-----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, TCkx1HQr/bm0qaYRGqnI1LP5Wlg9A7vc4etUfZs/LxRkDJJcXbOTGG3LI8KZSlw5 mDLwlW9qoJUm41HM33Guqw== 0000935069-08-002554.txt : 20081028 0000935069-08-002554.hdr.sgml : 20081028 20081028164221 ACCESSION NUMBER: 0000935069-08-002554 CONFORMED SUBMISSION TYPE: N-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20080831 FILED AS OF DATE: 20081028 DATE AS OF CHANGE: 20081028 EFFECTIVENESS DATE: 20081028 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Flaherty & Crumrine 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-Q SEC ACT: 1940 Act SEC FILE NUMBER: 811-06495 FILM NUMBER: 081145182 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: (626) 795-7300 MAIL ADDRESS: STREET 1: 301 COLORADO BLVD STE 720 STREET 2: C/O FLAHERTY & CRUMRINE INC CITY: PASADENA STATE: CA ZIP: 91101 FORMER COMPANY: FORMER CONFORMED NAME: PREFERRED INCOME OPPORTUNITY FUND INC DATE OF NAME CHANGE: 19920929 N-Q 1 wrapper48810prefincoppfund.txt FLAHERTY PREFERRED INCOME OPPORTUNITY FUND UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-Q QUARTERLY SCHEDULE OF PORTFOLIO HOLDINGS OF REGISTERED MANAGEMENT INVESTMENT COMPANY Investment Company Act file number 811-06495 ---------------------------- FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED - -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) 301 E. Colorado Boulevard, Suite 720 PASADENA, CA 91101 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip code) Donald F. Crumrine Flaherty & Crumrine Incorporated 301 E. Colorado Boulevard, Suite 720 PASADENA, CA 91101 - -------------------------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: 626-795-7300 --------------------- Date of fiscal year end: NOVEMBER 30 ------------- Date of reporting period: AUGUST 31, 2008 ----------------- Form N-Q is to be used by management investment companies, other than small business investment companies registered on Form N-5 (ss.ss. 239.24 and 274.5 of this chapter), to file reports with the Commission, not later than 60 days after the close of the first and third fiscal quarters, pursuant to rule 30b1-5 under the Investment Company Act of 1940 (17 CFR 270.30b1-5). The Commission may use the information provided on Form N-Q in its regulatory, disclosure review, inspection, and policymaking roles. A registrant is required to disclose the information specified by Form N-Q, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-Q unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. ss. 3507. ITEM 1. SCHEDULE OF INVESTMENTS. The Schedule(s) of Investments is attached herewith. FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND To the Shareholders of Flaherty & Crumrine Preferred Income Opportunity: Stating the obvious, we are facing extraordinary and unprecedented times in the financial markets. The events that ultimately culminated in the government's massive financial rescue plan have impacted the market for preferred securities particularly hard. As a result, for the quarter ended August 31, 2008, the Fund's common shareholders experienced a total return on net asset value of - -14.1%, subsequent to the quarter-end and through the date of this letter, the net asset value has continued to decline significantly. Prices on long-term US Treasury bonds rose during the quarter, as investors sought the safety of government bonds despite historically low yields. On the flip side, there were few buyers and abundant sellers of most preferred securities and corporate bonds. A downward cycle for prices ensued, as selling pressure pushed prices lower which in turn led to more selling pressure. This pattern of selling begetting selling is an effect of severe bear market psychology. In addition, investors and lenders, seeking the safety and security of cash, withhold capital from borrowers. Since the free flow of capital is essential to our economy, and economic growth is a key factor in security valuation, concerns about price declines become self-fulfilling. The bears clearly were in control both during and subsequent to the quarter. The root cause of the current financial problems remains unresolved-residential real estate markets have yet to stabilize. The speculative component of residential housing has resulted in "bubble and crash" cycles in the past, but the current adjustment is unlike any we can recall. Far too many people wanted to buy homes under the "greater fool" plan and lenders were far too willing to help. The real estate market will eventually return to equilibrium and the dramatic measures taken by the government will help calm the markets. In the meantime we must deal with circumstances at hand. Since the end of our fiscal quarter events have transpired at a breathtaking pace - particularly relating to the Fund's use of leverage and its dividend. Our website allows for much more frequent communication than our quarterly letters. We have posted updates throughout this financial crisis and we encourage you to continue visiting us at www.preferredincome.com. In addition to managing your Fund, we are also shareholders. We understand your concerns about recent events and we are doing our best to respond to them. Nonetheless, our goals remain constant - conduct exhaustive research and construct an investment portfolio that is designed to deliver high current income consistent with the objectives and guidelines of the Fund. Sincerely, /s/ Donald F. Crumrine /s/ Robert M. Ettinger Donald F. Crumrine Robert M. Ettinger Chairman of the Board President October 16, 2008 Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OVERVIEW AUGUST 31, 2008 (UNAUDITED)
