-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BD3xRpvYlc0P0KqR9S90nw2yT9rrNsGHUZYGg8PLSdwOvBvYZ/OihUtu/6u+qX7a KRUXLDFWqsIMOoWtJoeFyA== 0000927405-96-000174.txt : 19960411 0000927405-96-000174.hdr.sgml : 19960411 ACCESSION NUMBER: 0000927405-96-000174 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19960229 FILED AS OF DATE: 19960410 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREFERRED INCOME FUND INC CENTRAL INDEX KEY: 0000868578 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954305694 STATE OF INCORPORATION: MD FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: 1940 Act SEC FILE NUMBER: 811-06179 FILM NUMBER: 96545682 BUSINESS ADDRESS: STREET 1: 301 E COLORADO BLVD STE 720 STREET 2: C/O FLAHERTY & CRUMRINE INC CITY: PASADENA STATE: CA ZIP: 91101 BUSINESS PHONE: 8187957300 MAIL ADDRESS: STREET 1: 301 COLORADO BLVD STREET 2: STE 720 CITY: PASADENA STATE: CA ZIP: 91101 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREFERRED INCOME OPPORTUNITY FUND INC CENTRAL INDEX KEY: 0000882071 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954355600 STATE OF INCORPORATION: MD FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: 1940 Act SEC FILE NUMBER: 811-06495 FILM NUMBER: 96545683 BUSINESS ADDRESS: STREET 1: 301 E COLORADO BLVD STE 720 STREET 2: C/O FLAHERTY & CRUMRINE INC CITY: PASADENA STATE: CA ZIP: 91101 BUSINESS PHONE: 8187957300 MAIL ADDRESS: STREET 1: 301 COLORADO BLVD STREET 2: STE 720 CITY: PASADENA STATE: CA ZIP: 91101 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREFERRED INCOME MANAGEMENT FUND INC CENTRAL INDEX KEY: 0000895422 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954405635 STATE OF INCORPORATION: MD FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: 1940 Act SEC FILE NUMBER: 811-07390 FILM NUMBER: 96545684 BUSINESS ADDRESS: STREET 1: C/O FLAHERTY & CRUMRINE INC STREET 2: 301 E COLORADO BLVD STE 720 CITY: PASADENA STATE: CA ZIP: 91101 BUSINESS PHONE: 8187957300 MAIL ADDRESS: STREET 1: 301 COLORADO BLVD STREET 2: STE 720 CITY: PASADENA STATE: CA ZIP: 91101 N-30B-2 1 PREFERRED INCOME FUND Quarterly Report February 29, 1996 PREFERRED INCOME FUND INCORPORATED Dear Shareholder: The Preferred Income Fund turned in a solid performance in the fiscal first quarter ending February 29, 1996. The total return on the net asset value ("NAV") of the Fund's shares was -1.1%. That was a good result considering the rise in interest rates, which put pressure on fixed income investments generally, and some disruptive tax proposals introduced in Washington. Long term interest rates, as represented by yields on Treasury bonds, suddenly spurted to almost 6.5% in the last few weeks of February after drifting just above 6% for most of the quarter. Investors appeared to throw in the towel on the chances for meaningful action this year on deficit reduction because of the deadlock in Washington and the distractions caused by the Republican primary campaigns. The bond market headed south, and most preferred stocks followed along. As we would expect, the Fund's hedges were a strong positive under these circumstances. The put options owned by the Fund appreciated roughly $1.7 million ($0.18 per share) in the quarter. An immediate benefit of these gains was that they offset part of the decline in the value of the Fund's preferred stock holdings. If the gains persist over a period of time, they also will make it possible to add to the preferred stock portfolio and, possibly, increase the Fund's income. As I have mentioned before in these letters, hedging with put options is not a "free lunch." Using the analogy of buying an insurance policy, there is a premium to be paid and a deductible to be met before any money comes back to cover losses. Ordinarily, hedging should provide better protection against large increases in interest rates than smaller ones. All these factors played a role in the results for the last quarter. In the budget negotiations in early December, the Clinton Administration proposed a long list of "corporate welfare" provisions which could have an impact on the Fund. Those included a reduction of the intercorporate dividends received deduction ("DRD") from 70% to 50%, which would make preferred stocks less attractive to corporate investors if it were enacted. Initially, this put pressure on preferred prices, but the market has subsequently recovered. Investors now appear to view the proposals as a political maneuver over a deficit reduction bill that is not likely to become law. We are encouraged by the strong