-----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, Hu8pZrP4VFYWfJveS4k8IhSyxAXXm4dKgimdSZuLOwEmqa37aaUGxItCG4vQJUQA XWU+Ikx8G6CrN5zJv3r0Zg== 0000927405-99-000017.txt : 19990128 0000927405-99-000017.hdr.sgml : 19990128 ACCESSION NUMBER: 0000927405-99-000017 CONFORMED SUBMISSION TYPE: N-30D PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19981130 FILED AS OF DATE: 19990127 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-30D SEC ACT: SEC FILE NUMBER: 811-06495 FILM NUMBER: 99513939 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-30D 1 PREFERRED INCOME OPPORTUNITY FUND INCORPORATED Dear Shareholder: Fiscal 1998 ending on November 30th was a good year. Not great, but good! The Preferred Income Opportunity Fund earned a return of 8.3% on the net asset value ("NAV") of its shares despite market conditions that tried our patience at times. The following table presents our "report card" on the performance of the Fund over the last one, three and five years. For perspective, we have also included in the table the returns on a composite of over 50 higher quality closed-end bond funds, which typically have investment objectives similar to those of the Fund. We hope to earn our keep by doing better than the bond funds over longer holding periods, including both ups and downs in interest rates. In any single year, however, the impact of interest rate trends on our hedging strategy will probably have the greatest effect on how we compare to the bond funds. - ------------------------------------------------------------------------------- TOTAL RETURN PER YEAR ON NET ASSET VALUE* FOR PERIODS ENDED 11/30/98
ONE THREE FIVE YEAR YEARS YEARS ---- ----- ----- Preferred Income Opportunity Fund...................... 8.0% 11.4% 10.6% Lipper Higher Quality Bond Fund Composite**............ 7.5% 8.0% 7.2% Source: 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.
- ------------------------------------------------------------------------------- As shown by the table, the Fund's total return on NAV has substantially outperformed the bond fund composite over the last three years and five years. For example, the Fund's return of 10.6% per year over five years compares to an average of 7.2% for the bond funds. In contrast, the return in the last year did not really distinguish the Fund very much from the composite. Actually, this rather bland picture of the last year was the net result of considerably more dramatic, but offsetting, market events. Economic distress in Asia, Russia and parts of Latin America generally dominated financial markets in the past year. A "flight to quality" resulted, reaching near panic this last fall, as investors seeking safety drove up the prices of U.S. Treasury bonds and reduced the yield on long-term Treasuries by approximately a full percentage point. Other fixed income markets, particularly junk bonds and emerging market debt, lagged far behind and, in some cases, actually declined in value. Better quality preferreds, such as those in which the Fund invests, walked the line between the two extremes. The serious problems suffered by a few highly visible "hedge funds" demonstrated how treacherous these conflicting trends could be. On the surface, our hedges worked very well in Fiscal 1998. The appreciation on our portfolio of preferreds offset the losses on our hedges with a little to spare. However, this came about because our use of purchased put options kept hedge losses down to manageable levels, not because the appreciation on our preferreds was all that big. Had the preferred market performed as well as the Treasury bond market, the Fund would have enjoyed a really great year. We believe the preferred market is generally undervalued as a result of these trends, but we are very cautious about predicting when preferreds might come back into line with Treasuries. Fortunately, we have had some good opportunities to add to the Fund's performance by moving money around within the preferred market. Traditional preferreds eligible for the Dividends Received Deduction ("DRD") available to corporate investors were the best performers in the preferred market earlier in the fiscal year, while hybrid preferreds saved their best for last. This gave us the opportunity to move more than 20% of the Fund's portfolio from some more fully valued traditional preferreds into undervalued hybrids before hybrids started to shine. Revolving door investment opportunities like this make a portfolio manager's day! [PREFERRED INCOME OPPORTUNITY FUND PIE CHART]
11/30/97 11/30/98 Adjustable Rates 24.3% 13.8% Traditional Fixed Rates 46.7% 36.9% Common Stock 4.7% 1.4% Non-DRD Preferreds & Securities 22.2% 43.5% (Hybrids) Cash and Other 2.1% 4.4%
The pie charts vividly illustrate the shift from traditional fixed and adjustable rate preferreds into hybrid preferreds that took place over the course of the year. Although the small position in common stocks almost slips below the radar screen, the Fund did benefit from our ventures during the year in several common stocks. Typically, these instances involved utilities whose common shares clearly seemed to offer better investment opportunities than their preferred stocks in which the Fund might otherwise have invested. 2 The Fund's income was one of the high points of Fiscal 1998. Despite the decline in interest rates, the Fund maintained a constant dividend rate of $0.068 per share throughout the year. In part, this was due to the increase in our holdings of hybrid preferreds, which yield considerably more than traditional preferreds. The special distribution of $0.81 per share payable December 31, 1998, primarily representing capital gains realized by the Fund, will reduce the Fund's earning assets and necessitate lowering the monthly dividend rate per share to $0.0655 per share effective January 29, 1999. As illustrated in the Question and Answer section following this letter, we do not anticipate that shareholders who reinvest the year-end distribution through the Fund's Dividend Reinvestment Plan will see much change in their total dividend income. The Question and Answer section that follows provides additional important information