<PAGE>
PREFERRED INCOME OPPORTUNITY FUND
INCORPORATED
Dear Shareholder:
The Preferred Income Opportunity Fund enjoyed very good results in its
fiscal second quarter that ended on May 31, 1996. The return on the net asset
value ("NAV") of the Fund's shares was 3.8% for the quarter. Furthermore, the
Fund was able to increase the dividend rate on its shares by 6.5% to a new
monthly rate of $0.074 per share effective with the dividend payable May 31,
1996.
The Fund's ongoing strategy of hedging against the risk of rising interest
rates provided dramatic benefits in the second quarter. Long term interest
rates surged throughout the quarter and caused sharp declines in the prices of
both long term bonds and preferred stocks. In the case of the Preferred Income
Opportunity Fund, however, the decline in the value of its preferred stock
holdings was only half of the story. The Fund also had substantial gains on
put options on Treasury bond futures contracts purchased as a hedge. The
overall result for the Fund was a relatively stable NAV.
Hedging is also behind the increase in the Fund's dividend rate. As the
gains on the put options held as hedges are converted into cash, the Fund is
able to purchase additional holdings of preferred stocks for its portfolio. Of
course, more preferred stocks in the portfolio produce more income. An
important part of the Fund's income strategy is the expectation that income
will increase in response to a significant increase in interest rates.
The preferred stock market has now shrugged off the impact of the tax
changes proposed by the Clinton Administration last December, which has also
helped the Fund's performance. So far, Congress has taken no action on those
proposals. Beyond that, congressional leaders have given their assurances that
even if Congress should adopt any of the proposals, they would not be
retroactive. Nonetheless, we can not lose sight of the fact that the risk of
unfavorable tax legislation is always there.
The "creeping scarcity" of traditional preferred stocks, which has
previously been discussed in these letters, is accelerating as an indirect
result of the Administration's tax proposals. That tax package includes
restrictions on new issues of a hybrid preferred/debt type of security that
has become widely used by corporations to gain possible tax advantages. Such
hybrids have accounted for most new preferred financing in the last several
years and have often been issued to refinance outstanding issues of
traditional preferred stock. Issuers are now rushing ahead with new issues of
such hybrids and redemptions of traditional preferreds before any changes in
the tax rules can be enacted. Tighter supply has helped prop up the prices of
traditional preferred stocks, which make up most of the Fund's portfolio.
As is the case with most closed-end funds now, the Fund's shares continue
to sell in the market at a discount from their NAV. Two positive developments
during the last quarter may eventually help. First, two of the country's
largest brokerage firms instituted research coverage of the Fund and published
favorable reports. Second, the increase in the dividend rate has attracted
some attention to the Fund's accomplishments. As we go to press, the current
yield on the shares is 8.5%, but the discount is still around 13.4%.
We urge you to read the "Question and Answer" section that follows. It
responds to common questions about the nature of the Fund and its investment
strategies.
Sincerely,
/s/ Robert T. Flaherty
Robert T. Flaherty
Chairman of the Board
June 14, 1996
<PAGE>
- ------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
QUESTION & ANSWER SECTION
MAY 31, 1996 (UNAUDITED)
- ----------------------------------------------
HOW IS THE FUND PERFORMING?
The Preferred Income Opportunity Fund has performed very well in the face
of a sharp turnaround in the trend of long term interest rates. Last year,
interest rates fell, the prices of bonds and preferred stocks rose, and the
Fund made lots of money. In the first half of this year, the markets have
reversed themselves, and the Fund has been very successful in protecting the
previous year's gains. When you put it all together over a period of time, it
adds up to very good returns.
The following chart shows the cumulative performance of the Fund's NAV,
assuming that all monthly dividends and year-end distributions were reinvested
at NAV. For the first half of the current fiscal year, the total return on NAV
was 2.2%, which is the saw-toothed plateau at the right end of the graph line.
For background, the total return on NAV was 26.7% in fiscal 1995, which ended
last November 30, and it has been 11.7% per year since the inception of the
Fund in early 1992.
PREFERRED INCOME OPPORTUNITY FUND
NAV Performance
- --------------------------------------------------------------------------------
INCREASE IN $1,000 OF FUND ASSETS THROUGH MAY 31, 1996
(Feb. 13, 1992 = $1,000)
1000.00 Feb. '92
1175.00 Feb. '93
1336.00 Feb. '94
1295.00 Feb. '95
1580.00 Feb. '96
1618.00 May '96
- --------------------------------------------------------------------------------
Past performance is not necessarily indicative of future performance.
All Distributions Reinvestd
The best indicator of the Fund's recent performance may be the 10.8% total
return on NAV for the last twelve months through May 31, assuming again the
reinvestment of all distributions at NAV. Long term interest rates followed a
volatile path in that period, starting with a significant decline followed by
an even sharper rise. As a result, the prices of investment grade long term
bonds generally declined. We think the Fund's total return of 10.8% was a
remarkable achievement under such turbulent conditions.
Remember what the Preferred Income Opportunity Fund is all about. It is
intended to be an alternative to bond funds for investors who want less
exposure to fluctuating interest rates than is normally associated with fixed
income investments.
WHAT ABOUT THE CLINTON ADMINISTRATION'S TAX PROPOSALS? HAVE THEY AFFECTED THE
FUND'S PERFORMANCE?
The Fund's portfolio would be affected most directly by the proposal to
reduce the intercorporate Dividends Received Deduction ("DRD") from 70% to
50%. The DRD was originally designed to reduce multiple layers of corporate
taxation as income generated by a corporation ultimately finds its way to non-
corporate shareholders. Cutting the DRD would increase the effective corporate
tax rate on dividends. That would make all stocks, including preferred stocks,
less attractive to corporate investors and would probably have a negative
impact on the prices of some preferreds.
The proposals have not had a major lasting impact on the Fund's NAV.
Preferred stock prices initially reacted unfavorably, but the market now
appears to be giving little weight to the chance that the proposals will
become law. A good portion of the decline in the Fund's NAV that occurred in
the fiscal first quarter has since been recouped, and the remainder is easily
explained by changes in interest rates over the period.
The introduction of the tax proposals last December has not helped the
market price of the Fund's shares. Following the announcement, the market
price fell more than the NAV causing the discount from NAV to widen. Despite
the subsequent recovery in the NAV, the greater discount has persisted.
IS THERE ANYTHING NEW TO REPORT ON THE DISCOUNT FROM NAV?
Not really! The increase in the dividend rate may have had some favorable
effect on the discount, which we would expect. Also, the increased number of
research analysts following the Fund's shares is a real positive. We hope that
the stability of the NAV, the discount and the market price during the bond
market's unhappy moments in the last few months will draw some attention to
the Fund's record.
