<PAGE>
PREFERRED INCOME OPPORTUNITY FUND
INCORPORATED
Dear Shareholder:
The Preferred Income Opportunity Fund had good results in its
fiscal first
half ended May 31, 1997, despite market conditions that were
generally difficult
for bond investors. Total return on net asset value ("NAV") was
5.0% for the six
months. The return on market price was 8.8%. This was slightly
better as the
discount of NAV from market narrowed further to approximately 3.6%
at the end of
our first half.
The Preferred Income Opportunity Fund is intended to be an
alternative to
higher quality bond funds for investors who want less exposure to
fluctuating
interest rates than is normally associated with fixed income
investments. As the
following table shows, it has proven to be a very good
alternative. The Fund has
outperformed, over time, almost all the funds in a group of up to
60 higher
quality closed-end bond funds compiled by Lipper Analytical
Services, Inc.
<TABLE>
<S>
<C> <C> <C>
TOTAL RETURNS EARNED ON NET
ASSET VALUE
THROUGH MAY 31, 1997
ONE YEAR TWO YEARS THREE YEARS
- ----------- ------------- ---------------
PREFERRED INCOME OPPORTUNITY FUND
15.0% 12.9% 11.7%
RANK VS. HIGHER QUALITY BOND FUNDS
#3 OF 60 #5 OF 60 #2 OF 38
</TABLE>
Source: Lipper Analytical Services, Inc. The comparison group
includes all
U.S. Government bond, mortgage bond and term trust, and
investment grade
bond funds in Lipper's closed-end fund database.
The Fund's performance has been aided recently by a bit of a
tail wind.
There has been a steady stream of redemptions of traditional
preferred stocks,
motivated by the tax benefits to issuers of refinancing with new
forms of hybrid
preferreds. As a result, preferred stocks eligible for the
Dividends Received
Deduction ("DRD") have become increasingly scarce, and their
prices have been
quite firm. Such issues make up the bulk of the Fund's portfolio.
As the prices of preferred stocks eligible for the DRD
strengthened, we
whittled down the Fund's holdings of such issues. The net
reduction was focused
on fixed rate preferreds, which now account for 50% of the
portfolio, down from
65% the year before. Adjustable rate preferred ("ARPs"), which
seemed rather
cheap at times last year, were increased to approximately 30% of
the portfolio,
compared to 25% twelve months earlier. This was good move since
ARPs proved to
be the Fund's star performers.
The cash from the net sales of preferreds eligible for the DRD
was used to
increase the Fund's holdings of hybrid preferreds to approximately
17% of the
portfolio, compared to 5% last year at this time. Most of the
increase has
occurred since the Federal Reserve Board's approval last October
of the issuance
of hybrids by banks. A surge of new issues of hybrids resulted
from that action,
which has produced more attractive yields for investors.
<PAGE>
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
PORFOLIO COMPOSITION AS OF
<S> <C>
5/31/97
Adjustable Rates 30%
Non-DRD Preferreds 17%
Traditional Fixed Rates 50%
Cash & Other 3%
</TABLE>
The Question and Answer section that follows this letter goes
into greater
detail concerning the scarcity of traditional preferreds and the
expanded role
of hybrid preferreds in the Fund's portfolio.
The uncertainty about the tax laws that has been hanging over
the preferred
stock market may be starting to clear up a bit. As previously
discussed in these
letters, the Clinton Administration has proposed reducing and
otherwise
curtailing the DRD and also restricting hybrid preferreds in a
number of ways.
The recent budget agreement appears to put much of the
responsibility for the
details of the necessary tax legislation back in the hands of
Congress. We are
encouraged that the tax bill unveiled this June by the Chairman of
the House
Committee on Ways & Means does not contain any of the proposals
that we
previously found most disturbing. Just remember, in Washington,
"It ain't over
'til it's over."
On balance, the Fund's hedges have slightly reduced the
returns earned in
the current fiscal year to date. Although interest rates are up
since the start
of the year, they have not increased far enough or fast enough to
overcome the
cost of the hedge. The hedges did, however, help the stability of
NAV as
interest rates bounced around. This is similar to an insurance
policy that costs
you money but helps you sleep better.
Although many of our shareholders participate in the Fund's
Dividend
Reinvestment Plan, unceremoniously labeled the "DRIP," we suspect
there are
others who may have overlooked this opportunity. The DRIP allows
shareholders to
acquire additional shares of the Fund on a regular basis at very
economical
transaction costs and, in the current market, a discount from NAV.
(See pages
21-22 of this report for a detailed description of the DRIP.)
Information about
the plan is available through the Fund's Shareholder Servicing
Agent, First Data
Investor Services Group, Inc. at 1-800-331-1710.
Sincerely,
[SIG]
Robert T. Flaherty
CHAIRMAN OF THE BOARD
June 10, 1997
2
<PAGE>
- ------------------------------------------------------------------
- --------------
Preferred Income Opportunity
Fund Incorporated
QUESTION &
ANSWER SECTION
MAY 31,
1997 (UNAUDITED)
---------------------------------
- --------------
HOW LONG WILL THE SCARCITY OF TRADITIONAL PREFERRED STOCKS LAST?
We do not buy the notion that traditional preferreds, which
are eligible for
the Dividends Received Deduction (the "DRD"), will be totally
replaced by hybrid
preferreds. Ultimately, the two types of preferreds should coexist
in the market
place. As the saying goes, it's just a matter of price.
The current wave of redemptions of DRD eligible traditional
preferreds has a
lot of momentum. There are many such preferreds with dividend
rates above
current market levels that become redeemable for the first time
this year. Many
of the issuers of those traditional preferreds have already come
to market with
new hybrid preferreds for the obvious purpose of refinancing in
advance their
DRD eligible issues. Because of this, the scarcity of traditional
preferreds
will continue for a while and may become even more pronounced in
the months
ahead.