FUND STATISTICS ON 8/31/08 - -------------------------- Net Asset Value $ 7.36 Market Price $ 7.25 Discount 1.49% Yield on Market Price 11.26% Common Stock Shares Outstanding 11,833,198
MOODY'S RATINGS % OF PORTFOLIO - --------------- -------------- AA 4.4% A 11.5% BBB 57.0% BB 21.4% Below "BB" 0.2% Not Rated 3.4% ---- Below Investment Grade* 18.5%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P. (PIE CHART)
INDUSTRY CATEGORIES % OF PORTFOLIO - ------------------- -------------- Banking 22% Energy 7% Financial Services 14% Insurance 16% Other 5% REITs 2% Utilities 34%
TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO - ------------------------- -------------- Interstate Power & Light 5.8% Liberty Mutual Group 4.5% Merrill Lynch 4.4% Southern California Edison 3.6% Sovereign Bancorp 3.5% Puget Energy 3.1% Entergy Louisiana 2.9% Metlife 2.8% Banco Santander 2.8% CIT Group 2.6%
% OF PORTFOLIO** ---------------- Holdings Generating Qualified Dividend Income (QDI) for Individuals 56% Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD) 51%
** THIS DOES NOT REFLECT YEAR-END RESULTS OR ACTUAL TAX CATEGORIZATION OF FUND DISTRIBUTIONS. THESE PERCENTAGES CAN, AND DO, CHANGE, PERHAPS SIGNIFICANTLY, DEPENDING ON MARKET CONDITIONS. INVESTORS SHOULD CONSULT THEIR TAX ADVISOR REGARDING THEIR PERSONAL SITUATION. 2 Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS AUGUST 31, 2008 (UNAUDITED)
SHARES/$ PAR VALUE - ------------ ------------ PREFERRED SECURITIES -- 95.4% BANKING -- 21.7% $ 3,000,000 Astoria Capital Trust I, 9.75% 11/01/29, Series B ............................... $ 3,020,100 Banco Santander: 178,200 6.50% Pfd. ................................................................... 3,569,578**(1) 36,800 6.80% Pfd. ................................................................... 788,900**(1) $ 2,400,000 Capital One Capital III, 7.686% 08/15/36 ........................................ 1,781,760 $ 4,500,000 CBG Florida REIT Corporation, 7.114%, 144A**** .................................. 1,407,600 25,000 Citigroup, Inc., 8.50% Pfd., Series F ........................................... 538,000* 19,648 Citizens Funding Trust I, 7.50% Pfd. 09/15/66 ................................... 246,828 45,000 Cobank, ACB, 7.00% Pfd., 144A**** ............................................... 1,478,700* $ 3,500,000 Comerica Capital Trust II, 6.576% 02/20/37 ...................................... 1,992,200 4,500 FBOP Corporation, Adj. Rate Pfd., 144A**** ...................................... 2,475,000* $ 2,250,000 First Hawaiian Capital I, 8.343% 07/01/27, Series B ............................. 2,172,600(1) 1,750 First Tennessee Bank, Adj. Rate Pfd., 144A**** .................................. 918,750* $ 450,000 HBOS PLC, 6.657%, 144A**** ...................................................... 282,915**(1) 4,400 HSBC Series II, Variable Inverse Pfd., Pvt. ..................................... 0*+ 2,500 HSBC USA, Inc., $2.8575 Pfd. .................................................... 97,825* JPMorgan Chase & Co.: 10,000 6.15% Pfd., Series E ......................................................... 394,800* $ 250,000 7.90%, Series I .............................................................. 227,825* 60,000 Keycorp Capital IX, 6.75% Pfd. 12/15/66 ......................................... 903,750 99,000 National City Corporation, 9.875% Pfd. .......................................... 1,948,320* 28,000 PFGI Capital Corporation, 7.75% Pfd. ............................................ 441,560 $ 2,500,000 Regions Financing Trust II, 6.625% 05/15/47 ..................................... 1,322,000 3,200 Regions Financing Trust III, 8.875% Pfd. 06/15/78 ............................... 69,920(2) 212,700 Sovereign Bancorp, 7.30% Pfd., Series C ......................................... 3,409,858* 20,375 Sovereign Capital Trust V, 7.75% Pfd. 05/22/36 .................................. 372,710(2) 1,850 Sovereign REIT, 12.00% Pfd., Series A, 144A**** ................................. 1,764,641 U.S. Bancorp, Auction Pass-Through Trust, Cl. B: 9 Series 2006-5, Variable Rate Pfd., 144A**** .................................. 225*+ 9 Series 2006-6, Variable Rate Pfd., 144A**** .................................. 225*+ 60,000 Wachovia Corporation, 8.00% Pfd., Series J ...................................... 1,118,400* $ 900,000 Washington Mutual Preferred Funding IV, 9.75%, 144A**** ......................... 403,560 $ 1,400,000 Webster Capital Trust IV, 7.65% 06/15/37 ........................................ 903,420 ------------ 34,051,970 ------------ FINANCIAL SERVICES -- 14.2% CIT Group, Inc.: 10,000 5.189% Pfd., Series B ........................................................ 460,800* 261,200 6.35% Pfd., Series A ......................................................... 3,667,901*
