FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND
Dear Shareholder:
The Flaherty & Crumrine Preferred Income Opportunity Fund ("PFO")
delivered very respectable results during the most recently concluded fiscal
quarter. For the three month period ending February 28, 2005, the Fund produced
a total return on net asset value ("NAV") of 6.1%(1). All segments of the
investment portfolio performed well during the period; however, the Adjustable
Rate Preferred securities in the Fund (approximately 8% of the portfolio at the
beginning of the quarter) were exceptionally strong. The Fund's hedges were a
modest drag on investment results, as long-term interest rates declined during
the period.
In recent letters, we have indicated that the Fund is susceptible to the
same factors that have forced many other income-oriented funds to reduce their
dividend distributions. In April, the Fund's monthly dividend was set at $0.0705
per share, a 6.6% reduction from the prior month.
As is the case with other leveraged funds, rising short-term interest
rates have increased the amount the Fund must pay on its Money Market Cumulative
Preferred(TM) Stock ("MMP(R)"). Typically, rising short-term interest rates are
accompanied by rising long-term rates, which should increase the value of the
Fund's hedges. The gains on the hedges can then be invested in additional
securities, which in turn increase the Fund's income, and, on balance, help keep
the Fund's dividend relatively stable.
U.S. TREASURY YIELD CURVES
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Maturity 4/30/04 2/28/05
0.25 0.97 2.74
0.50 1.14 2.97
2.00 2.31 3.58
3.00 2.75 3.75
5.00 3.61 3.99
10.00 4.50 4.36
30.00 5.28 4.71
As the above chart shows, current market conditions are anything but
typical--since the Federal Reserve signaled its intent to raise short-term
interest rates last April, short-term interest rates have increased by
approximately 175 basis points, while long-term interest rates have FALLEN by
over 50 basis points! As a result, the Fund's MMP(R) expense is significantly
higher, but the hedges have not enabled us to produce more income. While we do
not expect these conditions to persist for long periods, at this time it is
necessary to adjust the monthly distribution to a more sustainable amount.
Over the longer term, a "flatter" yield curve (as measured by the
difference in short- and long-term interest rates) is not a bad thing for the
Fund. Obviously, the cost of the Fund's leverage will go up, but at
----------
(1) Based on monthly data provided by Lipper Inc. Distributions are
assumed to be reinvested at NAV in accordance with Lipper's
practice.
the same time, the cost of the Fund's hedging strategy should go down. This
effect can be significant since the leverage comprises roughly 32.5% of the
Fund's assets, while the ENTIRE portfolio is hedged. The impact of the higher
leverage cost occurs almost immediately, while the benefits of lower hedging
costs take a bit longer to impact the Fund's income. The mathematics of all this
can be a bit daunting, but over the long run, these two effects have tended to
offset each other.
As a rule, we don't comment on the market price of the Fund's common
shares; however, recent market activity certainly does warrant some
observations. Over the long run, the market price SHOULD track the net asset
value. From time to time we expect to see some deviation due to factors or
circumstances unique to the Fund. For example, most investors cannot replicate
PFO's investment portfolio, hedging strategy, or leverage, and therefore may be
willing to pay a premium to the NAV.
The chart below plots the recent market price and net asset value of PFO.
For most of this period, the market price traded at a premium to the NAV. We
attributed this in part to the Fund's long history and successful track record,
plus an attractive dividend rate which may be taxed at favorable rates for
certain investors. During late February of this year, shares were trading around
$13 3/4; as of this writing, they are trading around $12 1/2. During the same
period, the net asset value declined less than $0.10!
FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND
MARKET PRICE VS. NET ASSET VALUE
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND
2/6/04 14.75 12.91
2/13/04 14.78 12.96
2/20/04 14.95 12.89
2/27/04 14.57 13.01
3/5/04 14.67 13.04
3/12/04 14.89 13.11
3/19/04 15.1 13.11
3/26/04 15.05 12.94
4/2/04 14.3 12.85
4/9/04 13.59 12.85
4/16/04 13.84 12.8
4/23/04 12.89 12.67
4/30/04 12.97 12.68
5/7/04 12.55 12.48
5/14/04 12.99 12.33
5/21/04 13.2 12.22
5/28/04 13.25 12.26
6/4/04 13.05 12.24
6/11/04 12.85 12.19
6/18/04 12.8 12.23
6/25/04 12.74 12.13
7/2/04 12.77 12.16
7/9/04 12.79 12.14
7/16/04 12.93 12.23
7/23/04 12.82 12.09
7/30/04 12.68 12.11
8/6/04 13.3 12.22
8/13/04 13.26 12.28
8/20/04 13.38 12.21
8/27/04 13.7 12.23
9/3/04 13.706 12.2
9/10/04 13.89 12.33
9/17/04 13.97 12.46
9/24/04 13.63 12.57
10/1/04 13.62 12.42
10/8/04 13.54 12.47
10/15/04 13.74 12.54
10/22/04 13.68 12.5
10/29/04 13.56 12.48
11/5/04 13.82 12.41
11/12/04 13.79 12.41
11/19/04 13.79 12.39
11/26/04 13.72 12.4
12/3/04 13.16 12.45
12/10/04 13.15 12.59
12/17/04 13.4 12.59
12/24/04 13.65 12.46
12/31/04 13.5 12.58
1/7/05 13.59 12.54
1/14/05 13.62 12.72
1/21/05 13.66 12.76
1/28/05 13.62 12.75
2/4/05 13.73 12.91
2/11/05 13.8 12.91
2/18/05 13.9 12.78
2/25/05 13.75 12.79
3/4/05 13.44 12.84
3/11/05 12.69 12.69
3/18/05 12.36 12.68
3/25/05 11.95 12.53
4/1/05 12.36 12.7
Unlike open-end mutual funds, investors in closed-end funds should have a
longer investment horizon in order to weather swings in the relationship between
market price and NAV. In that same vein, investors with a long-term investment
horizon should stay focused on the NAV performance and dividend history of the
Fund. We plan to stay the course and hopefully will continue to meet and exceed
the objectives of the Fund.
As was evident in its recent Proxy Statement, 2005 represents a year of
transition in the individuals representing the Fund's shareholders. Martin
Brody, who has served as a Director since the inception of the Fund, will retire
at the upcoming Shareholder's Meeting. Martin brought a wealth of wisdom and
experience to the board, and will be missed. In addition, to comply with recent
SEC rule amendments requiring that independent directors constitute 75% of the
Board, Robert Ettinger did not stand for reelection as a Director. However, Bob
will continue to be very involved with the management of the Fund, continuing to
serve as President of the Fund and President of Flaherty & Crumrine
Incorporated, the Fund's Investment Adviser. Karen Hogan has been nominated by
the Board to replace Bob. Karen brings an extensive financial and investment
banking background to the Board; her knowledge will certainly benefit
Shareholders.
Please take advantage of the Fund's website, www.preferredincome.com. It
contains a wide range of useful and up-to-date information about the Fund. We
have also addressed in greater detail many of the topics discussed in this
letter.
Sincerely,
/S/ DONALD F. CRUMRINE /S/ ROBERT M. ETTINGER
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
April 5, 2005
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OVERVIEW
FEBRUARY 28, 2005 (UNAUDITED)
------------------------------------------------------------------
FUND STATISTICS ON 2/28/05
-----------------------------------------------
Net Asset Value $ 12.74
Market Price $ 13.85
Premium 8.71%
Yield on Market Price 6.54%
Common Shares
Outstanding 11,621,839
INDUSTRY CATEGORIES % OF PORTFOLIO
--------------------------------------------------------------------------------
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
Utilities 43%
Banks 21%
Financial Services 16%
Insurance 9%
Oil and Gas 6%
Other 4%
REITs 1%
MOODY'S RATINGS % OF PORTFOLIO
--------------------------------------------------------------------------------
Aaa 0.6%
Aa 8.5%
A 20.4%
Baa 40.7%
Ba 16.9%
Not Rated 7.6%
--------------------------------------------------------------------------------
Below Investment Grade* 16.0%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P.
TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO
--------------------------------------------------------------------------------
Interstate Power 5.3%
Alabama Power 4.6%
Lehman Brothers 4.5%
Citigroup 3.8%
Xcel Energy 3.5%
The Bear Stearns Cos. 3.4%
Duke Energy 3.2%
Fannie Mae 3.1%
Cobank 3.1%
North Fork Bancorporation 3.0%
% OF PORTFOLIO**
--------------------------------------------------------------------------------------------------------------
Holdings Generating Qualified Dividend Income (QDI) for Individuals 78%
Holdings Generating Income Eligible for the Corporate Dividend Received Deduction (DRD) 77%
--------------------------------------------------------------------------------------------------------------
** 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.
4
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS
FEBRUARY 28, 2005 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ---------
PREFERRED SECURITIES -- 92.6%
BANKING -- 20.5%
------------------------------------------------------------------------------------------------------------------------
ABN AMRO North America, Inc.:
1,165 6.46% Pfd., 144A**** ......................................................... $ 1,203,870*
4,200 6.59% Pfd., 144A**** ......................................................... 4,375,056*
$ 150,000 BT Capital Trust B, 7.90% 01/15/27, Capital Security ........................... 163,387(1)
$ 660,000 BT Preferred Capital Trust II, 7.875% 02/25/27 Capital Security ................ 721,179(1)
$ 250,000 Chase Capital I, 7.67% 12/01/26 Capital Security ............................... 271,486
Citigroup, Inc.:
72,435 5.864% Pfd., Series M ........................................................ 3,732,576*
7,700 6.213% Pfd., Series G ........................................................ 402,363*
46,000 6.231% Pfd., Series H ........................................................ 2,422,360*
31,850 6.365% Pfd., Series F ........................................................ 1,690,916*
Cobank, ACB:
45,000 7.00% Pfd., 144A**** ......................................................... 2,500,875*
75,000 Adj. Rate Pfd., 144A**** ..................................................... 4,227,750*
$ 500,000 Comerica (Imperial) Capital Trust I, 9.98% 12/31/26 Capital Security, Series B . 584,522
$ 2,250,000 First Hawaiian Capital I, 8.343% 07/01/27 Capital Security, Series B ........... 2,498,344(1)
$ 719,000 First Union Institutional Capital I, 8.04% 12/01/26 Capital Security ........... 788,973
$ 1,885,000 First Union Institutional Capital II, 7.85% 01/01/27 Capital Security .......... 2,055,998
$ 4,349,000 GreenPoint Capital Trust I, 9.10% 06/01/27 Capital Security .................... 4,915,827
$ 2,500,000 HBOS Capital Funding LP, 6.85% Pfd. ............................................ 2,638,612(1)
6,900 HSBC USA, Inc., $2.8575 Pfd. ................................................... 352,970*
36,500 J.P. Morgan Chase & Co., 6.625% Pfd., Series H ................................. 1,882,305*
$ 1,350,000 Keycorp Institutional Capital B, 8.25% 12/15/26 Capital Security ............... 1,485,500
$ 1,500,000 North Fork Capital Trust I, 8.70% 12/15/26 Capital Security .................... 1,668,945
$ 1,700,000 RBS Capital Trust B, 6.80% Pfd. ................................................ 1,784,176**(1)
10 Roslyn Real Estate, 8.95% Pfd., Pvt., Series C, 144A**** ....................... 1,079,875
$ 1,200,000 Wachovia Capital Trust V, 7.965% 06/01/27 Capital Security, 144A**** ........... 1,325,124
-------------------------------------------------------------------------------------------------------------------
44,772,989
----------------
FINANCIAL SERVICES -- 15.5%
------------------------------------------------------------------------------------------------------------------------
The Bear Stearns Companies, Inc.:
63,750 5.49% Pfd., Series G ......................................................... 3,203,756*
78,823 5.72% Pfd., Series F ......................................................... 4,112,590*
120,000 Fannie Mae, Adj. Rate Pfd. ..................................................... 6,756,000*
Freddie Mac:
6,975 5.00% Pfd., Series F ......................................................... 308,121*
25,500 5.10% Pfd., Series H ......................................................... 1,149,030*
42,650 5.30% Pfd. ................................................................... 1,997,086*
5
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2005 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ---------
PREFERRED SECURITIES -- (CONTINUED)
FINANCIAL SERVICES -- (CONTINUED)
----------------------------------------------------------------------------------------------------------------------
Lehman Brothers Holdings, Inc.:
10,150 5.67% Pfd., Series D ......................................................... $ 519,274*
159,505 5.94% Pfd., Series C ......................................................... 8,184,202*
44,000 6.50% Pfd., Series F ......................................................... 1,177,220*
110,900 SLM Corporation, 6.97% Pfd., Series A .......................................... 6,293,575*
-------------------------------------------------------------------------------------------------------------------
