<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
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: [email protected]
web site: www.preferredincome.com
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
[Preferred Income Opportunity Fund]
Quarterly
Report
August 31, 1999
<PAGE>
PREFERRED INCOME OPPORTUNITY FUND INCORPORATED
Dear Shareholder:
The fixed income markets have been fighting an uphill battle lately. This
shows up in the Preferred Income Opportunity Fund's total return on net asset
value of -0.8% for the first three quarters of fiscal 1999.
Interest rates increased significantly in the first nine months of fiscal
1999, reflecting strength in the domestic economy and two recent moves by the
Federal Reserve Board to tighten credit. This led to a decline in the market
prices of long term Treasury bonds as their yields rose more than a full
percentage point. Corporate bonds and preferreds were generally hit even harder
by rising interest rates, resulting in bigger price declines and larger yield
increases compared to Treasuries.
The sub-par performance of corporate bonds and preferreds was due to a
flood of new issues hitting the market in the last few months. This reflected an
active economy and, perhaps, a rush to catch up by corporate treasurers who
missed the bottom of interest rates earlier. Some financing may also have been
accelerated to avoid the risk of the "Y2K" problem impacting the market later in
the year. Corporate bonds were particularly affected, but the fall-out also hit
preferreds.
The stars of our portfolio were the put options on Treasury bond futures
contracts that the Fund purchased as hedges against rising interest rates. In
the first three quarters of fiscal 1999, those puts added approximately $4.8
million to the Fund's total return. We would have made even more on our hedges
if Treasury bonds had declined in price as much as corporate bonds and
preferreds.
We are very comfortable with the Fund's portfolio at this time. Present
market prices of corporate bonds and preferreds seem quite attractive. In
comparison, Treasury bonds appear to be somewhat overvalued, which is good since
we make money on our hedges when the prices of Treasuries decline. Furthermore,
at current price levels, many individual issues offer better protection against
the risk of redemptions by issuers. This typically results in greater upside
potential.
We hope that those of you who have access to the Internet will check out
our new web site at WWW.PREFERREDINCOME.COM. It provides basic information about
the Fund, recent news and up-to-date "vital statistics" on the Fund's
performance, dividends, net asset value, market discount and the like. We would
welcome your comments on it.
As everyone knows, "Y2K" is coming. We have done everything we can to
prepare for it, although there are still risks of market disruptions and
problems originating elsewhere cascading through the system. Nonetheless, we are
sleeping soundly at night and are looking forward to January 1, 2000 when we
hope to be able to get on with life as usual.
Sincerely,
/s/ Robert T. Flaherty
Robert T. Flaherty
Chairman of the Board
September 17, 1999
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
SUMMARY OF INVESTMENTS
AUGUST 31, 1999 (UNAUDITED)
- ---------------------------------------------
<TABLE>
<CAPTION>
PERCENT
VALUE OF TOTAL
(000'S) NET ASSETS
-------- ----------
<S> <C> <C>
ADJUSTABLE RATE PREFERRED STOCKS
Utilities............................................... $ 13,592 6.7%
Banking................................................. 8,196 4.0
-------- -----
Total Adjustable Rate............................... 21,788 10.7
-------- -----
FIXED RATE PREFERRED STOCKS AND SECURITIES
Utilities............................................... 68,810 33.7
Banking................................................. 35,597 17.4
Financial Services...................................... 28,025 13.7
Insurance............................................... 20,983 10.3
Miscellaneous Industries................................ 18,250 9.0
-------- -----
Total Fixed Rate.................................... 171,665 84.1
-------- -----
TOTAL PREFERRED STOCKS AND SECURITIES....................... 193,453 94.8
COMMON STOCKS
Utilities............................................... 1,052 0.5
REPURCHASE AGREEMENT........................................ 4,379 2.1
PURCHASED PUT OPTIONS....................................... 3,975 2.0
-------- -----
TOTAL INVESTMENTS........................................... 202,859 99.4
OTHER ASSETS AND LIABILITIES (NET).......................... 1,294 0.6
-------- -----
TOTAL NET ASSETS.................................... $204,153 100.0%
======== =====
</TABLE>
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, 1998........................................... $0.8100 $12.75 $12.5000 $12.53
January 31, 1999............................................ 0.0655 12.67 11.9375 11.92
February 28, 1999........................................... 0.0655 12.68 11.3125 11.62
March 31, 1999.............................................. 0.0655 12.61 11.6250 11.57
April 30, 1999.............................................. 0.0655 12.65 11.1875 11.15
May 31, 1999................................................ 0.0655 12.56 11.1875 11.38
June 30, 1999............................................... 0.0710 12.41 11.6250 11.57
July 31, 1999............................................... 0.0710 12.13 11.1250 11.12
August 31, 1999............................................. 0.0710 12.00 10.9375 10.87
</TABLE>
- ---------------
(1) Whenever the net asset value per share of the Fund's common stock is less
than or equal to the market price per share on the payment date, new shares
issued will be valued at the higher of net asset value or 95% of the then
current market price. Otherwise, the reinvestment shares of common stock
will be purchased in the open market.
