-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Kf5lVATanZ8IWeB4M/OmBT8DcAWundeh70KKEvtyKxh+zEHW82tDzQjv6feqV3Al 2ogY2rEGIfKVXj5ID1hRzg== 0001133228-02-000252.txt : 20020830 0001133228-02-000252.hdr.sgml : 20020830 20020830132157 ACCESSION NUMBER: 0001133228-02-000252 CONFORMED SUBMISSION TYPE: N-30B-2 PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20020630 FILED AS OF DATE: 20020830 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HIGH INCOME OPPORTUNITY FUND INC CENTRAL INDEX KEY: 0000910068 IRS NUMBER: 133735236 STATE OF INCORPORATION: MD FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: N-30B-2 SEC ACT: 1940 Act SEC FILE NUMBER: 811-07920 FILM NUMBER: 02753912 BUSINESS ADDRESS: STREET 1: 125 BROAD STREET STREET 2: 10TH FLOOR - MF2 CITY: NEW YORK STATE: NY ZIP: 10004 BUSINESS PHONE: 212-291-2556 MAIL ADDRESS: STREET 1: 125 BROAD STREET STREET 2: 10TH FLOOR - MF2 CITY: NEW YORK STATE: NY ZIP: 10004 FORMER COMPANY: FORMER CONFORMED NAME: SMITH BARNEY HIGH INCOME FUND INC DATE OF NAME CHANGE: 19930802 FORMER COMPANY: FORMER CONFORMED NAME: SMITH BARNEY HIGH INCOME OPPORTUNITY FUND INC DATE OF NAME CHANGE: 19930913 N-30B-2 1 sb131809.txt QUARTERLY REPORT HIGH INCOME Opportunity Fund Inc. Quarterly Report June 30, 2002 High Income Opportunity Fund Inc. [PHOTO OMITTED] Heath B. McLendon Chairman Dear Shareholder, We are pleased to provide the nine-month report for the High Income Opportunity Fund Inc. ("Fund") for the period ended June 30, 2002. In this report we summarize what we believe to be the period's prevailing economic conditions and outline our investment strategy. A detailed summary of the Fund's performance can be found in the appropriate sections that follow. We hope you find this report to be useful and informative. Special Shareholder Notice During the period, the Board of Directors of the Fund approved certain changes to the Fund's management policies in connection with Rule 35d-1 under the Investment Company Act of 1940. Under normal conditions, the Fund will invest at least 80% of its net assets for investment purposes in high-yielding corporate debt securities and preferred stocks. Previously, the Fund's management policies stated that the Fund would invest at least 65% of its assets in such securities. Performance Update During the past nine months, the Fund distributed income dividends to shareholders totaling $0.58 per share. The table on page 2 shows the annualized distribution rate and nine-month total return based on the Fund's June 30, 2002 net asset value ("NAV") per share and its New York Stock Exchange ("NYSE") closing price.(1) - ---------- (1) The NAV is calculated by subtracting total liabilities from the closing value of all securities held by the Fund (plus all other assets) and dividing the result (total net assets) by the total number of the Fund's shares outstanding. The NAV fluctuates with the changes in the market price of the securities in which the Fund has invested. However, the price at which an investor may buy or sell shares of the Fund is at their market (NYSE) price as determined by supply of and demand for the Fund's shares. - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 1 Price Annualized Nine-Month Per Share Distribution Rate(2) Total Return(2) --------- -------------------- --------------- $6.56 (NAV) 10.43% (0.52)% $6.16 (NYSE) 11.10% (8.38)% In comparison, the Lipper Inc. ("Lipper")(3) peer group, the high-current-yield closed-end funds category, returned negative 1.44% for the same period. Investment Strategy The Fund seeks a high current income. Capital appreciation is a secondary objective. Market Overview At the beginning of the period, the U.S. Federal Reserve Board ("Fed") continued its aggressive easing campaign. By December 2001, short-term interest rates had been lowered to a 40-year low of 1.75%. Encouraged by evidence that the economy was recovering, the Fed has kept the federal funds rate steady since then. As reports on the economy through the first quarter of 2002 indicated that stronger growth was occurring. High-yield bonds were buoyed by the improvement in investor sentiment, increasing strength in the equity markets, and evidence of economic growth. The high-yield market gained in April due to encouraging economic data and strong mutual fund inflows. However, just as the overall market began to embrace the idea of an economic turnaround at the start of 2002, a new bout of investor risk aversion took hold in response to questionable corporate accounting practices and credit concerns. Disclosure of off-balance sheet debt at Adelphia Communications limited the high-yield market's performance. Additional findings of accounting irregularities at Adelphia, poor first quarter results and concerns about slowing subscriber growth in the wireless telecommunications sector, the downgrading of Worldcom and Qwest to below - ---------- (2) Total returns are based on changes in NAV or the market price, respectively. Total returns assume the reinvestment of all dividends and/or capital gains distributions in additional shares. Annualized distribution rate is the Fund's current monthly income dividend rate, annualized, and then divided by the NAV or the market price noted in this report. This annualized distribution rate assumes a current monthly income dividend rate of $0.057 for 12 months. This rate is as of June 30, 2002 and is subject to change. The important difference between a total return and an annualized distribution rate is that the total return takes into consideration a number of factors including the fluctuation of the NAV or the market price during the period reported. The NAV fluctuation includes the effects of unrealized appreciation or depreciation in the Fund. Accordingly, since an annualized distribution rate only reflects the current monthly income dividend rate annualized, it should not be used as