HIGH INCOME
---------------------
Opportunity Fund Inc.
Annual Report
September 30, 1998
<PAGE>
High Income [PHOTO OMITTED] [PHOTO OMITTED]
Opportunity HEATH B. JOHN C.
Fund Inc. MCLENDON BIANCHI, CFA
Chairman Vice President
Dear Shareholder:
We are pleased to provide the annual report for the High Income Opportunity Fund
Inc. ("Fund") for the year ended September 30, 1998. During the past year, the
Fund paid income dividends totaling $1.13 per share. The table below details the
annualized distribution rate and twelve-month total return for the Fund based on
its September 30, 1998 net asset value ("NAV") per share and the New York Stock
Exchange ("NYSE") closing price.
Price Annualized Twelve-Month
Per Share Distribution Rate Total Return
--------------- ----------------- ------------
$11.24 (NAV) 9.50% (0.58)%
$11.125 (NYSE) 9.60% (1.65)%
The Fund generated a negative total return of 0.58% for the past twelve months.
While we were clearly disappointed by the weak results of the Fund over the past
year, our performance was much better on a relative basis than the negative
3.70% average total returns for closed-end high-yield funds as reported by
Lipper Analytical Services, Inc. (Lipper is an independent mutual fund
performance tracking organization). We believe we have been able to generate
above average performance returns in the Fund through prudent asset selection
with a heavy focus on companies with improving fundamentals. A full discussion
of the past twelve months' economic and market conditions as well as the
investment strategy pursued by the Fund during this time follows.
Market and Economic Overview
The high-yield bond market generated relatively weak results during the
twelve-month period ended September 30, 1998 and underperformed all other U.S.
bond market sectors. As many investors became more convinced that the emerging
market crisis would contribute to an economic slowdown in the U.S. beginning in
the second half of 1998, the 30-year U.S. Treasury bond generated very strong
performance results. The higher quality high-yield issues generated the
strongest results given their potential to better weather any slowdown in U.S.
economic growth. On the other hand, the lowest quality high-yield bond issues
generated
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High Income Opportunity Fund Inc. 1
<PAGE>
the worst returns in the U.S. bond market, which was not surprising given their
higher vulnerability to any potential slowdown in economic growth. By the end of
September, the high-yield bond market had reached relative valuation levels last
seen in the recession of 1990 and 1991. We believe that the high-yield bond
market's recent selloff has been more of a function of very poor short-term
supply demand and less of a function of any major deterioration in U.S. economic
growth.
The year-to-date total of newly issued high-yield bonds was roughly $120
billion, more than twice last year's figure of about $60 billion. The
year-to-date $15 billion of cash inflows into open-end high-yield bond mutual
funds, while above last year's total of $8 billion, was clearly insufficient to
counterbalance the extremely heavy new issue calendar. We believe this
short-term imbalance will eventually correct itself with reduced new issuance
and greater investor participation. Moreover, the recent problems among many
domestic hedge funds has also negatively influenced the financial markets as
they continue to liquidate their positions.
While the current U.S. economy remains generally supportive of a broad range of
U.S. companies and inflation continues to be modest, there is some concern that
the Asian economic crisis as well as recent financial market turmoil may force
the U.S. economy into a recession. So far, we have not seen nor do we expect to
see a significant increase in bankruptcies among most companies that issue
high-yield bonds.
While there could be some increase in failure rates of some companies, we
believe it will be confined to the more vulnerable lower quality companies in
industries marked by significant competition and declining prices. Yet, there is
no question that the U.S. economy is slowing down somewhat, especially among
some commodity companies that either export products overseas or compete with
lower-cost imports.
We believe that it's still an open question as to whether or not Asia's problems
will have a meaningfully negative impact on overall U.S. economic growth.
Nevertheless, the Federal Reserve Board ("Fed") remains vigilant about the
potential for a pronounced deterioration in U.S. economic growth. The Fed has
recently begun reducing short-term interest rates to prevent the current
slowdown from turning into a major recession. We believe this monetary policy
change on the part of the Fed should go a long way towards stabilizing the
financial markets both here and abroad.
Portfolio Strategy and Market Outlook
The High Income Opportunity Fund remains cautiously positioned with a heavy
emphasis in better quality, intermediate maturity "B" and "BB" rated high-yield
bonds. As of September 30, 1998, the Fund's average maturity on a call-adjusted
basis was approximately 6 1/2 years. (Average maturity on a call-adjusted basis
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2 1998 Annual Report to Shareholders
<PAGE>
means that the premium bonds are assumed to be called earlier than their
maturity.) In addition, the Fund continued to emphasize telecommunications
issues as well as cable and media issues.
As high-yield bond spreads continued to widen during the past year, we began to
take advantage of what we believed were attractively priced "B" rated issues.
Given the continued problems in Asia, we plan to remain underweighted in basic
commodity industries such as steel, forest products and petrochemicals,
industries that have been negatively affected by deflationary trends over the
past twelve months. (Deflation is when prices actually fall. Deflation should
not be confused with disinflation, which is the slowing down of the rate at
which prices increase.)
