HIGH INCOME
[GRAPHIC OMITTED]
Opportunity Fund Inc.
Quarterly Report
June 30, 1998
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High Income
Opportunity
Fund Inc.
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HEATH B. MCLENDON JOHN C. BIANCHI, CFA
Chairman Vice President
Dear Shareholder:
We are pleased to provide the third quarter report for the High Income
Opportunity Fund Inc. ("Fund") for the period ended June 30, 1998. During the
past nine months, the Fund paid income dividends totaling $0.86 per share. The
table below details the annualized distribution rate and the nine-month total
return for the Fund based on its June 30, 1998 net asset value ("NAV") per share
and the New York Stock Exchange ("NYSE") closing share price.
Price Annualized Nine-Month
Per Share Distribution Rate Total Return
------------- ----------------- ------------
$12.18 (NAV) 8.77% 5.19%
$11.938 (NYSE) 8.95% 3.58%
The Fund's performance compares favorably with the nine-month average total
return of 4.23% based on NAV for closed-end high yield bond funds as reported by
Lipper Analytical Services, Inc. (Lipper is an independent mutual
fund-performance tracking organization).
Market and Economic Overview
The high yield bond market generated relatively weak results in the second
quarter of 1998 and underperformed most other sectors of the bond market. The
30-year U.S. Treasury bond generated the strongest results of all the sectors
(e.g., a total return of more than 6%) as many investors became more convinced
that the Asian crisis would contribute to an economic slowdown in the U.S.
beginning in the second quarter of 1998. The U.S. Treasury market has been
sought out as a "safe haven" by investors concerned about increased economic
uncertainty. Moreover, an extremely heavy amount of new high yield bond issuance
also caused the high yield bond market to underperform versus other U.S. bond
market sectors. The higher-rated issues generated the strongest results among
high yield bonds given their greater sensitivity to interest rates. On the other
hand, the lowest-rated high yield bond issues generated the weakest returns,
which was not surprising given their greater sensitivity to general economic
conditions and stock market performance. While the stock market generated
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High Income Opportunity Fund Inc. 1
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positive results during the reporting period, there was considerably greater
volatility in the stock markets because of higher uncertainty among many
investors.
Year to date the total of newly issued high yield bonds was roughly $110
billion, which is more than twice last year's figure of about $50 billion.
Moreover, the year-to-date of cash inflows of approximately $15 billion into
high yield bond mutual funds, while above last year's total of $8 billion, was
clearly insufficient to counterbalance the effects of the extremely heavy new
issue calendar. However, continued strong demand for high yield bonds from
pension funds and insurance companies somewhat limited the underperformance of
the high yield bond market versus other bond sectors during the second quarter
of 1998.
The U.S. economy today remains generally supportive of high yield bonds and
inflation continues to be modest. In fact, recent retail sales growth and U.S.
housing sales and employment remains quite strong. We believe that it's still an
open question whether Asia's problems will have any meaningful negative impact
on future U.S. economic growth. While the Federal Reserve Board remains
concerned about the strength of the U.S. economy and the potential for higher
inflation in the future, there has been little evidence of inflationary
pressures so far.
Portfolio Strategy and Market Outlook
The Fund is cautiously positioned with a heavy emphasis in better quality,
intermediate maturity "B" and "BB" rated high yield bonds. As of June 30, 1998,
the Fund's average maturity on a call-adjusted basis was approximately 6.5
years. In addition, the Fund continued to emphasize telecommunications issues as
well as cable and media issues.
As the high yield bond market continued to underperform during the second
quarter of 1998, we began to gradually 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 six months. (Deflation is when prices actually
fall. Deflation should not be confused with disinflation. Disinflation is the
slowing down of the rate at which prices increase.) We have recently started to
lower our exposure to the energy industry given the continued weakness in energy
prices and our expectation that as long as Asia remains mired in difficulties,
energy prices should remain depressed. Yet we remain positive on the long-term
trends in the energy industry and do not plan to entirely eliminate the Fund's
current energy positions.
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2 1998 Quarterly Report to Shareholders
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Many other high-yield bond funds continue to be aggressively invested in
lower-quality high yield bonds in an effort to maintain their dividend yields
and to generate competitive performance. As a result of the recent correction in
the world's stock markets, these more speculative high yield bond issues have
started to perform poorly during the past six months. Given their more
speculative features, lower-quality high yield bonds tend to correlate more
closely to the performance of broad stock markets than other kinds of bonds. In
addition, many high yield bond funds have continued to invest in emerging market
government bonds, common stocks, convertible securities and derivatives, all of
which have suffered varying degrees of corrections. We have stayed committed to
owning better quality high yield bonds that should be much less vulnerable to
higher stock market volatility.