support for the DRD that we have encountered in Congress, but we are continuing to monitor the situation closely. Uncertainty surrounding interest rates and the tax laws has not helped the market price of the Fund's shares. The discount from NAV widened in reaction to the tax changes proposed in December, and it continues to linger around 15%. The market appears to be giving little recognition to the Fund's strong performance based on NAV and its success in meeting its income objective as discussed in our Annual Report. Sincerely, /s/Robert T. Flaherty Robert T. Flaherty Chairman of the Board March 18, 1996 - ------------------------------------------------------------------------------ Preferred Income Fund Incorporated SUMMARY OF INVESTMENTS FEBRUARY 29, 1996 (UNAUDITED) - ---------------------------- PERCENT VALUE OF TOTAL (000'S) NET ASSETS ------- ---------- ADJUSTABLE RATE PREFERRED STOCK Utilities ................................. $ 16,250 7.8% Banking ................................... 39,148 18.8 -------- ---- Total Adjustable Rate ................. 55,398 26.6 -------- ----- FIXED RATE PREFERRED STOCK Utilities ................................. 81,477 39.1 Banking ................................... 45,866 22.0 Financial Services ........................ 5,190 2.5 Insurance ................................. 2,512 1.2 Other ..................................... 7,981 3.8 -------- ----- Total Fixed Rate ...................... 143,026 68.6 -------- ----- TOTAL PREFERRED STOCK ......................... 198,424 95.2 REPURCHASE AGREEMENTS ......................... 2,600 1.3 PURCHASED PUT OPTIONS ......................... 4,360 2.1 -------- ----- TOTAL INVESTMENTS ............................. 205,384 98.6 OTHER ASSETS AND LIABILITIES (NET) ............ 3,001 1.4 -------- ----- TOTAL NET ASSETS .......................... $208,385 100.0% ======== ===== FINANCIAL DATA PER SHARE OF COMMON STOCK (UNAUDITED) - ------------------------------------- DIVIDEND DIVIDEND NET ASSET NYSE REINVESTMENT PAID VALUE CLOSING PRICE PRICE(1) -------- --------- ------------- ------------ December 31, 1995 .... $0.087 $15.54 $13.500 $13.48 January 31, 1996 ..... 0.087 15.61 13.625 13.74 February 29, 1996 .... 0.087 15.33 13.625 13.65 - ---------- (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. - ------------------------------------------------------------------------------- Preferred Income Fund Incorporated STATEMENT OF CHANGES IN NET ASSETS(1) THREE MONTHS ENDED FEBRUARY 29, 1996 (UNAUDITED) ------------------------------------------------ OPERATIONS: Net investment income ........................................ $ 3,244,267 Net realized gain on investments sold ........................ 1,096,511 Net unrealized depreciation of investments during the period . (5,747,168) ------------ Net decrease in net assets from operations ............... (1,406,390) DISTRIBUTIONS: Dividends paid from net investment income to Money Market Cumulative Preferred\TM/ Stock Shareholders ................ (694,048) Dividends paid from net investment income to Common Stock Shareholders ............................................... (2,567,856) ------------ Net decrease in net assets ............................... (4,668,294) NET ASSETS: Beginning of period .......................................... 213,053,235 ------------ End of period ................................................ $208,384,941 ============ FINANCIAL HIGHLIGHTS(1) THREE MONTHS ENDED FEBRUARY 29, 1996 (UNAUDITED) FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD. ----------------------------------------------------- OPERATING PERFORMANCE: Net asset value, beginning of period ......................... $ 15.80 ------------ Net investment income ........................................ 0.33 Net realized gain and unrealized depreciation on investments . (0.48) ------------ Net decrease in net asset value resulting from investment operations ................................................. (0.15) DISTRIBUTIONS: Dividends declared to Money Market Cumulative Preferred\TM/ Stock Shareholders ......................................... (0.07) Dividends paid from net investment income .................... (0.26) Change in accumulated undeclared dividends on Money Market Cumulative Preferred\TM/ Stock ............................. 0.01 ------------ Total from distributions ..................................... (0.32) ------------ Net asset value, end of period ............................... $ 15.33 ============ Market value, end of period .................................. $ 13.625 ============ Net assets, end of period .................................... $208,384,941 ============ Common shares outstanding, end of period ..................... 