We believe that the Fund is appropriately positioned for current economic
conditions. While we still expect economic growth to slow and corporate profit
margins to deteriorate for the remainder of 1998, we do not anticipate a
recession at this time, especially in light of the Fed's actions in lowering
short-term interest rates. Moreover, given the higher volatility in the
financial markets, we will continue to maintain the Fund's relatively sound
credit quality orientation.
Thank you for investing in the High Income Opportunity Fund Inc. We look forward
to continuing to help you pursue your investment goals. Should you have any
questions about your investment in the Fund, please call the First Data Investor
Services Group Inc. at (800) 331-1710.
Sincerely,
/s/ Heath B. McLendon /s/ John C. Bianchi, CFA
Heath B. McLendon John C. Bianchi, CFA
Chairman Vice President
October 20, 1998
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High Income Opportunity Fund Inc. 3
<PAGE>
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Take Advantage of the Fund's Dividend Reinvestment Plan!
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 ("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
Plan begins on page 25. Below is a short summary of how the 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 NAV per
share at the valuation time 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 at the valuation
time 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 at the valuation time. 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 Plan and about how you can
participate, please call First Data Investors Services Group, Inc. at (800)
331-1710.
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4 1998 Annual Report to Shareholders
<PAGE>
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Schedule of Investments September 30, 1998
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<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=======================================================================================================
<S> <C> <C> <C>
CORPORATE BONDS AND NOTES -- 98.0%
=======================================================================================================
Aerospace/Defense -- 2.1%
$15,775,000 Ba2* Airplanes Pass Through Trust, Corporate Collateralized
Mortgage Obligation, Series D, 10.875% due 3/15/19 $ 16,735,382
- -------------------------------------------------------------------------------------------------------
Banks/Savings and Loans -- 2.0%
13,900,000 B First Nationwide Holdings, Sr. Notes,
12.500% due 4/15/03 16,054,500
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Broadcasting-TV, Cable and Radio -- 12.6%
4,750,000 BB- Century Communications, Sr. Notes, 8.750% due 10/1/07 5,035,000
12,000,000 Ba3* Chancellor Media, Sr. Sub. Notes, 9.000% due 10/1/08+ 12,120,000
6,700,000 B2* Comcast UK Cable, Sr. Unsecured Discount Debentures,
step bond to yield 11.613% due 11/15/07 5,435,375
CSC Holdings, Inc.:
1,000,000 BB+ Sr. Notes, 7.625% due 7/15/18 967,500
Sr. Sub. Debentures:
15,725,000 BB- 9.875% due 2/15/13 17,454,750
5,525,000 BB- 10.500% due 5/15/16 6,450,437
5,900,000 BB- 9.875% due 4/1/23 6,549,000
Rogers Cablesystems, Sr. Secured Second Priority:
Debentures:
1,750,000 BB+ 10.000% due 3/15/05 1,929,375
5,650,000 BB+ 10.000% due 12/1/07 6,229,125
11,195,000 BB- Sr. Sub. Debentures, 11.000% due 12/1/15 12,986,200
3,475,000 CCC+ Telemundo Holdings, Sr. Discount Notes,
step bond to yield 11.500% due 8/15/08+ 1,841,750
TV Azteca SA De C.V.:
3,925,000 Ba3* Debentures, 10.125% due 2/15/04 2,865,250
4,950,000 Ba3* Sr. Notes, 10.500% due 2/15/07 3,663,000
36,000,000 B United International Holdings Inc., Sr. Discount Notes,
step bond to yield 11.045% due 2/15/08 17,280,000
- -------------------------------------------------------------------------------------------------------
100,806,762
- -------------------------------------------------------------------------------------------------------
Building/Construction -- 0.4%
1,250,000 BB Building Material Corp., Sr. Notes, 7.750% due 7/15/05 1,193,750
2,400,000 B+ Nortek Inc., Sr. Notes, 9.125% due 9/1/07 2,370,000
- -------------------------------------------------------------------------------------------------------
3,563,750
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Cellular and Other Wireless -- 12.0%
17,950,000 B3* Clearnet Communications, Inc., Sr. Discount Notes,
step bond to yield 12.986% due 12/15/05 14,943,375
Dolphin Telecom PLC, Sr. Discount Notes:
8,675,000 B- Step bond to yield 11.432% due 6/1/08+ 4,250,750
8,025,000++ B- Step bond to yield 11.625% due 6/1/08+ 4,536,141
13,175,000 B- Iridium LLC/Capital Corp., Sr. Notes, 14.000% due 7/15/05 11,758,687
14,000,000 B- Millicom International Cellular S.A., Sr. Discount Notes,
step bond to yield 13.469% due 6/1/06 9,135,000
</TABLE>
See Notes to Financial Statements
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High Income Opportunity Fund Inc. 5
<PAGE>
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Schedule of Investments (continued) September 30, 1998
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<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=======================================================================================================
