HIGH INCOME
---------------------
Opportunity Fund Inc.
Quarterly Report
December 31, 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 first quarter report for the High Income
Opportunity Fund Inc. ("Fund") for the period ended December 31, 1998. During
the last three months, the Fund paid income dividends totaling $0.27 per share.
The table below details the annualized distribution rate and the three-month
total return for the Fund based on its December 31, 1998 net asset value ("NAV")
per share and the New York Stock Exchange ("NYSE") closing price.
Price Annualized Three-Month
Per Share Distribution Rate *Total Return
--------------- ----------------- -------------
$11.26 (NAV) 9.17% 2.67%
$10.438 (NYSE) 9.89% (3.82)%
The Fund generated a return of 2.67% for the past three months and 0.81% for the
past twelve months. We were encouraged by the Fund's stronger performance
results in the past three months as the high-yield bond market began to recover
from its third quarter sell-off. Investors were encouraged by the Federal
Reserve Board ("Fed")'s determined effort to keep the U.S. economy from
deteriorating by lowering short-term interest rates three times. And while we
are clearly disappointed by the Fund's modest performance over the past three-
and twelve-months, we did perform better than the 0.10% and a negative 4.61%
average total returns, respectively, for non-leveraged, closed-end, high-yield
funds as reported by Lipper, Inc. (Lipper is a major independent mutual fund
performance-tracking organization). We believe the main reasons why we've been
able to generate above-average performance returns in the Fund are through
prudent issue selection with a heavy focus on companies with improving
fundamentals.
Please note that effective with the January 1999 dividend distribution, the Fund
modestly reduced the monthly income dividend from $0.089 per share to $0.086 per
share. This dividend adjustment was made because of the general decline in
- ----------
* This distribution rate assumes a current monthly income dividend rate of
$0.086 per share for twelve months.
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High Income Opportunity Fund Inc. 1
<PAGE>
interest rates over the past year as well as our continued emphasis on higher
quality, but slightly lower yielding issues in the portfolio. We believe that
the current volatile global economy has warranted a more conservative credit
strategy to protect the Fund's portfolio from any potential increase in overall
market default rates. We believe that this strategy has enabled us to avoid
defaults this past year.
Market and Economic Overview
The high-yield bond market generated relatively weak results during the third
quarter of 1998, underperforming all of the other domestic bond market sectors.
By the end of September, the Fed began taking aggressive actions to restore
investor confidence in the financial markets. The Fed concluded that the
financial markets were beginning to freeze up and overall liquidity in the bond
market was disappearing. Many companies were finding it increasingly more
difficult to borrow money through the bond markets. Moreover, there was a more
pronounced reluctance on the part of many investors to invest in new bonds,
especially from companies that issue high-yield bonds. Fears that an economic
recession was becoming more likely given the turmoil in emerging market
economies such as Korea, Russia and Indonesia added to the growing risk
aversion.
Moreover, investors became concerned that a worldwide credit crunch in the
financial markets might throw the U.S. economy into a meaningful recession. By
acting decisively and lowering short-term interest rates three times, the Fed
was able to stabilize the domestic financial markets and restore investor
confidence. In the fourth quarter of 1998, as investors slowly became more
comfortable with the economic outlook and the Fed's resolve to keep the economy
out of a recession, the high-yield bond market stabilized and outperformed other
bond sectors. Yet because of a lingering uncertainty over the economy, the
high-yield bond market still trades at undervalued levels. As more investors
become convinced that the U.S. economy is still fundamentally sound, the
high-yield bond market's performance should improve.
Portfolio Strategy and Market Outlook
The Fund remains cautiously positioned with a heavy emphasis in better quality,
intermediate maturity "B" and "BB" rated high-yield bonds. As of December 31,
1998, the Fund's average maturity on a call-adjusted basis was approximately 6.5
years. (Average maturity on a call-adjusted basis means that the bonds callable
earlier than their maturity are considered to a maturity date of the call date
for the purposes of the calculation.) In addition, the Fund continued to
emphasize telecommunications issues as well as cable and media issues.
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2 1998 Quarterly Report to Shareholders
<PAGE>
We viewed the recent correction in the high-yield bond market as a buying
opportunity and carefully redeployed excess cash reserves into the market during
this time. However, given the continued problems in Asia, we remained
underweighted in basic commodity industries such as steel, forest products,
energy and petrochemicals, industries that continue to be negatively affected by
worldwide deflationary trends. (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 the current economic
environment, which we think could be characterized by slower growth and somewhat
weaker corporate profits. It should be noted that we still do not anticipate a
domestic economic recession for 1999. Moreover, we will continue to maintain the
Fund's relatively sound credit quality orientation given the higher volatility
in financial markets.
In closing, thank you for investing in the High Income Opportunity Fund. 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
January 11, 1999
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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 distributions, if any, in additional shares of the Fund. 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
determination date, you will be issued shares by the Fund at a price reflecting
the NAV, or 95% of the market price, whichever is greater.
If the market price is less than the NAV at the time of valuation (the close of
business on the determination date), or if the Fund declares a dividend or
capital gains distribution payable only in cash, First Data Investor Services
Group, Inc. (the "Plan Agent") will buy common stock for your account in the
open market.
If the Plan Agent begins to purchase additional shares in the open market and
the market price of the shares subsequently rises above the NAV previously
determined before the purchases are completed, the Plan Agent will attempt to
terminate purchases and have the Fund issue the remaining dividend or
distribution in shares at the greater of the previously determined NAV. 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.
Restated Plan Adopted
A more complete description of the current Plan appears in the section of this
report beginning on page 25. The descriptions in here are based on a restated
version of the Plan, which was recently adopted to reflect current practices of
the Plan Agent and for the purpose of standardizing the terms among all
closed-end mutual funds managed by Mutual Management Corp.
