-----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, V0ejDb/ITKG/lHLsYatasTXvRHi3fQRw5ov1sLKQVFiVeOvIbJ2u+YVwiIu3hkZp 0CvvVjwAwYKbbxUc2/h8OQ== 0000927405-97-000132.txt : 19970416 0000927405-97-000132.hdr.sgml : 19970416 ACCESSION NUMBER: 0000927405-97-000132 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19970228 FILED AS OF DATE: 19970415 SROS: NONE 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: 97581146 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 N-30B-2 1 PREFERRED INCOME OPPORTUNITY FUND INCORPORATED Dear Shareholder: The Preferred Income Opportunity Fund stayed on an even course in its fiscal first quarter despite an unsettled interest rate environment. The Fund earned total returns on net asset value ("NAV") of 1.5% in the fiscal quarter and 16.4% in the twelve months ending February 28, 1997. The shares' market performance was helped by a steady to improving discount from NAV, which was around 6% at the end of the quarter. The bulk of the Fund's return in the first quarter came from its preferred stock portfolio. The "creeping scarcity" of traditional preferred stocks that qualify for the intercorporate Dividends Received Deduction (the "DRD") accelerated due to a surge in retirements of traditional preferreds, either through redemptions or tender offers. Market levels for the remaining issues strengthened as investors sought to reinvest and, perhaps, to anticipate further redemptions. Retirements of outstanding traditional preferred stocks reflect a scramble by issuers to capture tax benefits by refinancing those preferreds with a newer type of hybrid preferred that is similar in some respects, but not eligible for the DRD. The trend was accentuated after the Federal Reserve decided last October to allow banks to count hybrid preferreds issued by them as basic equity capital for regulatory purposes. The Fund has been able to take advantage of some attractive trading opportunities produced by all this activity in hybrid preferreds. The Fund has also benefited from increasing its position in undervalued adjustable rate preferred stocks ("ARPs"). On February 28, 1997, ARPs accounted for 32% of our portfolio, compared to 24% a year earlier. It now appears that the market is anticipating "redemption fever" spilling over into ARPs, many of which are selling at discounts to their redemption prices. The Fund made money on its hedges in the last quarter due to the decline in Treasury bond prices caused by an increase in long term interest rates of over 3/8%. However, that was just the frosting on the cake. Our hedges included "out-of-the-money" put options on Treasury bond futures, which are analogous to an insurance policy with a deductible. Consequently, a somewhat greater rise in interest rates and a larger decline in bond prices would have been needed to produce really big hedging gains. Much of the activity in the preferred market now is tax related, which is both an opportunity and a risk. All of the Administration's tax proposals affecting both traditional and hybrid preferreds, which we have previously discussed in these letters, have been included in its fiscal 1998 budget. We are watching the debate in Congress closely. We want to welcome a new addition to the Fund's Board of Directors, David Gale. He brings special expertise to this assignment by virtue of having headed up the preferred stock departments at two major Wall Street firms over the course of his career. We look forward to working with him. Sincerely, Robert T. Flaherty CHAIRMAN OF THE BOARD March 13, 1997 - -------------------------------------------------------------------------------- Preferred Income Opportunity Fund Incorporated SUMMARY OF INVESTMENTS FEBRUARY 28, 1997 (UNAUDITED) - -------------------------------
PERCENT OF VALUE TOTAL NET (000'S) ASSETS ----------- ------------- ADJUSTABLE RATE PREFERRED STOCKS Utilities................................................................................. $ 23,512 11.2% Banking................................................................................... 44,821 21.2 ----------- ----- Total Adjustable Rate................................................................. 68,333 32.4 ----------- ----- FIXED RATE PREFERRED STOCKS AND SECURITIES Utilities................................................................................. 89,930 42.6 Banking................................................................................... 7,170 3.4 Financial Services........................................................................ 19,120 9.0 Industrial................................................................................ 11,224 5.3 Insurance................................................................................. 5,016 2.4 ----------- ----- Total Fixed Rate...................................................................... 132,460 62.7 ----------- ----- TOTAL PREFERRED STOCKS AND SECURITIES......................................................... 200,793 95.1 COMMON STOCKS Utilities................................................................................. 5,072 2.4 REPURCHASE AGREEMENT.......................................................................... 2,421 1.2 PURCHASED PUT OPTIONS......................................................................... 2,635 1.2 ----------- ----- TOTAL INVESTMENTS............................................................................. 210,921 99.9 OTHER ASSETS AND LIABILITIES (NET)............................................................ 200 0.1 ----------- ----- TOTAL NET ASSETS...................................................................... $ 211,121 100.0% ----------- ----- ----------- -----
FINANCIAL DATA PER SHARE OF COMMON STOCK (UNAUDITED) - ---------------------------------------
DIVIDEND DIVIDEND NET ASSET NYSE CLOSING REINVESTMENT PAID VALUE PRICE PRICE (1) --------- ----------- ------------- ------------- December 31, 1996............................................... $ 0.2800 $ 12.56 $ 11.625 $ 11.65 January 31, 1997................................................ 0.0730 12.47 11.625 11.69 February 28, 1997............................................... 0.0730 12.64 11.875 12.01