the sole indicator to judge the return you receive from your Fund investment. Past performance is not indicative of future results. (3) Lipper is an independent mutual-fund tracking organization. Average annual returns are based on the nine months ended June 30, 2002, calculated among 7 funds in the high-current-yield closed-end funds category. - -------------------------------------------------------------------------------- 2 2002 Quarterly Report to Shareholders investment-grade and concerns about accounting improprieties resulted in a decline of the Salomon Smith Barney High-Yield Market Index(4) in May. In June, Worldcom's disclosure that it improperly accounted for $3.8 billion of expenses significantly damaged already weakened confidence in corporate earnings, causing investors to shun sectors with more complex financials. In addition, weak equity markets, negative mutual fund flows, and increased economic uncertainty contributed to a negative return in June. As if heightened economic and accounting uncertainties were not enough to pressure equity prices downward, global political development, including escalation of tensions between India and Pakistan and between the Israelis and the Palestinians created yet more market uncertainty. Unnerved by this insecurity, many investors flocked to higher-rated securities. Activity in the new issue market increased significantly from the first quarter as companies looked to take advantage of a receptive high-yield market and the low interest rate environment. As the market experienced volatility in May and June, investors became more selective in the new issue market, with better quality issuers rewarded and weaker credits struggling to complete transactions. Market and Fund Outlook Although the stock market has continued to be volatile, recent economic data has been generally positive, indicating that the economy is improving. We believe that a higher rate of productivity growth has laid the foundation for a short and shallow recession. The deep tax and interest-rate cuts of last year and effects of meaningful cuts in corporate inventories led to robust growth during the first calendar quarter. However, we believe that growth in the second half of 2002 will be more moderate. Consumer spending should remain solid, while improving corporate profits and economic activity should help business investment recover moderately later in the year. We expect inflation will continue to remain low. Going forward, although we believe valuations in the high-yield market continue to appear attractive, we remain somewhat cautious as we believe that several factors, including: (i) high global default rates and credit-rating downgrades, (ii) disappointing corporate profitability, (iii) the magnitude and timing of a global economic rally, (iv) reduced secondary-market liquidity, (v) the potential for the Fed interest-rate hikes, (vi) further accounting scares and (vii) continued equity-market volatility could dampen positive momentum. - ---------- (4) Salomon Smith Barney High-Yield Market Index is a broad-based unmanaged index of high-yield securities. Please note that an investor cannot invest directly in an index. - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 3 Subsequent to the end of the reporting period, the Fund's portfolio management team changed. Going forward, Peter J. Wilby and Beth A. Semmel will co-manage the Fund. Mr. Wilby is a senior portfolio manager responsible for directing investment policy and strategy for emerging markets and high-yield fixed-income portfolios. He has over 20 years of investment experience. Ms. Semmel is a senior portfolio manager and senior trader for high-yield portfolios. She also has over 20 years of investment experience. Mr. Wilby and Ms. Semmel currently manage high-yield portfolios for an affiliate of Smith Barney Fund Management LLC. Should you have any questions about the High Income Opportunity Fund Inc., please call PFPC Global Fund Services at (800) 331-1710. Thank you for your continued confidence in our investment approach. We look forward to continuing to help you meet your investment objectives. Sincerely, /s/ Heath B. McLendon Heath B. McLendon Chairman July 12, 2002 The information provided in this letter represents the opinion of the Fund's portfolio manager and is not intended to be a forecast of future events, a guarantee of future results nor investment advice. Further, there is no assurance that certain securities will remain in or out of the Fund or the percentage of the Fund's assets in various sections. Please refer to pages 6 through 23 for a list and percentage breakdown of the Fund's holdings. Also, please note that any discussion of the Fund's holdings is as of June 30, 2002 and is subject to change. - -------------------------------------------------------------------------------- 4 2002 Quarterly Report to Shareholders - -------------------------------------------------------------------------------- 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, PFPC Global Fund Services ("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. A more complete description of the current Plan appears in the section of this report beginning on page 35. To find out more detailed information about the Plan and about how you can participate, please call PFPC Global Fund Services at (800) 331-1710. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 5 - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) June 30, 2002 - --------------------------------------------------------------------------------