<S> <C> <C> <C>
Cellular and Other Wireless -- 12.0% (continued)
$17,650,000 B2* Nextel Communications Inc., Sr. Discount Notes,
step bond to yield 10.530% due 8/15/04 $16,944,000
Omnipoint Corp., Sr. Notes:
2,050,000 B3* 11.625% due 8/15/06 1,476,000
700,000 B3* Series A, 11.625% due 8/15/06 504,000
9,265,000 Ba3* Orange PLC, Sr. Notes, 8.000% due 8/1/08 9,079,700
5,500,000 B3* Pagemart Nationwide, Inc., Sr. Discount Notes,
step bond to yield 13.344% due 2/1/05 4,956,875
11,075,000 Caa* Pagemart Wireless Inc., Sr. Discount Notes,
step bond to yield 11.250% due 2/1/08 6,160,468
Telesystems Communications, Sr. Discount Notes:
15,850,000 CCC+ Step bond to yield 12.405% due 6/30/07 9,193,000
6,250,000 CCC+ Step bond to yield 11.387% due 11/1/07 3,250,000
- -------------------------------------------------------------------------------------------------------
96,187,996
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Diversified/Conglomerate Manufacturing -- 4.3%
3,100,000 B- Axiohm Transaction Solutions, Sr. Sub. Notes,
9.750% due 10/1/07 2,778,375
3,825,000 BB- CIA Latino Americana, Sr. Notes, 11.625% due 6/1/04+ 2,825,718
1,500,000 B- Eagle-Picher Industrial Inc., Sr. Sub. Notes,
9.375% due 3/1/08 1,387,500
3,875,000 B3* Interlake Corp., Sr. Sub. Notes, 12.125% due 3/1/02 3,884,687
4,950,000 B2* Intertek Finance, PLC, 10.250% due 11/1/06 4,516,875
8,550,000 B Outboard Marine Corp., Sr. Notes, 10.750% due 6/1/08+ 8,282,812
6,675,000 B- Outsourcing Solutions, Sr. Sub. Notes,
11.000% due 11/1/06 6,299,531
4,475,000 B+ Park-Ohio Industries, Sr. Sub. Notes, 9.250% due 12/1/07 4,486,187
- -------------------------------------------------------------------------------------------------------
34,461,685
- -------------------------------------------------------------------------------------------------------
Electric Utilities -- 3.3%
AES Corp., Sr. Sub. Notes:
3,400,000 Ba1* 10.250% due 7/15/06 3,536,000
11,775,000 Ba1* 8.500% due 11/1/07 11,186,250
Calpine Corp., Sr. Notes:
4,675,000 Ba2* 10.500% due 5/15/06 5,095,750
5,400,000 Ba2* 8.750% due 7/15/07 5,535,000
628,428 BB Midland Cogeneration Venture Limited Partnership,
Midland Funding, Debentures, Sr. Secured Lease
Obligation Bond, Series C, 10.330% due 7/23/02 669,276
950,000 BB- Niagara Mohawk Power, Sr. Discount Notes,
step bond to yield 8.229% due 7/1/10 673,312
- -------------------------------------------------------------------------------------------------------
26,695,588
- -------------------------------------------------------------------------------------------------------
Electronics/Computers -- 6.9%
4,051,000 B+ Celestica International, Sr. Sub. Notes,
10.500% due 12/31/06 4,324,442
</TABLE>
See Notes to Financial Statements
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6 1998 Annual Report to Shareholders
<PAGE>
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Schedule of Investments (continued) September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=======================================================================================================
<S> <C> <C> <C>
Electronics/Computers -- 6.9% (continued)
$ 8,225,000 B Fairchild Semiconductor Corp., Sr. Sub. Notes,
10.125% due 3/15/07 $ 7,402,500
4,725,000 B- Graphic Controls Corp., Sr. Sub. Notes,
12.000% due 9/15/05 5,292,000
Unisys Corp., Sr. Notes:
10,875,000 Ba3* 12.000% due 4/15/03 12,098,437
14,550,000 Ba3* 11.750% due 10/15/04 16,368,750
11,575,000 B- Viasystems Inc., Sr. Sub. Notes, 9.750% due 6/1/07 9,896,625
- -------------------------------------------------------------------------------------------------------
55,382,754
- -------------------------------------------------------------------------------------------------------
Finance Companies/Consumer Credit -- 2.0%
Amresco Inc., Sr. Sub. Notes:
4,250,000 B 10.000% due 3/15/04 3,538,125
1,000,000 B 9.875% due 3/15/05 822,500
4,000,000 NR Ocwen Asset Investment, Sr. Notes, 11.500% due 7/1/05+ 3,300,000
5,500,000 B2* Ocwen Capital Trust, Notes, 10.875% due 8/1/27 5,018,750
3,400,000 BB- Ocwen Financial Corp., Sr. Notes, 11.875% due 10/1/03 3,357,500
- -------------------------------------------------------------------------------------------------------
16,036,875
- -------------------------------------------------------------------------------------------------------
Food -- 2.3%
4,575,000 B- B&G Foods Inc., Sr. Sub. Notes, 9.625% due 8/1/07 4,231,875
2,750,000 Ba3* Carrols Corp., Sr. Notes, 11.500% due 8/15/03 2,880,625
7,075,000 B Imperial Holly Corp., Sr. Sub. Notes, 9.750% due 12/15/07 6,738,937
4,900,000 B SC International Services Inc., Sr. Sub. Notes,
9.250% due 9/1/07 4,753,000
- -------------------------------------------------------------------------------------------------------
18,604,437
- -------------------------------------------------------------------------------------------------------
Grocery/Convenience Stores -- 0.5%
3,250,000 B+ Jitney-Jungle Stores, Sr. Notes, 12.000% due 3/1/06 3,591,250
- -------------------------------------------------------------------------------------------------------
Health care/Drugs/Hospital Supplies -- 9.3%