On a more basic level, the incentive, including tax benefits,
for
corporations to issue hybrids instead of traditional preferreds is
gradually
declining. The cost of financing with traditional preferreds has
gotten
noticeably cheaper, reflecting stronger prices and lower yields
relative to
hybrids. Furthermore, regulatory and credit rating considerations
may encourage
companies that already have several issues of hybrids outstanding
to consider
financing again with traditional preferreds in the future. Of
course, we are
assuming no dramatic change in the tax laws.
It will take time for this situation to shake out completely.
New issue
activity in traditional preferreds may recover slowly, but it is
difficult to
see in the next year or two any net growth in this sector after
retirements. We
expect the prices of traditional preferreds to remain well above
what used to be
"normal" as long as the hybrid market is thriving.
WILL THE SCARCITY CAUSE TRADITIONAL PREFERREDS TO CONTINUE
OVERPERFORMING
HYBRIDS?
There are limits to everything, even "overperformance" by
traditional
preferreds. For a higher rate issue, the price at which it can be
redeemed by
the issuer, either now or in the near future, is clearly a barrier
on the
upside. Similarly, even a traditional preferred that has a lower
dividend rate
or is not redeemable in the near future will eventually lose steam
on the
upside. Potentially, the highest bidder for such an issue is the
issuer itself
through a stock buyback program. Corporate investors could lose
interest in
supporting the market before that happened, however, if the market
price rose
enough to discount fully the tax advantage of the DRD. At that
point, they would
then be indifferent between owning the traditional preferred or a
hybrid.
The potential performance of traditional preferreds varies
from case to
case. We have our eyes on the limits described above, even though
many issues
have not yet reached them.
3
<PAGE>
- ------------------------------------------------------------------
- --------------
Preferred Income Opportunity Fund Incorporated
QUESTION & ANSWER SECTION (CONTINUED)
MAY 31, 1997 (UNAUDITED)
- -----------------------------------------------
HAS THE FUND'S STRATEGY ON HYBRID PREFERREDS CHANGED?
Market conditions have been changing rapidly, and our strategy
on hybrids
has evolved in response to those changes.
When hybrids were first introduced over three years ago, it
was easy. As a
new gimmick, hybrids were relatively fully priced, and their
yields were not
very tempting. We saw a possible "creeping scarcity" of preferreds
eligible for
the DRD, which made traditional preferreds that much more
attractive. Zero
seemed like the right amount of dollars to put into hybrids, and
that proved to
be a very good decision.
A little over a year ago, hybrids became more interesting.
They were coming
to market so rapidly that bursts of new issues occasionally
offered investors
quite attractive yields. The hybrids purchased by the Fund proved
to be only
trading opportunities that were typically sold as soon as the
market snapped
back. Because of their increasing scarcity, traditional preferreds
still seemed
like the best place to be. That was another good decision.
An important "mid-course adjustment" occurred after the
Federal Reserve
Board determined last October that, subject to certain
limitations, banks could
issue hybrids to satisfy their capital requirements. In the months
that
followed, there was a flood of new issues of hybrids that pushed
their yields up
to and, in some cases, above the point where they were fully
competitive with
other sectors of the fixed income markets. We steadily built the
Fund's position
up to about 17% of the portfolio, trading actively along the way
the hybrids
that were held. That is where the Fund stands now, and it looks
like another
good decision so far.
IS THE FUND LIKELY TO MOVE FURTHER INTO HYBRID PREFERREDS?
The Fund may very well buy more hybrids. It will depend on
market
conditions. Ideally, we would like to squeeze the last drop of
overperformance
out of the Fund's holdings of traditional preferreds. However, we
will take
advantage of better opportunities in hybrids, whenever they come
along. In
short, we will continue to be comparison shoppers. Some things
never change!
HOW DOES THE INCREASE IN THE FUND'S POSITION IN HYBRIDS AFFECT THE
PORTION OF
THE FUND'S OWN DIVIDENDS THAT QUALIFIES FOR THE DIVIDENDS
RECEIVED DEDUCTION?
It appears as though increasing the Fund's position in hybrids
has not had
significant tax consequences up to this point, although the exact
numbers will
not be known until the end of the fiscal year on November 30th.
This favorable
outcome stems from the intricacies of the tax laws that permit the
Fund to
deduct all its expenses against income that is not eligible for
the DRD, such as
income from hybrids. However, adding further to our holdings of
hybrids probably
would reduce the percentage of the Fund's dividends eligible for
the DRD.
4
<PAGE>
- ------------------------------------------------------------------
- --------------
Preferred Income Opportunity
Fund Incorporated
QUESTION & ANSWER
SECTION (CONTINUED)
MAY 31,
1997 (UNAUDITED)
---------------------------------
- --------------
Although the Fund is no longer managed with a view to
maximizing income
eligible for the DRD, the DRD is still important. To the extent
that our
distributions do not fully qualify for the DRD, we must make extra
"gross up"
payments to holders of the Money Market Cumulative Preferred-TM-
Stock that
provides the Fund's leverage. In addition, the DRD increases the
appeal of the
Fund's shares to corporate investors and broadens the market for
our stock,
which helps all shareholders.
As a rule of thumb, if a traditional DRD eligible preferred is
attractive to
corporate investors generally, the Fund will probably be able to
make money on
it and get some advantage from the DRD also. If it is not
attractive to
corporate holders, who are typically the investors willing to pay
the best
price, the Fund probably should not own it either.