It may be helpful to remind our shareholders that they can obtain the
latest NAV for the Fund simply by calling the Fund's shareholder servicing
agent, First Data Investor Services Group, Inc., at 1-800-331-1710. The NAV is
also published each week in Barron's and in the Closed-End Funds section of
the Monday edition of The Wall Street Journal.
IS THE FUND'S PORTFOLIO ACTIVELY MANAGED?
We believe that active management can make an important contribution to
the performance of the portfolio. The preferred stock market is small and
relatively illiquid by the standards of the capital markets. As a result,
pricing can be highly inefficient which provides real opportunities for us
given our constant presence in the market, day in and day out.
The reasons behind the changes we make in the portfolio vary widely. Some
moves reflect broad sector judgments, such as the relative valuations of banks
versus utilities or fixed rate preferreds versus adjustable rate preferreds.
Furthermore, our conclusions concerning the credit standing of individual
issuers play a part in all transactions. We also find numerous opportunities
to make trades just to take advantage of temporary mispricings of individual
preferreds. We are not too proud to make a dollar any way we can.
The turnover statistics appear on page 13 of this report. Typically, some
positions in the portfolio will turn over several times in the course of a
year while other holdings do not change at all. In the aggregate, however,
transaction activity can add up to as much as the value of the entire
portfolio.
IS A SPECIAL YEAR-END DISTRIBUTION LIKELY THIS YEAR?
With the fiscal year only half over, it is really too early to speculate
on the amount of any year-end distribution. If our year were to end today,
however, the Fund would definitely have significant net realized capital gains
beyond the capital loss carryforwards available. If any long term gains were
retained by the Fund, it would have to pay tax on them subject to some complex
rules. The alternative would be to pay them out to shareholders, which we have
always elected to do in the past. In that case, each shareholder would be
taxed directly on the gains distributed.
Most of the capital gains have come from put options that the Fund
purchased as hedges. From a tax standpoint, it could be advantageous to offset
those gains, but there are now relatively few significant unrealized losses
among the Fund's holdings of preferreds. This scarcity of capital losses is,
of course, a good thing. It is a tangible demonstration of the strong
performance of the Fund's NAV over the years.
WILL THE FUND'S DIVIDEND RATE BE REDUCED IF THERE IS A YEAR-END DISTRIBUTION?
Yes! We make every effort to pay out the Fund's income through the monthly
dividends. Distributions "above and beyond" those monthly dividends should
properly be considered principal by our shareholders. Taking them in cash is
much like making a withdrawal from a savings account. When money is taken out,
there is less left to earn income. The result is that the dividend rate per
share must decline if the special distribution is of any significant size.
Shareholders can "beat the game," so to speak, by reinvesting any special
distributions in additional shares. Assuming there is no change in the basic
earning power of the portfolio, the reduction in the dividend rate per share
would be offset by an increase in the total number of shares held. Total
income in dollars would essentially be preserved. This reinvestment could be
accomplished simply by buying shares in the market. Also, shareholders willing
to reinvest all distributions every month can do this in a very efficient way
by participating in the Fund's Dividend Reinvestment Plan (the "DRIP").
Information on the DRIP can be obtained from the Plan's agent, First Data
Investor Services Group, Inc., at 1-800-331-1710.
IF THE FUND HAS DONE SO WELL, WHY ARE MY SHARES UNDER WATER?
It is an unpleasant fact of life that the performance of the market price
of the Fund's shares has not kept up with returns on the NAV. Over the last
three years, the market price has gone from a premium over NAV to a discount.
Depending upon when a particular shareholder purchased the shares, this may
have overwhelmed the strong returns earned by the Fund on NAV.
I'VE BEEN IN THE FUND SINCE THE BEGINNING. WHY HAVEN'T I DONE BETTER?
You have probably done better than you realize. As discussed in response
to the first question, the return on NAV for the life of the Fund has been
11.7% per year. Furthermore, as covered in more detail below, the shareholders
who have reinvested all distributions through the DRIP since the inception of
the Fund have earned a return on market value of 6.5% per year despite the
current discount on the shares. However, these favorable results are distorted
if a long term shareholder merely compares the cost of his stock for tax
purposes to its current market value. That comparison overlooks the special
year-end distributions made by the Fund in past years.
Look at the example of a shareholder that bought 1,000 shares of Preferred
Income Opportunity Fund at $12.50 in the initial public offering in early
1992. Assuming that all distributions were taken in cash, the statement of his
account still shows that he holds 1,000 shares with a cost of $12,500.
Furthermore, at the market price of $10.50 on May 31, 1996, the total market
value of those shares was $10,500. Something must be missing.
The missing ingredient is $1.51 per share, or over $1,500, that this
shareholder received through special year-end distributions above and beyond
the regular monthly dividends. In effect, he has been withdrawing principal
from his investment as we discussed two questions earlier. This has to be
taken into account in judging how the investment has done.
Look at the example from a different angle. Assume that the same
shareholder reinvested all distributions through the Fund's DRIP instead of
taking them in cash. The number of shares held has increased by more than 56%,
and the market value of those shares on May 31, 1996 was over $16,000. Yet,
his brokerage account statement says the cost of the stock is over $19,000.
What is going on here?
It is important to remember that the original investment in the stock was
$12,500 and its present value is over $16,000. That is the basis of the 6.5%
per year total return on market value since the initial public offering in
1992. The cost for tax purposes has increased substantially because it
includes all the reinvested distributions that produced that return. The
market value is below the cost by almost $3,000 because the market price of
the shares has gone from a premium over NAV to a discount. If that had not
happened, the shareholder could have earned even more than 6.5% per year on
market value.
If there is another significant year-end distribution in 1996, this
phenomenon will be accentuated. Obviously, this is "a problem of prosperity"
which is far better than not making money.