9,838,571 ============ RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS/ SUPPLEMENTAL DATA: Net investment income ........................................ 6.83%* Operating expenses ........................................... 1.52%* Portfolio turnover rate ...................................... 16% - ---------- (1) These tables summarize the three months ended February 29, 1996 and should be read in conjunction with the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30,1995. * Annualized. DIRECTORS Martin Brody Donald F. Crumrine Robert T. Flaherty Morgan Gust Robert F. Wulf OFFICERS Robert T. Flaherty Chairman of the Board and President Donald F. Crumrine Vice President and Secretary Robert M. Ettinger Vice President Peter C. Stimes Vice President and Treasurer Carl D. Johns Assistant Treasurer INVESTMENT ADVISER Flaherty & Crumrine Incorporated QUESTIONS CONCERNING YOUR SHARES OF PREFERRED INCOME 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 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 MANAGEMENT FUND QUARTERLY REPORT FEBRUARY 29, 1996 PREFERRED INCOME MANAGEMENT FUND INCORPORATED Dear Shareholder: The Preferred Income Management Fund turned in a solid performance in the fiscal first quarter ending February 29, 1996. The total return on the net asset value ("NAV") of the Fund's shares was -1.4%. That was a good result considering the rise in interest rates, which put pressure on fixed income investments generally, and some disruptive tax proposals introduced in Washington. Long term interest rates, as represented by yields on Treasury bonds, suddenly spurted to almost 6.5% in the last few weeks of February after drifting just above 6% for most of the quarter. Investors appeared to throw in the towel on the chances for meaningful action this year on deficit reduction because of the deadlock in Washington and the distractions caused by the Republican primary campaigns. The bond market headed south, and most preferred stocks followed along. As we would expect, the Fund's hedges were a strong positive under these circumstances. The put options owned by the Fund appreciated roughly $1.9 million ($0.20 per share) in the quarter. An immediate benefit of these gains was that they offset part of the decline in the value of the Fund's preferred stock holdings. If the gains persist over a period of time, they also will make it possible to add to the preferred stock portfolio and, possibly, increase the Fund's income. As I have mentioned before in these letters, hedging with put options is not a "free lunch." Using the analogy of buying an insurance policy, there is a premium to be paid and a deductible to be met before any money comes back to cover losses. Ordinarily, hedging should provide better protection against large increases in interest rates than smaller ones. All these factors played a role in the results for the last quarter. In the budget negotiations in early December, the Clinton Administration proposed a long list of "corporate welfare" provisions which could have an impact on the Fund. Those included a reduction of the intercorporate dividends received deduction ("DRD") from 70% to 50%, which would make preferred stocks less attractive to corporate investors if it were enacted. Initially, this put pressure on preferred prices, but the market has subsequently recovered. Investors now appear to view the proposals as a political maneuver over a deficit reduction bill that is not likely to become law. We are encouraged by the strong support for the DRD that we have encountered in Congress, but we are continuing to monitor the situation closely. Uncertainty surrounding interest rates and the tax laws has not helped the market price of the Fund's shares. The discount from NAV widened in reaction to the tax changes proposed in December, and it continues to linger around 14%. The market appears to be giving little recognition to the Fund's strong performance based on NAV and its success in meeting its income objective as discussed in our Annual Report. Sincerely, /s/Robert T. Flaherty Robert T. Flaherty Chairman of the Board March 18, 1996 - ------------------------------------------------------------------------------ Preferred Income Management Fund Incorporated SUMMARY OF INVESTMENTS FEBRUARY 29, 1996 (UNAUDITED) - ---------------------------- PERCENT VALUE OF TOTAL (000'S) NET ASSETS ------- ---------- ADJUSTABLE RATE PREFERRED STOCK Utilities ........................................ $ 12,376 5.9% Banking .......................................... 35,638 17.0 -------- ----- Total Adjustable Rate ........................ 48,014 22.9 -------- ----- FIXED RATE PREFERRED STOCK Utilities ........................................ 82,360 39.2 Banking .......................................... 48,334 23.0 Financial Services ............................... 6,103 2.9 Insurance ........................................ 3,218 1.5 Other ............................................ 8,376 4.0 -------- ----- Total Fixed Rate ............................. 148,391 70.6 -------- ----- TOTAL PREFERRED STOCK ................................ 196,405 93.5 COMMON STOCK Utilities .......................................... 2,188 1.0 REPURCHASE AGREEMENTS ................................ 1,185 0.6 PURCHASED PUT OPTIONS ................................ 4,712 2.2 -------- ----- TOTAL INVESTMENTS .................................... 204,490 97.3 OTHER ASSETS AND LIABILITIES (NET) ................... 5,713 2.7 -------- ----- TOTAL NET ASSETS ................................. $210,203 100.0% ======== ===== FINANCIAL DATA PER SHARE OF COMMON STOCK (UNAUDITED) - ------------------------------------- DIVIDEND DIVIDEND NET ASSET NYSE REINVESTMENT PAID VALUE CLOSING PRICE PRICE(1) -------- --------- ------------ ------------ December 31, 1995 ... $0.082 $14.31 $12.375 $12.38 January 31, 1996 .... 0.082 14.34 12.500 12.56 February 29, 1996 ... 0.082 14.06 12.250 12.28 - ---------- (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. - ------------------------------------------------------------------------------- Preferred Income Management Fund Incorporated STATEMENT OF CHANGES IN NET ASSETS(1) THREE MONTHS ENDED FEBRUARY 29, 1996 (UNAUDITED) ------------------------------------------------ OPERATIONS: Net investment income .................................... $ 3,237,877 Net realized gain on investments sold .................... 1,658,645 Net unrealized depreciation of investments during the period (6,298,748) ------------ Net decrease in net assets from operations ........... (1,402,226) DISTRIBUTIONS: Dividends paid from net investment income to Money Market Cumulative Preferred\TM/ Stock Shareholders .......... (905,812) Dividends paid from net investment income to Common Stock Shareholders ........................................... (2,316,537) ------------ Net decrease in net assets ........................... (4,624,575) NET ASSETS: Beginning of period ...................................... 214,827,084 ------------ End of period ............................................ $210,202,509 ============ FINANCIAL HIGHLIGHTS(1) THREE MONTHS ENDED FEBRUARY 29, 1996 (UNAUDITED) FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD. ----------------------------------------------------- OPERATING PERFORMANCE: Net asset value, beginning of period ...................... $ 14.54 ------------ Net investment income ..................................... 0.34 Net realized gain and unrealized depreciation on investments (0.48) ------------ Net decrease in net asset value resulting from investment operations .............................................. (0.14) DISTRIBUTIONS: Dividends declared to Money Market Cumulative Preferred\TM/ Stock Shareholders ...................................... (0.10) Dividends paid from net investment income ................. (0.25) Change in accumulated undeclared dividends on Money Market Cumulative Preferred\TM/ Stock .......................... 0.01 ------------ Total from distributions .................................. (0.34) ------------ Net asset value, end of period ............................ $ 14.06 ============ Market value, end of period ............................... $ 12.250 ============ Net assets, end of period ................................. $210,202,509 ============ Common shares outstanding, end of period .................. 9,416,743 ============ RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS/ SUPPLEMENTAL DATA: Net investment income ..................................... 7.15%* Operating expenses ........................................ 1.84%* Portfolio turnover rate ................................... 