HIGH INCOME
Opportunity Fund Inc.
[GRAPHIC OMITTED]
Quarterly Report
December 31, 1997
<PAGE>
High Income Opportunity Fund Inc.
Dear Shareholder:
We are pleased to provide the first quarter report for the High Income
Opportunity Fund Inc. ("Fund") for the three months ended December 31, 1997.
Over the past three months, the Fund paid income dividends totaling $0.32 per
share. The table below shows the annualized distribution rate and three month
total return for the Fund based on its December 31, 1997 net asset value ("NAV")
per share and its New York Stock Exchange ("NYSE") closing price.
<TABLE>
<CAPTION>
Price Annualized Three-Month
Per Share Distribution Rate Total Return
--------- ----------------- ------------
<S> <C> <C>
$12.24 (NAV) 9.12% 1.04%
$12.50 (NYSE) 8.92% 3.65%
</TABLE>
In light of the more challenging economic environment, we have maintained a more
conservative credit posture in the Fund's portfolio emphasizing stronger credits
that have less default risk.
The Fund generated a total return of 1.04% for the past three months and 12.96%
for the past twelve months, based on NAV. The three-month total return was below
the average three-month total return of 1.32% for closed-end high-yield bond
funds as reported by Lipper Analytical Services Inc., an independent fund
performance tracking organization. On a twelve-month basis, the High Income
Opportunity Fund's performance was below its Lipper peer group average of
13.95%.
During 1997 the more speculative high yield bonds generated stronger performance
than the more conservative issues held in the High Income Opportunity Fund. In
addition, because a significant number of closed-end high yield funds are
leveraged, they tend to generate somewhat stronger performance returns than the
unleveraged High Income Opportunity Fund in bond market rallies. As a result,
the overall average performance returns for closed-end high yield bond funds as
reported by Lipper tend to be overstated in strong market rallies. However, in
market declines such as what occurred in 1994, the leveraged funds suffer much
greater principal losses than the unleveraged High Income Opportunity Fund.
Despite the Fund's more conservative bond credit quality and unleveraged
position, it generated competitive performance returns with similar unleveraged
closed-end high yield funds during the last three- and 12-month periods.
1
<PAGE>
Market and Economic Overview
The high yield bond market generated relatively strong performance throughout
1997 with total returns in excess of about 13% compared to the roughly 6% to 11%
returns for intermediate U.S. Treasurys (i.e., maturities of less than 10 years)
and investment grade corporate bonds and roughly 12% to 14% for long term U.S.
Treasurys (10 or more years) and investment grade corporate bonds.
The Fund generated competitive total returns within that range for 1997. Within
the high yield bond market, the lower quality issues generated the strongest
total returns in 1997 (i.e., a roughly 16% range). This was not surprising given
the strong performance of the domestic stock market. The lower-quality segment
of the high yield bond market tends to be more closely correlated to the
domestic stock market than the higher-quality segments of the high yield bond
market.
The high yield bond market began to underperform U.S. Treasurys in the fourth
quarter of 1997 as fears of an economic slowdown and lower corporate profits
caused high yield bond premiums to increase versus the U.S. Treasury market. The
greatest underperformance in the fourth quarter was among the lower-quality
issues. In periods of increasing economic uncertainty, the lower-quality
segments of the high yield bond market generally underperform because of their
greater vulnerability to weaker economic conditions. The more interest-rate
sensitive higher quality issues generated the strongest total returns as general
interest rates declined.
By the start of the fourth quarter, the crisis in Asia had taken center stage
with severe currency and financial market declines in a number of Asian
countries potentially threatening economic stability not only in the Far Eastern
region, but throughout the world. Asia represents more than 25% of world
economic output and is a significant producer and consumer of a large number of
products and services. Consequently, there was a dramatic increase in market
volatility in the fourth quarter, especially in the stock markets both
domestically and abroad. Many investors began to invest more aggressively in
U.S. Treasurys that are viewed as the ultimate safe haven during periods of
economic uncertainty. Despite this increasing uncertainty over economic growth
and corporate profitability, the domestic stock market had another strong year
with total returns in the 25% to 33% range.
In 1997, the domestic high yield bond market responded favorably to the strength
in the domestic stock and U.S. Treasury markets. During the year, a total of
approximately $19 billion of new money flowed into open-end high yield bond
funds. In addition, there was higher demand for high-yield bonds from insurance
companies and pension funds. The overall demand was significant enough to absorb
a record total of over $120 billion of new high yield issues. Given this record
new issuance, the high yield bond market now totals more than $450 billion in
size, representing a meaningful 25% of the entire domestic corporate bond
market.
2
<PAGE>
Portfolio Strategy
We continue to believe that U.S. economic growth remains mixed and that many
consumer-sensitive sectors will continue to experience fierce price competition.
In addition, the significant problems in Asia could also put severe pressure on
commodity goods prices as troubled Asian companies attempt to increase their
exports to the rest of the world to make up for the expected economic declines
in their own region. We also believe that a slowdown in overall world economic
growth is inevitable as the severe economic decline in Asia sharply reduces
demand for U.S. and European products. Consequently, the first half of 1998
could see a slight increase in default rates among certain high yield bonds,
especially those of weaker more vulnerable companies that are having difficulty
competing.
We will continue to avoid the sectors of the economy that are adversely affected
by weak consumer spending trends as well as heavy pricing competition. In
addition, we also plan to maintain our emphasis on sectors that are experiencing
strong growth such as telecommunications, media, and cable television. Moreover,
we expect to be overweighted in stronger rated "B" and "BB" credits and avoid
the weaker lower tier issues that are generally in the "CCC/Caa" rating
category. We are more committed then ever to our conservative credit investment
strategy because of the higher risks and greater uncertainly in the world's
financial markets.
Market Outlook
We believe the financial markets will remain choppy as investors continue to
sort out the potential negative impact on world economic growth from the large
declines in both the currencies and financial assets of the emerging markets in
Asia and Latin America.