on the Fund's accomplishments and operations. It is definitely "recommended reading"! Sincerely yours, /s/ Robert T. Flaherty Robert T. Flaherty Chairman of the Board December 22, 1998 3 QUESTIONS AND ANSWERS HOW HAS THE FUND'S INCOME BEEN AFFECTED BY CHANGES IN INTEREST RATES? The following chart is one of our favorites. It sends a very simple message about a very complicated strategy. [30 YEAR TREASURY YIELD CHART] [MONTHLY DIVIDEND INCOME] Feb-92 7.79 Aug-95 6.61 Feb-92 Aug-95 83.83 Mar-92 8.03 Sep-95 6.5 Mar-92 Sep-95 83.83 Apr-92 7.84 Oct-95 6.36 Apr-92 Oct-95 83.83 May-92 7.84 Nov-95 6.08 Mar-92 82.5 Nov-95 83.83 Jun-92 7.78 Dec-95 5.95 Jun-92 82.5 Dec-95 78.73 Jul-92 7.46 Jan-96 6.05 Jul-92 82.5 Jan-96 78.73 Aug-92 7.41 Feb-96 6.36 Aug-92 82.5 Feb-96 78.73 Sep-92 7.38 Mar-96 6.67 Sep-92 82.5 Mar-96 78.73 Oct-92 7.62 Apr-96 6.83 Oct-92 82.5 Apr-96 78.73 Nov-92 7.6 May-96 7 Nov-92 82.5 May-96 83.83 Dec-92 7.39 Jun-96 6.95 Dec-92 83.14 Jun-96 83.83 Jan-93 7.19 Jul-96 7.01 Jan-93 83.14 Jul-96 83.83 Feb-93 6.9 Aug-96 7.12 Feb-93 83.14 Aug-96 83.83 Mar-93 6.92 Sep-96 6.9 Mar-93 83.14 Sep-96 83.83 Apr-93 6.93 Oct-96 6.81 Apr-93 83.14 Oct-96 83.83 May-93 6.98 Nov-96 6.51 May-93 83.14 Nov-96 83.83 Jun-93 6.67 Dec-96 6.6 Jun-93 83.14 Dec-96 84.06 Jul-93 6.56 Jan-97 6.79 Jul-93 83.14 Jan-97 84.06 Aug-93 6.09 Feb-97 6.8 Aug-93 83.14 Feb-97 84.06 Sep-93 6.02 Mar-97 7.09 Sep-93 83.14 Mar-97 84.06 Oct-93 5.97 Apr-97 6.89 Oct-93 83.14 Apr-97 84.06 Nov-93 6.3 May-97 6.98 Nov-93 83.14 May-97 84.06 Dec-93 6.35 Jun-97 6.74 Dec-93 73.87 Jun-97 84.06 Jan-94 6.24 Jul-97 6.45 Jan-94 79.87 Jul-97 84.06 Feb-94 6.66 Aug-97 6.61 Feb-94 79.87 Aug-97 84.06 Mar-94 7.09 Sep-97 6.3 Mar-94 79.87 Sep-97 84.06 Apr-94 7.26 Oct-97 6.15 Apr-94 79.87 Oct-97 84.06 May-94 7.34 Nov-97 6.04 May-94 85.89 Nov-97 84.06 Jun-94 7.61 Dec-97 5.95 Jun-94 85.89 Dec-97 79.79 Jul-94 7.39 Jan-98 5.9 Jul-94 85.89 Jan-98 79.79 Aug-94 7.48 Feb-98 6.02 Aug-94 85.89 Feb-98 79.79 Sep-94 7.82 Mar-98 5.93 Sep-94 85.89 Mar-98 79.79 Oct-94 7.96 Apr-98 5.95 Oct-94 85.89 Apr-98 79.79 Nov-94 7.94 May-98 5.8 Nov-94 89.17 May-98 79.79 Dec-94 7.88 Jun-98 5.62 Dec-94 88.36 Jun-98 79.79 Jan-95 7.73 Jul-98 5.72 Jan-95 88.36 Jul-98 79.79 Feb-95 7.55 Aug-98 5.26 Feb-95 88.36 Aug-98 79.79 Mar-95 7.43 Sep-98 4.98 Mar-95 88.36 Sep-98 79.79 Apr-95 7.33 Oct-98 5.15 Apr-95 88.36 Oct-98 79.79 May-95 6.63 Nov-98 5.07 May-95 88.36 Nov-98 79.79 Jun-95 6.54 Dec-98 Jun-95 83.83 Dec-98 81.37 Jul-95 6.9 Jan-99 Jul-95 83.83 Jan-99 81.37 The Fund's income (shown by the solid line) has generally managed to hold up pretty well when the interest rate on long term Treasury bonds (the dotted line) has gone down. In contrast, when the Treasury interest rate has increased, income from the Fund has shared in the increase. Over the life of the Fund, income has generally moved sideways, with a few bumps here and there, despite a substantial decline in interest rates (shown on the right hand scale). This is the way the Fund was designed to work. The chart is based on a hypothetical investment in 1,000 shares of the Fund at its inception. It assumes that the regular monthly dividends were taken in cash and that additional shares were acquired only by reinvesting the portion of each special year-end distribution that was above and beyond the regular monthly dividend. We have also projected the impact of the special distribution payable on December 31, 1998 and the new dividend rate effective in January. 4 WHAT ABOUT TOTAL RETURN INCLUDING CHANGES IN NAV? HOW HAS IT RESPONDED TO CHANGES IN INTEREST RATES? A great strength of the Preferred Income Opportunity Fund has been its ability to do well in down markets. The following bar chart compares the Fund's total return since inception, including both income and changes in net asset value, to the average returns on the Lipper composite of higher quality closed- end bond funds. The historical returns are also broken down between strong and weak markets based upon whether the bond fund composite, on a month by month basis, managed to beat the total return on Treasury bills. PREFERRED INCOME OPPORTUNITY FUND
Lipper Index PFO Weak Markets -8.8 -0.8 Strong Markets 18.30 19.90 All Markets 7.90 12.20
THE DATA, PREPARED BY LIPPER INC, SHOW THE AVERAGE ANNUALIZED TOTAL RETURNS IN THE 82 MONTHS ENDED 11/30/98, INCLUDING 29 WEAK MARKETS AND 53 STRONG MARKETS. Naturally, the Fund produced its biggest returns in strong markets characterized by declining interest rates and rising prices for bonds and preferreds. In these good times, it had a clear edge over the bond funds, which also did well. In weak markets, typically caused by rising interest rates that drove down bond and preferred prices, the Fund distinguished itself by almost breaking even when the average return on the bond funds was down significantly. Doing reasonably well in good times and not giving it back in bad times has produced outstanding returns for the Fund over its entire history. This part may not be as obvious. The same strategies that supported the Fund's income, as described in the preceding Q&A, were also responsible for the strong showing of the Fund's total return. These include the combination of hedging and leverage that is unique to the Fund and its sister funds. If income does well, it is a pretty good bet that total return will also do well. 5 HOW DOES THE MARKET PRICE OF THE FUND'S SHARES COMPARE TO THEIR NET ASSET VALUE? As illustrated by the following chart, the Fund's shares are selling in the market at a moderate discount from net asset value. For the last two years, that discount has stayed within a relatively narrow range, and the returns on the market value of the shares have mirrored those on the net asset value rather closely. [PREFERRED INCOME OPPORTUNITY FUND GRAPH] PREMIUM/DISCOUNT OF MARKET PRICE TO NAV 2/21/92 7.26 4/9/93 5.78 5/27/94 -3.12 7/14/95 -7.64 8/30/96 -8.36 10/17/97 -5.06 2/28/92 8.05 4/16/93 5.70 6/3/94 -6.83 7/21/95 -10.87 9/6/96 -8.36 10/24/97 -5.27 3/6/92 8.74 4/23/93 6.59 6/10/94 -2.88 7/28/95 -9.11 9/13/96 -6.61 10/31/97 -4.77 3/13/92 9.80 4/30/93 6.51 6/17/94 -4.57 8/4/95 -9.73 9/20/96 -9.91 11/7/97 -4.42 3/20/92 8.19 5/7/93 5.13 