[PHOTO OMITTED]
HIGH INCOME
-------------------
Opportunity Fund Inc.
Semi-Annual Report
March 31, 1998
<PAGE>
High Income Opportunity Fund Inc.
Dear Shareholder:
We are pleased to provide the semi-annual report for the High Income Opportunity
Fund Inc. ("Fund") for the period ended March 31, 1998. Over the past six months
the Fund paid income dividends totaling $0.60 per share. The table below shows
the annualized distribution rate and six-month total return for the Fund based
on its March 31, 1998 net asset value ("NAV") per share and its New York Stock
Exchange ("NYSE") closing price.
Price Annualized Six-Month
Per Share Distribution Total Return
--------- -------------- ----------
$12.34 (NAV) 8.65% 4.22%
$11.875 (NYSE) 8.99% 0.23%
The Fund generated a total return on NAV of 4.22% for the six-month ended March
31, 1998. In comparison, the six-month average total return for closed-end high
yield bond funds for the same time period was 5.55%, according to Lipper
Analytical Services, Inc., an independent fund-tracking organization. A full
discussion of the past six-month's economic and market conditions as well as the
investment strategy employed by the Fund during this time follows.
Market and Economic Overview
The high yield bond market generated positive performance during the six months
ended March 31, 1998 with total returns in the 5% to 6% range. In the first
quarter of 1998, the high yield bond market continued to generate competitive
performance returns. The lower quality issues generally outperformed the higher
quality issues as the performance of the lower quality issues tends to correlate
more closely to the U.S. stock market.
During the first quarter of 1998 the U.S. stock market rose by 10% to 15%
depending upon which stock market index was used. A strong U.S. economy, ample
liquidity in the financial markets and moderate inflation continued to help fuel
the stock markets' performance. Interest rates remained confined to a narrow
range with little change in the rates of intermediate- and long-term U.S.
Treasury securities. The Federal Reserve Board ("Fed") continued to remain on
the sidelines, and the federal-funds rate remained unchanged at 5.50%.
While the Asian crisis did not dampen U.S. economic growth, it did keep pressure
on worldwide inflation with price declines on a number of important global
commodities such as oil. The net result was extremely positive for U.S.
financial markets, particularly the U.S. stock market. The U.S. bond market
1
<PAGE>
was stuck in a narrow trading range and we believe the bond market will probably
continue to trade in a narrow range as long as the Fed's monetary policy remains
on hold. However, in recent weeks, the Fed has grown more concerned over strong
U.S. economic growth and the possibility that inflation may be increasing. Yet
the evidence so far suggests otherwise, with most statistics indicating
relatively tame inflation during the first quarter of 1998.
During the first three months of 1998, the stock markets experienced high
volatility with most major indices again moving toward record highs. Despite
record new issuance, the high yield bond market also generated strong
performance results in the first quarter. In our view, this was likely in
reaction to continued strength in the U.S. stock markets.
As previously noted, the lower quality segment of the high yield bond market
tends to more closely track the performance of the U.S. stock market rather than
the higher quality segments. The Fund's relatively higher-quality orientation
caused its performance to lag the high yield bond averages modestly during the
past six months. Despite the Fund's modest underperformance, we remain committed
to our strategy of emphasizing the better quality issues, especially in light of
the increased turbulence in a number of Asian economies.
Portfolio Strategy and Market Outlook
During the past six months, we became more conservative and increased our
weighting in higher-quality, defensive issues. We continue to believe that the
U.S. economy's outlook remains mixed and that many consumer-sensitive industries
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.
Moreover, we believe that a slowdown in overall world economic growth may occur
in the coming months as the severe economic decline in Asia sharply reduces
demand for many U.S. and European products. Consequently, the first half of 1998
could experience a slight increase in the default rates of select high yield
credits, especially weaker, more vulnerable companies that are having difficulty
competing. Given the increased uncertainty over Asia, we would expect stock
market volatility to further rise in the coming months.
We will, therefore, still avoid these areas of the U.S. economy where consumer
spending is weak as well as industries facing heavy pricing competition. Our
emphasis will be on industries that are experiencing strong growth such as
telecommunications, media, and cable television. We also plan on owning stronger
rated B and BB bonds and avoiding the weaker, lower tier issues that are
generally in the CCC/Caa rating category. We believe our conservative investment
strategy is a prudent course of action given the higher risks and
2
<PAGE>
volatility we expect in the world's financial markets going forward. Yet,
despite our general cautiousness, we plan to take advantage of select high
growth potential opportunities, especially the telecommunications and media
industries where total returns were the strongest in 1997.
In closing, thank you for investing in the High Income Opportunity Fund. We look
forward to continuing to help you pursue your investment goals. If you have any
questions about the Fund, please call The First Data Investor Services Group,
Inc. at (800) 331-1710.
Sincerely,
/s/ Heath B. McLendon /s/ John C. Bianchi, C.F.A.