FACE AMOUNT+ RATING(a) SECURITY VALUE ================================================================================================= CORPORATE BONDS AND NOTES -- 94.4% Advertising/Marketing -- 0.2% 905,000 BB+ Ackerley Group Inc., Sr. Sub. Notes, Series B, 9.000% due 1/15/09 $ 1,019,256 - ------------------------------------------------------------------------------------------------- Aerospace and Defense -- 1.0% 175,000 B- Argo-Tech Corp., Company Guaranteed, 8.625% due 10/1/07 154,875 BE Aerospace, Inc., Sr. Sub. Notes, Series B: 1,375,000 B 8.000% due 3/1/08 1,271,875 950,000 B 8.875% due 5/1/11 888,250 1,600,000 B- Dunlop Standard Aerospace Holdings, Sr. Notes, 11.875% due 5/15/09 1,696,000 525,000 B- Transdigm Inc., Sr. Sub. Notes, 10.375% due 12/1/08 (b) 540,750 - ------------------------------------------------------------------------------------------------- 4,551,750 - ------------------------------------------------------------------------------------------------- Airlines -- 2.5% 2,000,000 B Air Canada, Sr. Notes, 10.250% due 3/15/11 1,575,000 9,956,016 B2* Airplanes Pass-Through Trust, Series D, Company Guaranteed, 10.875% due 3/15/12 746,701 Continental Airlines, Inc., Pass-Through Certificates: 1,555,000 BBB- Series 99-2, 7.434% due 9/15/04 1,437,714 666,127 BBB- Series 00-2, 8.312% due 4/2/11 625,554 2,380,000 BB Series D, 7.568% due 12/1/06 2,173,984 United Air Lines, Pass-Through Certificates: 973,920 BBB Series 00-1, 8.030% due 7/1/11 850,792 2,268,135 BBB+ Series 00-2, 7.811% due 10/1/09 1,980,456 Series 01-1: 1,045,000 BB+ 6.831% due 9/1/08 804,615 460,000 BBB+ 6.932% due 9/1/11 366,202 952,965 A- US Airways, Pass-Through Trust, Series 99-1, 8.360% due 1/20/19++ 912,547 - ------------------------------------------------------------------------------------------------- 11,473,565 - ------------------------------------------------------------------------------------------------- Alternative Power Generation -- 2.3% The AES Corp.: 3,455,000 BB- Sr. Notes, 9.500% due 6/1/09 2,297,575 1,300,000 B Sr. Sub. Notes, 10.250% due 7/15/06 682,500 Calpine Corp.: 3,920,000 B+ Company Guaranteed, 8.500% due 5/1/08 2,704,800 Sr. Notes: 870,000 B+ 8.750% due 7/15/07 613,350 6,590,000 B+ 8.625% due 8/15/10 4,316,450 - ------------------------------------------------------------------------------------------------- 10,614,675 - ------------------------------------------------------------------------------------------------- Apparel/Footwear -- 1.3% Levi Strauss Co.: 955,000 BB- Notes, 7.000% due 11/1/06 797,425 750,000 BB- Sr. Notes, 11.625% due 1/15/08 716,250
See Notes to Financial Statements. - -------------------------------------------------------------------------------- 6 2002 Quarterly Report to Shareholders - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) (continued) June 30, 2002 - --------------------------------------------------------------------------------
FACE AMOUNT+ RATING(a) SECURITY VALUE ================================================================================================= Apparel/Footwear -- 1.3% (continued) 525,000 BB Russell Corp., Sr. Notes, 9.250% due 5/1/10 (b) $ 543,375 1,060,000 BBB- Tommy Hilfiger USA Inc., Company Guaranteed, 6.500% due 6/1/03 1,067,388 1,360,000 B- Tropical Sportswear International Corp., Series A, Company Guaranteed, 11.000% due 6/15/08 1,441,600 1,195,000 B- William Carter, Series B, Company Guaranteed, 10.875% due 8/15/11 1,314,500 - ------------------------------------------------------------------------------------------------- 5,880,538 - ------------------------------------------------------------------------------------------------- Apparel/Footwear Retail -- 0.5% 525,000 BB+ The Gap Inc., Notes, step bond to yield 8.150% due 12/15/05 537,531 1,745,000 CCC J Crew Operating Corp., Sr. Sub. Notes, 10.375% due 10/15/07 1,518,150 - ------------------------------------------------------------------------------------------------- 2,055,681 - ------------------------------------------------------------------------------------------------- Auto Parts: O.E.M. -- 2.1% 350,000 Ba3* American Axle & Manufacturing Inc., Company Guaranteed, 9.750% due 3/1/09 372,750 695,000 Ba1* Arvin Capital I, Company Guaranteed, 9.500% due 2/1/27 692,279 Collins & Aikman Products Co.: 520,000 B Company Guaranteed, 11.500% due 4/15/06 495,300 1,545,000 B Sr. Notes, 10.750% due 12/31/11 (b) 1,560,450 Dana Corp.: 1,925,000 BB Notes, 6.500% due 3/1/09 1,674,750 875,000 BB Sr. Notes, 10.125% due 3/15/10 (b) 896,875 880,000 B+ Intermet Corp., Sr. Notes, 9.750% due 6/15/09 (b) 886,600 175,000 Caa3* LDM Technologies, Inc., Series B, Company Guaranteed, 10.750% due 1/15/07 132,125 875,000 B Metaldyne Corp., Sr. Notes, 11.000% due 6/15/12 (b) 857,500 45,000 B- Prestolite Electric Inc., Company Guaranteed, 9.625% due 2/1/08 32,175 885,000 B Stanadyne Automotive Corp., Series B, Company Guaranteed, 10.250% due 12/15/07 712,425 865,000 B Stoneridge Inc., Sr. Notes, 11.500% due 5/1/12 (b) 877,975 Venture Holdings Trust: 570,000 Caa1* Series B, Sr. Notes, 9.500% due 7/1/05 344,850 570,000 Caa2* Sr. Sub. Notes, 12.000% due 6/1/09 225,150 - ------------------------------------------------------------------------------------------------- 9,761,204 - ------------------------------------------------------------------------------------------------- Automotive Aftermarket -- 0.3% 1,695,000 BBB Cooper Tire & Rubber Co., Notes, 7.625% due 3/15/27 1,556,329 - ------------------------------------------------------------------------------------------------- Beverages: Non-Alcoholic -- 0.2% 875,000 B+ Cott Beverages Inc., Company Guaranteed, 8.000% due 12/15/11 888,125 - -------------------------------------------------------------------------------------------------
See Notes to Financial Statements. - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 7 - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) (continued) June 30, 2002 - --------------------------------------------------------------------------------