While we still expect U.S. economic growth to slow and corporate profit margins
may deteriorate for the rest of 1998, we do not anticipate any meaningful U.S.
economic slowdown for the balance of the year.
In closing, thank you for investing in the High Income Opportunity Fund Inc. We
look forward to continuing to help you achieve 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
Heath B. McLendon John C. Bianchi, CFA
Chairman Vice President
July 20, 1998
Shareholder Notice
On a more somber note, we report with much sadness the passing of Emeritus
Director C. Richard Youngdahl on August 6, 1998. Dick made many valuable
contributions to the board and the Fund during his tenure and he will be missed.
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High Income Opportunity Fund Inc. 3
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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 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 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 Quarterly Report to Shareholders
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Schedule of Investments (unaudited) June 30, 1998
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FACE
AMOUNT RATING SECURITY VALUE
================================================================================
CORPORATE BONDS AND NOTES -- 92.1%
================================================================================
Aerospace/Defense -- 2.0%
$11,275,000 Ba2* Airplanes Pass Through Trust, Corporate
Collateralized Mortgage Obligation,
Series D, 10.875% due 3/15/19 $ 12,735,563
4,375,000 BB Morgan Stanley Aircraft Finance, 8.700%
due 3/15/23+ 4,396,875
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17,132,438
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Banks/Savings and Loans -- 2.3%
First Nationwide Holdings, Sr. Notes:
15,900,000 Ba3* 12.500% due 4/15/03 18,205,500
1,400,000 Ba2* 10.625% due 10/1/03 1,589,000
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19,794,500
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Broadcasting-TV, Cable and Radio -- 11.6%
CSC Holdings, Inc., 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 6,484,968
5,900,000 BB- 9.875% due 4/1/23 6,563,750
Century Communications, Sr. Notes:
4,750,000 BB- 8.750% due 10/1/07 5,035,000
1,925,000 BB- Zero coupon bond to yield 8.160% due
3/15/03 1,309,000
7,950,000 B2* Comcast UK Cable, Sr. Unsecured Discount
Debentures, step bond to yield 11.535%
due 11/15/07 6,638,250
2,600,000 BBB- Le Groupe Videotron, Sr. Notes, 10.625%
due 2/15/05 2,912,000
Rogers Cablesystems, Sr. Secured Second
Priority:
4,000,000 BB+ Debentures, 10.000% due 3/15/05 4,440,000
4,400,000 BB+ Debentures, 10.000% due 12/1/07 4,895,000
11,195,000 BB- Sr. Sub. Debentures, 11.000% due 12/1/15 13,126,137
Rogers Communications, Sr. Notes:
2,250,000 BB- 9.125% due 1/15/06 2,283,750
2,700,000 BB- 8.875% due 7/15/07 2,713,500
TV Azteca SA De C.V.:
3,925,000 Ba3* Debentures,10.125% due 2/15/04 3,934,812
4,950,000 Ba3* Sr. Notes, 10.500% due 2/15/07 4,974,750
28,500,000 B United International Holdings Inc., Sr.
Discount Notes, Step bond to yield
10.669% due 2/15/08 17,598,750
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100,364,417
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Cellular and Other Wireless -- 8.5%
11,100,000 B3* Clearnet Communications, Inc., Sr. Discount
Notes, step bond to yield 13.507% due
12/15/05 9,310,125
Dolphin Telecom PLC, Sr. Discount Notes:
6,675,000 B- Step bond to yield 11.500% due 6/1/08+ 3,804,750
8,025,000++ B- Step bond to yield 11.625% due 6/1/08 4,956,423
14,175,000 B- Iridium LLC/Capital Corp., Sr. Notes,
14.000% due 7/15/05 15,805,125
See Notes to Financial Statements
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High Income Opportunity Fund 5
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Schedule of Investments (unaudited) (continued) June 30, 1998
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FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Cellular and Other Wireless -- 8.5% (continued)
$ 8,925,000 B- Millicom International Cellular S.A., Sr.
Discount Notes, step bond to yield
13.500% due 6/1/06 $ 6,827,625
15,125,000 B2* Nextel Communications Inc., Sr. Discount
Notes, Step bond to yield 11.206% due
8/15/04 14,746,875
5,500,000 B3* Pagemart Nationwide, Inc., Sr. Discount
Notes, step bond to yield 13.344% due
2/1/05+ 4,895,550
Telesystems Communications, Sr. Discount
Debentures:
15,850,000 CCC+ Step bond to yield 12.405% due 6/30/07 10,659,125
3,800,000 CCC+ Step bond to yield 10.513% due 11/1/07 2,289,500
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73,295,098
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Chemicals -- 1.3%
4,225,000 BB- Buckeye Technologies Inc., Sr. Sub. Notes,
8.000% due 10/15/10+ 4,267,250
5,000,000 B1* NL Industries, Sr. Secured Notes, 11.750%
due 10/15/03 5,537,500
1,300,000 B Unifrax Investment Corp., Sr. Notes,
10.500% due 11/1/03 1,361,750
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11,166,500
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Consumer Durables/Home Furnishings -- 1.0%
8,550,000 B Outboard Marine Corp, Sr. Notes, 10.750%
due 6/1/08+ 8,827,875
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Diversified/Conglomerate Manufacturing -- 2.1%
2,900,000 B- Alvey Systems Inc., Sr. Sub. Notes, 11.375%
due 1/31/03 3,030,500
1,500,000 B- Eagle-Picher Industrial Inc., Sr. Sub.