To find out more detailed information about the Plan and about how you can
participate, please call First Data Investor Services Group, Inc. at (800)
331-1710.
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4 1998 Quarterly Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT++ RATING(a) SECURITY VALUE
================================================================================================
CORPORATE BONDS AND NOTES -- 96.8%
================================================================================================
Aerospace/Defense -- 0.4%
<S> <C> <C>
$ 3,025,000 B1* BE Aerospace, Sr. Sub. Notes, 9.500% due 11/1/08+ $ 3,206,500
- ------------------------------------------------------------------------------------------------
Airlines -- 2.4%
15,775,000 BB Airplanes Pass Through Trust, Corporate Collateralized
Mortgage Obligation, Series D, 10.875% due 3/15/19 16,775,766
2,060,000 Ba2* Continental Airlines, Notes, 8.000% due 12/15/05 2,057,425
- ------------------------------------------------------------------------------------------------
18,833,191
- ------------------------------------------------------------------------------------------------
Automobile/Auto Parts -- 1.3%
7,855,000 B+ Breed Technologies Inc., Sr. Sub. Notes, 9.250% due
4/15/08+ 6,932,038
3,380,000 B1* Exide Corp., Sr. Notes, 10.000% due 4/15/05 3,396,900
- ------------------------------------------------------------------------------------------------
10,328,938
- ------------------------------------------------------------------------------------------------
Broadcasting-TV, Cable and Radio -- 16.7%
890,000 B- Capstar Broadcasting, Sr. Discount Notes, step bond to
yield 11.002% due 2/1/09 734,250
5,250,000 BB- Century Communications, Sr. Notes, 8.750% due 10/1/07 5,788,125
12,000,000 B Chancellor Media, Sr. Sub. Notes, 9.000% due 10/1/08+ 12,750,000
Citadel Broadcasting Co., Sr. Sub. Notes:
1,350,000 B- 10.250% due 7/1/07 1,478,250
2,145,000 B- 9.250% due 11/15/08+ 2,244,206
6,700,000 B2* Comcast UK Cable, Sr. Unsecured Discount Debentures,
step bond to yield 11.613% due 11/15/07 5,678,250
CSC Holdings, Inc.:
1,000,000 BB+ Sr. Notes, 7.625% due 7/15/18 1,006,250
Sr. Sub. Debentures:
15,725,000 BB- 9.875% due 2/15/13 17,670,969
5,525,000 BB- 10.500% due 5/15/16 6,560,938
5,000,000 BB- 9.875% due 4/1/23 5,606,250
NTL Inc.:
Sr. Notes:
2,900,000 B- 11.500% due 10/1/08+ 3,168,250
6,430,000 B- Step bond to yield 12.375% due 10/1/03+ 4,066,975
2,975,000(GBP) B- Sr. Unsub. Notes, 9.500% due 4/1/08 4,529,100
RCN Corp.:
7,775,000 B3* Sr. Discount Notes, step bond to yield 11.142% due
11.142% due 10/15/07 4,548,375
4,000,000 B3* Sr. Notes, 10.000% due 10/15/07 3,840,000
Rogers Cablesystems, Sr. Secured Second Priority:
Debentures:
1,750,000 BB+ 10.000% due 3/15/05 1,970,938
4,250,000 BB+ 10.000% due 12/1/07 4,791,875
11,970,000 BB- Sr. Sub. Debentures, 11.000% due 12/1/15 14,184,450
2,250,000 BB- Rogers Communications, Sr. Notes, 2,345,625
</TABLE> 9.125% due 1/15/06
See Notes to Financial Statements.
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High Income Opportunity Fund Inc. 5
<PAGE>
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Schedule of Investments (unaudited) (continued) December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT++ RATING(a) SECURITY VALUE
================================================================================================
<S> <C> <C>
Broadcasting-TV, Cable and Radio -- 16.7% (continued)
$ 3,475,000 CCC+ Telemundo Holdings, Sr. Discount Notes, step bond to
yield 11.132% due 8/15/03+ $ 1,998,125
3,650,000 B+ Telewest Communications PLC, Sr. Notes, 11.250% due
11/1/08+ 4,097,125
TV Azteca SA De C.V.:
3,925,000 B+ Debentures, 10.125% due 2/15/04 3,404,938
2,200,000 B+ Sr. Notes, 10.500% due 2/15/07 1,853,500
36,000,000 B United International Holdings Inc., Sr. Discount
Notes, step bond to yield 11.045% due 2/15/08 19,440,000
- ------------------------------------------------------------------------------------------------
133,756,764
- ------------------------------------------------------------------------------------------------
Building/Construction -- 1.7%
Building Material Corp., Sr. Notes:
1,250,000 BB 7.750% due 7/15/05 1,237,500
2,665,000 BB 8.000% due 12/1/08+ 2,684,988
750,000 BB Step bond to yield 10.015% due 7/1/04 768,750
3,775,000 B Columbus McKinnon Corp., Company Guaranteed Notes,
8.500% due 4/1/08 3,567,375
Nortek Inc., Sr. Notes:
1,250,000 B+ 9.250% due 3/15/07 1,296,875
4,140,000 B+ 9.125% due 9/1/07 4,264,200
- ------------------------------------------------------------------------------------------------
13,819,688
- ------------------------------------------------------------------------------------------------
Cellular and Other Wireless -- 9.3%
3,460,000 CCC+ Centennial Cellular, Sr. Sub. Notes, 10.750% due
12/15/08+ 3,485,950
15,564,000 B3* Clearnet Communications, Inc., Sr. Discount Notes,
step bond to yield 12.750% due 12/15/05 13,423,950
Dolphin Telecom PLC, Sr. Discount Notes, step bond to
yield:
8,675,000 CCC+ 11.432% due 6/1/08+ 3,079,625
8,025,000(ECU) CCC+ 12.702% due 6/1/08 3,062,725
12,285,000 B- Iridium LLC/Capital Corp., Sr. Notes, 14.000% due
7/15/05 11,747,531
14,000,000 B- Millicom International Cellular S.A., Sr. Discount
Notes, step bond to yield 13.469% due 6/1/06 10,360,000
