UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
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 Inc.
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: NOVEMBER 30, 2005
-------------------
Form N-CSR is to be used by management investment companies to file reports with
the Commission not later than 10 days after the transmission to stockholders of
any report that is required to be transmitted to stockholders under Rule 30e-1
under the Investment Company Act of 1940 (17 CFR 270.30e-1). The Commission may
use the information provided on Form N-CSR in its regulatory, disclosure review,
inspection, and policymaking roles.
A registrant is required to disclose the information specified by Form N-CSR,
and the Commission will make this information public. A registrant is not
required to respond to the collection of information contained in Form N-CSR
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 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. REPORTS TO STOCKHOLDERS.
The Report to Shareholders is attached herewith.
FLAHERTY & CRUMRINE PREFERRED INCOME
OPPORTUNITY FUND
To the Shareholders of the Flaherty & Crumrine Preferred Income Opportunity Fund
("PFO"):
During the fourth fiscal quarter of 2005 which ended on November 30, 2005,
the Fund's total return on net asset value was -2.4%(1). While this result is
disappointing, the return for all of fiscal 2005 was a much more respectable
+6.4%(1). Most importantly, as the table below shows, the Fund has delivered
consistently strong returns over the long run.
--------------------------------------------------------------------------------
TOTAL RETURN PER YEAR ON NET ASSET VALUE(1)
FOR PERIODS ENDED NOVEMBER 30, 2005
ONE FIVE TEN LIFE OF
YEAR YEARS YEARS FUND(2)
-------- -------- -------- --------
Flaherty & Crumrine Preferred Income
Opportunity Fund............................................ 6.4% 10.8% 8.9% 9.8%
Lipper Domestic Investment Grade Bond Funds(3) ................ 3.7% 7.1% 6.7% 7.0%
----------------
(1) Based on data published by Lipper Inc. in each calendar month during the
relevant periods. Distributions are assumed to be reinvested at NAV in
accordance with Lipper's practice, which differs from the procedures used
elsewhere in this report.
(2) Since inception on February 13, 1992.
(3) Includes all U.S. Government bond, mortgage bond and term trust and
investment grade bond funds in Lipper's closed-end fund database at each
point in time.
--------------------------------------------------------------------------------
Negative returns of the magnitude experienced during the past quarter have
been rare for PFO. Of the 55 quarters since the inception of the Fund, only six
have produced a return below that of this past quarter; in fact, only eleven
quarters had a negative return. Of course, past performance is not a guarantee
of future results.
As we began the last fiscal quarter, long term interest rates were hovering
near their all-time lows of 4 1/4%; by quarter's end, these same rates were just
below 4 3/4%. As a result, the total return (price change plus income) of the
30-year US Treasury bond for the quarter was -4.9%. During the period, the
Fund's interest rate hedging strategy performed as designed by making money when
long-term interest rates increased. These gains, however, did not entirely
offset the decline in value of the Fund's investment portfolio, and as a result,
the overall performance was still negative (please see the Question & Answer
section which follows for more on the performance of the Fund's hedges).
As we've discussed often in the past, setting the Fund's monthly dividend
amount entails careful analysis based partially on some crystal ball gazing. The
Board recently acted on management's recommendation to continue the current
monthly dividend amount of $0.0705 per share. In a period when most similar
funds have been forced to pare back distributions, this is a very satisfying
result. While PFO is not immune to the forces affecting other funds, it has
benefited from efforts to boost portfolio income through securities selection;
in addition, the Fund's use of tax-benefited preferred stock as leverage has
been more cost-effective than the taxable preferreds used by many other
closed-end income funds because it offers some investors certain tax advantages.
There have been some small but important changes in the Fund's investment
portfolio during recent months. As can be seen from the Portfolio Overview on
page 7, utilities comprise 38% of the portfolio. This figure was 44% as recently
as six months ago. The drop reflects the fact that several utilities have
redeemed preferred shares and these have not been replaced with new issues.
The Fund must normally have at least 25% of its assets invested in the
utility industry, so we are focusing on the shrinking universe of utility
preferreds. Historically, preferred stock has been a standard form of financing
for utility companies. In recent years, changes in the regulatory environment,
industry consolidation, limited capital expenditure, and the repeal of certain
federal laws, have all led to the reduction of the size of the utility preferred
universe. While these changes have been generally positive for the Fund's
investments, the long-term trend may present challenges in finding enough
suitable utility preferreds.
A number of insurance companies issued new preferred securities to
replenish capital after one of the worst hurricane seasons on record. While many
of these new issues didn't meet our credit standards, we identified several
attractive issues and made meaningful additions to the portfolio. We also added
positions in new preferred securities issues of several high quality companies
in the financial services industry. Among the recent additions are Goldman
Sachs, Merrill Lynch and HSBC, which joined our existing holdings of Lehman
Brothers.
Recently, an innovative twist on an old preferred structure has produced a
new type of preferred security. In classic Wall Street tradition, the bankers
can't agree on what to call them; for now, we'll use the first coined acronym
"ECAPS (SM)," which stands for "Enhanced Capital Advantage Preferred Security."
These new issues combine a variety of terms and covenants to create a security
that captures some important characteristics of both debt and equity. As a
result, the issues are considered "equity-like" by the rating agencies, yet the
interest paid on the issue is deductible by the issuer as interest expense for
tax purposes (both critical factors in a company's cost of capital). Please see
the Q&A section for more on ECAPS (SM) and their impact on the Fund.
Perhaps because so many income-oriented closed-end funds have cut their
distributions, the market prices of most of those funds have fallen relative to
their net asset values. On August 31, 2005, the market price of PFO was 6.6%
above the NAV, and by December 30th, it was 9.4% below the NAV. However, as of
this writing, the market price had increased to 3.3% above the NAV. We've often
said that in a perfect world the market price would closely track the NAV, but
this is rarely the case. Whatever the cause of this disparity, investors in
closed-end funds should always have a long-term investment horizon and stay
focused on the NAV performance.
We hope investors will 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.
Sincerely,
/S/DONALD F. CRUMRINE /S/ROBERT M. ETTINGER
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
January 20, 2006
2
QUESTIONS & ANSWERS
WHY HAS THE MARKET PRICE OF THE FUND'S SHARES BEEN FALLING?
Shareholders are understandably concerned about the recent decline in the
price of the Fund's shares. While our focus is primarily on managing the Fund,
we realize that an investor's actual return is comprised of the monthly dividend
payments plus changes in the market price of the Fund. During the fourth fiscal
quarter, the Fund's total return on MARKET VALUE was -13.1%. For all of fiscal
2005, the return was -8.4%. Over the life of the Fund, the return was +9.2%.
We've often said that in a perfect world the market price would closely
track the net asset value; however, as seen in the chart below, in the real
world the deviations can be large. In our experience, periods of large price
drops have displayed similar patterns. Usually some catalyst sets off a bit of
selling which in turn leads to a cycle of stop-loss triggers and a "sell now,
ask questions later" mood among investors. The triggers this time could
potentially be explained by rising short-term interest rates, year-end tax
selling, and competition from new closed-end fund offerings.
--------------------------------------------------------------------------------
FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND (PFO)
PREMIUM/DISCOUNT OF MARKET PRICE TO NAV THROUGH 12/31/05
[GRAPHIC OMITTED]
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS:
Date Prem/Disc
12/28/90
1/4/91
1/11/91
1/18/91
1/25/91
2/1/91
2/8/91
2/15/91
2/22/91
3/1/91
3/8/91
3/15/91
3/22/91
3/29/91
4/5/91
4/12/91
4/19/91
4/26/91
5/3/91
5/10/91
5/17/91
5/24/91
5/31/91
6/7/91
6/14/91
6/21/91
6/28/91
7/5/91
7/12/91
7/19/91
7/26/91
8/2/91
8/9/91
8/16/91
8/23/91
8/30/91
9/6/91
9/13/91
9/20/91
9/27/91
10/4/91
10/11/91
10/18/91
10/25/91
11/1/91
11/8/91
11/15/91
11/22/91
11/29/91
12/6/91
12/13/91
12/20/91
12/27/91
1/3/92
1/10/92
1/17/92
1/24/92
1/31/92
2/7/92
2/14/92
2/21/92 0.0726
2/28/92 0.0805
3/6/92 0.0874
3/13/92 0.098
3/20/92 0.0819
3/27/92 0.0556
4/3/92 0.0538
4/10/92 0.0705
4/17/92 0.0547
4/24/92 0.059
5/1/92 0.0546
5/8/92 0.0536
5/15/92 0.0306
5/22/92 0.0248
5/29/92 0.0307
6/5/92 0.0181
6/12/92 0.04
6/19/92 0.0357
6/26/92 0.0442
7/3/92 0.0475
7/10/92 0.0626
7/17/92 0.08
7/24/92 0.0592
7/31/92 0.0647
8/7/92 0.0613
8/14/92 0.0628
8/21/92 0.0514
8/28/92 0.0539
9/4/92 0.0409
9/11/92 0.0684
9/18/92 0.0572
9/25/92 0.0539
10/2/92 0.062
10/9/92 0.0675
10/16/92 0.049
10/23/92 0.0188
10/30/92 0.0474
11/6/92 0.018
11/13/92 0.0188
11/20/92 0.0408
11/27/92 0.0844
12/4/92 0.063
12/11/92 0.0515
12/18/92 0.0691
12/25/92 0.0638
1/1/93 0.0621
1/8/93 0.0679
1/15/93 0.0595
1/22/93 0.0434
1/29/93 0.0475
2/5/93 0.0483
2/12/93 0.0284
2/19/93 0.0202
2/26/93 0.031
3/5/93 0.0473
3/12/93 0.0651
3/19/93 0.0303
3/26/93 0.036
4/2/93 0.0514
4/9/93 0.0675
4/16/93 0.057
4/23/93 0.0853
4/30/93 0.0651
5/7/93 0.0513
5/14/93 0.061
5/21/93 0.057
5/28/93 0.0441
6/4/93 0.0497
6/11/93 0.0561
6/18/93 0.0497
6/25/93 0.0417
7/2/93 0.0472
7/9/93 0.0425
7/16/93 0.0362
7/23/93 0.0068
7/30/93 0.0306
8/6/93 0.0212
8/13/93 0.0181
8/20/93 0.0008
8/27/93 0.037
9/3/93 0.0331
9/10/93 0.0401
9/17/93 0.0338
9/24/93 0.0244
10/1/93 0.0214
10/8/93 0.0261
10/15/93 0.0263
10/22/93 0.0246
10/29/93 0.009
11/5/93 0
11/12/93 -0.0107
11/19/93 -0.0282
11/26/93 -0.0179
12/3/93 -0.0076
12/10/93 -0.0334
12/17/93 -0.0338