We appreciate your past support and look forward to achieving competitive
investment results in 1998. Should you have any questions about your investment
in the Fund, please call the Shareholder Services Group at (800) 331-1710.
Sincerely,
/s/ Heath B. McLendon /s/ John C. Bianchi, CFA
Heath B. McLendon John C. Bianchi, CFA
Chairman Vice President
January 29, 1998
3
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) December 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
CORPORATE BONDS AND NOTES -- 92.5%
================================================================================
Aerospace/Defense -- 1.1%
$ 8,275,000 BB Airplanes Pass Through Trust, Corporate
Collateralized Mortgage Obligation,
Series D, 10.875% due 3/15/19$ 9,309,541
- --------------------------------------------------------------------------------
Banks/Savings and Loans -- 4.8%
4,250,000 B Amresco Inc., Sr. Notes, 10.000% due 3/15/04 4,420,000
13,150,000 B First Nationwide Holdings, Sr. Notes,
12.500% due 4/15/03 14,991,000
Netia Holdings B.V., Company Guaranteed Notes:
3,400,000 NR 10.250% due 11/1/07+ 3,221,500
1,250,000 NR Step bond to yield 11.115% due 11/1/07+ 714,063
5,500,000 B+ Ocwen Capital Corp., Sr. Notes, 11.875%
due 8/1/27 5,960,625
3,400,000 B+ Ocwen Financial Corp., Sr. Notes, 11.875%
due 10/1/03 3,833,500
5,500,000 BBB+ SIG Capital Trust, Company Guaranteed,
9.500% due 8/15/27 5,596,250
2,550,000 BB- Veritas Capital Trust, Company Guranteed,
10.000% due 1/2/28 2,601,000
- --------------------------------------------------------------------------------
41,337,938
- --------------------------------------------------------------------------------
Broadcasting/TV, Cable and Radio -- 12.4%
Cablevision Systems Corp., Sr. Sub.
Debentures:
15,725,000 B 9.875% due 2/15/13 17,415,437
5,525,000 B 10.500% due 5/15/16 6,436,625
2,150,000 B 9.875% due 4/1/23 2,381,125
Century Communications, Sr. Notes:
4,900,000 BB- 8.750% due 10/1/07 5,010,250
1,350,000 BB- 8.375% due 12/15/07 1,353,375
7,950,000 B Comcast UK Cable, Sr. Unsecured Discount
Debentures, step bond to yield 11.535%
due 11/15/07 6,528,938
Marcus Cable Capital Corp., Sr. Discount
Notes:
4,100,000 B Step bond to yield 11.210% due 8/1/04 3,813,000
2,590,000 B Step bond to yield 12.748% due 12/15/05 2,246,825
Rogers Cablesystems, Sr. Secured Second
Priority:
4,000,000 BB+ Debentures, 10.000% due 3/15/05 4,430,000
4,400,000 BB+ Debentures, 10.000% due 12/1/07 4,840,000
11,195,000 BB- Sr. Sub. Debentures, 11.000% due 12/1/15 12,986,200
4,950,000 BB- Rogers Communications, Sr. Debentures,
10.875% due 4/15/04 4,962,375
TV Azteca SA De CV, Sr. Sub. Notes:
2,900,000 B+ 10.125% due 2/15/04 3,001,500
3,625,000 B+ 10.500% due 2/15/07 3,779,063
United International Holdings Inc.,
Australia/Pacific, Sr. Discount
Debentures:
2,625,000 B3* Step bond to yield 12.775% due 5/15/06+ 1,798,125
12,200,000 B3* Step bond to yield 13.912% due 5/15/06 8,357,000
United International Holdings Inc., Sr.
Secured Discount Notes:
3,950,000 B- Zero coupon bond to yield 11.910% due
11/15/99 3,239,000
6,875,000 B- Zero coupon bond to yield 12.420% due
11/15/99 5,637,500
See Notes to Financial Statements.
4
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)(continued) December 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Broadcasting/TV, Cable and Radio -- 12.4% (continued)
$ 4,250,000 BB+ Videotron Holdings PLC,
Sr. Sub. Notes, 10.250% due 10/15/02 $ 4,462,500
2,600,000 BB+ Videotron (Le Groupe), Sr. Notes, 10.625%
due 2/15/05 2,908,750
4,600,000 B- Wireless One Inc., Sr. Notes, 13.000% due
10/15/03 2,024,000
- --------------------------------------------------------------------------------
107,611,588
- --------------------------------------------------------------------------------
Building/Construction -- 0.4%
3,825,000 NR CIA Latino Amerivana, Company Guaranteed,
11.625% due 6/1/04 3,825,000
- --------------------------------------------------------------------------------
Chemicals -- 0.9%
5,000,000 B NL Industries, Sr. Secured Notes, 11.750%
due 10/15/03 5,550,000
1,800,000 B+ Terra Industries, Inc., Sr. Notes,
10.500% due 6/15/05 1,939,500
- --------------------------------------------------------------------------------
7,489,500
- --------------------------------------------------------------------------------
Consumer Durables -- 0.5%
CLN Holdings Inc:
5,800,000 B Zero coupon bond to yield 11.410% due
5/15/01 3,857,000
700,000 B Zero coupon bond to yield 12.580% due
5/15/01 421,750
- --------------------------------------------------------------------------------
4,278,750
- --------------------------------------------------------------------------------
Diversified/Conglomerate Manufacturing -- 3.2%
3,875,000 B3* Interlake Corp., Sr. Sub. Notes, 12.125%
due 3/1/01 4,025,156
4,950,000 BBB Intertek Finance, 10.250% due 11/1/06 5,185,125
4,475,000 B+ Park-Ohio Industries, Sr. Sub. Notes,
9.250% due 12/1/07+ 4,592,469
8,250,000 B- Terex Corp., Sr. Sub. Notes, 13.250% due