3 Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2008 (UNAUDITED)
SHARES/$ PAR VALUE - ------------ ------------ PREFERRED SECURITIES -- (CONTINUED) FINANCIAL SERVICES -- (CONTINUED) 160,000 Countrywide Capital IV, 6.75% Pfd. .............................................. $ 2,410,000(2) 12,000 Countrywide Capital V, 7.00% Pfd. 11/01/36 ...................................... 178,500 890 First Republic Preferred Capital Corporation, 10.50% Pfd., 144A**** ............. 940,926 22,500 First Republic Preferred Capital Corporation II, 8.75% Pfd., Series B, 144A**** ..................................................................... 519,750 Goldman Sachs: 20,000 Adj. Rate Pfd., Series C ..................................................... 323,750* 175,000 Adj. Rate Pfd., Series D ..................................................... 2,723,438* 24,680 Cabco Trust Capital I, Adj. Rate Pfd. 02/15/34 ............................... 346,569 11 Pass-Through Certificates, Class B, 144A**** ................................. 0*+ 3,500 STRIPES Custodial Receipts, Pvt. ............................................. 35*+ Lehman Brothers Holdings, Inc.: 45,800 5.67% Pfd., Series D ......................................................... 1,257,668* 9,500 5.94% Pfd., Series C ......................................................... 257,830* 25,000 6.50% Pfd., Series F ......................................................... 376,500* 13,400 7.95% Pfd. ................................................................... 208,504* Merrill Lynch: 112,000 Adj. Rate Pfd., Series 5 ..................................................... 1,323,000* 3,000 Series II STRIPES Custodial Receipts, Pvt. ................................... 30*+ 200,000 6.25% Pfd. ................................................................... 3,562,000* 30,000 8.625% Pfd., Series 8 ........................................................ 640,200* SLM Corporation: 4,000 Adj. Rate Pfd., Series B ..................................................... 161,500* 94,150 6.97% Pfd., Series A ......................................................... 2,985,497* ------------ 22,344,398 ------------ INSURANCE -- 13.8% $ 1,000,000 AMBAC Financial Group, Inc., 6.15% 02/15/37 ..................................... 353,300 $ 3,250,000 AON Capital Trust A, 8.205% 01/01/27 ............................................ 3,043,407 Arch Capital Group Ltd.: 10,000 7.875% Pfd., Series B ........................................................ 231,563**(1) 24,400 8.00% Pfd., Series A ......................................................... 559,675**(1) 29,700 Axis Capital Holdings, 7.50% Pfd., Series B ..................................... 2,323,431(1) 90,000 Delphi Financial Group, 7.376% Pfd. 05/15/37 .................................... 1,577,817 $ 3,250,000 Everest Re Holdings, 6.60% 05/15/37 ............................................. 2,151,500 Liberty Mutual Group: $ 4,500,000 7.80% 03/15/37, 144A**** ..................................................... 3,359,250 $ 250,000 10.75% 06/15/58, 144A**** .................................................... 227,800
4 Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2008 (UNAUDITED)
SHARES/$ PAR VALUE - ------------ ------------ PREFERRED SECURITIES -- (CONTINUED) INSURANCE -- (CONTINUED) $ 500,000 MetLife Capital Trust X, 9.25% 04/08/38, 144A**** ............................... $ 507,450 186,600 MetLife, Inc., 6.50% Pfd., Series B ............................................. 3,919,067* $ 200,000 PartnerRe Finance II, 6.44% 12/01/66 ............................................ 154,440(1) Renaissancere Holdings Ltd.: 42,050 6.08% Pfd., Series C ......................................................... 740,080**(1) 56,700 6.60% Pfd., Series D ......................................................... 1,111,320**(1) 115,500 Scottish Re Group Ltd., 7.25% Pfd. .............................................. 245,438**(1)+ $ 1,060,000 USF&G Capital, 8.312% 07/01/46, 144A**** ........................................ 1,140,194 ------------ 21,645,732 ------------ UTILITIES -- 34.3% Alabama Power Company: 4,980 4.60% Pfd. ................................................................... 388,639* 6,485 4.72% Pfd. ................................................................... 