HIGH INCOME
---------------------
Opportunity Fund Inc.
Quarterly Report
December 31, 1996
<PAGE>
- ---------------------------------
High Income Opportunity Fund Inc.
- ---------------------------------
Dear Shareholder:
We are pleased to provide you with the quarterly report for the High Income
Opportunity Fund Inc. for the three-month period ended December 31, 1996. Over
the past three months the Fund paid dividends totaling $0.279 per share. The
table below shows the annualized distribution rates and three-month total
returns for the Fund based on its December 31, 1996 net asset value (NAV) per
share and New York Stock Exchange (NYSE) closing price.
Price Annualized Three-Month
Per Share Distribution Rate Total Return
------------- ----------------- ------------
$11.92 (NAV) 9.36% 4.19%
$11.50 (NYSE) 9.70% 2.44%
In comparison, closed-end high yield bond funds posted a 3.80% average total
return based on NAV during the same time period, according to Lipper Analytical
Services, an independent fund tracking organization. Whereas the High Income
Opportunity Fund's unleveraged position and relative conservative credit quality
had held back its performance throughout the first nine months of 1996, the
better quality issues that the Fund emphasizes helped boost the Fund's
performance during the three-month period covered by this report.
Market and Economic Overview
The fixed income markets began to rally in the fourth quarter of 1996, with
strong performance gains by investment grade and U.S. Treasury bonds. The
ongoing slowdown in U.S. economic growth over the past three months, combined
with favorable inflation data, helped to bolster the domestic fixed income
markets. The bond market rally was also fueled by the Federal Reserve Board's
decision to remain on the sidelines, and not raise interest rates. However,
since early December, several factors have prevented interest rates from
declining further. For example, Federal Reserve Chairman Alan Greenspan's
comments about "irrational exuberance" in the financial markets caused a
widespread but temporary sell-off. In addition, reports of
stronger-than-expected growth in the manufacturing and construction sectors have
caused inflation fears to resurface in the bond market.
While the high yield market has generally outperformed the more interest-rate
sensitive, longer maturity Treasury and investment grade markets throughout much
of 1996, the high yield market's performance lagged that of the other bond
markets during the past three months. In particular, the lower quality issues
(CCC/Caa and CC/Ca) turned in disappointing performance most likely
1
<PAGE>
due to the slowdown in U.S. economic growth and an increasing number of bond
defaults in 1996. The most visible defaults or failures in 1996 included Marvel
Entertainment, Moblemedia, Anchor Glass, CAI Wireless and MidAmerican West. A
number of these issues experienced price declines of between 60% to 80%. Given
our relatively conservative investment philosophy, we avoided these issues.
In contrast to the performance of the lower-rated high yield issues, the current
steady growth rate of the U.S. economy has been particularly constructive for
the better quality high yield issues (BB/Ba and B/B). During the past three
months, the performance of better quality issues has exceeded that of the more
speculative, lower quality issues. In addition, more investors have become
dissatisfied with the modest returns and extreme price swings in the U.S.
Treasury market during 1996 and have invested increasing amounts of money into
the upper-rated tier of the high yield market for yields of 3% to 4% (300 to 400
basis points) higher than those offered by Treasuries. In fact, during the
course of 1996, over $15 billion flowed into high yield bond funds. At the same
time, a large number of institutional investors such as insurance companies and
municipal and corporate pension fund managers allocated a larger portion of
their assets to the high yield market, particularly the better quality issues.
In our view, this trend is likely to continue well into 1997 as investors search
for higher yielding investment alternatives. However, selectivity has become
increasingly more important when picking investment ideas given the high yield
market's fully valued levels and the likelihood of an increasing number of bond
defaults in 1997.
Portfolio Strategy
Despite the increasing number of disappointments, the outlook for the high yield
bond market in 1997 is still positive for a large number of companies that are
successfully competing in their markets. These companies tend to be in
industries that continue to benefit from new technology. We have found many
growth opportunities in the telecommunications, media, cable TV and oil and
natural gas industries, and the Fund is overweighted in these areas. Some of the
issues that we continue to favor include Time Warner, Brooks Fiber, Teleport and
Revlon to name a few. All of these companies continue to generate improving
results through either increased market share and/or improved cost controls.
We still firmly believe that the better quality high yield issues offer superior
risk-adjusted returns and lower default risk relative to lower-rated issues.
Considering the trend toward greater industry competition and little pricing
power in most sectors of the domestic economy, we believe our prudent
2
<PAGE>
approach to high yield investing will generate the most consistent positive
returns in 1997. We, therefore, will continue to avoid the sectors of the
economy that are experiencing weak consumer spending trends as well as heavy
industry competition. In addition, we will continue to place more emphasis on
higher quality issues and avoid the weaker, lower-tier issues.
We have experienced a slight rise in our cash reserves as a result of some
sector shifting and profit taking. However, we expect to be fully invested
within the first quarter of 1997 as we take advantage of a relatively heavy new
issue calendar in the coming months. As we become fully invested, we will begin
to extend the Fund's average maturity modestly to the 7- to 8-year range from
the 5- to 6-year range. This strategy should not be construed as an attempt to
time the beneficial effects of falling interest rates, but rather as a
reflection of the Fund being fully invested.
Outlook
In our opinion, the U.S. economy will remain in a moderate growth environment at
least through the first half of 1997. We expect most consumer sensitive sectors
will continue to experience problems as individuals slowly reduce their debt
burdens. As a result, we believe there will be a continued increase in default
rates among high yield issuers, especially the weaker, more vulnerable companies
that are having trouble competing. However, we do remain optimistic on the high
yield market's prospects for 1997, particularly among the higher rated issues,
and are positioned accordingly.
Given our expectations for modest economic growth with continued low inflation,
we remain constructive on the bond market as a whole. Although we expect
intermediate- and long-term interest rates to decline over the first half of
1997, there is still the possibility for some market turbulence over the next
six months resulting from conflicting or inconclusive economic data.
In closing, that you for investing in the High Income Opportunity Fund Inc. We
look forward to continuing to help you achieve your investment goals.