9,265,000 Ba3* Orange PLC, Sr. Notes, 8.000% due 8/1/08 9,311,325
5,500,000 B3* Pagemart Nationwide, Inc., Sr. Discount Notes, step
bond to yield 13.344% due 2/1/05 4,896,155
11,075,000 NR Pagemart Wireless Inc., Sr. Discount Notes, step bond
to yield 11.250% due 2/1/08 5,316,000
Telesystems Communications, Sr. Discount Notes, step
bond to yield:
16,375,000 CCC+ 12.584% due 6/30/07 7,368,750
6,250,000 CCC+ 11.387% due 11/1/07 2,343,750
- ------------------------------------------------------------------------------------------------
74,395,761
- ------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
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6 1998 Quarterly Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT++ RATING(a) SECURITY VALUE
================================================================================================
<S> <C> <C>
Chemicals -- 0.2%
$ 1,155,000 NR Huntsman Corp., Sr. Sub. Notes, 9.500% due 7/1/07+ $ 1,157,888
- ------------------------------------------------------------------------------------------------
Diversified/Conglomerate Manufacturing -- 2.7%
1,150,000 B- Eagle-Picher Industrial Inc., Sr. Sub. Notes, 9.375%
due 3/1/08 1,104,000
Fisher Scientific International, Sr. Sub. Notes:
3,710,000 B- 9.000% due 2/1/08 3,710,000
895,000 B- 9.000% due 2/1/08+ 895,000
3,375,000 B3* Interlake Corp., Sr. Sub. Notes, 12.125% due 3/1/02 3,450,938
8,550,000 B Outboard Marine Corp., Sr. Notes, 10.750% due 6/1/08 8,379,000
4,475,000 B+ Park-Ohio Industries, Sr. Sub. Notes, 9.250% due
12/1/07 4,575,688
- ------------------------------------------------------------------------------------------------
22,114,626
- ------------------------------------------------------------------------------------------------
Diversified/Conglomerate Services -- 1.7%
3,825,000 BB- CIA Latino Americana, Sr. Notes, 11.625% due 6/1/04+ 2,543,625
1,720,000 B Nationsrent Inc., Sr. Sub. Notes, 10.375% due 12/15/08+ 1,720,000
6,675,000 B- Outsourcing Solutions, Sr. Sub. Notes, 11.000% due
11/1/06+ 6,441,375
2,540,000 BB- United Rentals Inc., Sr. Sub. Notes, 9.250% due
1/15/09+ 2,565,400
- ------------------------------------------------------------------------------------------------
13,270,400
- ------------------------------------------------------------------------------------------------
Electric Utilities -- 3.6%
AES Corp., Sr. Sub. Notes:
3,400,000 Ba1* 10.250% due 7/15/06 3,689,000
11,775,000 Ba1* 8.500% due 11/1/07 11,966,344
Calpine Corp., Sr. Notes:
5,675,000 Ba2* 10.500% due 5/15/06 6,086,438
5,400,000 Ba2* 8.750% due 7/15/07 5,670,000
628,428 BB Midland Cogeneration Venture Limited Partnership,
Midland Funding, Debentures, Sr. Secured Lease
Obligation Bond, Series C, 10.330% due 7/23/02 675,560
950,000 BB- Niagara Mohawk Power, Sr. Discount Notes, step bond to
yield 8.229% due 7/1/10 729,125
- ------------------------------------------------------------------------------------------------
28,816,467
- ------------------------------------------------------------------------------------------------
Electronics/Computers -- 6.7%
3,100,000 B3* Axiohm Transaction Solutions, Sr. Sub. Notes, 9.750%
due 10/1/07 2,890,750
4,051,000 B+ Celestica International, Sr. Sub. Notes, 10.500% due
12/31/06 4,435,845
6,510,000 B Fairchild Semiconductor Corp., Sr. Sub. Notes, 10.125%
due 3/15/07 6,510,000
Unisys Corp., Sr. Notes:
10,875,000 BB- 12.000% due 4/15/03 12,207,187
14,550,000 BB- 11.750% due 10/15/04 16,914,375
11,575,000 B- Viasystems Inc., Sr. Sub. Notes, 9.750% due 6/1/07 10,996,250
- ------------------------------------------------------------------------------------------------
53,954,407
- ------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 7
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT++ RATING(a) SECURITY VALUE
================================================================================================
<S> <C> <C>
Finance Companies/Consumer Credit -- 1.6%
Amresco Inc., Sr. Sub. Notes:
$ 750,000 CCC+ 10.000% due 3/15/04 $ 536,250
1,890,000 CCC+ 9.875% due 3/15/05 1,351,350
4,000,000 NR Ocwen Asset Investment, Sr. Notes, 11.500% due 7/1/05+ 3,200,000
5,500,000 B2* Ocwen Capital Trust, Notes, 10.875% due 8/1/27 4,565,000
3,400,000 BB- Ocwen Financial Corp., Sr. Notes, 11.875% due 10/1/03 3,060,000
- ------------------------------------------------------------------------------------------------
12,712,600
- ------------------------------------------------------------------------------------------------
Food -- 3.0%
4,575,000 B- B&G Foods Inc., Sr. Sub. Notes, 9.625% due 8/1/07 4,494,937
6,615,000 NR Carrols Corp., Sr. Notes, 9.500% due 12/1/08+ 6,747,300
7,075,000 B Imperial Holly Corp., Sr. Sub. Notes, 9.750% due
12/15/07 7,004,250
5,640,000 B SC International Services Inc., Sr. Sub. Notes, 9.250%
due 9/1/07 5,668,200
- ------------------------------------------------------------------------------------------------
23,914,687
- ------------------------------------------------------------------------------------------------
Health care/Drugs/Hospital Supplies -- 8.3%
Columbia/HCA Healthcare, Notes:
5,000,000 BBB 7.000% due 7/1/07 4,768,750
1,000,000 BBB 7.250% due 5/20/08 965,000
1,000,000 BBB 8.700% due 2/10/10 1,056,250
2,000,000 BBB 6.630% due 7/15/45 1,955,000
