FLAHERTY & CRUMRINE PREFERRED INCOME FUND
To the Shareholders of Flaherty & Crumrine Preferred Income Fund:
Stating the obvious, we are facing extraordinary and unprecedented times in
the financial markets. The events that ultimately culminated in the government's
massive financial rescue plan have impacted the market for preferred securities
particularly hard. As a result, for the quarter ended August 31, 2008, the
Fund's common shareholders experienced a total return on net asset value of
-14.2%, subsequent to the quarter-end and through the date of this letter, the
net asset value has continued to decline significantly.
Prices on long-term US Treasury bonds rose during the quarter, as investors
sought the safety of government bonds despite historically low yields. On the
flip side, there were few buyers and abundant sellers of most preferred
securities and corporate bonds. A downward cycle for prices ensued, as selling
pressure pushed prices lower which in turn led to more selling pressure.
This pattern of selling begetting selling is an effect of severe bear
market psychology. In addition, investors and lenders, seeking the safety and
security of cash, withhold capital from borrowers. Since the free flow of
capital is essential to our economy, and economic growth is a key factor in
security valuation, concerns about price declines become self-fulfilling. The
bears clearly were in control both during and subsequent to the quarter.
The root cause of the current financial problems remains
unresolved-residential real estate markets have yet to stabilize. The
speculative component of residential housing has resulted in "bubble and crash"
cycles in the past, but the current adjustment is unlike any we can recall. Far
too many people wanted to buy homes under the "greater fool" plan and lenders
were far too willing to help. The real estate market will eventually return to
equilibrium and the dramatic measures taken by the government will help calm the
markets. In the meantime we must deal with circumstances at hand.
Since the end of our fiscal quarter events have transpired at a
breathtaking pace - particularly relating to the Fund's use of leverage and its
dividend. Our website allows for much more frequent communication than our
quarterly letters. We have posted updates throughout this financial crisis and
we encourage you to continue visiting us at www.preferredincome.com.
In addition to managing your Fund, we are also shareholders. We understand
your concerns about recent events and we are doing our best to respond to them.
Nonetheless, our goals remain constant - conduct exhaustive research and
construct an investment portfolio that is designed to deliver high current
income consistent with the objectives and guidelines of the Fund.
Sincerely,
/s/ Donald F. Crumrine /s/ Robert M. Ettinger
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
October 16, 2008
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OVERVIEW
AUGUST 31, 2008 (UNAUDITED)
FUND STATISTICS ON 8/31/08
--------------------------
Net Asset Value $ 9.34
Market Price $ 10.08
Premium 7.92%
Yield on Market Price 9.23%
Common Stock Shares Outstanding 10,576,453
MOODY'S RATINGS % OF PORTFOLIO
--------------- --------------
AA 4.9%
A 16.3%
BBB 51.3%
BB 20.5%
Below "BB" 0.1%
Not Rated 4.7%
Below Investment Grade 17.4%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P.
(PIE CHART)
