PREFERRED INCOME OPPORTUNITY FUND INCORPORATED
Dear Shareholder:
It all came together for the Preferred Income Opportunity Fund in the
fiscal third quarter that ended August 31, 2000. The result was a very strong
total return of 9.1% on the Fund's net asset value. This more than offset the
disappointing results in the first half of the year and resulted in a positive
total return of 4.6% for fiscal 2000 to date.
The Fund's success in the most recent fiscal quarter was the cumulative
result of several factors, none of which was really big news on its own:
(Bullet) Yields on long-term Treasury bonds declined somewhat. This helped
the value of the Fund's preferred portfolio, but it hurt the results
on our hedges. On balance, it did us more good than harm.
(Bullet) The preferred market moderately outperformed the long-term Treasury
bonds on which our hedges are based. Although preferreds only
recovered a small portion of the beating that they had taken versus
Treasuries in previous quarters, we were happy to have this extra
boost.
(Bullet) Through active management of the Fund's portfolio, we were able to
take advantage of out-of-line values in various sectors of the
preferred market that were created by the general stress in the
fixed income markets. This added a significant layer of "frosting"
to the cake.
The rewards for being in the right place at the right time within the
preferred market have been particularly great this year. For example, look at
the gyrations of "retail hybrid preferreds", i.e. $25 par value issues that are
typically designed to be sold to individual investors. Those preferreds
generally got quite cheap relative to other preferreds in December of 1999 (tax
selling!), recovered a few months later, became cheap again in the late spring
of 2000, and recently recovered again. The Fund's results in the last quarter
underscored the benefits of exploiting moves like this, but the groundwork was
really laid in previous months.
The Fund's Board of Directors recently approved the purchase of options on
interest rate swaps (called "swaptions") as an additional hedging tool that the
Fund may use depending on market conditions. Traditionally, the Fund has hedged
solely by purchasing put options on Treasury bond futures contracts. In view of
the potential shrinkage of the Treasury bond market due to federal budget
surpluses, however, we may need greater flexibility going forward. A more
detailed discussion of our hedging strategies appears in the Fund's most recent
semi-annual report, which is available on our web site at
WWW.PREFERREDINCOME.COM.
The market price of the Fund's shares has stayed within a fairly narrow
range as the net asset value has increased in recent months. As a result, the
discount of the market from NAV has increased slightly to over 11% at the
moment. Our web site at WWW.PREFERREDINCOME.COM also contains continually
updated data on the discount.
Sincerely,
/S/ SIGNATURE - Robert T. Flaherty
Robert T. Flaherty
CHAIRMAN OF THE BOARD
September 22, 2000
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Preferred Income Opportunity Fund Incorporated
SUMMARY OF INVESTMENTS
August 31, 2000 (Unaudited)
----------------------------------------------
PERCENT
VALUE OF TOTAL
(000'S) NET ASSETS
-------- ----------
ADJUSTABLE RATE PREFERRED STOCKS
Utilities .................................. $ 10,268 5.4%
Banking .................................... 10,469 5.5
-------- -----
Total Adjustable Rate .................. 20,737 10.9
-------- -----
FIXED RATE PREFERRED STOCKS AND SECURITIES
Utilities .................................. 65,320 34.3
Banking .................................... 34,510 18.1
Financial Services ......................... 28,884 15.1
Insurance .................................. 16,221 8.5
Oil and Gas ................................ 16,207 8.5
Miscellaneous Industries ................... 2,704 1.4
-------- -----
Total Fixed Rate ....................... 163,846 85.9
-------- -----
TOTAL PREFERRED STOCKS AND SECURITIES ........... 184,583 96.8
COMMON STOCKS
Utilities .................................. 2,237 1.2
COMMERCIAL PAPER ................................ 1,964 1.0
PURCHASED PUT OPTIONS ........................... 639 0.4
-------- -----
TOTAL INVESTMENTS ............................... 189,423 99.4
OTHER ASSETS AND LIABILITIES (NET) .............. 1,215 0.6
-------- -----
TOTAL NET ASSETS ........................... $190,638 100.0%
======== =====
FINANCIAL DATA
PER SHARE OF COMMON STOCK (UNAUDITED)
-------------------------------------
<TABLE>
DIVIDEND
DISTRIBUTION NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE (1)
---------- ------------ ------------- ------------
<S> <C> <C> <C> <C>
December 31, 1999 ............................... $0.5800 $10.82 $10.4375 $10.55
January 31, 2000 ................................ 0.0680 10.76 9.6250 9.73
February 29, 2000 ............................... 0.0680 10.61 9.5000 9.54
March 31, 2000 .................................. 0.0680 10.78 9.3125 9.59
April 30, 2000 .................................. 0.0680 10.35 9.6875 9.65