20% - ---------- (1) These tables summarize the three months ended February 29, 1996 and should be read in conjunction with the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30, 1995. * Annualized. DIRECTORS Martin Brody Donald F. Crumrine Robert T. Flaherty Morgan Gust Robert F. Wulf OFFICERS Robert T. Flaherty Chairman of the Board and President Donald F. Crumrine Vice President and Secretary Robert M. Ettinger Vice President Peter C. Stimes Vice President and Treasurer Carl D. Johns Assistant Treasurer INVESTMENT ADVISER Flaherty & Crumrine Incorporated QUESTIONS CONCERNING YOUR SHARES OF PREFERRED INCOME MANAGEMENT FUND? o If your shares are held in a Brokerage Account, contact your Broker. o 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 MANAGEMENT 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 FUND QUARTERLY REPORT FEBRUARY 29, 1996 PREFERRED INCOME OPPORTUNITY FUND INCORPORATED Dear Shareholder: The Preferred Income Opportunity Fund turned in a solid performance in the fiscal first quarter ending February 29, 1996. The total return on the net asset value ("NAV") of the Fund's shares was -1.3%. That was a good result considering the rise in interest rates, which put pressure on fixed income investments generally, and some disruptive tax proposals introduced in Washington. Long term interest rates, as represented by yields on Treasury bonds, suddenly spurted to almost 6.5% in the last few weeks of February after drifting just above 6% for most of the quarter. Investors appeared to throw in the towel on the chances for meaningful action this year on deficit reduction because of the deadlock in Washington and the distractions caused by the Republican primary campaigns. The bond market headed south, and most preferred stocks followed along. As we would expect, the Fund's hedges were a strong positive under these circumstances. The put options owned by the Fund appreciated roughly $1.8 million ($0.16 per share) in the quarter. An immediate benefit of these gains was that they offset part of the decline in the value of the Fund's preferred stock holdings. If the gains persist over a period of time, they also will make it possible to add to the preferred stock portfolio and, possibly, increase the Fund's income. As I have mentioned before in these letters, hedging with put options is not a "free lunch." Using the analogy of buying an insurance policy, there is a premium to be paid and a deductible to be met before any money comes back to cover losses. Ordinarily, hedging should provide better protection against large increases in interest rates than smaller ones. All these factors played a role in the results for the last quarter. In the budget negotiations in early December, the Clinton Administration proposed a long list of "corporate welfare" provisions which could have an impact on the Fund. Those included a reduction of the intercorporate dividends received deduction ("DRD") from 70% to 50%, which would make preferred stocks less attractive to corporate investors if it were enacted. Initially, this put pressure on preferred prices, but the market has subsequently recovered. Investors now appear to view the proposals as a political maneuver over a deficit reduction bill that is not likely to become law. We are encouraged by the strong support for the DRD that we have encountered in Congress, but we are continuing to monitor the situation closely. Uncertainty surrounding interest rates and the tax laws has not helped the market price of the Fund's shares. The discount from NAV widened in reaction to the tax changes proposed in December, and it continues to linger around 15%. The market appears to be giving little recognition to the Fund's strong performance based on NAV and its success in meeting its income objective as discussed in our Annual Report. Sincerely, /s/Robert T. Flaherty Robert T. Flaherty Chairman of the Board March 18, 1996 - ------------------------------------------------------------------------------ Preferred Income Opportunity Fund Incorporated SUMMARY OF INVESTMENTS FEBRUARY 29, 1996 (UNAUDITED) - ---------------------------- PERCENT VALUE OF TOTAL (000'S) NET ASSETS ------- ---------- ADJUSTABLE RATE PREFERRED STOCK Utilities ................................... $ 21,217 10.4% Banking ..................................... 28,190 13.8 -------- ----- Total Adjustable Rate ................... 49,407 24.2 -------- ----- FIXED RATE PREFERRED STOCK Utilities ................................... 101,698 49.9 Banking ..................................... 21,015 10.3 Financial Services .......................... 5,917 2.9 Insurance ................................... 2,764 1.4 Other ....................................... 