Heath B. McLendon John C. Bianchi, C.F.A.
Chairman Vice President
May 4, 1998
3
<PAGE>
Take Advantage of the Fund's Dividend Reinvestment Policy!
Did you know that fund investors who reinvest their dividends are taking
advantage of one of the most effective wealth-building tools available today?
Systematic investments put time to work for you through the strength of
compounding.
As an investor in the Fund, you can participate in its Dividend Reinvestment
Plan, a convenient, simple and efficient way to reinvest your dividends and
capital gains, if any, in additional shares of the Fund. The Fund's complete
Dividend Reinvestment Plan begins on page 24. Below is a short summary of how
the Dividend Reinvestment Plan works.
Plan Summary
If you are a Plan participant who has not elected to receive your dividends in
the form of a cash payment, then your dividend and capital gain distributions
will be reinvested automatically in additional shares of the Fund.
The number of common stock shares in the Fund you will receive in lieu of a cash
dividend is determined in the following manner. If the market price of the
common stock is equal to or exceeds the net asset value ("NAV") per share on the
date of valuation, you will be issued shares for the equivalent of the most
recently determined NAV per share or 95% of the market price, whichever is
greater.
If the NAV per share at the time of valuation is greater than the market price
of the common stock, or if the Fund declares a dividend or capital gains
distribution payable only in cash, the Fund will buy common stock for your
account in the open market or on the New York Stock Exchange.
If the Fund begins to purchase additional shares in the open market and the
market price of the shares subsequently rises above the NAV before the purchases
are completed, the Fund will attempt to cancel any remaining orders and issue
the remaining dividend or distribution in shares at the Fund's NAV per share. In
that case, the number of Fund shares you receive will be based on the weighted
average of prices paid for shares purchased in the open market and the price at
which the Fund issues the remaining shares.
To find out more detailed information about the Dividend Reinvestment Plan and
about how you can participate, please call First Data Investors Services Group
at (800) 331-1710.
4
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
CORPORATE BONDS AND NOTES -- 92.0%
===========================================================================================================
Aerospace/Defense -- 2.0%
<S> <C> <C> <C>
$11,275,000 Ba2* Airplanes Pass Through Trust, Corporate Collateralized
Mortgage Obligation, Series D, 10.875% due 3/15/19 $ 12,696,439
4,375,000 BB Morgan Stanley Aircraft Finance, 8.700% due 3/15/23(a) 4,451,563
- -----------------------------------------------------------------------------------------------------------
17,148,002
- -----------------------------------------------------------------------------------------------------------
Banks/Savings and Loans -- 3.7%
Amresco Inc., Sr. Sub. Notes:
4,250,000 B 10.000% due 3/15/04 4,430,625
1,000,000 B 9.875% due 3/15/05 1,020,000
14,900,000 B First Nationwide Holdings, Sr. Notes, 12.500%
due 4/15/03 17,097,750
5,500,000 B2* Ocwen Capital Corp., Sr. Notes, 11.875% due 8/1/27 6,105,000
3,400,000 BB- Ocwen Financial Corp., Sr. Notes, 11.875% due 10/1/03 3,884,500
- -----------------------------------------------------------------------------------------------------------
32,537,875
- -----------------------------------------------------------------------------------------------------------
Broadcasting- TV, Cable, and Radio -- 12.4%
Cablevision Systems Corp., Sr. Sub. Debentures:
15,725,000 BB- 9.875% due 2/15/13 17,415,438
5,525,000 BB- 10.500% due 5/15/16 6,491,875
5,900,000 BB- 9.875% due 4/1/23 6,563,750
6,250,000 Ba3* Century Communications, Sr. Notes, 8.750% due 10/1/07 6,515,625
7,950,000 B2* Comcast UK Cable, Sr. Unsecured Discount Debentures,
step bond to yield 11.535% due 11/15/07 6,618,375
2,600,000 BB+ Le Groupe Videotron, Sr. Notes, 10.625% due 2/15/05 2,918,500
Marcus Cable Capital Corp., Sr. Discount Notes:
4,100,000 B3* Step bond to yield 11.210% due 8/1/04 3,915,500
2,590,000 B1* Step bond to yield 12.748% due 12/15/05 2,356,900
6,000,000 B- PX Escrow Corp., Sr. Discount Notes, step bond to
yield 9.322% due 2/1/06(a) 4,282,500
Rogers Cablesystems, Sr. Secured Second Priority:
4,000,000 BB+ Debentures 10.000% due 3/15/05 4,460,000
4,400,000 BB+ Debentures 10.000% due 12/1/07 4,917,000
11,195,000 BB- Sr. Sub. Debentures, 11.000% due 12/1/15 13,224,094
4,950,000 BB- Rogers Communications, Sr. Notes, 8.875%
due 7/15/07 5,036,625
TV Azteca SA De CV, Sr. Sub. Notes:
3,925,000 Ba3* 10.125% due 2/15/04 4,121,250
6,450,000 Ba3* 10.500% due 2/15/07 6,901,500
21,225,000 B United International Holdings Inc., Sr. Discount Notes,
Step bond to yield 10.669% due 2/15/08(a) 13,292,156