May 31, 2000 .................................... 0.0680 10.08 9.1875 9.24
June 30, 2000 ................................... 0.0680 10.44 9.5625 9.60
July 31, 2000 ................................... 0.0680 10.57 9.5625 9.66
August 31, 2000 ................................. 0.0680 10.77 9.5625 9.62
</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
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Preferred Income Opportunity Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS(1)
NINE MONTHS ENDED AUGUST 31, 2000 (UNAUDITED)
-----------------------------------------------
<TABLE>
<S> <C>
OPERATIONS:
Net investment income ...................................................................... $ 9,880,608
Net realized loss on investments sold ...................................................... (4,571,147)
Net unrealized appreciation of investments during the period ............................... 1,911,283
------------
Net increase in net assets from operations ............................................. 7,220,744
DISTRIBUTIONS:
Dividends paid from net investment income to MMP* shareholders ............................. (2,916,827)
Distributions paid from net realized capital gains to MMP* shareholders (3) ................ (191,425)
Dividends paid from net investment income to Common Stock shareholders (2) ................. (7,821,289)
Distributions paid from net realized capital gains to Common Stock Shareholders (3) ........ (4,712,758)
------------
Total Distributions ........................................................................ (15,642,299)
------------
NET DECREASE IN NET ASSETS: ..................................................................... (8,421,555)
NET ASSETS:
Beginning of period ........................................................................ 199,059,509
------------
End of period .............................................................................. $190,637,954
============
</TABLE>
FINANCIAL HIGHLIGHTS(1)
NINE MONTHS ENDED AUGUST 31, 2000 (UNAUDITED
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD.
-----------------------------------------------------
<TABLE>
<S> <C>
OPERATING PERFORMANCE:
Net asset value, beginning of period .......................................................... $ 11.50
------------
Net investment income ......................................................................... 0.89
Net realized gain and unrealized depreciation on investments .................................. (0.24)
------------
Net increase in net asset value resulting from investment operations .......................... 0.65
DISTRIBUTIONS:
Dividends paid from net investment income to MMP* Shareholders ................................ (0.26)
Distributions paid from net realized capital gains to MMP* Shareholders (3) ................... (0.02)
Dividends paid from net investment income to Common Stock Shareholders (2) .................... (0.70)
Distributions paid from net realized capital gains to Common Stock Shareholders (3) ........... (0.42)
Change in accumulated undeclared dividends on MMP* ............................................ 0.02
------------
Total distributions ........................................................................... (1.38)
------------
Net asset value, end of period ................................................................ $ 10.77
============
Market value, end of period ................................................................... $ 9.5625
============
Common shares outstanding, end of period ...................................................... 11,151,287
============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income ......................................................................... 7.95%**
Operating expenses ............................................................................ 1.61%**
SUPPLEMENTAL DATA:
Portfolio turnover rate ................................................................... 54%
----------------------------------------------------------------------------------------------------
Ratio of operating expenses to total average net assets including MMP* ........................ 1.01%**
</TABLE>
(1) These tables summarize the nine months ended August 31, 2000 and should be
read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 1999.
(2) Includes income earned, but not paid out, in prior fiscal year.
(3) Paid from capital gains realized, but not paid out, in prior fiscal year.
* Money Market Cumulative Preferred(TRADE MARK) Stock.
** Annualized.
3
<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]
QUESTIONS CONCERNING YOUR SHARES OF PREFERRED
INCOME OPPORTUNITY FUND?
(BULLET) If your shares are held in a brokerage
Account, contact your broker.
(BULLET) If you have physical possession of your shares
in certificate form, contact the Fund's Transfer
Agent & Shareholder Servicing Agent--
PFPC Inc.
P.O. Box 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.
[GRAPHIC OMITTED)
PREFERRED
INCOME
OPPORTUNITY
FUND
Quarterly
Report
August 31, 2000
web site: www.preferredincome.com