12/24/93 -0.0431
12/31/93 0.0249
1/7/94 -0.0036
1/14/94 0.0157
1/21/94 -0.023
1/28/94 -0.0377
2/4/94 -0.0323
2/11/94 -0.0361
2/18/94 -0.0863
2/25/94 -0.05
3/4/94 -0.0392
3/11/94 -0.0315
3/18/94 -0.0585
3/25/94 -0.0562
4/1/94 -0.0556
4/8/94 -0.0612
4/15/94 -0.0771
4/22/94 -0.1012
4/29/94 -0.1145
5/6/94 -0.0775
5/13/94 -0.0633
5/20/94 -0.0636
5/27/94 -0.0312
6/3/94 -0.0683
6/10/94 -0.0288
6/17/94 -0.0457
6/24/94 -0.0393
7/1/94 -0.0409
7/8/94 -0.045
7/15/94 -0.049
7/22/94 -0.0294
7/29/94 -0.0327
8/5/94 -0.0221
8/12/94 -0.0303
8/19/94 -0.0269
8/26/94 -0.0348
9/2/94 -0.0204
9/9/94 -0.0318
9/16/94 -0.0409
9/23/94 -0.0628
9/30/94 -0.062
10/7/94 -0.1322
10/14/94 -0.1149
10/21/94 -0.141
10/28/94 -0.104
11/4/94 -0.0786
11/11/94 -0.0976
11/18/94 -0.099
11/25/94 -0.077
12/2/94 -0.0402
12/9/94 -0.0868
12/16/94 -0.0732
12/23/94 -0.0604
12/30/94 -0.0851
1/6/95 -0.001
1/13/95 -0.0141
1/20/95 -0.0303
1/27/95 -0.0619
2/3/95 -0.0119
2/10/95 -0.0314
2/17/95 -0.0702
2/24/95 -0.0376
3/3/95 -0.0297
3/10/95 -0.0585
3/17/95 -0.0523
3/24/95 -0.0534
3/31/95 -0.0393
4/7/95 -0.0341
4/14/95 -0.0393
4/21/95 -0.069
4/28/95 -0.0341
5/5/95 -0.0576
5/12/95 -0.0501
5/19/95 -0.0933
5/26/95 -0.0753
6/2/95 -0.0481
6/9/95 -0.0729
6/16/95 -0.0702
6/23/95 -0.0749
6/30/95 -0.0686
7/7/95 -0.069
7/14/95 -0.0869
7/21/95 -0.1087
7/28/95 -0.0911
8/4/95 -0.0973
8/11/95 -0.1018
8/18/95 -0.1011
8/25/95 -0.078
9/1/95 -0.0706
9/8/95 -0.0833
9/15/95 -0.071
9/22/95 -0.0749
9/29/95 -0.0641
10/6/95 -0.0718
10/13/95 -0.1006
10/20/95 -0.0909
10/27/95 -0.1012
11/3/95 -0.1232
11/10/95 -0.0962
11/17/95 -0.1071
11/24/95 -0.1093
12/1/95 -0.1014
12/8/95 -0.1277
12/15/95 -0.1233
12/22/95 -0.1265
12/29/95 -0.1454
1/5/96 -0.1197
1/12/96 -0.1279
1/19/96 -0.1312
1/26/96 -0.1146
2/2/96 -0.1233
2/9/96 -0.1233
2/16/96 -0.1279
2/23/96 -0.1303
3/1/96 -0.1124
3/8/96 -0.1465
3/15/96 -0.1508
3/22/96 -0.1487
3/29/96 -0.1515
4/5/96 -0.1315
4/12/96 -0.1286
4/19/96 -0.1279
4/26/96 -0.1383
5/3/96 -0.1257
5/10/96 -0.113
5/17/96 -0.1408
5/24/96 -0.1386
5/31/96 -0.1386
6/7/96 -0.1255
6/14/96 -0.1337
6/21/96 -0.1301
6/28/96 -0.0918
7/5/96 -0.1079
7/12/96 -0.0911
7/19/96 -0.1122
7/26/96 -0.0939
8/2/96 -0.0876
8/9/96 -0.0688
8/16/96 -0.0673
8/23/96 -0.0881
8/30/96 -0.0836
9/6/96 -0.0836
9/13/96 -0.0661
9/20/96 -0.0889
9/27/96 -0.0991
10/4/96 -0.0876
10/11/96 -0.0876
10/18/96 -0.0935
10/25/96 -0.0834
11/1/96 -0.0796
11/8/96 -0.0932
11/15/96 -0.0726
11/22/96 -0.0586
11/29/96 -0.0608
12/6/96 -0.0792
12/13/96 -0.0813
12/20/96 -0.1009
12/27/96 -0.0837
1/3/97 -0.0693
1/10/97 -0.0562
1/17/97 -0.0693
1/24/97 -0.0834
1/31/97 -0.0678
2/7/97 -0.0623
2/14/97 -0.0551
2/21/97 -0.0645
2/28/97 -0.0605
3/7/97 -0.0581
3/14/97 -0.0654
3/21/97 -0.0715
3/28/97 -0.0715
4/4/97 -0.0573
4/11/97 -0.0973
4/18/97 -0.0806
4/25/97 -0.0748
5/2/97 -0.0672
5/9/97 -0.052
5/16/97 -0.0647
5/23/97 -0.0573
5/30/97 -0.0362
6/6/97 -0.0615
6/13/97 -0.0385
6/20/97 -0.0473
6/27/97 -0.0418
7/4/97 -0.0498
7/11/97 -0.0585
7/18/97 -0.0486
7/25/97 -0.063
8/1/97 -0.0273
8/8/97 -0.0701
8/15/97 -0.0715
8/22/97 -0.0767
8/29/97 -0.0472
9/5/97 -0.058
9/12/97 -0.0656
9/19/97 -0.0557
9/26/97 -0.0492
10/3/97 -0.0292
10/10/97 -0.0492
10/17/97 -0.0506
10/24/97 -0.0574
10/31/97 -0.0477
11/7/97 -0.0442
11/14/97 -0.0377
11/21/97 -0.0688
11/28/97 -0.0484
12/5/97 -0.0406
12/12/97 -0.0652
12/19/97 -0.0648
12/26/97 -0.0456
1/2/98 -0.0171
1/9/98 -0.0197
1/16/98 -0.0185
1/23/98 -0.062
1/30/98 -0.0477
2/6/98 -0.053
2/13/98 -0.0604
2/20/98 -0.0456
2/27/98 -0.0477
3/6/98 -0.0473
3/13/98 -0.0568
3/20/98 -0.0487
3/27/98 -0.0579
4/3/98 -0.0682
4/10/98 -0.0508
4/17/98 -0.062
4/24/98 -0.0768
5/1/98 -0.0618
5/8/98 -0.054
5/15/98 -0.0717
5/22/98 -0.0664
5/29/98 -0.0648
6/5/98 -0.0643
6/12/98 -0.0627
6/19/98 -0.0573
6/26/98 -0.06
7/3/98 -0.0575
7/10/98 -0.0562
7/17/98 -0.0563
7/24/98 -0.0465
7/31/98 -0.0526
8/7/98 -0.0472
8/14/98 -0.0864
8/21/98 -0.0954
8/28/98 -0.054
9/4/98 -0.0618
9/11/98 -0.0487
9/18/98 -0.0392
9/25/98 -0.0402
10/2/98 -0.0554
10/9/98 -0.0744
10/16/98 -0.0485
10/23/98 -0.0406
10/30/98 -0.0616
11/6/98 -0.0396
11/13/98 -0.0481
11/20/98 -0.0641
11/27/98 -0.0478
12/4/98 -0.0413
12/11/98 -0.0363
12/18/98 -0.0537
12/25/98 -0.0132
1/1/99 -0.0196
1/8/99 -0.0297
1/15/99 -0.0392
1/22/99 -0.0627
1/29/99 -0.0677
2/5/99 -0.061
2/12/99 -0.0887
2/19/99 -0.0937
2/26/99 -0.1078
3/5/99 -0.0846
3/12/99 -0.065
3/19/99 -0.1022
3/26/99 -0.0888
4/2/99 -0.0724
4/9/99 -0.1029
4/16/99 -0.0781
4/23/99 -0.093
4/30/99 -0.1156
5/7/99 -0.1015
5/14/99 -0.1277
5/21/99 -0.1256
5/28/99 -0.1093
6/4/99 -0.1007
6/11/99 -0.0558
6/18/99 -0.0835
6/25/99 -0.0602
7/2/99 -0.0532
7/9/99 -0.0532
7/16/99 -0.0761
7/23/99 -0.0558
7/30/99 -0.0829
8/6/99 -0.0464
8/13/99 -0.078
8/20/99 -0.0864
8/27/99 -0.0345
9/3/99 -0.1057
9/10/99 -0.0938
9/17/99 -0.0683
9/24/99 -0.0401
10/1/99 -0.077
10/8/99 -0.086
10/15/99 -0.1231
10/22/99 -0.1254
10/29/99 -0.1223
11/5/99 -0.1192
11/12/99 -0.1252
11/19/99 -0.0826
11/26/99 -0.0979
12/3/99 -0.097
12/10/99 -0.0807
12/17/99 -0.1118
12/24/99 -0.1212
12/31/99 -0.0354
1/7/00 -0.0028
1/14/00 -0.0385
1/21/00 -0.0996
1/28/00 -0.1047
2/4/00 -0.0923
2/11/00 -0.0845
2/18/00 -0.1038
2/25/00 -0.0962
3/3/00 -0.1021
3/10/00 -0.0858
3/17/00 -0.1055
3/24/00 -0.1272
3/31/00 -0.1361
4/7/00 -0.1047
4/14/00 -0.0894
4/21/00 -0.0781
4/28/00 -0.064
5/5/00 -0.0385
5/12/00 -0.0566
5/19/00 -0.0734
5/26/00 -0.0759
6/2/00 -0.0905
6/9/00 -0.1037
6/16/00 -0.0943
6/23/00 -0.0775
6/30/00 -0.0841
7/7/00 -0.0909
7/14/00 -0.0893
7/21/00 -0.097
7/28/00 -0.0927
8/4/00 -0.0912
8/11/00 -0.0879
8/18/00 -0.1046
8/25/00 -0.1046
9/1/00 -0.1105
9/8/00 -0.1113
9/15/00 -0.0836
9/22/00 -0.1189
9/29/00 -0.1155
10/6/00 -0.0896
10/13/00 -0.0921
10/20/00 -0.0895
10/27/00 -0.0725
11/3/00 -0.0739
11/10/00 -0.0747
11/17/00 -0.0962
11/24/00 -0.0937
12/1/00 -0.0928
12/8/00 -0.0903
12/15/00 -0.0913
12/22/00 -0.0672
12/29/00 -0.0276
1/5/01 -0.0411
1/12/01 -0.02
1/19/01 -0.0077
1/26/01 0.0192
2/2/01 -0.0528
2/9/01 -0.0346
2/16/01 -0.0184
2/23/01 -0.0257
3/2/01 -0.0109
3/9/01 -0.036
3/16/01 -0.0393
3/23/01 -0.036
3/30/01 -0.0109
4/6/01 0.02
4/13/01 0.0046
4/20/01 0.0243
4/27/01 -0.0278
5/4/01 -0.0218
5/11/01 0.0037
5/18/01 -0.0228
5/25/01 -0.0111
6/1/01 -0.0345
6/8/01 -0.0325
6/15/01 -0.0654
6/22/01 -0.0623
6/29/01 -0.0379
7/6/01 -0.0307
7/13/01 -0.0098
7/20/01 -0.0264
7/27/01 0.0237
8/3/01 0.0035
8/10/01 -0.0567
8/17/01 -0.0439
8/24/01 -0.0365
8/31/01 -0.0603
9/7/01 -0.0353
9/14/01 -0.0353
9/21/01 0
9/28/01 -0.0414
10/5/01 -0.0433
10/12/01 -0.0114
10/19/01 -0.0191
10/26/01 -0.0138
11/2/01 0.0017
11/9/01 -0.0068
11/16/01 0.026
11/23/01 0.0304
11/30/01 -0.0284
12/7/01 -0.0009
12/14/01 -0.0201
12/21/01 0.021
12/28/01 0.0289
1/4/02 0.0297
1/11/02 0.0276
1/18/02 0.0268
1/25/02 0.0677
2/1/02 0.0444
2/8/02 0.0607
2/15/02 0.0457
2/22/02 0.0582
3/1/02 0.0595
3/8/02 0.0124
3/15/02 0.0302
3/22/02 0.0383
3/29/02 0.04
4/5/02 0.0248
4/12/02 0.0409
4/19/02 0.0394
4/26/02 0.0526
5/3/02 0.0839
5/10/02 0.0595
5/17/02 0.0858
5/24/02 0.0757
5/31/02 0.0766
6/7/02 0.0832
6/14/02 0.067
6/21/02 0.0743
6/28/02 0.0933
7/5/02 0.1238
7/12/02 0.0692
7/19/02 0.0972
7/26/02 0.1421
8/2/02 0.1372
8/9/02 0.1002
8/16/02 0.1195
8/23/02 0.1206
8/30/02 0.1077
9/6/02 0.1002
9/13/02 0.0965
9/20/02 0.0993
9/27/02 0.1042
10/4/02 0.1141
10/11/02 0.1429
10/18/02 0.0519
10/25/02 0.0741
11/1/02 0.0733
11/8/02 0.0721
11/15/02 0.0664
11/22/02 0.061
11/29/02 0.0872
12/6/02 0.0972
12/13/02 0.1086
12/20/02 0.1278
12/27/02 0.1558
1/3/03 0.1518
1/10/03 0.093
1/17/03 0.1092
1/24/03 0.0865
1/31/03 0.1038
2/7/03 0.0983
2/14/03 0.096
2/21/03 0.1148
2/28/03 0.0969
3/7/03 0.1258
3/14/03 0.1585
3/21/03 0.0897
3/28/03 0.1033
4/4/03 0.1225
4/11/03 0.1477
4/18/03 0.1463
4/25/03 0.1211
5/2/03 0.0989
5/9/03 0.0553
5/16/03 0.033
5/23/03 0.0145
5/30/03 0.0486
6/6/03 -0.0024
6/13/03 -0.0086
6/20/03 0.0032
6/27/03 0.0144
7/4/03 0.0296
7/11/03 -0.0249
7/18/03 -0.0105
7/25/03 -0.0049
8/1/03 -0.0353
8/8/03 -0.0217
8/15/03 -0.0297
8/22/03 0.0008
8/29/03 -0.0032
9/5/03 0.0008
9/12/03 -0.0112
9/19/03 -0.023
9/26/03 -0.0346
10/3/03 -0.0214
10/10/03 -0.0207
10/17/03 -0.0254
10/24/03 0.0095
10/31/03 0.0284
11/7/03 0.0422
11/14/03 0.0386
11/21/03 0.074
11/28/03 0.0731
12/5/03 0.0875
12/12/03 0.0816
12/19/03 0.1044
12/26/03 0.1084
1/2/04 0.129
1/9/04 0.1265
1/16/04 0.1176
1/23/04 0.1305
1/30/04 0.1482
2/6/04 0.1425
2/13/04 0.1404
2/20/04 0.1598
2/27/04 0.1199
3/5/04 0.125
3/12/04 0.1358
3/19/04 0.1518
3/26/04 0.1631
4/2/04 0.1128
4/9/04 0.0576
4/16/04 0.0812
4/23/04 0.0174
4/30/04 0.0229
5/7/04 0.0056
5/14/04 0.0535
5/21/04 0.0802
5/28/04 0.0808
6/4/04 0.0662
6/11/04 0.0541
6/18/04 0.0466
6/25/04 0.0503
7/2/04 0.0502
7/9/04 0.0535
7/16/04 0.0572
7/23/04 0.0604
7/30/04 0.0471
8/6/04 0.0884
8/13/04 0.0798
8/20/04 0.0958
8/27/04 0.1202
9/3/04 0.1234
9/10/04 0.1265
9/17/04 0.1212
9/24/04 0.0843
10/1/04 0.0966
10/8/04 0.0858
10/15/04 0.0957
10/22/04 0.0944
10/29/04 0.0865
11/5/04 0.1136
11/12/04 0.1112
11/19/04 0.113
11/26/04 0.1065
12/3/04 0.057
12/10/04 0.0445
12/17/04 0.0643
12/24/04 0.0955
12/31/04 0.0731
1/7/05 0.0837
1/14/05 0.0708
1/21/05 0.0705
1/28/05 0.0682
2/4/05 0.0635
2/11/05 0.0689
2/18/05 0.0876
2/25/05 0.0751
3/4/05 0.0467
3/11/05 0
3/18/05 -0.0252
3/25/05 -0.0463
4/1/05 -0.0268
4/8/05 -0.0182
4/15/05 -0.0361
4/22/05 -0.0471
4/29/05 -0.0196
5/6/05 0.0016
5/13/05 -0.0047
5/20/05 0.0213
5/27/05 0.0205
6/3/05 0.0242
6/10/05 0.0259
6/17/05 -0.0316
6/24/05 0.0024
7/1/05 0.0207
7/8/05 0.0345
7/15/05 0.0619
7/22/05 0.0492
7/29/05 0.0668
8/5/05 0.0743
8/12/05 0.0343
8/19/05 0.0621
8/26/05 0.0686
9/2/05 0.0745
9/9/05 0.0994
9/16/05 0.0914
9/23/05 0.0543
9/30/05 0.0546
10/7/05 0.0204
10/14/05 -0.0057
10/21/05 -0.0164
10/28/05 -0.0372
11/4/05 -0.0431
11/11/05 -0.0361
11/18/05 -0.0221
11/25/05 -0.0305
12/2/05 -0.0231
12/9/05 -0.0561
12/16/05 -0.0796
12/23/05 -0.0735
12/30/05 -0.094
For additional information about the premiums and discounts, please see the
"Frequently Asked Questions" section of the Fund's website at
WWW.PREFERREDINCOME.COM.
ARE THERE ANY FEDERAL TAX ADVANTAGES TO THE DISTRIBUTIONS MADE BY THE FUND IN
2005?
Yes. In 2005, the Fund passed on a portion of its income to individuals in
the form of qualified dividend income or QDI. QDI is taxed at a 15% or 5% rate
(depending on an individual's income) instead of the individual's ordinary
income tax rate. In calendar year 2005, 86.57% of the distributions made by the
Fund were eligible for QDI treatment. For an individual in the 28% tax bracket,
this means that the Fund's total distributions will only be taxed at a blended
16.7% rate versus the 28% rate which would apply to distributions by a fund
investing in traditional corporate bonds. This tax advantage means that, for an
individual in the 28%
3
tax bracket, in calendar year 2005, the before-tax 6.3% yield on net asset
value of the Fund was approximately equivalent to a 7.3% yield on net asset
value of a traditional corporate bond fund.