- -----------------------------------------------------------------------------------------------------------
109,031,088
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
5
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Building/Construction -- 0.7%
$ 3,825,000 NR CIA Latino Americana, Company Guaranteed, 11.625%
due 6/1/04(a) $ 3,958,875
2,000,000 BB+ Trizec Finance, Sr. Notes, 10.875% due 10/15/05 2,267,500
- -----------------------------------------------------------------------------------------------------------
6,226,375
- -----------------------------------------------------------------------------------------------------------
Chemicals -- 1.7%
1,125,000 BB- American Pacific Corp., Sr. Notes, 9.250% due 3/1/05(a) 1,164,375
3,875,000 B3* Interlake Corp., Sr. Sub. Notes, 12.125% due 3/1/02 4,020,313
5,000,000 B1* NL Industries, Sr. Secured Notes, 11.750% due
10/15/03 5,550,000
4,350,000 B Unifrax Investment Corp., Sr. Notes, 10.500%
due 11/1/03 4,545,750
- -----------------------------------------------------------------------------------------------------------
15,280,438
- -----------------------------------------------------------------------------------------------------------
Consumer Durables -- 0.9%
4,000,000 B- Eagle-Picher Industrial Inc., Sr. Sub. Notes, 9.375%
due 3/1/08(a) 4,080,000
6,050,000 B Texon International, Sr. Notes, 10.000% due 2/1/08(a) 3,394,006
- -----------------------------------------------------------------------------------------------------------
7,474,006
- -----------------------------------------------------------------------------------------------------------
Diversified/Conglomerate Manufacturing -- 1.1%
4,950,000 B2* Intertek Finance PLC, Sr. Sub. Notes, 10.250% due 11/1/06 5,265,563
4,475,000 B+ Park-Ohio Industries, Sr. Sub. Notes, 9.250%
due 12/1/07 4,721,125
- -----------------------------------------------------------------------------------------------------------
9,986,688
- -----------------------------------------------------------------------------------------------------------
Diversified/Conglomerate Services -- 0.9%
2,900,000 B- Alvey Systems Inc., Sr. Sub. Notes, 11.375%
due 1/31/03 3,034,125
4,675,000 B- Outsourcing Solutions, Sr. Sub. Notes, 11.000%
due 11/1/06 5,148,344
- -----------------------------------------------------------------------------------------------------------
8,182,469
- -----------------------------------------------------------------------------------------------------------
Electric Utilities -- 4.7%
AES Corp., Sr. Sub. Notes:
2,150,000 Ba1* 10.250% due 7/15/06 2,375,750
2,300,000 Ba1* 8.375% due 8/15/07 2,363,250
11,025,000 Ba1* 8.500% due 11/1/07(a) 11,410,875
Calpine Corp., Sr. Notes:
6,675,000 Ba2* 10.500% due 5/15/06 7,375,875
2,400,000 Ba2* 8.750% due 7/15/07 2,478,000
3,425,000 BB+ Cleveland Electric, Sr. Notes, 7.430% due 11/1/09(a) 3,549,156
5,525,000 BB+ El Paso Electric Co., First Mortgage, 8.900% due 2/1/06 6,146,563
1,624,341 BB Midland Cogeneration Venture Limited Partnership,
Midland Funding, Debentures, Sr. Secured Lease
Obligation Bond, Series C, 10.330% due 7/23/02 1,748,197
3,400,000 BBB- Niagara Mohawk Power, First Mortgage, 7.750%
due 5/15/06 3,591,250
- -----------------------------------------------------------------------------------------------------------
41,038,916
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
6
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
==========================================================================================================
<S> <C> <C> <C>
Electronics/Computers -- 6.5%
3,100,000 B- Axiohm Transaction Services, Sr. Sub. Notes, 9.750%
due 10/1/07 3,162,000
3,925,000 B Celestica International, Sr. Sub. Notes, 10.500%
due 12/31/06 4,288,063
8,225,000 B Fairchild Semiconductor Corp., Sr. Sub. Notes, 10.125%
due 3/15/07 8,595,125
4,725,000 B- Graphic Controls Corp., Sr. Sub. Notes, 12.000%
due 9/15/05 5,303,813
Unisys Corp., Sr. Notes:
10,875,000 B+ 12.000% due 4/15/03 12,397,500
12,550,000 B+ 11.750% due 10/15/04 14,573,688
8,000,000 B- Viasystems Inc., Sr. Sub. Notes, 9.750% due 6/1/07 8,400,000
- -----------------------------------------------------------------------------------------------------------
56,720,189
- -----------------------------------------------------------------------------------------------------------
Financial Services -- 0.6%
4,950,000 B2* Intertek Finance PLC, Sr. Sub. Notes, 10.250% due 11/1/06 5,265,563
- -----------------------------------------------------------------------------------------------------------
Food -- 2.3%
2,275,000 B+ Ameriserve Food Distributors Company Guaranteed,
8.875% due 10/15/06 2,348,938
4,575,000 B- B & G Foods Inc., Sr. Sub. Notes, 9.625% due 8/1/07 4,700,813
7,075,000 B Imperial Holly Corp., Sr. Sub. Notes, 9.750%
due 12/15/07 7,304,938
3,000,000 B Purina Mills Inc., Sr. Sub. Notes, 9.000% due 3/15/10(a) 3,105,000