INDUSTRY CATEGORIES % OF PORTFOLIO
------------------- --------------
Banking 31%
Utilities 29%
Insurance 16%
Financial Services 12%
Energy 6%
REITs 1%
Other 5%
TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO
------------------------- --------------
Interstate Power & Light 5.8%
Merrill Lynch 4.2%
Liberty Mutual Group 4.2%
Banco Santander 3.7%
National City 3.3%
Sovereign Bancorp 3.3%
Midamerican Energy 2.9%
FBOP Corp 2.8%
SLM Corp 2.6%
Entergy Louisiana 2.6%
% OF PORTFOLIO**
----------------
Holdings Generating Qualified
Dividend Income (QDI) for Individuals 62%
Holdings Generating Income Eligible for
the Corporate Dividend Received
Deduction (DRD) 56%
** 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.
2
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS
AUGUST 31, 2008 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- 95.7%
BANKING -- 30.9%
$ 3,000,000 Astoria Capital Trust I, 9.75% 11/01/29, Series B ........... $ 3,020,100
Banco Santander:
25,000 Adj. Rate Pfd. ........................................... 353,500**(1)
269,500 6.50% Pfd. ............................................... 5,398,435**(1)
42,900 6.80% Pfd. ............................................... 919,669**(1)
$ 2,500,000 Capital One Capital III, 7.686% 08/15/36 .................... 1,856,000
$ 5,210,000 CBG Florida REIT Corporation, 7.114%, 144A**** .............. 1,629,688
Citigroup, Inc.:
55,000 8.125% Pfd., Series AA ................................... 1,082,812*
135,000 8.50% Pfd., Series F ..................................... 2,905,200*
19,648 Citizens Funding Trust I, 7.50% Pfd. 09/15/66 ............... 246,828
50,000 Cobank, ACB, 7.00% Pfd., 144A**** ........................... 1,643,000*
$ 4,400,000 Comerica Capital Trust II, 6.576% 02/20/37 .................. 2,504,480
9,000 FBOP Corporation, Adj. Rate Pfd., 144A**** .................. 4,950,000*
$ 2,250,000 First Hawaiian Capital I, 8.343% 07/01/27, Series B ......... 2,172,600(1)
1,750 First Tennessee Bank, Adj. Rate Pfd., 144A**** .............. 918,750*
$ 1,500,000 First Union Capital II, 7.95% 11/15/29 ...................... 1,399,436
$ 550,000 HBOS PLC, 6.657%, 144A**** .................................. 345,785**(1)
4,400 HSBC Series II, Variable Inverse Pfd., Pvt. ................. 0*+
HSBC USA, Inc.:
96,250 6.50% Pfd., Series H ..................................... 2,175,491*
2,500 $2.8575 Pfd. ............................................. 97,825*
$ 3,200,000 JPMorgan Chase & Co., 7.90%, Series I ....................... 2,916,160*
40,000 Keycorp Capital IX, 6.75% Pfd. 12/15/66 ..................... 602,500
274,200 National City Corporation, 9.875% Pfd. ...................... 5,396,256*
31,500 PFGI Capital Corporation, 7.75% Pfd. ........................ 496,755
$ 1,750,000 PNC Preferred Funding Trust III, 8.70%, 144A**** ............ 1,677,900
$ 1,500,000 Regions Financing Trust II, 6.625% 05/15/47 ................. 793,200
271,480 Sovereign Bancorp, 7.30% Pfd., Series C ..................... 4,352,177*
30,600 Sovereign Capital Trust V, 7.75% Pfd. 05/22/36 .............. 559,751(2)
1,000 Sovereign REIT, 12.00% Pfd., Series A, 144A**** ............. 953,860
U.S. Bancorp, Auction Pass-Through Trust, Cl. B:
11 Series 2006-5, Variable Rate Pfd., 144A**** .............. 275*+
11 Series 2006-6, Variable Rate Pfd., 144A**** .............. 275*+
75,000 Wachovia Corporation, 8.00% Pfd., Series J .................. 1,398,000*
$ 1,000,000 Washington Mutual Preferred Funding IV, 9.75%, 144A**** ..... 448,400
$ 1,600,000 Webster Capital Trust IV, 7.65% 06/15/37 .................... 1,032,480
$ 1,000,000 Wells Fargo Capital XIII, 7.70% ............................. 958,900
------------
55,206,488
------------
3
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2008 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
FINANCIAL SERVICES -- 12.2%
291,500 CIT Group, Inc., 6.35% Pfd., Series A ....................... $ 4,093,389*
25,000 Countrywide Capital IV, 6.75% Pfd. .......................... 376,562(2)
50,300 Countrywide Capital V, 7.00% Pfd. 11/01/36 .................. 748,212
1,250 First Republic Preferred Capital Corporation, 10.50% Pfd.,
144A**** ................................................. 1,321,525