- ------------------------------------------------------------------
- --------------
Preferred Income Opportunity Fund Incorporated
FINANCIAL DATA
PER SHARE OF COMMON STOCK (UNAUDITED)
- ---------------------------------------
<TABLE>
<CAPTION>
DIVIDEND
DIVIDEND NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE (1)
- ----------- ----------- ------------- -------------
<S>
<C> <C> <C> <C>
December 31, 1996................................................
$ 0.280 $ 12.56 $ 11.625 $ 11.65
January 31, 1997.................................................
0.073 12.47 11.625 11.69
February 28, 1997................................................
0.073 12.64 11.875 12.01
March 31, 1997...................................................
0.073 12.81 12.000 12.03
April 30, 1997...................................................
0.073 12.72 11.875 12.03
May 31, 1997.....................................................
0.073 12.84 12.375 12.44
</TABLE>
- ------------------------
(1) See ADDITIONAL INFORMATION; Dividend Reinvestment and Cash
Purchase Plan on
pages 21 and 22 of this report.
5
<PAGE>
- ------------------------------------------------------------------
- --------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS
MAY 31, 1997 (UNAUDITED)
- --------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- --------- -----------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES -- 94.9%
ADJUSTABLE RATE PREFERRED STOCKS -- 30.7%
UTILITIES -- 10.8%
20,000 Alabama Power Company,
Series 1993, Adj. Rate Pfd.... $ 471,250
22,470 Arizona Public Service Company,
Series Q, Adj. Rate Pfd....... 2,112,180
4,899 Entergy Gulf States Utilities
Inc., Series A, Adj. Rate
Pfd........................... 472,754
Georgia Power Company:
7,500 Series 1993 K, Adj. Rate
Pfd........................... 188,906
15,300 Series 1993-2 L, Adj. Rate
Pfd........................... 369,113
9,000 Gulf Power Company,
Adj. Rate Pfd................. 204,750
81,415 Illinois Power Company,
Series A, Adj. Rate Pfd....... 3,622,968
189,504 New York State Electric & Gas
Corporation,
Series B, Adj. Rate Pfd....... 4,477,032
Niagara Mohawk Power
Corporation:
95,275 Series A, Adj. Rate Pfd....... 1,929,319
195,918 Series B, Adj. Rate Pfd....... 4,726,522
25,000 Series C, Adj. Rate Pfd....... 578,125
12,300 Northern Indiana Public Service
Company,
Series A, Adj. Rate Pfd....... 564,263
Northern States Power Company:
11,520 Series A, Adj. Rate Pfd....... 1,091,520
13,935 Series B, Adj. Rate Pfd....... 1,320,341
42,900 Puget Sound Power & Light
Company, Series B, Adj. Rate
Pfd........................... 1,026,919
-----------
TOTAL UTILITY ADJUSTABLE RATE
PREFERRED STOCKS............... 23,155,962
-----------
BANKING -- 19.9%
BankAmerica Corporation:
9,050 Series A, Adj. Rate Pfd....... 447,409
69,200 Series B, Adj. Rate Pfd....... 6,561,025
BankBoston Corporation:
9,800 Series A, Adj. Rate Pfd....... 452,637
60,600 Series B, Adj. Rate Pfd....... 2,810,325
33,700 Series C, Adj. Rate Pfd....... 2,864,500
204,000 Bankers Trust New York
Corporation, Series Q, Adj.
Rate Pfd...................... 4,857,750
<CAPTION>
VALUE
SHARES (NOTE 1)
- --------- -----------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
ADJUSTABLE RATE PREFERRED STOCKS (CONTINUED)
BANKING (CONTINUED)
Chase Manhattan Corporation:
26,550 Series L, Adj. Rate Pfd....... $ 2,628,450
7,600 Series N, Adj. Rate Pfd....... 190,950
Citicorp:
89,448 Second Series, Adj. Rate
Pfd........................... 8,486,379
1,500 Third Series, Adj. Rate
Pfd........................... 149,625
17,700 Series 18, Adj. Rate Pfd...... 440,287
9,300 Series 19, Adj. Rate Pfd...... 231,919
First Chicago NBD:
36,211 Series B, Adj. Rate Pfd....... 3,421,939
20,000 Series C, Adj. Rate Pfd....... 1,945,000
83,600 MBNA Corporation,
Series B, Adj. Rate Pfd....... 2,262,425
35,750 Morgan (J.P.) & Company Inc.,
Series A, Adj. Rate Pfd....... 2,842,125
35,000 Republic New York Corporation,
Series D, Adj. Rate Pfd....... 866,250
20,000 Wells Fargo & Company,
Series B, Adj. Rate Pfd....... 917,500
-----------
TOTAL BANKING ADJUSTABLE RATE
PREFERRED STOCKS............... 42,376,495
-----------
TOTAL ADJUSTABLE RATE PREFERRED
STOCKS......................... 65,532,457
-----------
FIXED RATE PREFERRED STOCKS AND SECURITIES -- 64.2%
UTILITIES -- 44.4%
Alabama Power Company:
55,000 7.375% TOPRS.................. 1,343,375
46,700 7.60% TOPRS................... 1,149,988
159,700 Class A, 6.40% Pfd............ 3,916,642
24,500 Series 1992-2, 7.60% Pfd...... 612,806
61,800 Appalachian Power Company,
Series A, 8.25% TOPRS......... 1,560,450
22,646 Arizona Public Service Company,
Series W, 7.25% Pfd........... 576,058
Baltimore Gas & Electric
Company:
27,650 Series 1993, 6.70% Pfd........ 2,875,600
48,800 Series 1995, 6.99% Pfd........ 5,252,100
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
- ------------------------------------------------------------------
- --------------
Preferred Income Opportunity