3,850,000 Ba3* Fresenius Medical Capital Trust, Company Guaranteed,
7.875% due 2/1/08 3,830,750
4,725,000 BBB+ Graphic Controls Corp., Sr. Sub. Notes, 12.000% due
9/15/05 5,445,562
11,250,000 BB ICN Pharmaceuticals Inc., Sr. Notes, 9.250% due 8/15/05 11,559,375
Integrated Health Services Inc., Sr. Sub. Notes:
3,950,000 B2* 9.500% due 9/15/07 3,772,250
1,585,000 B2* 9.250% due 1/15/08 1,509,712
18,450,000 B- Magellan Health Services, Sr. Sub. Notes, 9.000% due
2/15/08 16,512,750
8,625,000 B- Mariner Post-Acute Network, Sr. Sub. Notes, 9.500% due
11/1/07 6,986,250
Sun Healthcare Group Inc., Sr. Sub. Notes:
4,200,000 B2* 9.500% due 7/1/07 3,402,000
5,400,000 B2* 9.375% due 5/1/08+ 4,347,000
- ------------------------------------------------------------------------------------------------
66,110,649
- ------------------------------------------------------------------------------------------------
Hotel, Casinos and Gaming -- 4.8%
355,000 BB+ Circus Circus Enterprises, Sr. Sub. Notes, 9.250% due
12/1/05 363,431
5,375,000 B- Courtyard by Marriott, Sr. Secured Notes, 10.750% due
2/1/08 5,590,000
6,900,000 BB Grand Casinos, First Mortgage, 10.125% due 12/1/03 7,521,000
</TABLE>
See Notes to Financial Statements.
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8 1998 Quarterly Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT++ RATING(a) SECURITY VALUE
================================================================================================
<S> <C> <C>
Hotel, Casinos and Gaming -- 4.8% (continued)
HMH Properties:
$ 4,105,000 BB Company Guaranteed Notes, 7.875% due 8/1/08 $ 4,007,506
6,280,000 BB Sr. Notes, 8.450% due 12/1/08 6,303,550
4,080,000 BB+ Harrahs Operating Inc., Company Guaranteed Notes,
7.875% due 12/15/05 4,100,400
5,125,000 BB+ Mohegan Tribal Gaming Authority, Sr. Secured Notes,
13.500% due 11/15/02 6,175,625
3,450,000 BB+ Park Place Entertainment, Sr. Sub. Notes, 7.875% due
12/15/05+ 3,458,625
1,250,000 B+ Station Casinos, Sr. Sub. Notes, 8.875% due 12/1/08+ 1,259,375
- ------------------------------------------------------------------------------------------------
38,779,512
- ------------------------------------------------------------------------------------------------
Insurance Companies -- 1.0%
5,500,000 BB+ SIG Capital Trust, Notes, 9.500% due 8/15/27 4,578,750
4,175,000 NR Veritas Capital Trust, Trust Certificates, 10.000%
due 1/1/28 3,809,687
- ------------------------------------------------------------------------------------------------
8,388,437
- ------------------------------------------------------------------------------------------------
Leisure/Amusement/Motion Pictures -- 2.0%
1,285,000 B+ Intrawest Corp., Sr. Notes, 9.750% due 8/15/08+ 1,313,912
6,085,000 B Regal Cinemas Inc., Sr. Sub. Notes, 9.500% due 6/1/08+ 6,343,612
8,625,000 B- SFX Entertainment Inc., Sr. Sub. Notes, 9.125% due
2/1/08 8,603,438
- ------------------------------------------------------------------------------------------------
16,260,962
- ------------------------------------------------------------------------------------------------
Machinery -- 0.5%
3,812,000 B- Alvey Systems Inc., Sr. Sub. Notes, 11.375% due 1/31/03 3,840,590
- ------------------------------------------------------------------------------------------------
Metals/Mining -- 0.6%
5,050,000 B- Haynes International Inc., Sr. Notes, 11.625% due
9/1/04 4,709,125
- ------------------------------------------------------------------------------------------------
Miscellaneous -- 0.6%
4,950,000 B Intertek Finance PLC, Company Guaranteed Notes,
10.250% due 11/1/06 4,603,500
- ------------------------------------------------------------------------------------------------
Oil/Natural Gas -- 2.6%
2,375,000 B Canadian Forest Oil Ltd., Sr. Sub. Notes, 8.750% due
9/15/07 2,167,187
6,350,000 B+ Clark USA Inc., Sr. Notes, 10.875% due 12/1/05 5,969,000
Ocean Energy:
3,600,000 BB- Sr. Sub. Debentures, 9.750% due 10/1/06 3,726,000
5,425,000 BB- Sr. Sub. Notes, 10.375% due 10/15/05 5,750,500
3,200,000 B2* Stone Energy Corp., Sr. Sub. Notes, 8.750% due 9/15/07 3,144,000
- ------------------------------------------------------------------------------------------------
20,756,687
- ------------------------------------------------------------------------------------------------
Oil Services -- 0.6%
3,600,000 B+ ICO Inc., Sr. Notes, 10.375% due 6/1/07 3,384,000
1,520,000 BB+ J. Ray McDermott SA, Sr. Sub. Notes, 9.375% due 7/15/06 1,618,800
- ------------------------------------------------------------------------------------------------
5,002,800
- ------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 9
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT++ RATING(a) SECURITY VALUE
================================================================================================
<S> <C> <C>
Packaging and Containers -- 1.1%
$ 3,250,000 B Huntsman Packaging Corp., Sr. Sub. Notes, 9.125% due
10/1/07 $ 3,233,750
5,125,000DEM B Impress Metal Packaging, Sr. Sub. Notes, 9.875% due
5/29/07 3,384,666
1,900,000 B- Tekni-Plex, Inc., Sr. Sub. Notes, 9.250% due 3/1/08 1,997,375
- ------------------------------------------------------------------------------------------------
8,615,791
- ------------------------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 1.9%