22,500 First Republic Preferred Capital Corporation II, 8.75% Pfd.,
Series B, 144A**** ....................................... 519,750
Goldman Sachs:
20,000 Adj. Rate Pfd., Series C ................................. 323,750*
125,000 Adj. Rate Pfd., Series D ................................. 1,945,313*
20,200 Cabco Trust Capital I, Adj. Rate Pfd. 02/15/34 ........... 283,658
11 Pass-Through Certificates, Class B, 144A**** ............. 0*+
2,500 STRIPES Custodial Receipts, Pvt. ......................... 25*+
Lehman Brothers Holdings, Inc.:
15,000 5.67% Pfd., Series D ..................................... 411,900*
19,500 5.94% Pfd., Series C ..................................... 529,230*
25,000 6.50% Pfd., Series F ..................................... 376,500*
27,500 7.95% Pfd. ............................................... 427,900*
Merrill Lynch:
108,000 Adj. Rate Pfd., Series 5 ................................. 1,275,750*
3,000 Series II STRIPES Custodial Receipts, Pvt. ............... 30*+
200,000 6.25% Pfd. ............................................... 3,562,000*
48,700 6.70% Pfd. ............................................... 911,177*
SLM Corporation:
9,000 Adj. Rate Pfd., Series B ................................. 363,375*
136,855 6.97% Pfd., Series A ..................................... 4,339,672*
------------
21,809,718
------------
INSURANCE -- 13.4%
$ 1,000,000 AMBAC Financial Group, Inc., 6.15% 02/15/37 ................. 353,300
$ 3,750,000 AON Capital Trust A, 8.205% 01/01/27 ........................ 3,511,624
Arch Capital Group Ltd.:
10,000 7.875% Pfd., Series B .................................... 231,563**(1)
36,300 8.00% Pfd., Series A ..................................... 832,631**(1)
35,900 Axis Capital Holdings, 7.50% Pfd., Series B ................. 2,808,457(1)
90,600 Delphi Financial Group, 7.376% Pfd. 05/15/37 ................ 1,588,336
$ 3,000,000 Everest Re Holdings, 6.60% 05/15/37 ......................... 1,986,000
4
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2008 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
Liberty Mutual Group:
$ 4,500,000 7.80% 03/15/37, 144A**** ................................. $ 3,359,250
$ 500,000 10.75% 06/15/58, 144A**** ................................ 455,600
$ 500,000 MetLife Capital Trust X, 9.25% 04/08/38, 144A**** ........... 507,450
150,000 MetLife, Inc., 6.50% Pfd., Series B ......................... 3,150,375*
$ 2,000,000 PartnerRe Finance II, 6.44% 12/01/66 ........................ 1,544,400(1)
Renaissancere Holdings Ltd.:
67,550 6.08% Pfd., Series C ..................................... 1,188,880**(1)
66,400 6.60% Pfd., Series D ..................................... 1,301,440**(1)
2,100 7.30% Pfd., Series B ..................................... 44,297**(1)
119,500 Scottish Re Group Ltd., 7.25% Pfd. .......................... 253,938**(1)+
$ 750,000 USF&G Capital, 8.312% 07/01/46, 144A**** .................... 806,741
------------
23,924,282
------------
UTILITIES -- 29.2%
Alabama Power Company:
300 4.52% Pfd. ............................................... 23,004*
5,734 4.72% Pfd. ............................................... 459,064*
5,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ... 493,350*
115,000 Calenergy Capital Trust III, 6.50% Pfd. 09/01/27 ............ 5,156,600
900 Central Hudson Gas & Electric Corporation, 4.96% Pfd.,
Series E, Pvt. ........................................... 78,003*
5,560 Central Vermont Public Service Corporation, 8.30% Sinking
Fund Pfd., Pvt. .......................................... 572,902*
Connecticut Light & Power Company:
34,300 5.28% Pfd., Series 1967 .................................. 1,511,944*
1,905 6.56% Pfd., Series 1968 .................................. 92,831*
2,100 Consolidated Edison Company of New York, 4.65% Pfd.,
Series C ................................................. 172,116*
30,000 Constellation Energy Group, Inc., 8.625% Pfd. 06/15/63,
Series A ................................................. 752,400
$ 500,000 Dominion Resources, Inc., 7.50% ............................. 453,650
Duquesne Light Company:
7,675 4.10% Pfd. ............................................... 242,300*