Sincerely,
/s/ Heath B. McLendon /s/ John C. Bianchi
Heath B. McLendon John C. Bianchi, CFA
Chairman and Vice President
Chief Executive Officer
January 15, 1997
3
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) December 31, 1996
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
CORPORATE BONDS AND NOTES -- 91.2%
================================================================================
Aerospace/Defense -- 2.5%
$ 6,725,000 BB Airplanes Pass Through Trust, Corporate
Collateralized Mortgage Obligation,
Series D, 10.875% due 3/15/19 $ 7,418,079
2,000,000 B+ Hawk Corp., Sr. Notes, 10.250% due 12/1/03 2,060,000
4,415,000 B Howmet Corp., Sr. Sub. Notes, 10.000%
due 12/1/03 4,812,350
3,700,000 B Tracor Inc., Sr. Sub. Notes, 10.875%
due 8/15/01 3,954,375
2,325,000 B UNC Inc., Sr. Sub. Notes, 11.000% due 6/1/06+ 2,487,750
- --------------------------------------------------------------------------------
20,732,554
- --------------------------------------------------------------------------------
Banks - Savings and Loans -- 1.8%
13,150,000 B First Nationwide Holdings, Sr. Notes,
12.500% due 4/15/03 14,628,531
- --------------------------------------------------------------------------------
Broadcasting - TV, Cable and Radio -- 25.0%
1,700,000 NR All American Communications Inc.,
Sr. Sub. Notes, 10.875% due 10/15/01 1,725,500
3,575,000 B- Allbritton Communications Corp., Sr.
Sub. Debentures, 11.500% due 8/15/04 3,789,500
8,800,000 CCC+ Australis Holdings, Sr. Sub. Discount
Notes, step bond to yield 14.993%
due 11/1/02++ 5,192,000
16,425,000 CCC Australis Media Ltd., Sr. Sub. Discount
Notes, step bond to yield 13.740%
due 5/15/03++ 9,362,250
Bell Cablemedia, Sr. Discounts Notes:
16,275,000 BB- Step bond to yield 14.500% due 7/15/04 14,301,656
6,125,000 BB- Step bond to yield 12.770% due 9/15/05 4,961,250
Cablevision Systems Corp., Sr. Sub.
Debentures:
10,775,000 B 10.750% due 4/1/04 11,206,000
12,950,000 B 9.875% due 2/15/13 12,820,500
5,025,000 B 10.500% due 5/15/16 5,213,438
12,500,000 B Comcast UK Cable, Sr. Unsecured Discount
Debentures, step bond to yield 11.720%
due 11/15/07 8,843,750
Globopar, Debentures:
3,500,000 NR Series A, 9.875% due 12/20/04 3,500,000
3,500,000 NR Series B, 10.500% due 12/20/06 3,500,000
1,000,000 B Jacor Communications Corp., Sr. Sub. Notes,
9.750% due 12/15/06 1,030,000
26,100,000 B Marcus Cable Capital Corp., Sr. Discount
Notes, step bond to yield 13.400%
due 8/1/04 21,206,250
22,045,000 B NWCG Holdings, Sr. Discount Notes, zero
coupon bond to yield 16.360% due 6/15/99 18,517,800
Rogers Cablesystems, Sr. Secured Second
Priority:
4,400,000 BB+ Debentures, 10.000% due 12/1/07 4,642,000
5,450,000 BB+ Debentures, 9.650% due 1/15/14 3,896,549
5,400,000 BB- Sr. Sub. Debentures, 11.000% due 12/1/15 5,832,000
See Notes to Financial Statements.
4
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) December 31, 1996
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Broadcasting - TV, Cable and Radio -- 25.0% (continued)
$10,315,000 BB- Rogers Communications, Sr. Debentures,
10.875% due 4/15/04 $ 10,856,538
3,950,000 BB- SCI Television Inc., Sr. Secured Notes,
11.000% due 6/30/05 4,241,313
6,350,000 B- SFX Broadcasting, Sr. Sub. Notes,
10.750% due 5/15/06 6,715,125
17,575,000 BB Telewest Communications PLC, Sr. Discount
Debentures, step bond to yield 11.470%
due 10/1/07 12,258,563
11,550,000 B3* United International Holdings Inc.,
Australia/Pacific, Sr. Discount Notes,
step bond to yield 13.920% due 5/15/06 6,121,500
United International Holdings Inc.,
Sr. Secured Discount Notes.:
8,300,000 B- Zero coupon bond to yield 12.300% due
11/15/99 6,038,250
6,875,000 B- Zero coupon bond to yield 12.720% due
11/15/99 5,001,563
Videotron Holdings PLC:
5,425,000 B+ Sr. Discount Notes, step bond to yield
12.440% due 8/15/05 4,394,250
4,250,000 BB+ Sr. Sub. Notes, 10.250% due 10/15/02 4,547,500
2,600,000 BB+ Videotron (Le Groupe), Sr. Notes, 10.625%
due 2/15/05 2,886,000
1,900,000 B- Wireless One Inc., Sr. Notes, 13.000% due
10/15/03 1,809,750
2,650,000 B Young Broadcasting, Sr. Sub. Notes,
11.750% due 11/15/04 2,908,375
- --------------------------------------------------------------------------------
207,319,170
- --------------------------------------------------------------------------------
Building/Construction -- 0.3%
2,650,000 BB- American Standard Inc., Sr. Debentures,
11.375% due 5/15/04 2,862,000
- --------------------------------------------------------------------------------
Chemicals -- 4.4%
6,725,000 B- Haynes International Inc., Sr. Notes,
11.625% due 9/1/04 7,094,875
NL Industries, Sr. Secured Notes:
5,950,000 B 11.750% due 10/15/03 6,321,875
6,375,000 B Step bond to yield 12.260% due 10/15/05 5,498,438
5,975,000 BB Pt. Polysindo Eka Perkasa, Sr. Secured Notes,
13.000% due 6/15/01 6,706,938
7,350,000 B+ Terra Industries, Inc., Sr. Notes, 10.500%
due 6/15/05 8,020,688
2,350,000 B Texas Petrochemical Corp., Sr. Sub. Notes,
11.125% due 7/1/06+ 2,532,125
- --------------------------------------------------------------------------------
36,174,939
- --------------------------------------------------------------------------------
Consumer Durables -- 2.0%
20,025,000 B+ International Semi-Tech, Sr. Secured
Discount Notes, step bond to yield
13.560% due 8/15/03 13,166,438
3,104,000 B- TAG-Heuer International Inc., Sr. Sub.