<PAGE>
- ------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 1996 (UNAUDITED)
- ----------------------------------------------
VALUE
SHARES (NOTE 1)
------ --------
PREFERRED STOCK -- 89.4%
ADJUSTABLE RATE PREFERRED STOCK -- 24.9%
UTILITIES -- 9.8%
8,000 Alabama Power Company,
Series 1993, Adj. Rate Pfd. ................... $ 179,000
3,420 Arizona Public Service Company,
Series Q, Adj. Rate Pfd. ...................... 300,960
41,700 ENSERCH Corporation,
Series F, Adj. Rate Pfd. ...................... 938,250
5,100 Entergy Gulf States Utilities Inc.,
Series A, Adj. Rate Pfd. ...................... 488,325
43,600 Georgia Power Company,
Series 1993-2 L, Adj. Rate Pfd. ............... 981,000
81,415 Illinois Power Company,
Series A, Adj. Rate Pfd. ...................... 3,582,260
11,800 New York State Electric & Gas
Corporation,
Series B, Adj. Rate Pfd. ...................... 263,287
Niagara Mohawk Power Corporation:
95,275 Series A, Adj. Rate Pfd. ...................... 1,548,219
195,918 Series B, Adj. Rate Pfd. ...................... 3,673,463
25,000 Series C, Adj. Rate Pfd. ...................... 435,937
6,800 Northern Indiana Public Service Company, Series
A, Adj. Rate Pfd. ............................. 304,300
Northern States Power Company:
4,900 Series A, Adj. Rate Pfd. ...................... 447,125
14,555 Series B, Adj. Rate Pfd. ...................... 1,328,144
14,600 Puget Sound Power & Light Company,
Series B, Adj. Rate Pfd. ...................... 330,325
Texas Utilities Electric Company:
55,601 Series A, Adj. Rate Pfd. ...................... 5,042,316
3,400 Series B, Adj. Rate Pfd. ...................... 323,000
------------
TOTAL UTILITY ADJUSTABLE RATE
PREFERRED STOCK ............................... 20,165,911
------------
BANKING -- 15.1%
Bank of Boston Corporation:
43,600 Series B, Adj. Rate Pfd. ...................... 1,853,000
23,100 Series C, Adj. Rate Pfd. ...................... 1,793,138
BankAmerica Corporation:
26,000 Series A, Adj. Rate Pfd. ...................... 1,209,000
60,400 Series B, Adj. Rate Pfd. ...................... 5,111,350
Bankers Trust New York Corporation:
30,000 Series Q, Adj. Rate Pfd. ...................... 667,500
164,000 Series R, Adj. Rate Pfd. ...................... 3,649,000
20,400 Chase Manhattan Corporation,
Series N, Adj. Rate Pfd. ...................... 474,300
Citicorp:
76,248 Second Series, Adj. Rate Pfd. ................. 6,533,500
20,000 Series 19, Adj. Rate Pfd. ..................... 457,500
44,611 First Chicago NBD,
Series B, Adj. Rate Pfd. ...................... 3,691,560
15,660 First Union Corporation,
Series D, Adj. Rate Pfd. ...................... 1,565,021
32,500 HSBC Americas Inc.,
Series A, Adj. Rate Pfd. ...................... 1,405,625
31,750 Morgan (J.P.) & Company Inc.,
Series A, Adj. Rate Pfd. ...................... 2,401,094
20,000 Republic New York Corporation,
Series D, Adj. Rate Pfd. ...................... 452,500
------------
TOTAL BANKING ADJUSTABLE RATE
PREFERRED STOCK ............................... 31,264,088
------------
TOTAL ADJUSTABLE RATE
PREFERRED STOCK ............................... 51,429,999
------------
FIXED RATE PREFERRED STOCK -- 64.5%
UTILITIES -- 45.7%
Alabama Power Company:
147,300 Class A, 6.40% Pfd. ........................... 3,259,013
6,400 Series 1992-1, 7.60% Pfd. ..................... 162,400
21,500 Series 1992-2, 7.60% Pfd. ..................... 545,563
160,446 Arizona Public Service Company,
Series W, 7.25% Pfd. .......................... 3,950,983
Baltimore Gas & Electric Company:
35,900 Series 1993, 6.70% Pfd. ....................... 3,441,913
3,585 Series 1993, 7.125% Pfd. ...................... 363,429
47,300 Series 1995, 6.99% Pfd. ....................... 4,706,350
100 Central Hudson Gas & Electric
Corporation,
Series D, 4.35% Pfd. .......................... 5,938
7,500 Commonwealth Edison Company,
$8.40 Pfd. .................................... 750,000
Consumers Power Company:
139,533 Class A, 8.32% Pfd. ........................... 3,540,650
2,850 Series G, $7.76 Pfd. .......................... 277,163
2,800 Delmarva Power & Light Company,
6.75% Pfd. .................................... 269,500
67,000 Detroit Edison Company,
7.75% Pfd. .................................... 1,708,500
Duke Power Company:
23,600 Series S, 7.85% Pfd. .......................... 2,498,650
46,935 Series W, 7.00% Pfd. .......................... 4,652,432
24,455 Series Y, 7.04% Pfd. .......................... 2,430,216
3,125 Entergy Gulf States Utilities Inc.,
$9.96 Pfd. .................................... 317,188
Entergy Louisiana Inc.:
58,681 8.00% Pfd. .................................... 1,468,491
56,800 9.68% Pfd. .................................... 1,455,500
6,000 Entergy Mississippi Inc.,
8.36% Pfd. .................................... 612,750
Florida Power & Light Company:
693 4.50% Pfd. .................................... 44,698
38,850 Series S, 6.98% Pfd. .......................... 3,826,725
41,666 Series T, 7.05% Pfd. .......................... 4,145,767
19,400 Series U, 6.75% Pfd. .......................... 1,857,550
Georgia Power Company:
1,246 $6.48 Pfd. .................................... 112,607
2,305 $6.60 Pfd. .................................... 212,348
16,000 Series P, $1.90 Pfd. .......................... 404,000
21,000 Series Q, $1.9875 Pfd. ........................ 535,500
12,500 Series S, $1.925 Pfd. ......................... 318,750
8,000 Gulf Power Company,
Class A, 7.00% Pfd. ........................... 197,800
4,250 Idaho Power Company,
7.07% Pfd. .................................... 423,406
20,000 MidAmerican Energy Company,
$1.7375 Pfd. .................................. 482,500
37,000 Mississippi Power Company,
7.25% Pfd. .................................... 934,250
20,000 Monongahela Power Company,
Series L, $7.73 Pfd. .......................... 2,110,000
5,400 Montana Power Company,
$6.875 Pfd. ................................... 515,025
17,700 Nevada Power Company,
Series A, 9.90% Sinking Fund Pfd. ............. 1,935,937
New York State Electric & Gas
Corporation:
5,000 6.30% Sinking Fund Pfd. ....................... 493,750
3,320 6.48% Pfd. .................................... 279,710
Niagara Mohawk Power Corporation:
6,250 4.10% Pfd. .................................... 238,281
44,605 7.85% Sinking Fund Pfd. ....................... 1,070,520
62,000 9.50% Pfd. .................................... 1,288,050
Northern States Power Company:
1,660 $4.10 Pfd. .................................... 98,355
350 $4.16 Pfd. .................................... 21,044
5,600 Series I, $7.00 Pfd. .......................... 554,400
2,150 Pacific Enterprises,