9,190 4.15% Pfd. ............................................... 293,712*
910 4.20% Pfd. ............................................... 29,429*
5,490 $2.10 Pfd., Series A ..................................... 177,547*
100,000 Entergy Arkansas, Inc., 6.45% Pfd. .......................... 2,470,000*
46,000 Entergy Louisiana, Inc., 6.95% Pfd. ......................... 4,582,520*
18,535 Florida Power Company, 4.75% Pfd. ........................... 1,532,844*
5
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2008 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
Georgia Power Company:
13,100 6.125% Pfd. .............................................. $ 320,426*
5,500 6.50% Pfd., Series 07-A .................................. 545,270*
2,010 Great Plains Energy, Inc., 4.50% Pfd. ....................... 162,931*
50,000 Hawaiian Electric Company, Inc., 5.25% Pfd., Series H,
Pvt. ..................................................... 914,065*
32,650 Indianapolis Power & Light Company, 5.65% Pfd. .............. 2,822,919*
384,000 Interstate Power & Light Company, 8.375% Pfd., Series B ..... 10,383,360*
Pacific Enterprises:
22,430 $4.50 Pfd. ............................................... 1,772,643*
10,000 $4.75 Pfd., Series 53 .................................... 834,100*
1,095 PacifiCorp, 5.40% Pfd. ...................................... 105,887*
$ 500,000 PECO Energy Capital Trust III, 7.38% 04/06/28, Series D ..... 494,050
5,000 PPL Electric Utilities Corporation, 6.75% Pfd. .............. 517,550*
$ 2,975,000 Puget Sound Energy, Inc., 6.974% 06/01/67 ................... 2,494,537
23,713 San Diego Gas & Electric Company, $1.70 Pfd. ................ 586,897*
South Carolina Electric & Gas Company:
24,456 5.125% Purchase Fund Pfd., Pvt. .......................... 1,259,484*
6,703 6.00% Purchase Fund Pfd., Pvt. ........................... 341,987*
Southern California Edison:
10,000 6.00% Pfd., Series C ..................................... 916,000*
15,000 6.125% Pfd. .............................................. 1,409,700*
Southern Union Company:
$ 1,000,000 7.20% 11/01/66 ........................................... 798,700
5,075 7.55% Pfd. ............................................... 128,937*
$ 750,000 TXU Electric Capital V, 8.175% 01/30/37 ..................... 600,075
Union Electric Company:
14,150 4.56% Pfd. ............................................... 1,106,672*
18,800 $7.64 Pfd. ............................................... 1,836,008*
12,500 Virginia Electric & Power Company, $7.05 Pfd. ............... 1,267,969*
$ 1,900,000 Wisconsin Energy Corporation, 6.25% 05/15/67 ................ 1,575,157
------------
52,289,540
------------
ENERGY -- 6.1%
$ 4,500,000 Enbridge Energy Partners LP, 8.05% 10/01/37 ................. 4,011,115
$ 2,600,000 Enterprise Products Partners, 7.034% 01/15/68 ............... 2,258,628
3,500 Kinder Morgan GP, Inc., 8.33% Pfd., 144A**** ................ 3,599,190*
10,000 Lasmo America Limited, 8.15% Pfd., 144A**** ................. 1,015,000*(1)
------------
10,883,933
------------
6
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2008 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
PREFERRED SECURITIES -- (CONTINUED)
REAL ESTATE INVESTMENT TRUST (REIT) -- 0.9%
40,000 Duke Realty Corporation, 8.375% Pfd., Series O .............. $ 945,600
30,000 PS Business Parks, Inc., 7.375% Pfd., Series O .............. 603,750
------------
1,549,350
------------
MISCELLANEOUS INDUSTRIES -- 2.6%
13,600 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B ... 1,107,448*
40,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ......... 3,610,800*
------------
4,718,248
------------
U.S. GOVERNMENT AGENCY -- 0.4%
74,000 Fannie Mae, Adj. Rate Pfd., Series P ........................ 711,880*
------------
711,880
------------
TOTAL PREFERRED SECURITIES
(Cost $215,332,688) ...................................... 171,093,439
------------
CORPORATE DEBT SECURITIES -- 2.1%
INSURANCE -- 2.1%
$ 4,729,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** ........... 3,724,560
------------
3,724,560
------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $4,646,057) ........................................ 3,724,560