519,189* 868 4.92% Pfd. ................................................................... 72,443* 1,579 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ....................... 155,800* 92,000 Calenergy Capital Trust III, 6.50% Pfd. 09/01/27 ................................ 4,125,280 5,560 Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt. ....... 572,902* Connecticut Light & Power Company: 2,050 4.50% Pfd., Series 1956 ...................................................... 75,399* 25,000 5.28% Pfd., Series 1967 ...................................................... 1,102,000* 2,000 Consolidated Edison Company of New York, 4.65% Pfd., Series C ................... 163,920* 40,000 Constellation Energy Group, Inc, 8.625% Pfd. 06/15/63, Series A ................. 1,003,200 $ 1,750,000 Dominion Resources, Inc., 7.50% ................................................. 1,587,775 15,030 Duquesne Light Company, 3.75% Pfd. .............................................. 434,066* 90,000 Entergy Arkansas, Inc., 6.45% Pfd. .............................................. 2,223,000* 46,000 Entergy Louisiana, Inc., 6.95% Pfd. ............................................. 4,582,520* 4,400 Florida Power Company, 4.75% Pfd. ............................................... 363,880* Georgia Power Company: 8,000 6.125% Pfd. .................................................................. 195,680* 6,500 6.50% Pfd., Series 07-A ...................................................... 644,410* 2,000 Great Plains Energy, Inc., 4.35% Pfd. ........................................... 156,720* Hawaiian Electric Company, Inc.: 2,471 5.00% Pfd., Series D ......................................................... 43,011* 7,438 5.00% Pfd., Series E ......................................................... 129,468* 1,383 5.00% Pfd., Series I ......................................................... 24,073* 30,500 Indianapolis Power & Light Company, 5.65% Pfd. .................................. 2,637,030* 336,400 Interstate Power & Light Company, 8.375% Pfd., Series B ......................... 9,096,256*
5 Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2008 (UNAUDITED)
SHARES/$ PAR VALUE - ------------ ------------ PREFERRED SECURITIES -- (CONTINUED) UTILITIES -- (CONTINUED) Pacific Enterprises: 15,935 $4.50 Pfd. ................................................................... $ 1,259,343* 8,935 $4.75 Pfd., Series 53 ........................................................ 745,268* $ 1,500,000 PECO Energy Capital Trust III, 7.38% 04/06/28, Series D ......................... 1,482,150 14,020 Public Service Electric & Gas Company, 5.28% Pfd., Series E ..................... 1,334,564* $ 5,750,000 Puget Sound Energy, Inc., 6.974% 06/01/67 ....................................... 4,821,375 21,635 San Diego Gas & Electric Company, $1.70 Pfd. .................................... 535,466* South Carolina Electric & Gas Company: 13,711 5.125% Purchase Fund Pfd., Pvt. .............................................. 706,117* 7,774 6.00% Purchase Fund Pfd., Pvt. ............................................... 396,629* Southern California Edison: 25,000 6.00% Pfd., Series C ......................................................... 2,290,000* 35,000 6.125% Pfd. .................................................................. 3,289,300* Southern Union Company: $ 1,780,000 7.20% 11/01/66 ............................................................... 1,421,686 6,575 7.55% Pfd. ................................................................... 167,046* $ 750,000 TXU Electric Capital V, 8.175% 01/30/37 ......................................... 600,075 Union Electric Company: 5,700 4.56% Pfd. ................................................................... 445,797* 10,156 $7.64 Pfd. ................................................................... 991,835* Virginia Electric & Power Company: 3,878 $6.98 Pfd. ................................................................... 384,310* 12,500 $7.05 Pfd. ................................................................... 1,267,969* $ 1,700,000 Wisconsin Energy Corporation, 6.25% 05/15/67 .................................... 1,409,351 ------------ 53,844,942 ------------ ENERGY -- 6.3% $ 4,000,000 Enbridge Energy Partners LP, 8.05% 10/01/37 ..................................... 3,565,436 $ 2,500,000 Enterprise Products Partners, 7.034% 01/15/68 ................................... 2,171,757 3,000 Kinder Morgan GP, Inc., 8.33% Pfd., 144A**** .................................... 3,085,020* 10,000 Lasmo America Limited, 8.15% Pfd., 144A**** ..................................... 1,015,000*(1) ------------ 9,837,213 ------------ REAL ESTATE INVESTMENT TRUST (REIT) -- 2.1% 65,000 Duke Realty Corporation, 8.375% Pfd., Series O .................................. 1,536,600 PS Business Parks, Inc.: 10,000 6.70% Pfd., Series P ......................................................... 186,250(2) 59,400 6.875% Pfd., Series I ........................................................ 1,128,600 7,500 7.20% Pfd., Series M ......................................................... 150,704