Notes, 9.375% due 3/1/08+ 1,528,125
3,875,000 B3* Interlake Corp., Sr. Sub. Notes, 12.125%
due 3/1/02 3,991,250
4,950,000 B2* Intertek Finance PLC, 10.250% due 11/1/06 5,259,375
4,475,000 B+ Park-Ohio Industries, Sr. Sub. Notes,
9.250% due 12/1/07 4,575,687
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18,384,937
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Diversified/Conglomerate Services -- 1.2%
3,100,000 NR Axiohm Transaction Services, Sr. Sub.
Notes, 9.750% due 10/1/07 3,131,000
6,675,000 B- Outsourcing Solutions, Sr. Sub. Notes,
11.000% due 11/1/06 7,259,063
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10,390,063
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Electric Utilities -- 4.1%
AES Corp., Sr. Sub. Notes:
2,150,000 Ba1* 10.250% due 7/15/06 2,343,500
13,025,000 Ba1* 8.500% due 11/1/07 13,236,655
Calpine Corp., Sr. Notes:
6,675,000 Ba2* 10.500% due 5/15/06 7,325,813
5,400,000 Ba2* 8.750% due 7/15/07 5,548,500
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 1,746,167
See Notes to Financial Statements
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6 1998 Quarterly Report to Shareholders
<PAGE>
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Schedule of Investments (unaudited) (continued) June 30, 1998
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FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Electric Utilities -- 4.1% (continued)
Niagara Mohawk Power:
$ 3,950,000 BB Sr. Discount Notes, 7.750% due 7/1/10 $ 2,745,250
2,550,000 BB- Sr. Notes, 7.750% due 10/1/08 2,620,125
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35,566,010
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Electronics/Computers -- 6.8%
3,925,000 B Celestica International, Sr. Sub.
Notes, 10.500% due 12/31/06 4,332,219
8,225,000 B Fairchild Semiconductor Corp., Sr. Sub.
Notes, 10.125% due 3/15/07 8,492,313
4,725,000 B- Graphic Controls Corp., Sr. Sub. Notes,
12.000% due 9/15/05 5,297,906
Unisys Corp., Sr. Notes:
10,875,000 Ba3* 12.000% due 4/15/03 12,356,719
14,550,000 Ba3* 11.750% due 10/15/04 16,878,000
Viasystems Inc., Sr. Sub. Notes:
8,575,000 B- 9.750% due 6/1/07 8,424,937
1,000,000 B- Series B, 9.750% due 6/1/07 982,500
3,650,000 NR Wam!Net Inc., Units, step bond to yield
13.250% due 3/1/05+ 2,304,062
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59,068,656
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Finance Companies/Consumer Credit -- 1.8%
Amresco Inc., Sr. Sub. Notes:
4,250,000 B 10.000% due 3/15/04 4,414,687
1,000,000 B 9.875% due 3/15/05 1,023,750
5,500,000 B2* Ocwen Capital Corp., Sr. Notes, 10.875%
due 8/1/27 6,008,750
3,400,000 BB- Ocwen Financial Corp., Sr. Notes, 11.875%
due 10/1/03 3,825,000
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15,272,187
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Food -- 1.7%
4,575,000 B- B&G Foods Inc., Sr. Sub. Notes, 9.625%
due 8/1/07 4,655,063
7,075,000 B Imperial Holly Corp., Sr. Sub. Notes, 9.750%
due 12/15/07 7,145,750
2,335,000 B2* Van de Kamp Inc., Sr. Sub. Notes, 12.000%
due 9/15/05 2,612,281
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14,413,094
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Health Care/Drugs/Hospital Supplies -- 7.2%
8,750,000 BB ICN Pharmaceuticals Inc., Sr. Notes, 9.250%
due 8/15/05 9,296,875
Integrated Health Services Inc., Sr. Sub.
Notes:
4,450,000 B2* 9.500% due 9/15/07 4,672,500
8,125,000 B2* 9.250% due 1/15/08 8,450,000
15,400,000 B- Magellan Health Services, Sr. Sub. Notes,
9.000% due 2/15/08+ 15,284,500
7,625,000 B- Paragon Health Network, Sr. Sub. Notes,
9.500% due 11/1/07 7,777,500
4,425,000 B- Pharmaceutical Fine Chemicals, Sr. Sub.
