<PAGE>
PREFERRED INCOME OPPORTUNITY FUND
INCORPORATED
Dear Shareholder:
The last year was a tough one that most income investors would rather
forget. The Preferred Income Opportunity Fund took its share of the lumps that
were being handed out, although we think we fought a good rear guard action. At
the end of Fiscal 1999, the Fund was still at the top of Morningstar's scale
with an overall rating of "Five Stars" (as discussed in greater detail in the
following Question & Answer section).
Our "report card" in the following table shows the total returns earned by
the Fund on net asset value ("NAV") for various time periods through November
30, 1999, the end of our fiscal year. For comparison purposes, we have also
shown the results of a composite of over 50 higher quality closed-end bond funds
compiled from Lipper's database. That comparison seems appropriate since the
Preferred Income Opportunity Fund is designed to provide income investors with
an alternative to such bond funds, even though it is not a bond fund itself. The
bond funds were tough competition in the last year, but we have much to crow
about over the longer pull.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
TOTAL RETURN PER YEAR ON NET ASSET VALUE*
FOR PERIODS ENDED 11/30/99
ONE FIVE LIFE
YEAR YEARS OF FUND
---- ----- -------
<S> <C> <C> <C>
Preferred Income Opportunity Fund........................... -3.6% 11.1% 10.0%
Lipper Composite of Investment Grade Bond Funds**........... 0.3% 8.6% 6.9%
- ---------------
* Based on data provided by Lipper Inc. Distributions are assumed to be reinvested at
NAV in accordance with Lipper's practice, which differs from the procedures used
elsewhere in this report.
** Includes all U.S. Government bond, mortgage bond and term trust, and investment grade
bond funds in Lipper's closed-end fund database.
- ---------------------------------------------------------------------------------------
</TABLE>
The rise in interest rates in the year ended November 30, 1999 was, at
best, a mixed blessing for the Fund. The yields on long term Treasury bonds
increased from approximately 5% at the start of the fiscal year to about 6 1/4%
at the end, which caused a sharp decline in the prices of bonds and preferreds
generally. Our put option hedges, which typically create a "safety net" somewhat
below the market, offset only part of the price declines; and the market
weakness hurt the Fund's net asset value and total return on balance. However,
the gains that our hedges did produce allowed the Fund to add to its holdings of
preferreds and to boost its income. The pay off was an increase at mid-year in
the dividend rate on the Fund's shares.
As Fiscal 1999 progressed, many preferreds showed even greater price
weakness than Treasury bonds. The blame was generally put on concerns about the
Y2K computer bug. The supply of corporate bonds and preferreds weighed heavily
on the market as numerous corporations "played it safe" by financing ahead of
schedule. Meanwhile, the buyers went on strike, choosing to hang back to see
what would happen. The effect was to throw a wet blanket on the preferred
market.
<PAGE>
They say, "It's an ill wind that blows no one any good." Because preferreds
underperformed Treasury bonds last year, they are starting out Fiscal 2000 at
historically generous yields compared to Treasuries. If this causes preferreds
to produce better returns than Treasuries in the future, it will create a
favorable "tail wind" for our hedged portfolio.
For the year as a whole, traditional preferreds eligible for the Dividends
Received Deduction ("DRD") available to corporate investors typically
outperformed hybrid preferreds. However, relationships within the preferred
market produced more zigs and zags than real trends. (See the Q&A section for a
refresher course on the differences between the two types of preferreds.) As the
pie chart shows, there were no substantial changes versus the previous year-end
in the breakdown of the portfolio among the major sectors of the preferred
market. Each time the market zigged or zagged, so did we. In the end, the
percentage breakdown of the portfolio wound up pretty much where it started.
[1997 AND 1998 PREFERRED INCOME OPPORTUNITY FUND PIE CHART]
Preferred Income Opportunity Fund
<TABLE>
<CAPTION>
11/30/98 11/30/99
-------- --------
<S> <C> <C>
Adjustable Rates 13.8% 10.8%
Traditional Fixed Rates 36.9% 40.1%
Common Stock 1.4% 0.5%
Hybrids 43.5% 41.1%
Cash & Other 4.4% 7.5%
</TABLE>
We are doing our best to take advantage of some opportunities that we see
in the market now. In particular, we think some bargains are available among
certain traditional (DRD) preferreds, including some new issues that have
recently come to market. In addition, hybrid preferreds owned primarily by
individual investors also seem severely depressed by year-end tax selling. It's
fun to go shopping at these levels!
On December 30, 1999, the Fund paid to shareholders a special distribution
of $0.58 per share, which was mostly due to the realization of capital gains
during Fiscal 1999. Given market conditions, our hedges were clearly the main
source of gains last year. The Fund has paid a special year-end distribution in
every year but one since its inception, even though we manage its portfolio with
the goal of high current income, not capital gains.
Effective in January, 2000, the Fund's monthly dividend rate per share will
be reduced slightly from $0.0710 to $0.0680 to adjust for the reduction in the
Fund's earning assets caused by the special year-end distribution. This is
similar to the adjustments made in previous years for such distributions. We
anticipate that shareholders that reinvest the year-end distribution through the
Fund's Dividend Reinvest-
2
<PAGE>
ment Plan (affectionately called the "DRIP") will not experience any reduction
in total income in dollars. The Q&A section explains this further and
illustrates graphically the Fund's income record.
Finally, we want to put in a plug for WWW.PREFERREDINCOME.COM, the new web
site for the Preferred Income Group of closed-end funds. You can find current
information there on market prices, net asset values, discounts, yields,
dividends, performance and portfolio holdings, as well as news items and general
information about the Fund. We expect to improve the site from time to time, but
we need to know what would be helpful to you. Please let us hear from you.
Sincerely,
/s/ Robert T. Flaherty
---------------------------
Robert T. Flaherty
Chairman of the Board
December 15, 1999
QUESTIONS & ANSWERS
WHAT ARE THE FUND'S MORNINGSTAR RATINGS?
Preferred Income Opportunity Fund had an "overall" rating of five stars at
the end of Fiscal 1999 on November 30, 1999. It was rated five stars for the
last five fiscal years and four stars for the latest three fiscal years.
Morningstar's proprietary ratings are based upon a fund's historical risk
adjusted performance on net asset value versus the returns on 90 day U.S.
Treasury bills. Certain adjustments are made for fees and a risk penalty is
assessed for returns below Treasury bills. The Preferred Income Opportunity Fund
is ranked against the universe of closed-end taxable bond funds, including 128
funds for both the three and five-year periods. The top 10% of the funds receive
five stars, while 22.5% receive four stars, 35% get three stars, 22.5% get two
stars and 10% receive one star. The ratings are subject to change every month.
You can check our up-to-date ratings at any time by visiting our new web
site, WWW.PREFERREDINCOME.COM. You will find there a direct link to the page in
Morningstar's web site that displays our ratings.
OF COURSE, PAST PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS.
3
<PAGE>
HOW HAS THE FUND USUALLY DONE IN WEAK MARKETS?
Typically, we have done very well in tough times. This is consistent with
our Morningstar ratings, which pay particular attention to risk. Further
confirmation is provided by the following bar chart.
[PREFERRED INCOME OPPORTUNITY FUND]
<TABLE>
<CAPTION>
LIPPER COMPOSITE OF INVESTMENT PREFERRED INCOME
GRADE BOND FUNDS OPPORTUNITY INDEX
------------------------------- ------------------
<S> <C> <C>
Weak Markets -8.1% -2.0%
Strong Markets 17.5% 18.2%
All Markets 6.9% 10.0%
</TABLE>
THE DATA PROVIDED BY LIPPER INC., SHOW THE AVERAGE ANNUALIZED TOTAL
RETURNS IN THE 94 MONTHS ENDED 11/30/99, INCLUDING 36 WEAK MARKETS AND 58
STRONG MARKETS.