Corporate shareholders also receive a federal tax benefit from the 84.66%
of the distributions which were eligible for the inter-corporate dividends
received deduction or DRD.
It is important to remember the composition of the portfolio and the income
distributions can change from one year to the next, and the QDI or DRD portions
of next year's distributions may not be the same (or even similar) to this
year's.
WHAT WERE THE COMPONENTS OF THE FUND'S TOTAL RETURN ON NET ASSET VALUE OVER THE
PAST YEAR?
One technique to better understand the Fund's net asset value (NAV)
performance is to begin with the Fund's total return on its investment
portfolio, and progressively adjust for the impact of hedging, expenses and
leverage to arrive at total return based on NAV (which factors in all of these
items). During fiscal 2005, the Fund's unhedged portfolio returned 8.5%.
Although the hedge made money during the 4th fiscal quarter, it was a drag on
performance over the full year as the hedged portfolio's return before the
impact of expenses and leverage declined to 6.5%. However, the favorable impact
of leverage served to approximately offset expenses during the year as the
Fund's total return on NAV equaled 6.4%, only slightly below the return on the
Fund's hedged investment portfolio.
HOW DID THE INTEREST RATE HEDGE PERFORM OVER THE PAST YEAR?
As discussed above, with the exception of the 4th fiscal quarter, the
Fund's interest rate hedge was a drag on performance over the full fiscal year.
From November 30, 2004 through August 31, 2005, long-term US Treasury yields
declined by approximately 0.75%. As a result, on a monthly basis the hedge
rarely broke even over this period. While these results are not favorable when
reviewed in hindsight, hedging the portfolio against significant increases in
long-term interest rates has been, and will continue to be, a fundamental part
of the Fund's investment strategy. The hedging strategy is designed so that the
Fund's shareholders effectively pay an "insurance premium" to help protect the
Fund's NAV against a significant increase in long-term interest rates. Moreover,
if interest rates rise significantly over a short period of time, the Fund's
hedging strategy may result in realized gains, the reinvestment of which might
also permit the Fund to increase its dividend rate.
Beginning in early September, long-term interest rates finally started to
track the increases in the short end of the yield curve, and the hedge results
for the 4th fiscal quarter were accordingly positive. Even in this environment
of increasing interest rates, the hedge wasn't perfect. It has always been
designed as a "safety net" (to help control the cost of hedging), which means
that the Fund must absorb some loss before the hedge protection fully engages.
However, from that point forward, the hedge is designed to provide significant
protection if interest rates continue to rise.
HOW HAS THE CURRENT INTEREST RATE ENVIRONMENT AFFECTED THE FUND?
The recent interest rate environment has been unusual and challenging for
managing a hedged, leveraged preferred fund. Its most unusual feature is that
long-term Treasury yields have actually fallen slightly since the Federal
Reserve began raising the short-term federal funds rate (by a cumulative 3.25%)
in June 2004. This "bull flattening" of the yield curve has simultaneously
reduced the incremental return that the Fund earns on its leverage and generated
losses on its hedges. Historically when the Fed has tightened monetary policy,
long-term interest rates have risen along with short-term rates, producing gains
on the hedge which could be used - at least in part - to purchase securities and
thereby increase income on the portfolio. At the same time, corporate issuers
generally have reduced debt and preferreds relative to equity over the past
4
several years, causing the incremental yield on those securities to decline
relative to Treasuries. This put additional pressure on the Fund's ability to
generate income.
Looking ahead, we see the environment improving. Corporate demand for debt
and preferred financing is picking up, new security structures are broadening
the appeal of preferred financing, and the incremental yields offered by these
securities have increased as a result. Recently, long-term interest rates have
increased along with short-term rates, and the Fund's hedges have generated
gains. Finally, although a flatter yield curve has reduced the incremental
income generated by the Fund's leverage, it also has reduced the cost of
hedging.
HOW WOULD AN "INVERTED YIELD CURVE" IMPACT THE FUND?
An inverted yield curve, where short-term rates are above long-term rates,
would affect the Fund in three ways. First, an inverted yield curve would
increase the cost of the Fund's leverage relative to the return the Fund earns
on long-maturity assets. In fact, if the yield curve were to invert by a large
amount, it's possible that the leverage costs could exceed the current return on
the preferred securities in the Fund's portfolio. (Although the yield curve may
invert, we don't think that a large inversion is likely.) These higher leverage
costs would reduce the incremental return earned on the roughly one-third of the
portfolio that is financed by the Fund's leverage.
Second, an inverted yield curve would reduce the cost of hedging on 100% of
the portfolio. That is because the long-term cost of hedging is directly
affected by the slope of the yield curve. When the yield curve is steep - as it
has been for most of the past four years - hedging tends to be expensive,
because the market charges hedgers the difference between long- and short-term
yields. If the yield curve inverts, however, hedgers earn the difference between
short- and long-term yields.
Third, how the yield curve inverts is also important to the Fund. On one
hand, if the yield curve inverts with short rates rising and long rates falling,
leverage costs rise while the hedge loses money (although less than it would
have if the curve were steep, because the initial hedge cost is lower when the
curve is inverted). This is essentially a continuation of the scenario that
played out from June 2004 through August 2005, and it's a scenario that we
believe has run its course. On the other hand, if the yield curve inverts with
both short- and long-term rates rising, the hedge gains can be used to offset
some portion of the higher leverage costs; how much depends upon how far and how
quickly long-term rates increase.
As we have explained in the past, the first two effects tend to generally
offset each other over time in total return, with the higher cost of leverage
reducing income and the lower cost of hedging improving NAV. But how those
effects play out in any given quarter or year depends upon the third factor: How
rates actually move.
WHAT ARE ECAPS (SM)?
Enhanced Capital Advantage Preferred Securities, or ECAPS (SM), represent
the latest evolution of hybrid preferred securities. Like other hybrid preferred
securities, ECAPS (SM) pay interest (as opposed to the dividends paid on
perpetual preferred stock) which is taxed as ordinary income for most investors.
By combining certain elements of debt and equity financing, issuers of ECAPS are
able to capture some key advantages of each in a single security. The result has
been a dream of Wall Street for years - a true "hybrid" security.
Of course, this is not the first time Wall Street engineers thought they
discovered the magic combination. In the latter part of 1993, Monthly Income
Preferred Securities, or "MIPS (SM)", were created with similar promise
5
and fanfare. As the MIPS (SM) structure grew in popularity (not to mention
acronyms), the credit rating agencies increasingly began to treat such issues as
debt when assessing an issuer's credit strength. ECAPS (SM) are designed to
specifically address the concerns of the rating agencies. Time will tell if the
structure can deliver on all its promises; for now, however, we expect to see
substantial new issuance of this type of security. As of this writing, there
have been ten such issues totaling $4.7 billion from seven different issuers.
HOW MIGHT ECAPS (SM) IMPACT THE FUND?
In the future, ECAPS (SM) could affect the Fund in several ways. This
segment appears poised to grow quickly, and could potentially surpass other
preferred structures in size.
Companies that have preferred securities currently outstanding (either
traditional preferred stock or older types of hybrid preferred) will certainly
CONSIDER redeeming and replacing them with ECAPS (SM), since the new structure
may provide issuers some important advantages. If this trend does develop, some
of the positions in the Fund may have to be replaced.
We also anticipate issuance from companies that haven't issued preferred
securities in the past. A larger universe of issuers is good for the Fund. Not
only would it allow greater diversification, but the likelihood of us finding
price anomalies or misunderstood credit risks should increase.
6
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OVERVIEW
NOVEMBER 30, 2005 (UNAUDITED)
----------------------------
FUND STATISTICS ON 11/30/05
-----------------------------------------------
Net Asset Value $ 12.14
Market Price $ 11.53
Discount 5.02%
Yield on Market Price 7.34%
Common Shares
Outstanding 11,676,585
INDUSTRY CATEGORIES % OF PORTFOLIO
-------------------------------------------
Utilities 38%
Banks 23%
Insurance 14%
Financial
Services 11%
Oil and Gas 7%
Other 5%
REITs 2%
MOODY'S RATINGS % OF PORTFOLIO
--------------------------------------------
AAA 1.4%
AA 3.4%
A 19.0%
BBB 46.3%
BB 17.3%
Not Rated 10.5%
--------------------------------------------
Below Investment Grade* 18.5%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND
S&P.
% OF
TOP 10 HOLDINGS BY ISSUER PORTFOLIO
---------------------------------------------------------
Interstate Power 5.3%
Lehman Brothers 4.3%
Alabama Power 4.0%
Xcel Energy 3.7%
Principal Financial Group 3.5%
EOG Resources 3.1%
Cobank 3.0%
North Fork Bancorporation 3.0%
UnumProvident 2.5%
HSBC 2.5%
% OF PORTFOLIO**
------------------------------------------------------------------------------------------------------------------------
Holdings Generating Qualified Dividend Income (QDI) for Individuals 76%
Holdings Generating Income Eligible for the Corporate Dividends Received Deduction (DRD) 73%
------------------------------------------------------------------------------------------------------------------------
** 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. SEE ACCOMPANYING NOTES TO THE FINANCIAL STATEMENTS FOR THE TAX CHARACTERIZATION OF 2005 DISTRIBUTIONS.
7
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS
NOVEMBER 30, 2005
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ---------
PREFERRED SECURITIES -- 95.0%
BANKING -- 22.3%
---------------------------------------------------------------------------------------------------------------------
ABN AMRO North America, Inc.:
1,165 6.46% Pfd., 144A****........................................................... $ 1,184,933*
1,700 6.59% Pfd., 144A****........................................................... 1,724,531*
$ 150,000 BT Capital Trust B, 7.90% 01/15/27 Capital Security.............................. 159,055(1)
$ 660,000 BT Preferred Capital Trust II, 7.875% 02/25/27 Capital Security.................. 703,312(1)
$ 250,000 Chase Capital I, 7.67% 12/01/26 Capital Security................................. 265,076
Citigroup, Inc.:
7,700 6.213% Pfd., Series G.......................................................... 386,886*
46,000 6.231% Pfd., Series H.......................................................... 2,310,810*
25,650 6.365% Pfd., Series F.......................................................... 1,293,658*
Cobank, ACB:
45,000 7.00% Pfd., 144A****........................................................... 2,354,175*
75,000 Adj. Rate Pfd., 144A****....................................................... 4,066,125*
$ 500,000 Comerica (Imperial) Capital Trust I, 9.98% 12/31/26 Capital Security, Series B... 558,010
4,000 FBOP Corporation, Adj. Rate Pfd., 144A****....................................... 3,980,000*
$ 2,250,000 First Hawaiian Capital I, 8.343% 07/01/27 Capital Security, Series B............. 2,437,740(1)
First Republic Bank:
200,000 6.25% Pfd...................................................................... 4,678,000*
5,000 6.70% Pfd...................................................................... 125,275*
$ 1,885,000 First Union Institutional Capital II, 7.85% 01/01/27 Capital Security............ 2,005,555
$ 4,349,000 GreenPoint Capital Trust I, 9.10% 06/01/27 Capital Security...................... 4,768,352
$ 2,500,000 HBOS Capital Funding LP, 6.85% Pfd............................................... 2,502,575(1)
5,000 HSBC II, Variable Inverse Pfd., Pvt.............................................. 5,306,250*
2,145 J.P. Morgan Chase & Co., 6.625% Pfd., Series H................................... 109,170*
$ 1,350,000 Keycorp Institutional Capital B, 8.25% 12/15/26 Capital Security................. 1,438,054
$ 1,500,000 North Fork Capital Trust I, 8.70% 12/15/26 Capital Security...................... 1,608,780
16,000 PFGI Capital Corporation, 7.75% Pfd.............................................. 430,800
$ 1,700,000 RBS Capital Trust B, 6.80% Pfd................................................... 1,704,063**(1)
10 Roslyn Real Estate, 8.95% Pfd., Pvt., Series C, 144A****......................... 1,099,758
-------------------------------------------------------------------------------------------------------------------
47,200,943
----------------
FINANCIAL SERVICES -- 11.4%
---------------------------------------------------------------------------------------------------------------------
5,000 Bear Stearns Company, 5.72% Pfd., Series F....................................... 237,575*
175,000 CIT Group, Inc., 6.35% Pfd., Series A............................................ 4,364,500*
The accompanying notes are an integral part of the financial statements.
8
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2005
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ---------
PREFERRED SECURITIES -- (CONTINUED)
FINANCIAL SERVICES -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
Freddie Mac:
33,125 5.00% Pfd., Series F........................................................... $ 1,390,256*
42,650 5.30% Pfd...................................................................... 1,897,285*
83,500 Goldman Sachs Group, Inc., 6.20% Pfd., Series B.................................. 2,080,820*
Lehman Brothers Holdings, Inc.:
5,150 5.67% Pfd., Series D........................................................... 242,308*
159,505 5.94% Pfd., Series C........................................................... 7,783,844*
44,000 6.50% Pfd., Series F........................................................... 1,119,800*
94,150 SLM Corporation, 6.97% Pfd., Series A............................................ 5,021,961*
-------------------------------------------------------------------------------------------------------------------
24,138,349
----------------
INSURANCE -- 13.7%
---------------------------------------------------------------------------------------------------------------------
20,000 ACE Ltd., 7.80% Pfd., Series C................................................... 527,500**(1)
25,000 Aegon NV, 6.375% Pfd............................................................. 612,750**(1)
16,000 Berkley W.R. Capital Trust II, 6.75% 07/26/45.................................... 380,160
15,850 Everest Re Capital Trust II, 6.20% Pfd., Series B................................ 349,651(1)
140,000 MetLife Inc., 6.50% Pfd., Series B............................................... 3,510,500*
$ 4,395,000 MMI Capital Trust I, 7.625% 12/15/27 Capital Security, Series B.................. 4,869,770
275,000 Principal Financial Group, 6.518% Pfd............................................ 7,418,780*
$ 5,734,000 Provident Financing Trust I, 7.405% 03/15/38 Capital Security.................... 5,386,003
123,000 Scottish Re Group Ltd., 7.25% Pfd................................................ 3,068,850**(1)
2,800 Zurich RegCaPS Funding Trust, 6.58% Pfd., 144A****............................... 2,921,856*
-------------------------------------------------------------------------------------------------------------------
29,045,820
----------------
UTILITIES -- 37.9%
---------------------------------------------------------------------------------------------------------------------
Alabama Power Company:
4,980 4.60% Pfd...................................................................... 424,645*
6,485 4.72% Pfd...................................................................... 567,373*
868 4.92% Pfd...................................................................... 79,162*
85,207 5.20% Pfd...................................................................... 1,986,601*
225,000 5.30% Pfd...................................................................... 5,333,625*
6,000 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993........................ 624,090*
1,628 Central Hudson Gas & Electric Corporation, 4.35% Pfd., Series D, Pvt............. 139,617*
3,798 Central Maine Power Company, 4.75% Pfd........................................... 336,560*
16,679 Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt......... 1,733,699*
The accompanying notes are an integral part of the financial statements.