6 Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2008 (UNAUDITED)
SHARES/$ PAR VALUE - ------------ ------------ PREFERRED SECURITIES -- (CONTINUED) REAL ESTATE INVESTMENT TRUST (REIT) -- (CONTINUED) Public Storage, Inc.: 10,500 6.75% Pfd., Series E ......................................................... $ 220,172 5,500 6.75% Pfd., Series L ......................................................... 116,875 ------------ 3,339,201 ------------ MISCELLANEOUS INDUSTRIES -- 2.7% 13,600 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B ....................... 1,107,448* 35,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ............................. 3,159,450* ------------ 4,266,898 ------------ U.S. GOVERNMENT AGENCY -- 0.3% 55,000 Fannie Mae, Adj. Rate Pfd., Series P ............................................ 529,100* ------------ 529,100 ------------ TOTAL PREFERRED SECURITIES (Cost $190,166,686) .......................................................... 149,859,454 ------------ CORPORATE DEBT SECURITIES -- 2.5% INSURANCE -- 2.2% $ 4,417,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** ............................. 3,478,829 ------------ 3,478,829 ------------ ENERGY -- 0.3% 19,500 Nexen, Inc., 7.35% Subordinated Notes ........................................... 460,079(1) ------------ 460,079 ------------ TOTAL CORPORATE DEBT SECURITIES (Cost $4,835,608) ............................................................ 3,938,908 ------------ OPTION CONTRACTS -- 0.2% 150 December Put Options on December U.S. Treasury Bond Futures, Expiring 11/21/08 ............................................................... 234,375+ ------------ TOTAL OPTION CONTRACTS (Cost $262,010) .............................................................. 234,375 ------------ SECURITIES LENDING COLLATERAL -- 1.9% 3,025,332 BlackRock Institutional Money Market Trust ...................................... 3,025,332 ------------ TOTAL SECURITIES LENDING COLLATERAL (Cost $3,025,332) ............................................................ 3,025,332 ------------
7 Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated PORTFOLIO OF INVESTMENTS (CONTINUED) AUGUST 31, 2008 (UNAUDITED) TOTAL INVESTMENTS (Cost $198,289,636***) ....................................................... 100.0% $157,058,069 OTHER ASSETS AND LIABILITIES (Net) ............................................................. 0.0% 47,932 ----- ------------ TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK ....................................... 100.0%++ $157,106,001 ----- ------------ AUCTION PREFERRED STOCK (APS) REDEMPTION VALUE ................................................. (70,000,000) ------------ TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ..................................................... $ 87,106,001 ============
- ---------- * Securities eligible for the Dividends Received Deduction and distributing Qualified Dividend Income. ** Securities distributing Qualified Dividend Income only. *** Aggregate cost of securities held. **** Securities 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. These securities have been determined to be liquid under the guidelines established by the Board of Directors. (1) Foreign Issuer. (2) All or a portion of this security is on loan. + Non-income producing. ++ The percentage shown for each investment category is the total value of that category as a percentage of net assets available to Common and Preferred Stock. ABBREVIATIONS: PFD. -- Preferred Securities PVT. -- Private Placement Securities 8 Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1) FOR THE PERIOD FROM DECEMBER 1, 2007 THROUGH AUGUST 31, 2008 (UNAUDITED)
VALUE ------------ OPERATIONS: Net investment income ................................................ $ 9,049,395 Net realized gain/(loss) on investments sold during the period ....... (3,053,082) Change in net unrealized appreciation/depreciation of investments .... (28,552,710) Distributions to APS* Shareholders from net investment income, including changes in accumulated undeclared distributions ......... (3,026,812) ------------ NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ................. (25,583,209) DISTRIBUTIONS: Dividends paid from net investment income to Common Stock Shareholders(2) ................................................... (7,217,562) ------------ TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ..................... (7,217,562) FUND SHARE TRANSACTIONS: Increase from shares issued under the Dividend Reinvestment and Cash Purchase Plan ..................................................... 820,339 ------------ NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING FROM FUND SHARE TRANSACTIONS ........................................... 820,339 ------------ NET DECREASE IN NET ASSETS AVAILABLE TO COMMON STOCK FOR THE PERIOD ..... $(31,980,432) ============ NET ASSETS AVAILABLE TO COMMON STOCK: Beginning of period .................................................. $119,086,433 Net decrease in net assets during the period ......................... (31,980,432) ------------ End of period ........................................................ $ 87,106,001 ============