5/15/02 9,425,625
4,350,000 B Unifrax Investment Corp., Sr. Notes,
- --------------------------------------------------------------------------------
27,730,625
- --------------------------------------------------------------------------------
Diversified/Conglomerate Services -- 1.0%
2,900,000 B- Alvey Systems Inc., Sr. Sub. Notes,
11.375% due 1/31/03 3,030,500
4,675,000 B- Outsourcing Solutions, Sr. Sub. Notes,
11.000% due 11/1/06 5,165,875
- --------------------------------------------------------------------------------
8,196,375
- --------------------------------------------------------------------------------
Electric Utilities -- 4.3%
AES Corp., Sr. Sub. Notes:
2,150,000 B+ 10.250% due 7/15/06 2,338,125
2,300,000 B+ 8.375% due 8/15/07 2,300,000
7,525,000 B+ 8.500% due 11/1/07+ 7,543,813
Calpine Corp., Sr. Notes:
6,675,000 B 10.500% due 5/15/06 7,275,750
2,400,000 BB- 8.750% due 7/15/07+ 2,442,000
3,425,000 BB+ Cleveland Electric, Sr. Notes, 7.430% due
11/1/09+ 3,527,750
5,525,000 BB+ El Paso Electric Co., First Mortgage,
8.900% due 2/1/06 6,125,844
1,791,684 BB- Midland Cogeneration Venture Limited
Partnership, Midland Funding,
Debentures, Sr. Secured Lease
Obligation Bond, Series C, 10.330% due
7/23/02 1,928,300
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)(continued) December 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Electric Utilities -- 4.3% (continued)
$ 3,400,000 Ba3* Niagara Mohawk Power, First Mortgage,
7.750% due 5/15/06 $ 3,587,000
- --------------------------------------------------------------------------------
37,068,582
- --------------------------------------------------------------------------------
Electronics/Computers -- 5.8%
3,100,000 B- Axiohm Transaction Services, Sr. Sub.
Notes, 9.750% due 10/1/07+ 3,154,250
3,925,000 B Celestica International, Sr. Sub. Notes,
10.500% due 12/31/06 4,258,625
7,225,000 B Fairchild Semiconductor Corp., Sr. Sub.
Notes, 10.125% due 3/15/07 7,640,438
3,275,000 B Flextronics International Ltd., Sr. Sub.
Notes, 8.750% due 10/15/07+ 3,266,813
4,725,000 B- Graphic Controls Corp., Sr. Sub. Notes,
12.000% due 9/15/05 5,280,188
Unisys Corp., Sr. Notes:
7,925,000 B+ 12.000% due 4/15/03 8,975,063
8,450,000 B+ 11.750% due 10/15/04 9,633,000
8,000,000 B- Viasystems Inc., Sr. Sub. Notes, 9.750%
due 6/1/07 8,270,000
- --------------------------------------------------------------------------------
50,478,377
- --------------------------------------------------------------------------------
Food -- 1.8%
2,275,000 NR Ameriserve Food Distributors Company
Guaranteed, 8.875% due 10/15/06 2,309,125
4,575,000 B- B & G Foods Inc., Sr. Sub. Notes, 9.625%
due 8/1/07+ 4,620,750
5,975,000 B Imperial Holly Corp., Sr. Sub. Notes,
9.750% due 12/15/07+ 6,012,344
2,335,000 B- Van de Kamp Inc., Sr. Sub. Notes, 12.000%
due 9/15/05 2,591,850
- --------------------------------------------------------------------------------
15,534,069
- --------------------------------------------------------------------------------
Grocery/Convenience Stores -- 0.4%
4,500,000 B- Pathmark Stores Inc., Sub. Notes, 12.625%
due 6/15/02 3,780,000
- --------------------------------------------------------------------------------
Health Care -- 3.9%
4,575,000 B- Extendicare Health Services, Sr. Sub.
Notes, 9.350% due 12/15/07+ 4,689,375
8,750,000 BB ICN Pharmaceuticals Inc., Sr. Notes,
9.250% due 8/15/05 9,296,875
5,625,000 B Magellan Health Services, Sr. Sub. Notes,
11.250% due 4/15/04 6,257,813
4,425,000 NR Pharmaceutical Fine Chemicals, Sr. Sub.
Notes, 9.750% due 11/15/07+ 4,491,375
Tenet Healthcare Corp., Sr. Sub. Notes:
4,000,000 BB 8.000% due 1/15/05 4,075,000
5,000,000 B+ 8.625% due 1/15/07 5,181,250
- --------------------------------------------------------------------------------
33,991,688
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)(continued) December 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Hotel, Casinos and Gaming -- 6.1%
$ 2,350,000 B Aztar Corp., Sr. Sub. Notes, 13.750% due
10/1/04 $ 2,696,625
5,375,000 B- Courtyard by Marriott, Sr. Secured Notes,
10.750% due 2/1/08 5,912,500
1,650,000 BB Grand Casinos Inc., Sr. Sub. Notes,
10.125% due 12/1/03 1,782,000
1,500,000 Ba3* HMC Acquisition Properties, Sr. Notes,
9.000% due 12/15/07 1,543,125
HMH Properties, Sr. Notes:
17,550,000 BB- 9.500% due 5/15/05 18,690,750
4,350,000 BB- 8.875% due 715/07 4,589,250
5,125,000 NR Mohegan Tribal Gaming Authority, Sr.
Secured Notes, 13.500% due 11/15/02 6,630,469
5,500,000 B Showboat Inc., Sr. Sub. Notes, 13.000%
due 8/1/09 6,627,500
3,850,000 B Signature Resorts Inc., Sr. Sub. Notes,
9.750% due 10/1/07+ 3,888,500
- --------------------------------------------------------------------------------
52,360,719
- --------------------------------------------------------------------------------
Metals/Mining -- 2.7%
9,350,000 B- Haynes International Inc., Sr. Notes,
11.625% due 9/1/04 10,787,563
6,325,000 B- Kaiser Aluminum and Chemical, Sr. Sub.
