-----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, CncjVwDmwsHnxnsglrdQV6w/AvA8M7+pMJtXIMwkAbzar/ppwJPxd1SWK6SxRp4L fB4WgTwABm7ZnKPKRcMUDg== 0000935069-04-001694.txt : 20041026 0000935069-04-001694.hdr.sgml : 20041026 20041026173046 ACCESSION NUMBER: 0000935069-04-001694 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20040229 FILED AS OF DATE: 20041026 DATE AS OF CHANGE: 20041026 EFFECTIVENESS DATE: 20041026 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREFERRED INCOME OPPORTUNITY FUND INC CENTRAL INDEX KEY: 0000882071 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: 041097519 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 perferredincomeopp0204.txt FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND Dear Shareholder: The Flaherty & Crumrine Preferred Income Opportunity Fund ("PFO") got off to a very good start in fiscal 2004. The total return on net asset value ("NAV") for fiscal first quarter ending February 29th was +5.4% 1. For the trailing twelve month period, the total return was +22.2% 1. Once again, strength in the preferred securities market was the major factor in the Fund's performance. With interest rates hovering near all-time lows, individual investors have increasingly turned to preferred securities as they try to increase the income from their portfolios. At the same time, the size of the market has remained fairly stable. There has been a steady stream of new issues brought to market, but older issues are being redeemed at about the same pace. As expected, issuers are replacing older high coupon preferred issues with similar but less expensive ones. These refinancing transactions are very important to the Fund--if the trend persists for a long period of time, there may be downward pressure on the income generated by the portfolio. On the other hand, low interest rates keep the cost of the Fund's leverage extremely low. So far these two effects have roughly offset each other. The Fund's hedging strategy also performed as expected. To refresh your memory, PFO normally hedges by purchasing put options on U.S. Treasury bond futures. As interest rates go up or down, the prices of these put options typically move in the opposite direction of the preferred securities. There is, however, an important and valuable feature to a put option hedge--in a period of falling interest rates (as in recent months), the value of the preferred portfolio usually goes up by more than the drop in the value of the put options. Although the value of the hedge positions declined during the period, when compared to appreciation in the preferred positions this loss was small. Of course, if we knew interest rates were going to fall, the best hedge would have been no hedge at all, but our crystal ball is a bit too cloudy for that! We prefer to hedge consistently, knowing that the portfolio should participate in a rally but be protected if interest rates rise significantly. The Fund's combination of preferred securities and the put option hedge creates an unusual investment product and we have yet to find a perfect benchmark for comparison. When measured against LONG-TERM fixed income investments, we expect the returns on NAV to lag (but generally only a little!) during periods of falling interest rates (because the hedge will hurt returns), and to perform much better if rates rise substantially. In most interest rate scenarios, the Fund's returns on NAV should out-perform SHORT-TERM investments, although the Fund's returns on NAV may lag briefly during periods of rising short-term rates. In any event, investors should always bear in mind that changes in the Fund's premium or discount to NAV can significantly affect the performance and volatility of the Fund's common share price. To provide some comparison of the Fund's performance, the total return on the Lehman Brothers index of long-term investment grade corporate bonds (a good proxy for long-term fixed-income investments) was +4.9% during the fiscal quarter and +10.8% during the twelve months ending February 29th. The Lehman Brothers index of 3 - 6 month U.S. Treasury Bills (a short-term proxy) earned 0.3% during the quarter and 1.2% for the year. Keep in mind that these indices do not utilize leverage. Economic conditions in the United States continue to show signs of improvement. This rising economic tide has benefited corporate profitability and enabled companies to improve the quality of their balance sheets. At the same time, sluggish job formation and subdued inflation have persuaded the Federal Reserve to keep monetary policy accommodative, which has held down the cost of the Fund's leverage. In the coming weeks, the Fund's adviser, Flaherty & Crumrine, will launch a new web site, www.preferredstockguide.com. The site will contain useful information about most of the issues that make up the preferred securities universe. We've tried to make the site informative and easy to use. We hope you will also continue to visit the Fund's web site at WWW.PREFERREDINCOME.COM. Sincerely, /S/DONALD F. CRUMRINE /S/ROBERT M. ETTINGER Donald F. Crumrine Robert M. Ettinger Chairman of the Board President April 12, 2004 (1) Based on monthly data provided by Lipper Inc. Distributions are assumed to be reinvested at NAV in accordance with Lipper's practice. - -------------------------------------------------------------------------------- Flaherty & Crumrine Preferred Income Opportunity Fund SUMMARY OF INVESTMENTS FEBRUARY 29, 2004 (UNAUDITED) - -----------------------------
PERCENT VALUE OF TOTAL (000'S) NET ASSETS -------- ---------- ADJUSTABLE RATE PREFERRED SECURITIES Utilities ................................................................. $ 628 0.3% Banking ................................................................... 18,750 8.5 -------- ------ TOTAL ADJUSTABLE RATE ................................................. 19,378 8.8 -------- ------ FIXED RATE PREFERRED SECURITIES Utilities ................................................................. 88,863 40.5 Banking ................................................................... 31,183 14.2 Financial Services ........................................................ 28,314 12.9 Insurance ................................................................. 19,864 9.0 Oil and Gas ............................................................... 9,315 4.2 Miscellaneous Industries .................................................. 5,041 2.3 -------- ------ TOTAL FIXED RATE ...................................................... 182,580 83.1 -------- ------ INVERSE FLOATING RATE PREFERRED SECURITIES ..................................... 2,133 1.0 TOTAL PREFERRED STOCKS AND SECURITIES .......................................... 204,091 92.9 CORPORATE DEBT SECURITIES ...................................................... 3,702 1.7 COMMON STOCKS AND CONVERTIBLE SECURITIES ....................................... 8,232 3.7 PURCHASED PUT OPTIONS .......................................................... 697 0.3 MONEY MARKET FUNDS ............................................................. 1,471 0.7 -------- ------ TOTAL INVESTMENTS .............................................................. 218,193 99.3 OTHER ASSETS AND LIABILITIES (NET) ............................................. 1,448 0.7 -------- ------ TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK .................. $219,641 100.0% ======== ======