2,335,000 B- Van de Kamp Inc., Sr. Sub. Notes, 12.000% due 9/15/05 2,615,200
- -----------------------------------------------------------------------------------------------------------
20,074,889
- -----------------------------------------------------------------------------------------------------------
Health Care -- 5.6%
4,275,000 B- Fisher Scientific International Inc., Sr. Sub. Notes,
9.000% due 2/1/08(a) 4,371,188
3,950,000 B+ Frensenius Medical Capital Trust II, Company Guaranteed,
7.875% due 2/1/08(a) 3,950,000
8,750,000 BB ICN Pharmaceuticals Inc., Sr. Notes, 9.250%
due 8/15/05 9,296,875
4,125,000 B2* Integrated Health Services Inc., Sr. Sub. Notes,
9.250% due 1/15/08 4,346,719
14,400,000 B- Magellan Health Services, Sr. Sub. Notes, 9.000%
due 2/15/08(a) 14,580,000
7,625,000 B- Paragon Health Network, Sr. Sub. Notes, 9.500%
due 11/1/07 7,872,813
4,425,000 B- Pharmaceutical Fine Chemicals, Sr. Sub. Notes,
9.750% due 11/15/07(a) 4,574,344
- -----------------------------------------------------------------------------------------------------------
48,991,939
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Hotel, Casinos and Gaming -- 7.2%
$ 2,350,000 B Aztar Corp., Sr. Sub. Notes, 13.750% due 10/1/04 $ 2,711,313
7,350,000 B+ Clark USA Inc., Sr. Notes, 10.875% due 12/1/05 8,112,563
5,375,000 B- Courtyard by Marriott, Sr. Secured Notes, 10.750%
due 2/1/08 5,952,813
3,125,000 B2* Extended Stay America, Sr. Sub. Notes, 9.150%
due 3/15/08(a) 3,156,250
1,500,000 Ba3* HMC Acquisition Properties, Sr. Notes, 9.000%
due 12/15/07 1,578,750
HMH Properties, Sr. Notes:
17,550,000 BB- 9.500% due 5/15/05 18,690,732
4,350,000 BB- 8.875% due 7/15/07 4,600,125
5,125,000 Ba1* Mohegan Tribal Gaming Authority, Sr. Secured Notes,
13.500% due 11/15/02 6,624,063
5,500,000 B Showboat Inc., Sr. Sub. Notes, 13.000% due 8/1/09 6,696,250
5,025,000 B Signature Resorts Inc., Sr. Sub. Notes, 9.750%
due 10/1/07 5,125,500
- -----------------------------------------------------------------------------------------------------------
63,248,359
- -----------------------------------------------------------------------------------------------------------
Insurance -- 1.1%
5,500,000 BB+ SIG Capital Trust, Company Guaranteed, 9.500%
due 8/15/27 5,671,875
4,175,000 BB- Veritas Capital Trust, Company Guaranteed, 10.000%
due 1/2/28 4,394,188
- -----------------------------------------------------------------------------------------------------------
10,066,063
- -----------------------------------------------------------------------------------------------------------
Leisure -- 1.0%
Premier Parks Inc., Sr. Notes:
2,750,000 B- 9.250% due 4/1/06 2,818,750
2,750,000 B- Step bond to yield 10.000% due 4/1/08 1,756,563
4,225,000 B3* SFX Entertainment Inc., Sr. Sub. Notes, 9.125%
due 2/1/08(a) 4,182,750
- -----------------------------------------------------------------------------------------------------------
8,758,063
- -----------------------------------------------------------------------------------------------------------
Metals/Mining -- 2.5%
9,350,000 B- Haynes International Inc., Sr. Notes, 11.625%
due 9/1/04 10,600,563
8,700,000 B2* Kaiser Aluminum and Chemical, Sr. Sub. Notes,
12.750% due 2/1/03 9,265,500
2,275,000 B2* Koppers Industry Inc., Sr. Sub. Notes, 9.875%
due 12/1/07 2,411,500
- -----------------------------------------------------------------------------------------------------------
22,277,563
- -----------------------------------------------------------------------------------------------------------
Oil and Natural Gas -- 8.6%
4,350,000 B Canadian Forest Oil Ltd., Sr. Sub. Notes, 8.750%
due 9/15/07 4,447,875
2,425,000 B2* Coho Energy, Sr. Sub. Notes, 8.875% due 10/15/07 2,315,875
</TABLE>
8 See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Oil and Natural Gas-- 8.6% (continued)
$ 8,475,000 B+ Dawson Production Services, Sr. Sub. Notes,
9.375% due 2/1/07 $ 8,739,844
3,950,000 Baa3* Deeptech International, Sr. Sub. Notes, 12.000%
due 12/15/00 4,384,500
7,025,000 Ba2* Gulf Canada Resources Ltd., Sub. Debentures,
9.625% due 7/1/05 7,639,688
3,600,000 B+ ICO Inc., Sr. Notes, 10.375% due 6/1/07 3,780,000
2,275,000 BB- J. Ray McDermott SA, Sr. Sub. Notes, 9.375%
due 7/15/06 2,462,688
Ocean Energy Inc., Company Guaranteed,
4,675,000 B 10.375% due 10/15/05 5,189,250
3,600,000 BB- 9.750% due 10/1/06 3,969,000
2,325,000 B- 8.875% due 7/15/07 2,481,938
Parker Drilling, Debentures:
9,525,000 B+ 9.750% due 11/15/06 10,215,563
4,200,000 B+ 9.750% due 11/15/06(a) 4,504,500
4,425,000 BB- Pride Petroleum, Sr. Sub. Notes, 9.375% due 5/1/07 4,723,688
6,025,000 BB+ Santa Fe Energy Resources, Sr. Sub. Debentures,
11.000% due 5/15/04 6,552,188
3,675,000 B2* Stone Energy Corp., Sr. Sub. Notes, 8.750%
due 9/15/07 3,771,469
- -----------------------------------------------------------------------------------------------------------
75,178,066
- -----------------------------------------------------------------------------------------------------------