2,500,000 B- Alaris Medical, Sr. Discount Notes, step bond to yield
11.125% due 8/1/08+ 1,100,000
Columbia/HCA Healthcare, Notes:
5,000,000 BBB 7.000% due 7/1/07 4,837,500
1,000,000 BBB 7.250% due 5/20/08 980,000
2,000,000 BBB 6.630% due 7/15/45 1,980,000
ICN Pharmaceuticals Inc., Sr. Notes:
11,250,000 BB 9.250% due 8/15/05 11,165,625
1,500,000 BB 8.750% due 11/15/08+ 1,488,750
Integrated Health Services Inc., Sr. Sub. Notes:
4,450,000 B2* 9.500% due 9/15/07 4,305,375
8,625,000 B2* 9.250% due 1/15/08 8,258,437
19,700,000 B- Magellan Health Services, Sr. Sub. Notes,
9.000% due 2/15/08+ 16,966,625
8,625,000 B- Mariner Post-Acute Network, Sr. Sub. Notes,
9.500% due 11/1/07 8,042,813
</TABLE>
See Notes to Financial Statements
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High Income Opportunity Fund Inc. 7
<PAGE>
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Schedule of Investments (continued) September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=======================================================================================================
<S> <C> <C> <C>
Health Care/Drugs/Hospital Supplies -- 9.3% (continued)
Sun Healthcare Group Inc., Sr. Sub. Notes:
$7,600,000 B2* 9.500% due 7/1/07 $ 6,954,000
9,150,000 B2* 9.375% due 5/1/08+ 8,280,750
- -------------------------------------------------------------------------------------------------------
74,359,875
- -------------------------------------------------------------------------------------------------------
Hotel, Casinos and Gaming -- 2.6%
2,350,000 B Aztar Corp., Sr. Sub. Notes, 13.750% due 10/1/04 2,667,250
5,375,000 B- Courtyard by Marriott, Sr. Secured Notes,
10.750% due 2/1/08 5,670,625
5,250,000 BB Grand Casinos, First Mortgage, 10.125% due 12/1/03 5,591,250
5,125,000 BB+ Mohegan Tribal Gaming Authority, Sr. Secured Notes,
13.500% due 11/15/02 6,617,656
- -------------------------------------------------------------------------------------------------------
20,546,781
- -------------------------------------------------------------------------------------------------------
Insurance Companies -- 1.2%
5,500,000 BB+ SIG Capital Trust, Sr. Notes, 9.500% due 8/15/27 5,348,750
4,175,000 BB- Veritas Capital Trust, Trust Certificates,
10.000% due 1/1/28 4,060,188
- -------------------------------------------------------------------------------------------------------
9,408,938
- -------------------------------------------------------------------------------------------------------
Leisure/Amusement/Motion Pictures -- 0.6%
4,975,000 B3* SFX Entertainment Inc., Sr. Sub. Notes, 9.125% due 2/1/08 4,726,250
- -------------------------------------------------------------------------------------------------------
Machinery -- 0.4%
2,900,000 B- Alvey Systems Inc., Sr. Sub. Notes, 11.375% due 1/31/03 2,896,375
- -------------------------------------------------------------------------------------------------------
Metals/Mining -- 0.7%
5,050,000 B- Haynes International Inc., Sr. Notes, 11.625% due 9/1/04 5,618,125
- -------------------------------------------------------------------------------------------------------
Oil/Natural Gas -- 4.0%
3,500,000 B Canadian Forest Oil Ltd., Sr. Sub. Notes,
8.750% due 9/15/07 3,185,000
6,350,000 B+ Clark USA Inc., Sr. Notes, 10.875% due 12/1/05 6,096,000
Ocean Energy Inc.:
3,600,000 BB- Sr. Sub. Debentures, 9.750% due 10/1/06 3,735,000
4,675,000 BB- Sr. Sub. Notes, 10.375% due 10/15/05 4,920,438
2,275,000 BB- Sr. Sub. Notes, 8.875% due 7/15/07 2,286,375
2,225,000 B+ Parker Drilling, Sr. Notes, 9.750% due 11/15/06 2,074,813
6,025,000 BB- Santa Fe Energy Resources, Sr. Sub. Debentures,
11.000% due 5/15/04 6,401,563
3,675,000 B2* Stone Energy Corp., Sr. Sub. Notes, 8.750% due 9/15/07 3,528,000
- -------------------------------------------------------------------------------------------------------
32,227,189
- -------------------------------------------------------------------------------------------------------
Oil Services -- 1.8%
3,950,000 B- Deeptech International, Sr. Notes, 12.000% due 12/15/00 4,354,875
3,600,000 B+ ICO Inc., Sr. Notes, 10.375% due 6/1/07 3,411,000
2,275,000 BB- J. Ray McDermott SA, Sr. Sub. Notes, 9.375% due 7/15/06 2,400,125
4,425,000 BB Pride Petroleum, Sr. Notes, 9.375% due 5/1/07 4,170,563
- -------------------------------------------------------------------------------------------------------
14,336,563
- -------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
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8 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=======================================================================================================
<S> <C> <C> <C>
Packaging and Containers -- 1.1%
$ 3,250,000 B Huntsman Packaging Corp., Sr. Sub. Notes,
9.125% due 10/1/07 $ 2,884,375
5,125,000++ B Impress Metal Packaging, Sr. Sub. Notes,
9.875% due 5/29/07 3,066,292
2,900,000 B- Tekni-Plex, Inc., Sr. Sub. Notes, 9.250% due 3/1/08 2,798,500
- -------------------------------------------------------------------------------------------------------
8,749,167
- -------------------------------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 1.7%
12,575,000 B+ SD Warren Corp., Sr. Sub. Notes, 12.000% due 12/15/04 13,848,219