6/24/94 -3.93 8/11/95 -10.18 9/27/96 -9.91 11/14/97 -3.77 3/27/92 5.56 5/14/93 6.10 7/1/94 -4.09 8/18/95 -10.11 10/4/96 -8.76 11/21/97 -6.41 4/3/92 5.38 5/21/93 5.70 7/8/94 -3.44 8/25/95 -7.80 10/11/96 -8.76 11/28/97 -5.76 4/10/92 7.05 5/28/93 4.41 7/15/94 -4.90 9/1/95 -7.06 10/18/96 -9.35 12/5/97 -4.98 4/17/92 5.47 6/4/93 4.97 7/22/94 -2.94 9/8/95 -8.33 10/25/96 -8.34 12/12/97 -4.69 4/24/92 5.90 6/11/93 5.61 7/29/94 -3.27 9/15/95 -8.13 11/1/96 -7.96 12/19/97 -6.48 5/1/92 5.46 6/18/93 4.97 8/5/94 -2.21 9/22/95 -7.49 11/8/96 -9.32 12/26/97 -5.02 5/8/92 5.36 6/25/93 4.17 8/12/94 -2.98 9/29/95 -6.41 11/15/96 -6.30 1/2/98 -1.71 5/15/92 3.06 7/2/93 4.72 8/19/94 -3.76 10/6/95 -7.18 11/22/96 -5.86 1/9/98 -1.97 5/22/92 2.48 7/9/93 4.25 8/26/94 -2.94 10/13/95 -10.06 11/29/96 -6.08 1/16/98 -1.85 5/29/92 3.07 7/16/93 3.62 9/2/94 -2.04 10/20/95 -9.09 12/6/96 -7.92 1/23/98 -6.20 6/5/92 2.82 7/23/93 1.63 9/9/94 -3.18 10/27/95 -10.12 12/13/96 -8.13 1/30/98 -4.77 6/12/92 4.00 7/30/93 3.06 9/16/94 -4.09 11/3/95 -12.32 12/20/96 -10.09 2/6/98 -5.30 6/19/92 3.57 8/6/93 2.12 9/23/94 -6.28 11/10/95 -11.15 12/27/96 -8.37 2/13/98 -6.04 6/26/92 4.42 8/13/93 1.81 9/30/94 -5.10 11/17/95 -10.71 1/3/97 -6.93 2/20/98 -3.63 7/3/92 4.75 8/20/93 0.08 10/7/94 -13.22 11/24/95 -9.91 1/10/97 -5.62 2/27/98 -4.77 7/10/92 6.26 8/27/93 3.70 10/14/94 -13.68 12/1/95 -10.14 1/17/97 -6.93 3/6/98 -4.27 7/17/92 8.00 9/3/93 3.31 10/21/94 -14.1 12/8/95 -11.74 1/24/97 -8.34 3/13/98 -5.68 7/24/92 5.92 9/10/93 4.01 10/28/94 -10.4 12/15/95 -12.33 1/31/97 -6.78 3/20/98 -4.87 7/31/92 6.47 9/17/93 3.38 11/4/94 -7.86 12/22/95 -12.65 2/7/97 -6.23 3/27/98 -5.79 8/7/92 6.13 9/24/93 2.44 11/11/94 -10.87 12/29/95 -14.54 2/14/97 -5.51 4/3/98 -6.82 8/14/92 6.28 10/1/93 2.14 11/18/94 -9.90 1/5/96 -11.97 2/21/97 -6.45 4/10/98 -5.08 8/21/92 5.14 10/8/93 2.61 11/23/94 -7.70 1/12/96 -12.79 2/28/97 -6.05 4/17/98 -6.20 8/28/92 5.39 10/15/93 2.63 12/2/94 -4.02 1/19/96 -13.12 3/7/97 -5.81 4/24/98 -7.68 9/4/92 5.06 10/22/93 2.46 12/9/94 -8.68 1/26/96 -11.46 3/14/97 -6.54 5/1/98 -6.18 9/11/92 6.84 10/29/93 0.90 12/16/94 -7.32 2/2/96 -12.33 3/21/97 -7.15 5/8/98 -5.40 9/18/92 4.74 11/5/93 0.00 12/23/94 -6.04 2/9/96 -12.33 3/28/97 -7.15 5/15/98 -7.17 9/25/92 4.41 11/12/93 -1.07 12/30/94 -8.51 2/16/96 -12.79 4/4/97 -5.73 5/22/98 -7.10 10/2/92 6.20 11/19/93 -2.82 1/6/95 -0.10 2/23/96 -13.03 4/11/97 -7.77 5/29/98 -6.48 10/9/92 6.75 11/26/93 -1.79 1/13/95 -1.41 3/1/96 -11.24 4/18/97 -9.04 6/5/98 -6.43 10/16/92 4.90 12/3/93 -0.76 1/20/95 -4.21 3/8/96 -14.65 4/25/97 -7.48 6/12/98 -6.27 10/23/92 1.88 12/10/93 -3.34 1/27/95 -6.19 3/15/96 -15.08 5/2/97 -6.72 6/19/98 -5.73 10/30/92 2.78 12/17/93 -3.38 2/3/95 -2.34 3/22/96 -14.87 5/9/97 -6.18 6/26/98 -6.00 11/6/92 1.80 12/24/93 -4.31 2/10/95 -3.14 3/29/96 -15.15 5/16/97 -6.47 7/3/98 -5.75 11/13/92 1.88 12/31/93 -1.53 2/17/95 -5.88 4/5/96 -13.15 5/23/97 -5.73 7/10/98 -5.61 11/20/92 4.08 1/7/94 -0.36 2/24/95 -3.76 4/12/96 -12.86 5/30/97 -3.62 7/17/98 -5.18 11/27/92 8.44 1/14/94 1.57 3/3/95 -2.97 4/19/96 -12.79 6/6/97 -6.15 7/24/98 -6.93 12/4/92 6.30 1/21/94 -1.29 3/10/95 -5.85 4/26/96 -13.83 6/13/97 -4.81 7/31/98 -5.26 12/11/92 6.13 1/28/94 -3.77 3/17/95 -5.23 5/3/96 -11.53 6/20/97 -4.73 8/7/98 -4.72 12/18/92 6.91 2/4/94 -3.19 3/24/95 -5.34 5/10/96 -11.30 6/27/97 -4.18 8/14/98 -8.64 12/25/92 5.36 2/11/94 -4.62 3/31/95 -3.93 5/17/96 -14.08 7/4/97 -4.98 8/21/98 -8.63 1/1/93 6.21 2/18/94 -8.63 4/7/95 -3.41 5/24/96 -13.86 7/11/97 -5.85 8/28/98 -5.40 1/8/93 6.79 2/25/94 -5.00 4/14/95 -3.93 5/31/96 -13.86 7/18/97 -4.86 9/4/98 -6.18 1/15/93 5.95 3/4/94 -3.92 4/21/95 -6.90 6/7/96 -12.55 7/25/97 -6.30 9/11/98 -4.87 1/22/93 4.34 3/11/94 -3.15 4/28/95 -3.41 6/14/96 -13.37 8/1/97 -2.73 9/18/98 -3.92 1/29/93 5.76 3/18/94 -5.85 5/5/95 -5.76 6/21/96 -13.01 8/8/97 -7.01 9/25/98 -4.02 2/5/93 4.83 3/25/94 -5.62 5/12/95 -3.93 6/28/96 -9.18 8/15/97 -8.09 10/2/98 -5.54 2/12/93 2.84 4/1/94 -5.52 5/19/95 -9.33 7/5/96 -10.79 8/22/97 -7.67 10/9/98 -6.51 2/19/93 2.02 4/8/94 -5.10 5/26/95 -7.53 7/12/96 -10.13 8/29/97 -4.72 10/16/98 -4.85 2/26/93 3.10 4/15/94 -9.76 6/2/95 -4.81 7/19/96 -11.22 9/5/97 -5.80 10/23/98 -4.06 3/5/93 4.73 4/22/94 -10.12 6/9/95 -7.29 7/26/96 -9.39 9/12/97 -6.56 10/30/98 -6.16 3/12/93 6.51 4/29/94 -10.42 6/16/95 -8.07 8/2/96 -8.76 9/19/97 -5.10 11/6/98 -3.96 3/19/93 3.03 5/6/94 -7.75 6/23/95 -7.49 8/9/96 -6.88 9/26/97 -4.92 11/13/98 -4.81 3/26/93 4.57 5/13/94 -7.37 6/30/95 -6.86 8/16/96 -6.73 10/3/97 -2.92 11/20/98 -6.41 4/2/93 5.14 5/20/94 -6.36 7/7/95 -6.90 8/23/96 -7.79 10/10/97 -4.92 11/27/98 -4.78
DOES THE FUND HAVE A YEAR 2000 PROBLEM? By now, everyone has probably heard about the so-called "Y2K" problem. This has resulted from too many short cuts taken by computer programmers over the years, which may cause some systems that are important to our daily lives not being able to determine that the year 2000 is not really 1900. There is clearly a significant risk that some systems will fail and cause a chain reaction affecting other users that depend upon them. The Fund could suffer interruptions and other material adverse effects unless the Year 2000 problem is solved properly, not only by the Fund, but also by others such as our suppliers and service providers, the financial markets in which Funds operates, and the companies in which we invest. The Fund is taking what it considers to be reasonable steps to deal with this exposure, but there are no assurances that the Fund will not be affected by the Y2K problem. 6 - -------------------------------------------------------------------------------- Preferred Income Opportunity Fund Incorporated FINANCIAL DATA PER SHARE OF COMMON STOCK (UNAUDITED) ---------------------------------------------------
DIVIDEND DIVIDEND NET ASSET NYSE REINVESTMENT PAID VALUE CLOSING PRICE PRICE(1) -------- --------- ------------- ------------ December 31, 1997.......... $0.325 $13.46 $13.0000 $13.40 January 31, 1998........... 0.068 13.52 12.8750 12.95 February 28, 1998.......... 0.068 13.52 12.8750 12.96 March 31, 1998............. 0.068 13.62 12.8125 12.92 April 30, 1998............. 0.068 13.59 12.6250 12.75 May 31, 1998............... 0.068 13.70 12.8125 12.92 June 30, 1998.............. 0.068 13.80 13.1250 13.11 July 31, 1998.............. 0.068 13.59 12.8750 12.86 August 31, 1998............ 0.068 13.64 12.8750 12.92 September 30, 1998......... 0.068 13.54 12.8125 12.81 October 31, 1998........... 0.068 13.32 12.5000 12.59 November 30, 1998.......... 0.068 13.50 12.8750 12.95