Fund Incorporated
PORTFOLIO OF
INVESTMENTS (CONTINUED)
MAY 31,
1997 (UNAUDITED)
------------------------------------
- --------------
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- --------- -----------
PREFERRED STOCKS AND SECURITIES (CONTINUED)
<C> <S> <C>
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
7,500 Boston Edison Company,
4.78% Pfd..................... $ 512,812
100 Central Hudson Gas & Electric
Corporation,
Series D, 4.35% Pfd........... 6,275
18,000 Columbus Southern Power Company,
Series B, 7.92% Pfd........... 445,050
7,500 Commonwealth Edison Company,
$8.40 Pfd..................... 768,750
10,000 Consolidated Edison Company
of New York, Series A, 7.75%
QUIPS......................... 248,750
Consumers Power Company:
111,833 Class A, 8.32% Pfd............ 2,921,637
3,170 Series D, $7.45 Pfd........... 307,490
2,850 Series G, $7.76 Pfd........... 286,069
60,000 CPL Capital,
Series A, 8.00% QUIPS......... 1,522,500
54,400 Detroit Edison Company,
7.75% Pfd..................... 1,404,200
Duke Power Company:
8,900 Series 1993 A, 6.375% Pfd..... 221,387
24,700 Series C, 4.50% Pfd........... 1,750,612
4,000 Series E, 6.72% Pfd........... 403,000
6,000 Series R, 7.50% Pfd........... 629,250
26,700 Series S, 7.85% Pfd........... 2,910,300
13,200 Series W, 7.00% Pfd........... 1,409,100
2,755 Series Y, 7.04% Pfd........... 295,129
53,750 Duquesne Capital,
Series A, 8.375% MIPS......... 1,357,188
56,200 El Paso, Tennessee Pipeline
Company, Series A, 8.25%
Pfd........................... 3,076,950
6,000 Entergy Mississippi Inc.,
8.36% Pfd..................... 613,500
Florida Power & Light Company:
4,000 4.50% Pfd..................... 280,000
4,105 Series E, 4.35% Pfd........... 274,009
32,850 Series S, 6.98% Pfd........... 3,490,312
18,100 Series T, 7.05% Pfd........... 1,938,963
<CAPTION>
VALUE
SHARES (NOTE 1)
- --------- -----------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
Georgia Power Company:
1,246 $6.48 Pfd..................... $ 123,666
2,639 $6.60 Pfd..................... 266,539
8,400 7.60% TOPRS................... 207,690
21,000 Series Q, $1.9875 Pfd......... 534,187
12,500 Series S, $1.925 Pfd.......... 319,531
10,000 Gulf Power Company,
Series A, 7.625% QUIPS........ 247,750
12,500 Hawaiian Electric Industries,
8.36% TOPRS................... 315,625
10,000 Jersey Central Power & Light
Company, Series K, 7.52%
Sinking Fund Pfd.............. 1,046,250
4,900 Massachusetts Electric Company,
6.84% Pfd..................... 125,562
Mississippi Power Company:
15,000 6.32% Pfd..................... 370,875
62,000 7.25% Pfd..................... 1,577,125
20,000 Monongahela Power Company,
Series L, $7.73 Pfd........... 2,170,000
Montana Power Capital:
3,900 $6.875 Pfd.................... 408,037
30,000 Series A, 8.45% QUIPS......... 768,750
New York State Electric & Gas
Corporation:
5,000 6.30% Sinking Fund Pfd........ 506,250
9,696 6.48% Pfd..................... 947,784
Niagara Mohawk Power
Corporation:
6,250 4.10% Pfd..................... 310,938
44,605 7.85% Sinking Fund Pfd........ 1,120,701
62,000 9.50% Pfd..................... 1,619,750
Northern States Power Company:
2,380 $4.10 Pfd..................... 154,105
2,420 $4.16 Pfd..................... 158,813
47,500 Ohio Power Company,
Series B, 7.92% QUIDS......... 1,174,438
2,150 Pacific Enterprises,
$4.50 Pfd..................... 150,500
</TABLE>
See Notes to Financial Statements.
7
<PAGE>
- ------------------------------------------------------------------
- --------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
MAY 31, 1997 (UNAUDITED)
- --------------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- --------- -----------
PREFERRED STOCKS AND SECURITIES (CONTINUED)
<C> <S> <C>
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
9,000 Pacificorp,
7.48% Sinking Fund Pfd........ $ 974,250
17,800 Pennsylvania Power Company,
7.75% Pfd..................... 1,679,875
1,413 Potomac Electric Power Company,
Series 1957, $2.44 Pfd........ 54,047
PSI Energy, Inc.:
4,850 6.875% Pfd.................... 507,431
167,582 7.44% Pfd..................... 4,283,815
5,776 Public Service Company of
Colorado, 4.64% Pfd........... 407,208
Puget Sound Power & Light
Company:
29,100 7.75% Sinking Fund Pfd........ 3,070,050
47,135 7.875% Pfd.................... 1,187,213
128,500 Series II, 7.45% Pfd.......... 3,453,438
4,030 Rochester Gas & Electric
Corporation, Series I, 4.75%
Pfd........................... 271,018
78,800 San Diego Gas & Electric
Company, 6.80% Pfd............ 2,063,575
26,000 Sierra Pacific Capital,
8.60% TOPRS................... 674,375
26,000 Southern California Gas Company,
7.75% Pfd..................... 669,500
5,000 South Carolina Electric & Gas,
6.52% Pfd..................... 522,500
4,000 Southern Indiana Gas & Electric,
4.75% Pfd..................... 282,500
160,000 Swepco Capital,
Series A, 7.875% Pfd.......... 4,004,000
Transcanada Pipeline Ltd.:
123,693 8.50% COPRS................... 3,208,287