Notes, 12.000% due 12/15/05 3,585,120
- --------------------------------------------------------------------------------
16,751,558
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) December 31, 1996
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Diversified - Conglomerate Manufacturing -- 2.2%
$ 3,000,000 B- Alvey Systems Inc., Sr. Sub. Notes,
11.375% due 1/31/03 $ 3,165,000
Interlake Corp.:
1,250,000 B- Sr. Notes, 12.000% due 11/15/01 1,346,875
4,325,000 B3* Sr. Sub. Debentures, 12.125% due 3/1/02 4,476,375
4,500,000 B2* Intertek Finance PLC, 10.250% due 11/1/06 4,668,750
3,725,000 B Unifrax Investment Corp., Sr. Notes,
10.500% due 11/1/03 3,860,030
- --------------------------------------------------------------------------------
17,517,030
- --------------------------------------------------------------------------------
Diversified - Conglomerate Services -- 0.5%
3,925,000 B- Outsourcing Solutions, Sr. Sub. Notes,
11.000% due 11/1/06 4,131,063
- --------------------------------------------------------------------------------
Electric Utilities -- 1.2%
7,275,000 B Calpine Corp., Sr. Notes, 10.500% due
5/15/06+ 7,738,781
2,055,918 BB- Midland Cogeneration Venture Limited
Partnership, Midland Funding, Debentures,
Sr. Secured Lease Obligation Bond,
Series C, 10.330% due 7/23/02 2,202,402
- --------------------------------------------------------------------------------
9,941,183
- --------------------------------------------------------------------------------
Electrical Equipment -- 0.4%
3,400,000 B Goss Graphic Systems, Sr. Sub. Notes,
12.000% due 10/15/06 3,476,500
- --------------------------------------------------------------------------------
Electronics - Computers -- 3.5%
4,225,000 B Celestica International, Sr. Sub. Notes,
10.500% due 12/31/06 4,452,094
4,725,000 B- Graphic Controls Corp., Sr. Sub. Notes,
12.000% due 9/15/05 5,244,750
Unisys Corp., Sr. Notes:
7,925,000 B+ 12.000% due 4/15/03 8,450,031
10,200,000 B+ 11.750% due 10/15/04 10,863,000
- --------------------------------------------------------------------------------
29,009,875
- --------------------------------------------------------------------------------
Food -- 1.2%
3,350,000 B- International Home Foods, Sr. Sub. Notes,
10.375% due 11/1/06 3,484,000
3,825,000 BB- TLC Beatrice Inc., Sr. Secured Notes,
11.500% due 10/1/05 4,064,063
2,335,000 B- Van de Kamp Inc., Sr. Sub. Notes,
12.000% due 9/15/05 2,586,013
- --------------------------------------------------------------------------------
10,134,076
- --------------------------------------------------------------------------------
Grocery - Convenience Stores -- 1.4%
441 B- Kash-N-Karry, Sr. Notes, 11.500% due 2/1/03 446
Pathmark Stores Inc., Sub. Notes:
3,750,000 B- 11.625% due 6/15/02 3,843,750
7,485,000 B- 12.625% due 6/15/02 7,765,688
- --------------------------------------------------------------------------------
11,609,884
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) December 31, 1996
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Healthcare -- 3.1%
$ 6,600,000 B Magellan Health Services, Sr. Sub. Notes,
11.250% due 4/15/04 $ 7,309,500
17,147,000 B- OrNda Healthcorp, Sr. Sub. Notes,
12.250% due 5/15/02 18,282,989
- --------------------------------------------------------------------------------
25,592,489
- --------------------------------------------------------------------------------
Hotels, Casinos and Gaming -- 2.6%
2,500,000 B Aztar Corp., Sr. Sub. Notes, 13.750%
due 10/1/04 2,675,000
5,375,000 B- Courtyard by Marriott, Sr. Secured Notes,
10.750% due 2/1/08 5,710,938
5,125,000 NR Mohegan Tribal Gaming Authority, Sr.
Secured Notes, 13.500% due 11/15/02 6,662,500
5,750,000 B Showboat Inc., Sr. Sub. Notes, 13.000%
due 8/1/09 6,440,000
- --------------------------------------------------------------------------------
21,488,438
- --------------------------------------------------------------------------------
Leisure -- 0.8%
2,834,285 NR Gillett Holdings, Inc., Sr. Sub. Notes,
12.250% due 6/30/02 2,983,085
3,985,000 B Remington Arms Co., Inc., Sr. Sub. Notes,
9.500% due 12/1/03 (Current penalty
coupon 10.000%)+ 3,362,344
- --------------------------------------------------------------------------------
6,345,429
- --------------------------------------------------------------------------------
Metals and Mining -- 4.6%
451,000 B Algoma Steel Inc., Sr. Secured Notes,
12.375% due 7/15/05 485,547
3,825,000 B- Commonwealth Aluminum Co., Sr. Sub. Notes,
10.750% due 10/1/06+ 3,939,750
5,500,000 B- Ivex Holdings Corp., Sr. Discount
Debentures, step bond to yield
12.790% due 3/15/05 4,262,500
18,075,000 B- Kaiser Aluminum and Chemical, Sr. Sub.
Notes, 12.750% due 2/1/03 19,362,844
3,600,000 B Russel Metals, Sr. Notes, 10.250%
due 6/15/00 3,672,000
5,495,000 BB- UCAR Global Enterprises Inc., Sr. Sub.