The chart breaks down the Fund's historical total returns, on a month by
month basis, between strong and weak markets based upon whether the Lipper
composite of higher quality bond funds managed to beat the total return on
Treasury bills. As the chart indicates, we have generally done reasonably well
in good markets and extremely well in bad markets, which has produced
outstanding results overall.
WAS SOMETHING DIFFERENT ABOUT THIS YEAR'S DOWN MARKET?
Very definitely! To begin with, the Fund's performance was not as
outstanding as we have come to expect in a down market. As detailed on the
following page, the explanation lies in the particular reasons behind the
weakness in the preferred market in Fiscal 1999.
4
<PAGE>
The pressure on preferred prices in the last year can be divided into two
components:
1. The impact of the GENERAL INCREASE IN INTEREST rates as represented by the
rising yields of Treasury bonds. Our hedges are designed to reduce the
Fund's exposure to this risk, and they worked very much as they have in the
past. We made good profits on our hedges in Fiscal 1999.
2. The UNDERPERFORMANCE OF PREFERREDS compared to Treasuries, which is
discussed in our opening letter. Since our hedges are based on Treasuries,
we do not expect them to offset the amount by which preferreds perform
better or worse than Treasuries. Fiscal 1999 would have been a much better
year if preferreds had just mirrored the performance of Treasuries.
Preferreds rarely track Treasuries in lockstep. In fact, preferreds often
become either expensive or cheap as they get "out of sync" with Treasuries,
although such tracking errors tend to balance out over longer time periods. Such
distortions are typically due to aberrations in supply factors, which can be
difficult to predict ahead of time. Our goal is to recognize such discrepancies
in valuations when they do occur and to adjust the Fund's portfolio to take
advantage of them over the longer term.
WILL THE SPECIAL YEAR-END DISTRIBUTION REDUCE THE VALUE OF MY INVESTMENT IN THE
FUND?
It depends on whether or not the distribution is reinvested. Let's use the
analogy of a savings account. Taking the distribution out is a withdrawal of
principal that will reduce the account's value. You can not get back to where
you started without reinvesting.
A good many of our shareholders reinvest all distributions, including the
monthly dividends, through the Fund's Dividend Reinvestment Plan. The DRIP is a
particularly efficient way to reinvest on a regular basis with a minimum of
hassle. If your shares are held in a brokerage account, ask your broker how to
participate in the Fund's DRIP. If you hold your shares in certificate form,
call the Plan's agent, PFPC Inc., at 1-800-331-1710 for more information.
Shareholders who wish to reinvest only now and then in amounts of their own
choosing can always acquire more shares of the Preferred Income Opportunity Fund
by calling their brokers and purchasing shares in the market.
HOW WILL MY INCOME BE AFFECTED BY THE SPECIAL DISTRIBUTION?
The savings account analogy also applies to income. A shareholder's income
will actually increase ever so slightly if the special year-end distribution is
reinvested in additional shares. If the distribution is not reinvested, income
will be reduced by about 4%.
We have projected into January, 2000 the historical income data for the
Fund contained in the following chart, which has appeared in these reports many
times before. The solid red line (measured on the left-hand scale) represents
the monthly dollar income received from an original investment in 1,000 shares
of the Fund. It is based on the assumption that the shareholder spent his or her
regular monthly income from the Fund and reinvested at net asset value just the
portion of each special year-end distribution that was "above and beyond" the
monthly dividends.
5
<PAGE>
[MONTHLY DIVIDEND INCOME CHART]
- --------------------------------------------------------------------------------
PREFERRED INCOME OPPORTUNITY FUND MONTHLY DIVIDEND INCOME
On a 1,000 Share ($12,500) Initial Investment
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Monthly Dividend Income 30 Year Treasury Yield
<S> <C> <C>
Dec-91
Jan-92 7.76
Feb-92 7.79
Mar-92 7.96
Apr-92 8.03
May-92 82.5 7.84
Jun-92 82.5 7.78
Jul-92 82.5 7.46
Aug-92 82.5 7.41
Sep-92 82.5 7.38
Oct-92 82.5 7.62
Nov-92 82.5 7.6
Dec-92 83.14 7.39
Jan-93 83.14 7.19
Feb-93 83.14 6.9
Mar-93 83.14 6.92
Apr-93 83.14 6.93
May-93 83.14 6.98
Jun-93 83.14 6.67
Jul-93 83.14 6.56
Aug-93 83.14 6.09
Sep-93 83.14 6.02
Oct-93 83.14 5.97
Nov-93 83.14 6.3
Dec-93 79.87 6.35
Jan-94 79.87 6.24
Feb-94 79.87 6.66
Mar-94 79.87 7.09
Apr-94 79.87 7.3
May-94 85.89 7.43
Jun-94 85.89 7.61
Jul-94 85.89 7.39
Aug-94 85.89 7.48
Sep-94 85.89 7.82
Oct-94 85.89 7.96
Nov-94 89.17 7.94
Dec-94 88.36 7.88
Jan-95 88.36 7.73
Feb-95 88.36 7.55
Mar-95 88.36 7.43
Apr-95 88.36 7.33
May-95 88.36 6.63
Jun-95 83.83 6.54
Jul-95 83.83 6.9
Aug-95 83.83 6.61
Sep-95 83.83 6.5
Oct-95 83.83 6.36
Nov-95 83.83 6.08
Dec-95 78.73 5.95
Jan-96 78.73 6.05
Feb-96 78.73 6.36
Mar-96 78.73 6.67
Apr-96 78.73 6.83
May-96 83.83 7
Jun-96 83.83 6.95
Jul-96 83.83 7.01
Aug-96 83.83 7.12
Sep-96 83.83 6.9
Oct-96 83.83 6.81
Nov-96 83.83 6.51
Dec-96 84.06 6.6
Jan-97 84.06 6.79
Feb-97 84.06 6.8
Mar-97 84.06 7.09
Apr-97 84.06 6.89
May-97 84.06 6.98
Jun-97 84.06 6.74
Jul-97 84.06 6.45
Aug-97 84.06 6.61
Sep-97 84.06 6.3
Oct-97 84.06 6.15
Nov-97 84.06 6.04
Dec-97 79.79 5.95
Jan-98 79.79 5.9
Feb-98 79.79 6.02
Mar-98 79.79 5.93
Apr-98 79.79 5.95
May-98 79.79 5.8
Jun-98 79.79 5.62
Jul-98 79.79 5.72
Aug-98 79.79 5.26
Sep-98 79.79 4.98
Oct-98 79.79 5.15
Nov-98 79.79 5.07
Dec-98 81.35 5.09
Jan-99 81.35 5.09
Feb-99 81.35 5.58
Mar-99 81.35 5.62
Apr-99 81.35 5.66
May-99 81.35 5.82
Jun-99 88.18 5.97
Jul-99 88.18 6.1
Aug-99 88.18 6.06
Sep-99 88.18 6.05
Oct-99 88.18 6.16
Nov-99 88.18 6.29
Dec-99 88.18 6.48
88.38
88.43
All distributions in excess of regular monthly dividends are assumed to be
reinvested at NAV
</TABLE>
The chart's message is that the monthly income of shareholders that
reinvest has actually increased since the inception of the Fund. That increase
is rather remarkable in view of the substantial decline in the interest rates on
long term U.S. Treasury bonds (the dashed red line measured on the right-hand
scale) from roughly 8% to about 6 3/8% now.
WHAT IS THE DIFFERENCE BETWEEN TRADITIONAL PREFERREDS AND HYBRID PREFERREDS?
It is basically a matter of corporate taxes. In all other respects,
traditional and hybrid preferreds are really very similar. The markets for these
two kinds of preferreds relate to each other in rather complicated ways, which
occasionally provide opportunities for us to make some money for the Fund by
taking advantage of pricing disparities.