- ---------- * Auction Preferred Stock. (1) These tables summarize the nine months ended August 31, 2008 and should be read in conjunction with the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30, 2007. (2) May include income earned, but not paid out, in prior fiscal year. 9 Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated FINANCIAL HIGHLIGHTS(1) FOR THE PERIOD FROM DECEMBER 1, 2007 THROUGH AUGUST 31, 2008 (UNAUDITED) FOR A COMMON STOCK SHARE OUTSTANDING THROUGHOUT THE PERIOD. PER SHARE OPERATING PERFORMANCE: Net asset value, beginning of period ................................................ $ 10.14 ----------- INVESTMENT OPERATIONS: Net investment income ............................................................... 0.77 Net realized and unrealized gain/(loss) on investments .............................. (2.68) DISTRIBUTIONS TO APS* SHAREHOLDERS: From net investment income .......................................................... (0.26) ----------- Total from investment operations .................................................... (2.17) ----------- DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS: From net investment income .......................................................... (0.61) ----------- Total distributions to Common Stock Shareholders .................................... (0.61) ----------- Net asset value, end of period ...................................................... $ 7.36 =========== Market value, end of period ......................................................... $ 7.25 =========== Common Stock shares outstanding, end of period ...................................... 11,833,198 =========== RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS: Net investment income+ .............................................................. 7.68%** Operating expenses .................................................................. 2.03%** SUPPLEMENTAL DATA:++ Portfolio turnover rate ............................................................. 52%*** Total net assets available to Common and Preferred Stock, end of period (in 000's) .. $ 157,106 Ratio of operating expenses to total average net assets available to Common and Preferred Stock .................................................................. 1.21%**
(1) These tables summarize the nine months ended August 31, 2008 and should be read in conjunction with the Fund's audited financial statements, including footnotes, in its Annual Report dated November 30, 2007. * Auction Preferred Stock. ** Annualized. *** Not Annualized. + The net investment income ratios reflect income net of operating expenses and payments to APS Shareholders. ++ Information presented under heading Supplemental Data includes APS. 10 Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated FINANCIAL HIGHLIGHTS (CONTINUED) PER SHARE OF COMMON STOCK (UNAUDITED)
TOTAL DIVIDEND DIVIDENDS NET ASSET NYSE REINVESTMENT PAID VALUE CLOSING PRICE PRICE(1) --------- --------- ------------- ------------ December 31, 2007 ... $0.0680 $ 9.64 $ 9.46 $ 9.64 January 31, 2008 .... 0.0680 10.23 10.25 10.23 February 29, 2008 ... 0.0680 9.94 10.06 9.94 March 31, 2008 ...... 0.0680 8.65 9.09 8.65 April 30, 2008 ...... 0.0680 8.93 9.47 9.00 May 31, 2008 ........ 0.0680 8.80 9.90 9.41 June 30, 2008 ....... 0.0680 8.10 9.30 8.83 July 31, 2008 ....... 0.0680 7.39 7.77 7.39 August 31, 2008 ..... 0.0680 7.36 7.25 7.35
- ---------- (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 reinvestment 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. 11 Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. AGGREGATE INFORMATION FOR FEDERAL INCOME TAX PURPOSES At August 31, 2008 the aggregate cost of securities for federal income tax purposes was $198,176,947, the aggregate gross unrealized appreciation for all securities in which there is an excess of value over tax cost was $3,570,966 and the aggregate gross unrealized depreciation for all securities in which there is an excess of tax cost over value was $44,689,844. 2. ADDITIONAL ACCOUNTING STANDARDS STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 157 "FAIR VALUE MEASUREMENTS" ("SFAS 157") In September 2006, the Financial Accounting Standards Board issued SFAS 157 effective for fiscal years beginning after November 15, 2007. This standard clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements. The Fund has adopted SFAS 157 as of December 1, 2007. The three levels of the fair value hierarchy under SFAS 157 are described below: - Level 1 - quoted prices in active markets for identical securities - Level 2 - other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.) - Level 3 - significant unobservable inputs (including the Fund's own assumptions in determining the fair value of investments) The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. A summary of the inputs used to value the Fund's net assets as of August 31, 2008 is as follows:
OTHER FINANCIAL INSTRUMENTS INVESTMENTS (UNREALIZED IN SECURITIES APPRECIATION/ VALUATION INPUTS (MARKET VALUE) DEPRECIATION)* - ---------------- -------------- --------------- Level 1 - Quoted Prices - Investments .......... $ 39,428,049 $-- Level 2 - Other Significant Observable Inputs .. 114,604,688 -- Level 3 - Significant Unobservable Inputs ...... -- -- ------------ --- TOTAL .......................................... $154,032,737 $--
* Other financial instruments are derivative instruments not reflected in the Schedule of Investments, such as futures, forwards and swaps which are valued at the unrealized appreciation/depreciation on the investment. As of August 31, 2008 the Fund does not have any other financial instruments. 12 Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 3. SECTION 19 NOTICES Section 19 of the Investment Company Act of 1940 requires registered investment companies to include a notice with the payment of a dividend if a portion of that dividend may come from sources other than undistributed net income (other sources could include realized gains from the sale of securities and non-taxable return of capital). Copies of the Section 19 notices for the Fund are available on the website at www.preferredincome.com. The amounts and sources of distributions reported below are only estimates and are not being provided for tax reporting purposes. Form 1099-DIV will be sent to shareholders in January 2009 reporting the amount and tax characterization of distributions for the 2008 calendar year.
SOURCE OF DISTRIBUTIONS AS OF 08/31/08 ------------------------------------------------ NET NET RETURN TOTAL PER INVESTMENT REALIZED OF COMMON INCOME CAPITAL GAINS CAPITAL SHARE ---------- ------------- ------- --------- Calendar 2008 Distributions ........ $0.5256 $0.00 $0.0184 $0.544 Percentage of Total Distributions .. 96.6% 0.0% 3.4% --
4. SUBSEQUENT EVENTS On September 7, 2008, Fannie Mae was placed into conservatorship. The value of preferred stock issued by this entity, which was held by the Fund, has been adversely impacted and is not reflected in this report. From August 31, 2008 to September 25, 2008, when the Fund sold its remaining position, the decrease in value totaled $425,700. On September 15, 2008, Lehman Brothers Holdings Inc. filed for bankruptcy. On September 26, 2008, Washington Mutual Inc. filed for bankruptcy. As a result, the Fund may not be able to recover the principal invested in securities issued by these entities, and also does not expect to receive income payments on these securities going forward. The value of securities issued by these entities, which were held by the Fund, has been adversely impacted and may decline further. The decline since August 31, 2008 is not reflected in this report. Subsequent to the reporting period, the market values of certain investments of the Fund have declined significantly and may decline further as a result of the ongoing financial crisis. The market value of the Fund's investments is reflected in the weekly net asset values reported by the Fund. The Funds are subject to several different asset coverage requirements that arise from the use of leverage by the Fund. The decline in asset values has resulted in the Fund not meeting these asset coverage requirements at various points in time since the end of the fiscal quarter. According to these requirements, the Fund may not declare, set aside, or pay a common stock dividend unless the asset coverage requirements are met. The Fund has delayed the payment of the September common stock dividend as a result. To meet the requirements and pay the delayed dividend and future dividends, the Fund has been selling assets to raise cash, and has applied much of the proceeds to the reduction of 13 Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) leverage or invested in higher quality short-term securities in anticipation of future reductions in leverage. On October 1, 2008, the Fund announced the redemption of $10 million of auction preferred stock that was redeemed on October 14, 2008. The Fund may be adversely impacted by the reduction in leverage. Updated information on the status of these requirements may be found on the Fund website at www.preferredincome.com. 14 [This page intentionally left blank] (FLAHERTY & CRUMRINE LOGO) PREFERRED INCOME OPPORTUNITY FUND Quarterly Report August 31, 2008 www.preferredincome.com DIRECTORS Donald F. Crumrine, CFA Chairman of the Board David Gale Morgan Gust Karen H. Hogan Robert F. Wulf, CFA OFFICERS Donald F. Crumrine, CFA Chief Executive Officer Robert M. Ettinger, CFA President R. Eric Chadwick, CFA Chief Financial Officer, Vice President and Treasurer Chad C. Conwell Chief Compliance Officer, Vice President and Secretary Bradford S. Stone Vice President and Assistant Treasurer Laurie C. Lodolo Assistant Compliance Officer, Assistant Treasurer and Assistant Secretary INVESTMENT ADVISER Flaherty & Crumrine Incorporated e-mail: flaherty@pfdincome.com QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY & CRUMRINE 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 -- PNC Global Investment Servicing (U.S.) 