FLAHERTY & CRUMRINE PREFERRED INCOME OPPORTUNITY FUND
To the Shareholders of the Flaherty & Crumrine Preferred Income Opportunity Fund
("PFO"):
Beginning with issues arising in the subprime mortgage loan market, a
well-publicized series of events has roiled financial markets over the past
several months. The preferred stock market and closed-end funds have been
particularly impacted, and, consequently, for the Fund's third fiscal quarter
ended August 31, 2007, the Fund had a total return of -5.5% on the net asset
value (NAV) of its Common Stock.
As we've discussed in prior letters, problems in the subprime mortgage
loan market first bubbled up in January of this year. Throughout this year, the
Fund has had no direct exposure to subprime loans, and we avoided investing in
companies that had meaningful risks associated with the product. Our research
team closely monitors the loan quality and underwriting standards of each
financial company in the portfolio, and we invest only in companies that meet
our quality thresholds. We're not perfect, but we believe that the Fund's
portfolio is comprised of holdings in fundamentally sound companies.
In isolation, the impact of this weakness in the subprime loan market
should have been limited to direct participants in this market; unfortunately,
given the complexity of the financial system, few things happen in isolation.
When the subprime problems became more pronounced several months ago, the
fallout from this subprime weakness has been widespread and severe.
Fueled by low interest rates and relatively relaxed financing terms, a
great deal more leverage had become built into the system than even just a few
years ago. As investments directly associated with subprime mortgages declined
significantly in value during the quarter, they became very illiquid.
Highly-leveraged investors then were forced to sell other more liquid types of
assets like investment-grade preferred and debt securities to meet redemptions
or margin calls. Risk and liquidity premiums surged, indiscriminately taking
yields on all credit instruments with them. In short, excess leverage created
the financial powder keg and subprime loan problems provided the spark.
With yields on preferred securities rising more than yields on more senior
debt securities, the prices of the securities in our portfolio fell as the
supply of preferred securities exceeded demand. The rearview mirror is still a
bit foggy, but it appears that much of the selling pressure came from hedge
funds. Hedge funds had become the 800-pound gorilla in the credit markets
recently, and although they've been forced to slim down, they can still have a
big impact.
Hedge funds were not the only investors selling, but since they aren't
required to disclose their preferred securities holdings, no one knows how
extensive their selling pressure was. As a result, prospective buyers were
extremely cautious because they feared additional selling would further depress
prices. Wall Street brokers and dealers normally stand ready to provide
liquidity to sellers, but they appeared reluctant to buy. Long-term investors
like the Fund, as well as individual investors, insurance companies and pension
funds, also stayed on the sidelines for the most part. During the quarter, and
since it ended, we have added some positions at attractive levels, but we are
continuing to take a go-slow approach.
Subprime fallout also extended to the market for short-term, or
money-market, securities such as commercial paper and auction-rate securities.
This market was in a state of disarray throughout August and into early
September. Investors in money-market securities don't like risk, and, at the
slightest hint of trouble, they pull their money out and invest in short-term
government securities. While the perception of risk is real for a small segment
of borrowers, the reaction seems to be disproportionate.
These disruptions in the short-term market impacted the Fund in two
meaningful ways. First, they contributed to price weakness in many of the Fund's
investments, particularly in financial companies.
While banks can fulfill their short-term financing needs with customer deposits
and through the Federal Reserve, finance companies like broker-dealers need to
rely on the short-term securities market to run their day-to-day operations.
This market is like oxygen to most financial companies, and restricting their
borrowing makes it more expensive for them to operate. We continue to believe
that none of the financial companies in our portfolio face significant risks of
default as a result of this increased cost of borrowing, but it has clearly
impacted their earnings outlooks and the prices of their preferred securities.
Second, the rates paid by the Fund on its own auction-rate Preferred Stock
have risen significantly as a direct result of liquidity problems in the
financial markets. The frustrating irony is that the Fund's own Preferred Stock
is of very high quality with a rating of AA and logic would dictate that rates
should fall as investors seek out higher quality investments. This high quality
is a function of the Investment Company Act (which governs the Fund) and the
guidelines imposed by the rating agencies. As Kevin Conery, Merrill Lynch's
Preferred Stock Strategist, recently observed about the Investment Company Act,
"while some have criticized it for being too conservative for its 200% asset
coverage test, at times like these in the market, we respect this discipline."
While we are beginning to see some improvement in the auction rates of our
Preferred Stock, and the recent interest rate cut by the Federal Reserve should
help over the coming months, we haven't yet returned to more normalized auction
rates.