100,000 8.75% TOPRS................... 2,656,250
TU Capital:
60,220 Series M, 8.25% TOPRS......... 1,528,083
9,000 Series N, 9.00% TOPRS......... 234,000
3,000 Union Electric Company,
$7.64 Pfd..................... 325,875
Virginia Electric & Power
Company:
1,136 $4.04 Pfd..................... 71,568
1,420 $4.20 Pfd..................... 93,010
27,300 $6.98 Pfd..................... 2,897,213
<CAPTION>
VALUE
SHARES (NOTE 1)
- --------- -----------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
5,500 Wisconsin Power & Light Company,
6.20% Pfd..................... $ 530,750
-----------
TOTAL UTILITY FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 94,634,949
-----------
BANKING -- 4.9%
Bankers Trust New York
Corporation:
1,000,000 Series B1, 7.90% Capital
Security, 144A**.............. 980,000
21,000 Series O, 7.625% Pfd.......... 539,437
1,350,000 Bank of New York Inc.,
7.78% Capital Security,
144A**........................ 1,311,356
Chase Manhattan Corporation:
101,050 Series C, 10.84% Pfd.......... 3,176,759
12,700 Series K, 7.50% Pfd........... 329,406
2,500,000 First Union Institutional,
8.04% Capital Security,
144A**........................ 2,520,000
Fleet Financial Group, Inc.:
12,300 Series VI, 6.75% Pfd.......... 658,050
35,000 Series E, 9.35% Pfd........... 982,187
-----------
TOTAL BANKING FIXED RATE
PREFERRED STOCKS............... 10,497,195
-----------
FINANCIAL SERVICES -- 8.8%
174,950 Household International, Inc.,
8.70% TOPRS................... 4,636,175
121,725 Lehman Brothers Holdings Inc.,
5.00% Conv. Pfd............... 3,484,378
Merrill Lynch & Company, Inc.:
20,000 7.75% TOPRS................... 499,500
77,100 8.00% TOPRS................... 1,956,413
104,200 Series A, 9.00% Pfd........... 3,171,588
56,000 Morgan Stanley Group Inc.,
7.75% Pfd..................... 3,024,000
21 Prudential Management,
6.30% PVT, Sinking Fund....... 1,869,000
-----------
TOTAL FINANCIAL SERVICES FIXED
RATE PREFERRED STOCKS AND
SECURITIES..................... 18,641,054
-----------
</TABLE>
See Notes to Financial Statements.
8
<PAGE>
- ------------------------------------------------------------------
- --------------
Preferred Income Opportunity
Fund Incorporated
PORTFOLIO OF
INVESTMENTS (CONTINUED)
MAY 31,
1997 (UNAUDITED)
------------------------------------
- --------------
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
- --------- -----------
PREFERRED STOCKS AND SECURITIES (CONTINUED)
<C> <S> <C>
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
INDUSTRIAL -- 3.7%
67,319 Coastal Corporation,
Series H, $2.125 Pfd.......... $ 1,720,842
103,570 Ford Motor Company,
Series B, 8.25% Pfd........... 2,880,541
110,800 James River Corporation,
Series O, 8.25% Pfd........... 2,818,475
9,520 Viad Corporation,
$4.75 Sinking Fund Pfd........ 556,920
-----------
TOTAL INDUSTRIAL FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 7,976,778
-----------
INSURANCE -- 2.4%
124,750 AON Corporation,
8.00% Pfd..................... 3,188,922
70,681 Hartford Capital,
Series B, 8.35% QUIPS......... 1,820,036
-----------
TOTAL INSURANCE FIXED RATE
PREFERRED STOCKS AND
SECURITIES..................... 5,008,958
-----------
TOTAL FIXED RATE PREFERRED
STOCKS AND SECURITIES.......... 136,758,934
-----------
TOTAL PREFERRED STOCKS AND
SECURITIES (Cost
$189,980,400).................. 202,291,391
-----------
COMMON STOCKS -- 3.1%
UTILITIES -- 3.1%
61,000 Consolidated Edison Company
of New York, Inc.............. 1,765,187
220,800 Nevada Power Company............ 4,512,600
17,500 Rochester Gas & Electric
Corporation................... 348,906
-----------
TOTAL UTILITY COMMON STOCKS
(Cost $6,927,132)............. 6,626,693
-----------
MISCELLANEOUS SECURITIES -- 0.4% (Cost $1,248,469)
Put Options on U.S. Treasury
Bond Futures.................. 936,583
-----------
<CAPTION>
PRINCIPAL VALUE
AMOUNT (NOTE 1)
- --------- -----------
<C> <S> <C>
REPURCHASE AGREEMENT -- 0.7% (Cost $1,583,000)
$1,583,000 Agreement with UBS Securities
Inc., 5.50% dated 5/30/97, to
be repurchased at $1,583,726
on 6/2/97, collateralized by
$1,691,000 U.S. Treasury Note,
5.875% due 11/15/05 (value
$1,583,333)................... $ 1,583,000
-----------
</TABLE>
<TABLE>
<S> <C> <C>
TOTAL INVESTMENTS (Cost
$199,739,001*)..................... 99.1% 211,437,667
OTHER ASSETS AND LIABILITIES (NET)........ 0.9
1,853,222
--------- -----------
- --
NET ASSETS................................ 100.0% $
213,290,889
--------- -----------
- --
--------- -----------
- --
</TABLE>
- ----------------------------------
* Aggregate cost for Federal tax purposes.
** Security 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.
ABBREVIATIONS:
<TABLE>
<S> <C> <C>
COPRS -- Canadian Originated Preferred Securities
(Note 7)
MIPS -- Monthly Income Preferred Securities (Note 7)
QUIDS -- Quarterly Income Debt Securities (Note 7)
QUIPS -- Quarterly Income Preferred Securities (Note
7)
TOPRS -- Trust Originated Preferred Securities (Note
7)
</TABLE>
See Notes to Financial Statements.