FACE AMOUNT+ RATING(a) SECURITY VALUE ================================================================================================= Broadcasting -- 3.0% 4,655,000 B- Emmis Escrow Co., Sr. Discount Notes, step bond to yield 12.349% due 3/15/11 $ 3,374,875 3,140,000 B- LIN Holdings Corp., Sr. Discount Notes, step bond to yield 13.577% due 3/1/08 2,904,500 Paxson Communications Corp., Company Guaranteed: 1,715,000 B- 10.750% due 7/15/08 1,654,975 1,370,000 B- Step bond to yield 12.309% due 1/15/09 784,325 175,000 B3* Pegasus Communications Corp., Series B, Sr. Notes, 9.625% due 10/15/05 79,625 1,485,000 B Sinclair Broadcast Group, Inc., Company Guaranteed, 8.750% due 12/15/11 1,492,425 850,000 B- Spanish Broadcasting System, Inc., Company Guaranteed, 9.625% due 11/1/09 879,750 1,130,000 CCC+ XM Satellite Radio Inc., Secured Notes, 14.000% due 3/15/10 536,750 Young Broadcasting Inc., Company Guaranteed: 1,310,000 B 8.500% due 12/15/08 (b) 1,310,000 790,000 B- 10.000% due 3/1/11 703,100 - ------------------------------------------------------------------------------------------------- 13,720,325 - ------------------------------------------------------------------------------------------------- Building Products -- 1.1% 560,000 B Amatek Industries Property Ltd., Sr. Sub. Notes, 12.000% due 2/15/08 580,300 435,000 B Associated Materials Inc., Sr. Sub. Notes, 9.750% due 4/15/12 (b) 448,050 1,745,000 B- Atrium Cos. Inc., Series B, Company Guaranteed, 10.500% due 5/1/09 1,790,806 2,185,000 B- Nortek Inc., Series B, Sr. Sub. Notes, 9.875% due 6/15/11 2,217,775 - ------------------------------------------------------------------------------------------------- 5,036,931 - ------------------------------------------------------------------------------------------------- Cable/Satellite TV -- 5.5% 2,710,000 Ca* Adelphia Communications Corp., Sr. Discount Notes, Series B, zero coupon due 1/15/08 (c) 514,900 Charter Communications Holdings LLC: Sr. Discount Notes: 10,855,000 B+ Step bond to yield 12.087% due 1/15/10 4,939,025 2,735,000 B+ Step bond to yield 11.668% due 1/15/11 1,039,300 2,200,000 B+ Step bond to yield 11.757% due 5/15/11 781,000 1,680,000 B+ Sr. Notes, 11.125% due 1/15/11 1,167,600 CSC Holdings Inc.: 700,000 BB+ Series B, Sr. Notes, 7.625% due 4/1/11 564,040 2,130,000 BB- Sr. Sub. Debentures, 10.500% due 5/15/16 1,608,150 EchoStar Broadband Corp., Sr. Notes: 3,495,000 B1* 10.375% due 10/1/07 3,355,200 3,045,000 B+ 9.125% due 1/15/09 (b) 2,801,400 1,405,000 B+ 9.375% due 2/1/09 1,306,650
See Notes to Financial Statements. - -------------------------------------------------------------------------------- 8 2002 Quarterly Report to Shareholders - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) (continued) June 30, 2002 - --------------------------------------------------------------------------------
FACE AMOUNT+ RATING(a) SECURITY VALUE ================================================================================================= Cable/Satellite TV -- 5.5% (continued) 2,630,000 B- Insight Communications Co., Inc., Sr. Discount Notes, step bond to yield 13.766% due 2/15/11 $ 1,144,050 375,000(EUR) CCC+ Ono Finance PLC, Sr. Notes, 14.000% due 7/15/10 129,546 Pegasus Communications Corp.: 870,000 CCC+ Sr. Discount Notes, step bond to yield 19.102% due 3/1/07 265,350 710,000 B3* Sr. Notes, Series B, 9.750% due 12/1/06 323,050 4,500,000 Ba1* Rogers Cablesystems, Ltd., Company Guaranteed, 11.000% due 12/1/15 4,882,500 1,420,000(GBP) CCC- TeleWest Communications PLC, Sr. Notes, 5.250% due 2/19/07 (b) 813,206 - ------------------------------------------------------------------------------------------------- 25,634,967 - ------------------------------------------------------------------------------------------------- Casinos/Gaming -- 3.4% 1,360,000 B- Alliance Gaming Corp., Series B, Company Guaranteed, 10.000% due 8/1/07 1,421,200 870,000 B- Ameristar Casinos Inc., Company Guaranteed, 10.750% due 2/15/09 937,425 Mandalay Resort Group: 1,725,000 BB- Series B, Sr. Sub. Notes, 10.250% due 8/1/07 1,817,719 700,000 BB- Sr. Sub. Debentures, 7.625% due 7/15/13 647,500 2,050,000 BB+ MGM Mirage, Company Guaranteed, 8.375% due 2/1/11 2,070,500 2,545,000 BB+ Park Place Entertainment Corp., Sr. Sub. Notes, 8.125% due 5/15/11 2,545,000 1,780,000 B+ Station Casinos, Inc., Sr. Sub. Notes, 8.875% due 12/1/08 1,815,600 975,000 B+ Sun International Hotels, Ltd., Company Guaranteed, 8.625% due 12/15/07 996,938 3,540,000 B- Venetian Casino Resort LLC, Second Mortgage Notes, 11.000% due 6/15/10 (b) 3,579,825 - ------------------------------------------------------------------------------------------------- 15,831,707 - ------------------------------------------------------------------------------------------------- Chemicals - Agricultural -- 0.9% 1,750,000 Ba1* IMC Global Inc., Series B, Company Guaranteed, 11.250% due 6/1/11 1,898,750 170,000 BB- Terra Capital Inc., Company Guaranteed, 12.875% due 10/15/08 175,100 2,395,000 B Terra Industries, Inc., Series B, Sr. Notes, 10.500% due 6/15/05 2,119,575 - ------------------------------------------------------------------------------------------------- 4,193,425 - -------------------------------------------------------------------------------------------------
See Notes to Financial Statements. - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 9 - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) (continued) June 30, 2002 - --------------------------------------------------------------------------------