Notes, 12.750% due 2/1/03 6,751,938
2,275,000 B- Koppers Industry Inc., Sr. Sub. Notes,
9.875% due 12/1/07+ 2,343,250
3,070,000 BB- UCAR Global Enterprises Inc., Sr. Sub.
Notes, 12.000% due 1/15/05 3,465,263
- --------------------------------------------------------------------------------
23,348,014
- --------------------------------------------------------------------------------
Oil and Natural Gas -- 8.1%
4,350,000 B Canadian Forest Oil Ltd., Sr. Sub. Notes,
8.750% due 9/15/07+ 4,409,813
Clark R & M Inc.:
1,950,000 BB Sr. Notes, 8.375% due 11/15/07+ 1,964,625
3,425,000 BB Sr. Sub. Notes, 8.875% due 11/15/07+ 3,459,250
3,925,000 B- Coho Energy, Sr. Sub. Notes, 8.875% due
10/15/07 3,944,625
8,475,000 B+ Dawson Production Services, Sr. Sub.
Notes, 9.375% due 2/1/07 8,898,750
3,950,000 Caa* Deeptech International, Sr. Sub. Notes,
12.000% due 12/15/00 4,211,687
7,025,000 BB- Gulf Canada Resources Ltd., Sub.
Debentures, 9.625% due 7/1/05 7,639,687
3,600,000 B+ Ico Inc., Sr. Notes, 10.375% due 6/1/01 3,870,000
1,425,000 BB- J. Ray McDermott SA, Sr. Sub. Notes,
9.375% due 7/15/06 1,530,094
9,525,000 B+ Parker Drilling, Debentures, 9.750% due
11/15/06 10,287,000
4,425,000 BB- Pride Petroleum, Sr. Sub. Notes, 9.375%
due 5/1/07 4,767,937
6,025,000 BB- Santa Fe Energy Resources, Sr. Sub.
Debentures, 11.000% due 5/15/04 6,537,124
3,675,000 B- Stone Energy Corp., Sr. Sub. Notes,
8.750% due 9/15/07 3,757,687
See Notes to Financial Statements.
7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)(continued) December 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Oil and Natural Gas -- 8.1% (continued)
$ 4,325,000 B United Meridian Corp., Sr. Sub.
Guaranteed Notes, 10.375% due 10/15/05 $ 4,714,250
- --------------------------------------------------------------------------------
69,992,529
- --------------------------------------------------------------------------------
Packaging and Containers -- 1.7%
1,825,000 B AEP Industries Inc., Sr. Sub. Notes,
9.875% due 11/15/07+ 1,879,750
2,000,000 B+ Container Corp. of America, Sr. Notes,
11.250% due 5/1/04 2,185,000
3,175,000 B- Gaylord Container Corp., Sr. Sub.
Debentures, 12.750% due 5/15/05 3,405,188
4,250,000 B Huntsman Packaging Corp., Sr. Sub. Notes,
9.125% due 10/1/07+ 4,388,125
5,125,000# B Impress Metal Packaging, Sr. Sub. Notes,
9.650% due 5/29/07 3,001,578
- --------------------------------------------------------------------------------
14,859,641
- --------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 5.2%
2,927,000 NR American Pad & Paper Co., Sr. Sub. Notes,
13.000% due 11/15/05 3,420,931
7,175,000 B+ Asia Pulp & Paper II Maritus Ltd., Sr.
Sub. Notes, 12.000% due 12/29/49 6,349,875
3,400,000 B Goss Graphic Systems, Sr. Sub. Notes,
12.000% due 10/15/06 3,854,750
14,875,000 BB Indah Kiat International Finance Co.,
Secured Notes, 11.875% due 6/15/02 14,205,625
10,075,000 B+ SD Warren Corp., Sr. Sub. Notes, 12.000%
due 12/15/04 11,258,813
6,415,000 BB Tjiwi Kimia Industries, Sr. Guaranteed
Notes, 13.250% due 8/1/01 6,158,400
- --------------------------------------------------------------------------------
45,248,394
- --------------------------------------------------------------------------------
Personal Care Products/Cosmetics -- 0.2%
2,000,000 B- Revlon Worldwide Corp., Sr. Discounts
Notes, zero coupon bond to yield
12.280% due 3/15/01 1,380,000
- --------------------------------------------------------------------------------
Pollution Control/Waste Removal -- 0.5%
3,925,000 B+ Allied Waste North America, Sr. Sub.
Notes, 10.250% due 12/1/06 4,297,875
- --------------------------------------------------------------------------------
Publishing -- 1.3%
14,575,000# NR ITT Promedia, Sr. Sub. Notes, 9.125% due
9/15/07 8,541,463
2,850,000 NR ITT Publimedia BV, Sr. Sub. Notes, 9.375%
due 9/15/07 3,006,750
- --------------------------------------------------------------------------------
11,548,213
- --------------------------------------------------------------------------------
Real Estate Development/ REITS -- 1.0%
2,000,000 BB- Trizec Finance, Sr. Notes, 10.875% due
10/15/05 2,257,500
5,600,000 BB Trizec Hahn Corp., Sr. Notes, 10.000% due
12/1/01 6,104,000
- --------------------------------------------------------------------------------
8,361,500
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
8
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)(continued) December 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Retail -- 0.2%
$ 1,400,000 NR American Builders & Contractors, Sr. Sub.
Notes, 10.625% due 5/15/07 $ 1,457,750
- --------------------------------------------------------------------------------
Telecommunications -- 22.9%
16,600,000 B3* Clearnet Communications, Inc., Sr.
Discount Notes, step bond to yield
13.906% due 12/15/05 13,197,000
1,400,000 NR Colt Telecommunications, Sr. Notes,
10.125% due 11/30/07 2,326,614
8,000,000 NR Colt Telecommunications, Units, step bond
to yield 11.615% due 12/15/06+ 6,260,000
11,275,000 NR Esprit Telecom Group, Sr. Notes, 11.500%
due 12/15/07 8,241,597
6,450,000 B+ Fonorola Inc., Sr. Secured Notes, 12.500%
due 8/15/02 7,175,625
3,027,000 B Globalstar L.P., Sr. Sub. Notes, 11.375%
due 2/15/04 3,057,270
3,950,000 B Hermes Europe Railtel Intelcom, Sr.