- -------------------------------------------------------------------------------------------------------
Personal Care Products/Cosmetics -- 1.5%
6,450,000 B- Revlon Consumer Products, Sr. Sub. Notes,
8.625% due 2/1/08 6,353,250
7,050,000 B- Revlon Worldwide, Series B, Sr. Discount Notes,
zero coupon bond to yield 12.297% due 3/15/01 5,410,875
- -------------------------------------------------------------------------------------------------------
11,764,125
- -------------------------------------------------------------------------------------------------------
Pollution Control/Waste Removal -- 0.4%
3,325,000 B+ Allied Waste North America, Sr. Sub. Notes,
10.250% due 12/1/06 3,632,563
- -------------------------------------------------------------------------------------------------------
Publishing -- 1.1%
5,850,000++ NR Middleweb PLC, Sr. Notes, 10.500% due 5/30/08 8,649,140
- -------------------------------------------------------------------------------------------------------
Real Estate Development/REITS -- 0.4%
1,250,000 B- BF Saul REIT, Sr. Notes, 9.750% due 4/1/08 1,096,875
2,000,000 Baa3* Trizec Finance, Sr. Notes, 10.875% due 10/15/05 2,215,000
- -------------------------------------------------------------------------------------------------------
3,311,875
- -------------------------------------------------------------------------------------------------------
Retail -- 1.7%
4,500,000 B- Advance Holdings Corp., Sr. Discount Notes,
step bond to yield 12.765% due 4/15/09+ 2,610,000
5,600,000 B- Advance Stores Co. Inc., Sr. Sub. Notes,
10.250% due 4/15/08+ 5,488,000
6,350,000 B- US Office Products Co., Sr. Sub. Notes,
9.750% due 6/15/08+ 5,445,125
- -------------------------------------------------------------------------------------------------------
13,543,125
- -------------------------------------------------------------------------------------------------------
Telecommunications -- 19.0%
Colt Telecommunications Group PLC:
400,000++ B Sr. Notes, 10.125% due 11/30/07 666,168
12,250,000++ B Sr. Notes, 7.625% due 7/31/08 6,596,267
7,200,000 B Sr. Sub. Notes, step bond to yield 11.572% due 12/15/06 5,688,000
14,450,000 NR E.Spire Communications, Sr. Notes, step bond to yield
10.991% due 7/1/08+ 7,441,750
Esprit Telecommunications Group, Sr. Notes:
3,900,000 B- 11.500% due 12/15/07 3,568,500
4,000,000++ B- 11.500% due 12/15/07 2,117,985
2,250,000 B- 10.875% due 6/15/08 2,025,000
</TABLE>
See Notes to Financial Statements
- --------------------------------------------------------------------------------
High Income Opoortunity Fund Inc. 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=======================================================================================================
<S> <C> <C> <C>
Telecommunications -- 19.0% (continued)
$ 5,825,000 NR Facilicom International Inc., Sr. Notes,
10.500% due 1/15/08 $ 5,096,875
6,850,000 B Hermes Europe Railtel Intelcom, Sr. Notes,
11.500% due 8/15/07 7,192,500
Impsat Corp., Sr. Notes:
1,250,000 BB- 12.125% due 7/15/03 954,688
2,200,000 B+ 12.375% due 6/15/08+ 1,746,250
10,225,000 B Intermedia Communications Inc., Sr. Discount
Unsecured Notes, step bond to yield
11.961% due 5/15/06 8,333,375
8,600,000 B Level 3 Communications, Sr. Notes, 9.125% due 5/1/08 8,127,000
7,700,000 B+ McLeod Inc., Sr. Discount Notes, step bond to yield
10.750% due 3/1/07 5,621,000
Metronet Communications:
19,375,000 B Sr. Discount Notes, step bond to yield
10.038% due 6/15/08 10,704,687
10,225,000 B Sr. Notes, 12.000% due 8/15/07 10,838,500
10,000,000 B Nextlink Communications, Sr. Notes, 12.500% due 4/15/06 10,825,000
8,600,000 B- Primus Telecom Group, Sr. Notes, 11.750% due 8/1/04 8,277,500
7,000,000 B- Psinet Inc., Sr. Notes, 10.000% due 2/15/05 7,035,000
Qwest Communications:
9,825,000 B+ Sr. Discount Notes, step bond to yield
9.369% due 10/15/07 7,540,687
3,625,000 BB+ Sr. Notes, 10.875% due 4/1/07 4,177,813
RCN Corp:
7,775,000 B3* Sr. Discount Notes, step bond to yield
11.142% due 10/15/08 4,315,125
4,000,000 B3* Sr. Notes, 10.000% due 10/15/07 3,760,000
2,250,000 BB- Rogers Communications, Sr. Notes, 9.125% due 1/15/06 2,250,000
3,582,000 B- RSL Communications Ltd., Sr. Notes,
12.250% due 11/15/06 3,940,200
6,975,000 NR Splitrock Services, 11.750% due 7/15/08@+ 6,312,375
4,300,000 NR Versatel Telecommunications, Sr. Notes,
13.250% due 5/15/08+ 4,095,750
4,650,000 NR Wam!Net Inc., Sr. Discount Notes, step bond to yield
13.004% due 3/1/05 2,604,000
- -------------------------------------------------------------------------------------------------------
151,851,995
- -------------------------------------------------------------------------------------------------------
Textiles/Apparel -- 0.5%
9,050,000++ B Texon International, Sr. Notes, 10.000% due 2/1/08+ 4,223,406
- -------------------------------------------------------------------------------------------------------
Transportation/Trucking -- 1.6%
1,650,000 B+ American Reefer Co. Ltd., First Mortgage,
10.250% due 3/1/08 1,386,000
5,700,000 BB- Sea Containers Limited, Sr. Sub. Debentures,
12.500% due 12/1/04 6,391,125
</TABLE>
See Notes to Financial Statements
- --------------------------------------------------------------------------------