$4.50 Pfd. .................................... 135,181
15,000 Pacificorp,
7.48% Sinking Fund Pfd. ....................... 1,599,375
17,800 Pennsylvania Power Company,
7.75% Pfd. .................................... 1,697,675
30,700 Pennsylvania Power & Light Company,
$6.75 Pfd. .................................... 2,897,312
558 Potomac Electric Power Company,
Series 1957, $2.44 Pfd. ....................... 18,972
PSI Energy, Inc.:
4,850 6.875% Pfd. ................................... 461,962
127,700 7.44% Pfd. .................................... 3,224,425
Public Service Electric & Gas Company:
6,480 4.08% Pfd. .................................... 378,270
18,208 5.05% Pfd. .................................... 1,313,252
10,810 5.28% Pfd. .................................... 814,804
15,000 6.92% Pfd. .................................... 1,460,625
Puget Sound Power & Light Company:
35,600 7.75% Sinking Fund Pfd. ....................... 3,755,800
44,135 7.875% Pfd. ................................... 1,119,926
180,000 San Diego Gas & Electric Company,
6.80% Pfd. .................................... 4,360,500
26,000 Southern California Gas Company,
7.75% Pfd. .................................... 663,000
15,100 Texas Utilities Electric Company,
$7.98 Pfd. .................................... 1,627,025
Union Electric Company:
3,000 $7.64 Pfd. .................................... 311,250
8,000 Series G, $6.40 Pfd. .......................... 729,000
Virginia Electric & Power Company:
39,800 $6.98 Pfd. .................................... 3,925,275
19,300 $7.05 Pfd. .................................... 1,915,525
111,000 Washington Natural Gas Company,
Series II, 7.45% Pfd. ......................... 2,802,750
5,500 Wisconsin Power & Light Company,
6.20% Pfd. .................................... 492,250
------------
TOTAL UTILITY FIXED RATE
PREFERRED STOCK ............................... 94,221,756
------------
BANKING -- 9.2%
26,600 Ahmanson (H.F.) & Company,
Series C, 8.40% Pfd. .......................... 684,950
20,971 Bank of Boston Corporation,
Series E, 8.60% Pfd. .......................... 536,071
10,300 Bank of New York Company, Inc.,
Series B, 8.60% Pfd. .......................... 265,869
BankAmerica Corporation:
42,500 Series L, 8.16% Pfd. .......................... 1,083,750
23,600 Series M, 7.875% Pfd. ......................... 597,375
21,387 Series N, 8.50% Pfd. .......................... 552,052
Chase Manhattan Corporation:
101,050 Series C, 10.84% Pfd. ......................... 3,012,553
18,100 Series F, 8.32% Pfd. .......................... 469,469
72,100 Series I, 7.92% Pfd. .......................... 1,852,069
68,000 Series J, 7.58% Pfd. .......................... 1,721,250
60,000 Citicorp,
Series 22, 7.75% Pfd. ......................... 1,545,000
13,911 First Chicago NBD,
Series E, 8.45% Pfd. .......................... 363,425
Fleet Financial Group, Inc.:
26,700 Series VI, 6.75% Pfd. ......................... 1,261,575
24,700 Series VII, 6.60% Pfd. ........................ 1,194,863
8,200 Series B, 10.12% Pfd. ......................... 217,300
35,000 Series E, 9.35% Pfd. .......................... 958,125
35,450 Great Western Financial Corporation,
8.30% Pfd. .................................... 910,622
21,472 MBNA Corporation,
Series A, 7.50% Pfd. .......................... 534,116
10,000 Morgan (J.P.) & Company Inc.,
Series H, 6.625% Pfd. ......................... 472,500
26,618 Wells Fargo & Company,
Series G, 9.00% Pfd. .......................... 702,050
------------
TOTAL BANKING FIXED RATE
PREFERRED STOCK ............................... 18,934,984
------------
FINANCIAL SERVICES -- 4.7%
Household International, Inc.:
19,800 Series 1992 A, 8.25% Pfd. ..................... 530,887
176,785 Series 1993 A, 7.35% Pfd. ..................... 4,397,527
95,500 Lehman Brothers Holdings Inc.,
5.00% Conv. Pfd. .............................. 2,313,487
83,200 Merrill Lynch & Company, Inc.,
Series A, 9.00% Pfd. .......................... 2,376,400
------------
TOTAL FINANCIAL SERVICES FIXED RATE
PREFERRED STOCK ............................... 9,618,301
------------
INDUSTRIAL -- 3.1%
31,830 Coastal Corporation,
Series H, $2.125 Pfd. ......................... 803,708
9,520 Dial Corporation,
$4.75 Sinking Fund Pfd. ....................... 554,540
124,570 Ford Motor Company,
Series B, 8.25% Pfd. .......................... 3,340,033
65,800 James River Corporation,
Series O, 8.25% Pfd. .......................... 1,636,775
------------
TOTAL INDUSTRIAL FIXED RATE
PREFERRED STOCK ............................... 6,335,056
------------
INSURANCE -- 1.8%
124,750 AON Corporation,
8.00% Pfd. .................................... 3,188,922
25,000 Berkley (W.R.) Corporation,
Series A, 7.375% Pfd. ......................... 611,875
------------
TOTAL INSURANCE FIXED RATE
PREFERRED STOCK ............................... 3,800,797
------------
TOTAL FIXED RATE
PREFERRED STOCK ............................... 132,910,894
------------
TOTAL PREFERRED STOCK
(Cost $182,356,589) ........................... 184,340,893
------------
COMMON STOCK -- 2.1% (Cost $4,763,207)
UTILITIES -- 2.1%
220,800 Nevada Power Company ............................ 4,429,800
------------
OTHER SECURITIES -- 4.9%
43,750 Duquesne Capital,
Series A, 8.375% MIPS ......................... 1,062,031
135,800 MCI Capital,
Series A, 8.00% QUIPS ......................... 3,262,595
TU Capital:
60,220 Series M, 8.25% TOPRS ......................... 1,482,917
8,000 Series N, 9.00% TOPRS ......................... 203,000
59,000 Series O, 8.00% QUIPS ......................... 1,435,175
Travelers/Aetna Property & Casualty
Capital:
38,500 Series A, 8.08% TOPRS ......................... 945,656
66,400 Series B, 8.00% TOPRS ......................... 1,614,350
3,100 West Penn Power Company,
Series A, 8.00% QUIDS ......................... 77,694
------------
TOTAL OTHER SECURITIES
(Cost $10,272,140) ............................ 10,083,418
------------
MISCELLANEOUS SECURITIES -- 2.3% (Cost $4,086,320)
Put Options on U.S. Treasury Bond Futures $ 4,747,763
------------
<PAGE>
PRINCIPAL
- ---------
AMOUNT
REPURCHASE AGREEMENT -- 0.6% (Cost $1,175,000)
$1,175,000 Agreement with UBS Securities Inc., 5.28%
dated 5/31/96, to be repurchased at
$1,175,517 on 6/3/96, collateralized by
$1,185,000 U.S. Treasury Note, 6.00%
due 8/31/97 (value $1,202,405) ......... 1,175,000
------------
TOTAL INVESTMENTS (Cost $202,653,256*) ................. 99.3% 204,776,874
OTHER ASSETS AND LIABILITIES (Net) ..................... 0.7 1,419,919
----- ------------
NET ASSETS ............................................. 100.0% $206,196,793
===== ============
- ----------
* Aggregate cost for Federal tax purposes.