9
<PAGE>
- ------------------------------------------------------------------
- --------------
Preferred Income Opportunity Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
MAY 31, 1997 (UNAUDITED)
- --------------------------------------------
<TABLE>
<S>
<C> <C>
ASSETS:
Investments, at value (Cost $199,739,001) (Note 1)
See accompanying schedule..................................
$ 211,437,667
Cash.........................................................
70
Receivable for securities sold...............................
3,670,211
Dividends and interest receivable............................
1,289,418
Prepaid expenses.............................................
86,506
- -------------
Total Assets...........................................
216,483,872
LIABILITIES:
Payable for securities purchased.............................
$ 2,704,867
Dividends payable............................................
248,874
Investment advisory fee payable (Note 2).....................
100,968
Accrued expenses and other payables..........................
138,274
- -----------
Total Liabilities......................................
3,192,983
- -------------
NET ASSETS.......................................................
$ 213,290,889
- -------------
- -------------
NET ASSETS CONSIST OF:
Distributions in excess of net investment income (Note 1)....
$ (73,844)
Accumulated net realized gain on investments sold (Note 1)...
2,731,564
Unrealized appreciation of investments (Note 3)..............
11,698,666
Par value of Common Stock....................................
111,513
Paid-in capital in excess of par value of Common Stock.......
128,822,990
Money Market Cumulative Preferred-TM- Stock (Note 5).........
70,000,000
- -------------
Total Net Assets.......................................
$ 213,290,889
- -------------
- -------------
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........................................
116.39 81,472
- ----------- -------------
$100,116.39 70,081,472
- -----------
- -----------
Common Stock (11,151,287 shares outstanding).................
$12.84 143,209,417
- ------ ------------
- ------
TOTAL NET ASSETS.................................................
$ 213,290,889
- -------------
- -------------
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
- ------------------------------------------------------------------
- --------------
Preferred Income Opportunity
Fund Incorporated
STATEMENT
OF OPERATIONS
FOR THE SIX MONTHS ENDED MAY 31,
1997 (UNAUDITED)
------------------------------------
- --------------
<TABLE>
<S>
<C> <C>
INVESTMENT INCOME:
Dividends.........................................................
$6,834,498
Interest..........................................................
208,210
- ----------
Total Investment
Income..................................... 7,042,708
EXPENSES:
Investment advisory fee (Note
2).................................. $ 589,689
Administration fee (Note
2)....................................... 126,573
Money Market Cumulative Preferred-TM- broker commissions
and Auction Agent
fees.......................................... 88,478
Legal and audit
fees.............................................. 44,804
Insurance
expense.................................................
43,647
Shareholder servicing agent fees (Note
2)......................... 36,483
Directors' fees and expenses (Note
2)............................. 26,444
Economic consulting fee (Note
2).................................. 22,667
Custodian fees (Note
2)........................................... 18,006
Amortization of deferred organization costs (Note
6).............. 3,333
Other.............................................................
34,348
- ---------
Total
Expenses..............................................
1,034,472
- ----------
NET INVESTMENT
INCOME.................................................
6,008,236
- ----------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
(Notes 1 and 3):
Net realized gain on investments sold during the
period........... 2,184,471
Change in net unrealized appreciation/(depreciation) of
investments during the
period................................... (266,515)
- ----------
NET REALIZED AND UNREALIZED GAIN ON
INVESTMENTS....................... 1,917,956
- ----------
NET INCREASE IN NET ASSETS RESULTING FROM
OPERATIONS.................. $7,926,192
- ----------
- ----------
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
- ------------------------------------------------------------------
- --------------
Preferred Income Opportunity Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------------------
<TABLE>
<CAPTION>
SIX MONTHS ENDED
MAY 31, 1997 YEAR ENDED
(UNAUDITED) NOVEMBER 30, 1996
- ------------------ -------------------
<S>
<C> <C>
OPERATIONS:
Net investment
income................................................... $
6,008,236 $ 12,914,657
Net realized gain on investments sold during the
period................. 2,184,471 6,552,224
Change in net unrealized appreciation/(depreciation) of
investments
during the
period.....................................................
(266,515) (630,710)
- ------------------ -------------------
Net increase in net assets resulting from
operations.................... 7,926,192
18,836,171
DISTRIBUTIONS:
Dividends paid from net investment income to Money Market
Cumulative
Preferred-TM- Stock Shareholders (Note
5)............................. (1,621,959)
(2,326,879)
Distributions paid from net realized capital gains to Money
Market
Cumulative Preferred-TM- Stock Shareholders (Note
5).................. (15,432) (383,206)
Dividends paid from net investment income to Common Stock
Shareholders......................................................
.... (5,461,360) (9,651,475)
Distributions paid from net realized capital gains to Common
Stock
Shareholders......................................................
.... (1,731,258) --
NET INCREASE/(DECREASE) IN NET ASSETS FOR THE
PERIOD...................... (903,817)
6,474,611
- ------------------ -------------------
NET ASSETS:
Beginning of
period.....................................................
214,194,706 207,720,095
- ------------------ -------------------
End of period (including (distributions in excess of net
investment
income)/undistributed net investment income of $(73,844) and
$1,001,239,
respectively)............................................. $
213,290,889 $ 214,194,706
- ------------------ -------------------
- ------------------ -------------------
</TABLE>
See Notes to Financial Statements.
12
<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
MAY 31, 1997 NOVEMBER 30, NOVEMBER 30,
(UNAUDITED) 1996 1995
-----
- --------------- ---------------- ----------------
<S> <C>
<C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period.......................