10 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT RATING SECURITY VALUE
=======================================================================================================
<S> <C> <C> <C>
Transportation/Trucking -- 1.6% (continued)
$3,950,000 B+ Stena Line AB, Sr. Notes, 10.625% due 6/1/08 $ 3,564,875
2,400,000 B+ TBS Shipping International LTD, First Mortgage,
10.000% due 5/1/05+ 1,800,000
- -------------------------------------------------------------------------------------------------------
13,142,000
- -------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $815,226,873) 784,956,690
<CAPTION>
=======================================================================================================
SHARES SECURITY VALUE
=======================================================================================================
<S> <C> <C>
PREFERRED STOCK -- 1.3%
=======================================================================================================
Banks/Savings and Loans -- 0.3%
108,000 California Federal, Series A, Exchangeable 9.125% 2,760,750
- -------------------------------------------------------------------------------------------------------
Broadcasting-TV, Cable and Radio -- 0.5%
35,000 SFX Broadcasting, Exchangeable 12.625% 4,112,500
- -------------------------------------------------------------------------------------------------------
Electronics/Computers -- 0.2%
63,721 Viasystems Inc. 1,146,995
- -------------------------------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 0.3%
50,000 SD Warren, Series B, Exchangeable 14.000% 2,450,000
- -------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost -- $10,522,851) 10,470,245
=======================================================================================================
COMMON STOCK -- 0.0%
=======================================================================================================
Cellular and Other Wireless -- 0.0%
20,125 Pagemart Nationwide Inc. (Cost-- $0) 150,938
=======================================================================================================
WARRANTS -- 0.7%
=======================================================================================================
Broadcasting-TV, Cable and Radio -- 0.0%
9,225 Australis Holdings Ltd., Expire 10/30/01+ 1
5,700 Wireless One, Inc., Expire 10/15/03 1,424
- -------------------------------------------------------------------------------------------------------
1,425
- -------------------------------------------------------------------------------------------------------
Cellular and Other Wireless -- 0.3%
55,110 Clearnet Communications Inc., Expire 9/15/05+ 330,660
7,500 Globalstar LP, Expire 2/15/04+ 787,500
6,725 Iridium LLC Corp., Expire 7/15/05+ 941,500
11,959 Nextel Communications, Inc., Expire 12/15/98 12
6,575 Nextel Communications, Inc., Expire 4/25/99+ 66
43,470 Pagemart Inc., Expire 12/31/03+ 260,820
- -------------------------------------------------------------------------------------------------------
2,320,558
- -------------------------------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 0.0%
8,175 SD Warren Corp., Expire 12/5/06+ 143,880
- -------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (continued) September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SHARES SECURITY VALUE
=======================================================================================================
<S> <C> <C>
Telecommunications -- 0.4%
7,800 Allegiance Telecommunications Inc., Expire 2/3/08 $ 93,600
8,000 Colt Telecommunications Group PLC, Expire 12/31/06+ 1,600,000
10,225 Metronet Communications, Expire 8/15/07+ 409,000
7,600 Primus Telecomm Group, Expire 8/1/04 38,000
6,975 RSL Communications Ltd., Expire 11/15/06+ 279,000
14,825 United International Holdings Australia Inc.,
Expire 5/15/06 74,125
4,300 Versatel Telecom Inc., Expire 5/15/08+ 43,000
13,950 Wam!Net Inc., Expire 3/1/05+ 111,600
- -------------------------------------------------------------------------------------------------------
2,648,325
- -------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost -- $2,603,974) 5,114,188
=======================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $828,353,698**) $800,692,061
=======================================================================================================
</TABLE>
+ 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.
++ Represents local currency.
# Non-income producing securities.
@ Security has been issued with attached warrants.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 13 for definition of ratings.
See Notes to Financial Statements
- --------------------------------------------------------------------------------
12 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings (unaudited)
- --------------------------------------------------------------------------------
All ratings are by Standard & Poor's Ratings Service ("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", "B" and "CCC" are regarded, on balance, as
and CCC predominantly speculative 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", 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 in fact have speculative characteristics
as well.