- --------------- (1) See ADDITIONAL INFORMATION; Dividend Reinvestment and Cash Purchase Plan on pages 25 and 26 of this report. 7 - -------------------------------------------------------------------------------- Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS NOVEMBER 30, 1998 - ---------------------------------------------------------------
VALUE SHARES/PAR (NOTE 1) - ---------- ------------ PREFERRED STOCKS AND SECURITIES -- 94.2% ADJUSTABLE RATE PREFERRED STOCKS -- 13.8% UTILITIES -- 7.6% 22,470 Arizona Public Service Company, Series Q, Adj. Rate Pfd. ...... $ 2,235,765 264,504 New York State Electric & Gas Corporation, Series B, Adj. Rate Pfd. ...... 6,215,844 Niagara Mohawk Power Corporation: 95,275 Series A, Adj. Rate Pfd. ...... 2,432,490 190,320 Series B, Adj. Rate Pfd. ...... 4,841,265 25,000 Series C, Adj. Rate Pfd. ...... 635,938 6,800 Northern Indiana Public Service Company, Series A, Adj. Rate Pfd. ...... 343,400 ------------ TOTAL UTILITY ADJUSTABLE RATE PREFERRED STOCKS............... 16,704,702 ------------ BANKING -- 6.2% Bank One Corporation: 9,011 Series B, Adj. Rate Pfd. ...... 906,732 20,000 Series C, Adj. Rate Pfd. ...... 2,012,500 Bankers Trust New York Corporation: 101,900 Series Q, Adj. Rate Pfd. ...... 2,420,125 151,700 Series R, Adj. Rate Pfd. ...... 3,640,800 Chase Manhattan Corporation: 24,650 Series L, Adj. Rate Pfd. ...... 2,378,725 10,000 Series N, Adj. Rate Pfd. ...... 222,500 25,000 Citigroup Inc., Series R, Adj. Rate Pfd. ..................... 561,719 3,200 Morgan (J.P.) & Company Inc., Series A, Adj. Rate Pfd. ...... 288,000 7,600 Republic New York Corporation, Series D, Adj. Rate Pfd. ...... 190,000 22,700 Wells Fargo & Company, Series B, Adj. Rate Pfd. ...... 1,139,256 ------------ TOTAL BANKING ADJUSTABLE RATE PREFERRED STOCKS............... 13,760,357 ------------ TOTAL ADJUSTABLE RATE PREFERRED STOCKS......................... 30,465,059 ------------
VALUE SHARES/PAR (NOTE 1) - ---------- ------------ FIXED RATE PREFERRED STOCKS AND SECURITIES -- 80.4% UTILITIES -- 34.2% Alabama Power & Company: 3,332 4.60% Pfd. .................... $ 302,379 1,852 4.72% Pfd. .................... 172,467 100 4.92% Pfd. .................... 9,712 7,250 5.20% Pfd. .................... 185,781 80,000 Alabama Power Capital Trust II, 7.60% TOPrS.................... 2,075,000 28,100 Alabama Power Capital Trust I, 7.375% TOPrS................... 721,819 60,400 Appalachian Power Company, 8.00% QUIDS, Series B.......... 1,566,625 22,646 Arizona Public Service Company 7.25% Pfd., Series W........... 566,150 Baltimore Gas & Electric Company: 10,650 6.70% Pfd., Series 1993........ 1,214,100 27,200 6.99% Pfd., Series 1995........ 3,219,800 10,000 Boston Edison Company, 4.78% Pfd...................... 940,000 1,328 Central Hudson Gas & Electric Corporation, 4.35% Pfd., Series D........... 112,050 27,000 Columbus Southern Power Company, 7.92% Jr. Sub. Debt, Series B....................... 696,938 7,500 Commonwealth Edison Company, $8.40 Pfd. .................... 770,625 29,000 Consolidated Edison Company of New York, 7.75% QUICS, Series A.......... 744,937 134,100 CPL Capital, 8.00% QUIPS, Series A.......... 3,511,744 Duke Energy Corporation: 7,019 4.50% Pfd., Series C........... 622,936 10,003 7.85% Pfd., Series S........... 1,161,598 1,009 7.00% Pfd., Series W........... 114,521 Duquesne Light Company: 20,000 7.375% QIB, Series E........... 501,250 53,750 Duquesne Capital, 8.375% MIPS, Series A.......... 1,387,422 5,050 El Paso Tennessee Pipeline Company, 8.25% Pfd., Series A....................... 278,381
See Notes to Financial Statements. 8 - -------------------------------------------------------------------------------- Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) NOVEMBER 30, 1998 ---------------------------------------------------------------
VALUE SHARES/PAR (NOTE 1) - ---------- -------- PREFERRED STOCKS AND SECURITIES (CONTINUED) FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED) UTILITIES (CONTINUED) Florida Power & Light Company: 4,000 4.50% Pfd. .................... $ 361,500 4,105 4.35% Pfd., Series E........... 352,004 32,850 6.98% Pfd., Series S........... 3,720,262 14,200 7.05% Pfd., Series T........... 1,625,900 Georgia Power Company: 1,246 $6.48 Pfd. .................... 130,519 3,481 $6.60 Pfd. .................... 364,635 13,500 Capital Trust III, 7.75%, Series V................ 351,844 4,500 Gulf Power Company, 7.625% QUIPS, Series A......... 116,719 Hawaiian Electric Company, Inc.: 23,600 HECO Capital Trust I, 8.05% QUIPS.................... 612,125 23,500 Hawaiian Electric Industries Capital Trust I, 8.36% TOPrS.................... 618,344 45,241 HL&P Capital Trust I, 8.125%, Series A Security...... 1,173,438 Indiana Michigan Power Company: 10,000 8.00% Pfd., Series A........... 259,375 20,000 7.60% Pfd., Series B........... 511,250 6,750 Indianapolis Power & Light Company, 5.65% Pfd............. 749,250 8,845 Jersey Central Power & Light Company, 7.52% Sinking Fund Pfd., Series K....................... 925,408 22,000 MidAmerican Energy Financing I, 7.98% QUIPS, Series A.......... 567,875 15,000 Mississippi Power Company, 6.32% Pfd. .................... 386,250 Monongahela Power Company: 24,000 8.00% QUIDS, Series A.......... 616,500 20,000 $7.73 Pfd., Series L........... 2,367,500 10,000 MP&L Capital, 8.05% QUIPS.................... 259,375 5,000 New York State Electric & Gas Corporation, 6.30% Sinking Fund Pfd. ....... 519,063