------------
OPTION CONTRACTS -- 0.2%
188 December Put Options on December U.S. Treasury Bond Futures,
Expiring 11/21/08 ........................................ 293,750+
------------
TOTAL OPTION CONTRACTS
(Cost $328,222) .......................................... 293,750
------------
MONEY MARKET FUND -- 0.0%
35,004 BlackRock Provident Institutional, TempFund ................. 35,004
------------
TOTAL MONEY MARKET FUND
(Cost $35,004) ........................................... 35,004
------------
7
Flaherty & Crumrine Preferred Income Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2008 (UNAUDITED)
SHARES/$ PAR VALUE
------------ ------------
SECURITIES LENDING COLLATERAL -- 0.5%
968,100 BlackRock Institutional Money Market Trust .................. $ 968,100
------------
TOTAL SECURITIES LENDING COLLATERAL
(Cost $968,100) .......................................... 968,100
------------
TOTAL INVESTMENTS (Cost $221,310,071***) ................................... 98.5% 176,114,853
OTHER ASSETS AND LIABILITIES (Net) ......................................... 1.5% 2,651,995
----- ------------
TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK ................... 100.0%++ $178,766,848
----- ------------
AUCTION PREFERRED STOCK (APS) REDEMPTION VALUE ............................. (80,000,000)
------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ................................. $ 98,766,848
============
----------
* Securities eligible for the Dividends Received Deduction and distributing
Qualified Dividend Income.
** Securities distributing Qualified Dividend Income only.
*** Aggregate cost of securities held.
**** Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration to qualified institutional buyers. These securities have been
determined to be liquid under the guidelines established by the Board of
Directors.
(1) Foreign Issuer.
(2) All or a portion of the security is on loan.
+ 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
8
Flaherty & Crumrine Preferred Income Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
FOR THE PERIOD FROM DECEMBER 1, 2007 THROUGH AUGUST 31, 2008 (UNAUDITED)
VALUE
------------
OPERATIONS:
Net investment income ............................................................... $ 10,496,951
Net realized gain/(loss) on investments sold during the period ...................... (3,721,019)
Change in net unrealized appreciation/depreciation of investments ................... (32,818,054)
Distributions to APS* Shareholders from net investment income, including changes in
accumulated undeclared distributions ............................................. (3,530,748)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ................................ (29,572,870)
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders(2) ........... (7,541,958)
------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS .................................... (7,541,958)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment and Cash Purchase Plan .. 327,161
------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING FROM
FUND SHARE TRANSACTIONS .......................................................... 327,161
------------
NET DECREASE IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE PERIOD .................... $(36,787,667)
============
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ................................................................. $135,554,515
Net decrease in net assets during the period ........................................ (36,787,667)
------------
End of period ....................................................................... $ 98,766,848
============
----------
* Auction Preferred Stock.
(1) These tables summarize the nine months ended August 31, 2008 and should be
read in conjunction with the Fund's audited financial statements, including
footnotes, in its Annual Report dated November 30, 2007.
(2) May include income earned, but not paid out, in prior fiscal year.
9
Flaherty & Crumrine Preferred Income Fund Incorporated
FINANCIAL HIGHLIGHTS(1)
FOR THE PERIOD FROM DECEMBER 1, 2007 THROUGH AUGUST 31, 2008 (UNAUDITED)
FOR A COMMON STOCK SHARE OUTSTANDING THROUGHOUT THE PERIOD.