Traditional preferreds are treated for tax purposes just like common stock
or any other equity security. The corporations that issue them do not get a tax
deduction for the dividends that they pay. On the other hand, traditional
preferreds are particularly appealing to corporate investors to whom the
dividends on such issues are 70% tax-free. That is the result of the Dividends
Received Deduction that was included in the federal tax laws many years ago to
offset some of the double taxation of these dollars that would otherwise occur
at the corporate level.
6
<PAGE>
Hybrid preferreds were created about six years ago for the purpose of
allowing issuers to get a deduction for the dividend payments they make on
preferreds, just as they would deduct interest payments on debt securities.
Since the issuer pays no tax, there is no double tax to avoid and,
correspondingly, no DRD available to a corporate holder of hybrids. Initially,
individual investors were the primary purchasers of hybrids, but the market has
now broadened to include institutions as well.
WHAT IS THE DISCOUNT FROM NET ASSET VALUE ON THE FUND'S SHARES?
As this is being written, the discount of the market value of the Fund's
shares from their net asset value is approximately 12%. As shown by the
following graph, the discount has recently fluctuated rather consistently
between the high single digits and the very low teens. Weekly updates of the
graph of the discount are included in our web site at WWW.PREFERREDINCOME.COM.
[CHART]
<TABLE>
<CAPTION>
Preferred Income Opportunity Fund
Premium/Discount of Market Price to NAV
PREMIUM/DISCOUNT
----------------
<S> <C>
12/27/91
1/3/92
1/10/92
1/17/92
1/24/92
1/31/92
2/7/92
2/14/92
2/21/92 7.26
2/28/92 8.05
3/6/92 8.74
3/13/92 9.80
3/20/92 8.19
3/27/92 5.56
4/3/92 5.38
4/10/92 7.05
4/17/92 5.47
4/24/92 5.90
5/1/92 5.46
5/8/92 5.36
5/15/92 3.06
5/22/92 2.48
5/29/92 3.07
6/5/92 1.81
6/12/92 4.00
6/19/92 3.57
6/26/92 4.42
7/3/92 4.75
7/10/92 6.26
7/17/92 8.00
7/24/92 5.92
7/31/92 6.47
8/7/92 6.13
8/14/92 6.28
8/21/92 5.14
8/28/92 5.39
9/4/92 4.09
9/11/92 6.84
9/18/92 5.72
9/25/92 5.39
10/2/92 6.20
10/9/92 6.75
10/16/92 4.90
10/23/92 1.88
10/30/92 4.74
11/6/92 1.80
11/13/92 1.88
11/20/92 4.08
11/27/92 8.44
12/4/92 6.30
12/11/92 5.15
12/18/92 6.91
12/25/92 6.38
1/1/93 6.21
1/8/93 6.79
1/15/93 5.95
1/22/93 4.34
1/29/93 4.75
2/5/93 4.83
2/12/93 2.84
2/19/93 2.02
2/26/93 3.10
3/5/93 4.73
3/12/93 6.51
3/19/93 3.03
3/26/93 3.60
4/2/93 5.14
4/9/93 6.75
4/16/93 5.70
4/23/93 8.53
4/30/93 6.51
5/7/93 5.13
5/14/93 6.10
5/21/93 5.70
5/28/93 4.41
6/4/93 4.97
6/11/93 5.61
6/18/93 4.97
6/25/93 4.17
7/2/93 4.72
7/9/93 4.25
7/16/93 3.62
7/23/93 0.68
7/30/93 3.06
8/6/93 2.12
8/13/93 1.81
8/20/93 0.08
8/27/93 3.70
9/3/93 3.31
9/10/93 4.01
9/17/93 3.38
9/24/93 2.44
10/1/93 2.14
10/8/93 2.61
10/15/93 2.63
10/22/93 2.46
10/29/93 0.90
11/5/93 0.00
11/12/93 -1.07
11/19/93 -2.82
11/26/93 -1.79
12/3/93 -0.76
12/10/93 -3.34
12/17/93 -3.38
12/24/93 -4.31
12/31/93 2.49
1/7/94 -0.36
1/14/94 1.57
1/21/94 -2.3
1/28/94 -3.77
2/4/94 -3.23
2/11/94 -3.61
2/18/94 -8.63
2/25/94 -5
3/4/94 -3.92
3/11/94 -3.15
3/18/94 -5.85
3/25/94 -5.62
4/1/94 -5.56
4/8/94 -6.12
4/15/94 -7.71
4/22/94 -10.12
4/29/94 -11.45
5/6/94 -7.75
5/13/94 -6.33
5/20/94 -6.36
5/27/94 -3.12
6/3/94 -6.83
6/10/94 -2.88
6/17/94 -4.57
6/24/94 -3.93
7/1/94 -4.09
7/8/94 -4.5
7/15/94 -4.9
7/22/94 -2.94
7/29/94 -3.27
8/5/94 -2.21
8/12/94 -3.03
8/19/94 -2.69
8/26/94 -3.48
9/2/94 -2.04
9/9/94 -3.18
9/16/94 -4.09
9/23/94 -6.28
9/30/94 -6.2
10/7/94 -13.22
10/14/94 -11.49
10/21/94 -14.1
10/28/94 -10.4
11/4/94 -7.86
11/11/94 -9.76
11/18/94 -9.9
11/25/94 -7.7
12/2/94 -4.02
12/9/94 -8.68
12/16/94 -7.32
12/23/94 -6.04
12/30/94 -8.51
1/6/95 -0.1
1/13/95 -1.41
1/20/95 -3.03
1/27/95 -6.19
2/3/95 -1.19
2/10/95 -3.14
2/17/95 -7.02
2/24/95 -3.76
3/3/95 -2.97
3/10/95 -5.85
3/17/95 -5.23
3/24/95 -5.34
3/31/95 -3.93
4/7/95 -3.41
4/14/95 -3.93
4/21/95 -6.9
4/28/95 -3.41
5/5/95 -5.76
5/12/95 -5.01
5/19/95 -9.33
5/26/95 -7.53
6/2/95 -4.81
6/9/95 -7.29
6/16/95 -7.02
6/23/95 -7.49
6/30/95 -6.86
7/7/95 -6.9
7/14/95 -8.69
7/21/95 -10.87
7/28/95 -9.11
8/4/95 -9.73
8/11/95 -10.18
8/18/95 -10.11
8/25/95 -7.8
9/1/95 -7.06
9/8/95 -8.33
9/15/95 -7.1
9/22/95 -7.49
9/29/95 -6.41
10/6/95 -7.18
10/13/95 -10.06
10/20/95 -9.09
10/27/95 -10.12
11/3/95 -12.32
11/10/95 -9.62
11/17/95 -10.71
11/24/95 -10.93
12/1/95 -10.14
12/8/95 -12.77
12/15/95 -12.33
12/22/95 -12.65
12/29/95 -14.54
1/5/96 -11.97
1/12/96 -12.79
1/19/96 -13.12
1/26/96 -11.46
2/2/96 -12.33