2
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS(1)
NINE MONTHS ENDED AUGUST 31, 1999 (UNAUDITED)
------------------------------------------------------------------
<TABLE>
<S> <C>
OPERATIONS:
Net investment income.................................... $ 9,475,465
Net realized gain on investments sold.................... 6,600,661
Net unrealized depreciation of investments during the
period................................................. (15,147,484)
------------
Net increase in net assets from operations........... 928,642
DISTRIBUTIONS:
Dividends paid from net investment income to MMP*
Shareholders........................................... (2,157,830)
Distributions paid from net realized capital gains to
MMP* Shareholders(3)................................... (247,384)
Dividends paid from net investment income to Common Stock
Shareholders(2)........................................ (8,370,009)
Distributions paid from net realized capital gains to
Common Stock Shareholders(3)........................... (6,689,804)
NET DECREASE IN NET ASSETS:................................. (16,536,385)
NET ASSETS:
Beginning of period...................................... 220,689,622
------------
End of period............................................ $204,153,237
============
</TABLE>
FINANCIAL HIGHLIGHTS(1)
NINE MONTHS ENDED AUGUST 31, 1999 (UNAUDITED)
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD.
-------------------------------------------------------------------
<TABLE>
<S> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period..................... $ 13.50
-----------
Net investment income.................................... 0.85
Net realized gain and unrealized depreciation on
investments............................................ (0.77)
-----------
Net increase in net asset value resulting from investment
operations............................................. 0.08
DISTRIBUTIONS:
Dividends paid from net investment income to MMP*
Shareholders........................................... (0.19)
Distributions paid from net realized capital gains to
MMP* Shareholders(3)................................... (0.02)
Dividends paid from net investment income to Common Stock
Shareholders(2)........................................ (0.75)
Distributions paid from net realized capital gains to
Common Stock Shareholders(3)........................... (0.60)
Change in accumulated undeclared dividends on MMP*....... (0.02)
-----------
Total distributions...................................... (1.58)
-----------
Net asset value, end of period........................... $ 12.00
===========
Market value, end of period.............................. $ 10.9375
===========
Common shares outstanding, end of period................. 11,151,287
===========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK
SHAREHOLDERS:
Net investment income(4)................................. 6.52%**
Operating expenses....................................... 1.53%**
SUPPLEMENTAL DATA:
Portfolio turnover rate.................................. 40%
- ------------------------------------------------------------
Ratio of operating expenses to total average net assets
including MMP*............................................. 1.02%**
</TABLE>
(1) These tables summarize the nine months ended August 31, 1999 and should be
read in conjunction with the Fund's audited financial statements, including
footnotes, in its Annual Report dated November 30, 1998.
(2) Includes dividends earned, but not paid out, in prior fiscal year.
(3) Paid from capital gains realized, but not paid out, in prior fiscal year.
(4) Not necessarily reflective of results on an annual basis due to impact of
Fiscal 1998 Additional Distributions to MMP*, all of which were paid in the
first quarter of Fiscal 1999.
* Money Market Cumulative Preferred(TM) Stock
** Annualized
3