FACE AMOUNT+ RATING(a) SECURITY VALUE ================================================================================================= Chemicals - Major Diversified -- 1.6% Huntsman ICI Holdings LLC: 19,410,000 B- Sr. Discount Notes, zero coupon due 12/31/09 $ 4,755,450 870,000 B Sr. Notes, 9.875% due 3/1/09 (b) 876,525 1,920,000 B Texas Petrochemical Corp., Sr. Sub. Notes, 11.125% due 7/1/06 1,564,800 - ------------------------------------------------------------------------------------------------- 7,196,775 - ------------------------------------------------------------------------------------------------- Chemicals - Specialty -- 2.7% 1,020,000 Ba2* Airgas Inc., Company Guaranteed, 9.125% due 10/1/11 1,081,200 1,720,000 B- Avecia Group PLC, Company Guaranteed, 11.000% due 7/1/09 1,720,000 ISP Holdings, Inc.: 1,750,000 BB- Company Guaranteed, Series B, 10.250% due 7/10/11 1,793,750 1,715,000 B+ Secured Notes, 10.625% due 12/15/09 (b) 1,706,425 1,745,000 BB Lyondell Chemical Co., Bonds, 11.125% due 7/15/12 1,740,637 2,560,000(EUR) B+ Messer Griesheim Holdings AG, Sr. Notes, 10.375% due 6/1/11 2,708,093 700,000 BBB- Methanex Corp., Sr. Notes, 8.750% due 8/15/12 717,500 1,030,000 B+ Om Group Inc., Sr. Sub. Notes, 9.250% due 12/15/11 1,071,200 - ------------------------------------------------------------------------------------------------- 12,538,805 - ------------------------------------------------------------------------------------------------- Coal -- 0.4% 1,790,000 BB Luscar Coal Inc., Sr. Notes, 9.750% due 10/15/11 1,933,200 - ------------------------------------------------------------------------------------------------- Commercial Printing/Forms -- 0.3% 1,210,000 BB Mail-Well I Corp., Company Guaranteed, 9.625% due 3/15/12 (b) 1,222,100 - ------------------------------------------------------------------------------------------------- Consumer Specialties -- 0.2% 860,000 B+ American Achievement Corp., Series B, Company Guaranteed, 11.625% due 1/1/07 891,175 175,000 B- Doane Pet Care Co., Sr. Sub. Notes, 9.750% due 5/15/07 153,125 - ------------------------------------------------------------------------------------------------- 1,044,300 - ------------------------------------------------------------------------------------------------- Consumer Sundries -- 0.8% American Greetings Corp.: 1,220,000 BBB- Notes, 6.100% due 8/1/28 1,113,250 790,000 BB+ Sr. Sub. Notes, 11.750% due 7/15/08 869,000 620,000 B- Packaged Ice Inc., Series B, Company Guaranteed, 9.750% due 2/1/02 520,800 1,395,000 BB Sola International Inc., Notes, 6.875% due 3/15/08 1,237,463 - ------------------------------------------------------------------------------------------------- 3,740,513 - -------------------------------------------------------------------------------------------------
See Notes to Financial Statements. - -------------------------------------------------------------------------------- 10 2002 Quarterly Report to Shareholders - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) (continued) June 30, 2002 - --------------------------------------------------------------------------------
FACE AMOUNT+ RATING(a) SECURITY VALUE ================================================================================================= Containers/Packaging -- 4.0% 3,420,000 BB Owens-Brockway Glass Container, Inc., Secured Notes, 8.875% due 2/15/09 (b) $ 3,437,100 3,015,000 B+ Owens-Illinois Inc., Sr. Notes, 7.150% due 5/15/05 2,819,025 245,000 B- Pliant Corp., Company Guaranteed, 13.000% due 6/1/10 256,637 1,550,000 BBB Sealed Air Corp., Notes, 6.950% due 5/15/09 (b) 1,478,223 6,810,000 B Stone Container Finance Corp., Company Guaranteed, 11.500% due 8/15/06 (b) 7,388,850 1,790,000 B- Sweetheart Cup Co. Inc., Sr. Sub. Notes, 10.500% due 9/1/03 1,727,350 1,385,000 B- Tekni-Plex Inc., Series B, Company Guaranteed, 12.750% due 6/15/10 1,440,400 - ------------------------------------------------------------------------------------------------- 18,547,585 - ------------------------------------------------------------------------------------------------- Contract Drilling -- 0.5% 410,000 B- Parker Drilling Co., 5.500% due 8/1/04 390,012 1,890,000 BB Pride International Inc., Sr. Notes, 10.000% due 6/1/09 2,031,750 - ------------------------------------------------------------------------------------------------- 2,421,762 - ------------------------------------------------------------------------------------------------- Department Stores -- 0.9% J.C. Penney Co. Inc.: 860,000 BBB- Debentures, 6.900% due 8/15/26 866,748 1,285,000 BBB- Notes, 6.125% due 11/15/03 1,291,935 1,944,000 BB Saks Inc., Company Guaranteed, 9.875% due 10/1/11 1,963,440 - ------------------------------------------------------------------------------------------------- 4,122,123 - ------------------------------------------------------------------------------------------------- Drugstore Chains -- 0.4% Rite Aid Corp.: 1,845,000 B- Notes, 7.125% due 1/15/07 1,300,725 880,000 B- Sr. Notes, 7.625% due 4/15/05 673,200 - ------------------------------------------------------------------------------------------------- 1,973,925 - ------------------------------------------------------------------------------------------------- Electric Utilities -- 2.2% 875,000 BB+ Avista Corp., Sr. Notes, 9.750% due 6/1/08 919,389 CMS Energy Corp., Sr. Notes: 1,120,000 BB 7.625% due 11/15/04 840,497 1,005,000 BB 9.875% due 10/15/07 754,595 1,750,000 BBB- Edison Mission Energy, Sr. Notes, 10.000% due 8/15/08 1,743,604 3,415,000 Ba2* Mission Energy Holding Co., Secured Notes, 13.500% due 7/15/08 3,449,150 3,150,000 BBB Orion Power Holdings Inc., Sr. Notes, 12.000% due 5/1/10 2,661,750 - ------------------------------------------------------------------------------------------------- 10,368,985 - ------------------------------------------------------------------------------------------------- Electrical Products -- 0.4% 2,060,000 Baa2* Thomas & Betts Corp., Series MTN, Notes, 6.625% due 5/7/08 1,915,646 - -------------------------------------------------------------------------------------------------
See Notes to Financial Statements. - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 11 - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) (continued) June 30, 2002 - --------------------------------------------------------------------------------