2/9/96 -12.33
2/16/96 -12.79
2/23/96 -13.03
3/1/96 -11.24
3/8/96 -14.65
3/15/96 -15.08
3/22/96 -14.87
3/29/96 -15.15
4/5/96 -13.15
4/12/96 -12.86
4/19/96 -12.79
4/26/96 -13.83
5/3/96 -12.57
5/10/96 -11.3
5/17/96 -14.08
5/24/96 -13.86
5/31/96 -13.86
6/7/96 -12.55
6/14/96 -13.37
6/21/96 -13.01
6/28/96 -9.18
7/5/96 -10.79
7/12/96 -9.11
7/19/96 -11.22
7/26/96 -9.39
8/2/96 -8.76
8/9/96 -6.88
8/16/96 -6.73
8/23/96 -8.81
8/30/96 -8.36
9/6/96 -8.36
9/13/96 -6.61
9/20/96 -8.89
9/27/96 -9.91
10/4/96 -8.76
10/11/96 -8.76
10/18/96 -9.35
10/25/96 -8.34
11/1/96 -7.96
11/8/96 -9.32
11/15/96 -7.26
11/22/96 -5.86
11/29/96 -6.08
12/6/96 -7.92
12/13/96 -8.13
12/20/96 -10.09
12/27/96 -8.37
1/3/97 -6.93
1/10/97 -5.62
1/17/97 -6.93
1/24/97 -8.34
1/31/97 -6.78
2/7/97 -6.23
2/14/97 -5.51
2/21/97 -6.45
2/28/97 -6.05
3/7/97 -5.81
3/14/97 -6.54
3/21/97 -7.15
3/28/97 -7.15
4/4/97 -5.73
4/11/97 -9.73
4/18/97 -8.06
4/25/97 -7.48
5/2/97 -6.72
5/9/97 -5.2
5/16/97 -6.47
5/23/97 -5.73
5/30/97 -3.62
6/6/97 -6.15
6/13/97 -3.85
6/20/97 -4.73
6/27/97 -4.18
7/4/97 -4.98
7/11/97 -5.85
7/18/97 -4.86
7/25/97 -6.3
8/1/97 -2.73
8/8/97 -7.01
8/15/97 -7.15
8/22/97 -7.67
8/29/97 -4.72
9/5/97 -5.8
9/12/97 -6.56
9/19/97 -5.57
9/26/97 -4.92
10/3/97 -2.92
10/10/97 -4.92
10/17/97 -5.06
10/24/97 -5.74
10/31/97 -4.77
11/7/97 -4.42
11/14/97 -3.77
11/21/97 -6.88
11/28/97 -4.84
12/5/97 -4.06
12/12/97 -6.52
12/19/97 -6.48
12/26/97 -4.56
1/2/98 -1.71
1/9/98 -1.97
1/16/98 -1.85
1/23/98 -6.2
1/30/98 -4.77
2/6/98 -5.3
2/13/98 -6.04
2/20/98 -4.56
2/27/98 -4.77
3/6/98 -4.73
3/13/98 -5.68
3/20/98 -4.87
3/27/98 -5.79
4/3/98 -6.82
4/10/98 -5.08
4/17/98 -6.2
4/24/98 -7.68
5/1/98 -6.18
5/8/98 -5.4
5/15/98 -7.17
5/22/98 -6.64
5/29/98 -6.48
6/5/98 -6.43
6/12/98 -6.27
6/19/98 -5.73
6/26/98 -6
7/3/98 -5.75
7/10/98 -5.62
7/17/98 -5.63
7/24/98 -4.65
7/31/98 -5.26
8/7/98 -4.72
8/14/98 -8.64
8/21/98 -9.54
8/28/98 -5.4
9/4/98 -6.18
9/11/98 -4.87
9/18/98 -3.92
9/25/98 -4.02
10/2/98 -5.54
10/9/98 -7.44
10/16/98 -4.85
10/23/98 -4.06
10/30/98 -6.16
11/6/98 -3.96
11/13/98 -4.81
11/20/98 -6.41
11/27/98 -4.78
12/4/98 -4.13
12/11/98 -3.63
12/18/98 -5.37
12/25/98 -1.32
1/1/99 -1.96
1/8/99 -2.97
1/15/99 -3.92
1/22/99 -6.27
1/29/99 -6.77
2/5/99 -6.1
2/12/99 -8.87
2/19/99 -9.37
2/26/99 -10.78
3/5/99 -8.46
3/12/99 -6.5
3/19/99 -10.22
3/26/99 -8.88
4/2/99 -7.24
4/9/99 -10.29
4/16/99 -7.81
4/23/99 -9.3
4/30/99 -11.56
5/7/99 -10.15
5/14/99 -12.77
5/21/99 -12.56
5/28/99 -10.93
6/4/99 -10.07
6/11/99 -5.58
6/18/99 -8.35
6/25/99 -6.02
7/2/99 -5.32
7/9/99 -5.32
7/16/99 -7.61
7/23/99 -5.58
7/30/99 -8.29
8/6/99 -4.64
8/13/99 -7.8
8/20/99 -8.64
8/27/99 -3.45
9/3/99 -10.57
9/10/99 -9.38
9/17/99 -6.83
9/24/99 -4.01
10/1/99 -7.7
10/8/99 -8.6
10/15/99 -12.31
10/22/99 -12.54
10/29/99 -12.23
11/5/99 -11.92
11/12/99 -12.52
11/19/99 -8.26
11/26/99 -9.79
12/3/99 -10.1
12/10/99 -8.47
12/17/99 -11.57
12/24/99 -12.12
12/31/99 -3.54
</TABLE>
7
<PAGE>
[This page intentionally left blank]
8
<PAGE>
- --------------------------------------------------------------------------------
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, 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
September 30, 1999................................... 0.0710 11.86 10.8750 10.87
October 31, 1999..................................... 0.0710 11.75 10.3125 10.43
November 30, 1999.................................... 0.0710 11.50 10.5000 10.46
December 31, 1999.................................... 0.5800 10.82 10.4375 N.A.
</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.
9
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 1999
- ----------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<C> <S> <C>
PREFERRED STOCKS AND SECURITIES -- 92.0%
ADJUSTABLE RATE PREFERRED STOCKS -- 10.8%
UTILITIES -- 4.0%
Niagara Mohawk Power Corporation:
95,275 Series A, Adj. Rate Pfd. ...... $ 2,387,830*
184,723 Series B, Adj. Rate Pfd. ...... 4,641,165*
25,000 Series C, Adj. Rate Pfd. ...... 628,125*
6,800 Northern Indiana Public Service
Company,
Series A, Adj. Rate Pfd. ...... 327,250*
-----------
TOTAL UTILITY ADJUSTABLE RATE
PREFERRED STOCKS............... 7,984,370
-----------
BANKING -- 6.5%
9,011 Bank One Corporation,
Series B, Adj. Rate Pfd. ...... 862,803*
29,450 Chase Manhattan Corporation,
Series L, Adj. Rate Pfd. ...... 2,812,475*
65,676 Citigroup Inc.,
Series Q, Adj. Rate Pfd. ...... 1,539,281*
Deutsche Bank AG:
28,000 Bankers Trust New York
Corporation, Series Q, Adj.
Rate Pfd. ..................... 656,250*
125,500 Bankers Trust New York
Corporation, Series R, Adj.