FINANCIAL DATA PER SHARE OF COMMON STOCK (UNAUDITED) - -------------------------------------------------------- DIVIDEND DIVIDEND NET ASSET NYSE REINVESTMENT PAID VALUE CLOSING PRICE PRICE (1) -------- --------- ------------- ------------ December 31, 2003 - Extra ........................... $0.0300 $12.63 $14.36 $13.64 December 31, 2003 ................................... 0.0755 12.63 14.36 13.64 January 31, 2004 .................................... 0.0755 12.89 14.80 14.06 February 29, 2004 ................................... 0.0755 13.01 14.57 13.84 - -------------------- (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 - -------------------------------------------------------------------------------- STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1) THREE MONTHS ENDED FEBRUARY 29, 2004 (UNAUDITED) ---------------------------------------------------------------
VALUE (000'S) -------- OPERATIONS: Net investment income ......................................................................... $ 2,865 Net realized gain on investments sold during the period ....................................... 926 Net unrealized appreciation of investments during the period .................................. 4,210 Distributions to Money Market Cumulative PreferredTM Stock Shareholders from net investment income, including changes in accumulated undeclared distributions ......................... (227) ------------- Net increase in net assets from operations ................................................ 7,774 DISTRIBUTIONS: Dividends paid from net investment income to Common Stock Shareholders (2) .................... (2,945) Distributions paid from net realized capital gains to Common Stock Shareholders ............... 0 ------------- Total Distributions ....................................................................... (2,945) ------------- FUND SHARE TRANSACTIONS: Increase from Common Stock Transactions ................................................... 449 ------------- NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE PERIOD ................................ 5,278 NET ASSETS AVAILABLE TO COMMON STOCK: Beginning of period ........................................................................... 144,303 ------------- End of period ................................................................................. $ 149,581 ============= FINANCIAL HIGHLIGHTS(1) THREE MONTHS ENDED FEBRURAY 29, 2004 (UNAUDITED) FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD. ----------------------------------------------------- PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period .......................................................... $ 12.59 ------------- INVESTMENT OPERATIONS: Net investment income ......................................................................... 0.25 Net realized gain and unrealized appreciation on investments .................................. 0.45 DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS: From net investment income (including change in accumulated undeclared dividends on MMP(R)*) .. (0.02) From net realized capital gains ............................................................... 0.00 ------------- Total from investment operations .............................................................. 0.68 ------------- DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS: From net investment income .................................................................... (0.26) From net realized capital gains ............................................................... 0.00 ------------- Total distributions to Common Stock Shareholders .............................................. (0.26) ------------- Net asset value, end of period ................................................................ $ 13.01 ============= Market value, end of period ................................................................... $ 14.57 ============= Common shares outstanding, end of period ...................................................... 11,494,245 ============= RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS: Net investment income + ....................................................................... 7.76%** Operating expenses ............................................................................ 1.53%** - -------------------------------------------------------- SUPPLEMENTAL DATA:++ Portfolio turnover rate fiscal year to date ................................................... 9%*** Total net assets available to Common and Preferred Stock, end of period (in 000's) ............ $ 219,641 Ratio of operating expenses to total average net assets including MMP(R)* ..................... 1.04%** (1) These tables summarize the three months ended February 29, 2004 and should be read in conjunction with the Fund's audited financial statements, including footnotes, contained in its Annual Report dated November 30, 2003. (2) Includes income earned, but not paid out, in prior fiscal year. * Money Market Cumulative PreferredTM Stock. ** Annualized. *** Not Annualized. + The net investment income ratios reflect income net of operating expenses and payments to MMP(R)* Shareholders. ++ Information presented under heading Supplemental Data includes MMP(R)*.
3 DIRECTORS Martin Brody Donald F. Crumrine, CFA Robert M. Ettinger, CFA David Gale Morgan Gust Robert F. Wulf, CFA OFFICERS Donald F. Crumrine, CFA Chairman of the Board and Chief Executive Officer Robert M. Ettinger, CFA President Peter C. Stimes, CFA Chief Financial and Accounting Officer, Vice President and Treasurer R. Eric Chadwick, CFA Vice President and Secretary Bradford S. Stone Vice President INVESTMENT ADVISER Flaherty & Crumrine Incorporated e-mail: flaherty@fin-mail.com QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY & CRUMRINE 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 -- PFPC Inc. P.O. Box 43027 Providence, RI 02940-3027 1-800-331-1710 THIS REPORT IS SENT TO SHAREHOLDERS OF FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED FOR THEIR INFORMATION. IT IS NOT A PROSPECTUS, CIRCULAR OR REPRESENTATION INTENDED FOR USE IN THE PURCHASE OR SALE OF SHARES OF THE FUND OR OF ANY SECURITIES MENTIONED IN THIS REPORT. [GRAPHIC OMITTED] LIGHTHOUSE Flaherty & Crumrine =================== Preferred Income Opportunity fund Quarterly Report February 29, 2004 web site: www.preferredincome.com -----END PRIVACY-ENHANCED MESSAGE-----