33,700,854
----------------
INSURANCE -- 9.0%
----------------------------------------------------------------------------------------------------------------------
$ 2,000,000 AON Capital Trust A, 8.205% 01/01/27 Capital Security .......................... 2,290,780
15,850 Everest Re Capital Trust II, 6.20% Pfd. Series B ............................... 389,117(1)
$ 4,395,000 MMI Capital Trust I, 7.625% 12/15/27 Capital Security, Series B ................ 4,961,779
18 Premium Assets, Series A, Zurich RegCaPS Variable Inverse Pfd., Pvt. ........... 2,049,027*
$ 5,734,000 Provident Financing Trust I, 7.405% 03/15/38 Capital Security .................. 5,530,586
Zurich RegCaPS Funding Trust:
1,750 6.01% Pfd., 144A**** ......................................................... 1,774,334*
2,600 6.58% Pfd., 144A**** ......................................................... 2,746,549*
-------------------------------------------------------------------------------------------------------------------
19,742,172
----------------
UTILITIES -- 39.8%
----------------------------------------------------------------------------------------------------------------------
Alabama Power Company:
4,980 4.60% Pfd. ................................................................... 471,631*
6,485 4.72% Pfd. ................................................................... 630,180*
868 4.92% Pfd. ................................................................... 85,337*
120,900 5.20% Pfd. ................................................................... 3,030,963*
225,000 5.30% Pfd. ................................................................... 5,748,750*
6,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 ...................... 626,430*
1,628 Central Hudson Gas & Electric Corporation, 4.35% Pfd., Series D, Pvt. .......... 138,258*
10,000 Central Illinois Light Company, 4.64% Pfd. ..................................... 938,050*
8,160 Central Illinois Public Service Corporation, 4.90% Pfd. ........................ 784,625*
3,798 Central Maine Power Company, 4.75% Pfd. ........................................ 345,656*
16,679 Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd. Pvt. ....... 1,734,533*
Connecticut Light & Power Company:
2,050 4.50% Pfd., Series 1956 ...................................................... 84,901*
2,900 $2.20 Pfd., Series 1949 ...................................................... 117,435*
9,652 $3.24 Pfd. ................................................................... 506,585*
2,000 Consolidated Edison Company of New York, 4.65% Pfd., Series C .................. 187,030*
7,500 Dayton Power and Light Company, 3.90% Pfd., Series C ........................... 552,262*
6
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2005 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ---------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
Duke Energy Corporation:
8,004 4.50% Pfd., Series C, Pvt. ................................................... $ 703,872*
34,943 7.85% Pfd., Series S ......................................................... 3,622,017*
Duquesne Light Company:
15,030 3.75% Pfd. ................................................................... 508,916*
25,775 6.50% Pfd. ................................................................... 1,407,444*
5,000 Energy East Capital Trust I, 8.25% Pfd. ........................................ 131,975
Entergy Arkansas, Inc.:
2,840 4.56% Pfd. ................................................................... 237,907*
3,050 4.56% Pfd., Series 1965 ...................................................... 255,498*
1,050 6.08% Pfd. ................................................................... 109,258*
13,500 7.40% Pfd. ................................................................... 1,404,607*
5,880 7.80% Pfd. ................................................................... 615,019*
2,265 7.88% Pfd. ................................................................... 236,387*
23,914 $1.96 Pfd. ................................................................... 598,448*
2,441 Entergy Gulf States, Inc., 7.56% Pfd. .......................................... 248,543*
Entergy Louisiana, Inc.:
299 5.16% Pfd. ................................................................... 26,795*
705 6.44% Pfd. ................................................................... 69,901*
4,174 7.36% Pfd. ................................................................... 434,388*
175,000 8.00% Pfd., Series 92 ........................................................ 4,414,375*
Entergy Mississippi, Inc.:
3,791 4.36% Pfd. ................................................................... 287,073*
5,000 4.92% Pfd. ................................................................... 427,250*
8,500 7.44% Pfd. ................................................................... 880,855*
10,900 Enterprise Capital Trust I, 7.44% Pfd., Series A ............................... 277,132
Florida Power Company:
10,000 4.58% Pfd. ................................................................... 905,400*
2,000 4.75% Pfd. ................................................................... 186,860*
Great Plains Energy, Inc.:
1,625 4.20% Pfd. ................................................................... 123,313*