- ------------ (1) Whenever the net asset value per share of the Fund's common stock is less than or equal to the market price per share on the payment date, new shares issued will be valued at the higher of net asset value or 95% of the then current market price. Otherwise, the reinvestment shares of common stock will be purchased in the open market. 2 - -------------------------------------------------------------------------------- Preferred Income Opportunity Fund Incorporated STATEMENT OF CHANGES IN NET ASSETS(1) THREE MONTHS ENDED FEBRUARY 28, 1997 (UNAUDITED) ------------------------------------------------ OPERATIONS: Net investment income................................................................................ $ 2,789,856 Net realized gain on investments sold................................................................ 1,136,365 Net unrealized depreciation of investments during the period......................................... (1,369,620) ------------- Net increase in net assets from operations....................................................... 2,556,601 DISTRIBUTIONS: Dividends paid from net investment income to MMP* Shareholders....................................... (864,503) Distributions paid from net realized capital gains to MMP* Shareholders.............................. (15,432) Dividends paid from net investment income to Common Stock Shareholders............................... (3,019,200) Distributions paid from net realized capital gains to Common Stock Shareholders...................... (1,731,258) ------------- Net decrease in net assets....................................................................... (3,073,792) NET ASSETS: Beginning of period.................................................................................. 214,194,706 ------------- End of period........................................................................................ $ 211,120,914 ------------- -------------
FINANCIAL HIGHLIGHTS(1) THREE MONTHS ENDED FEBRUARY 28, 1997 (UNAUDITED) FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD. ------------------------------------------------------ OPERATING PERFORMANCE: Net asset value, beginning of period................................................................. $ 12.91 ------------- Net investment income................................................................................ 0.25 Net realized gain and unrealized depreciation on investments......................................... (0.02) ------------- Net increase in net asset value resulting from investment operations................................. 0.23 DISTRIBUTIONS: Dividends declared to MMP* Shareholders.............................................................. (0.08) Distributions paid from net realized capital gains to MMP* Shareholders.............................. (0.00)# Dividends paid from net investment income(2)......................................................... (0.27) Distributions paid from net realized capital gains(3)................................................ (0.16) Change in accumulated undeclared dividends on MMP* Shareholders...................................... 0.01 ------------- Total from distributions............................................................................. (0.50) ------------- Net asset value, end of period....................................................................... $ 12.64 ------------- ------------- Market value, end of period.......................................................................... $ 11.875 ------------- ------------- Net assets, end of period............................................................................ $ 211,120,914 ------------- ------------- Common shares outstanding, end of period............................................................. 11,151,287 ------------- ------------- RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS/SUPPLEMENTAL DATA: Net investment income................................................................................ 6.01%** Operating expenses................................................................................... 1.56%** Portfolio turnover rate.............................................................................. 17%
- --------------- (1) These tables summarize the three months ended February 28, 1997 and should be read in conjunction with the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30, 1996. (2) Includes dividends earned, but not paid out, in prior fiscal year. (3) Paid from capital gains realized, but not paid out, in prior fiscal year. * Money Market Cumulative Preferred-TM- Stock. ** Annualized. # Amount represents less than $0.01 per share. 3 DIRECTORS Martin Brody Donald F. Crumrine, CFA Robert T. Flaherty, CFA David Gale Morgan Gust Robert F. Wulf, CFA OFFICERS Robert T. Flaherty, CFA Chairman of the Board and President Donald F. Crumrine, CFA Vice President and Secretary Robert M. Ettinger, CFA Vice President Peter C. Stimes, CFA Vice President and Treasurer Carl D. Johns Assistant Treasurer INVESTMENT ADVISER Flaherty & Crumrine Incorporated e-mail: flaherty@westworld.com QUESTIONS CONCERNING YOUR SHARES OF PREFERRED INCOME OPPORTUNITY FUND? - If your shares are held in a Brokerage Account, contact your Broker. - If you have physical possession of your shares in certificate form, contact the Fund's Transfer Agent & Shareholder Servicing Agent -- First Data Investor Services Group, Inc. (FDISG) P.O. Box 1376 Boston, MA 02104 1-800-331-1710 THIS REPORT IS SENT TO SHAREHOLDERS OF PREFERRED INCOME OPPORTUNITY FUND INCORPORATED FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR OF ANY SECURITIES MENTIONED IN THIS REPORT. 3202-QI [LOGO] Quarterly Report February 28, 1997 -----END PRIVACY-ENHANCED MESSAGE-----