4,900,000 BB Mallette Inc., Sr. Notes, 12.250% due 7/15/04 5,328,750
Riverwood International Corp., Company Guaranteed:
3,945,000 CCC+ 10.625% due 8/1/07 3,945,000
1,065,000 B- 10.875% due 4/1/08 974,475
4,915,000 B+ SD Warren Corp., Sr. Sub. Notes, 12.000% due 12/15/04 5,357,350
- ------------------------------------------------------------------------------------------------
15,605,575
- ------------------------------------------------------------------------------------------------
Personal Care Products/Cosmetics -- 0.7%
6,450,000 B- Revlon Consumer Products, Sr. Sub. Notes, 8.625% due
2/1/08 5,934,000
- ------------------------------------------------------------------------------------------------
Pollution Control/Waste Removal -- 0.4%
3,100,000 BB Allied Waste North America, Sr. Sub. Notes, 7.875%
due 1/1/09+ 3,150,375
- ------------------------------------------------------------------------------------------------
Publishing -- 1.2%
3,125,000 B+ Mail-Well Corp., Sr. Sub. Notes, 8.750% due 12/15/08+ 3,140,625
4,100,000(GBP) B Middleweb PLC, Sr. Notes, 10.500% due 5/30/08 6,207,676
- ------------------------------------------------------------------------------------------------
9,348,301
- ------------------------------------------------------------------------------------------------
Real Estate Development/REITS -- 0.4%
3,100,000 BB+ Trizec Finance, Sr. Notes, 10.875% due 10/15/05 3,425,500
- ------------------------------------------------------------------------------------------------
Retail -- 1.4%
4,500,000 NR Advance Holdings Corp., Sr. Discount Notes, step bond
to yield 12.765% due 4/15/09 2,655,000
5,600,000 B- Advance Stores Co. Inc., Sr. Sub. Notes,
10.250% due 4/15/08 5,684,000
2,930,000 BB DR Structured Finance Co., Pass through Certificates,
8.375% due 8/15/05 2,879,604
- ------------------------------------------------------------------------------------------------
11,218,604
- ------------------------------------------------------------------------------------------------
Telecommunications -- 15.7%
Colt Telecommunications Group PLC, Sr. Notes:
1,390,000(DEM) B 8.875% due 11/30/07 834,534
400,000(GBP) B 10.125% due 11/30/07 672,179
12,745,000(DEM) B 7.625% due 7/31/08 7,345,821
E.Spire Communications, Sr. Notes:
700,000 NR 13.750% due 7/15/07 728,000
14,450,000 NR Step bond to yield 10.991% due 7/1/08 6,069,000
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
10 1998 Quarterly Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT++ RATING(a) SECURITY VALUE
================================================================================================
<S> <C> <C>
Telecommunications -- 15.7% (continued)
Esprit Telecommunications Group, Sr. Notes:
$ 3,900,000 B- 11.500% due 12/15/07 $ 4,021,875
4,000,000(DEM) B- 11.500% due 12/15/07 2,425,552
2,250,000 B- 10.875% due 6/15/08 2,275,312
6,575,000 NR Facilicom International Inc., Sr. Notes, 10.500% due
1/15/08 5,391,500
Hermes Europe Railtel Intelcom, Sr. Notes:
6,850,000 B 11.500% due 8/15/07 7,380,875
2,050,000 B 10.375% due 1/15/09+ 2,080,750
Impsat Corp., Sr. Notes:
1,250,000 BB- 12.125% due 7/15/03 1,118,750
2,200,000 B 12.375% due 6/15/08 1,845,250
10,225,000 B Intermedia Communications Inc., Sr. Discount Unsecured
Notes, step bond to yield 11.961% due 5/15/06 8,384,500
960,000 B Level 3 Communications, Sr. Notes, 9.125% due 5/1/08 955,200
4,635,000 B Metromedia Fiber Network, Sr. Notes, 10.000% due
11/15/08+ 4,803,019
Metronet Communications:
19,375,000 B Sr. Discount Notes, step bond to yield 10.038% due
6/15/08 11,964,063
Sr. Notes:
10,225,000 B 12.000% due 8/15/07 11,400,875
3,030,000 B 10.625% due 11/1/08+ 3,242,100
10,000,000 B Nextlink Communications, Sr. Notes, 12.500% due 4/15/06 10,925,000
8,600,000 B- Primus Telecom Group, Sr. Notes, 11.750% due 8/1/04 9,030,000
Psinet Inc., Sr. Notes:
7,000,000 B- 10.000% due 2/15/05 6,930,000
3,800,000 B- 11.500% due 11/1/08+ 3,952,000
6,975,000 NR Splitrock Services, Company Guaranteed, 11.750% due
7/15/08 6,033,375
2,710,000 B- Verio Inc., Sr. Notes, 11.250% due 12/1/08+ 2,737,100
625,000 NR Versatel Telecommunications, Sr. Notes, 13.250% due
5/15/08 620,313
4,650,000 NR WAM!Net Inc., Sr. Discount Notes, step bond to yield
13.004% due 3/1/05 2,580,750
- ------------------------------------------------------------------------------------------------
125,747,693
- ------------------------------------------------------------------------------------------------
Textiles/Apparel -- 0.5%
9,050,000(DEM) B Texon International, Sr. Notes, 10.000% due 2/1/08 4,238,112
- ------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 11
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT++ RATING(a) SECURITY VALUE
================================================================================================
<S> <C> <C>
Transportation/Trucking -- 1.2%
$ 1,650,000 B+ American Reefer Co. Ltd., First Mortgage, 10.250% due
3/1/08 $ 1,047,750
3,315,000 BB- Sea Containers Ltd., Sr. Sub. Debentures, 12.500% due
12/1/04 3,646,500
3,950,000 B+ Stena Line AB, Sr. Notes, 10.625% due 6/1/08 3,579,688
2,400,000 B+ TBS Shipping International Ltd, First Mortgage,
10.000% due 5/1/05 1,392,000
- ------------------------------------------------------------------------------------------------
9,665,938
- ------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost-- $800,685,923) 775,684,068