ABBREVIATIONS:
MIPS -- Monthly Income Preferred Shares (Note 7)
QUIDS -- Quarterly Income Debt Securities (Note7)
QUIPS -- Quarterly Income Preferred Shares (Note 7)
TOPRS -- Trust Originated Preferred Securities (Note 7)
See Notes to Financial Statements.
<PAGE>
- ------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1996 (UNAUDITED)
- ----------------------------------------------
ASSETS:
Investments, at value (Cost $202,653,256)(Note 1)
See accompanying schedule ................ $204,776,874
Cash ....................................... 229
Receivable for securities sold ............. 4,057,554
Dividends and interest receivable .......... 1,285,377
Prepaid expense ............................ 89,732
Unamortized organization costs (Note 6) .... 10,333
------------
Total Assets ........................... 210,220,099
LIABILITIES:
Payable for securities purchased ........... $ 3,485,408
Dividends payable .......................... 305,366
Investment advisory fee payable (Note 2) ... 97,661
Accrued expenses and other payables ........ 134,871
-----------
Total Liabilities ...................... 4,023,306
------------
NET ASSETS ..................................... $206,196,793
============
NET ASSETS consist of:
Undistributed net investment income (Note 1) $ 530,963
Accumulated net realized gain on investments
sold (Note 1) ............................ 4,587,323
Unrealized appreciation of investments
(Note 3) ................................. 2,123,618
Par value of Common Stock .................. 111,513
Paid-in capital in excess of par value of
Common Stock ............................. 128,843,376
Money Market Cumulative Preferred(TM) Stock
(Note 5) ................................. 70,000,000
------------
Total Net Assets ....................... $206,196,793
============
PER SHARE
---------
NET ASSETS AVAILABLE TO:
Money Market Cumulative Preferred(TM) Stock
(700 shares outstanding) redemption value $100,000.00 $ 70,000,000
Accumulated undeclared dividends on Money
Market Cumulative Preferred(TM) Stock .... 411.63 288,138
----------- ------------
$100,411.63 70,288,138
===========
Common Stock (11,151,287 shares outstanding) $12.19 135,908,655
====== ------------
TOTAL NET ASSETS ............................... $206,196,793
============
See Notes to Financial Statements.
<PAGE>
- ------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31, 1996 (UNAUDITED)
-------------------------------------------------
INVESTMENT INCOME:
Dividends ..................................... $ 7,413,324
Interest ...................................... 127,414
------------
Total Investment Income ................... 7,540,738
EXPENSES:
Investment advisory fee (Note 2) .............. $575,380
Administration fee (Note 2) ................... 194,884
Money Market Cumulative Preferred(TM) broker
commissions and Auction Agent fees .......... 88,964
Shareholder servicing agent fees (Note 2) ..... 53,754
Insurance expense ............................. 49,186
Economic consulting fee (Note 2) .............. 37,500
Legal and audit fees .......................... 30,366
Custodian fees (Note 2) ....................... 30,058
Directors' fees and expenses (Note 2) ......... 18,770
Amortization of deferred organization costs
(Note 6) .................................... 7,000
Other ......................................... 73,015
--------
Total Expenses ............................ 1,158,877
------------
NET INVESTMENT INCOME ............................. 6,381,861
------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(Notes 1 and 3):
Net realized gain on investments sold during
the period .................................. 8,462,558
Change in net unrealized appreciation/
(depreciation) of investments during the
period ...................................... (10,472,273)
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS ... (2,009,715)
------------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS ........................................ $ 4,372,146
============
See Notes to Financial Statements.
<PAGE>
- ------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------------------
SIX MONTHS
ENDED
MAY 31, 1996 YEAR ENDED
(UNAUDITED) NOVEMBER 30, 1995
----------- -----------------
OPERATIONS:
Net investment income ................... $ 6,381,861 $ 14,179,582
Net realized gain/(loss) on investments
sold during the period ................ 8,462,558 (5,097,206)
Change in net unrealized appreciation/
(depreciation) of investments during
the period ......... .................. (10,472,273) 24,429,567
------------ ------------
Net increase in net assets resulting
from operations ....................... 4,372,146 33,511,943
DISTRIBUTIONS:
Dividends paid from net investment income
to Money Market Cumulative Preferred(TM)
Stock Shareholders (Note 5) ........... (1,195,166) (3,498,611)
Distributions paid from net realized
capital gains to Money Market
Cumulative Preferred(TM) Stock
Shareholders (Note 5) ................. -- (12,001)
Dividends paid from net investment income
to Common Stock Shareholders .......... (4,700,282) (12,414,321)
Distributions paid from net realized
capital gains to Common Stock
Shareholders .......................... -- (1,894,269)
FUND SHARE TRANSACTIONS:
Increase from Common Stock transactions
(Note 4) .............................. -- 230,242
------------ ------------
NET INCREASE/(DECREASE) IN NET ASSETS FOR THE
PERIOD (1,523,302) 15,922,983
NET ASSETS:
Beginning of period ..................... 207,720,095 191,797,112
------------ ------------
End of period (including undistributed
net investment income of $530,963 and
$44,550, respectively) ................ $206,196,793 $207,720,095
============ ============
See Notes to Financial Statements.