Notes, 12.000% due 1/15/05 6,360,463
- --------------------------------------------------------------------------------
38,083,104
- --------------------------------------------------------------------------------
Oil and Natural Gas -- 5.3%
7,250,000 B+ Clark USA Inc., Sr. Notes, 10.875%
due 12/1/05 7,540,000
6,650,000 BB- Global Marine, Sr. Secured Notes,12.750%
due 12/15/99 7,165,375
3,725,000 B+ Kelley Oil & Gas Corp., Sr. Guaranteed
Notes, 10.375% due 10/15/06 3,874,000
7,800,000 B+ Parker Drilling, Debentures, 9.750% due
11/15/06 8,229,000
6,950,000 B+ R&M Clark Holdings, Sr. Notes, zero coupon
bond to yield 10.400% due 2/15/00 4,995,313
6,025,000 BB- Santa Fe Energy Resources, Sr. Sub.
Debentures, 11.000% due 5/15/04 6,717,875
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) December 31, 1996
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Oil and Natural Gas -- 5.3% (continued)
$ 4,325,000 B United Meridian Corp., Sr. Sub. Guaranteed
Notes, 10.375% due 10/15/05 $ 4,752,094
- --------------------------------------------------------------------------------
43,273,657
- --------------------------------------------------------------------------------
Packaging and Containers -- 0.8%
2,000,000 B+ Container Corp. of America, Sr. Notes,
11.250% due 5/1/04 2,170,000
1,950,000 B- Gaylord Container Corp., Sr. Sub.
Debentures, 12.750 due 5/15/05 2,145,000
1,825,000 B Spinnaker Industries, Sr. Secured Notes,
10.750% due 10/15/06 1,888,875
- --------------------------------------------------------------------------------
6,203,875
- --------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 4.4%
4,502,000 NR American Pad & Paper Co., Sr. Sub.
Notes, 13.000% due 11/15/05@ 5,301,105
14,875,000 BB Indah Kiat International Finance Co.,
Secured Notes, 11.875% due 6/15/02 16,343,906
6,425,000 B+ SD Warren Corp., Sr. Sub. Notes, 12.000%
due 12/15/04 6,955,063
6,415,000 BB Tjiwi Kimia Industries, Sr. Guaranteed Notes,
13.250% due 8/1/01 7,305,081
- --------------------------------------------------------------------------------
35,905,155
- --------------------------------------------------------------------------------
Personal Care Products - Cosmetics -- 2.8%
3,500,000 B3* Revlon Consumer Products Corp., Sr.
Sub. Notes, 10.500% due 2/15/03 3,683,750
22,735,000 B- Revlon Worldwide Corp., Sr. Secured
Discount Notes, zero coupon bond to
yield 23.540% due 3/15/98 19,608,938
- --------------------------------------------------------------------------------
23,292,688
- --------------------------------------------------------------------------------
Pollution Control - Waste Removal -- 0.5%
3,925,000 B+ Allied Waste North America, Sr. Sub. Notes,
10.250% due 12/01/06 4,140,875
- --------------------------------------------------------------------------------
Real Estate Development - REITS -- 1.0%
7,225,000 BB- Trizec Finance, Sr. Notes, 10.875%
due 10/15/05 8,001,688
- --------------------------------------------------------------------------------
Retail -- 1.0%
7,400,000 B+ Barnes and Noble, Sr. Sub. Notes, 11.875%
due 1/15/03 8,121,500
- --------------------------------------------------------------------------------
Telecommunications -- 16.0%
Brooks Fiber Properties, Sr. Discount Notes:
5,825,000 NR Step bond to yield 10.875% due 3/1/06 3,902,750
3,500,000 NR Step bond to yield 12.930% due 3/1/06 2,345,000
16,425,000 NR Step bond to yield 11.875% due 11/1/06 10,512,000
16,700,000 B3* Clearnet Communications Inc., Sr. Discount
Notes, step bond to yield 15.030%
due 12/15/05 10,896,750
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) December 31, 1996
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Telecommunications -- 16.0% (continued)
$ 3,600,000 NR Colt Telecommunications Group PLC Units,
step bond to yield 12.000% due 12/15/06 $ 2,160,000
Dial Call Communications, Inc., Sr.
Discount Notes:
4,950,000 CCC- Step bond to yield 15.430% due 4/15/04 3,570,188
7,750,000 NR Step bond to yield 13.050% due 12/15/05 5,270,000
3,950,000 B+ Fonorola Inc., Sr. Secured Notes, 12.500%
due 8/15/02 4,325,250
15,025,000 NR Intelcom Group Inc., Sr. Discount Notes,
step bond to yield 12.440% due 5/1/06+ 9,841,375
12,500,000 B- Intermedia Communications of Florida,
Sr. Discount Unsecured Notes, step
bond to yield 12.430% due 5/15/06 8,500,000
13,725,000 B- Millicom International Cellular S.A.,
Sr. Discount Notes, step bond to yield
13.490% due 6/1/06+ 8,509,500
16,950,000 CCC- Nextel Communications, Sr. Discount Notes,
step bond to yield 12.790% due 8/15/04 11,568,375
7,550,000 NR Nextlink Communications, Sr. Notes,
12.500% due 4/15/06+ 8,097,375
6,250,000 CCC+ Omnipoint Corp., Sr. Notes, 11.625%
due 8/15/06+ 6,531,250
9,450,000 NR Pagemart Inc., Sr. Discount Notes, step
bond to yield 14.210% due 11/1/03 7,536,375
5,500,000 NR Pagemart Nationwide, Inc., Sr. Discount
Notes, step bond to yield 14.950%
due 2/1/05+ 3,712,500
2,050,000 B- Phonetel Technologies, Sr. Notes, 12.000%
due 12/15/06 2,126,875
3,225,000 B Pricellular Wireless, Sr. Notes, 10.750%
due 11/1/04 3,378,188
5,050,000 NR RSL Communications Ltd., Units, 12.250%
due 11/15/06 5,075,250
9,375,000 B Teleport Communications Group Inc., Sr.