================================================================================================
SHARES SECURITY VALUE
================================================================================================
PREFERRED STOCK -- 1.1%
Banks/Savings and Loans -- 0.3%
108,000 California Federal, Series A, Exchangeable 9.125% 2,733,750
- ------------------------------------------------------------------------------------------------
Broadcasting-TV, Cable and Radio -- 0.6%
35,000 SFX Broadcasting, Exchangeable 12.625% 4,340,000
- ------------------------------------------------------------------------------------------------
Electronics/Computers -- 0.1%
63,722 Viasystems Inc. 955,829
- ------------------------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 0.1%
14,000 SD Warren, Series B, Exchangeable 14.000% 721,000
- ------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost -- $8,736,351) 8,750,579
================================================================================================
COMMON STOCK -- 0.0%
================================================================================================
Cellular and Other Wireless -- 0.0%
20,125 Pagemart Nationwide Inc.+ (Cost -- $0) 100,625
================================================================================================
WARRANTS -- 0.7%
================================================================================================
Broadcasting-TV, Cable and Radio -- 0.0%
14,825 United International Holdings Australia Inc., Expire
5/15/06 14,825
5,700 Wireless One, Inc., Expire 10/15/03 1,425
- ------------------------------------------------------------------------------------------------
16,250
- ------------------------------------------------------------------------------------------------
Cellular and Other Wireless -- 0.2%
55,110 Clearnet Communications Inc., Expire 9/15/05 275,550
7,500 Globalstar LP, Expire 2/15/04+ 525,000
6,725 Iridium LLC Corp., Expire 7/15/05+ 934,641
6,575 Nextel Communications, Inc., Expire 4/25/99+ 66
43,470 Pagemart Inc., Expire 12/31/03+ 173,880
- ------------------------------------------------------------------------------------------------
1,909,137
- ------------------------------------------------------------------------------------------------
Paper/Forest Products/Printing -- 0.0%
8,175 SD Warren Corp., Expire 12/5/06+ 143,880
- ------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 1998 Quarterly Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Schedule of Investments (unaudited) (continued) December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
FACE
AMOUNT++ RATING(a) SECURITY VALUE
================================================================================================
<S> <C> <C>
Telecommunications -- 0.5%
7,800 Allegiance Telecommunications Inc., Expire 2/3/08 $ 85,800
8,000 Colt Telecommunications Group PLC, Expire 12/31/06+ 2,800,000
102,250 Metronet Communications, Expire 8/15/07 357,875
7,600 Primus Telecomm Group, Expire 8/1/04 37,050
6,975 RSL Communications Ltd., Expire 11/15/06 272,025
6,975 Splitrock Service Inc., Expire 7/15/08+ 76,725
625 Versatel Telecom Inc., Expire 5/15/08+ 6,250
13,950 WAM!Net Inc., Expire 3/1/05+ 111,600
- ------------------------------------------------------------------------------------------------
3,747,325
- ------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost -- $2,576,034) 5,816,592
================================================================================================
FACE
AMOUNT SECURITY VALUE
================================================================================================
REPURCHASE AGREEMENT -- 1.4%
$11,261,000 Morgan Stanley Dean Witter & Co., 4.650% due 1/4/99;
Proceeds at maturity -- $11,266,818; (Fully
collateralized by U.S. Treasury Notes, 6.000% to
6.500% due 7/15/99 to 8/15/27; Market value
--$11,538,712) (Cost -- $11,261,000) 11,261,000
================================================================================================
TOTAL INVESTMENTS -- 100%
(Cost -- $823,259,308**) $801,612,864
================================================================================================
</TABLE>
(a) All ratings are by Standard & Poor's Ratings Service except that those
identified by an asterisk (*) are rated by Moody's Investors Service, Inc.
+ 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.
++ Face amount denominated in U.S. dollars unless otherwise indicated.
# Non-income producing security.
** Aggregate cost for Federal income tax purposes is substantially the same.
Currency Abbreviations:
GBP -- British Pound
ECU -- European Currency Unit
DEM -- German Mark
See page 14 for definition of ratings.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 13
<PAGE>
- --------------------------------------------------------------------------------
Bond Ratings (unaudited)
- --------------------------------------------------------------------------------
The definitions of the applicable rating symbols are set forth below:
Standard & Poor's Ratings Service ("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", 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 Investors Service, Inc. ("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.