Packaging and Containers -- 1.6%
2,000,000 B+ Container Corp. of America, Sr. Notes, 11.250%
due 5/1/04 2,190,000
4,250,000 B Huntsman Packaging Corp., Sr. Sub. Notes, 9.125%
due 10/1/07(a) 4,340,313
5,125,000# B Impress Metal Packaging, Sr. Sub. Notes, 9.875%
due 5/29/07 2,968,615
4,250,000 B- Tekni-Plex, Inc., Sr. Sub. Notes, 9.250% due 3/1/08(a) 4,377,500
- -----------------------------------------------------------------------------------------------------------
13,876,428
- -----------------------------------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 1.9%
1,677,000 B- American Pad & Paper Co., Sr. Sub. Notes, 13.000%
due 11/15/05 1,697,963
3,400,000 B Goss Graphic Systems, Sr. Sub. Notes, 12.000%
due 10/15/06 3,867,500
10,075,000 B+ SD Warren Corp., Sr. Sub. Notes, 12.000% due 12/15/04 11,271,406
- -----------------------------------------------------------------------------------------------------------
16,836,869
- -----------------------------------------------------------------------------------------------------------
Pollution Control/Waste Removal -- 0.5%
3,925,000 B+ Allied Waste North America, Sr. Sub. Notes, 10.250%
due 12/1/06 4,376,375
- -----------------------------------------------------------------------------------------------------------
Real Estate Development/ REITS -- 0.4%
3,200,000 B- BF Saul REIT, Sr. Notes, 9.750% due 4/1/08(a) 3,240,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements. 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
===========================================================================================================
<S> <C> <C> <C>
Telecommunications -- 22.9%
$ 4,400,000 NR Allegiance Telecom Inc., Units, step bond to yield
11.713% due 2/15/08(a) $ 2,552,000
2,250,000 NR American Mobile Satellite, Units, 12.250% due 4/1/08(a) 2,340,000
3,375,000# B2* Cellular Communications International Inc.,
Sr. Discount Notes, 9.500% due 4/1/05 2,413,384
11,100,000 B3* Clearnet Communications, Inc., Sr. Discount Notes,
step bond to yield 13.507% due 12/15/05 9,213,000
8,000,000 NR Colt Telecommunications, Units, step bond to yield
11.615% due 12/15/06(a) 7,040,000
400,000# NR Colt Telecommunications, Sr. Notes, 10.125%
due 11/30/07 723,424
Esprit Telecom Group, Sr. Notes:
3,900,000 B- 11.500% due 12/15/07(a) 4,304,625
7,375,000# B- 11.500% due 12/15/07 4,386,558
4,325,000 NR Facilicom International Inc., Sr. Notes, 10.500%
due 1/15/08(a) 4,530,438
6,450,000 B2* Fonorola Inc., Sr. Secured Notes, 12.500% due 8/15/02 7,215,938
4,550,000 B Hermes Europe Railtel Intelcom, Sr. Notes, 11.500%
due 8/15/07 5,164,250
10,225,000 B Intermedia Communications of Florida, Sr. Discount
Unsecured Notes, step bond to yield 11.961%
due 5/15/06 8,448,406
12,925,000 B- Iridium LLC/Capital Corp., Sr. Notes, 14.000%
due 7/15/05 15,041,469
9,450,000 B+ McLeod Inc., Sr. Discount Debentures, step bond to
yield 10.704% due 3/1/07 7,241,063
10,225,000 NR Metronet Communications, Sr. Notes, 12.000%
due 8/15/07 11,835,438
8,925,000 B Millicom International Cellular S.A., Sr. Discount Notes,
step bond to yield 13.500% due 6/1/06 6,905,719
3,875,000 B Netia Holdings B.V., Company Guaranteed Notes,
10.250% due 11/1/07(a) 3,991,250
Nextel Communications Inc., Sr. Discount Notes:
15,125,000 B2* Step bond to yield 11.206% due 8/15/04 14,557,813
1,000,000 B3* Step bond to yield 9.844% due 9/15/07 670,000
10,125,000 B Nextlink Communications, Sr. Notes, 12.500%
due 4/15/06 11,732,344
1,250,000 NR Orbital Imaging Corp., Units, 11.625% due 3/1/05(a) 1,375,000
5,500,000 Caa2* Pagemart Nationwide, Inc., Sr. Discount Notes,
step bond to yield 13.344% due 2/1/05(a) 4,867,500
11,075,000 Caa2* Pagemart Wireless Inc., Sr. Discount Notes, step bond
to yield 11.250% due 2/1/08(a) 6,811,125
8,600,000 B- Primus Telecomm Group, Sr. Notes, 11.750% due 8/1/04 9,632,000
Qwest Communications:
10,825,000 B+ Sr. Discount Notes, step bond to yield 9.378%
due 10/15/07 7,969,906
3,625,000 B+ Sr. Notes, 10.875% due 4/1/07 4,205,000
</TABLE>
10 See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATINGS SECURITY VALUE
==========================================================================================================
<S> <C> <C> <C>
Telecommunications-- 22.9% (continued) RCN Corp.:
$ 9,025,000 B3* Sr. Discount Notes, step bond to yield 11.140%
due 10/15/07 $ 6,114,438
4,000,000 B3* Sr. Notes, 10.000% due 10/15/07 4,280,000
6,975,000 B- RSL Communications Ltd., Units, 12.250% due 11/15/06 7,942,781
2,125,000 B- Satelites Mexicanos SA, Sr. Notes, 10.125%
due 11/1/04 2,188,750
Telesystems Communications, Sr. Discount Debentures:
15,850,000 B Step bond to yield 12.405% due 6/30/07 11,095,000
3,450,000 CCC+ Step bond to yield 10.513% due 11/1/07 2,208,000
3,150,000 NR Wam!Net Inc., Units, Step bond to yield 13.250%
due 3/1/05(a) 1,921,500
- -----------------------------------------------------------------------------------------------------------