<PAGE>
- ------------------------------------------------------------------------------
Preferred Income Opportunity 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.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED YEAR ENDED YEAR ENDED YEAR ENDED PERIOD ENDED
MAY 31, 1996 NOVEMBER 30, NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
(UNAUDITED) 1995 1994 1993 1992*
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period .................. $ 12.35 $ 10.92 $ 13.17 $ 12.69 $ 11.63
-------- -------- -------- -------- --------
Net investment income ................................ 0.57 1.27 1.19 1.19 0.88
Net realized and unrealized gain/(loss) on investments (0.18) 1.73 (1.64) 0.92 1.09
-------- -------- -------- -------- --------
Net increase/(decrease) in net asset value resulting
from investment operations ......................... 0.39 3.00 (0.45) 2.11 1.97
Offering costs and Money Market Cumulative Preferred
(TM) Stock underwriting commissions charged to paid-
in capital ......................................... -- -- -- -- (0.19)
DISTRIBUTIONS:
Dividends paid from net investment income to Money
Market Cumulative Preferred(TM) Stock Shareholders .. (0.11) (0.31) (0.18) (0.15) (0.10)
Distributions paid from net realized capital gains to
Money Market Cumulative Preferred(TM) Stock
Shareholders ........................................ -- (0.00) (0.03) (0.05) (0.02)
Dividends paid from net investment income to Common
Stock Shareholders ................................. (0.42) (1.11) (0.86) (1.18) (0.58)
Distributions paid from net realized capital gains to
Common Stock Shareholders .......................... -- (0.17) (0.72) (0.26) --
Change in accumulated undeclared dividends on Money
Market Cumulative Preferred(TM) Stock .............. (0.02) 0.02 (0.01) 0.01 (0.02)
-------- -------- -------- -------- --------
Total distributions .................................. (0.55) (1.57) (1.80) (1.63) (0.72)
-------- -------- -------- -------- --------
Net asset value, end of period ....................... $ 12.19 $ 12.35 $ 10.92 $ 13.17 $ 12.69
======== ======== ======== ======== ========
Market value, end of period .......................... $ 10.500 $ 11.250 $ 10.125 $ 13.250 $ 13.625
======== ======== ======== ======== ========
Total investment return based on net asset value*** .. 2.73% 27.25% (5.44)% 16.04% 14.18%
======== ======== ======== ======== ========
Total investment return based on market value*** ..... (2.86)% 25.02% (12.83)% 8.70% 14.10%
======== ======== ======== ======== ========
Net assets, end of period (in 000's) ................. $206,197 $207,720 $191,797 $213,569 $200,469
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK
SHAREHOLDERS/SUPPLEMENTAL DATA:
Net investment income .............................. 7.28%** 8.47% 8.31% 7.65% 7.46%**
Operating expenses ................................. 1.72%** 1.78% 1.69% 1.72% 1.73%**
Portfolio turnover rate ............................ 45% 94% 116% 129% 77%
RATIO TO TOTAL AVERAGE NET ASSETS
(WHICH INCLUDES MONEY MARKET CUMULATIVE
PREFERRED(TM) STOCK):
Operating expenses (unaudited) ..................... 1.13%** 1.13% 1.11% 1.14% 1.19%**
- ----------
* The Fund commenced operations on February 13, 1992.
** Annualized.
*** Assumes reinvestment of distributions.
</TABLE>
See Notes to Financial Statements.
<PAGE>
- ---------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
- ----------------------------------------------
The table below sets out information with respect to Money Market
Cumulative Preferred(TM) Stock currently outstanding.
<TABLE>
<CAPTION>
INVOLUNTARY AVERAGE
ASSET LIQUIDATING MARKET
TOTAL SHARES COVERAGE PREFERENCE VALUE
OUTSTANDING PER SHARE PER SHARE (1) PER SHARE (1) & (2)
------------ --------- ------------- -------------------
<C> <C> <C> <C> <C>
5/31/96 700 $294,567 $100,000 $100,000
11/30/95 700 296,743 100,000 100,000
11/30/94 700 273,996 100,000 100,000
11/30/93 700 305,099 100,000 100,000
11/30/92 700 286,384 100,000 100,000
<FN>
- ----------
(1) Excludes accumulated undeclared dividends.
(2) See Note 5.
</FN>
</TABLE>
See Notes to Financial Statements.
<PAGE>
- ------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Preferred Income Opportunity Fund Incorporated (the "Fund") is a
diversified, closed-end management investment company organized as a Maryland
corporation on December 10, 1991 and is registered with the Securities and
Exchange Commission ("SEC") under the Investment Company Act of 1940, as
amended. The Fund commenced operations on February 13, 1992. The preparation
of financial statements in accordance with generally accepted accounting
principles requires management to make estimates and assumptions that affect
the reported amounts and disclosures in the financial statements. Actual
results could differ from those estimates. The policies described below are
followed consistently by the Fund in the preparation of its financial
statements in conformity with generally accepted accounting principles.
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 shares by the number of shares of
Common Stock outstanding. The value of the Fund's net assets attributable to
common shares is deemed to equal the value of the Fund's total assets less (i)
the Fund's liabilities, (ii) the aggregate liquidation value of the
outstanding Money Market Cumulative Preferred(TM) Stock and (iii) accumulated
and unpaid dividends on the outstanding Money Market Cumulative Preferred(TM)
Stock. Securities listed on a national securities exchange are valued on the
basis of the last sale on such exchange on the day of valuation. In the
absence of sales of listed securities and with respect to securities for which
the most recent sale prices are not deemed to represent fair market value and
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 for which market quotations
are not readily available 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 considered comparable in
quality, maturity and type. Investments in money market instruments, which
mature in 60 days or less, are valued at amortized cost.
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.
Option accounting principles: Upon the purchase of a put option by the
Fund, the total purchase price paid is recorded as an investment. The market
valuation is determined as set forth in the second preceding paragraph. When
the Fund enters into a closing sale transaction, the Fund will record a gain
or loss depending on the difference between the purchase and sale price. The
risks associated with purchasing options and the maximum loss the Fund would
incur are limited to the purchase price originally paid.
Repurchase Agreements: The Fund may engage in repurchase agreement
transactions. The Fund's Board of Directors reviews and approves periodically
the eligibility of the banks and dealers with which the Fund enters 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 and, in the event of counterparty default, the Fund has the
right to use the collateral to offset losses incurred. There is the
possibility of loss to the Fund in the event the Fund is delayed or prevented
from exercising its rights to dispose of the collateral securities.
Dividends and distributions to shareholders: The Fund expects to declare
dividends on a monthly basis to shareholders of Common Stock. The shareholders
of Money Market Cumulative Preferred(TM) Stock are entitled to receive
cumulative cash dividends as declared by the Fund's Board of Directors.
Distributions to shareholders are recorded on the ex-dividend date. Any net
realized short-term capital gains will be distributed to shareholders at least
annually. Any net realized long-term capital gains may be distributed to
shareholders at least annually or may be retained by the Fund as determined by
the Fund's Board of Directors. Capital gains retained by the Fund are subject
to tax at the corporate tax rate. Any taxes paid by the Fund on such net
realized long-term gains may be used by the Fund's Common Stock Shareholders
as a credit against their own tax liabilities subject to the Fund qualifying
as a regulated investment company as described in the following paragraph.