9
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2005
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ---------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
Connecticut Light & Power Company:
2,050 4.50% Pfd., Series 1956........................................................ $ 80,134*
25,000 5.28% Pfd., Series 1967........................................................ 1,132,500*
883 $2.04 Pfd., Series 1949........................................................ 31,294*
2,900 $2.20 Pfd., Series 1949........................................................ 110,852*
9,652 $3.24 Pfd...................................................................... 505,330*
2,000 Consolidated Edison Company of New York, 4.65% Pfd., Series C.................... 174,980*
7,500 Dayton Power and Light Company, 3.90% Pfd., Series C............................. 501,037*
$ 1,000,000 Dominion Resources Capital Trust III, 8.40% 01/15/31............................. 1,202,005
5,000 Duke Energy Corporation, 4.50% Pfd., Series C, Pvt............................... 504,250*
Duquesne Light Company:
15,030 3.75% Pfd...................................................................... 487,648*
25,775 6.50% Pfd...................................................................... 1,331,794*
5,000 Energy East Capital Trust I, 8.25% Pfd........................................... 127,750
Entergy Arkansas, Inc.:
2,840 4.56% Pfd...................................................................... 238,106*
3,050 4.56% Pfd., Series 1965........................................................ 255,712*
1,150 6.08% Pfd...................................................................... 106,622*
14,225 7.40% Pfd...................................................................... 1,479,187*
6,388 7.80% Pfd...................................................................... 667,770*
2,265 7.88% Pfd...................................................................... 236,251*
25,536 $1.96 Pfd...................................................................... 639,038*
2,441 Entergy Gulf States, Inc., 7.56% Pfd............................................. 237,046*
Entergy Louisiana, Inc.:
299 5.16% Pfd...................................................................... 28,505*
943 6.44% Pfd...................................................................... 97,662*
4,174 7.36% Pfd...................................................................... 434,117*
175,000 8.00% Pfd., Series 92.......................................................... 4,411,750*
Entergy Mississippi, Inc.:
4,616 4.36% Pfd...................................................................... 329,882*
5,000 4.92% Pfd...................................................................... 403,250*
Florida Power Company:
10,000 4.58% Pfd...................................................................... 879,550*
2,000 4.75% Pfd...................................................................... 181,560*
Great Plains Energy, Inc.:
1,625 4.20% Pfd...................................................................... 123,256*
2,000 4.35% Pfd...................................................................... 157,110*
The accompanying notes are an integral part of the financial statements.
10
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2005
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ---------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
20,000 Gulf Power Company, 6.00% Pfd.................................................... $ 2,009,200*
Hawaiian Electric Company, Inc.:
2,471 5.00% Pfd., Series D........................................................... 46,084*
7,438 5.00% Pfd., Series E........................................................... 138,719*
1,383 5.00% Pfd., Series I........................................................... 25,793*
$ 3,750,000 Houston Light & Power Capital Trust II, 8.257% 02/01/37 Capital Security......... 3,968,437
30,500 Indianapolis Power & Light Company, 5.65% Pfd.................................... 2,812,710*
340,000 Interstate Power & Light Company, 8.375% Pfd., Series B.......................... 11,316,900*
200 Narragansett Electric Company, 4.64% Pfd......................................... 9,237*
2,588 New York State Electric & Gas, $4.50 Pfd., Series 1949........................... 222,361*
12,265 Northern Indiana Public Service Company, Adj. Rate Pfd., Series A................ 627,048*
Ohio Power Company:
3,018 4.20% Pfd...................................................................... 246,601*
1,251 4.40% Pfd...................................................................... 107,092*
Pacific Enterprises:
13,680 $4.36 Pfd...................................................................... 1,134,346*
24,985 $4.50 Pfd...................................................................... 2,138,216*
15,730 $4.75 Pfd., Series 53.......................................................... 1,420,970*
Pacific Gas & Electric Co.:
41,500 5.00% Pfd., Series D........................................................... 868,387*
50,000 5.00% Pfd., Series E........................................................... 1,064,000*
PacifiCorp:
5,672 $4.56 Pfd...................................................................... 468,394*
6,708 $4.72 Pfd...................................................................... 573,366*
10,500 $7.48 Sinking Fund Pfd......................................................... 1,089,847*
1,250 PECO Energy Company, $4.30 Pfd., Series B........................................ 101,262*
15,142 Portland General Electric, 7.75% Sinking Fund Pfd................................ 1,569,090*
14,020 Public Service Electric & Gas Company, 5.28% Pfd., Series E...................... 1,337,508*
70,210 San Diego Gas & Electric Company, $1.70 Pfd...................................... 1,822,652*
8,900 Savannah Electric & Gas Company, 6.00% Pfd....................................... 226,015*
South Carolina Electric & Gas Company:
14,226 5.125% Purchase Fund Pfd., Pvt................................................. 731,501*
7,774 6.00% Purchase Fund Pfd., Pvt.................................................. 396,008*
Southern California Edison:
57,646 4.08% Pfd...................................................................... 1,082,015*
5,000 4.24% Pfd...................................................................... 95,800*
60,000 Southern Union Company, 7.55% Pfd................................................ 1,608,900*
The accompanying notes are an integral part of the financial statements.
11
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2005
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ---------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
$ 750,000 TXU Electric Capital V, 8.175% 01/30/37 Capital Security......................... $ 792,011
5,700 Union Electric Company, 4.56% Pfd................................................ 488,234*
Virginia Electric & Power Company:
1,665 $4.04 Pfd...................................................................... 128,088*
2,470 $4.20 Pfd...................................................................... 197,551*
1,673 $4.80 Pfd...................................................................... 154,376*
2,878 $6.98 Pfd...................................................................... 295,614*
12,500 $7.05 Pfd...................................................................... 1,279,938*
2,262 Washington Gas & Light Company, $4.25 Pfd........................................ 184,342*
12,863 Wisconsin Power & Light, 6.20% Pfd............................................... 1,319,294*
Xcel Energy, Inc.:
15,000 $4.08 Pfd., Series B........................................................... 1,158,675*
20,040 $4.10 Pfd., Series C........................................................... 1,555,505*
35,510 $4.11 Pfd., Series D........................................................... 2,763,033*
17,750 $4.16 Pfd., Series E........................................................... 1,397,901*
10,000 $4.56 Pfd., Series G........................................................... 863,300*
-------------------------------------------------------------------------------------------------------------------
80,157,641
----------------
OIL AND GAS -- 5.6%
---------------------------------------------------------------------------------------------------------------------
17,200 Anadarko Petroleum Corporation, 5.46% Pfd........................................ 1,733,416*
8,000 Devon Energy Corporation, 6.49% Pfd., Series A................................... 809,720*
6,125 EOG Resources, Inc., 7.195% Pfd., Series B....................................... 6,498,594*
$ 1,650,000 KN Capital Trust III, 7.63% 04/15/28 Capital Security............................ 1,805,562
10,000 Lasmo America Limited, 8.15% Pfd., 144A****...................................... 1,099,350*(1)
-------------------------------------------------------------------------------------------------------------------
11,946,642
----------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 2.2%
---------------------------------------------------------------------------------------------------------------------
1,000 Equity Residential Properties, 8.29% Pfd., REIT, Series K........................ 59,305
PS Business Parks, Inc.:
10,000 7.00% Pfd., REIT, Series H..................................................... 242,350
18,120 7.20% Pfd., REIT, Series M..................................................... 441,041
Public Storage, Inc.:
11,100 6.18% Pfd., REIT, Series D..................................................... 248,029
14,350 6.45% Pfd., REIT, Series F..................................................... 331,916
22,500 6.75% Pfd., REIT, Series E..................................................... 547,875
30,000 7.125% Pfd., REIT.............................................................. 758,700
The accompanying notes are an integral part of the financial statements.
12
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2005
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ---------
PREFERRED SECURITIES -- (CONTINUED)
REAL ESTATE INVESTMENT TRUST (REIT) -- (CONTINUED)
---------------------------------------------------------------------------------------------------------------------
40,000 Realty Income Corporation, 7.375% Pfd., REIT, Series D........................... $ 1,015,400
40,000 Regency Centers Corporation, 7.25% Pfd., REIT.................................... 1,001,400
-------------------------------------------------------------------------------------------------------------------
4,646,016
----------------
MISCELLANEOUS INDUSTRIES -- 1.9%
---------------------------------------------------------------------------------------------------------------------
13,600 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B........................ 1,173,476*
30,500 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A****.............................. 2,731,123*
26,000 Touch America Holdings, $6.875 Pfd............................................... --*+
-------------------------------------------------------------------------------------------------------------------
3,904,599
----------------
TOTAL PREFERRED SECURITIES(Cost $188,416,250).................................... 201,040,010
----------------
CORPORATE DEBT SECURITIES -- 1.5%
OIL AND GAS -- 1.1%
---------------------------------------------------------------------------------------------------------------------
85,900 Nexen, Inc., 7.35% Subordinated Notes............................................ 2,214,502(1)
---------------------------------------------------------------------------------------------------------------------
UTILITIES -- 0.4%
---------------------------------------------------------------------------------------------------------------------
$ 1,000,000 Duquesne Light Holdings, 6.25% 08/15/35.......................................... 958,020
-------------------------------------------------------------------------------------------------------------------
TOTAL CORPORATE DEBT SECURITIES(Cost $3,241,551)................................. 3,172,522
----------------
COMMON STOCK -- 0.8%
BANKING -- 0.8%
---------------------------------------------------------------------------------------------------------------------
110,000 New York Community Bancorp, Inc.................................................. 1,831,500*
-------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK(Cost $1,917,807).............................................. 1,831,500
----------------
OPTION CONTRACTS -- 0.8%
206 January Put Options on March U.S. Treasury Bond Futures, Expiring 12/22/05....... 627,656+
1,169 March Put Options on March U.S. Treasury Bond Futures, Expiring 02/24/06......... 1,009,563+
-------------------------------------------------------------------------------------------------------------------
TOTAL OPTION CONTRACTS(Cost $2,070,815).......................................... 1,637,219
----------------
The accompanying notes are an integral part of the financial statements.
13
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
NOVEMBER 30, 2005
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------ ---------
MONEY MARKET FUND -- 1.4%
3,028,802 BlackRock Provident Institutional, TempFund...................................... $ 3,028,802
-------------------------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND(Cost $3,028,802)......................................... 3,028,802
----------------
TOTAL INVESTMENTS (Cost $198,675,225***).......................................... 99.5% 210,710,053
OTHER ASSETS AND LIABILITIES (Net)................................................ 0.5% 1,006,470
--------- ----------------
TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK.......................... 100.0%++ $ 211,716,523
--------- ----------------
MONEY MARKET CUMULATIVE PREFERRED STOCK(TM) (MMP(R)) REDEMPTION VALUE.......................... (70,000,000)
----------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK..................................................... $ 141,716,523
================
-----------------------------
* 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 guidelines established by the Board of
Directors.
(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
The accompanying notes are an integral part of the financial statements.
14
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
STATEMENT OF ASSETS AND LIABILITIES
NOVEMBER 30, 2005
-----------------------------------
ASSETS:
Investments, at value (Cost $198,675,225) ................................... $ 210,710,053
Receivable for Investments sold.............................................. 1,247,648
Dividends and interest receivable............................................ 1,690,881
Prepaid expenses............................................................. 83,848
--------------
Total Assets......................................................... 213,732,430
LIABILITIES:
Payable for Investments purchased............................................ $ 1,443,158
Dividends payable to Common Stock Shareholders............................... 112,394
Investment advisory fee payable.............................................. 97,436
Administration, Transfer Agent and Custodian fees payable.................... 39,449
Professional fees payable.................................................... 58,939
Directors' fees payable...................................................... 609
Accrued expenses and other payables.......................................... 28,774
Accumulated undeclared distributions to Money Market Cumulative
Preferred(TM) Stock Shareholders ....................................... 235,148
------------
Total Liabilities.................................................... 2,015,907
--------------
MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (700 SHARES
OUTSTANDING) REDEMPTION VALUE .......................................... 70,000,000
--------------
NET ASSETS AVAILABLE TO COMMON STOCK............................................ $ 141,716,523
==============
NET ASSETS AVAILABLE TO COMMON STOCK consist of:
Distributions in excess of net investment income............................. $ (209,391)
Accumulated net realized loss on investments sold............................ (5,257,425)
Unrealized appreciation of investments....................................... 12,034,828
Par value of Common Stock.................................................... 116,766
Paid-in capital in excess of par value of Common Stock....................... 135,031,745
--------------
Total Net Assets Available to Common Stock........................... $ 141,716,523
==============
NET ASSET VALUE PER SHARE OF COMMON STOCK:
Common Stock (11,676,585 shares outstanding)............................... $ 12.14
==============
The accompanying notes are an integral part of the financial statements.
15
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED NOVEMBER 30, 2005
------------------------------------
INVESTMENT INCOME:
Dividends++ ............................................................... $ 10,550,979
Interest................................................................... 2,822,238
--------------
Total Investment Income............................................... 13,373,217
EXPENSES:
Investment advisory fee.................................................... $ 1,206,133
Administrator's fee........................................................ 212,602
Money Market Cumulative Preferred(TM) Stock broker commissions
and auction agent fees ................................................. 189,930
Professional fees.......................................................... 121,990
Insurance expense.......................................................... 148,700
Transfer agent fees ....................................................... 79,214
Directors' fees ........................................................... 67,975
Custodian fees ............................................................ 27,316
Chief Compliance Officer fees ............................................. 38,815
Other ..................................................................... 135,491
------------
Total Expenses........................................................ 2,228,166
--------------
NET INVESTMENT INCOME........................................................... 11,145,051
--------------
REALIZED AND UNREALIZED GAIN/(LOSS) ON INVESTMENTS
Net realized gain on investments sold during the year...................... 4,238,243
Change in unrealized appreciation/depreciation of investments
during the year ........................................................ (4,421,911)
--------------
NET REALIZED AND UNREALIZED LOSS ON INVESTMENTS................................. (183,668)
--------------
DISTRIBUTIONS TO MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK SHAREHOLDERS:
From net investment income (including changes in accumulated
undeclared distributions) .............................................. (1,937,548)
--------------
NET INCREASE IN NET ASSETS TO COMMON STOCK RESULTING FROM OPERATIONS.............. $ 9,023,835
==============
-----------
++ For Federal income tax purposes, a significant portion of this amount may
not qualify for the inter-corporate dividends received deduction ("DRD")
or as qualified dividend income ("QDI") for individuals.