2,000 4.35% Pfd. ................................................................... 157,190*
Hawaiian Electric Company, Inc.:
1,411 5.00% Pfd., Series D ......................................................... 27,063*
6,688 5.00% Pfd., Series E ......................................................... 128,276*
$ 3,750,000 Houston Light & Power, Capital Trust II, 8.257% 02/01/37 Capital Security ...... 4,114,519
30,500 Indianapolis Power & Light Company, 5.65% Pfd. ................................. 2,904,057*
340,000 Interstate Power & Light Company, 8.375% Pfd., Series B ........................ 11,478,400*
2,588 New York State Electric & Gas, $4.50 Pfd., Series 1949 ......................... 222,115*
7
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2005 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ---------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
--------------------------------------------------------------------------------------------------------------------
12,265 Northern Indiana Public Service Company, Adj. Rate Pfd., Series A ............ $ 623,062*
Ohio Power Company:
3,018 4.20% Pfd. ................................................................. 251,324*
1,251 4.40% Pfd. ................................................................. 109,137*
Pacific Enterprises:
13,680 $4.36 Pfd. ................................................................. 1,191,049*
24,985 $4.50 Pfd. ................................................................. 2,245,152*
15,730 $4.75 Pfd., Series 53 ...................................................... 1,491,991*
PacifiCorp:
5,672 $4.56 Pfd. ................................................................. 509,374*
6,458 $4.72 Pfd. ................................................................. 600,303*
12,250 $7.48 Sinking Fund Pfd. .................................................... 1,311,485*
PECO Energy Company:
1,100 $4.30 Pfd., Series B ....................................................... 92,521*
5,000 $4.40 Pfd., Series C ....................................................... 406,850*
17,537 Portland General Electric, 7.75% Sinking Fund Pfd. ........................... 1,776,937*
14,020 Public Service Electric & Gas Company, 5.28% Pfd., Series E .................. 1,373,469*
San Diego Gas & Electric Company:
55,210 $1.70 Pfd .................................................................. 1,438,773*
30,000 $1.7625 Sinking Fund Pfd. .................................................. 774,150*
85,000 Savannah Electric & Gas Company, 6.00% Pfd. .................................. 2,209,150*
South Carolina Electric & Gas Company:
14,226 5.125% Purchase Fund Pfd., Pvt. ............................................ 732,070*
7,774 6.00% Purchase Fund Pfd., Pvt. ............................................. 396,241*
57,646 Southern California Edison, 4.08% Pfd. ....................................... 1,123,232*
60,000 Southern Union Company, 7.55% Pfd. ........................................... 1,658,100*
$ 750,000 TXU Electric Capital V, 8.175% 01/30/37 Capital Security ..................... 825,244
10,000 TXU US Holdings Company, $4.00 Pfd., Series TES .............................. 745,750*
5,600 Union Electric Company, 4.56% Pfd. ........................................... 518,112*
Virginia Electric & Power Company:
1,665 $4.04 Pfd. ................................................................. 137,213*
2,270 $4.20 Pfd. ................................................................. 194,482*
1,673 $4.80 Pfd. ................................................................. 163,812*
2,878 $6.98 Pfd. ................................................................. 296,765*
12,500 $7.05 Pfd. ................................................................. 1,289,500*
2,262 Washington Gas & Light Company, $4.25 Pfd. ................................... 199,373*
12,863 Wisconsin Power & Light, 6.20% Pfd. .......................................... 1,320,194*
8
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2005 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ---------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
----------------------------------------------------------------------------------------------------------------------
Xcel Energy, Inc.:
15,000 $4.08 Pfd., Series B ........................................................ $ 1,158,000*
20,040 $4.10 Pfd., Series C ........................................................ 1,554,703*
35,510 $4.11 Pfd., Series D ........................................................ 2,761,435*
17,750 $4.16 Pfd., Series E ........................................................ 1,397,191*
10,000 $4.56 Pfd., Series G ........................................................ 862,850*
-------------------------------------------------------------------------------------------------------------------
86,866,473
----------------
OIL AND GAS -- 5.0%
----------------------------------------------------------------------------------------------------------------------
17,200 Anadarko Petroleum Corporation, 5.46% Pfd. .................................... 1,764,720*
6,650 Apache Corporation, 5.68% Pfd., Series B ...................................... 693,927*