8,241 4.1 -------- ----- Total Fixed Rate ........................ 139,635 68.6 -------- ----- TOTAL PREFERRED STOCK ........................... 189,042 92.8 COMMON STOCK Utilities ................................... 2,188 1.1 REPURCHASE AGREEMENTS ........................... 5,904 2.9 PURCHASED PUT OPTIONS ........................... 4,342 2.1 -------- ----- TOTAL INVESTMENTS ............................... 201,476 98.9 OTHER ASSETS AND LIABILITIES (NET) .............. 2,141 1.1 -------- ----- TOTAL NET ASSETS ............................ $203,617 100.0% ======== ===== FINANCIAL DATA PER SHARE OF COMMON STOCK (UNAUDITED) - ------------------------------------- DIVIDEND DIVIDEND NET ASSET NYSE REINVESTMENT PAID VALUE CLOSING PRICE PRICE(1) -------- --------- ------------- ------------ December 31, 1995 .....$0.0695 $12.14 $10.375 $10.47 January 31, 1996 ...... 0.0695 12.18 10.750 10.73 February 29, 1996 ..... 0.0695 11.95 10.500 10.58 - ---------- (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. - ------------------------------------------------------------------------------- Preferred Income Opportunity Fund Incorporated STATEMENT OF CHANGES IN NET ASSETS(1) THREE MONTHS ENDED FEBRUARY 29, 1996 (UNAUDITED) ------------------------------------------------ OPERATIONS: Net investment income ....................................... $ 3,095,377 Net realized gain on investments sold ....................... 809,184 Net unrealized depreciation of investments during the period (5,263,301) ------------ Net decrease in net assets from operations .............. (1,358,740) DISTRIBUTIONS: Dividends paid from net investment income to Money Market Cumulative Preferred\TM/ Stock Shareholders ............... (419,223) Dividends paid from net investment income to Common Stock Shareholders .............................................. (2,325,055) ------------ Net decrease in net assets .............................. (4,103,018) NET ASSETS: Beginning of period ......................................... 207,720,095 ------------ End of period ............................................... $203,617,077 ============ FINANCIAL HIGHLIGHTS(1) THREE MONTHS ENDED FEBRUARY 29, 1996 (UNAUDITED) FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD. ----------------------------------------------------- OPERATING PERFORMANCE: Net asset value, beginning of period ......................... $ 12.35 ------------ Net investment income ........................................ 0.28 Net realized gain and unrealized depreciation on investments . (0.40) ------------ Net decrease in net asset value resulting from investment operations ................................................. (0.12) DISTRIBUTIONS: Dividends declared to Money Market Cumulative Preferred\TM/ Stock Shareholders ......................................... (0.04) Dividends paid from net investment income .................... (0.21) Change in accumulated undeclared dividends on Money Market Cumulative Preferred\TM/ Stock ............................. (0.03) ------------ Total from distributions ..................................... (0.28) ------------ Net asset value, end of period ............................... $ 11.95 ============ Market value, end of period .................................. $ 10.500 ============ Net assets, end of period .................................... $203,617,077 ============ Common shares outstanding, end of period ..................... 11,151,287 ============ RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS/ SUPPLEMENTAL DATA: Net investment income ........................................ 6.91%* Operating expenses ........................................... 1.71%* Portfolio turnover rate ...................................... 16% - ---------- (1) These tables summarize the three months ended February 29, 1996 and should be read in conjunction with the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30, 1995. * Annualized. DIRECTORS Martin Brody Donald F. Crumrine Robert T. Flaherty Morgan Gust Robert F. Wulf OFFICERS Robert T. Flaherty Chairman of the Board and President Donald F. Crumrine Vice President and Secretary Robert M. Ettinger Vice President Peter C. Stimes Vice President and Treasurer Carl D. Johns Assistant Treasurer INVESTMENT ADVISER Flaherty & Crumrine Incorporated QUESTIONS CONCERNING YOUR SHARES OF PREFERRED INCOME OPPORTUNITY FUND? o If your shares are held in a Brokerage Account, contact your Broker. o 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. -----END PRIVACY-ENHANCED MESSAGE-----