- --------------------------------------------------------------------------------
14 1998 Quarterly Report to Shareholders
<PAGE>
- -------------------------------------------------------------------
Statement of Assets and Liabilities December 31, 1998
- -------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $823,259,308) $801,612,864
Cash 28
Interest receivable 16,769,517
Receivable for closed forward foreign currency
contracts 7,547
- ------------------------------------------------------------------
Total Assets 818,389,956
- ------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 2,050,000
Dividends payable 1,659,371
Management fees payable 795,475
Payable for open forward foreign currency contracts
(Note 8) 488,145
Accrued expenses 113,424
- ------------------------------------------------------------------
Total Liabilities 5,106,415
- ------------------------------------------------------------------
Total Net Assets $813,283,541
==================================================================
NET ASSETS:
Par value of capital shares $ 72,230
Capital paid in excess of par value 899,768,919
Overdistributed net investment income (2,056,595)
Accumulated net realized loss on security
transactions (62,377,140)
Net unrealized depreciation of investments
and foreign currencies (22,123,873)
- -------------------------------------------------------------------
Total Net Assets
(Equivalent to $11.26 a share on 72,230,352 shares
of $0.001 par value outstanding; 500,000,000
shares authorized) $813,283,541
- ------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 15
<PAGE>
- --------------------------------------------------------------------------------
Statement of Operations (unaudited) For the Three Months Ended December 31, 1998
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $21,560,085
Dividends 61,593
- ------------------------------------------------------------------
Total Investment Income 21,621,678
- ------------------------------------------------------------------
EXPENSES:
Management fees (Note 2) 2,322,312
Shareholder communication fees 60,493
Custody fees 13,611
Shareholder and system servicing fees 9,578
Audit and legal 7,360
Director fees 2,773
Other 15,124
- ------------------------------------------------------------------
Total Expenses 2,431,251
- ------------------------------------------------------------------
Net Investment Income 19,190,427
- ------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS AND FOREIGN CURRENCIES
(NOTES 3 AND 8):
Realized Loss From:
Securities transactions
(excluding short-term securities) (4,635,156)
Foreign currency transactions (646,561)
- ------------------------------------------------------------------
Net Realized Loss (5,281,717)
- ------------------------------------------------------------------
Change in Net Unrealized Depreciation
of Investments and Foreign Currencies:
Beginning of period (28,844,872)
End of period (22,123,873)
- ------------------------------------------------------------------
Decrease in Net Unrealized Depreciation 6,720,999
- ------------------------------------------------------------------
Net Gain on Investments and Foreign Currencies 1,439,282
- ------------------------------------------------------------------
Increase in Net Assets From Operations $20,629,709
- ------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 1998 Quarterly Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Three Months Ended December 31, 1998 (unaudited)
and the Year Ended September 30, 1998
<TABLE>
<CAPTION>
December 31 September 30
=======================================================================================================
<S> <C> <C>
OPERATIONS:
Net investment income $ 19,190,427 $ 77,058,960
Net realized gain (loss) (5,281,717) 4,505,920
Decrease (increase) in net unrealized depreciation 6,720,999 (85,807,339)
- -------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations 20,629,709 (4,242,459)
- -------------------------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (19,266,481) (81,031,027)
- -------------------------------------------------------------------------------------------------------
Decrease in Net Assets From Distributions to Shareholders (19,266,481) (81,031,027)
- -------------------------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 9):
Net asset value of shares issued for reinvestment of dividends 2,293,455 12,211,727
- -------------------------------------------------------------------------------------------------------
Increase in Net Assets From Fund Share Transactions 2,293,455 12,211,727
- -------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 3,656,683 (73,061,759)
NET ASSETS:
Beginning of period 809,626,858 882,688,617
- -------------------------------------------------------------------------------------------------------
End of period* $ 813,283,541 $ 809,626,858
=======================================================================================================
* Includes overdistributed net investment income of: $ (2,056,595) $ (1,966,392)
=======================================================================================================
</TABLE>
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 17
<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, 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
- --------------------------------------------------------------------------------
18 1998 Quarterly Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
statements are prepared. Changes in the economic environment, financial markets
and any other parameters used in determining these estimates could cause actual
results to differ.
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 three months ended December 31, 1998, the aggregate cost of purchases
and proceeds from sales of investments (including maturities, but excluding
short-term securities) were as follows:
================================================================================
Purchases $159,537,492
- --------------------------------------------------------------------------------
Sales 175,715,089
================================================================================
At December 31, 1998, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were substantially
as follows:
================================================================================
Gross unrealized appreciation $ 24,340,298
Gross unrealized depreciation (45,986,742)
- --------------------------------------------------------------------------------
Net unrealized depreciation $(21,646,444)
================================================================================
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
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 19
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (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 December 31, 1998, the Fund did not have any 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 December 31, 1998, the Fund did not have any open purchased call or put
option contracts.
- --------------------------------------------------------------------------------
20 1998 Quarterly Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
When the Fund writes a call or put option, an amount equal to the premium
received by the Fund is recorded as a liability, the value of which is
marked-to-market daily. When a written option expires, the Fund realizes a gain
equal to the amount of the premium received. When the Fund enters into a closing
purchase transaction, the Fund realizes a gain or loss depending upon whether
the cost of the closing transaction is greater or less than the premium
received, without regard to any unrealized gain or loss on the underlying
security, and the liability related to such option is eliminated. When a written
call option is exercised, the cost of the security sold will be decreased by the
premium originally received. When a written put option is exercised, the amount
of the premium originally received will reduce the cost of the security which
the Fund purchased upon exercise. When written index options are exercised,
settlement is made in cash.
The risk associated with purchasing options is limited to the premium originally
paid. The Fund enters into options for hedging purposes. The risk in writing a
covered call option is that the Fund gives up the opportunity to participate in
any increase in the price of the underlying security beyond the exercise price.
The risk in writing a put option is that the Fund is exposed to the risk of loss
if the market price of the underlying security declines.