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................................................ $ 12.85
------------
INVESTMENT OPERATIONS:
Net investment income ............................................................... 0.99
Net realized and unrealized gain/(loss) on investments .............................. (3.46)
DISTRIBUTIONS TO APS* SHAREHOLDERS:
From net investment income .......................................................... (0.33)
------------
Total from investment operations .................................................... (2.80)
------------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income .......................................................... (0.71)
------------
Total distributions to Common Stock Shareholders .................................... (0.71)
------------
Net asset value, end of period ...................................................... $ 9.34
============
Market value, end of period ......................................................... $ 10.08
============
Common Stock shares outstanding, end of period ...................................... 10,576,453
============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income+ .............................................................. 7.81%**
Operating expenses .................................................................. 1.93%**
SUPPLEMENTAL DATA:++
Portfolio turnover rate ............................................................. 57%***
Total net assets available to Common and Preferred Stock, end of period (in 000's) .. $ 178,767
Ratio of operating expenses to total average net assets available to Common and
Preferred Stock .................................................................. 1.15%**
----------
(1) These tables summarize the nine months ended August 31, 2008 and should be
read in conjunction with the Fund's audited financial statements, including
footnotes, in its Annual Report dated November 30, 2007.
* Auction Preferred Stock.
** Annualized.
*** Not Annualized.
+ The net investment income ratios reflect income net of operating expenses
and payments to APS Shareholders.
++ Information presented under heading Supplemental Data includes APS.
10
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, 2007 ......... $0.0860 $12.29 $11.70 $12.17
January 31, 2008 .......... 0.0860 12.93 12.82 12.92
February 29, 2008 ......... 0.0775 12.62 12.00 12.03
March 31, 2008 ............ 0.0775 11.03 10.18 10.44
April 30, 2008 ............ 0.0775 11.37 11.03 11.23
May 31, 2008 .............. 0.0775 11.15 11.73 11.15
June 30, 2008 ............. 0.0775 10.28 10.44 10.28
July 31, 2008 ............. 0.0775 9.38 10.19 9.68
August 31, 2008 ........... 0.0775 9.34 10.08 9.58
----------
(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 reinvestment 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.
11
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. AGGREGATE INFORMATION FOR FEDERAL INCOME TAX PURPOSES
At August 31, 2008 the aggregate cost of securities for federal income tax
purposes was $221,138,285, the aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $4,184,753 and
the aggregate gross unrealized depreciation for all securities in which there is
an excess of tax cost over value was $49,208,185.
2. ADDITIONAL ACCOUNTING STANDARDS
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 157 "FAIR VALUE
MEASUREMENTS" ("SFAS 157")
In September 2006, the Financial Accounting Standards Board issued SFAS 157
effective for fiscal years beginning after November 15, 2007. This standard
clarifies the definition of fair value for financial reporting, establishes a
framework for measuring fair value and requires additional disclosures about the
use of fair value measurements. The Fund has adopted SFAS 157 as of December 1,
2007. The three levels of the fair value hierarchy under SFAS 157 are described
below:
- Level 1 - quoted prices in active markets for identical securities
- Level 2 - other significant observable inputs (including quoted prices
for similar securities, interest rates, prepayment speeds,
credit risk, etc.)
- Level 3 - significant unobservable inputs (including the Fund's own
assumptions in determining the fair value of investments)
The inputs or methodology used for valuing securities are not necessarily
an indication of the risk associated with investing in those securities. A
summary of the inputs used to value the Fund's net assets as of August 31, 2008
is as follows:
OTHER FINANCIAL
INSTRUMENTS
INVESTMENTS (UNREALIZED
IN SECURITIES APPRECIATION/
VALUATION INPUTS (MARKET VALUE) DEPRECIATION)*
---------------- -------------- ---------------
Level 1 - Quoted Prices - Investments .............. $ 45,331,729 $--
Level 2 - Other Significant Observable Inputs ...... 129,815,024 --
Level 3 - Significant Unobservable Inputs .......... -- --
------------ ---
TOTAL .............................................. $175,146,753 $--
* Other financial instruments are derivative instruments not reflected in the
Schedule of Investments, such as futures, forwards and swaps which are
valued at the unrealized appreciation/depreciation on the investment. As of
August 31, 2008 the Fund does not have any other financial instruments.