Rate Pfd. ..................... 2,941,406*
7,100 J.P. Morgan & Company, Inc.,
Series A, Adj. Rate Pfd. ...... 549,363*
5,100 Republic New York Corporation,
Series D, Adj. Rate Pfd. ...... 121,763*
77,700 Wells Fargo & Company,
Series B, Adj. Rate Pfd. ...... 3,399,375*
-----------
TOTAL BANKING ADJUSTABLE RATE
PREFERRED STOCKS............... 12,882,716
-----------
FINANCIAL SERVICES -- 0.3 %
12,500 Student Loan Marketing
Association, Series A, Adj. Rate
Pfd. .......................... 584,375*
-----------
TOTAL ADJUSTABLE RATE PREFERRED
STOCKS......................... 21,451,461
-----------
FIXED RATE PREFERRED STOCKS AND SECURITIES -- 81.2%
UTILITIES -- 32.8%
Alabama Power Company:
3,332 4.60% Pfd. .................... $ 250,666*
1,852 4.72% Pfd. .................... 142,965*
100 4.92% Pfd. .................... 8,046*
113,650 5.83% Pfd. .................... 2,420,177*
40,000 Alabama Power Capital Trust II,
7.60% TOPrS.................... 921,400
70,400 Appalachian Power Company, 8.00%
QUIDS, Series B................ 1,678,336
Baltimore Gas & Electric Company:
10,650 6.70% Pfd., Series 1993........ 1,143,704*
12,000 6.99% Pfd., Series 1995........ 1,313,100*
10,000 Boston Edison Company,
4.78% Pfd. .................... 772,650*
1,328 Central Hudson Gas & Electric
Corporation,
4.35% Pfd., Series D........... 94,573*
12,450 Columbus Southern Power Company,
7.92% Jr. Sub. Debt, Series B.. 291,143
Central Power and Light Company:
134,100 CPL Capital,
8.00% QUIPS, Series A.......... 3,107,097
Duke Energy Corporation:
7,019 4.50% Pfd., Series C........... 515,861*
10,003 7.85% Pfd., Series S........... 1,088,276*
1,009 7.00% Pfd., Series W........... 107,534*
Duquesne Light Company:
53,750 Duquesne Capital,
8.375% MIPS, Series A.......... 1,288,656
6,000 Entergy Arkansas Inc.,
7.40% Pfd. .................... 594,120*
3,471 Entergy Louisiana Inc.,
7.36% Pfd. .................... 335,333*
Florida Power & Light Company:
4,000 4.50% Pfd. .................... 296,660*
4,105 4.35% Pfd., Series E, Pvt. .... 289,546*
34,180 6.98% Pfd., Series S........... 3,649,228*
14,200 7.05% Pfd., Series T........... 1,522,737*
</TABLE>
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
----------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<S> <C> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
Florida Progress Corporation:
52,250 FPC Capital I,
7.10% QUIPS, Series A.......... $ 1,104,826
4,700 Georgia Power Capital Trust I,
7.75%, Series T................ 108,030
Hawaiian Electric Company, Inc.:
23,600 HECO Capital Trust I,
8.05% QUIPS.................... 542,328
Indiana Michigan Power Company:
10,000 8.00% Pfd., Series A........... 234,350
60,000 7.60% Pfd., Series B........... 1,313,400
7,711 Jersey Central Power & Light
Company, 7.52% Sinking Fund
Pfd., Series K................. 807,110*
22,000 MidAmerican Energy Financing I,
7.98% QUIPS, Series A.......... 509,520
15,000 Mississippi Power Company, 6.32%
Pfd. .......................... 375,675*
20,000 Monongahela Power Company, $7.73
Pfd., Series L................. 2,178,300*
Nevada Power Company:
51,280 NVP Capital I,
8.20% QUIPS, Series A.......... 1,166,620
5,000 New York State Electric & Gas
Corporation,
6.30% Sinking Fund Pfd. ....... 518,050*
Niagara Mohawk Power Corporation:
17,890 7.85% Sinking Fund Pfd. ....... 454,585*
6,250 4.10% Pfd. .................... 377,938*
41,250 6.905% Pfd. ................... 2,081,681*
Northern States Power Company:
2,480 $4.10 Pfd. .................... 168,590*
2,660 $4.16 Pfd. .................... 183,460*
Ohio Power Company:
16,800 7.375% Sr. Notes............... 366,156
47,500 7.92% QUIDS, Series B.......... 1,083,475
PacifiCorp:
5,800 $7.48 Pfd. Sinking Fund Pfd. .. 634,462*
6,000 $4.72 Pfd. .................... 467,970*
PECO Energy:
1,100 $4.30 Pfd., Series B........... $ 73,101*
5,000 $4.40 Pfd., Series C........... 299,375*
1,000,000 Capital Trust III,
$7.38 4/6/28 Capital Security,
Series D....................... 878,610
2,493 Potomac Electric Power Company,
$2.44 Pfd., Series 1957........ 99,433*
PP&L Resources, Inc.:
105,000 PP&L Capital Trust II,
8.10% TOPrS.................... 2,481,675
10,650 PSI Energy, Inc.,
6.875% Pfd. ................... 1,125,812*
91,500 Public Service Company of
Colorado Capital Trust I,
7.60% TOPrS.................... 2,025,352
Public Service Enterprise Group
Incorporated:
53,500 Enterprise Capital Trust I,
7.44% TOPrS, Series A.......... 1,084,713
14,020 Public Service Electric & Gas
Company,
5.28% Pfd., Series E........... 1,183,779*
Puget Sound Energy, Inc.:
24,655 7.75% Sinking Fund Pfd. ....... 2,581,872*
125,300 7.45% Pfd., Series II.......... 3,351,149*
Reliant Energy, Inc.:
34,000 REI Trust I,
7.20% TOPrS, Series C.......... 704,310
Rochester Gas & Electric
Corporation:
4,030 4.75% Pfd., Series I........... 298,744*
4,960 4.10% Pfd., Series J........... 317,366*
Sempra Energy:
2,150 Pacific Enterprises,
$4.50 Pfd. .................... 152,112*
46,500 San Diego Gas & Electric Company,
6.80% Pfd. .................... 1,213,883*
South Carolina Electric & Gas
Company:
15,000 5.125% Purchase Fund Pfd. ..... 642,975*
86,200 SCE&G Trust I,
7.55%, Series A................ 1,989,927
4,000 Southern Indiana Gas & Electric,
4.75% Pfd. Pvt. ............... 300,880*
</TABLE>
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
- -----------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<S> <C> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
UTILITIES (CONTINUED)
35,000 Southwestern Public Service
Capital I, 7.85%, Series A..... $ 810,425
TransCanada PipeLines Ltd.:
TransCanada Capital:
57,300 8.75% TOPrS.................... 1,403,277
8,700 8.25%.......................... 201,796
Union Electric Power Company:
3,000 $7.64 Pfd. .................... 327,900*
4,000,000 7.69% 12/15/36 Capital
Security, Series A............. 3,627,860
Virginia Electric & Power
Company:
1,665 $4.04 Pfd. .................... 108,716*
2,270 $4.20 Pfd. .................... 154,099*
5,700 $6.98 Pfd. .................... 606,423*
Wisconsin Energy Corporation:
35,000 WEC Capital Trust I,
6.85%.......................... 726,950
------------
TOTAL UTILITY FIXED RATE
PREFERRED STOCKS
AND SECURITIES................. 65,280,848
------------
BANKING -- 17.4 %
ABN Amro North America:
1,050 LaSalle National Corporation,
6.46% Pfd. 144A***............. 992,318*
BancWest Corporation:
6,500,000 First Hawaiian Capital I,
8.343% 7/1/27 Capital Security,
Series B....................... 6,164,242
Bank of America Corporation:
1,500,000 NationsBank Capital Trust II,
7.83% 12/15/26 Capital
Security....................... 1,432,928
540,000 Bank of New York Company, Inc.,
7.78% 12/1/26 Capital Security
144A***........................ 508,834
48,925 Chase Manhattan Corporation,
10.84% Pfd., Series C.......... 1,384,088*
Citigroup Inc.:
50,780 6.213% Pfd., Series G.......... 2,356,192*
91,050 5.864% Pfd., Series M.......... 4,037,612*
Deutsche Bank AG:
3,400,000 BT Capital Trust B,
7.90% 1/15/27 Capital
Security....................... $ 3,194,827
First Union Corporation:
300,000 First Union Institutional
Capital I, 8.04% 12/1/26
Capital Security............... 285,632
1,885,000 First Union Institutional
Capital II, 7.85% 1/1/27
Capital Security............... 1,770,863
1,500,000 First Union Capital II, 7.95%
11/15/29 Capital Security...... 1,471,395
FleetBoston Financial Corporation
916,000 BankBoston Capital Trust I,
8.25% 12/15/26 Capital
Security....................... 894,213
1,275,000 BankBoston Capital Trust II,
7.75% 12/15/26 Capital
Security, Series B............. 1,181,217
12,300 Fleet Financial Group, Inc.,
6.75% Pfd., Series VI.......... 656,205*
GreenPoint Financial Corporation:
2,500,000 GreenPoint Capital Trust I,
9.10% 6/1/27 Capital Security.. 2,346,613
J.P. Morgan & Company, Inc.:
1,050,000 JPM Capital Trust I,