The accompanying notes are an integral part of the financial statements.
16
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK(1)
----------------------------------------------------------------
YEAR ENDED YEAR ENDED
NOVEMBER 30, 2005 NOVEMBER 30, 2004
----------------- -----------------
OPERATIONS:
Net investment income...................................................... $ 11,145,051 $ 11,304,884
Net realized gain on investments sold during the year...................... 4,238,243 149,942
Change in net unrealized appreciation/depreciation of investments
held during the year ................................................... (4,421,911) (3,431,405)
Distributions to Money Market Cumulative Preferred(TM) Stock
Shareholders from net investment income, including changes in
accumulated undeclared distributions.................................... (1,937,548) (1,029,065)
--------------- ---------------
NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS....................... 9,023,835 6,994,356
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders(1).. (10,602,545) (10,790,181)
--------------- ---------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS........................... (10,602,545) (10,790,181)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment and
Cash Purchase Plan ..................................................... 1,150,181 1,637,955
--------------- ---------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK
RESULTING FROM FUND SHARE TRANSACTIONS ................................. 1,150,181 1,637,955
NET DECREASE IN NET ASSETS AVAILABLE TO COMMON --------------- ---------------
STOCK FOR THE YEAR.......................................................... $ (428,529) $ (2,157,870)
=============== ===============
------------------------------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of year.......................................................... $ 142,145,052 $ 144,302,922
Net decrease during the year............................................... (428,529) (2,157,870)
--------------- ---------------
End of year (including distributions in excess of net investment
income of ($209,391) and undistributed net investment income
of $952,811, respectively).............................................. $ 141,716,523 $ 142,145,052
=============== ===============
-------------
(1) Includes income earned, but not paid out, in prior fiscal year.
The accompanying notes are an integral part of the financial statements.
17
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
FINANCIAL HIGHLIGHTS
FOR A COMMON SHARE OUTSTANDING THROUGHOUT EACH YEAR.
----------------------------------------------------
Contained below is per share operating performance data, total investment
returns, ratios to average net assets and other supplemental data. This
information has been derived from information provided in the financial
statements and market price data for the Fund's shares.
YEAR ENDED NOVEMBER 30,
------------------------------------------------------------------
2005 2004 2003 2002 2001
--------- -------- -------- -------- --------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of year............................. $ 12.27 $ 12.59 $ 10.78 $ 11.60 $ 10.68
--------- -------- -------- -------- --------
INVESTMENT OPERATIONS:
Net investment income.......................................... 0.96 0.98 1.02 1.07 1.10
Net realized and unrealized gain/(loss) on investments......... (0.01) (0.27) 1.85 (0.87) 0.89
DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS:
From net investment income..................................... (0.17) (0.09) (0.08) (0.11) (0.25)
--------- -------- -------- -------- --------
Total from investment operations............................... 0.78 0.62 2.79 0.09 1.74
--------- -------- -------- -------- --------
DISTRIBUTIONS TO COMMON SHAREHOLDERS:
From net investment income..................................... (0.91) (0.94) (0.98) (0.91) (0.82)
--------- -------- -------- -------- --------
Total distributions to Common Shareholders..................... (0.91) (0.94) (0.98) (0.91) (0.82)
--------- -------- -------- -------- --------
Net asset value, end of year................................... $ 12.14 $ 12.27 $ 12.59 $ 10.78 $ 11.60
========= ======== ======== ======== ========
Market value, end of year...................................... $ 11.53 $ 13.53 $ 13.51 $ 11.72 $ 11.27
========= ======== ======== ======== ========
Total investment return based on net asset value**............. 6.36% 4.68% 26.57% 0.63% 16.97%
========= ======== ======== ======== ========
Total investment return based on market value**................ (8.40%) 7.57% 24.92% 12.61% 26.95%
========= ======== ======== ======== ========
RATIOS TO AVERAGE NET ASSETS AVAILABLE
TO COMMON STOCK SHAREHOLDERS:
Total net assets, end of year (in 000's).................. $ 141,717 $142,145 $144,303 $122,258 $129,792
Operating expenses........................................ 1.53% 1.52% 1.54% 1.56% 1.61%
Net investment income + .................................. 6.30% 7.11% 7.85% 8.67% 7.63%
-----------------------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate................................... 57% 28% 28% 29% 41%
Total net assets available to Common and Preferred Stock,
end of year (in 000's) ................................ $ 211,717 $212,145 $214,411 $192,361 $200,228
Ratio of operating expenses to total average net assets
available to Common and Preferred Stock .................. 1.03% 1.03% 1.02% 1.00% 1.03%
* Money Market Cumulative Preferred(TM) Stock.
** Assumes reinvestment of distributions at the price obtained by the Fund's
Dividend Reinvestment and Cash Purchase Plan.
+ 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)*.
The accompanying notes are an integral part of the financial statements.
18
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
PER SHARE OF COMMON STOCK
--------------------------------
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
March 31, 2005................................................... 0.0755 12.65 11.91 12.39
April 30, 2005................................................... 0.0705 12.75 12.50 12.67
May 31, 2005..................................................... 0.0705 12.78 12.92 12.78
June 30, 2005.................................................... 0.0705 12.69 12.88 12.69
July 31, 2005.................................................... 0.0705 12.42 13.25 12.59
August 31, 2005.................................................. 0.0705 12.66 13.50 12.83
September 30, 2005............................................... 0.0705 12.28 12.95 12.30
October 31, 2005................................................. 0.0705 12.10 11.41 11.81
November 30, 2005................................................ 0.0705 12.14 11.53 11.78
-------------
(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.
The accompanying notes are an integral part of the financial statements.
19
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
------------------------------------------------------------------
The table below sets out information with respect to Money Market
Cumulative Preferred(TM) Stock currently outstanding.
INVOLUNTARY AVERAGE
ASSET LIQUIDATING MARKET
TOTAL SHARES COVERAGE PREFERENCE VALUE
DATE OUTSTANDING (1) PER SHARE (2) PER SHARE (3) PER SHARE (1) & (3)
-------------- ---------------- ------------- ------------- -------------------
11/30/05 700 $302,788 $100,000 $100,000
11/30/04 700 303,137 100,000 100,000
11/30/03 700 306,301 100,000 100,000
11/30/02 700 274,802 100,000 100,000
11/30/01 700 286,040 100,000 100,000
11/30/00 700 270,952 100,000 100,000
11/30/99 700 284,371 100,000 100,000
-----------
(1) See note 6.
(2) Calculated by subtracting the Fund's total liabilities (excluding the
MMP(R)) from the Fund's total assets and dividinG that amount by the number
of MMP(R) shares outstanding.
(3) Excludes accumulated undeclared dividends.
The accompanying notes are an integral part of the financial statements.
20
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS
------------------------------------------------------------------
1. ORGANIZATION
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated (the
"Fund") was incorporated as a Maryland corporation on December 10, 1991, and
commenced operations on February 13, 1992 as a diversified, closed-end
management investment company under the Investment Company Act of 1940, as
amended (the "1940 Act"). The Fund's investment objective is to provide its
common shareholders with high current income consistent with the preservation of
capital.
2. SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Fund in the preparation of its financial statements. The
preparation of financial statements is in conformity with accounting principles
generally accepted in the United States of America and requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities in the financial statements and the reported amounts of increases
and decreases in net assets from operations during the reporting period. Actual
results could differ from those estimates.
PORTFOLIO VALUATION: The net asset value of the Fund's Common Stock is
determined by the Fund's Administrator no less frequently than on the last
business day of each week and month. It is determined by dividing the value of
the Fund's net assets available to Common Stock by the number of shares of
Common Stock outstanding. The value of the Fund's net assets attributable to
Common Stock is deemed to equal the value of the Fund's total assets less (i)
the Fund's liabilities and (ii) the aggregate liquidation value of the
outstanding Money Market Cumulative Preferred(TM) Stock ("MMP(R)").
Securities listed on a national securities exchange are valued on the basis
of the last sale on such exchange on the day of valuation, except as described
hereafter. In the absence of sales of listed securities and with respect to (a)
securities for which the most recent sale prices are not deemed to represent
fair market value and (b) unlisted securities (other than money market
instruments), securities are valued at the mean between the closing bid and
asked prices when quoted prices for investments are readily available.
Investments in over-the-counter derivative instruments, such as interest rate
swaps and options thereon ("swaptions"), are valued at the prices obtained from
the broker/dealer or bank that is the counterparty to such instrument, subject
to comparison of such valuation with a valuation obtained from a broker/dealer
or bank that is not a counterparty to the particular derivative instrument.
Investments for which market quotations are not readily available or for which
management determines that the prices are not reflective of current market
conditions are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund, including reference to
valuations of other securities which are comparable in quality, maturity and
type. Investments in money market instruments, which mature in 60 days or less,
are valued at amortized cost. Investments in money market funds are valued at
the net asset value of such funds.
SECURITIES TRANSACTIONS AND INVESTMENT INCOME: Securities transactions are
recorded as of the trade date. Realized gains and losses from securities sold
are recorded on the identified cost basis. Dividend income is recorded on
ex-dividend dates. Interest income is recorded on the accrual basis. The Fund
also amortizes premiums and accretes discounts on certain fixed income
securities.
21
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------------------
OPTIONS: Purchases of options are recorded as an investment, the value of
which is marked-to-market at each valuation date. When the Fund enters into a
closing sale transaction, the Fund will record a gain or loss depending on the
difference between the purchase and sale price. The risks associated with
purchasing options and the maximum loss the Fund would incur are limited to the
purchase price originally paid.
When the Fund writes an option, an amount equal to the premium received by
the Fund is recorded as a liability, the value of which is marked-to-market at
each valuation date. When a written option expires, the Fund realizes a gain
equal to the amount of the premium originally received. When the Fund enters
into a closing purchase transaction, the Fund realizes a gain (or loss if the
cost of the closing purchase transaction exceeds the premium received when the
option was written) without regard to any unrealized gain or loss on the
underlying security, and the liability related to such option is eliminated.
When a call option is exercised, the Fund realizes a gain or loss from the sale
of the underlying security and the proceeds from such sale are increased by the
amount of the premium originally received. When a put option is exercised, the
amount of the premium originally received will reduce the cost of the security
which the Fund purchased upon exercise.
The risk in writing a call option is that the Fund may forego the
opportunity for profit if the market price of the underlying security increases
and the option is exercised. The risk in writing a put option is that the Fund
may incur a loss if the market price of the underlying security decreases and
the option is exercised.
REPURCHASE AGREEMENTS: The Fund may engage in repurchase agreement
transactions. The Fund's investment adviser reviews and approves the eligibility
of the banks and dealers with which the Fund may enter into repurchase agreement
transactions. The value of the collateral underlying such transactions is at
least equal at all times to the total amount of the repurchase obligations,
including interest. The Fund maintains possession of the collateral through its
custodian and, in the event of counterparty default, the Fund has the right to
use the collateral to offset losses incurred. There is the possibility of loss
to the Fund in the event the Fund is delayed or prevented from exercising its
rights to dispose of the collateral securities.
FEDERAL INCOME TAXES: The Fund intends to continue to qualify as a
regulated investment company by complying with the requirements under subchapter
M of the Internal Revenue Code of 1986, as amended, applicable to regulated
investment companies and intends to distribute substantially all of its taxable
net investment income to its shareholders. Therefore, no federal income tax
provision is required.
DIVIDENDS AND DISTRIBUTIONS TO SHAREHOLDERS: The Fund expects to declare
dividends on a monthly basis to shareholders of Common Stock ("Shareholders").
Distributions to Shareholders are recorded on the ex-dividend date. Any net
realized short-term capital gains will be distributed to Shareholders at least
annually. Any net realized long-term capital gains may be distributed to
Shareholders at least annually or may be retained by the Fund as determined by
the Fund's Board of Directors. Capital gains retained by the Fund are subject to
tax at the capital gains corporate tax rate. Subject to the Fund qualifying as a
regulated investment company, any taxes paid by the Fund on such net realized
long-term capital gains may be used by the Fund's Shareholders as a credit
against their own tax liabilities.
22
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------------------
Income and capital gain distributions are determined and characterized in
accordance with income tax regulations which may differ from generally accepted
accounting principles. These differences are primarily due to (1) differing
treatments of income and gains on various investment securities held by the
Fund, including timing differences, (2) the attribution of expenses against
certain components of taxable investment income, and (3) federal regulations
requiring proportionate allocation of income and gains to all classes of
shareholders.
Distributions from net realized gains for book purposes may include
short-term capital gains, which are included as ordinary income for tax
purposes, and may exclude amortization of premium on certain fixed income
securities, which are not reflected in ordinary income for tax purposes. The tax
character of distributions paid, including changes in accumulated undeclared
distributions to MMP(R) Shareholders, during 2005 and 2004 was as follows:
DISTRIBUTIONS PAID IN FISCAL YEAR 2005 DISTRIBUTIONS PAID IN FISCAL YEAR 2004
-------------------------------------- --------------------------------------
ORDINARY INCOME LONG-TERM CAPITAL GAINS ORDINARY INCOME LONG-TERM CAPITAL GAINS
--------------- ----------------------- --------------- -----------------------
Common $10,602,545 $0 $10,790,181 $0
Preferred $1,937,548 $0 $1,029,065 $0
As of November 30, 2005, the components of distributable earnings (i.e.,
ordinary income and capital gain/loss) available to Common and Preferred Stock
Shareholders, on a tax basis, were as follows:
UNDISTRIBUTED UNDISTRIBUTED NET UNREALIZED
CAPITAL (LOSS) CARRYFORWARD ORDINARY INCOME LONG-TERM GAIN APPRECIATION/(DEPRECIATION)
--------------------------- --------------- -------------- --------------------------
($5,431,581) $222,609 $0 $12,208,984
At November 30, 2005, the composition of the Fund's $5,431,581 accumulated
realized capital losses was $2,297,260, $982,343, $1,457,692 and $694,286 in
2000, 2001, 2002 and 2004, respectively. These losses may be carried forward and
offset against any future capital gains through 2008, 2009, 2010 and 2012,
respectively.
RECLASSIFICATION OF ACCOUNTS: During the year ended November 30, 2005,
reclassifications were made in the Fund's capital accounts to report these
balances on a tax basis, excluding temporary differences, as of November 30,
2005. Additional adjustments may be required in subsequent reporting periods.
These reclassifications have no impact on the net asset value of the Fund. The
calculation of net investment income per share in the financial highlights
excludes these adjustments. Below are the reclassifications:
UNDISTRIBUTED ACCUMULATED NET REALIZED
PAID-IN CAPITAL NET INVESTMENT INCOME GAIN ON INVESTMENTS
--------------- --------------------- -------------------
($44,074) $232,840 ($188,766)
EXCISE TAX: The Internal Revenue Code of 1986, as amended, imposes a 4%
nondeductible excise tax on the Fund to the extent the Fund does not distribute
by the end of any calendar year at least (1)
23
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------------------
98% of the sum of its net investment income for that year and its capital gains
(both long-term and short-term) for its fiscal year and (2) certain
undistributed amounts from previous years. The Fund is subject to a payment
of an estimated $17,000 of Federal excise taxes attributable to calendar year
2005. During the fiscal year which ended on November 30, 2005, the Fund paid
$43,594 of Federal excise taxes attributable to calendar year 2004.