The higher cost of our auction-rate Preferred Stock comes directly out of
money available for distribution as the monthly Common Stock dividend. On the
plus side, higher yields on preferred stock mean that we have been able to
increase the income earned on the portfolio. It will take some time to see how
these two offsetting factors affect income; in the meantime we are doing our
best to manage both. Effective with the August dividend, we raised the dividend
by 5% and we continue to be comfortable with that increased dividend payment;
nonetheless, we strive to pay out a rate that is sustainable and will make
adjustments as conditions warrant.
We have been through periods of fear and volatility before, and we remain
optimistic about long-term prospects for the Fund. Such periods create
opportunities to buy securities of sound companies at discounted prices, as many
shorter-term investors exit the market by selling both good and bad investments.
We expect both more rational pricing and reduced risk of early redemption of our
portfolio securities as markets settle down - both of which should benefit
future returns for long-term investors. In addition, our Preferred Stock auction
rates are likely to normalize in due course, as the market begins to better
recognize the credit quality of our Preferred Stock. While we cannot say with
certainty when, or if, these things will happen, as managers we are doing our
best to position the Fund to ride out the current storm and prepare for better
days ahead.
In volatile market conditions like these, we may provide more frequent
updates about the preferred securities market and the Fund's portfolio. We did
so this past quarter by adding special Questions and Answers regarding the
market price of the Fund's shares to the Fund's website at
WWW.PREFERREDINCOME.COM. We encourage you to stay informed as shareholders by
periodically visiting the website for additional information about your Fund.
Sincerely,
/s/ Donald F. Crumrine /s/ Robert M. Ettinger
Donald F. Crumrine Robert M. Ettinger
Chairman of the Board President
October 17, 2007
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OVERVIEW
AUGUST 31, 2007 (UNAUDITED)
------------------------------------------------------------------
FUND STATISTICS ON 08/31/07
--------------------------------------------------------------------------------
Net Asset Value $ 11.24
Market Price $ 11.00
Discount 2.14%
Yield on Market Price 7.42%
Common Stock Shares Outstanding 11,736,346
MOODY'S RATINGS % OF PORTFOLIO
--------------------------------------------------------------------------------
AA 3.5%
A 14.1%
BBB 57.2%
BB 14.3%
Not Rated 8.7%
--------------------------------------------------------------------------------
Below Investment Grade* 16.3%
* BELOW INVESTMENT GRADE BY BOTH MOODY'S AND S&P.
[THE FOLLOWING TABLE WAS REPRESENTED BY A PIE CHART IN THE PRINTED MATERIAL.]