During the three months ended December 31, 1998, the Fund did not write 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.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 21
<PAGE>
- --------------------------------------------------------------------------------
Notes to Financial Statements (unaudited) (continued)
- --------------------------------------------------------------------------------
8. Forward Foreign Currency Contracts
At December 31, 1998, the Fund had open forward foreign currency contracts as
described below. The Fund bears the market risk that arises from changes in
foreign currency exchange rates. The unrealized loss on the contracts is
reflected as follows:
Local Market Settlement Unrealized
Foreign Currency Currency Value Date Loss
================================================================================
To Sell:
British Pound 449,450 $ 746,454 2/25/99 $ (390,049)
European Currency Unit 3,165,060 3,727,903 3/1/99 (4,931)
German Mark 10,527,132 6,329,528 1/28/99 (6,917)
German Mark 4,039,667 2,432,907 3/3/99 (9,571)
German Mark 5,667,147 3,413,064 3/3/99 (58,332)
German Mark 7,840,819 4,722,168 3/3/99 (18,345)
================================================================================
Total Unrealized Loss on Open
Forward Foreign Currency Contracts $(488,145)
================================================================================
9. Capital Shares
Capital stock transactions were as follows:
Three Months Ended Year Ended
December 31, 1998 September 30, 1998
-------------------- ------------------------
Shares Amount Shares Amount
================================================================================
Shares issued on
dividend reinvestment 213,742 $2,293,455 995,988 $12,211,727
================================================================================
- --------------------------------------------------------------------------------
22 1998 Quarterly Report to Shareholders
<PAGE>
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each year ended September
30, except where noted:
<TABLE>
<CAPTION>
1998(1) 1998 1997 1996 1995 1994(2)(3)
=========================================================================================================
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period $11.24 $12.43 $11.72 $11.48 $11.20 $12.50
- ---------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income 0.27 1.08 1.15 1.14 1.14 1.01*
Net realized and unrealized
gain (loss) 0.02 (1.14) 0.68 0.22 0.28 (1.30)
- ---------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 0.29 (0.06) 1.83 1.36 1.42 (0.29)
- ---------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.27) (1.13) (1.12) (1.12) (1.12) (1.01)
Capital -- -- -- -- (0.02) --
- ---------------------------------------------------------------------------------------------------------
Total Distributions (0.27) (1.13) (1.12) (1.12) (1.14) (1.01)
- ---------------------------------------------------------------------------------------------------------
Net Asset Value,
End of Period $11.26 $11.24 $12.43 $11.72 $11.48 $11.20
- ---------------------------------------------------------------------------------------------------------
Total Return,
Based on Market Value** (3.82)%++ (1.65)% 18.18% 21.07% 9.90% (7.33)%++
- ---------------------------------------------------------------------------------------------------------
Total Return,
Based on Net Asset Value 2.67%++ (0.58)% 16.48% 12.86% 13.99% (2.31)%++
- ---------------------------------------------------------------------------------------------------------
Net Assets,
End of Period (millions) $813 $810 $883 $819 $802 $783
- ---------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.20%+ 1.18% 1.21% 1.21% 1.20% 1.15%+*
Net investment income 9.50+ 8.81 9.63 9.85 10.02 9.09+
- ---------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 20% 98% 87% 73% 59% 69%
- ---------------------------------------------------------------------------------------------------------
Market Value,
End of Period $10.438 $11.125 $12.438 $11.500 $10.500 $10.625
=========================================================================================================
</TABLE>
(1) For the three months ended December 31, 1998 (unaudited).
(2) For the period from October 22, 1993 (commencement of operations) to
September 30, 1994.
(3) Based on the weighted average shares outstanding for the period.
* The Manager waived a part of its fee for the period ended September 30,
1994. If such fees were not waived, the per share decrease in net
investment income and the annualized ratio of expenses to average net
assets would have been $0.01 and 1.21%, respectively.
** 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.
- --------------------------------------------------------------------------------
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
1999
October 27 11.06 10.73 0.0890 10.730
November 23 11.19 11.29 0.0890 11.150
December 21 10.44 11.18 0.0890 10.610
================================================================================
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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 or nominee in additional shares under the Plan, unless the service is
not provided by the broker or nominee or the shareholder elects to receive
distributions in cash. Investors who own common stock registered in street name
should consult their broker-dealers for details regarding reinvestment. All
distributions to 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. When the market
price of the common stock is equal to or exceeds the net asset value ("NAV") per
share of the common stock on the determination date (generally, the record date
for the distribution), the Plan participants will be issued shares of common
stock by the Fund at a price equal to the greater of NAV determined as described
below under NAV or 95% of the market price of the common stock.
If the market price of the common stock is less than the NAV of the common stock
at the time of valuation (which is the close of business on the determination
date), 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 stock
exchange 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 NAV of the common stock as of the valuation time,
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 in shares at
a price equal to the greater of (a) NAV as of the valuation time or (b) 95% of
the then current market price. In this case, the number of shares 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 NAV of the common stock
as of the valuation time, resulting in the acquisition of fewer shares than if
the dividend or capital gains distribution had
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 25
<PAGE>
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited) (continued)
- --------------------------------------------------------------------------------
been paid in common stock issued by the Fund at such net asset value. First Data
will begin to purchase common stock on the open market as soon as practicable
after the determination date for the dividend or capital gains distribution, but
in no event shall such purchases continue later than 30 days after the payment
date for such dividend or distribution, or the record date for a succeeding
dividend or distribution, 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
confirmation 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 the Plan participant.
Plan participants are subject to no charge for reinvesting dividends and capital
gains distribution 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 any brokerage commissions actually 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
1-800-451-2010.
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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>
(This page left intentionally blank.)
<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
Paul A. Brook
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
FD0850 2/99