Notes,
9.750% due 11/15/07+ 5,011,313
See Notes to Financial Statements
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High Income Opportunity Fund, Inc. 7
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Schedule of Investments (unaudited) (continued) June 30, 1998
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Health Care/Drugs/Hospital Supplies -- 7.2% (continued)
Sun Healthcare Group Inc., Sr. Sub. Notes:
$ 6,600,000 B2* 9.500% due 7/1/07+ $ 6,699,000
5,400,000 B2* 9.375% due 5/1/08+ 5,454,000
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62,645,688
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Hotel, Casinos and Gaming -- 1.8%
2,350,000 B Aztar Corp., Sr. Sub. Notes, 13.750% due
10/1/04 2,679,000
5,375,000 B- Courtyard by Marriott, Sr. Secured Notes,
10.750% due 2/1/08 5,925,937
5,125,000 BB+ Mohegan Tribal Gaming Authority, Sr.
Secured Notes, 13.500% due 11/15/02 6,617,655
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15,222,592
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Insurance Companies -- 1.2%
5,500,000 BB+ SIG Capital Trust, Sr. Notes, 9.500% due
8/15/27 5,651,250
4,175,000 BB- Veritas Capital Trust, Company Guranteed,
10.000% due 1/2/28 4,383,750
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10,035,000
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Leisure -- 0.6%
4,975,000 B3* SFX Entertainment Inc., Sr. Sub. Notes,
9.125% due 2/1/08+ 4,900,375
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Metals/Mining -- 2.4%
5,050,000 B- Haynes International Inc., Sr. Notes,
11.625% due 9/1/04 5,605,500
8,700,000 B2* Kaiser Aluminum and Chemical, Sr. Sub.
Notes,
12.750% due 2/1/03 9,243,750
2,275,000 B2* Koppers Industry Inc., Sr. Sub. Notes,
9.875% due 12/1/07 2,366,000
3,850,000 B WHX Corp., Sr. Notes, 10.500% due 4/15/05 3,927,000
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21,142,250
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Oil Services -- 1.8%
3,950,000 Baa3* Deeptech International, Sr. Notes,
12.000% due 12/15/00 4,379,563
3,600,000 B+ ICO Inc., Sr. Notes, 10.375% due 6/1/07 3,681,000
2,275,000 BB+ J. Ray McDermott SA, Sr. Sub. Notes,
9.375% due 7/15/06 2,457,000
4,425,000 BB Pride Petroleum, Sr. Notes,
9.375% due 5/1/07 4,673,906
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15,191,469
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Oil/Natural Gas -- 5.4%
4,350,000 B Canadian Forest Oil Ltd., Sr. Sub. Notes,
8.750% due 9/15/07 4,284,750
7,350,000 B+ Clark USA Inc., Sr. Notes,
10.875% due 12/1/05 8,020,687
7,025,000 Ba2* Gulf Canada Resources Ltd., Sub. Debentures,
9.625% due 7/1/05 7,551,874
Ocean Energy Inc.:
3,600,000 BB- Sr. Sub. Debentures, 9.750% due 10/1/06 3,942,000
4,675,000 BB- Sr. Sub. Notes, 10.375% due 10/15/05 5,177,563
2,325,000 BB- Sr. Sub. Notes, 8.875% due 7/15/07 2,435,438
Parker Drilling:
4,200,000 B+ Debentures, 9.750% due 11/15/06+ 4,305,000
525,000 B+ Sr. Notes, 9.750% due 11/15/06 538,125
See Notes to Financial Statements
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8 1998 Quarterly Report to Shareholders
<PAGE>
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Schedule of Investments (unaudited) (continued) June 30, 1998
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FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Oil/Natural Gas -- 5.4% (continued)
$ 6,025,000 BB- Santa Fe Energy Resources, Sr. Sub.