FACE AMOUNT+ RATING(a) SECURITY VALUE ================================================================================================= Electronic Components -- 1.3% Celestica International Inc.: 2,121,000 Ba2* Sr. Sub. Notes, 10.500% due 12/31/06 $ 2,216,445 2,555,000 Ba2* Sub. Notes, zero coupon due 8/1/20 1,089,069 4,405,000 Ba2* Sanmina Co., zero coupon due 9/12/20 1,629,850 1,730,000 BB Solectron Corp., zero coupon due 5/8/20 1,020,700 - ------------------------------------------------------------------------------------------------- 5,956,064 - ------------------------------------------------------------------------------------------------- Electronic Production Equipment -- 0.2% 1,980,000 B- Amkor Technologies Inc., 5.000% due 3/15/07 1,004,850 - ------------------------------------------------------------------------------------------------- Electronics Distributors -- 0.4% 1,885,000 Baa1* Arrow Electronic Inc., Debentures, 6.875% due 6/1/18 1,650,815 - ------------------------------------------------------------------------------------------------- Electronics/Appliances -- 0.6% 1,400,000 CCC Remington Product Co., LLC, Sr. Notes, Series B, 11.000% due 5/15/06 1,078,000 Salton Inc.: 185,000 B Company Guaranteed, 10.750% due 12/15/05 186,850 1,450,000 B Sr. Sub. Notes, 12.500% due 4/15/08 1,493,500 - ------------------------------------------------------------------------------------------------- 2,758,350 - ------------------------------------------------------------------------------------------------- Engineering and Construction -- 0.4% 905,000 B+ Integrated Electrical Services, Inc., Series B, Company Guaranteed, 9.375% due 2/1/09 873,325 3,305,000 NR Metromedia Fiber Network, Inc., Sr. Notes, 14.000% due 3/15/07 (c) 1,156,750 - ------------------------------------------------------------------------------------------------- 2,030,075 - ------------------------------------------------------------------------------------------------- Environmental Services -- 2.1% Allied Waste Corp., Series B, Company Guaranteed: 2,580,000 BB- 8.500% due 12/1/08 2,502,600 1,400,000 BB- 7.875% due 1/1/09 1,351,000 3,680,000 B+ 10.000% due 8/1/09 3,634,294 435,000 B Synagro Technologies Inc., Sr. Sub. Notes, 9.500% due 4/1/09 (b) 448,050 1,975,000 B+ URS Corp., Sr. Sub. Notes, Series B, 12.250% due 5/1/09 1,984,875 - ------------------------------------------------------------------------------------------------- 9,920,819 - ------------------------------------------------------------------------------------------------- Finance/Rental/Leasing -- 1.8% 2,845,000 BBB- Avis Group Holdings Inc., Company Guaranteed, 11.000% due 5/1/09 3,115,275 1,050,000 B Penhall International Inc., Company Guaranteed, 12.000% due 8/1/06 1,002,750 2,450,000 BB United Rentals Inc., Series B, Company Guaranteed, 10.750% due 4/15/08 2,633,750 1,705,000 B- Williams Scotsman Inc., Company Guaranteed, 9.875% due 6/1/07 1,636,800 - ------------------------------------------------------------------------------------------------- 8,388,575 - -------------------------------------------------------------------------------------------------
See Notes to Financial Statements. - -------------------------------------------------------------------------------- 12 2002 Quarterly Report to Shareholders - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) (continued) June 30, 2002 - --------------------------------------------------------------------------------
FACE AMOUNT+ RATING(a) SECURITY VALUE ================================================================================================= Financial Conglomerates -- 0.9% 11,862,000 NR Finova Group Inc., Notes, 7.500% due 11/15/09 $ 3,973,770 - ------------------------------------------------------------------------------------------------- Food Distributors -- 0.5% Fleming Cos. Inc., Company Guaranteed: 700,000 BB- 10.125% due 4/1/08 714,000 1,710,000 B+ Series D, 10.625% due 7/31/07 1,684,350 - ------------------------------------------------------------------------------------------------- 2,398,350 - ------------------------------------------------------------------------------------------------- Food Retail -- 0.4% 1,565,000 BB Great Atlantic & Pacific Tea Co., Notes, 7.750% due 4/15/07 1,447,625 525,000 B Roundy's, Inc., Sr. Sub. Notes, 8.875% due 6/15/12 (b) 526,313 - ------------------------------------------------------------------------------------------------- 1,973,938 - ------------------------------------------------------------------------------------------------- Foods - Major Diversified -- 1.1% 525,000 B- AgriLink Foods Inc., Company Guaranteed, 11.875% due 11/1/08 551,250 Aurora Foods Inc., Series B, Sr. Sub. Notes: 4,120,000 CCC 9.875% due 2/15/07 2,904,600 1,420,000 CCC 8.750% due 7/1/08 958,500 995,000 BB- Dean Foods Co., Sr. Notes, 6.900% due 10/15/17 879,230 - ------------------------------------------------------------------------------------------------- 5,293,580 - ------------------------------------------------------------------------------------------------- Foods - Meat/Fish/Dairy -- 0.6% 785,000 B American Seafood Group LLC, Sr. Sub. Notes, 10.125% due 4/15/10 (b) 796,775 880,000 BB Land O' Lakes Inc., Sr. Notes, 8.750% due 11/15/11 (b) 831,600 1,000,000 BBB Tyson Foods Inc., Notes, 7.000% due 1/15/28 940,773 - ------------------------------------------------------------------------------------------------- 2,569,148 - ------------------------------------------------------------------------------------------------- Foods - Specialty/Candy -- 0.7% 880,000 B Herbalife International, Inc., Sr. Sub. Notes, 11.750% due 7/15/10 (b) 884,400 1,635,000 B2* Michael Foods, Inc., Series B, Sr. Sub. Notes, 11.750% due 4/1/11 1,790,325 705,000 B2* Mrs. Fields Original Cookies, Series B, Company Guaranteed, 10.125% due 12/1/04 518,175 - ------------------------------------------------------------------------------------------------- 3,192,900 - ------------------------------------------------------------------------------------------------- Forest Products -- 0.9% 3,290,000 Ba2* Louisiana Pacific Corp., Sr. Sub. Notes, 10.875% due 11/15/08 3,635,450 525,000 B+ Millar Western Forest Products, Sr. Notes, 9.875% due 5/15/08 504,000 - ------------------------------------------------------------------------------------------------- 4,139,450 - -------------------------------------------------------------------------------------------------