INDUSTRY CATEGORIES % OF PORTFOLIO
--------------------------------------------------------------------------------
Utilities 34%
Banking 24%
Insurance 16%
Financial Services 12%
Energy 8%
REITs 3%
Other 3%
TOP 10 HOLDINGS BY ISSUER % OF PORTFOLIO
--------------------------------------------------------------------------------
Interstate Power & Light 5.1%
Liberty Mutual Group 4.1%
Xcel Energy 3.7%
First Republic Bank 3.3%
EOG Resources 3.2%
Public Storage 3.2%
CoBank ACB 3.1%
Banco Santander 3.0%
Goldman Sachs 2.9%
HSBC Plc 2.6%
% OF PORTFOLIO**
--------------------------------------------------------------------------------
Holdings Generating Qualified Dividend Income (QDI) for
Individuals 61%
Holdings Generating Income Eligible for the Corporate Dividend
Received Deduction (DRD) 53%
--------------------------------------------------------------------------------
** 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.
3
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS
AUGUST 31, 2007 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------- ---------------
PREFERRED SECURITIES -- 93.0%
BANKING -- 23.9%
------------------------------------------------------------------------------------------------------------------------------------
$ 3,000,000 Astoria Capital Trust I, 9.75% 11/01/29, Series B .......................................... $ 3,392,376
Banco Santander:
17,000 Adj. Rate Pfd., 144A**** ................................................................ 388,960**(1)
195,600 6.50% Pfd., 144A**** .................................................................... 4,389,264**(1)
56,800 6.80% Pfd., 144A**** .................................................................... 1,322,872**(1)
$ 1,900,000 Capital One Capital III, 7.686% 08/15/36 ................................................... 1,764,007
$ 3,000,000 CBG Florida REIT Corporation, 7.114%, 144A**** ............................................. 2,922,033
19,648 Citizens Funding Trust I, 7.50% Pfd. 09/15/66 .............................................. 484,447
Cobank, ACB:
45,000 7.00% Pfd., 144A**** .................................................................... 2,311,200*
75,000 7.814% Pfd., 144A**** ................................................................... 4,018,500*
$ 1,250,000 Comercia Capital Trust II, 6.576%, 02/30/37 ................................................ 1,109,492
4,500 FBOP Corporation, Adj. Rate Pfd., 144A**** ................................................. 4,606,875*
$ 2,250,000 First Hawaiian Capital I, 8.343% 07/01/27, Series B ........................................ 2,348,077(1)
First Republic Bank:
200,000 6.25% Pfd. .............................................................................. 4,962,500*
5,000 6.70% Pfd. .............................................................................. 123,750*
890 First Republic Preferred Capital Corporation, 10.50% Pfd., 144A**** ........................ 996,640
22,500 First Republic Preferred Capital Corporation II, 8.75% Pfd., Series B, 144A**** ............ 577,350
5,000 Fleet Capital Trust VIII, 7.20% Pfd. 03/15/32 .............................................. 126,094
5,000 HSBC Series II, Variable Inverse Pfd., Pvt. ................................................ 5,055,000*
2,500 HSBC USA, Inc., $2.8575 Pfd. ............................................................... 122,734*
7,000 ING Groep NV, 7.05% Pfd. ................................................................... 173,547**(1)
12,000 Keycorp Capital VIII, 7.00% Pfd. 06/15/66 .................................................. 297,750
45,000 Keycorp Capital IX, 6.75% Pfd. 12/15/66 .................................................... 1,054,688
28,000 PFGI Capital Corporation, 7.75% Pfd. ....................................................... 716,800
$ 250,000 Regions Financing Trust II, 6.625%, 05/15/47 ............................................... 230,922
10 Roslyn Real Estate, 8.95% Pfd., Series C, 144A**** ......................................... 1,068,658
70,500 Sovereign Bancorp, 7.30% Pfd., Series C .................................................... 1,883,231*
20,375 Sovereign Capital Trust V, 7.75% Pfd. 05/22/36 ............................................. 518,927
U.S. Bancorp, Auction Pass-Through Trust, Cl. B:
9 Series 2006-5, Variable Rate Pfd., 144A**** ............................................. 202,500*
9 Series 2006-6, Variable Rate Pfd., 144A**** ............................................. 202,500*
$ 900,000 Webster Capital Trust IV, 7.65% 06/15/37 ................................................... 889,636
------------------------------------------------------------------------------------------------------------------------------
48,261,330
---------------
4
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2007 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------- ---------------
PREFERRED SECURITIES -- (CONTINUED)
FINANCIAL SERVICES -- 11.2%
------------------------------------------------------------------------------------------------------------------------------------
CIT Group, Inc.:
$ 3,550,000 6.10% ................................................................................... $ 2,618,661
60,000 6.35% Pfd., Series A .................................................................... 1,311,750*
160,000 Countrywide Capital IV, 6.75% Pfd. ......................................................... 2,978,000(2)
12,000 Countrywide Capital V, 7.00% Pfd., 11/01/36 ................................................ 222,150
Goldman Sachs:
11,000 Adj. Rate Pfd., Series A ................................................................ 264,000*
36,500 Cabco Trust Capital I, Adj. Rate Pfd. 02/15/34 .......................................... 821,706
25 Pass-Through Certificates, Class B, 144A**** ............................................ 2,005,000*
3,500 STRIPES Custodial Receipts, Pvt. ........................................................ 2,838,500*
Merrill Lynch:
83,000 Adj. Rate Pfd., Series 5 ................................................................ 1,859,723*
29,000 Adj. Rate Pfd., Series H ................................................................ 667,000*
3,000 Series II STRIPES Custodial Receipts, Pvt. .............................................. 2,298,000*
SLM Corporation:
94,150 6.97% Pfd., Series A .................................................................... 4,366,677*
4,000 Adj. Rate Pfd., Series B ................................................................ 308,000*