Notes, 11.500% due 8/15/07+ 4,384,500
3,500,000 NR Intelcom Group Inc., Sr. Discount Notes,
step bond to yield 12.055% due 5/1/06 2,625,000
10,225,000 B- Intermedia Communications of Florida, Sr.
Discount Unsecured Notes, step bond to
yield 11.961% due 5/15/06 8,077,750
Iridium LLC/Capital Corp., Sr. Notes:
6,725,000 B- 13.000% due 7/15/05 7,086,467
6,850,000 B- 14.000% due 7/15/05 7,517,875
2,050,000 B Knology Holdings Inc., Units, step bond
to yield 11.875% due 10/15/07+ 1,127,500
9,450,000 NR McLeod Inc., Sr. Discount Debentures,
step bond to yield 10.704% due 3/1/07 6,874,874
Metronet Communications, Sr. Notes:
10,225,000 NR 12.000% due 8/15/07+ 11,809,874
2,000,000 NR Step bond to yield 10.750% due 11/1/07+ 1,225,000
8,925,000 B- Millicom International Cellular S.A., Sr.
Discount Notes, step bond to yield
13.500% due 6/1/06 6,626,812
Nextel Communications, Inc., Sr. Discount
Notes:
20,125,000 CCC- Step bond to yield 11.559% due 8/15/04 17,911,250
4,850,000 CCC Step bond to yield 10.650% due 9/15/07+ 3,073,688
14,950,000 CCC Step bond to yield 9.750% due 10/31/07+ 9,119,500
9,375,000 NR Nextlink Communications, Sr. Notes,
12.500% due 4/15/06 10,722,655
8,850,000 NR Pagemart Inc., Sr. Discount Notes, step
bond to yield 11.334% due 11/1/03 8,319,000
5,500,000 NR Pagemart Nationwide, Inc., Sr. Discount
Notes, step bond to yield 13.344% due
2/1/05 4,922,500
7,600,000 B- Primus Telecomm Group, 11.750% due 8/1/04 8,132,000
See Notes to Financial Statements.
9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)(continued) December 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Telecommunications -- 22.9% (continued)
Qwest Communications:
$10,825,000 B2* Sr. Discount Notes, step bond to yield
9.378% due 10/15/07+ $ 7,361,000
3,625,000 NR Sr. Notes, 10.875% due 4/1/07 4,096,250
RCN Corp.:
4,000,000 B3* Sr. Notes, 10.000% due 10/15/07+ 4,130,000
9,025,000 B3* Sr. Discount Notes, step bond to yield
11.140% due 10/15/07+ 5,685,750
6,975,000 NR RSL Communications Ltd. Units, 12.250%
due 11/15/06 7,620,188
Telesystems Communications, Sr. Discount
Debentures:
12,475,000 B- Step bond to yield 12.851% due 6/30/07+ 7,828,063
3,450,000 B- Step bond to yield 10.413% due 11/1/07+ 1,914,750
- --------------------------------------------------------------------------------
198,450,352
- --------------------------------------------------------------------------------
Textiles -- 0.6%
5,275,000 BB Pt. Polysindo Eka Perkasa, Sr. Secured
Notes, 13.000% due 6/15/01 4,747,500
- --------------------------------------------------------------------------------
Transportation -- 1.5%
8,000,000 BB GS Superhighway Holdings, Sr. Notes,
10.250% due 8/15/07 6,920,000
5,700,000 BB- Sea Containers Limited, Sr. Sub.
Debentures, 12.500% due 12/1/04 6,469,500
- --------------------------------------------------------------------------------
13,389,000
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $768,715,581) 800,074,020
================================================================================
SHARES SECURITY VALUE
================================================================================
PREFERRED STOCK -- 5.5%
================================================================================
Banks/Savings and Loans -- 0.3%
108,000 California Federal, Series A,
Exchangeable 9.125% 2,889,000
- --------------------------------------------------------------------------------
Broadcasting-TV, Cable and Radio -- 4.6%
33,800 Time Warner Inc., Series K, Exchangeable
10.250% 38,025,560
61,200 Viasystems Inc. 1,277,550
- --------------------------------------------------------------------------------
39,303,110
- --------------------------------------------------------------------------------
Telecommunications -- 0.6%
4,351 IXC Communications Corp., Exchangeable
12.500% 5,047,349
1,611 Primedia Inc., Series B, Exchangeable
11.625% 172,027
- --------------------------------------------------------------------------------
5,219,376
- --------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost-- $44,677,183) 47,411,486
================================================================================
See Notes to Financial Statements.
10
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)(continued) December 31, 1997
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
CONVERTIBLE PREFERRED STOCK -- 1.1%
- --------------------------------------------------------------------------------
Automobiles/Trucking -- 1.1%
164,400 Navistar International, Series G,
Convertible $6.00 (Cost-- $8,828,280) $ 9,822,900
================================================================================
COMMON STOCK -- 0.1%
================================================================================
Telecommunications -- 0.1%
21,302 Nextel Communications, Inc. ++ 498,467
20,125 Pagemart Nationwide Inc. 150,938
- --------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost-- $343,738) 649,405
================================================================================
SHARES SECURITY VALUE
================================================================================
WARRANTS -- 0.3%
================================================================================
Broadcasting/TV, Cable and Radio -- 0.0%
9,225 Australis Holdings Ltd., Expire
10/30/01++ 0
5,700 Wireless One, Inc., Expire 10/15/03++ 1,425
- --------------------------------------------------------------------------------
1,425
- --------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 0.0%
8,175 SD Warren, Corp., Expire 12/5/06+++ 143,880
- --------------------------------------------------------------------------------
Telecommunications -- 0.3%
55,110 Clearnet Communications Inc., Expire
9/15/05++ 330,660
7,500 Globalstar LP, Expire 2/15/04++ 765,000
6,725 Iridium LLC Corp, Expire 7/15/05++ 941,500
11,959 Nextel Communications, Inc., Expire
12/15/98++ 120
6,575 Nextel Communications, Inc., Expire
4/25/99++ 66
43,470 Pagemart Inc., Expire 12/31/03+++ 260,820
7,600 Primus Telecomm Group, Expire 8/1/04++ 76,000
6,975 RSL Communications Ltd., Expire 11/15/06++ 69,750
12,200 United International Holdings Australia
Inc., Expire 5/15/06++ 146,400
- --------------------------------------------------------------------------------
2,590,316
- --------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost-- $1,581,194) 2,735,621
================================================================================
See Notes to Financial Statements.
