over the past year and
since inception. The Board members noted that these services included managing
the Fund's investment program, as well as providing significant administrative
services beyond what the Agreement required. The Board members noted that the
Adviser also provided, generally at its expense: office facilities for use by
the Fund; personnel responsible for supervising the performance of
administrative, accounting and related services; and investment compliance
monitoring. The Board members also considered the Adviser's sound financial
condition and the Adviser's commitment to its business, as evidenced by its
hiring additional personnel as the business has grown. The Board members
evaluated the Adviser's services based on their direct experience serving as
Directors for many years, focusing on (i) the Adviser's knowledge of the
preferred securities market generally and the sophisticated hedging strategies
the Fund employs and (ii) the Adviser's culture of compliance. The Board members
reviewed the personnel responsible for providing services to the Fund and
observed that, based on their experience and interaction with the Adviser: (1)
the Adviser's personnel exhibited a high level of personal integrity, diligence
and attention to detail in carrying out their responsibilities under the
Agreement; (2) the Adviser was responsive to requests of the Board and its
personnel were available between Board meetings to answer questions from Board
members; and (3) the Adviser had kept the Board apprised of developments
relating to the Fund. The Board members also considered the continued efforts
undertaken by the Adviser to maintain an effective compliance program. The Board
members concluded that the nature and extent of the services provided were
reasonable and appropriate in relation to the Fund's investment goals and
strategies, the corporate and regulatory environment in which the Fund operates,
and the level of services provided by the Adviser, and that the quality of the
Adviser's service continues to be high.
INVESTMENT PERFORMANCE
The Board members considered the Fund's performance since inception,
including its performance in recent fiscal periods, to determine whether the
Fund had met its investment objective. The Board members determined that the
Fund had done so, especially in light of existing extraordinary market
conditions, which include rising short-term rates and a relatively flat yield
curve, conditions that reduce hedging benefits. In reaching this conclusion, the
Board members reviewed the Fund's performance compared to relevant indices and
funds thought to be generally comparable to the Fund, considered the costs and
benefits of the Fund's hedging strategy in the relevant market environment and
examined the differences between the Fund and certain funds in the comparison
group, including the significant positions in common equities of a number of
preferred stock funds. The Board members noted the Fund's adherence to its
respective investment mandate. The Board members also considered that recent
relative underperformance was attributable
35
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Flaherty & Crumrine Preferred Income Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------
largely to the Fund's stated hedging strategies, which have been a central
aspect of the Fund since inception.
PROFITABILITY
The Board members considered the Adviser's methodology for determining its
profitability with respect to the Fund, and the Adviser's profit margin on an
after-tax basis attributable to managing the Fund. The Board members concluded
that the profitability to the Adviser was not excessive based on the
considerable services it provides to the Fund, the Fund's relative performance
over time, its success in meeting the Fund's investment objective and the Fund's
relatively low expense ratio compared to funds with similar investment
objectives and strategies. The Board members also considered that the Adviser
provided, at a lower cost, services to separate account clients and determined
that the difference was justified in light of the additional services and costs
associated with managing registered investment companies, such as the Fund. The
Board members accepted the Adviser's statement that it did not realize material
indirect benefits from its relationship with the Fund and did not obtain soft
dollar credits from securities trading.
ECONOMIES OF SCALE
The Board members noted that the Fund, as a closed-end investment company,
was not expected to increase materially in size; thus, the Adviser would not
benefit from economies of scale. The Board members considered whether economies
of scale could be realized because the Adviser advises other similar funds.
Based on their experience, the Board members accepted the Adviser's explanation
that significant economies of scale would not be realized because of the
complexity of managing preferred securities for separate funds and other
portfolios. Nonetheless, the Board members noted that the Fund's advisory fee
schedule declines as assets increase beyond a certain level (commonly known as a
"breakpoint"), and that breakpoints provide for a sharing with shareholders of
benefits derived as a result of economies of scale arising from increased
assets. Accordingly, the Board members determined that the existing advisory fee
levels reflect possible economies of scale.
In light of their discussions and considerations as described above, the
Board members made the following determinations as to the Fund:
o the nature and extent and quality of the services provided by the
Adviser are reasonable and appropriate and the quality of the
services is high;
o the Fund's overall performance was satisfactory, given market
conditions;
o the fee paid to the Adviser was reasonable in light of (i)
comparative performance and expense and advisory fee information,
(ii) the cost of the services provided and profits to be realized,
and (iii) the benefits derived or to be derived by the Adviser from
the relationship with the Fund; and
o there were not at this time significant economies of scale to be
realized by the Adviser in managing the Fund's assets, and the fee
was structured to provide for a sharing of the benefits of economies
of scale.
Based on these conclusions, the Board members determined that approval of
the Agreement was in the best interests of the Fund and its shareholders.
36
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DIRECTORS
Donald F. Crumrine, CFA
Chairman of the Board
David Gale
Morgan Gust
Karen H. Hogan
Robert F. Wulf, CFA
OFFICERS
Donald F. Crumrine, CFA
Chief Executive Officer
Robert M. Ettinger, CFA
President
R. Eric Chadwick, CFA
Chief Financial Officer,
Vice President and Treasurer
Chad C. Conwell
Chief Compliance Officer,
Vice President and Secretary
Bradford S. Stone
Vice President and
Assistant Treasurer
Christopher D. Ryan, CFA
Vice President
Laurie C. Lodolo
Assistant Compliance Officer,
Assistant Treasurer and
Assistant Secretary
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@pfdincome.com
QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY & CRUMRINE PREFERRED INCOME FUND?
o If your shares are held in a Brokerage Account, contact your Broker.
o If you have physical possession of your shares in certificate form,
contact the Fund's Transfer Agent & Shareholder Servicing Agent --
PFPC Inc.
P.O. Box 43027
Providence, RI 02940-3027
1-800-331-1710
THIS REPORT IS SENT TO SHAREHOLDERS OF FLAHERTY & CRUMRINE PREFERRED INCOME FUND
INCORPORATED FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR
REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR
OF ANY SECURITIES MENTIONED IN THIS REPORT.
ITEM 2. CODE OF ETHICS.
Not applicable.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
Not applicable.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments in securities of unaffiliated issuers as of the close of
the reporting period is included as part of the report to shareholders filed
under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not 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) Not applicable.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section
302 of the Sarbanes-Oxley Act of 2002 are attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act and Section
906 of the Sarbanes-Oxley Act of 2002 are attached hereto.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
(registrant) FLAHERTY & CRUMRINE PREFERRED INCOME FUND INCORPORATED
By (Signature and Title)* /S/ DONALD F. CRUMRINE
-------------------------------------------------------
Donald F. Crumrine, Director, Chairman of the Board
and Chief Executive Officer
(principal executive officer)
Date JULY 17, 2006
----------------------------------------------------------------------------
Pursuant to the requirements of the Securities Exchange Act of 1934 and the
Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By (Signature and Title)* /S/ DONALD F. CRUMRINE
-------------------------------------------------------
Donald F. Crumrine, Director, Chairman of the Board
and Chief Executive Officer
(principal executive officer)
Date JULY 17, 2006
----------------------------------------------------------------------------
By (Signature and Title)* /S/ R. ERIC CHADWICK
-------------------------------------------------------
R. Eric Chadwick, Chief Financial Officer,
Treasurer and Vice President
(principal financial officer)
Date JULY 17, 2006
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.