------------------------------------------------------------------------------------------------------------------------------
22,559,167
---------------
INSURANCE -- 13.6%
------------------------------------------------------------------------------------------------------------------------------------
48,800 ACE Ltd., 7.80% Pfd., Series C ............................................................. 1,236,714**(1)
$ 4,250,000 AON Capital Trust A, 8.205% 01/01/27 ....................................................... 4,501,264
Arch Capital Group Ltd.:
10,000 7.875% Pfd., Series B ................................................................... 245,000**(1)
24,400 8.00% Pfd., Series A .................................................................... 607,714**(1)
$ 2,500,000 AXA SA, 6.463%, 144A**** ................................................................... 2,266,300**(1)
Axis Capital Holdings:
12,100 7.25% Pfd., Series A .................................................................... 288,736**(1)
24,700 7.50% Pfd., Series B .................................................................... 2,472,470(1)
22,300 Berkley W.R. Capital Trust II, 6.75% Pfd. 07/26/45 ......................................... 524,329
75,000 Delphi Financial Group, 7.376% Pfd. 05/15/37 ............................................... 1,802,250
5,750 Everest Re Capital Trust II, 6.20% Pfd., Series B .......................................... 128,872
$ 935,000 Everest Re Holdings, 6.60%, 05/15/37 ....................................................... 872,307
$ 4,500,000 Liberty Mutual Group, 7.80% 03/15/37, 144A**** ............................................. 4,022,919
29,350 MetLife, Inc., Adj. Rate Pfd., Series A .................................................... 726,779*
$ 511,000 Provident Financing Trust I, 7.405% 03/15/38 ............................................... 495,453
Renaissancere Holdings Ltd.:
27,950 6.08% Pfd., Series C .................................................................... 586,391**(1)
79,100 6.60% Pfd., Series D .................................................................... 1,748,110**(1)
5
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2007 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------- ---------------
PREFERRED SECURITIES -- (CONTINUED)
INSURANCE -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
115,500 Scottish Re Group Ltd., 7.25% Pfd. ......................................................... $ 2,014,031**(1)
$ 1,060,000 USF&G Capital, 8.312% 07/01/46, 144A**** ................................................... 1,263,944
$ 1,888,000 XL Capital Ltd., 6.50%, Series E ........................................................... 1,669,485(1)
------------------------------------------------------------------------------------------------------------------------------
27,473,068
---------------
UTILITIES -- 32.6%
------------------------------------------------------------------------------------------------------------------------------------
Alabama Power Company:
4,980 4.60% Pfd. .............................................................................. 415,282*
6,485 4.72% Pfd. .............................................................................. 554,857*
868 4.92% Pfd. .............................................................................. 77,417*
6,579 Baltimore Gas & Electric Company, 6.70% Pfd., Series 1993 .................................. 682,366*
74,270 Calenergy Capital Trust III, 6.50% Pfd. 09/01/27 ........................................... 3,554,562
1,628 Central Hudson Gas & Electric Corporation, 4.35% Pfd., Series D, Pvt. ...................... 130,224*
3,798 Central Maine Power Company, 4.75% Pfd. .................................................... 316,069*
8,339 Central Vermont Public Service Corporation, 8.30% Sinking Fund Pfd., Pvt. .................. 867,089*
Connecticut Light & Power Company:
2,050 4.50% Pfd., Series 1956 ................................................................. 81,877*
10,000 4.50% Pfd., Series 1963, Pvt. ........................................................... 397,400*
25,000 5.28% Pfd., Series 1967 ................................................................. 1,177,000*
883 $2.04 Pfd., Series 1949 ................................................................. 31,965*
2,900 $2.20 Pfd., Series 1949 ................................................................. 113,245*
9,652 $3.24 Pfd. .............................................................................. 505,958*
2,000 Consolidated Edison Company of New York, 4.65% Pfd., Series C .............................. 172,520*
7,500 Dayton Power and Light Company, 3.90% Pfd., Series C ....................................... 502,800*
15,030 Duquesne Light Company, 3.75% Pfd. ......................................................... 493,886*
Entergy Arkansas, Inc.:
2,840 4.56% Pfd. .............................................................................. 232,198*
3,050 4.56% Pfd., Series 1965 ................................................................. 249,368*
1,435 6.08% Pfd. .............................................................................. 147,374*
90,000 6.45% Pfd. .............................................................................. 2,322,900*
2,441 Entergy Gulf States, Inc., 7.56% Pfd. ...................................................... 240,756*
36,000 Entergy Louisiana, Inc., 6.95% Pfd. ........................................................ 3,769,920*
Entergy Mississippi, Inc.:
4,616 4.36% Pfd. .............................................................................. 331,290*
5,000 4.92% Pfd. .............................................................................. 404,900*
4,400 Florida Power Company, 4.75% Pfd. .......................................................... 386,408*
68,500 FPC Capital I, 7.10% Pfd., Series A ........................................................ 1,693,238
8,900 Georgia Power, 6.125% Pfd. ................................................................. 229,798*
6
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2007 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------- ---------------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
Great Plains Energy, Inc.:
1,625 4.20% Pfd. .............................................................................. $ 123,760*
2,000 4.35% Pfd. .............................................................................. 157,780*
Hawaiian Electric Company, Inc.:
2,471 5.00% Pfd., Series D .................................................................... 43,629*
7,438 5.00% Pfd., Series E .................................................................... 131,327*
1,383 5.00% Pfd., Series I .................................................................... 24,419*
30,500 Indianapolis Power & Light Company, 5.65% Pfd. ............................................. 2,867,000*
340,000 Interstate Power & Light Company, 8.375% Pfd., Series B .................................... 10,281,600*
2,588 New York State Electric & Gas, $4.50 Pfd., Series 1949 ..................................... 216,357*
Ohio Power Company:
3,018 4.20% Pfd. .............................................................................. 236,340*
1,251 4.40% Pfd. .............................................................................. 102,620*
Pacific Enterprises:
13,680 $4.36 Pfd. .............................................................................. 1,101,787*
24,985 $4.50 Pfd. .............................................................................. 2,076,753*
Pacific Gas & Electric Co.:
7,600 4.50% Pfd., Series H .................................................................... 156,712*
41,500 5.00% Pfd., Series D .................................................................... 951,180*
83,000 5.00% Pfd., Series E .................................................................... 1,918,960*
PacifiCorp:
5,672 $4.56 Pfd. .............................................................................. 470,549*
6,708 $4.72 Pfd. .............................................................................. 576,016*
1,250 PECO Energy Company, $4.30 Pfd., Series B .................................................. 99,888*
$ 1,500,000 PECO Energy Capital Trust III, 7.38% 04/06/28, Series D .................................... 1,543,650
14,020 Public Service Electric & Gas Company, 5.28% Pfd., Series E ................................ 1,379,848*
70,210 San Diego Gas & Electric Company, $1.70 Pfd. ............................................... 1,840,822*
South Carolina Electric & Gas Company:
13,974 5.125% Purchase Fund Pfd., Pvt. ......................................................... 718,683*
7,774 6.00% Purchase Fund Pfd., Pvt. .......................................................... 396,085*
11,300 Southern California Edison, 6.00% Pfd. ..................................................... 1,116,666*
Southern Union Company:
$ 700,000 7.20% 11/01/66 .......................................................................... 708,154
51,750 7.55% Pfd. .............................................................................. 1,321,695*
$ 750,000 TXU Electric Capital V, 8.175% 01/30/37 .................................................... 730,125
Union Electric Company:
5,700 4.56% Pfd. .............................................................................. 460,446*
10,156 $7.64 Pfd. .............................................................................. 1,043,021*
7
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2007 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------- ---------------
PREFERRED SECURITIES -- (CONTINUED)
UTILITIES -- (CONTINUED)
------------------------------------------------------------------------------------------------------------------------------------
Virginia Electric & Power Company:
1,665 $4.04 Pfd. .............................................................................. $ 123,843*
2,470 $4.20 Pfd. .............................................................................. 191,005*
1,673 $4.80 Pfd. .............................................................................. 147,860*
3,878 $6.98 Pfd. .............................................................................. 394,950*
12,500 $7.05 Pfd. .............................................................................. 1,264,844*
58,100 Virginia Power Capital Trust, 7.375% Pfd. 07/30/42 ......................................... 1,461,941
2,262 Washington Gas & Light Company, $4.25 Pfd. ................................................. 186,072*
$ 1,700,000 Wisconsin Energy Corporation, 6.25%, 05/15/67 .............................................. 1,649,660
Xcel Energy, Inc.:
15,000 $4.08 Pfd., Series B .................................................................... 1,132,500*
20,040 $4.10 Pfd., Series C .................................................................... 1,520,435*
35,510 $4.11 Pfd., Series D .................................................................... 2,700,891*
17,750 $4.16 Pfd., Series E .................................................................... 1,366,395*
10,000 $4.56 Pfd., Series G .................................................................... 843,800*
------------------------------------------------------------------------------------------------------------------------------
65,862,735
---------------
ENERGY -- 5.8%
------------------------------------------------------------------------------------------------------------------------------------
8,000 Devon Energy Corporation, 6.49% Pfd., Series A ............................................. 818,750*
$ 2,500,000 Enterprise Products Partners, 7.034%, 01/15/68 ............................................. 2,255,585
6,125 EOG Resources, Inc., 7.195% Pfd., Series B ................................................. 6,521,349*
$ 1,200,000 KN Capital Trust III, 7.63% 04/15/28 ....................................................... 1,069,080
10,000 Lasmo America Limited, 8.15% Pfd., 144A**** ................................................ 1,043,800*(1)
------------------------------------------------------------------------------------------------------------------------------
11,708,564
---------------
REAL ESTATE INVESTMENT TRUST (REIT) -- 3.4%
------------------------------------------------------------------------------------------------------------------------------------
12,600 BRE Properties, Inc., 6.75% Pfd., Series D ................................................. 286,650
1,000 Equity Residential Properties, 8.29% Pfd., Series K ........................................ 57,600
Public Storage, Inc.:
121,975 6.45% Pfd., Series F .................................................................... 2,729,191
97,700 6.625% Pfd., Series M ................................................................... 2,216,569
10,500 6.75% Pfd., Series E .................................................................... 243,469