3. INVESTMENT ADVISORY FEE, ADMINISTRATION FEE, TRANSFER AGENT FEE, CUSTODIAN
FEE, DIRECTORS' FEES AND CHIEF COMPLIANCE OFFICER FEE
Flaherty & Crumrine Incorporated (the "Adviser") serves as the Fund's
investment adviser. The Fund pays the Adviser a monthly fee at an annual rate of
0.625% of the value of the Fund's average monthly total net assets available to
Common and Preferred Stock up to $100 million and 0.50% of the value of the
Fund's average monthly total net assets available to Common and Preferred Stock
in excess of $100 million.
PFPC Inc., a member of the PNC Financial Services Group, Inc. ("PNC
Financial Services"), serves as the Fund's Administrator. As Administrator, PFPC
Inc. calculates the net asset value of the Fund's shares attributable to Common
Stock and generally assists in all aspects of the Fund's administration and
operation. As compensation for PFPC Inc.'s services as Administrator, the Fund
pays PFPC Inc. a monthly fee at an annual rate of 0.10% of the first $200
million of the Fund's average weekly total managed assets, 0.04% of the next
$300 million of the Fund's average weekly total managed assets, 0.03% of the
next $500 million of the Fund's average weekly total managed assets and 0.02% on
the Fund's average weekly total managed assets above $1 billion.
PFPC Inc. also serves as the Fund's Common Stock dividend-paying agent and
registrar (Transfer Agent). As compensation for PFPC Inc.'s services through
November 30, 2005, the Fund paid PFPC Inc. a fee at an annual rate of 0.02% of
the first $150 million of the Fund's average weekly net assets attributable to
Common Stock, 0.01% of the next $350 million of the Fund's average weekly net
assets attributable to Common Stock, 0.005% of the next $500 million of the
Fund's average weekly net assets attributable to Common Stock and 0.0025% of the
Fund's average weekly net assets attributable to Common Stock above $1 billion,
plus certain out of pocket expenses. Effective December 1, 2005, the Fund pays
PFPC Inc. a fee at an annual rate of 0.02% of the first $150 million of the
Fund's average weekly net assets attributable to Common Stock, 0.0075% of the
next $350 million of the Fund's average weekly net assets attributable to Common
Stock, and 0.0025% of the Fund's average weekly net assets attributable to
Common Stock above $500 million. For the purpose of calculating such fee, the
Fund's average weekly net assets attributable to Common Stock are deemed to be
the average weekly value of the Fund's total assets minus the sum of the Fund's
liabilities, and accumulated dividends, if any, on Preferred Stock. For this
calculation, the Fund's liabilities are deemed to include the aggregate
liquidation preference of any outstanding Fund preferred shares.
PFPC Trust Company ("PFPC Trust") serves as the Fund's custodian. PFPC
Trust is an indirect subsidiary of PNC Financial Services. As compensation for
PFPC Trust's services as custodian, the Fund pays PFPC Trust a monthly fee at
the annual rate of 0.010% of the first $200 million of the Fund's average weekly
total managed assets, 0.008% of the next $300 million of the Fund's average
weekly total managed assets, 0.006% of the next $500 million of the Fund's
average weekly total managed assets and 0.005% of
24
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------------------
the Fund's average weekly total managed assets above $1 billion.
The Fund currently pays each Director who is not a director, officer or
employee of the Adviser a fee of $9,000 per annum, plus $500 for each in-person
meeting of the Board of Directors or any committee and $150 for each telephone
meeting. The Audit Committee Chairman receives an additional annual fee of
$2,500. The Fund also reimburses all Directors for travel and out-of-pocket
expenses incurred in connection with such meetings.
On October 21, 2005, the Board of Directors accepted the resignation of
Peter C. Stimes as Chief Compliance Officer ("CCO") and Vice President of the
Fund and elected Chad C. Conwell as the new CCO. The Fund currently pays the
Adviser a fee of $37,500 per annum for CCO services and reimburses out-of-pocket
expenses incurred in connection with providing services in this role.
4. PURCHASES AND SALES OF SECURITIES
For the year ended November 30, 2005, the cost of purchases and proceeds
from sales of securities excluding short-term investments, aggregated
$119,950,344 and $125,752,819, respectively.
At November 30, 2005, the aggregate cost of securities for federal income
tax purposes was $198,501,069, the aggregate gross unrealized appreciation for
all securities in which there is an excess of value over tax cost was
$17,088,228 and the aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over value was $4,879,244.
5. COMMON STOCK
At November 30, 2005, 240,000,000 shares of $0.01 par value Common Stock
were authorized.
Common Stock transactions were as follows:
YEAR ENDED YEAR ENDED
11/30/05 11/30/04
------------------------ -----------------------
SHARES AMOUNT SHARES AMOUNT
-------- ---------- ------ ----------
Shares issued under the Dividend Reinvestment and Cash Purchase Plan 90,012 $1,150,181 125,523 $1,637,955
-------- ---------- ------- ----------
6. MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (MMP(R))
The Fund's Articles of Incorporation authorize the issuance of up to
10,000,000 shares of $0.01 par value preferred stock. The MMP(R) is senior to
the Common Stock and results in the financial leveraging of the Common Stock.
Such leveraginG tends to magnify both the risks and opportunities to Common
Stock Shareholders. Dividends on shares of MMP(R) are cumulative.
The Fund is required to meet certain asset coverage tests with respect to
the MMP(R). If the Fund fails to meet thesE requirements and does not correct
such failure, the Fund may be required to redeem, in part or in full, MMP(R) at
a redemptioN price of $100,000 per share plus an amount equal to the accumulated
and unpaid dividends on such shares in order to meet these requirements.
Additionally, failure to meet the
25
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------------------
foregoing asset requirements could restrict the Fund's ability to pay dividends
to Common Stock Shareholders and could lead to sales of portfolio securities at
inopportune times.
If the Fund allocates any net gains or income ineligible for the Dividends
Received Deduction to shares of the MMP(R), thE Fund is required to make
additional distributions to MMP(R) Shareholders or to pay a higher dividend rate
in amounts needed tO provide a return, net of tax, equal to the return had such
originally paid distributions been eligible for the Dividends Received
Deduction.
An auction of the MMP(R) is generally held every 49 days. Existing MMP(R)
Shareholders may submit an order to hold, bid OR sell such shares at par value
on each auction date. MMP(R) Shareholders may also trade shares in the secondary
market, if any, between auction dates.
At November 30, 2005, 700 shares of MMP(R) were outstanding at the
annualized rate of 3.00%. The dividend rate, as set bY the auction process, is
generally expected to vary with short-term interest rates. These rates may vary
in a manner unrelated to the income received on the Fund's assets, which could
have either a beneficial or detrimental impact on net investment income and
gains available to Common Stock Shareholders. While the Fund expects to
structure its portfolio holdings and hedging transactions to lessen such risks
to Common Stock Shareholders, there can be no assurance that such results will
be attained.
7. PORTFOLIO INVESTMENTS, CONCENTRATION AND INVESTMENT QUALITY
The Fund invests primarily in a diversified portfolio of preferred
securities. This includes traditional preferred stocks eligible for the
inter-corporate dividends received deduction ("DRD") and fully taxable
("hybrid") preferred securities. Under normal markets conditions, at least 80%
of the value of the Fund's net assets will be invested in preferred securities.
Also, under normal market conditions, the Fund invests at least 25% of its
assets in securities issued by companies in the utility industry and a
significant percentage, but no more than 25% of its assets, in securities issued
by companies in the banking industry. The Fund's portfolio may therefore be
subject to greater risk and market fluctuation than a portfolio of securities
representing a broader range of investment alternatives.
The Fund may invest up to 25% of its assets at the time of purchase in
securities rated below investment grade. These securities must be rated at least
either "Ba3" by Moody's Investors Service, Inc. or "BB-" by Standard & Poor's
or, if unrated, judged to be comparable in quality by the Adviser, in either
case at the time of purchase. However, these securities must be issued by an
issuer having a class of senior debt rated investment grade outstanding.
The Fund may invest up to 15% of its assets in common stocks and, under
normal market conditions, up to 20% of its assets in debt securities. Certain of
its investments in hybrid, i.e., fully taxable, preferred securities will be
subject to the foregoing 20% limitation to the extent that, in the opinion of
the Adviser, such investments are deemed to be debt-like in key characteristics.
Typically, a security will not be considered debt-like (a) if an issuer can
defer payment of income for eighteen months or more without triggering an event
of default and (b) if such issue is a junior and fully subordinated liability of
an issuer or its ultimate guarantor.
In addition to foreign money market securities, the Fund may invest up to
30% of its total assets in the securities of companies organized or having their
principal place of business outside the United States. All foreign securities
held by the Fund will be denominated in U.S. dollars.
26
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
------------------------------------------------------------------
8. SPECIAL INVESTMENT TECHNIQUES
The Fund may employ certain investment techniques in accordance with its
fundamental investment policies. These may include the use of when-issued and
delayed delivery transactions. Securities purchased or sold on a when-issued or
delayed delivery basis may be settled within 45 days after the date of the
transaction. Such transactions may expose the Fund to credit and market
valuation risk greater than that associated with regular trade settlement
procedures. The Fund may also enter into transactions, in accordance with its
investment policies, involving any or all of the following: short sales of
securities, futures contracts, interest rate swaps, swap futures, options on
futures contracts, options on securities, swaptions and certain credit
derivative transactions including, but not limited to, the purchase and sale of
credit protection. As in the case of when-issued securities, the use of
over-the-counter derivatives, such as interest rate swaps, swaptions, and credit
default swaps may expose the Fund to greater credit, operations, liquidity, and
valuation risk than is the case with regulated, exchange traded futures and
options. These transactions are used for hedging or other appropriate
risk-management purposes, or, under certain other circumstances, to increase
return. No assurance can be given that such transactions will achieve their
desired purposes or will result in an overall reduction of risk to the Fund.
9. SECURITIES LENDING
The Fund may lend up to 15% of its total assets (including the value of the
loan collateral) to certain qualified brokers in order to earn additional
income. The Fund receives compensation in the form of fees or interest earned on
the investment of any cash collateral received. The Fund also continues to
receive interest and dividends on the securities loaned. The Fund receives
collateral in the form of cash or securities with a market value at least equal
to the market value of the securities on loan, including accrued interest. In
the event of default or bankruptcy by the borrower, the Fund could experience
delays and costs in recovering the loaned securities or in gaining access to the
collateral. The Fund has the right under the lending agreement to recover the
securities from the borrower on demand. There were no securities lent as of
November 30, 2005 or during the year then ended.
27
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated:
We have audited the accompanying statement of assets and liabilities,
including the portfolio of investments, of the Flaherty & Crumrine Preferred
Income Opportunity Fund Incorporated, as of November 30, 2005, and the related
statement of operations for the year then ended, statements of changes in net
assets for each of the years in the two-year period then ended, and the
financial highlights for each of the years in the five-year period then ended.
These financial statements and financial highlights are the responsibility of
the Fund's management. Our responsibility is to express an opinion on these
financial statements and financial highlights based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements and financial highlights are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of November 30, 2005 by correspondence with
the custodian and brokers, or by other appropriate auditing procedures where
replies from brokers were not received. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred
to above present fairly, in all material respects, the financial position of the
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated, as of
November 30, 2005, the results of its operations, changes in its net assets and
financial highlights for each of the years described above in conformity with
accounting principles generally accepted in the United States of America.
/S/KPMG LLP
KPMG LLP
Boston, Massachusetts
January 20, 2006
28
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund
SUPPLEMENTARY TAX INFORMATION (UNAUDITED)
-----------------------------------------
Distributions to Common Stock and MMP(R) are characterized as follows for
purposes of Federal income taxes (as a percentagE of total distributions):
FISCAL YEAR 2005
----------------
INDIVIDUAL CORPORATION
---------- -----------
ORDINARY ORDINARY
QDI INCOME DRD INCOME
--- ------ --- ------
MMP(R) 87.09% 12.91% 85.24% 14.76%
Common Stock 87.09% 12.91% 85.24% 14.76%
CALENDAR YEAR 2005
------------------
INDIVIDUAL CORPORATION
---------- -----------
ORDINARY ORDINARY
QDI INCOME DRD INCOME
--- ------ --- ------
MMP(R) 87.09% 12.91% 85.24% 14.76%
Common Stock 86.57% 13.43% 84.66% 15.34%
For individual investors, a portion of the distributions consisted of
Qualified Dividend Income ("QDI") eligible for the maximum 15% personal tax
rate.
For corporate investors, a portion of the distributions consisted of income
eligible for the inter-corporate Dividends Received Deduction ("DRD").
29
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED)
------------------------------------------------------------------
DIVIDEND REINVESTMENT AND CASH PURCHASE PLAN
Under the Fund's Dividend Reinvestment and Cash Purchase Plan (the "Plan"),
a shareholder whose Common Stock is registered in their own name will have all
distributions reinvested automatically by PFPC Inc. as agent under the Plan,
unless the shareholder elects to receive cash. Distributions with respect to
shares registered in the name of a broker-dealer or other nominee (that is, in
"street name") may be reinvested by the broker or nominee in additional shares
under the Plan, but only if the service is provided by the broker or nominee,
unless the shareholder elects to receive distributions in cash. A shareholder
who holds Common Stock registered in the name of a broker or other nominee may
not be able to transfer the Common Stock to another broker or nominee and
continue to participate in the Plan. Investors who own Common Stock registered
in street name should consult their broker or nominee for details regarding
reinvestment.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price per share of the Fund's Common Stock is equal to or exceeds the
net asset value per share on the valuation date, participants in the Plan will
be issued new shares valued at the higher of net asset value or 95% of the then
current market value. Otherwise, PFPC Inc. will buy shares of the Fund's Common
Stock in the open market, on the New York Stock Exchange or elsewhere, on or
shortly after the payment date of the dividend or distribution and continuing
until the ex-dividend date of the Fund's next distribution to holders of the
Common Stock or until it has expended for such purchases all of the cash that
would otherwise be payable to the participants. The number of purchased shares
that will then be credited to the participants' accounts will be based on the
average per share purchase price of the shares so purchased, including brokerage
commissions. If PFPC Inc. commences purchases in the open market and the then
current market price of the shares (plus any estimated brokerage commissions)
subsequently exceeds their net asset value most recently determined before the
completion of the purchases, PFPC Inc. will attempt to terminate purchases in
the open market and cause the Fund to issue the remaining dividend or
distribution in shares. In this case, the number of shares received by the
participant will be based on the weighted average of prices paid for shares
purchased in the open market and the price at which the Fund issues the
remaining shares. These remaining shares will be issued by the Fund at the
higher of net asset value or 95% of the then current market value.