Discount Notes, zero coupon bond to
yield 11.310% due 7/1/07 6,480,469
5,750,000 CCC+ USA Mobile Communication Holdings, Inc.,
Sr. Notes, 14.000% due 11/1/04 6,526,250
- --------------------------------------------------------------------------------
130,865,720
- --------------------------------------------------------------------------------
Textiles - Apparel -- 0.4%
2,900,000 B+ Pillowtex Corp., Sr. Sub. Notes,
10.000% due 11/15/06 3,023,250
- --------------------------------------------------------------------------------
Tobacco -- 0.7%
5,075,000 B Consolidated Cigar Acquisition Corp., Sr. Sub. Notes,
10.500% due 3/1/03 5,335,083
- --------------------------------------------------------------------------------
Transportation -- 0.8%
6,200,000 BB- Sea Containers Limited, Sr. Sub. Debentures,
12.500% due 12/1/04 6,851,000
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $722,018,144) 750,812,314
================================================================================
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) December 31, 1996
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
PREFERRED STOCKS -- 4.6%
================================================================================
Healthcare - Pharmaceuticals -- 0.6%
210,825 Foxmeyer Health Corp., Series A,
Payment-in-kind, Exchangeable $4.20 1,871,077
2,900 Fresensius Medical Care, Exchangeable 9.000% 2,950,750
- --------------------------------------------------------------------------------
4,821,827
- --------------------------------------------------------------------------------
Publishing -- 1.9%
1,565 K-III Communications Corp., Series B,
Exchangeable 11.625% 158,162
14,305 Time Warner Inc., Series K,
Exchangeable 10.250% 15,539,751
- --------------------------------------------------------------------------------
15,697,913
- --------------------------------------------------------------------------------
Telecommunications -- 2.1%
14,354 PanAmSat Corp., Series A, Exchangeable
$12.875 17,512,384
- --------------------------------------------------------------------------------
TOTAL PREFERRED STOCKS
(Cost -- $39,678,753) 38,032,124
================================================================================
CONVERTIBLE PREFERRED STOCKS -- 1.1%
================================================================================
Automobiles and Trucking -- 1.1%
164,400 Navistar International, Series G,
Convertible $6.00 (Cost -- $8,828,280) 9,288,600
================================================================================
COMMON STOCKS -- 0.0%
================================================================================
Communications -- 0.0%
20,125 Pagemart Nationwide Inc. (Cost -- $0) 140,875
================================================================================
FOREIGN COMMON STOCKS -- 0.2%
================================================================================
Metals and Mining -- 0.2%
325,231 Algoma Steel Inc. (Cost -- $1,627,638) 1,660,916
================================================================================
WARRANTS -- 0.1%
55,110 Clearnet Communications Inc., Expires 9/15/05 234,218
32,800 DeGeorge Financial Corp., Expires 4/1/97 328
11,959 Nextel Communications, Inc., Expires 12/15/98+ 120
6,575 Nextel Communications, Inc., Expires 4/25/99+ 66
43,470 Pagemart Inc., Expires 12/31/03 195,615
8,175 SD Warren Corp., Expires 12/5/06 106,275
5,700 Wireless One Inc., Expires 10/15/03 28,500
- --------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost -- $341,931) 565,122
================================================================================
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) December 31, 1996
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENT -- 2.8%
$23,411,000 Chase Manhattan Corp., 6.606% due 1/2/97;
Proceeds at maturity -- $23,419,452;
(Fully collateralized by U.S. Treasury
Notes, 5.875% due 10/31/98;
Market value -- $23,907,760)
(Cost -- $23,411,000) 23,411,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $795,905,746*) $823,910,951
================================================================================
+ Security is exempt from registration under Rule 144A of the Securities Act
of 1933. This security may be resold in transactions that are exempt from
registration, normally to qualified institutional buyers.
++ Security issued with attached warrants.
@ Security formerly known as Williamhouse-Regency.
* Aggregate cost for Federal income tax purposes is substantially the same.
See page 12 for definition of ratings.
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Description of Ratings
- --------------------------------------------------------------------------------
All ratings are by Standard & Poor's Ratings Services ("Standard &Poor's")
except that those identified by an asterisk (*) are rated by Moody's Investors
Service, Inc. ("Moody's"). The definitions of the applicable rating symbols are
set forth below:
Standard & Poor's -- Ratings from "BBB" to "C" may be modified by the addition
of a plus (+) or a minus (-) sign to show relative standings within the major
rating categories.
BBB -- Bonds rated "BBB" are regarded as having an adequate capacity to pay
interest and repay principal. Whereas they normally exhibit adequate
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay
interest and repay principal for bonds in this category than for bonds
in higher rated categories.
BB, B -- Bonds rated "BB" and "B" are regarded, on balance, as predominantly
and CCC speculative and with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligation. "BB"
represents a lower degree of speculation than "B", and "CCC" the
highest degree of speculation. While such bonds will likely have some
quality and protective characteristics, these are outweighed by large
uncertainties or major risk exposures to adverse conditions.
C -- The rating "C" is reserved for income bonds on which no interest is
being paid.
D -- Bonds rated "D" are in default, and payment of interest and/or
repayment of principal is in arrears.
Moody's -- Numerical modifiers 1,2 and 3 may be applied to each generic rating
from "Baa" to "C", where 1 is the highest and 3 the lowest rating within its
generic category.
Baa -- Bonds rated "Baa" are considered to be medium grade obligations; that
is, they are neither highly protected nor poorly secured. Interest
payment and principal security appear adequate for the present but
certain protective elements may be lacking or may be
characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and may have
speculative characteristics as well.
Ba -- Bonds that are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well assured. Often the
protection of interest and principal payments may be very moderate and
thereby not well safeguarded during both good and bad times over the
future. Uncertainty of position characterizes bonds in this class.
B -- Bonds that are rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of
maintenance of other terms of the contract over any long period of
time may be small.
Caa -- Bonds that are rated "Caa" are of poor standing. These issues may be
in default, or present elements of danger may exist with respect to
principal or interest.
Ca -- Bonds that are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds that are rated "C" are the lowest rated class of bonds, and
issues so rated can be regarded as having extremely poor prospects of
ever attaining any real investment standing.
NR -- Indicates that the bond is not rated by Standard & Poor's or Moody's.