8,000 Devon Energy Corporation, 6.49% Pfd., Series A ................................ 847,360*
6,125 EOG Resources, Inc., 7.195% Pfd., Series B .................................... 6,536,355*
10,000 Lasmo America Limited, 8.15% Pfd., 144A**** ................................... 1,104,650*
-------------------------------------------------------------------------------------------------------------------
10,947,012
----------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 1.0%
----------------------------------------------------------------------------------------------------------------------
40,000 Realty Income Corporation, 7.375% Pfd., REIT, Series D ........................ 1,067,800
40,000 Regency Centers Corporation, 7.25% Pfd., REIT ................................. 1,041,400
-------------------------------------------------------------------------------------------------------------------
2,109,200
----------------
MISCELLANEOUS INDUSTRIES -- 1.8%
----------------------------------------------------------------------------------------------------------------------
13,600 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B ..................... 1,269,220*
36,200 Farmland Industries, Inc., 8.00% Pfd., 144A**** ............................... 18,100*+
30,500 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ........................... 2,565,203*
26,000 Touch America Holdings, $6.875 Pfd. ........................................... --*+
-------------------------------------------------------------------------------------------------------------------
3,852,523
----------------
TOTAL PREFERRED SECURITIES
(Cost $182,871,835) ......................................................... 201,991,223
----------------
CORPORATE DEBT SECURITY -- 1.1%
OIL AND GAS -- 1.1%
----------------------------------------------------------------------------------------------------------------------
85,900 Nexen, Inc., 7.35% Subordinated Notes ......................................... 2,313,287(1)
-------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE DEBT SECURITY
(Cost $2,245,426) ........................................................... 2,313,287
----------------
9
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2005 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ---------
COMMON STOCKS AND CONVERTIBLE SECURITIES -- 4.4%
BANKING -- 0.4%
---------------------------------------------------------------------------------------------------------------------
50,000 New York Community Bancorp, Inc. ............................................. $ 913,750*
-------------------------------------------------------------------------------------------------------------------
913,750
----------------
INSURANCE -- 0.4%
---------------------------------------------------------------------------------------------------------------------
25,000 UnumProvident Corporation, 8.25% Mandatory Convertible, 05/16/06 ............. 857,875
-------------------------------------------------------------------------------------------------------------------
857,875
----------------
UTILITIES -- 3.6%
---------------------------------------------------------------------------------------------------------------------
97,500 Duke Energy Corporation ...................................................... 2,634,937*
64,496 FPL Group, Inc. .............................................................. 5,125,820*
-------------------------------------------------------------------------------------------------------------------
7,760,757
----------------
TOTAL COMMON STOCKS AND CONVERTIBLE SECURITIES
(Cost $8,373,345) .......................................................... 9,532,382
----------------
OPTION CONTRACTS -- 1.0%
1,275 June Put Options on June U.S. Treasury Bond Futures, Expiring 05/20/05 ....... 2,139,360+
-------------------------------------------------------------------------------------------------------------------
TOTAL OPTION CONTRACTS
(Cost $1,580,670) .......................................................... 2,139,360
----------------
MONEY MARKET FUND -- 0.6%
1,342,237 BlackRock Provident Institutional, TempFund .................................. 1,342,237
-------------------------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost $1,342,237) .......................................................... 1,342,237
----------------
10
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
FEBRUARY 28, 2005 (UNAUDITED)
------------------------------------------------------------------
VALUE
---------
TOTAL INVESTMENTS (Cost $196,413,513***) ...................................... 99.7% $ 217,318,489
OTHER ASSETS AND LIABILITIES (NET) ............................................ 0.3% 761,459
------- ----------------
TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK ...................... 100.0%++ $ 218,079,948
------- ----------------
MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (MMP(R)) REDEMPTION VALUE .................... (70,000,000)
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ............................................... $ 148,079,948
================
----------
* 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 by resold in transactions exempt from
registration to qualified institutional buyers.