Plan participants are not subject to any charge for reinvesting dividends
or capital gains distributions. Each Plan participant will, however, bear a
proportionate share of brokerage commissions incurred with respect to PFPC
Inc.'s open market purchases in connection with the reinvestment of dividends or
capital gains distributions. For the year ended November 30, 2005, $1,151 in
brokerage commissions were incurred.
The automatic reinvestment of dividends and capital gains distributions
will not relieve Plan participants of any income tax that may be payable on the
dividends or capital gains distributions. A participant in the Plan will be
treated for Federal income tax purposes as having received, on the
30
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------------------
dividend payment date, a dividend or distribution in an amount equal to the cash
that the participant could have received instead of shares.
In addition to acquiring shares of Common Stock through the reinvestment of
cash dividends and distributions, a shareholder may invest any further amounts
from $100 to $3,000 semi-annually at the then current market price in shares
purchased through the Plan. Such semi-annual investments are subject to any
brokerage commission charges incurred by PFPC Inc. under the Plan.
A shareholder whose Common Stock is registered in his or her own name may
terminate participation in the Plan at any time by notifying PFPC Inc. in
writing, by completing the form on the back of the Plan account statement and
forwarding it to PFPC Inc., or by calling PFPC Inc. directly. A termination will
be effective immediately if notice is received by PFPC Inc. not less than 10
days before any dividend or distribution record date. Otherwise, the termination
will be effective, and only with respect to any subsequent dividends or
distributions, on the first day after the dividend or distribution has been
credited to the participant's account in additional shares of the Fund. Upon
termination and according to a participant's instructions, PFPC Inc. will either
(a) issue certificates for the whole shares credited to the shareholder's Plan
account and a check representing any fractional shares or (b) sell the shares in
the market. Shareholders who hold Common Stock registered in the name of a
broker or other nominee should consult their broker or nominee to terminate
participation.
The Plan is described in more detail in the Fund's Plan brochure.
Information concerning the Plan may be obtained from PFPC Inc. at
1-800-331-1710.
PROXY VOTING POLICIES AND PROXY VOTING RECORD ON FORM N-PX
The Fund files Form N-PX with its complete proxy voting record for the 12
months ended June 30th, no later than August 31st of each year. The Fund filed
its latest Form N-PX with the Securities and Exchange Commission ("SEC") on
August 17, 2005. This filing, as well as the Fund's proxy voting policies and
procedures, are available (i) without charge, upon request, by calling the
Fund's transfer agent at 1-800-331-1710 and (ii) on the SEC's website at
WWW.SEC.GOV. In addition, the Fund's proxy voting policies and procedures are
available on the Fund's website at WWW.PREFERREDINCOME.COM.
PORTFOLIO SCHEDULE ON FORM N-Q
The Fund files a complete schedule of portfolio holdings with the SEC
for the first and third fiscal quarters on Form N-Q, the latest of which was
filed for the quarter ended August 31, 2005. The Fund's Form N-Q is available on
the SEC's website at WWW.SEC.GOV or may be viewed and obtained from the SEC's
Public Reference Room in Washington D.C. Information on the operation of the
Public Reference Section may be obtained by calling 1-800-SEC-0330.
31
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------------------
PORTFOLIO MANAGEMENT TEAM
In managing the day-to-day operations of the Fund, the Adviser relies
on the expertise of its team of money management professionals, consisting of
Messrs. Crumrine, Ettinger, Stone and Chadwick. Effective as of November 30,
2005, Peter C. Stimes ceased being involved in managing the day-to-day
operations of the Fund. The professional backgrounds of each member of the
management team are included in the "Information about Fund Directors and
Officers" section of this report beginning on page 33.
CERTIFICATIONS
Donald F. Crumrine, as the Fund's Chief Executive Officer, has
certified to the New York Stock Exchange that, as of May 18, 2005, he was not
aware of any violation by the Fund of applicable NYSE corporate governance
listing standards. The Fund's reports to the SEC on Forms N-CSR and N-Q contain
certifications by the Fund's principal executive officer and principal financial
officer that relate to the Fund's disclosure in such reports and that are
required by rule 30a-2(a) under the 1940 Act.
32
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
----------------------------------------------
INFORMATION ABOUT FUND DIRECTORS AND OFFICERS
The business and affairs of the Fund are managed under the direction of
the Fund's Board of Directors. Information pertaining to the Directors and
officers of the Fund is set forth below.
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
------- -------------- ------------ ---------- ----------- ----------------
NON-INTERESTED
DIRECTORS:
----------
DAVID GALE Director Class I Director President & CEO of 4 Metromedia International
Delta Dividend Group, Inc. since January 1997 Delta Dividend Group, Inc.
220 Montgomery Street Group, Inc. (investments). (telecommunications).
Suite 426 Flaherty & Crumrine
San Francisco, CA 94104 Preferred Income Fund,
Age: 56 Flaherty & Crumrine/
Claymore Preferred
Securities Income Fund
and Flaherty & Crumrine/
Claymore Total Return
Fund.
MORGAN GUST Director Class III Director President of Giant 4 Flaherty & Crumrine
Giant Industries, Inc. since February 1992 Industries, Inc. (petroleum Preferred Income Fund,
23733 N. Scottsdale Road refining and marketing) since Flaherty & Crumrine/
Scottsdale, AZ 85255 March 2002, and for more Claymore Preferred
Age: 58 than five years prior thereto, Securities Income Fund
Executive Vice President, and Flaherty & Crumrine/
and various other Vice Claymore Total Return
President positions at Fund.
Giant Industries, Inc.
-----------------------
* The Fund's Board of Directors is divided into three classes, each class having
a term of three years. Each year the term of office of one class expires and the
successor or successors elected to such class serve for a three year term. The
three year term for each class expires as follows:
CLASS I DIRECTOR - three year term expires at
the Fund's 2006 Annual Meeting of Shareholders;
director may continue in office until his
successor is duly elected and qualified. CLASS
II DIRECTORS - three year term expires at the
Fund's 2007 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS III DIRECTORS - three year term expires
at the Fund's 2008 Annual Meeting of
Shareholders; directors may continue in office
until their successors are duly elected and
qualified.
33
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
----------------------------------------------
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
------- -------------- ------------ ---------- ----------- ----------------
NON-INTERESTED
DIRECTORS:
----------
KAREN H. HOGAN+ Director Class III Director Retired; Community 4 Flaherty & Crumrine
301 E. Colorado Boulevard since April 2005 Volunteer; from September Preferred Income Fund,
Suite 720 1985 to January 1997, Flaherty & Crumrine/
Pasadena, CA 91101 Senior Vice President of Claymore Preferred
Age: 44 Preferred Stock Origination Securities Income Fund
at Lehman Brothers and and Flaherty & Crumrine/
previously, Vice President of Claymore Total Return
New Product Development. Fund.
ROBERT F. WULF Director Class II Director Financial Consultant; 4 Flaherty & Crumrine
3560 Deerfield Drive South since February 1992 Trustee, University of Preferred Income Fund,
Salem, OR 97302 Oregon Foundation; Flaherty & Crumrine/
Age: 68 Trustee, San Francisco Claymore Preferred
Theological Seminary. Securities Income Fund
and Flaherty & Crumrine/
Claymore Total Return
Fund.
* The Fund's Board of Directors is divided into three classes, each class having
a term of three years. Each year the term of office of one class expires and the
successor or successors elected to such class serve for a three year term. The
three year term for each class expires as follows:
CLASS I DIRECTOR - three year term expires at
the Fund's 2006 Annual Meeting of Shareholders;
director may continue in office until his
successor is duly elected and qualified. CLASS
II DIRECTORS - three year term expires at the
Fund's 2007 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS III DIRECTORS - three year term expires
at the Fund's 2008 Annual Meeting of
Shareholders; directors may continue in office
until their successors are duly elected and
qualified.
+ As a Director, represents holders of shares of the Fund's Money Market
Cumulative Preferred(TM) Stock.
34
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
----------------------------------------------
PRINCIPAL NUMBER OF FUNDS
TERM OF OFFICE OCCUPATION(S) IN FUND COMPLEX
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST OVERSEEN OTHER DIRECTORSHIPS
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS BY DIRECTOR HELD BY DIRECTOR
------- -------------- ------------ ---------- ----------- ----------------
INTERESTED
DIRECTOR:
---------
DONALD F. CRUMRINE+, ++ Director, Class II Director Chairman of the Board 4 Flaherty & Crumrine
301 E. Colorado Boulevard Chairman since February 1992 and Director of Flaherty & Preferred Income Fund,
Suite 720 of the Board Crumrine Incorporated. Flaherty & Crumrine/
Pasadena, CA 91101 and Chief Claymore Preferred
Age: 58 Executive Officer Securities Income Fund
and Flaherty & Crumrine/
Claymore Total Return
Fund.
* The Fund's Board of Directors is divided into three classes, each class having
a term of three years. Each year the term of office of one class expires and the
successor or successors elected to such class serve for a three year term. The
three year term for each class expires as follows:
CLASS I DIRECTOR - three year term expires at
the Fund's 2006 Annual Meeting of Shareholders;
director may continue in office until his
successor is duly elected and qualified. CLASS
II DIRECTORS - three year term expires at the
Fund's 2007 Annual Meeting of Shareholders;
directors may continue in office until their
successors are duly elected and qualified.
CLASS III DIRECTORS - three year term expires
at the Fund's 2008 Annual Meeting of
Shareholders; directors may continue in office
until their successors are duly elected and
qualified.
+ As a Director, represents holders of shares of the Fund's Money Market
Cumulative Preferred(TM) Stock.
++ "Interested person" of the Fund as defined in the Investment Company Act of
1940. Mr. Crumrine is considered an "interested person" because of his
affiliation with Flaherty & Crumrine Incorporated which acts as the Fund's
investment adviser.
35
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
----------------------------------------------
PRINCIPAL
TERM OF OFFICE OCCUPATION(S)
NAME, ADDRESS, POSITION(S) AND LENGTH OF DURING PAST
AND AGE HELD WITH FUND TIME SERVED* FIVE YEARS
------- -------------- ------------ ----------
OFFICERS:
---------
ROBERT M. ETTINGER President Since President and Director of Flaherty &
301 E. Colorado Boulevard October 2002 Crumrine Incorporated.
Suite 720
Pasadena, CA 91101
Age: 47
R. ERIC CHADWICK Chief Financial Since Vice President of Flaherty & Crumrine
301 E. Colorado Boulevard Officer, Vice October 2002 Incorporated since August 2001, and
Suite 720 President portfolio manager of Flaherty & Crumrine
Pasadena, CA 91101 and Treasurer Incorporated.
Age: 30
CHAD C. CONWELL Chief Compliance Since Chief Compliance Officer of Flaherty &
301 E. Colorado Boulevard Officer, Vice July 2005 Crumrine Incorporated since September
Suite 720 President and 2005; since July 2005, Vice President of
Pasadena, CA 91101 Secretary Flaherty & Crumrine Incorporated; from
Age: 33 September 1998 through June 2005,
Attorney with Paul, Hastings, Janofsky
& Walker LLP.
BRADFORD S. STONE Vice President Since Vice President of Flaherty & Crumrine
392 Springfield Avenue and Assistant July 2003 Incorporated since May 2003; from June
Mezzanine Suite Treasurer 2001 to April 2003, Director of U.S. Market
Summit, NJ 07901 Strategy at Barclays Capital; from February
Age: 46 1987 to June 2001 Vice President of Goldman,
Sachs & Company as Director of U.S. Interest
Rate Strategy and, previously, Vice President
of Interest Rate Product Sales.
CHRISTOPHER D. RYAN Vice President Since Vice President of Flaherty & Crumrine
301 E. Colorado Boulevard April 2005 Incorporated since February 2004;
Suite 720 October 2002 to February 2004, Product
Pasadena, CA 91101 Analyst of Flaherty & Crumrine Incorporated.
Age: 38 From 1999 to 2002 graduate student.
LAURIE C. LODOLO Assistant Since Assistant Compliance Officer of Flaherty &
301 E. Colorado Boulevard Compliance July 2004 Crumrine Incorporated since August 2004;
Suite 720 Officer, Assistant since February 2004, Secretary of Flaherty
Pasadena, CA 91101 Treasurer and & Crumrine Incorporated; Account
Age: 42 Assistant Secretary Administrator of Flaherty & Crumrine
Incorporated.
36
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
ADDITIONAL INFORMATION (UNAUDITED) (CONTINUED)
------------------------------------------------------------------
AMENDMENTS TO CHARTER AND BYLAWS
In addition to the changes to the Fund's Charter that were approved by
Shareholders at the April 21, 2005 Annual Meeting of Shareholders, the Board of
Directors approved Articles Supplementary to the Fund's Charter and Amended and
Restated Bylaws ("Bylaws") at its April 21, 2005 meeting. Among the changes
reflected in the Fund's Bylaws are a bylaw amendment and related Articles
Supplementary reflecting the Board's determination to opt in to certain
provisions of the Maryland Unsolicited Takeover Act. Such action provides that
(1) the number of directors can be fixed only by the Board and (2) a director
elected by the Board to fill a Board vacancy holds office until the end of the
term of the class to which the director has been elected (rather than until the
next annual meeting).
At its April 21, 2005 Board meeting, the Board also approved an amendment
to the Bylaws to reserve exclusively to the directors the power to amend the
by-laws, which previously could be amended by either the directors or the
holders of a majority of the outstanding shares of the Fund. This change
enhances the Board's ability to control Fund operations, including the manner in
which shareholder meetings are conducted and the procedure for setting the
agenda for those meetings, as well as the Board nomination process and the vote
required to remove a director. At the same meeting, the Board also approved an
amendment to the Bylaws to clarify certain aspects of the calling of a Special
Meeting of Shareholders. Specifically, such Bylaw amendment clarifies that if a
shareholder or group of shareholders has requested and paid for a Special
Meeting of Shareholders, another Shareholder cannot add an additional proposal
to the proxy statement for that meeting.
The Board determined that the changes to the Bylaws and related Articles
Supplementary provide the Fund with certain additional protections in the case
of a hostile takeover bid to gain control of the Fund and change the objective
to the detriment of long-term shareholders. However, the Board is aware of no
such hostile takeover bid at the present time.
37
[This page intentionally left blank]
[This page intentionally left blank]
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
Christopher D. Ryan, CFA
Vice President
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?