12
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) December 31, 1996
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $795,905,746) $ 823,910,951
Interest receivable 11,793,137
- --------------------------------------------------------------------------------
Total Assets 835,704,088
- --------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 2,128,650
Management fees payable 806,622
Accrued expenses 310,722
- --------------------------------------------------------------------------------
Total Liabilities 3,245,994
- --------------------------------------------------------------------------------
Total Net Assets $ 832,458,094
================================================================================
NET ASSETS:
Par value of capital shares $ 69,858
Capital paid in excess of par value 871,919,590
Undistributed net investment income 1,834,826
Net realized loss from security transactions and options (69,371,385)
Net unrealized appreciation of investments 28,005,205
- --------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $11.92 a share on 69,858,000 shares
of $0.001 par value outstanding; 500,000,000 shares authorized) $ 832,458,094
================================================================================
See Notes to Financial Statements.
13
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended December 31, 1996
INVESTMENT INCOME:
Interest $22,415,133
Dividends 965,633
- --------------------------------------------------------------------------------
Total Investment Income 23,380,766
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 2,370,759
Shareholder communication fees 76,419
Shareholder and system servicing fees 7,778
Custody 7,614
Audit and legal 7,038
Directors' fees 2,899
Pricing 2,700
Other 19,271
- --------------------------------------------------------------------------------
Total Expenses 2,494,478
- --------------------------------------------------------------------------------
Net Investment Income 20,886,288
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN ON INVESTMENTS
AND OPTIONS (NOTES 3 AND 6):
Realized Gain From:
Security transactions (excluding short-term securities) 543,200
Options purchased 444,545
- --------------------------------------------------------------------------------
Net Realized Gain 987,745
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments:
Beginning of period 16,669,968
End of period 28,005,205
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 11,335,237
- --------------------------------------------------------------------------------
Net Gain on Investments and Options 12,322,982
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $33,209,270
================================================================================
See Notes to Financial Statements.
14
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Three Months Ended December 31, 1996 (unaudited)
and the Year Ended September 30, 1996
December 31 September 30
================================================================================
OPERATIONS:
Net investment income $ 20,886,288 $ 79,771,854
Net realized gain 987,745 918,351
Increase in net unrealized appreciation 11,335,237 13,960,981
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 33,209,270 94,651,186
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (19,490,382) (77,961,528)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (19,490,382) (77,961,528)
- --------------------------------------------------------------------------------
Increase in Net Assets 13,718,888 16,689,658
NET ASSETS:
Beginning of period 818,739,206 802,049,548
- --------------------------------------------------------------------------------
End of period* $ 832,458,094 $ 818,739,206
================================================================================
* Includes undistributed net investment
income of: $ 1,834,826 $ 438,920
================================================================================
See Notes to Financial Statements.
15
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)
- --------------------------------------------------------------------------------
1. SIGNIFICANT ACCOUNTING POLICIES
The High Income Opportunity Fund Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company.
The significant accounting policies consistently followed by the Fund are:
(a) security transactions are accounted for on trade date; (b) securities are
valued at the mean between the quoted bid and ask prices provided by an
independent pricing service that are based on transactions in corporate
obligations, quotations from corporate bond dealers, market transactions in
comparable securities and various relationships between securities; (c)
securities maturing within 60 days or less are valued at cost plus accreted
discount or minus amortized premium, which approximates market value; (d) gains
or losses on the sale of securities are calculated by using the specific
identification method; (e) dividend income is recorded on the ex-dividend date;
foreign dividends are recorded on the ex-dividend date or as soon as practical
after the Fund determines the existence of a dividend declaration after
exercising reasonable due diligence (f) interest income, adjusted for accretion
of original issue discount, is recorded on the accrual basis; (g) dividends and
distributions to shareholders are recorded on the ex-dividend date; (h) the
accounting records are maintained in U.S. dollars. All assets and liabilities
denominated in foreign currencies are translated into U.S. dollars based on the
rate of exchange of such currencies against U.S. dollars on the date of
valuation. Purchases and sales of securities, and income and expenses are
translated at the rate of exchange quoted on the respective date that such
transactions are recorded. Differences between income and expense amounts
recorded and collected or paid are adjusted when reported by the custodian bank;
(i) the character of income and gains to be distributed are determined in
accordance with income tax regulations which may differ from generally accepted
accounting principles. At September 30, 1996, reclassifications were made to the
Portfolio's capital accounts to reflect permanent book/tax differences and
income and gains available for distributions under income tax regulations.
Accordingly, a portion of undistributed net investment income amounting to
$1,162,180 was reclassified to paid-in capital. Net investment income, net
realized gains and net assets were not affected by this change; (j) the Fund
intends to comply with the requirements of the Internal Revenue Code of 1986, as
amended, pertaining to regulated investment companies and to make distributions
of taxable income sufficient to relieve it from substantially all Federal income
and excise taxes; and (k) estimates and assumptions are required to be made
regarding assets, liabilities and changes in net assets resulting from
operations when financial
16
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
2. MANAGEMENT AGREEMENT AND OTHER TRANSACTIONS
Smith Barney Mutual Funds Management Inc. ("SBMFM"), a subsidiary of Smith
Barney Holdings Inc. ("SBH"), through its Greenwich Street Advisors division,
acts as investment manager of the Fund. The Fund pays SBMFM a management fee
calculated at the annual rate of 1.15% of the Fund's average daily net assets.
This fee is calculated daily and paid monthly.
All officers and two Directors of the Fund are employees of Smith Barney
Inc., another subsidiary of SBH.
3. INVESTMENTS
During the three months ended December 31, 1996, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
================================================================================
Purchases $159,342,172
- --------------------------------------------------------------------------------
Sales 138,974,836
================================================================================
At December 31, 1996, the aggregate gross unrealized appreciation and
depreciation of investments were as follows:
================================================================================
Gross unrealized appreciation $64,660,570*
Gross unrealized depreciation (36,655,365)*
- --------------------------------------------------------------------------------
Gross unrealized appreciation $28,005,205 *
================================================================================
* Substantially the same for Federal income tax purposes.