Debentures, 11.000% due 5/15/04 $ 6,537,125
3,675,000 B2* Stone Energy Corp., Sr. Sub. Notes,
8.750% due 9/15/07 3,684,187
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46,476,749
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Packaging and Containers -- 1.5%
2,000,000 B+ Container Corp. of America, Sr. Notes,
11.250% due 5/1/04 2,178,780
3,250,000 B Huntsman Packaging Corp., Sr. Sub. Notes,
9.125% due 10/1/07 3,241,875
5,125,000++ B Impress Metal Packaging, Sr. Sub. Notes,
9.875% due 5/29/07 2,981,302
4,250,000 B- Tekni-Plex, Inc., Sr. Sub. Notes,
9.250% due 3/1/08 4,239,375
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12,641,332
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Paper/Forest Products/Printing -- 1.4 %
10,575,000 B+ SD Warren Corp., Sr. Sub. Notes,
12.000% due 12/15/04 11,751,469
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Personal Care Products/ Cosmetics -- 0.2%
1,250,000 B- AKI Holding Inc., Sr. Discount Debentures,
13.500% due 7/1/09+ 653,125
1,000,000 B+ AKI Inc., Senior Notes, step bond to yield
10.500% due 7/1/08+ 1,007,500
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1,660,625
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Pollution Control/Waste Removal -- 0.9%
3,925,000 B+ Allied Waste North America, Sr. Sub. Notes,
10.250% due 12/1/06 4,332,219
3,825,000 BB- CIA Latino Amerivana, Company Guaranteed,
11.625% due 6/1/04 3,815,438
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8,147,657
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Printing Equipment -- 0.4%
3,400,000 B Goss Graphic Systems, Sr. Sub. Notes,
12.000% due 10/15/06 3,604,000
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Publishing -- 0.7%
3,850,000 B Middleweb PLC, Sr. Notes,
10.500% due 5/30/08 6,439,792
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Real Estate Development/ REITS -- 0.4%
1,250,000 B- BF Saul REIT, Sr. Notes,
9.750% due 4/1/08+ 1,237,500
2,000,000 Baa3* Trizec Finance, Sr. Notes,
10.875% due 10/15/05 2,262,500
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3,500,000
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Retail -- 1.2%
2,750,000 B- Advance Holdings Corp., Sr. Discount Notes,
step bond to yield 12.875% due 4/15/09+ 1,636,250
3,600,000 B- Advance Stores Co. Inc., Sr. Sub. Notes,
12.875% due 4/15/09+ 3,739,500
4,700,000 B- US Office Products Co., Sr. Sub Notes,
9.750% due 6/15/08+ 4,711,750
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10,087,500
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See Notes to Financial Statements
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High Income Opportunity Fund, Inc. 9
<PAGE>
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Schedule of Investments (unaudited) (continued) June 30, 1998
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Telecommunications -- 17.8%
$ 7,800,000 NR Allegiance Telecom Inc., Units, step bond
to yield 11.713% due 2/15/08+ $ 4,143,750
Colt Telecommunications Group PLC:
400,000++ B Sr. Notes, 10.125% due 11/30/07 720,793
8,000,000 B Sr. Sub. Notes, step bond to yield
11.615% due 12/15/06 6,320,000
Esprit Telecom Group, Sr. Notes:
3,900,000 B- 11.500% due 12/15/07+ 4,026,750
4,000,000++ B- 11.500% due 12/15/07 2,282,548
2,250,000 B- 10.875% due 6/15/08+ 2,266,875
5,825,000 NR Facilicom International Inc., Sr. Notes,
10.500% due 1/15/08+ 5,810,438
7,000,000 NR Firstworld Communications, Units,
13.000% due 4/15/08+ 3,150,000
1,500,000 NR Fonorola Inc., Sr. Secured Notes,
12.500% due 8/15/02 1,676,250
6,850,000 B Hermes Europe Railtel Intelcom, Sr. Notes,
11.500% due 8/15/07 7,749,063
4,250,000 B+ Impsat Corp., Sr. Notes, 12.375% due
6/15/08+ 4,313,750
10,225,000 B Intermedia Communications Inc., Sr. Discount
Unsecured Notes, step bond to yield
11.961% due 5/15/06 8,410,063
9,450,000 B+ McLeod Inc., Sr. Discount Debentures,
step bond to yield 10.704% due 3/1/07 7,040,250
Metronet Communications:
10,225,000 B Sr. Discount Notes, 12.000% due 8/15/07 11,861,000
19,125,000 B Sr. Notes, step bond to yield
11.206% due 6/15/08+ 11,809,688
13,200,000 B Nextlink Communications, Sr. Notes,
12.500% due 4/15/06 15,312,000
11,075,000 NR Pagemart Wireless Inc., Sr. Discount Notes,
step bond to yield 11.250% due 2/1/08 6,949,563
8,600,000 B Primus Telecom Group, Sr. Notes,
11.750% due 8/1/04 9,137,500
4,900,000 B- Psinet Inc., Sr. Notes, 10.000% due 2/15/05 5,022,500
Qwest Communications:
10,825,000 BB+ Sr. Discount Notes, step bond to yield
9.378% due 10/15/07 8,145,813
3,625,000 BB+ Sr. Notes, 10.875% due 4/1/07 4,205,000
RCN Corp:
7,775,000 B3* Sr. Discount Notes, step bond to yield
11.140% due 10/15/07 4,976,000
4,000,000 B3* Sr. Notes, 10.000% due 10/15/07 4,120,000
3,582,000 B- RSL Communications Ltd., Sr. Notes,
12.250% due 11/15/06 4,070,048
1,900,000 NR Startec Global Communications, Units,
12.000% due 5/15/08+ 1,866,750
3,500,000 CCC+ Thermadyne Holdings Corp., Debentures,
step bond to yield 12.500% due 6/1/08+ 1,942,500
2,000,000 CCC+ Thermadyne Manufacturing LLC, Sr. Sub.