Federal income taxes: The Fund intends to qualify as a regulated
investment company by complying with the requirements under subchapter M of
the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and intends to distribute substantially all of its
taxable net investment income to its shareholders. Therefore, no Federal
income tax provision is required.
Income distributions and capital gain distributions are determined in
accordance with income tax regulations which may differ from generally
accepted accounting principals. These differences are primarily due to
differing treatments of income and gains on various investment securities held
by the Fund, timing differences and the differing characterization of
distributions made by the Fund.
2. INVESTMENT ADVISORY FEE, DIRECTORS' FEES, ECONOMIC CONSULTING FEE,
ADMINISTRATION FEE AND TRANSFER AGENT 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 net assets up to $100
million and 0.50% of the value of the Fund's average monthly net assets in
excess of $100 million.
The Fund currently pays each Director who is not a director, officer or
employee of the Adviser a fee of $9,000 per annum, plus $500 for each in-
person meeting of the Board of Directors or any committee and $100 for each
telephone meeting. In addition, the Fund will reimburse all Directors for
travel and out-of-pocket expenses incurred in connection with such meetings.
Lehman Brothers Global Economics ("Global Economics") (formerly Economic
Advisors, Inc.), a department of Lehman Brothers Inc., serves as the Fund's
Economic Consultant. The Fund pays Global Economics an annual fee equal to
$75,000 for services provided.
First Data Investor Services Group, Inc. ("FDISG"), a wholly owned
subsidiary of First Data Corporation, serves as the Fund's Administrator and
Transfer Agent. As Administrator, FDISG calculates the net asset value of the
Fund's shares and generally assists in all aspects of the Fund's administration
and operation. As compensation for FDISG's services as Administrator, the Fund
currently pays FDISG a monthly fee at an annual rate of 0.19% of the value of
the Fund's average monthly net assets. Boston Safe Deposit and Trust Company
("Boston Safe"), a wholly owned subsidiary of Mellon Bank Corporation, serves as
the Fund's Custodian. As compensation for Boston Safe's services as Custodian,
the Fund currently pays Boston Safe a monthly fee at an annual rate of 0.02% of
the value of the Fund's average monthly net assets. FDISG also serves as the
Fund's common stock servicing agent (transfer agent), dividend-paying agent and
registrar, and as compensation for FDISG's services as transfer agent, the Fund
currently pays FDISG a fee at an annual rate of 0.04% of the value of the Fund's
average monthly net assets plus certain out-of-pocket expenses. If, however, the
net assets of the Fund fall below $166,000,000, the fee will increase to an
annual rate of 0.05% of the value of the Fund's average monthly net assets.
Chase Manhattan Bank ("Auction Agent") serves as the Fund's Money Market
Cumulative Preferred(TM) Stock transfer agent, registrar, dividend disbursing
agent and redemption agent.
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities for the six months
ended May 31, 1996, excluding short-term investments, aggregated $91,061,630
and $88,231,749, respectively.
At May 31, 1996, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $6,805,601
and aggregate gross unrealized depreciation for all securities in which there
is an excess of tax cost over value was $4,681,983.
4. COMMON STOCK
At May 31, 1996, 240,000,000 shares of $0.01 par value Common Stock were
authorized.
Common Stock transactions were as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
5/31/96 11/30/95
------------------------------ ------------------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
Issued as reinvestment of dividends under the
Dividend Reinvestment and Cash Purchase Plan .............. 0 $ 0 21,619 $230,242
====== ====== ====== ========
</TABLE>
5. MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK
The Fund's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of $0.01 par value preferred stock. On April 9, 1992, the
Fund received proceeds from the public offering of 700 shares of Money Market
Cumulative Preferred(TM) Stock of $70,000,000 before offering costs of
$144,375 and underwriting discounts and commissions paid directly to Lehman
Brothers Inc. of $1,225,000. The Money Market Cumulative Preferred(TM) Stock
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 Money
Market Cumulative Preferred(TM) Stock are cumulative.
The Fund is required to meet certain asset coverage tests with respect to
the Money Market Cumulative Preferred(TM) Stock. 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, Money Market Cumulative Preferred(TM) Stock at
a redemption price of $100,000 per share plus an amount equal to the
accumulated and unpaid dividends on such shares in order to meet these
requirements. Additionally, failure to meet the foregoing asset requirements
could restrict the Fund's ability to pay dividends to Common Stock
Shareholders and could lead to sales of portfolio securities at inopportune
times.
If the Fund allocates any net gains or income ineligible for the Dividends
Received Deduction to shares of the Money Market Cumulative Preferred(TM)
Stock, the Fund may be required to make additional distributions to Money
Market Cumulative Preferred(TM) Stock 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 Money Market Cumulative Preferred(TM) Stock is generally
held every 49 days. Existing shareholders may submit an order to hold, bid or
sell such shares at par value on each auction date. Money Market Cumulative
Preferred(TM) Stock Shareholders may also trade shares in the secondary market
between auction dates.
At May 31, 1996, 700 shares of Money Market Cumulative Preferred(TM) Stock
were outstanding at the annual rate of 4.005%. 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 the portfolio holdings and hedging
transactions to lessen such risks to Common Stock Shareholders, there can be
no assurance that such results will be attained.
6. ORGANIZATION COSTS
Costs incurred by the Fund in connection with its organization and initial
public offering of Common Stock and Money Market Cumulative Preferred(TM)
Stock were $40,000 and $30,000, respectively, and are being amortized on a
straight-line basis over a five year period beginning February 13, 1992 (the
date of the Fund's commencement of investment operations) and April 9, 1992
(the date of the issuance of the Fund's Money Market Cumulative Preferred(TM)
Stock), respectively.
7. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY
The Fund invests primarily in adjustable and fixed rate preferred stocks.
Under normal market conditions, the Fund invests at least 25% of its assets in
securities issued by utilities and may invest a significant portion of its
assets, but less than 25% of its assets, in 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. Because of the Fund's concentration of investments in
the utility industry and significant holdings in the banking industry, the
ability of the Fund to maintain its dividend and the value of the Fund's
investments could be adversely affected by the possible inability of companies
in these industries to pay dividends and interest on their securities and the
ability of holders of securities of such companies to realize any value from
the assets of the issuer upon liquidation or bankruptcy. The Fund may invest
up to 15% of its assets at the time of purchase in securities rated below
investment grade, provided that no such investment may be rated below both
"Ba" by Moody's Investors Service, Inc. and "BB" by Standard & Poor's Rating
Group or judged to be comparable in quality at the time of purchase; however,
any such securities must be issued by an issuer having an outstanding class of
senior debt rated investment grade. The Fund may also invest up to 15% of its
assets in common stock. The Fund's investment policy regarding debt securities
was amended on July 21, 1995. The amended policy allows the Fund to invest up
to 35% of its assets in Monthly Income Preferred Shares ("MIPS"), Quarterly
Income Debt Securities ("QUIDS"), Quarterly Income Preferred Shares ("QUIPS"),
Trust Originated Preferred Securities ("TOPRS"), and similarly-structured
instruments, subject to the quality standards set forth above.