200,918,119
- -----------------------------------------------------------------------------------------------------------
Transportation -- 1.8%
2,750,000 B+ American Reefer Co. Ltd., 1st Mortgage, 10.250%
due 3/1/08(a) 2,763,750
5,800,000 BB GS Superhighway Holdings, Sr. Notes, 10.250%
due 8/15/07 4,937,250
Sea Containers Ltd.:
2,100,000 BB- Sr. Notes., 7.875% due 2/15/08(a) 2,079,000
5,700,000 BB- Sr. Sub. Debentures, 12.500% due 12/1/04 6,441,000
- -----------------------------------------------------------------------------------------------------------
16,221,000
- -----------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost-- $762,814,348) 807,689,779
===========================================================================================================
SHARES SECURITY VALUE
===========================================================================================================
PREFERRED STOCK -- 4.8%
===========================================================================================================
Banks/Savings and Loans -- 0.3%
108,000 California Federal, Series A, Exchangeable 9.125% 2,970,000
- -----------------------------------------------------------------------------------------------------------
Cable -- 4.5%
33,800 Time Warner Inc., Series K, Exchangeable 10.250% 37,813,750
61,200 Viasystems Inc. 1,277,550
- -----------------------------------------------------------------------------------------------------------
39,091,300
- -----------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost-- $40,024,321) 42,061,300
===========================================================================================================
COMMON STOCK -- 0.1%
===========================================================================================================
Telecommunications -- 0.1%
21,302 Nextel Communications, Inc 718,943
20,125 Pagemart Nationwide Inc. 174,836
- -----------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost-- $343,738) 893,779
===========================================================================================================
</TABLE>
See Notes to Financial Statements. 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
===========================================================================================================
WARRANTS -- 0.4%
===========================================================================================================
<S> <C> <C>
Broadcasting-TV, Cable and Radio -- 0.0%
9,225 Australis Holdings Ltd., Expire 10/30/01(a)(b) $ 1
14,825 United International Holdings Australia Inc.,
Expire 5/15/06(b) 177,900
5,700 Wireless One, Inc., Expire 10/15/03(b) 1,424
- -----------------------------------------------------------------------------------------------------------
179,325
- -----------------------------------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 0.0%
8,175 SD Warren Corp., Expire 12/5/06(a)(b) 143,880
- -----------------------------------------------------------------------------------------------------------
Telecommunications -- 0.4%
55,110 Clearnet Communications Inc., Expire 9/15/05(b) 330,660
7,500 Globalstar LP, Expire 2/15/04(b) 1,050,000
6,725 Iridium LLC Corp., Expire 7/15/05(b) 941,500
102,250 Metronet Communications, Expire 8/15/07(b) 204,500
11,959 Nextel Communications, Inc., Expire 12/15/98(a)(b) 5,023
6,575 Nextel Communications, Inc., Expire 4/25/99(a)(b) 19,002
43,470 Pagemart Inc., Expire 12/31/03(a)(b) 326,025
7,600 Primus Telecomm Group, Expire 8/1/04(b) 243,200
6,975 RSL Communications Ltd., Expire 11/15/06(b) 279,000
- -----------------------------------------------------------------------------------------------------------
3,398,910
- -----------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost-- $1,764,450) 3,722,115
===========================================================================================================
FACE
AMOUNT SECURITY VALUE
===========================================================================================================
REPURCHASE AGREEMENT -- 2.7%
$23,633,000 Goldman Sachs Inc., 5.843% due 4/1/98; Proceeds
at maturity -- $23,636,836; (Fully collateralized by
U.S. Treasury Notes, 5.375% due 2/15/01; Market
value-- $24,116,045) (Cost -- $23,633,000) 23,633,000
===========================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost-- $828,579,857**) $877,999,973
===========================================================================================================
</TABLE>
(a) 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.
(b) Non-income producing security.
# Represents local currency.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 13 for definition of ratings.
12 See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
Definition of Ratings (unaudited)
- --------------------------------------------------------------------------------