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. ITEM 2. CONTROLS AND PROCEDURES. (a) The registrant's principal executive and principal financial officers, or persons performing similar functions, have concluded that the registrant's disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940, as amended (the "1940 Act") (17 CFR 270.30a-3(c))) are effective, as of a date within 90 days of the filing date of the report that includes the disclosure required by this paragraph, based on their evaluation of these controls and procedures required by Rule 30a-3(b) under the 1940 Act (17 CFR 270.30a-3(b)) and Rules 13a-15(b) or 15d-15(b) under the Securities Exchange Act of 1934, as amended (17 CFR 240.13a-15(b) or 240.15d-15(b)). (b) There were no changes in the registrant's internal control over financial reporting (as defined in Rule 30a-3(d) under the 1940 Act (17 CFR 270.30a-3(d)) that occurred during the registrant's last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the registrant's internal control over financial reporting. ITEM 3. EXHIBITS. Certifications pursuant to Rule 30a-2(a) under the 1940 Act and Section 302 of the Sarbanes-Oxley Act of 2002 are attached hereto. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. (Registrant) FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND INCORPORATED -------------------------------------------------------------------- By (Signature and Title)* /S/ DONALD F. CRUMRINE ------------------------------------------------------- Donald F. Crumrine, Director, Chairman of the Board and Chief Executive Officer (principal executive officer) Date October 27, 2008 ---------------------------------------------------------------------------- Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By (Signature and Title)* /S/ DONALD F. CRUMRINE ------------------------------------------------------- Donald F. Crumrine, Director, Chairman of the Board and Chief Executive Officer (principal executive officer) Date October 27, 2008 ---------------------------------------------------------------------------- By (Signature and Title)* /S/ R. ERIC CHADWICK ------------------------------------------------------- R. Eric Chadwick, Chief Financial Officer, Treasurer and Vice President (principal financial officer) Date October 27, 2008 ---------------------------------------------------------------------------- * Print the name and title of each signing officer under his or her signature. EX-99.CERT 2 cert302a.txt CERT 30-2A CERTIFICATION PURSUANT TO RULE 30A-2(A) UNDER THE 1940 ACT AND SECTION 302 OF THE SARBANES-OXLEY ACT I, Donald F. Crumrine, certify that: 1. I have reviewed this report on Form N-Q of Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the schedules of investments included in this report fairly present in all material respects the investments of the registrant as of the end of the fiscal quarter for which the report is filed; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report, based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 27, 2008 /S/ DONALD F. CRUMRINE ---------------------- ------------------------------------------ Donald F. Crumrine, Director, Chairman of the Board and Chief Executive Officer (principal executive officer) CERTIFICATION PURSUANT TO RULE 30A-2(A) UNDER THE 1940 ACT AND SECTION 302 OF THE SARBANES-OXLEY ACT I, R. Eric Chadwick, certify that: 1. I have reviewed this report on Form N-Q of Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the schedules of investments included in this report fairly present in all material respects the investments of the registrant as of the end of the fiscal quarter for which the report is filed; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) and internal control over financial reporting (as defined in Rule 30a-3(d) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report, based on such evaluation; and (d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: October 27, 2008 /S/ R. ERIC CHADWICK ---------------------- ------------------------------------------ R. Eric Chadwick, Chief Financial Officer, Treasurer and Vice President (principal financial officer) -----END PRIVACY-ENHANCED MESSAGE-----