Ba -- Bonds 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 rated "B" generally lack characteristics of desirable
investments. Assurance of interest and principal payments or
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 there may be present elements of danger
with respect to principal or interest.
NR -- Indicates that the bond is not rated by Standard & Poor's or
Moody's.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 13
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities September 30, 1998
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments, at value (Cost-- $828,353,698) $ 800,692,061
Receivable for securities sold 2,552,354
Interest receivable 17,561,624
- ------------------------------------------------------------------------------------
Total Assets 820,806,039
- ------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 6,635,390
Dividends payable 1,835,338
Payable for open forward foreign currency contracts (Note 8) 1,200,242
Management fees payable 764,435
Payable to bank 518,220
Accrued expenses 225,556
- ------------------------------------------------------------------------------------
Total Liabilities 11,179,181
- ------------------------------------------------------------------------------------
Total Net Assets $ 809,626,858
====================================================================================
NET ASSETS:
Par value of capital shares $ 72,017
Capital paid in excess of par value 897,475,677
Overdistributed net investment income (1,966,392)
Accumulated net realized loss on security transactions,
futures contracts and options (57,109,572)
Net unrealized depreciation of investments and foreign currencies (28,844,872)
- ------------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $11.24 a share on 72,016,610 shares of
$0.001 par value outstanding; 500,000,000 shares authorized) $ 809,626,858
====================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended September 30, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 83,076,434
Dividends 4,340,649
- --------------------------------------------------------------------------------
Total Investment Income 87,417,083
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 10,065,212
Shareholder communication fees 154,470
Custody fees 40,207
Shareholder and system servicing fees 37,200
Audit and legal 27,923
Pricing fees 14,913
Directors' fees 6,695
Other 11,503
- --------------------------------------------------------------------------------
Total Expenses 10,358,123
- --------------------------------------------------------------------------------
Net Investment Income 77,058,960
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS,
FUTURES CONTRACTS, OPTIONS AND FOREIGN CURRENCIES
(NOTES 3, 5, 6 AND 8):
Realized Gain (Loss) From:
Security transactions (excluding short-term securities) 5,752,340
Futures contracts (462,223)
Options purchased (648,905)
Foreign currency transactions (135,292)
- --------------------------------------------------------------------------------
Net Realized Gain 4,505,920
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation (Depreciation)
of Investments and Foreign Currencies:
Beginning of year 56,962,467
End of year (28,844,872)
- --------------------------------------------------------------------------------
Increase in Net Unrealized Depreciation (85,807,339)
- --------------------------------------------------------------------------------
Net Loss on Investments, Futures Contracts,
Options and Foreign Currencies (81,301,419)
- --------------------------------------------------------------------------------
Decrease in Net Assets From Operations $ (4,242,459)
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 15
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
For the Years Ended September 30,
1998 1997
=========================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 77,058,960 $ 80,776,721
Net realized gain 4,505,920 7,070,567
Increase in net unrealized appreciation (depreciation) (85,807,339) 40,292,499
- -----------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations (4,242,459) 128,139,787
- -----------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (81,031,027) (78,232,239)
- -----------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (81,031,027) (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 (Decrease) in Net Assets (73,061,759) 63,949,411
NET ASSETS:
Beginning of year 882,688,617 818,739,206
- -----------------------------------------------------------------------------------------
End of year* $ 809,626,858 $ 882,688,617
=========================================================================================
* Includes undistributed (overdistributed)
net investment income of: $ (1,966,392) $ 2,386,575
=========================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
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, 1998, 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. Accordingly, a portion of
overdistributed net investment income amounting to $695,344 was reclassified to
paid-in capital. Net investment income, net realized gains and net assets were
not affected by this change; (j) the Fund intends to comply with the
requirements of the Internal Revenue Code of 1986, as amended, pertaining to
regulated investment companies and to make distributions of taxable income
sufficient to relieve it from substantially all Federal income and excise taxes;
and (k) estimates and assumptions are required to be made regarding assets,
liabilities and changes in net assets resulting from operations when financial
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 17
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
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 Salomon Smith Barney
Inc., another subsidiary of SSBH.
3. Investments
During the year ended September 30, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $837,178,825
- --------------------------------------------------------------------------------
Sales 820,906,221
================================================================================
At September 30, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 20,261,503
Gross unrealized depreciation (47,923,140)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(27,661,637)
================================================================================
4. Capital Loss Carryforward
At September 30, 1998, the Fund had, for Federal tax purposes, approximately
$54,135,000 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
- --------------------------------------------------------------------------------
18 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
amounts and expiration of carryforwards are indicated below. Expiration occurs
on September 30 in the year indicated:
2003 2004
================================================================================
Carryforward Amounts $16,017,000 $38,118,000
================================================================================
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 September 30, 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 September 30, 1998, the Fund had no open purchased call or put option
contracts.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
When a Fund writes a call or put option, an amount equal to the premium received
by the Fund is recorded as a liability, the value of which is marked-to-market
daily. When a written option expires, the Fund realizes a gain equal to the
amount of the premium received. When the Fund enters into a closing purchase
transaction, the Fund realizes a gain or loss 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 year ended September 30, 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.