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 GRAPHIC
FLAHERTY & CRUMRINE
PREFERRED INCOME
OPPORTUNITY FUND
ANNUAL
REPORT
NOVEMBER 30, 2005
web site: www.preferredincome.com
ITEM 2. CODE OF ETHICS.
(a) The registrant, as of the end of the period covered by this report, has
adopted a code of ethics that applies to the registrant's principal
executive officer, principal financial officer, principal accounting
officer or controller, or persons performing similar functions,
regardless of whether these individuals are employed by the registrant
or a third party.
(c) There have been no amendments, during the period covered by this
report, to a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are employed
by the registrant or a third party, and that relates to any element of
the code of ethics description.
(d) The registrant has not granted any waivers, including an implicit
waiver, from a provision of the code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller, or persons performing
similar functions, regardless of whether these individuals are employed
by the registrant or a third party, that relates to one or more of the
items set forth in paragraph (b) of this item's instructions.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
As of the end of the period covered by the report, the registrant's board of
directors has determined that David Gale, Karen H. Hogan and Robert F. Wulf are
each qualified to serve as an audit committee financial expert serving on its
audit committee and that they all are "independent," as defined by the
Securities and Exchange Commission.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
AUDIT FEES
(a) The aggregate fees billed for each of the last two fiscal years for
professional services rendered by the principal accountant for the
audit of the registrant's annual financial statements or services that
are normally provided by the accountant in connection with statutory
and regulatory filings or engagements for those fiscal years are
$36,500 for 2005 and $34,500 for 2004.
AUDIT-RELATED FEES
(b) The aggregate fees billed in each of the last two fiscal years for
assurance and related services by the principal accountant that are
reasonably related to the performance of the audit of the registrant's
financial statements and are not reported under paragraph (a) of this
Item are $0 for 2005 and $0 for 2004.
TAX FEES
(c) The aggregate fees billed in each of the last two fiscal years for
professional services rendered by the principal accountant for tax
compliance, tax advice, and tax planning are $6,400 for 2005 and $6,000
for 2004.
ALL OTHER FEES
(d) The aggregate fees billed in each of the last two fiscal years for
products and services provided by the principal accountant, other than
the services reported in paragraphs (a) through (c) of this Item are
$12,100 for 2005 and $11,200 for 2004. These services consist of the
principal accountant providing a "Quarterly Agreed-Upon-Procedures
Report on Articles Supplementary". These Agreed-Upon-Procedures ("AUP")
are requirements arising from the Articles Supplementary creating the
Fund's preferred stock. Specifically, the credit rating agencies
require such AUP be undertaken in order to maintain the preferred
stock's rating.
(e)(1) The Fund's Audit Committee Charter states that the Audit Committee
shall have the duty and power to pre-approve all audit and non-audit
services to be provided by the auditors to the Fund, and all non-audit
services to be provided by the auditors to the Fund's investment
adviser and any service providers controlling, controlled by or under
common control with the Fund's investment adviser that provide ongoing
services to the Fund, if the engagement relates directly to the
operations and financial reporting of the Fund.
(e)(2) The percentage of services described in each of paragraphs (b) through
(d) of this Item that were approved by the audit committee pursuant to
paragraph (c)(7)(i)(C) of Rule 2-01 of Regulation S-X are as follows:
(b) 0%
(c) 0%
(d) 0%
(f) The percentage of hours expended on the principal accountant's
engagement to audit the registrant's financial statements for the most
recent fiscal year that were attributed to work performed by persons
other than the principal accountant's full-time, permanent employees
was 0%.
(g) The aggregate non-audit fees billed by the registrant's accountant for
services rendered to the registrant, and rendered to the registrant's
investment adviser (not including any sub-adviser whose role is
primarily portfolio management and is subcontracted with or overseen by
another investment adviser), and any entity controlling, controlled by,
or under common control with the adviser that provides ongoing services
to the registrant for each of the last two fiscal years of the
registrant was $0 for 2005 and $0 for 2004.
(h) The registrant's audit committee of the board of directors has
considered whether the provision of non-audit services that were
rendered to the registrant's investment adviser (not including any
sub-adviser whose role is primarily portfolio management and is
subcontracted with or overseen
by another investment adviser), and any entity controlling, controlled
by, or under common control with the investment adviser that provides
ongoing services to the registrant that were not pre-approved pursuant
to paragraph (c)(7)(ii) of Rule 2-01 of Regulation S-X is compatible
with maintaining the principal accountant's independence.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
The registrant has a separately designated audit committee consisting of all the
independent directors of the registrant. The members of the audit committee are:
David Gale, Morgan Gust, Karen H. Hogan, and Robert F. Wulf.
ITEM 6. SCHEDULE OF INVESTMENTS.
Schedule of Investments in securities of unaffiliated issuers as of the close of
the reporting period is included as part of the report to shareholders filed
under Item 1 of this form.
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
The Proxy Voting Policies are attached herewith.
ADVISER PROXY VOTING POLICIES AND PROCEDURES
Flaherty & Crumrine Incorporated ("F&C") acts as discretionary investment
adviser for various clients, including the following six pooled investment
vehicles (the "Funds"):
As adviser to the "U.S. Funds" Flaherty & Crumrine Preferred Income Fund
Flaherty & Crumrine Preferred Income
Opportunity Fund
Flaherty & Crumrine/Claymore Preferred
Securities Income Fund
Flaherty & Crumrine/Claymore Total Return
Fund
As sub-adviser
to the "Canadian Funds" Flaherty & Crumrine Investment Grade Fixed
Income Fund
Flaherty & Crumrine Investment Grade
Preferred Fund
F&C's authority to vote proxies for its clients is established through the
delegation of discretionary authority under its investment advisory contracts
and the U.S. Funds have adopted these policies and procedures for themselves
PURPOSE
These policies and procedures are designed to satisfy F&C's duties of care and
loyalty to its clients with respect to monitoring corporate events and
exercising proxy authority in the best interests of such clients.
In connection with this objective, these policies and procedures are designed to
deal with potential complexities which may arise in cases where F&C's interests
conflict or appear to conflict with the interests of its clients.
These policies and procedures are also designed to communicate with clients the
methods and rationale whereby F&C exercises proxy voting authority.
This document is available to any client or Fund shareholder upon request and
F&C will make available to such clients and Fund shareholders the record of
F&C's votes promptly upon request and to the extent required by Federal law and
regulations.
FUNDAMENTAL STANDARD
F&C will be guided by the principle that, in those cases where it has proxy
voting authority, it will vote proxies, and take such other corporate actions,
consistent with the interest of its clients in a manner free of conflicts of
interest with the objective of client wealth maximization.
GENERAL
F&C has divided its discussion in this document into two major categories:
voting with respect to common stock and voting with respect to senior equity,
e.g., preferred stock and similar securities. In those events where F&C may have
to take action with respect to debt, such as in the case of amendments of
covenants or in the case of default, bankruptcy, reorganization, etc., F&C will
apply the same principles as would apply to common or preferred stock, MUTATIS
MUTANDIS.
These policies and procedures apply only where the client has granted
discretionary authority with respect to proxy voting. Where F&C does not have
authority, it will keep appropriate written records evidencing that such
discretionary authority has not been granted.
F&C may choose not to keep written copies of proxy materials that are subject to
SEC regulation and maintained in the SEC's EDGAR database. In other instances,
F&C will keep appropriate written records in its files or in reasonably
accessible storage.
Similarly, F&C will keep in its files, or reasonably accessible storage, work
papers and other materials that were significant to F&C in making a decision how
to vote.
For purposes of decision making, F&C will assume that each ballot for which it
casts votes is the only security of an issuer held by the client. Thus, when
casting votes where F&C may have discretionary authority with regard to several
different securities of the same issuer, it may vote securities "in favor" for
those securities or classes where F&C has determined the matter in question to
be beneficial while, at the same time, voting "against" for those securities or
classes where F&C has determined the matter to be adverse. Such cases
occasionally arise, for example, in those instances where a vote is required by
both common and preferred shareholders, voting as separate classes, for a change
in the terms regarding preferred stock issuance.
F&C will reach its voting decisions independently, after appropriate
investigation. It does not generally intend to delegate its decision making or
to rely on the recommendations of any third party, although it may take such
recommendations into consideration. F&C may consult with such other experts,
such as CPA's, investment bankers, attorneys, etc., as it regards necessary to
help it reach informed decisions.
Absent good reason to the contrary, F&C will generally give substantial weight
to management recommendations regarding voting. This is based on the view that
management is usually in the best position to know which corporate actions are
in the best interests of common shareholders as a whole.
With regard to those shareholder-originated proposals which are typically
described as "social, environmental, and corporate responsibility" matters, F&C
will typically give weight to management's recommendations and vote against such
shareholder proposals, particularly if the adoption of such proposals would
bring about burdens or costs not borne by those of the issuer's competitors.
In cases where the voting of proxies would not justify the time and costs
involved, F&C may refrain from voting. From the individual client's perspective,
this would most typically come about in the case of small holdings, such as
might arise in connection with spin-offs or other corporate reorganizations.
From the perspective of F&C's institutional clients, this envisions cases (1) as
more fully described below where preferred and common shareholders vote together
as a class or (2) other similar or analogous instances.
Ultimately, all voting decisions are made on a case-by-case basis, taking
relevant considerations into account.
VOTING OF COMMON STOCK PROXIES
F&C categorizes matters as either routine or non-routine, which definition may
or may not precisely conform to the definitions set forth by securities
exchanges or other bodies categorizing such matters. Routine matters would
include such things as the voting for directors and the ratification of auditors
and most shareholder proposals regarding social, environmental, and corporate
responsibility matters. Absent good reason to the contrary, F&C normally will
vote in favor of management's recommendations on these routine matters.
Non-routine matters might include, without limitation, such things as (1)
amendments to management incentive plans, (2) the authorization of additional
common or preferred stock, (3) initiation or termination of barriers to takeover
or acquisition, (4) mergers or acquisitions, (5) changes in the state of
incorporation, (6) corporate reorganizations, and (7) "contested" director
slates. In non-routine matters, F&C, as a matter of policy, will attempt to be
generally familiar with the questions at issue. This will include, without
limitation, studying news in the popular press, regulatory filings, and
competing proxy solicitation materials, if any. Non-routine matters will be
voted on a case-by-case basis, given the complexity of many of these issues.
VOTING OF PREFERRED STOCK PROXIES
Preferred stock, which is defined to include any form of equity senior to common
stock, generally has voting rights only in the event that the issuer has not
made timely payments of income and principal to shareholders or in the event
that a corporation desires to effectuate some change in its articles of
incorporation which might modify the rights of preferred stockholders. These are
non-routine in both form and substance.
In the case of non-routine matters having to do with the modification of the
rights or protections accorded preferred stock shareholders, F&C will attempt,
wherever possible, to assess the costs and benefits of such modifications and
will vote in favor of such modifications only if they are in the bests interests
of preferred shareholders or if the issuer has offered sufficient compensation
to preferred stock shareholders to offset the reasonably foreseeable adverse
consequences of such modifications. A similar
type of analysis would be made in the case where preferred shares, as a class,
are entitled to vote on a merger or other substantial transaction.
In the case of the election of directors when timely payments to preferred
shareholders have not been made ("contingent voting"), F&C will cast its votes
on a case-by-case basis after investigation of the qualifications and
independence of the persons standing for election.
Routine matters regarding preferred stock are the exception, rather than the
rule, and typically arise when the preferred and common shareholders vote
together as a class on such matters as election of directors. F&C will vote on a
case-by-case basis, reflecting the principles set forth elsewhere in this
document. However, in those instances (1) where the common shares of an issuer
are held by a parent company and (2) where, because of that, the election
outcome is not in doubt, F&C does not intend to vote such proxies since the time
and costs would outweigh the benefits.
ACTUAL AND APPARENT CONFLICTS OF INTEREST
Potential conflicts of interest between F&C and F&C's clients may arise when
F&C's relationships with an issuer or with a related third party conflict or
appear to conflict with the best interests of F&C's clients.
F&C will indicate in its voting records available to clients whether or not a
material conflict exists or appears to exist. In addition, F&C will communicate
with the client (which means the independent Directors or Director(s) they may
so designate in the case of the U.S. Funds and the investment adviser in the
case of the Canadian Funds) in instances when a material conflict of interest
may be apparent. F&C must describe the conflict to the client and state F&C's
voting recommendation and the basis therefor. If the client considers there to
be a reasonable basis for the proposed vote notwithstanding the conflict or, in
the case of the Funds, that the recommendation was not affected by the conflict
(without considering the merits of the proposal), F&C will vote in accordance
with the recommendation it had made to the client.
In all such instances, F&C will keep reasonable documentation supporting its
voting decisions and/or recommendations to clients.
AMENDMENT OF THE POLICIES AND PROCEDURES
These policies and procedures may be modified at any time by action of the Board
of Directors of F&C but will not become effective, in the case of the U.S.
Funds, unless they are approved by majority vote of the non-interested directors
of the U.S. Funds. Any such modifications will be sent to F&C's clients by mail
and/or other electronic means in a timely manner. These policies and procedures,
and any amendments hereto, will be posted on the U.S. Funds' websites and will
be disclosed in reports to shareholders as required by law.
ITEM 8. PORTFOLIO MANAGERS OF CLOSED-END MANAGEMENT INVESTMENT COMPANIES.
Not yet applicable.
ITEM 9. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT
COMPANY AND AFFILIATED PURCHASERS.
Not applicable.
ITEM 10. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There have been no material changes to the procedures by which the shareholders
may recommend nominees to the registrant's board of directors, where those
changes were implemented after the registrant last provided disclosure in
response to the requirements of Item 7(d)(2)(ii)(G) of Schedule 14A (17 CFR
240.14a-101), or this Item.
ITEM 11. 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 second fiscal
quarter of the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
ITEM 12. EXHIBITS.
(a)(1) Code of ethics, or any amendment thereto, that is the subject of
disclosure required by Item 2 is attached hereto.
(a)(2) Certifications pursuant to Rule 30a-2(a) under the 1940 Act
and Section 302 of the Sarbanes-Oxley Act of 2002 are
attached hereto.
(a)(3) Not applicable.
(b) Certifications pursuant to Rule 30a-2(b) under the 1940 Act
and Section 906 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 JANUARY 27, 2006
----------------------------------------------------------------------------
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 JANUARY 27, 2006
----------------------------------------------------------------------------
By (Signature and Title)* /S/ R. ERIC CHADWICK
-------------------------------------------------------
R. Eric Chadwick, Chief Financial Officer, Treasurer
and Vice President
(principal financial officer)
Date JANUARY 27, 2006
----------------------------------------------------------------------------
* Print the name and title of each signing officer under his or her signature.