VALUE SHARES/PAR (NOTE 1) - ---------- -------- Niagara Mohawk Power Corporation: 6,250 4.10% Pfd. .................... $ 432,812 26,802 7.85% Sinking Fund Pfd. ....... 681,776 62,000 9.50% Pfd. .................... 1,639,125 Northern States Power Company: 2,480 $4.10 Pfd. .................... 200,570 2,660 $4.16 Pfd. .................... 218,120 75,000 NSP Financing I 7.875% TOPrS... 2,001,563 Nevada Power Company: 28,360 NVP Capital I 8.20% QUIPS, Series A.......... 742,678 53,000 NVP Capital III 7.75% TIPS....... 1,341,563 Ohio Power Company: 75,800 7.375% Sr. Note................ 1,928,162 47,500 7.92% QUIDS, Series B.......... 1,220,156 2,150 Pacific Enterprises, $4.50 Pfd. .................... 185,706 2,493 Potomac Electric Power Company, $2.44 Pfd., Series 1957........ 118,106 Pennsylvania Power & Light Company: 96,900 PP&L Capital Trust II, 8.10% TOPrS.................... 2,537,569 30,400 PP&L Capital Trust, 8.20% TOPrS.................... 796,100 49,000 PSCO Capital Trust, 7.60% TOPrS.................... 1,258,688 12,350 PSI Energy, Inc., 6.875% Pfd. ................... 1,400,181 Puget Sound Energy Inc.: 1,050,000 Puget Sound Capital Trust, 8.231% 6/1/27 Capital Security, Series B....................... 1,162,875 27,555 7.75% Sinking Fund Pfd. ....... 2,900,164 125,300 7.45% Pfd., Series II.......... 3,633,700 4,030 Rochester Gas & Electric Corporation, 4.75% Pfd., Series I....................... 364,715 46,500 San Diego Gas & Electric Company, 6.80% Pfd. .................... 1,339,781 South Carolina Electric & Gas: 15,000 5.125% Purchase Fund Pfd. ..... 735,000 100,200 SCE&G Trust I, 7.55%, Series A................ 2,598,938
See Notes to Financial Statements. 9 - -------------------------------------------------------------------------------- Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) NOVEMBER 30, 1998 - ---------------------------------------------------------------
VALUE SHARES/PAR (NOTE 1) - ---------- -------- PREFERRED STOCKS AND SECURITIES (CONTINUED) FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED) UTILITIES (CONTINUED) 4,000 Southern Indiana Gas & Electric, 4.75% Pfd. .................... $ 372,000 35,000 Southwestern Public Service Capital I, 7.85%, Series A..... 899,062 57,300 Transcanada Capital, 8.75% TOPrS.................... 1,500,544 Union Electric Power Company: 3,000 $7.64 Pfd. .................... 351,000 4,000,000 7.69% 12/15/36 Capital Security, Series A............. 4,375,000 Virginia Electric & Power Company: 1,665 $4.04 Pfd. .................... 129,038 2,270 $4.20 Pfd. .................... 183,019 5,700 $6.98 Pfd. .................... 646,950 ------------ TOTAL UTILITY FIXED RATE PREFERRED STOCKS AND SECURITIES..................... 75,360,032 ------------ BANKING -- 18.3% 500 ABN Amro North America, 6.59% Pfd. 144A**.............. 542,500 BankAmerica Corporation: 2,650,000 BankAmerica Institutional, 7.70% 12/31/26 Capital Security 144A**......................... 2,871,937 35,500 NB Capital Trust I, 7.84% TOPrS.................... 942,969 1,800,000 NB Capital Trust II, 7.83% 12/15/26 Capital Security...... 1,998,000 1,275,000 BankBoston Capital Trust II, 7.75% 12/15/26 Capital Security, Series B............. 1,338,750 540,000 Bank of New York, 7.78% 12/1/26 Capital Security 144A**........ 592,650 2,000,000 BT Capital Trust B, 7.90% 1/15/27 Capital Security....................... 2,110,000 Chase Manhattan Corporation: 101,050 10.84% Pfd., Series C.......... 3,025,184 1,300,000 Chase Capital I, 7.67% 12/1/26 Capital Security, Series A..... 1,413,750
VALUE SHARES/PAR (NOTE 1) - ---------- -------- Citigroup Inc.: 20,000 6.365% Pfd., Series F.......... $ 1,072,500 10,000 6.213% Pfd., Series G.......... 527,500 50,780 6.231% Pfd., Series H.......... 2,735,772 48,300 5.864% Pfd., Series M.......... 2,428,584 3,500,000 First Hawaiian Capital I, 8.343% 7/1/27 Capital Security, Series B....................... 3,898,125 First Union Corporation: 300,000 First Union Institutional Capital I, 8.04% 12/1/26 Capital Security....................... 339,000 1,885,000 First Union Institutional Capital II, 7.85% 1/1/27 Capital Security....................... 2,089,994 12,300 Fleet Financial Group, Inc., 6.75% Pfd., Series VI.......... 694,950 2,500,000 Greenpoint Capital Trust I, 9.10% 6/1/27 Capital Security....................... 2,681,250 2,900,000 JPM Capital Trust I, 7.54% 1/15/27 Capital Security....................... 3,106,625 500,000 Keycorp Institutional Capital, 8.25% 12/15/26 Capital Security, Series B............. 577,500 200 LaSalle National Corporation, 6.46% Pfd. 144A**.............. 214,500 Republic New York Corporation: 3,200 5.715% Pfd. ................... 164,400 4,785,000 Republic NY Capital Trust II, 7.53% 12/4/26 Capital Security....................... 5,107,987 ------------ TOTAL BANKING FIXED RATE PREFERRED STOCKS AND SECURITIES..................... 40,474,427 ------------ FINANCIAL SERVICES -- 11.4% Bear Stearns Company: 11,700 5.72% Pfd., Series F............. 548,437 54,400 5.49% Pfd., Series G............. 2,454,800 2,500,000 Countrywide Capital III, 8.05% 6/15/27 Capital Security, Series B....................... 2,731,250 27,000 DLJ Capital Trust, 8.42% Pfd. .................... 700,313 15,000... Heller Financial, 6.687% Pfd., Series C.......... 1,501,875
See Notes to Financial Statements. 10 - -------------------------------------------------------------------------------- Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) NOVEMBER 30, 1998 ---------------------------------------------------------------
VALUE SHARES/PAR (NOTE 1) - ---------- -------- PREFERRED STOCKS AND SECURITIES (CONTINUED) FIXED RATE PREFERRED STOCKS AND SECURITIES (CONTINUED) FINANCIAL SERVICES (CONTINUED) 174,950 Household Capital Trust II, 8.70%.......................... $ 4,603,372 Lehman Brothers Holdings Inc.: 19,900 8.30% QUICS, Series A............ 503,719 188,125 5.00% Conv. Pfd., Series B....... 5,667,266 26,500 5.94% Pfd., Series C............. 1,185,875 26,600 5.67% Pfd., Series D............. 1,137,150 Merrill Lynch & Co., Inc.: 30,000 8.00% TOPrS...................... 815,625 104,200 9.00% Pfd., Series A............. 3,288,812 ------------ TOTAL FINANCIAL SERVICES FIXED RATE PREFERRED STOCKS AND SECURITIES..................... 25,138,494 ------------ INSURANCE -- 8.2% 1,920,000 Allstate Financing II, 7.83% 12/01/45 Capital Security....................... 2,073,600 300,000 American General Capital A, 7.57% 12/1/45 Capital Security 144A**......................... 322,875 2,800,000 Aon Capital Trust A, 8.205% 1/1/27 Capital Security....................... 3,220,000 71,481 Hartford Capital II, 8.35% QUIPS, Series B.......... 1,880,844 3,700,000 MMI Capital Trust I, 7.625% 12/15/27 Capital Security, Series B............. 3,700,000 2,950,000 Orion Capital Trust II, 7.701% 4/15/28 Capital Security....................... 2,872,563 1,810,000 Provident Financing Trust I, 7.405% 3/15/38 Capital Security....................... 1,814,525 21 Prudential Human Resources Management Company, Inc., 6.30% Private Placement, Sinking Fund Pfd., Series A.... 2,178,750 ------------ TOTAL INSURANCE FIXED RATE PREFERRED STOCKS AND SECURITIES..................... 18,063,157 ------------