- --------------------------------------------------------------------------------
20 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
8. Forward Foreign Currency Contracts
At September 30, 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 realized and unrealized loss on the
contracts is reflected as follows:
Realized/
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Loss
================================================================================
To Sell:
British Pound 449,450 $ 757,645 2/25/99 $ (29,536)
European Currency Unit 4,824,774 5,693,341 11/30/98 (307,817)
German Mark 16,130,602 9,682,993 12/3/98 (419,560)
German Mark 1,345,833 808,665 12/23/98 (53,671)
German Mark 10,527,132 6,336,683 1/28/99 (389,658)
- --------------------------------------------------------------------------------
Total Realized and Unrealized Loss on Open
Forward Foreign Currency Contracts $(1,200,242)
================================================================================
9. Capital Shares
During the years ended September 30, 1998 and 1997, capital stock transactions
were as follows:
1998 1997
-------------------- -----------------------
Shares Amount Shares Amount
================================================================================
Shares issued on
dividend reinvestment 995,988 $12,211,727 1,162,622 $14,041,863
================================================================================
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 21
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each year ended September
30:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994(1)(2)
===========================================================================================================
<S> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Year $ 12.43 $ 11.72 $ 11.48 $ 11.20 $ 12.50
- -----------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 1.08 1.15 1.14 1.14 1.01*
Net realized and unrealized
gain (loss) (1.14) 0.68 0.22 0.28 (1.30)
- -----------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations (0.06) 1.83 1.36 1.42 (0.29)
- -----------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (1.13) (1.12) (1.12) (1.12) (1.01)
Capital -- -- -- (0.02) --
- -----------------------------------------------------------------------------------------------------------
Total Distributions (1.13) (1.12) (1.12) (1.14) (1.01)
- -----------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 11.24 $ 12.43 $ 11.72 $ 11.48 $ 11.20
- -----------------------------------------------------------------------------------------------------------
Total Return,
Based on Market Value** (1.65)% 18.18% 21.07% 9.90% (7.33)%++
- -----------------------------------------------------------------------------------------------------------
Total Return,
Based on Net Asset Value** (0.58)% 16.48% 12.86% 13.99% (2.31)%++
- -----------------------------------------------------------------------------------------------------------
Net Assets,
End of Year (millions) $ 810 $ 883 $ 819 $ 802 $ 783
- -----------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.18% 1.21% 1.21% 1.20% 1.15%+*
Net investment income 8.81 9.63 9.85 10.02 9.09+
- -----------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 98% 87% 73% 59% 69%
- -----------------------------------------------------------------------------------------------------------
Market Value, End of Year $ 11.125 $ 12.438 $ 11.500 $ 10.500 $ 10.625
===========================================================================================================
</TABLE>
(1) For the period from October 22, 1993 (commencement of operations) to
September 30, 1994.
(2) 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.
- --------------------------------------------------------------------------------
22 1998 Annual Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
High Income Opportunity Fund Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of High Income Opportunity Fund Inc. as of
September 30, 1998, the related statement of operations for the year then ended,
the statements of changes in net assets for each of the years in the two-year
period then ended and financial highlights for each of the years in the
four-year period then ended and for the period from October 22, 1993
(commencement of operations) to September 30, 1994. These financial statements
and financial highlights are the responsibility of the Fund's management. Our
responsibility is to ex press an opinion on these financial statements and
financial highlights based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
September 30, 1998, by correspondence with the custodian. As to securities
purchased or sold but not received or delivered, we performed other appropriate
auditing procedures. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of High
Income Opportunity Fund Inc. as of September 30, 1998, the results of its
operations for the year then ended, the changes in its net assets for each of
the years in the two-year period then ended and the financial highlights for
each of the years in the four-year period then ended and the period from October
22, 1993 to September 30, 1994, in conformity with generally accepted accounting
principles.
/s/ KPMG Peat Marwick LLP
New York, New York
November 16, 1998
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 23
<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
================================================================================
1997
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
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
1998
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
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
April 21 11.94 12.32 0.0890 11.880
May 26 11.50 12.25 0.0890 11.930
June 23 11.81 12.16 0.0890 11.900
July 28 11.56 12.21 0.0890 11.790
August 25 11.69 11.82 0.0890 10.810
September 22 10.69 11.16 0.0890 10.850
================================================================================
- --------------------------------------------------------------------------------
24 1998 Annual Report to Shareholders
<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 share holders 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. When ever 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
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High Income Opportunity Fund Inc. 25
<PAGE>
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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.
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26 1998 Annual Report to Shareholders
<PAGE>
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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.
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Tax Information (unaudited)
- --------------------------------------------------------------------------------
For Federal tax purposes the Fund hereby designates for the fiscal year ended
September 30, 1998:
o A corporate dividends received deduction of 5.79%.
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High Income Opportunity Fund Inc. 27
<PAGE>
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<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
OFFICERS
Heath B. McLendon
President and
Chief Executive Officer
Lewis E. Daidone
Senior Vice President
and Treasurer
John C. Bianchi, CFA
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.
[LOGO]
HIO
Listed
NYSE
THE NEW YORK STOCK EXCHANGE
HIGH INCOME OPPORTUNITY FUND INC.
388 Greenwich Street
New York, New York 10013
FD0802 11/98