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 "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
and CCC predominantly 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.
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) March 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
ASSETS:
Investments, at value (Cost-- $828,579,857) $ 877,999,973
Cash 290
Receivable for securities sold 740,628
Receivable for open forward foreign currency contracts (Note 8) 227,530
Dividend and interest receivable 17,551,438
- ------------------------------------------------------------------------------------
Total Assets 896,519,859
- ------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 4,438,253
Dividends payable 2,032,254
Management fees payable 893,224
Accrued expenses 359,414
- ------------------------------------------------------------------------------------
Total Liabilities 7,723,145
- ------------------------------------------------------------------------------------
Total Net Assets $888,796,714
====================================================================================
NET ASSETS:
Par value of capital shares $ 72,017
Capital paid in excess of par value 898,171,021
Overdistributed net investment income (364,297)
Accumulated net realized loss on security
transactions, futures contracts and options (58,724,201)
Net unrealized appreciation of investments and foreign currencies 49,642,174
- ------------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $12.34 a share on 72,016,610 shares of
$0.001 par value outstanding; 500,000,000 shares authorized) $888,796,714
====================================================================================
</TABLE>
14 See Notes to Financial Statements.
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Six Months Ended March 31, 1998
INVESTMENT INCOME:
Interest $41,332,459
Dividends 3,310,986
- --------------------------------------------------------------------------------
Total Investment Income 44,643,445
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 5,060,661
Shareholder communication fees 151,176
Shareholder and system servicing fees 18,949
Audit and legal 15,170
Custody fees 15,062
Directors' fees 4,488
Other 21,640
- --------------------------------------------------------------------------------
Total Expenses 5,287,146
- --------------------------------------------------------------------------------
Net Investment Income 39,356,299
- --------------------------------------------------------------------------------
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) 5,078,663
Futures contracts (462,223)
Options purchased (648,905)
Foreign currency transactions 466,987
- --------------------------------------------------------------------------------
Net Realized Gain 4,434,522
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments
and Foreign Currencies:
Beginning of period 56,962,467
End of period 49,642,174
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (7,320,293)
- --------------------------------------------------------------------------------
Net Loss on Investments, Futures Contracts, Options
and Foreign Currencies (2,885,771)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $36,470,528
================================================================================
See Notes to Financial Statements. 15
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Six Months Ended March 31, 1998 (unaudited)
and the Year Ended September 30, 1997
<TABLE>
<CAPTION>
1998 1997
=========================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 39,356,299 $ 80,776,721
Net realized gain 4,434,522 7,070,567
Increase (decrease) in net unrealized appreciation (7,320,293) 40,292,499
- -----------------------------------------------------------------------------------------
Increase in Net Assets From Operations 36,470,528 128,139,787
- -----------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (42,574,158) (78,232,239)
- -----------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (42,574,158) (78,232,239)
- -----------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net asset value of shares issued
for reinvestment of dividends 12,211,727 14,041,863
- -----------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 12,211,727 14,041,863
- -----------------------------------------------------------------------------------------
Increase in Net Assets 6,108,097 63,949,411
NET ASSETS:
Beginning of period 882,688,617 818,739,206
- -----------------------------------------------------------------------------------------
End of period* $888,796,714 $882,688,617
=========================================================================================
* Includes undistributed (overdistributed)
net investment income of: $(364,297) $2,386,575
=========================================================================================