7.54% 1/15/27 Capital
Security....................... 964,835
1,160,000 JPM Capital Trust II,
7.95% 2/1/27 Capital
Security....................... 1,110,253
Republic New York Corporation:
4,600 5.715% Pfd. ................... 202,124*
3,285,000 Republic NY Capital Trust II,
7.53% 12/4/26 Capital
Security....................... 2,933,948
750,000 Wells Fargo & Company, Capital I,
7.96% 12/15/26 Capital
Security....................... 726,562
------------
TOTAL BANKING FIXED RATE
PREFERRED STOCKS
AND SECURITIES................. 34,614,901
------------
FINANCIAL SERVICES -- 16.0 %
Bear Stearns Companies, The:
44,500 5.72% Pfd., Series F........... 1,847,863*
78,650 5.49% Pfd., Series G........... 3,143,641*
2,500,000 Countrywide Credit Capital I,
8.00% 12/15/26 Capital
Security....................... 2,313,988
</TABLE>
See Notes to Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
----------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES/PAR (NOTE 1)
- ---------- --------
<S> <C> <C>
PREFERRED STOCKS AND SECURITIES (CONTINUED)
FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED)
FINANCIAL SERVICES (CONTINUED)
Donaldson, Lufkin & Jenrette,
Inc.:
11,800 DLJ Capital Trust,
8.42%.......................... $ 284,439
Heller Financial Inc.:
17,000 6.687% Pfd., Series C.......... 1,641,095*
6,700 6.95% Pfd., Series D........... 672,211*
Household International, Inc.:
174,950 Household Capital Trust II,
8.70%.......................... 4,268,780
58,000 Household Capital Trust IV,
7.25%.......................... 1,204,370
Lehman Brothers Holdings Inc.:
236,755 5.00% Convertible Pfd.,
Series B....................... 6,642,162*
64,600 5.94% Pfd., Series C........... 2,690,267*
22,400 5.67% Pfd., Series D........... 894,208*
Merrill Lynch & Co., Inc.:
30,000 ML Capital Trust,
8.00% TOPrS.................... 748,950
110,000 SLM Holding Corporation,
6.97% Pfd. .................... 5,429,600*
------------
TOTAL FINANCIAL SERVICES
FIXED RATE PREFERRED STOCKS
AND SECURITIES................. 31,781,574
------------
INSURANCE -- 7.8 %
Allstate Corporation:
1,920,000 Allstate Financing II,
7.83% 12/1/45 Capital
Security....................... 1,809,590
American General Corporation:
735,000 American General Capital A,
7.57% 12/1/45 Capital Security
144A***........................ 699,128
Hartford Financial Services
Group, Inc.:
61,986 Hartford Capital II,
8.35% QUIPS, Series B.......... 1,509,049
MMI Companies, Inc.:
6,700,000 MMI Capital Trust I,
7.625% 12/15/27 Capital
Security, Series B............. 4,456,840
Provident Companies, Inc.:
1,810,000 Provident Financing Trust I,
7.405% 3/15/38 Capital
Security....................... $ 1,535,052
15 Prudential Human Resources
Management Company, Inc., 6.30%
Private Placement, Sinking Fund
Pfd., Series A................. 1,485,472*
SAFECO Corporation:
4,600,000 Safeco Capital Trust I, 8.072%
7/15/37 Capital Security....... 4,035,097
------------
TOTAL INSURANCE FIXED RATE
PREFERRED STOCKS
AND SECURITIES................. 15,530,228
------------
MISCELLANEOUS INDUSTRIES -- 7.2 %
44,100 Anadarko Petroleum Corporation,
5.46% Pfd. .................... 3,556,444*
Coastal Corporation, The:
40,200 Coastal Finance I,
8.375% TOPrS................... 950,328
3,000 E.I. Du Pont de Nemours and
Company, $4.50 Pfd.,
Series B....................... 221,730*
57,600 Farmland Industries Inc.,
8.00% Pfd. 144A***............. 2,634,913*
KN Energy, Inc.:
3,750,000 KN Capital Trust III, 7.63%
4/15/28 Capital Security....... 3,329,400
30,000 LASMO America Ltd.,
8.15% Pfd. 144A***............. 3,213,300*
9,520 Viad Corporation,
$4.75 Sinking Fund Pfd. ....... 550,780*
------------
TOTAL MISCELLANEOUS INDUSTRIES
FIXED RATE PREFERRED STOCKS AND
SECURITIES..................... 14,456,895
------------
TOTAL FIXED RATE
PREFERRED STOCKS
AND SECURITIES................. 161,664,446
------------
TOTAL PREFERRED STOCKS
AND SECURITIES
(Cost $188,677,642)............ 183,115,907
------------
</TABLE>
See Notes to Financial Statements.
13
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 1999
- ----------------------------------------------
<TABLE>
<CAPTION>
VALUE
SHARES (NOTE 1)
------ --------
<S> <C> <C>
COMMON STOCKS -- 0.5 %
UTILITIES -- 0.5 %
47,250 Avista Corporation $1.24
RECONS......................... $ 727,886*
8,150 WPS Resources Corporation........ 213,163*
-------------
TOTAL UTILITY COMMON STOCKS
(Cost $1,062,635).............. 941,049
-------------
OPTION CONTRACTS -- 1.9 % (Cost $3,177,232)
March Put Options on U.S.
Treasury Bond Futures, expiring
2/20/00+....................... 3,822,208
-------------
PRINCIPAL
AMOUNT
- ---------
REPURCHASE AGREEMENT -- 4.0 % (Cost $8,012,000)
$8,012,000 Agreement with Warburg Dillon
Read, 5.650% dated 11/30/99,
to be repurchased at
$8,013,257 on 12/1/99,
collateralized by $7,533,000
U.S. Treasury Note, 7.125% due
2/15/23
(value $8,173,305)............ 8,012,000
------------
TOTAL INVESTMENTS
(Cost $200,929,509**).................. 98.4% 195,891,164
OTHER ASSETS AND LIABILITIES (Net)..... 1.6 3,168,345
----- ------------
NET ASSETS............................ 100.0% $199,059,509
===== ============
</TABLE>
- ---------------
* Securities eligible for the Dividends Received Deduction.
** Aggregate cost for federal tax purposes is $201,437,679.
*** 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.
+ Non-income producing.
ABBREVIATIONS (Note 6):
TOPrS -- Trust Originated Preferred Securities
QUIPS -- Quarterly Income Preferred Securities
MIPS -- Monthly Income Preferred Securities
QUIDS -- Quarterly Income Debt Securities
RECONS -- Return Enhanced Convertible Securities
Capital Securities are considered debt instruments for financial statement
purposes and the amounts shown in the Shares/Par column are dollar amounts of
par value.
See Notes to Financial Statements.
14
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 1999
----------------------------------------------
<TABLE>
<S> <C> <C>
ASSETS:
Investments, at value (Cost $200,929,509) (Note 1)
See accompanying schedule............................... $195,891,164
Cash...................................................... 434
Dividends and interest receivable......................... 2,045,346
Receivable for securities sold............................ 1,549,948
Prepaid expenses.......................................... 24,724
------------
Total Assets...................................... 199,511,616
LIABILITIES:
Dividends payable to Common Shareholders.................. $ 176,319
Investment advisory fee payable (Note 2).................. 92,890
Professional fees payable................................. 56,822
Accrued expenses and other payables....................... 126,076
-----------
Total Liabilities................................. 452,107
------------
NET ASSETS.................................................. $199,059,509
============
NET ASSETS consist of:
Undistributed net investment income (Note 1).............. $ 1,266,544
Accumulated net realized gain on investments sold
(Note 1)............................................... 3,939,084
Unrealized depreciation of investments (Note 3)........... (5,038,345)
Par value of Common Stock................................. 111,513
Paid-in capital in excess of par value of Common Stock.... 128,780,713
Money Market Cumulative Preferred(TM) Stock (Note 5)...... 70,000,000
------------
Total Net Assets.................................. $199,059,509
============
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 (Note 9)................ 1,227.40 859,178
----------- ------------
$101,227.40 70,859,178
===========
Common Stock (11,151,287 shares outstanding).............. $ 11.50 128,200,331
=========== ------------
TOTAL NET ASSETS............................................ $199,059,509
============
</TABLE>
See Notes to Financial Statements.