Notes, 9.875% due 6/1/08+ 2,017,500
See Notes to Financial Statements
- --------------------------------------------------------------------------------
10 1998 Quarterly Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1998
- --------------------------------------------------------------------------------
FACE
AMOUNT RATING SECURITY VALUE
================================================================================
Telecommunications -- 17.8% (continued)
$ 4,300,000 NR Versatel Telecommunications, Sr. Notes,
13.250% due 5/15/08+ $ 4,536,500
- --------------------------------------------------------------------------------
153,882,892
- --------------------------------------------------------------------------------
Textiles/Apparel -- 0.4%
6,050,000++ B Texon International, Sr. Notes,
10.000% due 2/1/08+ 3,351,801
- --------------------------------------------------------------------------------
Transportation/Trucking -- 2.4%
2,850,000 B American Commercial Lines,
10.250% due 6/30/08+ 2,899,875
2,250,000 B+ American Reefer Co. Ltd., First Mortgage,
10.250% due 3/1/08+ 2,252,813
2,000,000 BB Enterprises Shipholding, Sr. Notes,
8.875% due 5/1/08+ 1,967,500
1,000,000 BB GS Superhighway Holdings, Sr. Notes,
10.250% due 8/15/07 683,750
5,700,000 BB- Sea Containers Limited, Sr. Sub. Debentures,
12.500% due 12/1/04 6,433,875
3,950,000 B+ Stena Line AB, Sr. Notes,
10.625% due 6/1/08 4,014,188
2,400,000 B+ TBS Shipping International LTD,
First Mortgage, 10.000% due 5/1/05+ 2,196,000
- --------------------------------------------------------------------------------
20,448,001
- --------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $764,416,046) 794,804,967
================================================================================
SHARES SECURITY VALUE
================================================================================
PREFERRED STOCK -- 5.1%
================================================================================
Banks/Savings and Loans -- 0.3%
108,000 California Federal, Series A, Exchangeable
9.125% 2,943,000
- --------------------------------------------------------------------------------
Broadcasting-TV Cable and Radio -- 4.5%
33,800 Time Warner Inc., Series K, Exchangeable
10.250% 37,602,500
61,200 Viasystems Inc. 1,277,550
- --------------------------------------------------------------------------------
38,880,050
- --------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 0.3%
50,000 SD Warren, Series B, Exchangeable 14.000% 2,450,000
- --------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost -- $42,505,571) 44,273,050
================================================================================
COMMON STOCK -- 0.0%
================================================================================
Cellular and Other Wireless -- 0.0%
20,125 Pagemart Nationwide Inc.+
(Cost -- $0) 171,062
================================================================================
See Notes to Financial Statements
- --------------------------------------------------------------------------------
High Income Opportunity Fund, Inc. 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) June 30, 1998
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
================================================================================
WARRANTS -- 0.7%
================================================================================
Broadcasting-TV, Cable and Radio -- 0.0%
9,225 Australis Holdings Ltd., Expire
10/30/01+* $ 1
14,825 United International Holdings Australia
Inc., Expire 5/15/06* 177,900
5,700 Wireless One, Inc., Expire 10/15/03* 1,424
- --------------------------------------------------------------------------------
179,325
- --------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 0.0%
8,175 SD Warren Corp., Expire 12/5/06+* 143,880
- --------------------------------------------------------------------------------
Cellular and Other Wireless -- 0.2%
55,110 Clearnet Communications Inc., Expire
9/15/05* 330,660
7,500 Globalstar LP, Expire 2/15/04* 1,012,500
11,959 Nextel Communications, Inc., Expire
12/15/98* 120
6,575 Nextel Communications, Inc., Expire 4/25/99* 15,780
43,470 Pagemart Inc., Expire 12/31/03+* 326,025
- --------------------------------------------------------------------------------
1,685,085
- --------------------------------------------------------------------------------
Telecommunications -- 0.5%
7,800 Allegiance Telecommunications Inc.,
Expire 2/3/08 19,500
8,000 Colt Telecommunications Group PLC,
Expire 12/31/06 1,560,000
6,725 Iridium LLC Corp., Expire 7/15/05* 941,500
102,250 Metronet Communications, Expire 8/15/07* 409,000
7,600 Primus Telecomm Group, Expire 8/1/04* 288,800
6,975 RSL Communications Ltd., Expire 11/15/06* 279,000
- --------------------------------------------------------------------------------
3,497,800
- --------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost -- $2,344,054) 5,506,090
================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================
REPURCHASE AGREEMENT -- 2.1%
$ 18,385,000 Goldman, Sachs & Co., 5.645% due 7/1/98;
Proceeds at maturity -- $18,387,883;
(Fully collateralized by U.S. Treasury
Notes, 5.375% due 6/30/00; Market value
-- $18,761,442) (Cost-- $18,385,000) 18,385,000
================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $827,650,671**) $863,140,169
================================================================================
+ 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 security.