(1) Foreign Issuer.
+ 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:
REIT -- Real Estate Investment Trust
PFD. -- Preferred Securities
PVT. -- Private Placement Securities
Capital Securities are treated as debt instruments for financial
statement purposes and the amounts shown in the Shares/$ Par column are
dollar amounts of par value.
11
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
FOR THE PERIOD FROM DECEMBER 1, 2004 THROUGH FEBRUARY 28, 2005 (UNAUDITED)
--------------------------------------------------------------------------
VALUE
--------
OPERATIONS:
Net investment income ............................................................... $ 2,807,377
Net realized gain on investments sold during the period ............................. 1,780,351
Change in net unrealized appreciation of investments held during the period ......... 4,448,236
Distributions to Money Market Cumulative Preferred(TM) Stock
Shareholders from net investment income, including changes in
accumulated undeclared distributions ............................................ (402,964)
-------------
NET INCREASE IN NET ASSETS FROM OPERATIONS ...................................... 8,633,000
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders(2) ........... (3,151,541)
-------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ................................ (3,151,541)
FUND SHARE TRANSACTIONS:
Increase from Common Stock Transactions ............................................. 453,437
-------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING
FROM FUND SHARE TRANSACTIONS ................................................ 453,437
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK -------------
FOR THE PERIOD ...................................................................... $ 5,934,896
=============
------------------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period ................................................................. $ 142,145,052
Net increase during the period ...................................................... 5,934,896
-------------
End of period ....................................................................... $ 148,079,948
=============
----------
(1) These tables summarize the three months ended February 28, 2005 and should
be read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2004.
(2) Includes income earned, but not paid out, in prior fiscal year.
12
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
FINANCIAL HIGHLIGHTS(1)
FOR THE PERIOD FROM DECEMBER 1, 2004 THROUGH FEBRUARY 28, 2005 (UNAUDITED)
FOR A COMMON SHARE OUTSTANDING THROUGHOUT THE PERIOD.
-----------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................................................................... $ 12.27
--------------
INVESTMENT OPERATIONS:
Net investment income .................................................................................. 0.24
Net realized and unrealized gain on investments ........................................................ 0.53
DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS:
From net investment income ............................................................................. (0.03)
From net realized capital gains ........................................................................ --
--------------
Total from investment operations ....................................................................... 0.74
--------------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income ............................................................................. (0.27)
From net realized capital gains ........................................................................ --
--------------
Total distributions to Common Shareholders ............................................................. (0.27)
--------------
Net asset value, end of period ......................................................................... $ 12.74
==============
Market value, end of period ............................................................................ $ 13.85
==============
Common shares outstanding, end of period ............................................................... 11,621,839
==============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income + ................................................................................ 6.53%**
Operating expenses ..................................................................................... 1.59%**
----------
SUPPLEMENTAL DATA:++
Portfolio turnover rate ................................................................................ 8%***
Total net assets available to Common and Preferred Stock, end of period (in 000's) ..................... $ 218,080
Ratio of operating expenses to total average net assets available to
Common and Preferred Stock ......................................................................... 1.08%**
(1) These tables summarize the three months ended February 28, 2005 and should
be read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2004.
* Money Market Cumulative Preferred(TM) 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)*.
13
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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, 2004 - EXTRA ....................... $0.0450 $12.58 $13.50 $12.83
December 31, 2004 ............................... 0.0755 12.58 13.50 12.83
January 31, 2005 ................................ 0.0755 12.78 13.59 12.91
February 28, 2005 ............................... 0.0755 12.74 13.85 13.16
----------
(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.
14
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LIGHTHOUSE LOGO
FLAHERTY & CRUMRINE
===================
PREFERRED INCOME
OPPORTUNITY FUND
QUARTERLY
REPORT
FEBRUARY 28, 2005
web site: www.preferredincome.com
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
R. Eric Chadwick, CFA
Chief Financial Officer,
Vice President, Treasurer
and Secretary
Peter C. Stimes, CFA
Chief Compliance
Officer and Vice President
Bradford S. Stone
Vice President
Laurie 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?
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.