15
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 1999
- -----------------------------------------------
<TABLE>
<S> <C> <C>
INVESTMENT INCOME:
Dividends.............................................. $ 10,388,473
Interest............................................... 4,485,002
------------
Total Investment Income........................... 14,873,475
EXPENSES:
Investment advisory fee (Note 2)....................... $1,166,592
Administration fee (Note 2)............................ 249,982
Money Market Cumulative Preferred(TM) broker
commissions and Auction Agent fees................... 189,942
Insurance expense...................................... 96,195
Professional fees...................................... 91,509
Shareholder servicing agent fees and expenses
(Note 2)............................................. 83,858
Directors' fees and expenses (Note 2).................. 78,398
Economic consulting fee (Note 2)....................... 42,223
Custodian fees and expenses (Note 2)................... 29,813
Other.................................................. 85,535
----------
Total Expenses.................................... 2,114,047
------------
NET INVESTMENT INCOME....................................... 12,759,428
------------
REALIZED AND UNREALIZED LOSS ON INVESTMENTS
(Notes 1 and 3):
Net realized gain on investments sold during the
year................................................. 3,462,885
Change in net unrealized appreciation of investments
during the year...................................... (17,230,783)
------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS............. (13,767,898)
------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $ (1,008,470)
============
</TABLE>
See Notes to Financial Statements.
16
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS
----------------------------------------------
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
NOVEMBER 30, 1999 NOVEMBER 30, 1998
----------------- -----------------
<S> <C> <C>
INCREASE/(DECREASE) IN NET ASSETS
OPERATIONS:
Net investment income.................................. $ 12,759,428 $ 12,722,158
Net realized gain on investments sold during the
year................................................. 3,462,885 8,379,883
Change in net unrealized appreciation of investments
during the year...................................... (17,230,783) (6,412,102)
------------ ------------
Net increase/(decrease) in net assets resulting from
operations........................................... (1,008,470) 14,689,939
DISTRIBUTIONS:
Dividends paid from net investment income to Money
Market Cumulative Preferred(TM) Stock Shareholders
(Note 5)............................................. (2,149,987) (2,066,476)
Distributions paid from net realized capital gains to
Money Market Cumulative Preferred(TM) Stock
Shareholders (Note 5)................................ (1,036,504) (1,198,981)
Dividends paid from net investment income to Common
Stock Shareholders................................... (10,745,348) (9,921,815)
Distributions paid from net realized capital gains to
Common Stock Shareholders............................ (6,689,804) (2,043,516)
------------ ------------
NET DECREASE IN NET ASSETS FOR THE YEAR..................... (21,630,113) (540,849)
NET ASSETS:
Beginning of year...................................... 220,689,622 221,230,471
------------ ------------
End of year (including undistributed net investment
income of $1,266,544 and $1,422,597, respectively)... $199,059,509 $220,689,622
============ ============
</TABLE>
See Notes to Financial Statements.
17
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH YEAR.
- ---------------------------------------------------
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>
YEAR ENDED NOVEMBER 30,
--------------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year.......................... $ 13.50 $ 13.53 $ 12.91 $ 12.35 $ 10.92
-------- -------- -------- -------- --------
INVESTMENT OPERATIONS:
Net investment income....................................... 1.14 1.14 1.10 1.16 1.27
Net realized and unrealized gain/(loss) on investments...... (1.24) 0.17 0.87 0.53 1.73
-------- -------- -------- -------- --------
Total from investment operations............................ (0.10) 1.31 1.97 1.69 3.00
-------- -------- -------- -------- --------
DISTRIBUTIONS:
Dividends paid from net investment income to MMP*
Shareholders............................................... (0.19) (0.18) (0.21) (0.21) (0.31)
Distributions paid from net realized capital gains to MMP*
Shareholders............................................... (0.09) (0.11) (0.04) (0.03) (0.00)#
Dividends paid from net investment income to Common Stock
Shareholders............................................... (0.96) (0.89) (0.92) (0.87) (1.11)
Distributions paid from net realized capital gains to Common
Stock Shareholders......................................... (0.60) (0.18) (0.16) -- (0.17)
Change in accumulated undeclared dividends on MMP*.......... (0.06)+ 0.02 (0.02) (0.02) 0.02
-------- -------- -------- -------- --------
Total distributions......................................... (1.90) (1.34) (1.35) (1.13) (1.57)
-------- -------- -------- -------- --------
Net asset value, end of year................................ $ 11.50+ $ 13.50 $ 13.53 $ 12.91 $ 12.35
======== ======== ======== ======== ========
Market value, end of year................................... $ 10.500 $ 12.875 $ 12.875 $ 12.000 $ 11.250
======== ======== ======== ======== ========
Total investment return based on net asset value**.......... (2.99)% 8.29% 14.44% 13.11% 27.25%
======== ======== ======== ======== ========
Total investment return based on market value**............. (7.12)% 8.53% 17.16% 15.42% 25.02%
======== ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK
SHAREHOLDERS:
Operating expenses....................................... 1.53% 1.45% 1.48% 1.71% 1.78%
Net investment income***................................. 6.81% 6.37% 6.44% 7.36% 8.47%
SUPPLEMENTAL DATA:
Portfolio turnover rate.................................. 64% 87% 74% 87% 94%
Net assets, end of year (in 000's) (total Fund).......... $199,060 $220,690 $221,230 $214,195 $207,720
- ------------------------------------------------------------
Ratio of operating expenses to total average net assets
including MMP*............................................. 1.01% 0.99% 1.00% 1.13% 1.13%
</TABLE>
* Money Market Cumulative Preferred(TM) Stock.
** Assumes reinvestment of distributions at the price obtained by the Fund's
Dividend Reinvestment Plan.
*** The net investment income ratios reflect income net of operating expenses
and payments to MMP* Shareholders.
# Amount represents less than $0.01 per share.
+ Includes effect of additional distribution available to MMP* Shareholders
($0.05 per Common share). (See Notes 5 and 9 to the Financial Statements.)
See Notes to Financial Statements.
18
<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.(See Note 5 to the
Financial Statements.)
<TABLE>
<CAPTION>
INVOLUNTARY AVERAGE
ASSET LIQUIDATING MARKET
TOTAL SHARES COVERAGE PREFERENCE VALUE
OUTSTANDING PER SHARE PER SHARE(1) PER SHARE(1)
------------ --------- ------------ ------------
<S> <C> <C> <C> <C>
11/30/99 700 $284,371 $100,000 $100,000
11/30/98 700 315,271 100,000 100,000
11/30/97 700 316,044 100,000 100,000
11/30/96 700 305,992 100,000 100,000
11/30/95 700 296,743 100,000 100,000
</TABLE>
- ---------------
(1) Excludes accumulated undeclared dividends.
See Notes to Financial Statements.
19
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS
- ----------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
Preferred Income Opportunity Fund Incorporated (the "Fund") is a
diversified, closed-end management investment company organized as a Maryland
corporation and is registered with the Securities and Exchange Commission
("SEC") under the Investment Company Act of 1940, as amended. 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 Investment Adviser reviews and approves 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
20
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------
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. Subject to the Fund qualifying as a regulated
investment company, any taxes paid by the Fund on such net realized long-term
gains may be used by the Fund's Shareholders as a credit against their own tax
liabilities.