11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited)(continued) December 31, 1997
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENT-- 0.5%
$ 4,518,000 Goldman, Sachs & Co., 6.350% due 1/2/98;
Proceeds at maturity -- $4,519,594;
(Fully collateralized by U.S. Treasury
Notes, 5.875% due 9/30/02; Market value
-- $4,610,350 (Cost -- $4,518,000) $ 4,518,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $828,663,976**) $865,211,432
================================================================================
+ 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.
++ Restricted security (Note 9).
# Represents local currency.
++ Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 13 for definition of ratings.
See Notes to Financial Statements.
12
<PAGE>
- --------------------------------------------------------------------------------
Definition of Ratings
- --------------------------------------------------------------------------------
All ratings are by Standard & Poor's Ratings Services ("Standard &Poor's")
except 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 "CCC" 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 an 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.
Moody's -- Numerical modifiers 1,2 and 3 may be applied to each generic rating
from "Baa" to "Caa", 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.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
13
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) December 31, 1997
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost-- $828,663,976) $ 865,211,432
Cash 88
Receivable for open forward foreign currency contracts (Note 8) 186,918
Dividend and interest receivable 15,736,735
- --------------------------------------------------------------------------------
Total Assets 881,135,173
- --------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 2,682,567
Payable for open forward foreign currency contracts (Note 8) 1,445,441
Management fees payable 856,632
Accrued expenses 395,280
- --------------------------------------------------------------------------------
Total Liabilities 5,379,920
- --------------------------------------------------------------------------------
Total Net Assets $875,755,253
================================================================================
NET ASSETS:
Par value of capital shares $ 71,535
Capital paid in excess of par value 892,266,140
Undistributed net investment income 101,520
Accumulated net realized loss on security
transactions, futures contracts and options (51,967,199)
Net unrealized appreciation of investments and
foreign currencies 35,283,257
- --------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $12.24 a share on 71,535,122 shares of
$0.001 par value outstanding; 500,000,000 shares authorized) $875,755,253
================================================================================
See Notes to Financial Statements.
14
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Three Months Ended December 31, 1997
INVESTMENT INCOME:
Interest $ 20,721,724
Dividends 2,075,845
- --------------------------------------------------------------------------------
Total Investment Income 22,797,569
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 2,551,922
Shareholder communication fees 76,419
Shareholder and system servicing fees 9,578
Audit and legal 7,668
Custody fees 7,614
Pricing fees 5,783
Directors' fees 2,269
Other 5,156
- --------------------------------------------------------------------------------
Total Expenses 2,666,409
- --------------------------------------------------------------------------------
Net Investment Income 20,131,160
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FUTURES CONTRACTS, OPTIONS AND FOREIGN CURRENCIES
(NOTES 3, 5 AND 6):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 11,835,665
Futures contracts (462,223)
Options purchased (648,905)
Foreign currency transactions 121,043
- --------------------------------------------------------------------------------
Net Realized Gain 10,845,580
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments
and Foreign Currencies:
Beginning of period 56,962,467
End of period 35,283,257
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (21,679,210)
- --------------------------------------------------------------------------------
Net Loss on Investments, Futures Contracts, Options
and Foreign Currencies (10,833,630)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 9,297,530
================================================================================
See Notes to Financial Statements.
15
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Three Months Ended December 31, 1997 (unaudited)
and the Year Ended September 30, 1997
<TABLE>
<CAPTION>
December 31 September 30
====================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 20,131,160 $ 80,776,721
Net realized gain 10,845,580 7,070,567
Increase (decrease) in net unrealized appreciation (21,679,210) 40,292,499
- ------------------------------------------------------------------------------------
Increase in Net Assets From Operations 9,297,530 128,139,787
- ------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (22,537,258) (78,232,239)
- ------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (22,537,258) (78,232,239)
- ------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 10):
Net asset value of shares issued
for reinvestment of dividends 6,306,364 14,041,863
- ------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 6,306,364 14,041,863
- ------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets (6,933,364) 63,949,411
NET ASSETS:
Beginning of period 882,688,617 818,739,206
- ------------------------------------------------------------------------------------
End of period* $875,755,253 $882,688,617
====================================================================================
* Includes undistributed net investment income of: $101,520 $2,386,575
====================================================================================
</TABLE>
See Notes to Financial Statements.
16
<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 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 dividend income is 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 an 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 or 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, 1997, reclassifications were made to the
Fund's capital accounts to reflect permanent book/tax differences and income and
gains available for distributions under income tax regulations; (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 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.
17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)(continued)
- --------------------------------------------------------------------------------
In addition, the Fund may enter into forward exchange contracts in order
to hedge against foreign currency risk. These contracts are marked to market
daily by recognizing the difference between the contract exchange rate and the
current market rate as an unrealized gain or loss. Realized gains or losses are
recognized when contracts are settled.
2. MANAGEMENT AGREEMENT AND OTHER TRANSACTIONS
Mutual Management Corp. ("MMC"), formerly known as Smith Barney Mutual
Funds Management Inc., a subsidiary of Salomon Smith Barney Holdings Inc.