8. SPECIAL INVESTMENT TECHNIQUES
The Fund may employ certain investment techniques in accordance with its
fundamental investment policies. These may include the use of when-issued and
delayed delivery transactions. Securities purchased or sold on a when-issued
or delayed delivery basis may be settled within 45 days after the date of the
transaction. Such transactions may expose the Fund to credit and market
valuation risk greater than that associated with regular trade settlement
procedures. The Fund may also enter into transactions, in accordance with its
fundamental investment policies, involving any or all of the following:
lending of portfolio securities, short sales of securities, futures contracts,
options on futures contracts, and options on securities. With the exception of
purchasing securities on a when-issued or delayed delivery basis or lending
portfolio securities, these transactions are used for hedging or other
appropriate risk-management purposes or, under certain other circumstances, to
increase income. As of May 31, 1996, the Fund owned put options on U.S.
Treasury bond futures contracts. No assurance can be given that such
transactions will achieve their desired purposes or will result in an overall
reduction of risk to the Fund.
9. CAPITAL LOSS CARRYFORWARD
At November 30, 1995, the Fund had available capital loss carryforwards of
$4,657,870 to offset future realized net gains through the fiscal year ending
November 30, 2003.
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
QUARTERLY RESULTS OF INVESTMENT OPERATIONS (UNAUDITED)
- ------------------------------------------------------
<TABLE>
<CAPTION>
AVAILABLE TO COMMON STOCK SHAREHOLDERS
----------------------------------------------------------------------
NET REALIZED AND NET
UNREALIZED INCREASE/(DECREASE)
INVESTMENT NET INVESTMENT GAIN/(LOSS) IN NET ASSETS FROM
INCOME INCOME ON INVESTMENTS OPERATIONS
---------------------- --------------------- ----------------------- ----------------------
QUARTER PER PER PER PER
ENDED TOTAL SHARE* TOTAL SHARE* TOTAL SHARE* TOTAL SHARE*
------- ----- ------ ----- ------ ----- ------ ----- ------
<C> <C> <C> <C> <C> <C> <C> <C> <C>
02/28/94 $3,806,852 $0.34 $2,569,100 $0.23 $ (719,889) $(0.06) $1,849,211 $0.17
05/31/94 3,649,039 0.33 2,527,098 0.22 (6,277,612) (0.55) (3,750,514) (0.33)
08/31/94 4,188,158 0.38 3,023,002 0.27 (2,040,048) (0.18) 982,954 0.09
11/30/94 3,941,571 0.35 2,746,688 0.25 (9,402,313) (0.85) (6,655,625) (0.60)
02/28/95 3,861,014 0.35 2,420,831 0.22 4,639,812 0.41 7,060,643 0.63
05/31/95 4,149,620 0.37 2,769,492 0.25 9,552,841 0.86 12,322,333 1.11
08/31/95 4,225,009 0.38 2,843,183 0.25 518,935 0.05 3,362,118 0.30
11/30/95 4,181,057 0.37 2,849,065 0.26 4,620,773 0.41 7,469,838 0.67
02/29/96 3,672,584 0.33 2,333,543 0.21 (4,454,117) (0.40) (2,120,574) (0.19)
05/31/96 3,868,154 0.35 2,573,570 0.23 2,444,402 0.22 5,017,972 0.45
<FN>
- ----------
* Per share of common stock.
</FN>
- ---------------------------------------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
FINANCIAL DATA
PER SHARE OF COMMON STOCK (UNAUDITED)
- -------------------------------------
<CAPTION>
DIVIDEND
DIVIDEND NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE (1)
-------- --------- ------------- ------------
<S> <C> <C> <C> <C>
December 29, 1995 .......................... $0.0695 $12.14 $10.375 $10.47
January 31, 1996 ........................... 0.0695 12.18 10.750 10.73
February 29, 1996 .......................... 0.0695 11.95 10.500 10.58
March 29, 1996 ............................. 0.0695 12.08 10.250 10.28
April 30, 1996 ............................. 0.0695 12.04 10.625 10.56
May 31, 1996 ............................... 0.0740 12.19 10.500 10.52
<FN>
- ----------
(1) See ADDITIONAL INFORMATION; Dividend Reinvestment and Cash Purchase Plan on pages 21 and 22 of this report.
</FN>
</TABLE>
<PAGE>
- ------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED)
----------------------------------------------
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the
"Plan"), a shareholder whose Common Stock is registered in his own name will
have all distributions reinvested automatically by FDISG 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, FDISG 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 FDISG 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, FDISG 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 FDISG's
open market purchases in connection with the reinvestment of dividends or
capital gains distributions. For the six months ended May 31, 1996, $5,146 in
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.
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.
A shareholder whose Common Stock is registered in his or her own name may
terminate participation in the Plan at any time by notifying FDISG in writing,
by completing the form on the back of the Plan account statement and
forwarding it to FDISG or by calling FDISG directly. A termination will be
effective immediately if notice is received by FDISG 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, FDISG 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 FDISG at 1-800-331-1710.
<PAGE>
DIRECTORS
Martin Brody
Donald F. Crumrine, CFA
Robert T. Flaherty, CFA
Morgan Gust
Robert F. Wulf
OFFICERS
Robert T. Flaherty, CFA
Chairman of the Board
and President
Donald F. Crumrine, CFA
Vice President
and Secretary
Robert M. Ettinger, CFA
Vice President
Peter C. Stimes, CFA
Vice President
and Treasurer
Carl D. Johns
Assistant Treasurer
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
QUESTIONS CONCERNING YOUR SHARES OF PREFERRED
INCOME OPPORTUNITY 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 --
First Data Investor Services Group, Inc.
P.O. Box 1376
Boston, MA 02104
1-800-331-1710
THIS REPORT IS SENT TO SHAREHOLDERS OF PREFERRED INCOME OPPORTUNITY 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.
PREFERRED
INCOME
OPPORTUNITY
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F U N D
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Semi-Annual
Report
May 31, 1996