VALUE SHARES/PAR (NOTE 1) - ---------- -------- MISCELLANEOUS INDUSTRIES -- 8.3% 7,500 Anadarko Petroleum Corporation, 5.46% Pfd. .................... $ 678,750 118,300 Coastal Finance, 8.375% TOPrS................... 2,947,149 90,000 Cyprus AMAX Minerals Company, $4.00 Pfd., Series A........... 3,566,250 3,000 Du Pont Nemours, $4.50 Pfd., Series B........... 270,750 57,600 Farmland Industries Inc., 8.00% Pfd. 144A**.............. 3,434,400 30,000 LASMO America Ltd., 8.15% Pfd. 144A**.............. 3,101,250 30,000 Ocean Spray Cranberries, 6.25% Pfd. 144A**.............. 3,150,000 475 Time Warner Inc., 10.25% Pfd., Series M.......... 533,484 9,520 Viad Corporation, $4.75 Sinking Fund Pfd. ....... 725,900 ------------ TOTAL MISCELLANEOUS FIXED RATE PREFERRED STOCKS AND SECURITIES..................... 18,407,933 ------------ TOTAL FIXED RATE PREFERRED STOCKS AND SECURITIES................. 177,444,043 ------------ TOTAL PREFERRED STOCKS AND SECURITIES (Cost $194,909,264).................. 207,909,102 ------------ COMMON STOCKS -- 1.4% UTILITIES -- 1.4% 70,500 Nevada Power Company............. 1,669,969 14,000 New England Electric System...... 585,375 14,800 Wisconsin Energy Corporation..... 457,875 9,900 WPS Resources Corporation........ 331,959 ------------ TOTAL UTILITY COMMON STOCKS (Cost $2,722,622).............. 3,045,178 ------------ OPTION CONTRACTS -- 0.5% (Cost $2,105,737) March Put Options on U.S. Treasury Bond Futures, expiring 2/20/99+....................... 975,781 ------------
See Notes to Financial Statements. 11 - -------------------------------------------------------------------------------- Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) NOVEMBER 30, 1998 - ---------------------------------------------------------------
PRINCIPAL VALUE AMOUNT (NOTE 1) - --------- -------- REPURCHASE AGREEMENT -- 2.8% (Cost $6,287,000) $6,287,000 Agreement with UBS Securities Inc., 5.25% dated 11/30/98, to be repurchased at $6,287,917 on 12/1/98, collateralized by $5,487,000 U.S. Treasury Note, 6.50% due 11/15/26 (value $6,412,931)................... $ 6,287,000 ------------ TOTAL INVESTMENTS (Cost $206,024,623*). 98.9% 218,217,061 OTHER ASSETS AND LIABILITIES (Net)..... 1.1 2,472,561 ------ ------------ NET ASSETS.............................100.0% $220,689,622 ====== ============
- --------------- * Aggregate cost for Federal tax purposes is $204,782,466. ** 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 TIPS -- Trust Issued Preferred Securities QUIPS -- Quarterly Income Preferred Securities MIPS -- Monthly Income Preferred Securities QUIDS -- Quarterly Income Debt Securities QUICS -- Quarterly Income Capital Securities QIB -- Quarterly Interest Bonds
Capital Securities are debt instruments and the amounts shown in the Shares/Par column are dollar amounts of par value. See Notes to Financial Statements. 12 - -------------------------------------------------------------------------------- Preferred Income Opportunity Fund Incorporated STATEMENT OF ASSETS AND LIABILITIES NOVEMBER 30, 1998 ------------------------------------------------------------- ASSETS: Investments, at value (Cost $206,024,623) (Note 1) See accompanying schedule.................................. $218,217,061 Dividends and interest receivable......................... 2,035,976 Receivable for securities sold............................ 1,396,528 Prepaid expenses.......................................... 25,986 ------------ Total Assets...................................... 221,675,551 LIABILITIES: Payable for securities purchased.......................... $ 544,050 Dividends payable to Common Shareholders.................. 177,977 Investment advisory fee payable (Note 2).................. 100,312 Accrued expenses and other payables....................... 163,590 ----------- Total Liabilities................................. 985,929 ------------ NET ASSETS.................................................. $220,689,622 ============ NET ASSETS consist of: Undistributed net investment income (Note 1).............. $ 1,422,597 Accumulated net realized gain on investments sold (Note 1)............................................... 8,176,663 Unrealized appreciation of investments (Note 3)........... 12,192,438 Par value of Common Stock................................. 111,513 Paid-in capital in excess of par value of Common Stock.... 128,786,411 Money Market Cumulative Preferred(TM) Stock (Note 5)...... 70,000,000 ------------ Total Net Assets.................................. $220,689,622 ============ 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......................... 225.36 157,753 ----------- ------------ $100,225.36 70,157,753 =========== Common Stock (11,151,287 shares outstanding).............. $13.50 150,531,869 ====== ------------ TOTAL NET ASSETS............................................ $220,689,622 ============