4. CAPITAL LOSS CARRYFORWARD
At September 30, 1996, the Fund had, for Federal tax purposes,
approximately $69,656,000 of capital loss carryforwards available to offset
future realized capital gains. To the extent that these capital loss
carryforwards can be used to offset net realized capital gains, such gains, if
any, will not be distributed. The amounts and expiration of carryforwards are
indicated below. Expiration occurs on September 30 in the year indicated:
2003 2004
================================================================================
Carryforward Amounts $31,540,000 $38,116,000
================================================================================
17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
5. FUTURES CONTRACTS
Initial margin deposits are made upon entering into futures contracts and
are recognized as assets. The initial margin is segregated by the custodian and
is noted in the schedule of investments. During the period the futures contract
is open, changes in the value of the contract are recognized as unrealized gains
or losses by "marking to market" on a daily basis to reflect the market value of
the contract at the end of each day's trading. Variation margin payments are
made or received and recognized as assets due from or liabilities due to the
broker, depending upon whether unrealized gains or losses are incurred. When the
contract is closed, the Fund records a realized gain or loss equal to the
difference between the proceeds from (or cost of) the closing transaction and
the Fund's basis in the contract. The Fund enters into such contracts to hedge a
portion of its portfolio. The Fund bears the market risk that arises from
changes in the value of the financial instruments and securities indices
(futures contracts) and the credit risk should a counterparty fail to perform
under such contracts.
At December 31, 1996, the Fund had no open futures contracts.
6. OPTIONS CONTRACTS
Premiums paid when put or call options are purchased by the Fund, represent
investments, which are marked-to-market daily. When a purchased options expires,
the Fund will realized a loss in the amount of the premium paid. When the Fund
enters into a closing sales transaction, the Fund will realize a gain or loss
depending on whether the proceeds from the closing sales transaction are greater
or less than the premium paid for the option. When the Fund exercises a put
option, it will realize a gain or loss from the sale of the underlying security
and the proceeds from such sale will be decreased by the premium originally
paid. When the Fund exercises a call option, the cost of the security which the
Fund purchases upon exercise will be increased by the premium originally paid.
As of December 31, 1996, the Fund had no open purchased call or put option
contracts.
18
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
When a Fund writes a call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium 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
sold) without regard to any unrealized gain or loss on the underlying security,
and the liability related to such option is eliminated. When a written call
option is exercised the cost of the security sold will be decreased by the
premium originally received. When a written put option is exercised, the amount
of the premium originally received will reduce the cost of the security which
the Fund purchased upon exercise. When written index options are exercised,
settlement is made in cash. The risk associated with purchasing options is
limited to the premium originally paid. The Fund enters into options for hedging
purposes. The risk in writing a covered call option is that the Fund gives up
the opportunity to participate in any increase in the price of the underlying
security beyond the exercise price. The risk in writing a put option is that the
Fund is exposed to the risk of loss if the market price of the underlying
security declines.
During the period ended December 31, 1996, the Fund had not written any
call or put options.
7. REPURCHASE AGREEMENTS
The Fund purchases (and its custodian takes possession of) U.S. Government
securities from banks and securities dealers subject to agreements to resell the
securities to the sellers at a future date, (generally, the next business day)at
an agreed-upon higher repurchase price. The Fund requires continual maintenance
of the market value of the collateral in amounts at least equal to the
repurchase price.
19
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
1996(1) 1996 1995 1994(2)(3)
===============================================================================================
<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Period $ 11.72 $ 11.48 $ 11.20 $ 12.50
- -----------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.30 1.14 1.14 1.01*
Net realized and unrealized gain (loss) 0.18 0.22 0.28 (1.30)
- -----------------------------------------------------------------------------------------------
Total Income (Loss) from Operations 0.48 1.36 1.42 (0.29)
- -----------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.28) (1.12) (1.12) (1.01)
Overdistribution of net
investment income -- -- (0.00)# --
Capital -- -- (0.02) --
- -----------------------------------------------------------------------------------------------
Total Distributions (0.28) (1.12) (1.14) (1.01)
- -----------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 11.92 $ 11.72 $ 11.48 $ 11.20
- -----------------------------------------------------------------------------------------------
Total Return,
Based on Market Value 2.44%++ 21.08% 9.90% (7.33)%++
- -----------------------------------------------------------------------------------------------
Total Return,
Based on Net Asset Value 4.19%++ 12.86% 13.99% (2.31)%++
- -----------------------------------------------------------------------------------------------
Net Assets, End of Period (000s) $832,458 $818,739 $802,050 $782,524
- -----------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.21%+ 1.21% 1.20% 1.15%+*
Net investment income 10.10+ 9.85 10.02 9.09+
- -----------------------------------------------------------------------------------------------
Portfolio Turnover Rate 18% 73% 59% 69%
- -----------------------------------------------------------------------------------------------
Market Price, End of Period $ 11.500 $ 11.500 $ 10.500 $ 10.625
===============================================================================================
</TABLE>
(1) For the three months ended December 31, 1996 (unaudited).
(2) For the period from October 22, 1993 (commencement of operations) to
September 30, 1994.
(3) Based on the weighted average shares outstanding for the period.
* The Manager waived a part of its fee for the period ended September 30,
1994. If such fees were not waived, the per share decrease in net
investment income would have been $0.01 and the ratio of expenses to
average net assets would have been 1.21% (annualized).
# Amount represents less than $0.01.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
20
<PAGE>
- --------------------------------------------------------------------------------
Financial Data (unaudited)
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each period:
Income Dividend
NYSE Net Asset Dividend Reinvestment
Closing Price* Value Paid Price
================================================================================
1995
January 24 $10.25 $10.73 $0.096 $10.520
February 21 10.75 10.98 0.096 10.979
March 21 10.88 11.09 0.096 11.020
April 25 10.94 11.26 0.096 11.083
May 23 11.00 11.41 0.096 11.005
June 23 10.88 11.33 0.096 10.781
July 28 10.63 11.51 0.093 10.748
August 25 10.75 11.46 0.093 10.769
September 29 10.50 11.48 0.093 10.844
October 27 10.63 11.53 0.093 10.888
November 24 10.63 11.48 0.093 10.730
December 26 10.50 11.55 0.093 10.751
1996
January 23 11.00 11.68 0.093 11.339
February 20 11.13 11.85 0.093 11.242
March 26 11.13 11.62 0.093 11.135
April 23 11.00 11.56 0.093 11.010
May 28 10.81 11.62 0.093 10.880
June 25 10.69 11.48 0.093 11.020
July 23 11.13 11.44 0.093 11.270
August 27 11.25 11.47 0.093 11.300
September 24 11.13 11.61 0.093 11.430
October 22 11.38 11.65 0.093 11.375
November 25 11.25 11.77 0.093 11.375
December 23 11.38 11.84 0.093 11.490
================================================================================
* In December 1995, the valuation date was changed from payable date to record
date.