$ 12.91 $ 12.35 $ 10.92
-
- ---------- ---------------- ----------------
Net investment income......................................
0.54 1.16 1.27
Net realized and unrealized gain/(loss) on investments.....
0.17 0.53 1.73
-
- ---------- ---------------- ----------------
Net increase/(decrease) in net asset value resulting from
investment operations.....................................
0.71 1.69 3.00
Offering costs and MMP****
underwriting commissions charged to paid-in capital.......
- -- -- --
DISTRIBUTIONS:
Dividends paid from net investment income to MMP****
Shareholders..............................................
(0.14) (0.21) (0.31)
Distributions paid from net realized capital gains to
MMP**** Shareholders......................................
(0.00)# (0.03) (0.00)
Dividends paid from net investment income to Common Stock
Shareholders..............................................
(0.49) (0.87) (1.11)
Distributions paid from net realized capital gains to
Common Stock Shareholders.................................
(0.16) -- (0.17)
Change in accumulated undeclared dividends on MMP****......
0.01 (0.02) 0.02
-
- ---------- ---------------- ----------------
Total distributions........................................
(0.78) (1.13) (1.57)
-
- ---------- ---------------- ----------------
Net asset value, end of period.............................
$ 12.84 $ 12.91 $ 12.35
-
- ---------- ---------------- ----------------
-
- ---------- ---------------- ----------------
Market value, end of period................................
$ 12.375 $ 12.000 $ 11.250
-
- ---------- ---------------- ----------------
-
- ---------- ---------------- ----------------
Total investment return based on net asset value***........
4.97% 13.11% 27.25%
-
- ---------- ---------------- ----------------
-
- ---------- ---------------- ----------------
Total investment return based on market value***...........
8.85% 15.42% 25.02%
-
- ---------- ---------------- ----------------
-
- ---------- ---------------- ----------------
Net assets, end of period (in 000's).......................
$ 213,291 $ 214,195 $ 207,720
-
- ---------- ---------------- ----------------
-
- ---------- ---------------- ----------------
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK
SHAREHOLDERS/ SUPPLEMENTAL DATA:
Net investment income....................................
6.33%** 7.36% 8.47%
Operating expenses.......................................
1.46%** 1.71% 1.78%
Portfolio turnover rate..................................
31% 87% 94%
EXPENSE RATIO TO TOTAL AVERAGE NET ASSETS
(WHICH INCLUDES MMP****):
Operating expenses.......................................
0.98%** 1.13% 1.13%
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
NOVEMBER 30, NOVEMBER 30, NOVEMBER 30,
1994 1993 1992*
-----
- ----------- ---------------- ----------------
<S> <C>
<C> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period....................... $
13.17 $ 12.69 $ 11.63
-----
- ----------- ---------------- ----------------
Net investment income......................................
1.19 1.19 0.88
Net realized and unrealized gain/(loss) on investments.....
(1.64) 0.92 1.09
-----
- ----------- ---------------- ----------------
Net increase/(decrease) in net asset value resulting from
investment operations.....................................
(0.45) 2.11 1.97
Offering costs and MMP****
underwriting commissions charged to paid-in capital.......
- -- -- (0.19)
DISTRIBUTIONS:
Dividends paid from net investment income to MMP****
Shareholders..............................................
(0.18) (0.15) (0.10)
Distributions paid from net realized capital gains to
MMP**** Shareholders......................................
(0.03) (0.05) (0.02)
Dividends paid from net investment income to Common Stock
Shareholders..............................................
(0.86) (1.18) (0.58)
Distributions paid from net realized capital gains to
Common Stock Shareholders.................................
(0.72) (0.26) --
Change in accumulated undeclared dividends on MMP****......
(0.01) 0.01 (0.02)
-----
- ----------- ---------------- ----------------
Total distributions........................................
(1.80) (1.63) (0.72)
-----
- ----------- ---------------- ----------------
Net asset value, end of period............................. $
10.92 $ 13.17 $ 12.69
-----
- ----------- ---------------- ----------------
-----
- ----------- ---------------- ----------------
Market value, end of period................................ $
10.125 $ 13.250 $ 13.625
-----
- ----------- ---------------- ----------------
-----
- ----------- ---------------- ----------------
Total investment return based on net asset value***........
(5.44)% 16.04% 14.18%
-----
- ----------- ---------------- ----------------
-----
- ----------- ---------------- ----------------
Total investment return based on market value***...........
(12.83)% 8.70% 14.10%
-----
- ----------- ---------------- ----------------
-----
- ----------- ---------------- ----------------
Net assets, end of period (in 000's)....................... $
191,797 $ 213,569 $ 200,469
-----
- ----------- ---------------- ----------------
-----
- ----------- ---------------- ----------------
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK
SHAREHOLDERS/ SUPPLEMENTAL DATA:
Net investment income....................................
8.31% 7.65% 7.46%**
Operating expenses.......................................
1.69% 1.72% 1.73%**
Portfolio turnover rate..................................
116% 129% 77%
EXPENSE RATIO TO TOTAL AVERAGE NET ASSETS
(WHICH INCLUDES MMP****):
Operating expenses.......................................
1.11% 1.14% 1.19%**
</TABLE>
- ----------------------------------------
* The Fund commenced operations on February 13, 1992.
** Annualized.
*** Assumes reinvestment of distributions.
**** Money Market Cumulative Preferred-TM- Stock
# Amount represents less than $0.01 per share.
See Notes to Financial Statements.
13
<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)
--------
- ------- ----------- ------------- -------------------
<S> <C>
<C> <C> <C>
05/31/97
700 $ 304,701 $ 100,000 $ 100,000
11/30/96
700 305,992 100,000 100,000
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
</TABLE>
- ----------------------------------------
(1) Excludes accumulated undeclared dividends.