5,500 6.75% Pfd., Series L .................................................................... 127,016
4,500 6.95% Pfd., Series H .................................................................... 107,297
40,100 7.25% Pfd., Series K .................................................................... 989,969
------------------------------------------------------------------------------------------------------------------------------
6,757,761
---------------
8
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2007 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------- ---------------
PREFERRED SECURITIES -- (CONTINUED)
MISCELLANEOUS INDUSTRIES -- 2.1%
------------------------------------------------------------------------------------------------------------------------------------
13,600 E.I. Du Pont de Nemours and Company, $4.50 Pfd., Series B .................................. $ 1,076,848*
35,000 Ocean Spray Cranberries, Inc., 6.25% Pfd., 144A**** ........................................ 3,178,000*
------------------------------------------------------------------------------------------------------------------------------
4,254,848
---------------
U.S. GOVERNMENT SECURITIES -- 0.4%
------------------------------------------------------------------------------------------------------------------------------------
Freddie Mac:
9,500 5.00%, Series F ......................................................................... 407,075*
20,000 5.66%, Series W ......................................................................... 472,800*
------------------------------------------------------------------------------------------------------------------------------
879,875
---------------
TOTAL PREFERRED SECURITIES
(Cost $188,161,522) ..................................................................... 187,757,348
---------------
CORPORATE DEBT SECURITIES -- 6.2%
FINANCIAL SERVICES -- 0.8%
------------------------------------------------------------------------------------------------------------------------------------
$ 1,600,000 Lehman Brothers Holdings, 6.875% 07/17/37, Sub. Note ....................................... 1,507,702
------------------------------------------------------------------------------------------------------------------------------
1,507,702
---------------
INSURANCE -- 2.5%
------------------------------------------------------------------------------------------------------------------------------------
$ 900,000 Farmers Exchange Capital, 7.20% 07/15/48, 144A**** ......................................... 875,880
$ 4,417,000 Liberty Mutual Insurance, 7.697% 10/15/97, 144A**** ........................................ 4,231,928
------------------------------------------------------------------------------------------------------------------------------
5,107,808
---------------
UTILITIES -- 1.0%
------------------------------------------------------------------------------------------------------------------------------------
$ 1,000,000 Duke Capital Corporation, 8.00% 10/01/19, Senior Notes ..................................... 1,123,007
10,000 Entergy Louisiana LLC, 7.60% 04/01/32 ...................................................... 251,250
30,500 PPL Capital Funding, Inc., 6.85% 07/01/47 .................................................. 730,475
------------------------------------------------------------------------------------------------------------------------------
2,104,732
---------------
ENERGY -- 1.9%
------------------------------------------------------------------------------------------------------------------------------------
$ 2,450,000 KN Energy, Inc., 7.45% 03/01/98 ............................................................ 2,123,449
71,900 Nexen, Inc., 7.35% Subordinated Notes ...................................................... 1,797,500(1)
------------------------------------------------------------------------------------------------------------------------------
3,920,949
---------------
TOTAL CORPORATE DEBT SECURITIES
(Cost $12,898,640) ...................................................................... 12,641,191
---------------
9
--------------------------------------------------------------------------------
Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
PORTFOLIO OF INVESTMENTS (CONTINUED)
AUGUST 31, 2007 (UNAUDITED)
------------------------------------------------------------------
SHARES/$ PAR VALUE
------------- ---------------
OPTION CONTRACTS -- 0.0%
470 December Put Options on December U.S. Treasury Bond Futures, Expiring 11/20/07 $ 29,375+
930 October Put Options on December U.S. Treasury Bond Futures, Expiring 09/21/07 18,750+
------------------------------------------------------------------------------------------------------------------------------
TOTAL OPTION CONTRACTS
(Cost $174,307) ......................................................................... 48,125
---------------
MONEY MARKET FUND -- 0.2%
382,732 BlackRock Provident Institutional, TempFund ................................................ 382,732
------------------------------------------------------------------------------------------------------------------------------
TOTAL MONEY MARKET FUND
(Cost $382,732) ......................................................................... 382,732
---------------
SECURITIES LENDING COLLATERAL -- 0.7%
1,383,200 Institutional Money Market Trust ........................................................... 1,383,200
------------------------------------------------------------------------------------------------------------------------------
TOTAL SECURITIES LENDING COLLATERAL
(Cost $1,383,200) ....................................................................... 1,383,200
---------------
TOTAL INVESTMENTS (Cost $203,000,401***) ..................................................... 100.1% 202,212,596
OTHER ASSETS AND LIABILITIES (Net) ........................................................... (0.1)% (291,876)
------- ---------------
TOTAL NET ASSETS AVAILABLE TO COMMON AND PREFERRED STOCK ..................................... 100.0%++ $ 201,920,720
------- ---------------
MONEY MARKET CUMULATIVE PREFERRED(TM) STOCK (MMP(R)) REDEMPTION VALUE ...................................... (70,000,000)
---------------
TOTAL NET ASSETS AVAILABLE TO COMMON STOCK ................................................................. $ 131,920,720
===============
-----------------
* Securities eligible for the Dividends Received Deduction and distributing
Qualified Dividend Income.