See Notes to Financial Statements. 13 - -------------------------------------------------------------------------------- Preferred Income Opportunity Fund Incorporated STATEMENT OF OPERATIONS FOR THE YEAR ENDED NOVEMBER 30, 1998 - ----------------------------------------------- INVESTMENT INCOME: Dividends.............................................. $11,870,040 Interest............................................... 3,051,862 ----------- Total Investment Income........................... 14,921,902 EXPENSES: Investment advisory fee (Note 2)....................... $1,233,554 Administration fee (Note 2)............................ 268,296 Money Market Cumulative Preferred(TM) broker commissions and Auction Agent fees.................... 189,942 Shareholder servicing agent fees (Note 2).............. 99,059 Insurance expense...................................... 77,922 Legal and audit fees................................... 70,174 Directors' fees and expenses (Note 2).................. 58,474 Economic consulting fee (Note 2)....................... 45,333 Custodian fees (Note 2)................................ 32,748 Other.................................................. 124,242 ---------- Total Expenses.................................... 2,199,744 ----------- NET INVESTMENT INCOME....................................... 12,722,158 ----------- REALIZED AND UNREALIZED GAIN ON INVESTMENTS (Notes 1 and 3): Net realized gain on investments sold during the year.................................................. 8,379,883 Change in net unrealized appreciation/(depreciation) of investments during the year........................ (6,412,102) ----------- NET REALIZED AND UNREALIZED GAIN ON INVESTMENTS............. 1,967,781 ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS........ $14,689,939 ===========
See Notes to Financial Statements. 14 - -------------------------------------------------------------------------------- Preferred Income Opportunity Fund Incorporated STATEMENT OF CHANGES IN NET ASSETS ---------------------------------------------------------------
YEAR ENDED YEAR ENDED NOVEMBER 30, 1998 NOVEMBER 30, 1997 ----------------- ----------------- OPERATIONS: Net investment income.................................. $ 12,722,158 $ 12,304,022 Net realized gain on investments sold during the year................................................. 8,379,883 2,977,646 Change in net unrealized appreciation/(depreciation) of investments during the year.......................... (6,412,102) 6,639,359 ------------ ------------ Net increase in net assets resulting from operations... 14,689,939 21,921,027 DISTRIBUTIONS: Dividends paid from net investment income to Money Market Cumulative Preferred(TM) Stock Shareholders (Note 5)............................................. (2,066,476) (2,350,442) Distributions paid from net realized capital gains to Money Market Cumulative Preferred(TM) Stock Shareholders (Note 5)................................ (1,198,981) (457,916) Dividends paid from net investment income to Common Stock Shareholders................................... (9,921,815) (10,345,646) Distributions paid from net realized capital gains to Common Stock Shareholders............................ (2,043,516) (1,731,258) ------------ ------------ NET INCREASE/(DECREASE) IN NET ASSETS FOR THE YEAR.......... (540,849) 7,035,765 NET ASSETS: Beginning of year...................................... 221,230,471 214,194,706 ------------ ------------ End of year (including undistributed net investment income of $1,422,597 and $623,523, respectively)..... $220,689,622 $221,230,471 ============ ============
See Notes to Financial Statements. 15 - -------------------------------------------------------------------------------- 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.
YEAR ENDED NOVEMBER 30, --------------------------------------------------------- 1998 1997 1996 1995 1994 -------- -------- -------- -------- --------- OPERATING PERFORMANCE: Net asset value, beginning of year.......................... $ 13.53 $ 12.91 $ 12.35 $ 10.92 $ 13.17 -------- -------- -------- -------- --------- Net investment income....................................... 1.14 1.10 1.16 1.27 1.19 Net realized and unrealized gain/(loss) on investments...... 0.17 0.87 0.53 1.73 (1.64) -------- -------- -------- -------- --------- Total from investment operations............................ 1.31 1.97 1.69 3.00 (0.45) -------- -------- -------- -------- --------- DISTRIBUTIONS: Dividends paid from net investment income to MMP* Shareholders............................................... (0.18) (0.21) (0.21) (0.31) (0.18) Distributions paid from net realized capital gains to MMP* Shareholders............................................... (0.11) (0.04) (0.03) (0.00)# (0.03) Dividends paid from net investment income to Common Stock Shareholders............................................... (0.89) (0.92) (0.87) (1.11) (0.86) Distributions paid from net realized capital gains to Common Stock Shareholders......................................... (0.18) (0.16) -- (0.17) (0.72) Change in accumulated undeclared dividends on MMP*.......... 0.02 (0.02) (0.02) 0.02 (0.01) -------- -------- -------- -------- --------- Total Distributions......................................... (1.34) (1.35) (1.13) (1.57) (1.80) -------- -------- -------- -------- --------- Net asset value, end of year................................ $ 13.50 $ 13.53 $ 12.91 $ 12.35 $ 10.92 ======== ======== ======== ======== ========= Market value, end of year................................... $ 12.875 $ 12.875 $ 12.000 $ 11.250 $ 10.125 ======== ======== ======== ======== ========= Total Investment return based on net asset value**.......... 8.29% 14.44% 13.11% 27.25% (5.44)% ======== ======== ======== ======== ========= Total Investment return based on market value**............. 8.53% 17.16% 15.42% 25.02% (12.83)% ======== ======== ======== ======== ========= RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS: Operating expenses....................................... 1.45% 1.48% 1.71% 1.78% 1.69% Net investment income***................................. 6.37% 6.44% 7.36% 8.47% 8.31% SUPPLEMENTAL DATA: Portfolio turnover rate.................................. 87% 74% 87% 94% 116% Net assets, end of year (in 000's)....................... $220,690 $221,230 $214,195 $207,720 $191,797 ============================================================ Ratio of operating expenses to Total Average Net Assets including MMP*............................................. 0.99% 1.00% 1.13% 1.13% 1.11%
* 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. See Notes to Financial Statements. 16 - -------------------------------------------------------------------------------- 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.