Federal income taxes: The Fund intends to continue 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 and capital gain distributions are determined and characterized in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to (1) differing
treatments of income and gains on various investment securities held by the
Fund, including timing differences, (2) the attribution of expenses against
certain components of taxable investment income, and (3) federal regulations
requiring proportional allocation of income and gains to all classes of
Shareholders.
The Internal Revenue Code of 1986, as amended, imposes a 4% nondeductible
excise tax on the Fund to the extent the Fund does not distribute by the end of
any calendar year at least (1) 98% of the sum of its net investment income for
that year and its capital gains (both long term and short term) for its fiscal
year and (2) certain undistributed amounts from previous years.
Other: 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.
21
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- -----------------------------------------------
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.
Primark Decision Economics Inc. ("Primark") serves as the Fund's Economic
Consultant. Effective October 8, 1999, the Fund revised its agreement with
Primark and now pays Primark an annual fee equal to $25,000 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. (See Note 9.)
Chase Manhattan Bank ("Auction Agent") served as the Fund's Money Market
Cumulative Preferred(TM) Stock transfer agent registrar, dividend disbursing
agent and redemption agent, during the year. (See Note 9.)
3. PURCHASES AND SALES OF SECURITIES
Cost of purchases and proceeds from sales of securities for the year ended
November 30, 1999, excluding short-term investments, aggregated $127,438,975 and
$136,421,864, respectively.
At November 30, 1999, aggregate gross unrealized appreciation for all
securities in which there is an excess of value over tax cost was $5,468,748 and
aggregate gross unrealized depreciation for all securities in which there is an
excess of tax cost over value was $11,015,263.
4. COMMON STOCK
At November 30, 1999, 240,000,000 shares of $0.01 par value Common Stock
were authorized. There were no Common Stock transactions for the years ended
November 30, 1999 and 1998.
22
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------
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. 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 is 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. Net
assets available to Money Market Cumulative Preferred(TM) Stock at November 30,
1999 includes such an additional distribution of $534,709, which was declared on
December 20, 1999. (See Note 9.) In prior years, additional distributions were
not reported as available to Money Market Cumulative Preferred(TM) Stock until
declared by the Board of Directors.
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 November 30, 1999, 700 shares of Money Market Cumulative Preferred(TM)
Stock were outstanding at the annual rate of 4.07%. 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.
23
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
- ----------------------------------------------
6. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY
The Fund invests primarily in adjustable and fixed rate preferred stocks
and similar hybrid, i.e., fully taxable, preferred 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 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 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
invest up to 15% of its assets in common stock. Under normal conditions, the
Fund may invest up to 35% of its assets in debt securities. Certain of its
investments in hybrid, i.e., fully taxable, preferred securities, such as TOPrs,
TIPS, QUIPS, MIPS, QUIDS, QUICS, QIB's, Capital Securities, and other similar or
related investments, will be subject to the foregoing 35% limitation to the
extent that, in the opinion of the Fund's Adviser, such investments are deemed
to be debt-like in key characteristics.
7. 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 November 30, 1999, 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.
8. SIGNIFICANT SHAREHOLDERS
At November 30, 1999, the Commerce Group, Inc. owned approximately 26.4% of
the Fund's outstanding Common Stock.
24
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
----------------------------------------------
9. SUBSEQUENT EVENTS
On December 1, 1999, PFPC Trust Company, a wholly-owned subsidiary of PFPC
Worldwide, Inc. and an indirect wholly-owned subsidiary of PNC Bank Corporation,
acquired all of the outstanding stock of Investor Services Group (the
"Transaction"). On that same date and as part of the Transaction, PFPC Inc., an
indirect wholly-owned subsidiary of PNC Bank Corporation, was merged into
Investor Services Group, which then changed its name to PFPC Inc.
Bankers Trust Company, a wholly-owned subsidiary of Deutsche Bank, AG
("Auction Agent"), began serving as the Fund's Money Market Cumulative
Preferred(TM) Stock transfer agent, registrar, dividend disbursing agent and
redemption agent, effective December 1, 1999.
On December 13, 1999, the Fund declared a distribution of $0.58 per share
(of which for tax purposes $0.2451 per share represents a dividend from ordinary
income and $0.3349 per share represents a dividend from realized long term
capital gains) to Common Stock Shareholders of record December 23, 1999, payable
December 30, 1999.
As a result of the gains and income realized by the Fund that did not
qualify for the Corporate Dividends Received Deduction ("DRD"), a portion of the
distributions paid to the Fund's Money Market Cumulative Preferred(TM) Stock
Shareholders from January 1, 1999 through November 30, 1999 has been designated
as being from capital gains and other non-DRD income, as required by Internal
Revenue Service Ruling 89-81 with respect to the Internal Revenue Code of 1986,
as amended. On December 20, 1999, the Fund declared an additional distribution
of $534,709 payable December 22, 1999 to Money Market Cumulative Preferred(TM)
Stock Shareholders as required by the Fund's Articles Supplementary. This
additional distribution is required to reflect the fact that less than 100% of
the original distributions qualified for the DRD.
25
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of
Preferred Income Opportunity Fund Incorporated:
In our opinion, the accompanying statement of assets and liabilities,
including the portfolio of investments, and the related statements of operations
and of changes in net assets and the financial highlights present fairly, in all
material respects, the financial position of Preferred Income Opportunity Fund
Incorporated (the "Fund") at November 30, 1999, and the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended and the financial highlights for each of
the five years in the period then ended, in conformity with generally accepted
accounting principles. These financial statements and financial highlights
(hereafter referred to as "financial statements") are the responsibility of the
Fund's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards,
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of securities at November 30, 1999 by correspondence with the
custodian, provide a reasonable basis for the opinion expressed above.
Boston, Massachusetts PricewaterhouseCoopers LLP
January 12, 2000
26
<PAGE>
- --------------------------------------------------------------------------------
Preferred Income Opportunity Fund Incorporated
TAX INFORMATION (UNAUDITED)
----------------------------------------------
For the fiscal year ended November 30, 1999, the Fund realized and, by
December 31, 1999, had distributed long term capital gains to both Common Stock
Shareholders and Money Market Cumulative Preferred(TM) Stock Shareholders of
$4,510,511. The amount may differ from those shown elsewhere in this annual
report due to differences in the calculation of long term gains for tax purposes
as compared with SEC financial reporting requirements. Of the total
distributions attributable to the fiscal year ended November 30, 1999, including
the Additional Distribution to Money Market Cumulative Preferred(TM) Stock
Shareholders, 37.91% qualified for the Dividends Received Deduction for eligible
corporate investors. (See Note 9.)
For the calendar year ended December 31, 1999, 36.86% of all distributions
paid to Common Stock Shareholders qualified for the Dividends Received Deduction
for eligible corporate investors. Shareholders should refer to Form 1099
accompanying additional information and the information contained herein when
preparing their tax returns to determine the appropriate tax characterization of
the distributions they received from the Fund in calendar year 1999. (See Note
9.)
27
<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 PFPC Inc. 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, PFPC Inc. 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 PFPC Inc. 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, PFPC Inc. 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 PFPC's
open market purchases in connection with the reinvestment of dividends or
capital gains distributions. For the year ended November 30, 1999, $10,173 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
28
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Preferred Income Opportunity Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
----------------------------------------------
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 PFPC Inc. in
writing, by completing the form on the back of the Plan account statement and
forwarding it to PFPC Inc. or by calling PFPC Inc. directly. A termination will
be effective immediately if notice is received by PFPC Inc. 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, PFPC Inc. 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 PFPC Inc. at
1-800-331-1710.
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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 --
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.
[PREFERRED INCOME OPPORTUNITY LOGO]
ANNUAL
REPORT
NOVEMBER 30, 1999