** Aggregate cost for Federal income tax purposes is substantially the same.
See page 13 for definition of ratings.
See Notes to Financial Statements
- --------------------------------------------------------------------------------
12 1998 Quarterly 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" 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.
- --------------------------------------------------------------------------------
High Income Opportunity Fund, Inc. 13
<PAGE>
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities (unaudited) June 30, 1998
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $827,650,671) $863,140,169
Cash 89
Receivable for securities sold 2,085,750
Interest receivable 15,439,674
Receivable for open forward foreign currency contracts
(Note 8) 172,085
- --------------------------------------------------------------------------------
Total Assets 880,837,767
- --------------------------------------------------------------------------------
LIABILITIES:
Dividends payable 1,906,454
Management fees payable 887,965
Payable for securities purchased 403,383
Payable for open forward foreign currency contracts (Note 8) 17,819
Accrued expenses 408,102
- --------------------------------------------------------------------------------
Total Liabilities 3,623,723
- --------------------------------------------------------------------------------
Total Net Assets $877,214,044
================================================================================
NET ASSETS:
Par value of capital shares $ 72,017
Capital paid in excess of par value 898,171,021
Overdistributed net investment income (838,593)
Accumulated net realized loss on security transactions,
futures contracts and options (55,833,856)
Net unrealized appreciation of investments and foreign
currencies 35,643,455
- --------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $12.18 a share on 72,016,610 shares of $0.001
par value outstanding; 500,000,000 shares authorized) $877,214,044
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 1998 Quarterly Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited)
- --------------------------------------------------------------------------------
For the Nine Months Ended June 30, 1998
INVESTMENT INCOME:
Interest $ 61,934,519
Dividends 4,238,705
- --------------------------------------------------------------------------------
Total Investment Income 66,173,224
- --------------------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 7,597,737
Shareholder communication fees 226,765
Shareholder and system servicing fees 28,422
Audit and legal 22,755
Custody fees 22,593
Directors' fees 6,732
Other 32,460
- --------------------------------------------------------------------------------
Total Expenses 7,937,464
- --------------------------------------------------------------------------------
Net Investment Income 58,235,760
- --------------------------------------------------------------------------------
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) 7,969,008
Futures contracts (462,223)
Options purchased (648,905)
Foreign currency transactions 341,664
- --------------------------------------------------------------------------------
Net Realized Gain 7,199,544
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation of Investments
and Foreign Currencies:
Beginning of period 56,962,467
End of period 35,643,455
- --------------------------------------------------------------------------------
Decrease in Net Unrealized Appreciation (21,319,012)
- --------------------------------------------------------------------------------
Net Loss on Investments, Futures Contracts, Options and Foreign
Currencies (14,119,468)
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 44,116,292
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
High Income Opportunity Fund, Inc. 15
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Nine Months Ended June 30, 1998 (unaudited)
and the Year Ended September 30, 1997
1998 1997
================================================================================
OPERATIONS:
Net investment income $ 58,235,760 $ 80,776,721
Net realized gain 7,199,544 7,070,567
Increase (decrease) in net unrealized
appreciation (21,319,012) 40,292,499
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations 44,116,292 128,139,787
- --------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (61,802,592) (78,232,239)
- --------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (61,802,592) (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 (5,474,573) 63,949,411
NET ASSETS:
Beginning of period 882,688,617 818,739,206
- --------------------------------------------------------------------------------
End of period* $ 877,214,044 $ 882,688,617
================================================================================
* Includes undistributed (overdistributed)
net investment income of: $ (838,593) $ 2,386,575
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1998 Quarterly Report to Shareholders
<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.
- --------------------------------------------------------------------------------
High Income Opportunity Fund, Inc. 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 nine months ended June 30, 1998, the aggregate cost of purchases and
proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $602,807,839
- --------------------------------------------------------------------------------
Sales 612,520,198
================================================================================
At June 30, 1998, the aggregate gross unrealized appreciation and depreciation
of investments for Federal income tax purposes were substantially as follows:
================================================================================
Gross unrealized appreciation $39,500,273
Gross unrealized depreciation (4,010,775)
- --------------------------------------------------------------------------------
Net unrealized appreciation $35,489,498
================================================================================
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 1998 Quarterly Report to Shareholders
<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 June 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 June 30, 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,
- --------------------------------------------------------------------------------
High Income Opportunity Fund, Inc. 19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
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 nine months ended June 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.