INVOLUNTARY AVERAGE ASSET LIQUIDATING MARKET TOTAL SHARES COVERAGE PREFERENCE VALUE OUTSTANDING PER SHARE PER SHARE(1) PER SHARE(1) & (2) ------------ --------- ------------ ------------------ 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 11/30/94 700 273,996 100,000 100,000
- --------------- (1) Excludes accumulated undeclared dividends. (2) See Note 5. See Notes to Financial Statements. 17 - -------------------------------------------------------------------------------- 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 Board of Directors reviews and approves periodically 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 use the collateral to offset losses incurred. There is the possibility of loss to the 18 - -------------------------------------------------------------------------------- Preferred Income Opportunity Fund Incorporated NOTES TO FINANCIAL STATEMENTS (CONTINUED) ------------------------------------------------------------------------ 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. 19 - -------------------------------------------------------------------------------- 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. The Fund pays Primark an annual fee equal to $45,333 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. Chase Manhattan Bank ("Auction Agent") serves as the Fund's Money Market Cumulative Preferred(TM) Stock transfer agent, registrar, dividend disbursing agent and redemption agent. 3. PURCHASES AND SALES OF SECURITIES Cost of purchases and proceeds from sales of securities for the year ended November 30, 1998, excluding short-term investments, aggregated $188,896,861 and $202,996,639, respectively. At November 30, 1998, aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost was $14,315,934 and aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value was $881,339. 4. COMMON STOCK At November 30, 1998, 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, 1998 and 1997. 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 20 - -------------------------------------------------------------------------------- Preferred Income Opportunity Fund Incorporated NOTES TO FINANCIAL STATEMENTS (CONTINUED) ------------------------------------------------------------------------ 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. 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, 1998, 700 shares of Money Market Cumulative Preferred(TM) Stock were outstanding at the annual rate of 4.270%. 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. 6. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY The Fund invests primarily in adjustable and fixed rate preferred stocks and similar hybrid 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 21 - -------------------------------------------------------------------------------- Preferred Income Opportunity Fund Incorporated NOTES TO FINANCIAL STATEMENTS (CONTINUED) - ------------------------------------------------------------------------ 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 Rating Group 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 also 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 or 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, 1998, 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, 1998, the Commerce Group, Inc. owned approximately 25% of the total Common Stock Fund shares. 9. SUBSEQUENT EVENTS On December 14, 1998, the Fund declared a distribution of $0.81 per share (of which for tax purposes $0.3346 per share represents a dividend from ordinary income and $0.4754 per share represents a dividend from realized long term capital gains) to Common Stock Shareholders of record December 24, 1998, payable December 31, 1998. As a result of the gains realized by the Fund, a portion of the distributions paid to the Fund's Money Market Cumulative Preferred(TM) Stock Shareholders from January 1, 1998 through November 30, 1998 has been designated as being from long term capital gains, as required by ruling 89-81 of the Internal Revenue Code of 1986, as amended. On December 21, 1998, the Fund declared an additional distribution of $575,316 payable December 23, 1998 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 the original distributions did not qualify 100% for the Corporate Dividends Received Deduction. 22 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, 1998, 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, 1998 by correspondence with the custodian and brokers, provide a reasonable basis for the opinion expressed above. Boston, Massachusetts PricewaterhouseCoopers LLP January 15, 1999 23 - -------------------------------------------------------------------------------- Preferred Income Opportunity Fund Incorporated TAX INFORMATION (UNAUDITED) - ---------------------------------------------- For the fiscal year ended November 30, 1998, the Fund realized and, by December 31, 1998, had distributed long term capital gains to both Common Stock Shareholders and Money Market Cumulative Preferred(TM) Stock Shareholders of $6,463,321. 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, 1998, including the Additional Distribution to Money Market Cumulative Preferred(TM) Stock Shareholders, 42.73% qualified for the Dividends Received Deduction for eligible corporate investors. (See Note 9). For the calendar year ended December 31, 1998, 42.76% 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 1998. - -------------------------------------------------------------------------------- Preferred Income Opportunity Fund Incorporated QUARTERLY RESULTS OF INVESTMENT OPERATION (UNAUDITED) - --------------------------------------------------------------------------------
AVAILABLE TO COMMON STOCK SHAREHOLDERS ------------------------------------------------------------------ NET REALIZED AND UNREALIZED NET INCREASE GAIN/(LOSS) IN NET ASSETS FROM INVESTMENT INCOME NET INVESTMENT INCOME ON INVESTMENTS OPERATIONS ------------------- --------------------- -------------------- ------------------- QUARTER PER PER PER PER ENDED TOTAL SHARE* TOTAL SHARE* TOTAL SHARE* TOTAL SHARE* - ------- ----- ------ ----- ------ ----- ------ ----- ------ 02/28/97 $3,328,538 $0.30 $2,789,856 $0.25 $ (233,256) $(0.02) $2,556,600 $0.23 05/31/97 3,714,170 0.33 3,218,380 0.29 2,151,212 0.19 5,369,592 0.48 08/31/97 3,747,750 0.34 3,195,496 0.29 4,544,355 0.41 7,739,851 0.70 11/30/97 3,653,782 0.33 3,100,290 0.27 3,154,694 0.29 6,254,984 0.56 02/28/98 3,784,203 0.33 3,233,347 0.29 2,711,296 0.24 5,944,643 0.53 05/31/98 3,593,404 0.32 3,028,370 0.27 1,971,753 0.17 5,000,123 0.44 08/31/98 3,730,062 0.33 3,160,444 0.28 (894,789) (0.08) 2,265,655 0.20 11/30/98 3,814,233 0.34 3,299,997 0.30 (1,820,479) (0.16) 1,479,518 0.14
- --------------- * Per share of common stock. 24 - -------------------------------------------------------------------------------- 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 Investor Services Group 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, Investor Services Group 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 Investor Services Group 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, Investor Services Group 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 Investor Services Group's open market purchases in connection with the reinvestment of dividends or capital gains distributions. For the year ended November 30, 1998, $7,125 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 25 - -------------------------------------------------------------------------------- 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 Investor Services Group in writing, by completing the form on the back of the Plan account statement and forwarding it to Investor Services Group or by calling Investor Services Group directly. A termination will be effective immediately if notice is received by Investor Services Group 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, Investor Services Group 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 Investor Services Group at 1-800-331-1710. 26 DIRECTORS Martin Brody Donald F. Crumrine, CFA PREFERRED Robert T. Flaherty, CFA INCOME David Gale OPPORTUNITY Morgan Gust ----------- Robert F. Wulf, CFA FUND ----------- 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 Annual Flaherty & Crumrine Incorporated Report 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. 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. November 30, 1998 -----END PRIVACY-ENHANCED MESSAGE-----