(2) See Note 5.
See Notes to Financial Statements.
14
<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
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
15
<PAGE>
- ------------------------------------------------------------------
- --------------
Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------
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 principles. 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.
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.
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.
16
<PAGE>
- ------------------------------------------------------------------
- --------------
Preferred Income Opportunity
Fund Incorporated
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
---------------------------------------------------
- --------------
Primark Decision Economics Inc. ("Primark") serves as the
Fund's Economic
Consultant. The Fund pays Primark an annual fee equal to $45,333
for services
provided
First Data Investor Services Group, Inc. ("Investor Services
Group"), a
wholly owned subsidiary of First Data Corporation, serves as the
Fund's
Administrator and Transfer Agent. As Administrator, Investor
Services Group
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 Investor
Services Group's services as Administrator, the Fund pays Investor
Services
Group a monthly fee at an annual rate of 0.12% 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
pays Boston Safe
a monthly fee at an annual rate of 0.01% of the Fund's average
monthly net
assets. Investor Services Group also serves as the Fund's Common
Stock servicing
agent (transfer agent), dividend-paying agent and registrar, and
as compensation
for Investor Services Group's services as transfer agent, the Fund
pays Investor
Services Group a fee at an annual rate of 0.02% of the Fund's
average monthly
net assets plus certain out-of-pocket expenses.
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, 1997, excluding short-term investments, aggregated
$64,273,725 and
$68,554,154, respectively.
At May 31, 1997, aggregate gross unrealized appreciation for
all securities
in which there is an excess of value over tax cost was $12,591,377
and aggregate
gross unrealized depreciation for all securities in which there is
an excess of
tax cost over value was $892,711.
4. COMMON STOCK
At May 31, 1997, 240,000,000 shares of $0.01 par value Common
Stock were
authorized. There were no Common Stock transactions for the six
months ended May
31, 1997 and the year ended November 30, 1996.
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.
17
<PAGE>
- ------------------------------------------------------------------
- --------------
Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
- -----------------------------------------------------------------
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, 1997, 700 shares of Money Market Cumulative
Preferred-TM- Stock
were outstanding at the annual rate of 4.19%. 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 were 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. As of May 31, 1997, all such costs have been fully
amortized.
7. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY
The Fund invests primarily in adjustable and fixed rate
preferred securities
and related hybrid securities. 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
18
<PAGE>
- ------------------------------------------------------------------
- --------------
Preferred Income Opportunity
Fund Incorporated
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED) (CONTINUED)
---------------------------------------------------
- --------------
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 collectively in the following: Trust Originated Preferred
Securities
("TOPRS"), Monthly Income Preferred Shares ("MIPS"), Quarterly
Income Debt
Securities ("QUIDS"), Quarterly Income Preferred Shares ("QUIPS"),
Canadian
Originated Preferred Securities ("COPRS"), and similarly-
structured instruments
commonly referred to as hybrid or taxable preferreds, 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, 1997, 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.
19
<PAGE>
- ------------------------------------------------------------------
- --------------
Preferred Income Opportunity Fund Incorporated
QUARTERLY RESULTS OF INVESTMENT OPERATION (UNAUDITED)
- ------------------------------------------------------------------
- ----
<TABLE>
<CAPTION>
AVAILABLE TO COMMON STOCK SHAREHOLDERS
--------------------------
- ------------------------------------------------------
NET REALIZED AND NET INCREASE/(DECREASE)
INVESTMENT NET INVESTMENT
UNREALIZED 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*
- ---------- ------------- ----------- ------------- -----------
- -------------- --------- -------------- ---------
<S> <C> <C> <C> <C>
<C> <C> <C> <C>
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
08/31/96 3,961,160 0.35 2,661,602 0.24
(716,135) (0.06) 1,945,467 0.18
11/30/96 3,744,137 0.34 2,845,619 0.25
8,647,364 0.77 11,492,983 1.02
02/28/97 3,328,538 0.30 2,789,856 0.25
(233,256) (0.02) 2,556,600 0.23
05/31/97 3,714,170 0.33 3,218,380 0.29
2,151,212 0.19 5,369,592 0.48
</TABLE>
- ------------------------
* Per share of common stock.
20
<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 Investor Services Group
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, Investor Services Group 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 Investor Services Group
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,
Investor Services
Group 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 Investor
Services Group's open market purchases in connection with the
reinvestment of
dividends or capital gains distributions. For the six months ended
May 31, 1997,
$6,131 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.
21
<PAGE>
- ------------------------------------------------------------------
- --------------
Preferred Income Opportunity Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
- -------------------------------------------------------
In addition to acquiring shares of Common Stock through the
reinvestment of
cash dividends and distributions, a shareholder may invest any
further amounts
from $100 to $3,000 semi-annually at the then current market price
in shares
purchased through the Plan. Such semi-annual investments are
subject to any
brokerage commission charges incurred.
A shareholder whose Common Stock is registered in his or her
own name may
terminate participation in the Plan at any time by notifying
Investor Services
Group in writing, by completing the form on the back of the Plan
account
statement and forwarding it to Investor Services Group or by
calling Investor
Services Group directly. A termination will be effective
immediately if notice
is received by Investor Services Group 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, Investor Services Group 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 Investor
Services Group at
1-800-331-1710.
22
<PAGE>
DIRECTORS
Martin Brody
Donald F. Crumrine, CFA
Robert T. Flaherty, CFA
David Gale
Morgan Gust
Robert F. Wulf, CFA
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
e-mail: [email protected]
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.
3202-SEM
[LOGO]
Semi-Annual
Report
May 31, 1997