** Securities distributing Qualified Dividend Income only.
*** Aggregate cost of securities held.
**** Securities exempt from registration under Rule 144A of the Securities Act
of 1933. These securities may be resold in transactions exempt from
registration to qualified institutional buyers. These securities have been
determined to be liquid under the guidelines established by the Board of
Directors.
(1) Foreign Issuer.
(2) Security on loan.
+ Non-income producing.
++ The percentage shown for each investment category is the total value of
that category as a percentage of net assets available to Common and
Preferred Stock.
ABBREVIATIONS:
PFD. -- Preferred Securities
PVT. -- Private Placement Securities
10
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Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
STATEMENT OF CHANGES IN NET ASSETS AVAILABLE TO COMMON STOCK (1)
FOR THE PERIOD FROM DECEMBER 1, 2006 THROUGH AUGUST 31, 2007 (UNAUDITED)
-------------------------------------------------------------------------
OPERATIONS:
Net investment income ................................................................ $ 9,372,333
Net realized gain/(loss) on investments sold during the period ....................... (991,550)
Change in net unrealized appreciation/depreciation of investments held during the
period. ............................................................................ (15,040,896)
Distributions to MMP(R)* Shareholders from net investment income, including changes
in accumulated undeclared distributions ............................................ (2,390,637)
-------------
NET DECREASE IN NET ASSETS RESULTING FROM OPERATIONS ................................. (9,050,750)
DISTRIBUTIONS:
Dividends paid from net investment income to Common Stock Shareholders(2) ............ (6,888,954)
-------------
TOTAL DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS ..................................... (6,888,954)
FUND SHARE TRANSACTIONS:
Increase from shares issued under the Dividend Reinvestment and Cash Purchase Plan ... 503,098
-------------
NET INCREASE IN NET ASSETS AVAILABLE TO COMMON STOCK RESULTING FROM
FUND SHARE TRANSACTIONS ............................................................ 503,098
NET DECREASE IN NET ASSETS AVAILABLE TO COMMON STOCK -------------
FOR THE PERIOD ....................................................................... $ (15,436,606)
=============
------------------------------------------------------------------------------------------------------------
NET ASSETS AVAILABLE TO COMMON STOCK:
Beginning of period .................................................................. $ 147,357,326
Net decrease in net assets during the period ......................................... (15,436,606)
-------------
End of period ........................................................................ $ 131,920,720
=============
-----------------
* Money Market Cumulative Preferred(TM) StocK.
(1) These tables summarize the nine months ended August 31, 2007 and should be
read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2006.
(2) May include income earned, but not paid out, in prior fiscal year.
11
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Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
FINANCIAL HIGHLIGHTS(1)
FOR THE PERIOD FROM DECEMBER 1, 2006 THROUGH AUGUST 31, 2007 (UNAUDITED)
FOR A COMMON STOCK SHARE OUTSTANDING THROUGHOUT THE PERIOD.