12
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
3. SECTION 19 NOTICES
Section 19 of the Investment Company Act of 1940 requires registered
investment companies to include a notice with the payment of a dividend if a
portion of that dividend may come from sources other than undistributed net
income (other sources could include realized gains from the sale of securities
and non-taxable return of capital). Copies of the Section 19 notices for the
Fund are available on the website at www.preferredincome.com.
The amounts and sources of distributions reported below are only estimates
and are not being provided for tax reporting purposes. Form 1099-DIV will be
sent to shareholders in January 2009 reporting the amount and tax
characterization of distributions for the 2008 calendar year.
SOURCE OF DISTRIBUTIONS AS OF 8/31/08
------------------------------------------------
NET NET RETURN TOTAL PER
INVESTMENT REALIZED OF COMMON
INCOME CAPITAL GAINS CAPITAL SHARE
---------- ------------- ------- ---------
Calendar 2008 Distributions ......... $0.5955 $0.00 $0.0330 $0.6285
Percentage of Total Distributions ... 94.7% 0.0% 5.3% --
4. SUBSEQUENT EVENTS
On September 7, 2008, Fannie Mae was placed into conservatorship. The value
of preferred stock issued by this entity, which was held by the Fund, has been
adversely impacted and is not reflected in this report. From August 31, 2008 to
September 25, 2008, when the Fund sold its remaining position, the decrease in
value totaled $572,760.
On September 15, 2008, Lehman Brothers Holdings Inc. filed for bankruptcy.
On September 26, 2008, Washington Mutual Inc. filed for bankruptcy. As a result,
the Fund may not be able to recover the principal invested in securities issued
by these entities, and also does not expect to receive income payments on these
securities going forward. The value of securities issued by these entities,
which were held by the Fund, has been adversely impacted and may decline
further. The decline since August 31, 2008 is not reflected in this report.
Subsequent to the reporting period, the market values of certain
investments of the Fund have declined significantly and may decline further as a
result of the ongoing financial crisis. The market value of the Fund's
investments is reflected in the weekly net asset values reported by the Fund.
The Funds are subject to several different asset coverage requirements that
arise from the use of leverage by the Fund. The decline in asset values has
resulted in the Fund not meeting these asset coverage requirements at various
points in time since the end of the fiscal quarter. According to these
requirements, the Fund may not declare, set aside, or pay a common stock
dividend unless the asset coverage requirements are met. The Fund has delayed
the payment of the September common stock dividend as a result. To meet the
requirements and pay the delayed dividend and future dividends, the Fund has
been selling assets to raise cash, and has applied much of the proceeds to the
reduction of
13
Flaherty & Crumrine Preferred Income Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
leverage or invested in higher quality short-term securities in anticipation of
future reductions in leverage. On October 14, 2008, the Fund announced the
redemption of $8.1 million of auction preferred stock to be redeemed on
November 12, 2008. The Fund may be adversely impacted by the reduction in
leverage. Updated information on the status of these requirements may be found
on the Fund website at www.preferredincome.com.
14
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(FLAHERTY & CRUMRINE LOGO)
PREFERRED INCOME FUND
Quarterly Report
August 31, 2008
www.preferredincome.com
DIRECTORS
Donald F. Crumrine, CFA
Chairman of the Board
David Gale
Morgan Gust
Karen H. Hogan
Robert F. Wulf, CFA
OFFICERS
Donald F. Crumrine, CFA
Chief Executive Officer
Robert M. Ettinger, CFA
President
R. Eric Chadwick, CFA
Chief Financial Officer,
Vice President and Treasurer
Chad C. Conwell
Chief Compliance Officer,
Vice President and Secretary
Bradford S. Stone
Vice President and
Assistant Treasurer
Laurie C. Lodolo
Assistant Compliance Officer,
Assistant Treasurer and
Assistant Secretary
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@pfdincome.com
QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY & CRUMRINE PREFERRED INCOME FUND?
- If your shares are held in a Brokerage Account, contact your Broker.
- If you have physical possession of your shares in certificate form,
contact the Fund's Transfer Agent & Shareholder Servicing Agent --
PNC Global Investment Servicing
(U.S.) 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.