("SSBH"), acts as investment manager of the Fund. The Fund pays MMC a management
fee calculated at an annual rate of 1.15% of the Fund's average daily net
assets. This fee is calculated daily and paid monthly.
All officers and one Director of the Fund are employees of Smith Barney
Inc., another subsidiary of SSBH.
3. INVESTMENTS
During the three months ended December 31, 1997, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
<TABLE>
================================================================================
<S> <C>
Purchases $187,124,392
- --------------------------------------------------------------------------------
Sales 170,348,287
================================================================================
</TABLE>
At December 31, 1997, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
<TABLE>
================================================================================
<S> <C>
Gross unrealized appreciation $ 52,138,798
Gross unrealized depreciation (15,591,342)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 36,547,456
================================================================================
</TABLE>
18
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)(continued)
- --------------------------------------------------------------------------------
4. CAPITAL LOSS CARRYFORWARD
At September 30, 1997, the Fund had, for Federal tax purposes,
approximately $62,721,000 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:
<TABLE>
<CAPTION>
2003 2004
================================================================================
<S> <C> <C>
Carryforward Amounts $24,603,000 $38,118,000
================================================================================
</TABLE>
5. FUTURES CONTRACTS
Initial margin deposits are made upon entering into futures contracts and
are recognized as assets. Securities equal to the initial margin amount are
segregated by the custodian in the name of the broker. Additional securities are
also segregated up to the current market value of the futures contract. 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 received or made and recognized as assets
due from or liabilities due to 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).
At December 31, 1997, the Fund had no open futures contracts.
19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)(continued)
- --------------------------------------------------------------------------------
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 option
expires, the Fund will realize 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.
At December 31, 1997, the Fund had no open purchased call or put option
contracts.
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 depending upon whether
the cost of the closing transaction is greater or less than the premium
received, 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 three months ended December 31, 1997, the Fund had not written
any call or put options.
20
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited)(continued)
- --------------------------------------------------------------------------------
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.
8. FORWARD FOREIGN CURRENCY CONTRACTS
At December 31, 1997, the Fund had open forward foreign currency contracts
as described below. The Fund bears the market risk that arises from changes in
foreign currency exchange rates. The unrealized loss on the contracts is
reflected as follows:
<TABLE>
<CAPTION>
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain (Loss)
===================================================================================
<S> <C> <C> <C> <C>
To Sell:
British Pound $ 3,723,988 $2,279,080 5/26/98 $(1,445,441)
German Deutschemark 15,654,285 8,710,258 1/8/98 75,399
German Deutschemark 5,922,532 3,305,340 3/2/98 50,584
German Deutschemark 7,374,999 4,119,904 3/18/98 60,935
- -----------------------------------------------------------------------------------
Total Unrealized Loss on Forward
Foreign Currency Contracts $(1,258,523)
===================================================================================
</TABLE>
9. RESTRICTED SECURITIES
One of the Fund's investments is valued at the direction of the Fund's
Board of Directors; this security is restricted as to resale and has been valued
in good faith, taking into consideration the appropriate economic, financial and
other pertinent available information pertaining to the restricted security. The
table below shows the security valued by the Fund's Board of Directors:
<TABLE>
<CAPTION>
12/31/97 Value Percentage
Acquisition Fair Per of Net
Security Shares Date Value Unit Assets Cost
=======================================================================================
<S> <C> <C> > <C> <C> <C> <C>
Nextel Communications,
Inc. Common Stock 21,302 9/11/97 $498,467 $23.40 0.06% $343,738
=======================================================================================
</TABLE>
10. CAPITAL SHARES
During the year ended December 31, 1997, capital stock transactions were
as follows:
<TABLE>
<CAPTION>
Shares Amount
================================================================================
<S> <C> <C>
Shares issued on reinvestment 514,500 $6,306,364
================================================================================
</TABLE>
21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
1997(1) 1997 1996 1995 1994(2)(3)
===========================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $12.43 $11.72 $11.48 $11.20 $12.50
- -------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.29 1.15 1.14 1.14 1.01*
Net realized and unrealized
gain (loss) (0.16) 0.68 0.22 0.28 (1.30)
- -------------------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.13 1.83 1.36 1.42 (0.29)
- -------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.32) (1.12) (1.12) (1.12) (1.01)
Capital -- -- -- (0.02) --
- -------------------------------------------------------------------------------------------
Total Distributions (0.32) (1.12) (1.12) (1.14) (1.01)
- -------------------------------------------------------------------------------------------
Net Asset Value, End of Period $12.24 $12.43 $11.72 $11.48 $11.20
- -------------------------------------------------------------------------------------------
Total Return,
Based on Market Value 3.65%++ 18.18% 21.07% 9.90% (7.33)%++
- -------------------------------------------------------------------------------------------
Total Return,
Based on Net Asset Value 1.04%++ 16.48% 12.86% 13.99% (2.31)%++
- -------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $876 $883 $819 $802 $783
- -------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.20%+ 1.21% 1.21% 1.20% 1.15%+*
Net investment income 9.12+ 9.63 9.85 10.02 9.09+
- -------------------------------------------------------------------------------------------
Portfolio Turnover Rate 20% 87% 73% 59% 69%
- -------------------------------------------------------------------------------------------
Market Value, End of Period $12.500 $12.438 $11.500 $10.500 $10.625
===========================================================================================
</TABLE>
(1) For the three months ended December 31, 1997 (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).