-----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE:
Net asset value, beginning of period ................................................. $ 12.60
-------------
INVESTMENT OPERATIONS:
Net investment income ................................................................ 0.80
Net realized and unrealized gain/(loss) on investments ............................... (1.37)
DISTRIBUTIONS TO MMP(R)* SHAREHOLDERS:
From net investment income ........................................................... (0.20)
From net realized capital gains ...................................................... --
-------------
Total from investment operations ..................................................... (0.77)
-------------
DISTRIBUTIONS TO COMMON STOCK SHAREHOLDERS:
From net investment income ........................................................... (0.59)
From net realized capital gains ...................................................... --
-------------
Total distributions to Common Stock Shareholders ..................................... (0.59)
-------------
Net asset value, end of period ....................................................... $ 11.24
=============
Market value, end of period .......................................................... $ 11.00
=============
Common Stock shares outstanding, end of period ....................................... 11,736,346
=============
RATIOS TO AVERAGE NET ASSETS AVAILABLE TO COMMON STOCK SHAREHOLDERS:
Net investment income+ ............................................................... 6.54%**
Operating expenses ................................................................... 1.57%**
----------------------------------
SUPPLEMENTAL DATA:++
Portfolio turnover rate .............................................................. 51%***
Total net assets available to Common and Preferred Stock, end of period
(in 000's). ........................................................................ $ 201,921
Ratio of operating expenses to total average net assets available to
Common and Preferred Stock ......................................................... 1.05%**
(1) These tables summarize the nine months ended August 31, 2007 and should be
read in conjunction with the Fund's audited financial statements,
including footnotes, in its Annual Report dated November 30, 2006.
* Money Market Cumulative Preferred (TM) Stock.
** Annualized.
*** Not Annualized
+ The net investment income ratios reflect income net of operating expenses
and payments to MMP(R)* Shareholders.
++ Information presented under heading Supplemental Data includes MMP(R)*.
12
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Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
FINANCIAL HIGHLIGHTS (CONTINUED)
PER SHARE OF COMMON STOCK (UNAUDITED)
-------------------------------------
TOTAL DIVIDEND
DIVIDENDS NET ASSET NYSE REINVESTMENT
PAID VALUE CLOSING PRICE PRICE(1)
--------- --------- ------------- ------------
December 31, 2006 ........... $0.0650 $12.39 $12.36 $12.39
January 31, 2007 ............ 0.0650 12.42 12.39 12.42
February 28, 2007 ........... 0.0650 12.60 12.61 12.60
March 31, 2007 .............. 0.0650 12.32 12.66 12.32
April 30, 2007 .............. 0.0650 12.33 12.62 12.33
May 31, 2007 ................ 0.0650 12.10 12.13 12.10
June 30, 2007 ............... 0.0650 11.97 12.00 11.97
July 31, 2007 ............... 0.0650 11.55 11.46 11.39
August 31, 2007 ............. 0.0680 11.24 11.00 11.04
-----------------
(1) Whenever the net asset value per share of the Fund's Common Stock is less
than or equal to the market price per share on the reinvestment date, new
shares issued will be valued at the higher of net asset value or 95% of
the then current market price. Otherwise, the reinvestment shares of
Common Stock will be purchased in the open market.
13
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Flaherty & Crumrine Preferred Income Opportunity Fund Incorporated
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
-----------------------------------------
1. AGGREGATE INFORMATION FOR FEDERAL INCOME TAX PURPOSES
At August 31, 2007, the aggregate cost of securities for federal income
tax purposes was $203,135,259, the aggregate gross unrealized appreciation for
all securities in which there is an excess of value over tax cost was
$8,564,450, and the aggregate gross unrealized depreciation for all securities
in which there is an excess of tax cost over value was $9,487,113.
14
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DIRECTORS
Donald F. Crumrine, CFA
Chairman of the Board
David Gale
Morgan Gust
Karen H. Hogan
Robert F. Wulf, CFA
OFFICERS
Donald F. Crumrine, CFA
Chief Executive Officer
Robert M. Ettinger, CFA
President
R. Eric Chadwick, CFA
Chief Financial Officer,
Vice President and Treasurer
Chad C. Conwell
Chief Compliance Officer,
Vice President and Secretary
Bradford S. Stone
Vice President and
Assistant Treasurer
Laurie C. Lodolo
Assistant Compliance Officer,
Assistant Treasurer and
Assistant Secretary
INVESTMENT ADVISER
Flaherty & Crumrine Incorporated
e-mail: flaherty@pfdincome.com
QUESTIONS CONCERNING YOUR SHARES OF FLAHERTY & CRUMRINE PREFERRED INCOME
OPPORTUNITY FUND?
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.
Flaherty & Crumrine
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PREFERRED INCOME
OPPORTUNITY FUND
Quarterly
Report
August 31, 2007
www.preferredincome.com