8. Forward Foreign Currency Contracts
At June 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 unrealized gain (loss) on the contracts is
reflected as follows:
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Gain(Loss)
================================================================================
To Sell:
British Pound 449,450 $ 747,590 8/24/98 $ (17,819)
European Currency Unit 4,824,774 5,315,793 11/30/98 69,730
German Mark 16,130,602 8,971,506 9/2/98 102,355
- --------------------------------------------------------------------------------
Total Unrealized Gain on Open
Forward Foreign Currency Contracts $154,266
================================================================================
- --------------------------------------------------------------------------------
20 1998 Quarterly Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
9. Capital Shares
During the nine months ended June 30, 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
================================================================================
- --------------------------------------------------------------------------------
High Income Opportunity Fund, Inc. 21
<PAGE>
- --------------------------------------------------------------------------------
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 0.83 1.15 1.14 1.14 1.01*
Net realized and unrealized
gain (loss) (0.22) 0.68 0.22 0.28 (1.30)
- ------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 0.61 1.83 1.36 1.42 (0.29)
- ------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.86) (1.12) (1.12) (1.12) (1.01)
Capital -- -- -- (0.02) --
- ------------------------------------------------------------------------------------------------
Total Distributions (0.86) (1.12) (1.12) (1.14) (1.01)
- ------------------------------------------------------------------------------------------------
Net Asset Value, End of Period $ 12.18 $ 12.43 $ 11.72 $ 11.48 $ 11.20
- ------------------------------------------------------------------------------------------------
Total Return,
Based on Market Value** 3.58%++ 18.18% 21.07% 9.90% (7.33)%++
- ------------------------------------------------------------------------------------------------
Total Return,
Based on Net Asset Value** 5.19%++ 16.48% 12.86% 13.99% (2.31)%++
- ------------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $ 877 $ 883 $ 819 $ 802 $ 783
- ------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.20%+ 1.21% 1.21% 1.20% 1.15%+*
Net investment income 8.81+ 9.63 9.85 10.02 9.09+
- ------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 71% 87% 73% 59% 69%
- ------------------------------------------------------------------------------------------------
Market Value, End of Period $11.938 $12.438 $11.500 $10.500 $10.625
================================================================================================
</TABLE>
(1) For the nine months ended June 30, 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.
- --------------------------------------------------------------------------------
22 1998 Quarterly Report to Shareholders
<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
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
================================================================================
* In December 1995, the valuation date, which is the date that determines
the dividend reinvestment price, was changed from payable date to record
date.
- --------------------------------------------------------------------------------
High Income Opportunity Fund, Inc. 23
<PAGE>
- --------------------------------------------------------------------------------
Additional Shareholder Information (unaudited)
- --------------------------------------------------------------------------------
On February 12, 1997, the Annual Meeting of the shareholders of the Fund was
held for the purpose of voting on the following matters:
1. To vote on the election of Donald R. Foley and Paul Hardin as Directors;
and
2. To approve or disapprove the selection of KPMG Peat Marwick LLP as the
independent auditors for the current fiscal year of the Fund.
The results of the vote on Proposal 1 were as follows:
Shares Percentage of Shares Voted Percentage of
Directors* Voted For Shares Voted Against Shares Voted
================================================================================
Donald R. Foley 64,595,947.335 99.079% 600,391.117 0.921%
Paul Hardin 64,614,934.335 99.108 581,404.117 0.892
================================================================================
The results of the vote on Proposal 2 were as follows:
<TABLE>
<CAPTION>
Shares Percentage of Shares Voted Percentage of Shares Percentage of
Voted For Shares Voted Against Shares Voted Abstained Shares Abstained
=====================================================================================================
<S> <C> <C> <C> <C> <C>
64,411,047.333 98.796% 216,635.364 0.332% 568,655.755 0.872%
=====================================================================================================
</TABLE>
* The following Directors, representing the balance of the Board of
Directors, continue to serve as Directors: Heath B. McLendon, Roderick C.
Rasmussen and John P. Toolan.
- --------------------------------------------------------------------------------
24 1998 Quarterly 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 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
- --------------------------------------------------------------------------------
High Income Opportunity Fund, Inc. 25
<PAGE>
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited) (continued)
- --------------------------------------------------------------------------------
Data will begin to purchase Common Stock on the open market as soon as
practicable after the payment date of the dividend or capital gains
distribution, 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 Quarterly Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
High Income Opportunity Fund, Inc. 27
<PAGE>
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<PAGE>
HIGH INCOME
[GRAPHIC OMITTED}
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
FD01006 8/98