</TABLE>
16 See Notes to Financial Statements.
<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"), 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 six months ended March 31, 1998, the aggregate cost of
purchases and proceeds from sales of investments (including maturities, but
excluding short-term securities) were as follows:
================================================================================
Purchases $405,007,887
- --------------------------------------------------------------------------------
Sales 408,972,793
================================================================================
At March 31, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $50,689,782
Gross unrealized depreciation (1,269,666)
- --------------------------------------------------------------------------------
Net unrealized appreciation $49,420,116
================================================================================
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:
2003 2004
================================================================================
Carryforward Amounts $24,603,000 $38,118,000
================================================================================
18
<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. 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 March 31, 1998, 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 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 March 31, 1998, 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
19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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 six months ended March 31, 1998, 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.
8. Forward Foreign Currency Contracts
At March 31, 1998, 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 gain on the contracts is
reflected as follows:
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain
================================================================================
To Sell:
British Pound $ 1,394,820 $ 2,329,241 5/26/98 $ 4,530
European Currency Unit 2,125,806 2,293,223 6/18/98 33,408
German Mark 19,480,534 10,571,770 6/2/98 189,592
- --------------------------------------------------------------------------------
Total Unrealized Gain on Forward
Foreign Currency Contracts $227,530
================================================================================
20
<PAGE>
9. Capital Shares
During the six months ended March 31, 1998 and the year ended September
30, 1997, capital stock transactions were as follows:
1998 1997
-------------------- -----------------------
Shares Amount Shares Amount
================================================================================
Shares issued on reinvestment 995,988 $12,211,727 1,162,622 $14,041,863
================================================================================
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each period:
<TABLE>
<CAPTION>
1998(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 0.56 1.15 1.14 1.14 1.01*
Net realized and unrealized
gain (loss) (0.05) 0.68 0.22 0.28 (1.30)
- ------------------------------------------------------------------------------------------------------------
Total Income (Loss) From
Operations 0.51 1.83 1.36 1.42 (0.29)
- ------------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.60) (1.12) (1.12) (1.12) (1.01)
Capital -- -- -- (0.02) --
- ------------------------------------------------------------------------------------------------------------
Total Distributions (0.60) (1.12) (1.12) (1.14) (1.01)
- ------------------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $12.34 $12.43 $11.72 $11.48 $11.20
- ------------------------------------------------------------------------------------------------------------
Total Return,
Based on Market Value 0.23%++ 18.18% 21.07% 9.90% (7.33)%++
- ------------------------------------------------------------------------------------------------------------
Total Return,
Based on Net Asset Value** 4.22%++ 16.48% 12.86% 13.99% (2.31)%++
- ------------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $889 $883 $819 $802 $783
- ------------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.20%+ 1.21% 1.21% 1.20% 1.15%+*
Net investment income 8.94+ 9.63 9.85 10.02 9.09+
- ------------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 48% 87% 73% 59% 69%
- ------------------------------------------------------------------------------------------------------------
Market Value, End of Period $11.875 $12.438 $11.500 $10.500 $10.625
============================================================================================================
</TABLE>
(1) For the six months ended March 31, 1998 (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).
** The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan.
++ Total return is not annualized, as it may not be representative of the
total return for the year.
+ Annualized.
21
<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
================================================================================
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
1998
January 27 12.63 12.24 0.0930 12.240
February 24 12.69 12.30 0.0930 12.300
March 24 11.88 12.29 0.0930 11.990
================================================================================
* In December 1995, the valuation date, which is the date that determines the
dividend reinvestment price, was changed from payable date to record date.
22
<PAGE>
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited)
- --------------------------------------------------------------------------------
Under the Fund's Dividend Reinvestment Plan ("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 Investor
Services Group, Inc. ("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-dealer or nominee in additional shares
under the Plan, unless the service is not provided by the broker-dealer 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 Fund 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
23
<PAGE>
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited) (continued)
- --------------------------------------------------------------------------------
practicable after the payment date of the dividend or capital gains
distribution, 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.
24
<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.
[GRAPHIC OMITTED]
High Income Opportunity Fund Inc.
388 Greenwich Street
New York, New York 10013
FD0850 5/98