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
22
<PAGE>
- --------------------------------------------------------------------------------
Financial Data (unaudited)
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
Income Dividend
NYSE Net Asset Dividend Reinvestment
Closing Price* Value Paid Price
================================================================================
<S> <C> <C> <C> <C>
1996
January 23 $11.00 $11.68 $0.0930 $11.339
February 20 11.13 11.85 0.0930 11.242
March 26 11.13 11.62 0.0930 11.135
April 23 11.00 11.56 0.0930 11.010
May 28 10.81 11.62 0.0930 10.880
June 25 10.69 11.48 0.0930 11.020
July 23 11.13 11.44 0.0930 11.270
August 27 11.25 11.47 0.0930 11.300
September 24 11.13 11.61 0.0930 11.430
October 22 11.38 11.65 0.0930 11.375
November 25 11.25 11.77 0.0930 11.375
December 23 11.38 11.84 0.0930 11.490
1997
January 28 11.75 11.94 0.0930 11.872
February 25 11.75 12.09 0.0930 11.895
March 24 11.75 11.81 0.0930 11.710
April 22 11.75 11.67 0.0930 11.670
May 27 11.88 11.92 0.0930 11.920
June 24 12.06 12.13 0.0930 12.120
July 22 12.31 12.17 0.0930 12.170
August 26 12.25 12.24 0.0930 12.240
September 23 12.38 12.38 0.0930 12.380
October 28 11.69 12.30 0.0930 12.200
November 24 12.31 12.23 0.0930 12.230
December 22 12.44 12.26 0.0930 12.260
December 31 12.50 12.24 0.0375 12.240
================================================================================
</TABLE>
* In December 1995, the valuation date, which is the date that determines
the dividend reinvestment price, was changed from payable date to record date.
23
<PAGE>
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited)
- --------------------------------------------------------------------------------
Under the Fund's Dividend Reinvestment Plan (the "Plan"), a shareholder
whose shares of Common Stock are registered in his own name will have all
distributions from the Fund reinvested automatically by First Data as purchasing
agent under the Plan, unless the shareholder elects to receive cash.
Distributions with respect to shares registered in the name of a broker-dealer
or other nominee (that is, in "street name") will be reinvested by the broker or
nominee in additional shares under the Plan, unless the service is not provided
by the broker or nominee or the shareholder elects to receive distributions in
cash. Investors who own Common Stock registered in street name should consult
their broker-dealers for details regarding reinvestment. All distributions to
Fund shareholders who do not participate in the Plan will be paid by check
mailed directly to the record holder by or under the direction of First Data as
dividend-paying agent.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price of the Common Stock is equal to or exceeds the net asset value
per share on the date of valuation, Plan participants will be issued shares of
Common Stock at a price equal to the greater of (1) the net asset value per
share most recently determined (as described under "Net Asset Value" in the
Statement of Additional Information) or (2) 95% of the market price.
If the net asset value per share of Common Stock at the time of valuation
exceeds the market price of the Common Stock, or if the Fund declares a dividend
or capital gains distribution payable only in cash, First Data will buy Common
Stock in the open market, on the NYSE or elsewhere, for the participants'
accounts. If, following the commencement of the purchases and before First Data
has completed its purchases, the market price exceeds the net asset value of the
Common Stock, First Data will attempt to terminate purchases in the open market
and cause the Fund to issue the remaining portion of the dividend or
distribution by issuing shares at a price equal to the greater of (a) net asset
value or (b) 95% of the then current market price. In this case, the number of
shares of Common Stock received by a Plan participant will be based on the
weighted average of prices paid for shares purchased in the open market and the
price at which the Portfolio issues the remaining shares. To the extent First
Data is unable to stop open market purchases and cause the Fund to issue the
remaining shares, the average per share purchase price paid by First Data may
exceed the net asset value of the Common Stock, resulting in the acquisition of
fewer shares than if the dividend or capital gains distribution had been paid in
Common Stock issued by the Fund at net asset value. First Data will begin to
purchase Common Stock on the open market as soon as practicable after the
payment date of the dividend or capital gains distribution,
24
<PAGE>
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited)(continued)
- --------------------------------------------------------------------------------
but in no event shall such purchases continue later than 30 days after that
date, except when necessary to comply with applicable provisions of the federal
securities laws.
First Data maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in each account, including information
needed by a shareholder for personal and tax records. The automatic reinvestment
of dividends and capital gains distributions will not relieve Plan participants
of any income tax that may be payable on the dividends or capital gains
distributions. Common Stock in the account of each Plan participant will be held
by First Data in uncertificated form in the name of each Plan participant.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions under the Plan. First Data's fees for handling the
reinvestment of dividends and capital gains distributions will be paid by the
Fund. No brokerage charges apply with respect to shares of Common Stock issued
directly by the Fund under the Plan. Each Plan participant will, however, bear a
proportionate share of brokerage commissions incurred with respect to any open
market purchases made under the Plan.
Experience under the Plan may indicate that changes to it are desirable.
The Fund reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by First Data, with the Fund's prior written consent, on at least 30
days' written notice to Plan participants. All correspondence concerning the
Plan should be directed by mail to First Data Investor Services Group, Inc.,
P.O. Box 8030, Boston, Massachusetts 02266-8030 or by telephone at
1-800-331-1710.
- --------------------------------------------------------------------------------
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.
25
<PAGE>
HIGH INCOME
- ---------------------
Opportunity Fund Inc.
DIRECTORS
Donald R. Foley
Paul Hardin
Heath B. McLendon, Chairman
Roderick C. Rasmussen
John P. Toolan
Joseph H. Fleiss, Emeritus
C. Richard Youngdahl, Emeritus
OFFICERS
Heath B. McLendon
President and
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
John C. Bianchi
Vice President
Thomas M. Reynolds
Controller
Christina T. Sydor
Secretary
INVESTMENT MANAGER
Mutual Management Corp.
CUSTODIAN
PNC Bank, N.A.
SHAREHOLDER
SERVICING AGENT
First Data Investor Services Group, Inc.
P.O. Box 8030
Boston, MA 02266-8030
This report is intended only for the
shareholders of the High Income
Opportunity Fund Inc. 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
- ---------------------------
Listed High Income Opportunity Fund Inc.
- --------------------------- 388 Greenwich Street
NYSE New York, New York 10013
THE NEW YORK STOCK EXCHANGE
FD0850 2/98