See Notes to Financial Statements. - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 13 - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) (continued) June 30, 2002 - --------------------------------------------------------------------------------
FACE AMOUNT+ RATING(a) SECURITY VALUE ================================================================================================= Home Furnishings -- 0.3% 215,000 B- Sealy Mattress Co., Series B, Company Guaranteed, step bond to yield 10.258% due 12/15/07 $ 212,850 1,755,000 CCC+ WestPoint Stevens Inc., Sr. Notes, 7.875% due 6/15/08 1,079,325 - ------------------------------------------------------------------------------------------------- 1,292,175 - ------------------------------------------------------------------------------------------------- Homebuilding -- 2.5% 875,000 BB Beazer Homes USA, Inc., Company Guaranteed, 8.625% due 5/15/11 892,500 D.R. Horton Inc.: 1,140,000 Ba1* Company Guaranteed, 8.000% due 2/1/09 1,140,000 910,000 Ba2* Sr. Sub. Notes, 9.375% due 3/15/11 928,200 1,350,000 BB- KB Home, Sr. Sub. Notes, 9.500% due 2/15/11 1,393,875 1,490,000 BB+ Lennar Corp., Series B, Company Guaranteed, 9.950% due 5/1/10 1,646,450 1,015,000 B1* Meritage Corp., Company Guaranteed, 9.750% due 6/1/11 1,058,138 650,000 BB+ The Ryland Group, Inc., Sr. Notes, 9.750% due 9/1/10 706,875 1,715,000 B+ Schuler Homes, Inc., Company Guaranteed, 10.500% due 7/15/11 1,843,625 Standard Pacific Corp.: 1,140,000 BB Sr. Notes, 8.500% due 4/1/09 1,137,150 875,000 Ba3* Sr. Sub. Notes, 9.250% due 4/15/12 883,750 - ------------------------------------------------------------------------------------------------- 11,630,563 - ------------------------------------------------------------------------------------------------- Hospital/Nursing Management -- 0.2% 1,930,000 Caa1* Magellan Health Services, Inc., Sr. Sub. Notes, 9.000% due 2/15/08 704,450 - ------------------------------------------------------------------------------------------------- Hotels/Resorts/Cruiselines -- 2.4% 1,550,000 B1* Courtyard By Marriott II, Series B, Sr. Notes, 10.750% due 2/1/08 1,598,438 1,475,000 BBB- Hilton Hotels Corp., Sr. Notes, 7.950% due 4/15/07 1,531,192 5,995,000 B+ Intrawest Corp., Sr. Notes, 10.500% due 2/1/10 6,264,775 900,000 BB+ Royal Caribbean Cruises Ltd., Sr. Notes, 8.750% due 2/2/11 847,484 975,000 B Vail Resort Inc., Sr. Sub. Notes, 8.750% due 5/15/09 979,875 - ------------------------------------------------------------------------------------------------- 11,221,764 - ------------------------------------------------------------------------------------------------- Household/Personal Care -- 0.5% 700,000 B+ AKI, Inc., Sr. Notes, 10.500% due 7/1/08 669,375 1,410,000 B- Revlon Consumer Products Corp., Company Guaranteed, 12.000% due 12/1/05 1,410,000 - ------------------------------------------------------------------------------------------------- 2,079,375 - ------------------------------------------------------------------------------------------------- Industrial Machinery -- 0.2% 925,000 B Flowserve Corp., Company Guaranteed, 12.250% due 8/15/10 1,049,875 - -------------------------------------------------------------------------------------------------
See Notes to Financial Statements. - -------------------------------------------------------------------------------- 14 2002 Quarterly Report to Shareholders - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) (continued) June 30, 2002 - --------------------------------------------------------------------------------
FACE AMOUNT+ RATING(a) SECURITY VALUE ================================================================================================= Industrial Specialties -- 0.6% Foamex L.P., Company Guaranteed: 880,000 B- 9.875% due 6/15/07 $ 787,600 870,000 B 10.750% due 4/1/09 (b) 891,750 1,210,000 B UCAR Finance Inc., Company Guaranteed, 10.250% due 2/15/12 (b) 1,240,250 - ------------------------------------------------------------------------------------------------- 2,919,600 - ------------------------------------------------------------------------------------------------- Major Telecommunications -- 1.1% 2,600,000 Ba3* PamAmSat Corp., Company Guaranteed, 8.500% due 2/1/12 (b) 2,405,000 Qwest Capital Funding, Company Guaranteed: 870,000 BB 7.625% due 8/3/21 452,400 875,000 BB 7.750% due 2/15/31 459,375 1,775,000 Baa3* Qwest Corp., Notes, 8.875% due 3/15/12 (b) 1,588,625 - ------------------------------------------------------------------------------------------------- 4,905,400 - ------------------------------------------------------------------------------------------------- Managed Healthcare -- 0.2% 700,000 B+ PacifiCare Health Systems, Inc., Sr. Notes, 10.750% due 6/1/09 (b) 720,125 - ------------------------------------------------------------------------------------------------- Marine Shipping -- 0.5% 1,050,000 BB+ CP Ships Ltd., Sr. Notes, 10.375% due 7/15/12 (b) 1,039,500 885,000 B- Oglebay Norton Co., Sr. Sub. Notes, 10.000% due 2/1/09 668,175 700,000 B+ Sea Containers Ltd., Series A, Sr. Sub. Debentures, 12.500% due 12/1/04 698,250 - ------------------------------------------------------------------------------------------------- 2,405,925 - ------------------------------------------------------------------------------------------------- Medical Distributors -- 0.3% 1,400,000 B