21
<PAGE>
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited)
- --------------------------------------------------------------------------------
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), all
distributions are automatically reinvested by First Data Investor Services
Group, Inc., as plan agent (the "Plan Agent"), in additional shares of its
Common Stock (the "Common Shares") as provided below unless a stockholder elects
to receive cash.
Distributions with respect to Common Shares registered in the name of a
broker-dealer or other nominee (i.e., in "street name") are reinvested by the
broker or nominee in additional Common Shares under the Plan, unless the service
is not provided by the broker or nominee. Investors who own Common Shares
registered in street name should consult their broker-dealer for details. All
distributions to shareholders who do not participate in the Plan are paid by
check mailed directly to the record holder by First Data Investor Services
Group, Inc., as dividend disbursing agent.
If the Fund declares a distribution payable either in Common Shares or in cash,
nonparticipants in the Plan receive cash, and Plan participants receive the
equivalent in Common Shares valued in the following manner: whenever the market
price is equal to or exceeds the net asset value per share at the time Common
Shares are valued for the purpose of determining the number of Common Shares
equivalent to the cash distribution, participants are issued Common Shares
valued at the greater of (1) the net asset value most recently determined or (2)
95% of the then current market price of the Common Shares.
If the net asset value of the Common Shares at the time of valuation exceeds the
market price of the Common Shares, or if the Fund declares a distribution
payable only in cash, the Plan Agent buys Common Shares in the open market, on
the New York Stock Exchange or elsewhere, for the participants' accounts. The
Plan Agent applies all cash received as a distribution to purchase Common Shares
on the open market as soon as practicable after the record date of the
distribution, but in no event later than 30 days after such date, except when
necessary to comply with applicable provisions of the Federal securities laws.
If, following the commencement of purchases and before the Plan Agent has
completed its purchases the market price exceeds the net asset value of the
Common Shares, the Plan Agent is permitted to cease purchasing shares on the
open market and the Fund may issue the remaining shares at a price equal to the
greater of (a) net asset value or (b) 95% of the then current market price. In a
case where the Plan Agent has terminated open market purchases and the Fund has
issued the remaining shares, the number of shares received by the participant in
respect of the cash dividend or distribution will be based on the weighted
average of prices paid for shares purchased in the open market and the price at
which the Fund issued the remaining shares.
22
<PAGE>
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited) (continued)
- --------------------------------------------------------------------------------
Participants in the Plan may withdraw from the Plan upon written notice to the
Plan Agent which must be received at least ten business days prior to the
distribution record date to become effective for that distribution. Shares in
the account of each Plan participant are held by the Plan Agent in
non-certificated form in the name of the Plan Agent or participant. When a
participant withdraws from the Plan or upon termination of the Plan as provided
below, certificates for whole Fund shares credited to his or her account under
the Plan are issued and a cash payment is made for any fraction of a Fund share
credited to such account.
The automatic reinvestment of distributions does not relieve participants of any
Federal income tax that may be payable on such distributions.
The Fund does not charge participants for reinvesting distributions. Any Plan
Agent's fees for the handling of reinvestment of distributions under the Plan
are paid by the Fund. There are no brokerage charges with respect to Common
Shares issued directly by the Fund as a result of distributions payable either
in stock or in cash. However, each participant pays a pro rata share of
brokerage commissions incurred with respect to the Plan Agent's open market
purchases in connection with the reinvestment of distributions.
Experience under the Plan may indicate that changes are desirable. Accordingly,
the Fund and the Plan Agent reserve the right to amend the Plan as applied to
any distribution paid subsequent to written notice of the change sent to all
stockholders of the Fund at least 30 days before the record date for the
distribution. The Plan also may be terminated by the Fund or the Plan Agent by
at least 30 days' written notice to all Shareholders of the Fund. All
correspondence concerning the Plan should be directed to the Plan Agent at First
Data Investor Services Group, Inc., P.O. Box 9134, Boston, MA 02205-9134.
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
Notice is hereby given in accordance with Section 23(c) of the Investment
Company Act of 1940, as amended, that from time to time the Fund may purchase,
at market prices, shares of its common stock in the open market.
23
<PAGE>
- --------------------------------------------------------------------------------
HIGH INCOME
- --------------------- [Artwork]
Opportunity Fund Inc.
- --------------------------------------------------------------------------------
DIRECTORS
Jessica M. Bibliowicz
Joseph H. Fleiss
Donald R. Foley
Paul Hardin
Francis P. Martin, M.D.
Heath B. McLendon, Chairman
Roderick C. Rasmussen
John P. Toolan
OFFICERS
Heath B. McLendon
Chief Executive Officer
Jessica M. Bibliowicz
President
Lewis E. Daidone
Senior Vice President
and Treasurer
John C. Bianchi
Vice President
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
INVESTMENT MANAGER
Smith Barney Mutual Funds
Management Inc.
CUSTODIAN
PNC Bank, N.A.
SHAREHOLDER
SERVICING AGENT
First Data Investor Services Group, Inc.
P.O. Box 9134
Boston, MA 02205-9134
This report is sent to the shareholders
of the High Income Opportunity Fund
Inc. 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 the report.
HIO High Income Opportunity Fund Inc.
Listed 388 Greenwich Street
NYSE New York, New York 10013
THE NEW YORK STOCK EXCHANGE
FD0850 2/97