Physician Sales and Service, Company Guaranteed, 8.500% due 10/1/07 1,410,500 - ------------------------------------------------------------------------------------------------- Medical/Nursing Services -- 1.2% 525,000 B2* Extendicare Health Services, Sr. Notes, 9.500% due 7/1/10 (b) 528,281 HEALTHSOUTH Corp., Sr. Notes: 925,000 BBB- 6.875% due 6/15/05 922,980 860,000 BBB- 8.375% due 10/1/11 903,000 875,000 B Res-Care, Inc., Company Guaranteed, 10.625% due 11/15/08 813,750 2,520,000 B Total Renal Care Holdings, 7.000% due 5/15/09 2,475,900 - ------------------------------------------------------------------------------------------------- 5,643,911 - ------------------------------------------------------------------------------------------------- Medical Specialties -- 1.8% ALARIS Medical Inc.: 2,340,000 B- Company Guaranteed, 9.750% due 12/1/06 2,316,600 525,000 B+ Series B, Secured Notes, 11.625% due 12/1/06 593,250 1,755,000 B3* Hanger Orthopedic Group, Inc., Sr. Sub. Notes, 11.250% due 6/15/09 1,776,937
See Notes to Financial Statements. - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 15 - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) (continued) June 30, 2002 - --------------------------------------------------------------------------------
FACE AMOUNT+ RATING(a) SECURITY VALUE ================================================================================================= Medical Specialties -- 1.8% (continued) 1,965,000 B Per-Se Technologies Inc., Series B, Company Guaranteed, 9.500% due 2/15/05 $ 1,896,225 1,730,000 B- Universal Hospital Services, Inc., Sr. Notes, 10.250% due 3/1/08 1,738,650 - ------------------------------------------------------------------------------------------------- 8,321,662 - ------------------------------------------------------------------------------------------------- Metal Fabrication -- 0.8% 1,735,000 CCC+ Hexcel Corp., Sr. Sub. Notes, 9.750% due 1/15/09 1,344,625 2,680,000 CCC+ Park-Ohio Industries Inc., Sr. Sub. Notes, 9.250% due 12/1/07 1,835,800 710,000 BB- Wolverine Tube, Inc., Company Guaranteed, 10.500% due 4/1/09 (b) 699,350 - ------------------------------------------------------------------------------------------------- 3,879,775 - ------------------------------------------------------------------------------------------------- Miscellaneous Commercial Services -- 1.7% 1,560,000 BB- Intertek Finance PLC, Series B, Company Guaranteed, 10.250% due 11/1/06 1,647,360 520,000 B Johnsondiversey Inc., Sr. Sub. Notes, 9.625% due 5/15/12 (b) 546,000 4,770,000 CCC+ Outsourcing Solutions Inc., Sr. Sub. Notes, Series B, 11.000% due 11/1/06 4,078,350 1,900,000 Ba3* Spherion Corp., 4.500% due 6/1/05 1,672,000 - ------------------------------------------------------------------------------------------------- 7,943,710 - ------------------------------------------------------------------------------------------------- Miscellaneous Manufacturing -- 0.3% 1,235,000 CCC+ Aqua Chem Inc., Sr. Sub. Notes, 11.250% due 7/1/08 1,062,100 405,000 B- Eagle Picher Industries, Company Guaranteed, 9.375% due 3/1/08 336,150 - ------------------------------------------------------------------------------------------------- 1,398,250 - ------------------------------------------------------------------------------------------------- Movies/Entertainment -- 1.9% AMC Entertainment Inc., Sr. Sub. Notes: 2,670,000 CCC 9.500% due 3/15/09 2,656,650 1,175,000 CCC 9.500% due 2/1/11 1,170,594 5,110,000 B Premier Parks Inc., Sr. Discount Notes, step bond to yield 11.213% due 4/1/08 5,007,800 - ------------------------------------------------------------------------------------------------- 8,835,044 - ------------------------------------------------------------------------------------------------- Oil and Gas Pipelines -- 0.8% 1,400,000 BB- El Paso Energy Partners, L.P., Company Guaranteed, 8.500% due 6/1/11 (b) 1,400,000 2,075,000 BB- Leviathan Gas Pipeline Partners, L.P., Company Guaranteed, Series B, 10.375% due 6/1/09 2,209,875 - ------------------------------------------------------------------------------------------------- 3,609,875 - ------------------------------------------------------------------------------------------------- Oil and Gas Production -- 3.6% 520,000 B Denbury Management Inc., Company Guaranteed, 9.000% due 3/1/08 513,500 3,640,000 B+ Forest Oil Corp., Company Guaranteed, 10.500% due 1/15/06 3,894,800
See Notes to Financial Statements. - -------------------------------------------------------------------------------- 16 2002 Quarterly Report to Shareholders - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) (continued) June 30, 2002 - --------------------------------------------------------------------------------
FACE AMOUNT+ RATING(a) SECURITY VALUE ================================================================================================= Oil and Gas Production -- 3.6% (continued) 1,250,000 B Houston Exploration Co., Sr. Sub. Notes, Series B, 8.625% due 1/1/08 $ 1,287,500 875,000 B+ Magnum Hunter Resources, Inc., Sr. Notes, 9.600% due 3/15/12 (b) 905,625 515,000 B- Mission Resources Corp., Series C, Company Guaranteed, 10.875% due 4/1/07 424,875 875,000 B+ Nuevo Energy Co., Series B, Sr. Sub. Notes, 9.500% due 6/12/08 885,937 865,000 BB+ Ocean Energy Inc., Series B, Company Guaranteed, 8.375% due 7/1/08 916,900 Plains Resources Inc., Company Guaranteed: 690,000 B+ Series B, 10.250% due 3/15/06 715,875 285,000 B+ Series F, 10.250% due 3/15/06 295,688 Pogo Producing Co., Series B, Sr. Sub. Notes: 345,000 BB 10.375% due 2/15/09 372,600 520,000 BB 8.250% due 4/15/11 522,600 1,690,000 CCC Ram Energy Inc., Sr. Notes, 11.500% due 2/15/08 861,900 750,000 B- Range Resources Corp., Company Guaranteed, 8.750% due 1/15/07 765,000 1,985,000 B+ Stone Energy Corp., Company Guaranteed, 8.750% due 9/15/07 2,034,625 700,000 B Swift Energy Co., Sr. Sub. Notes, 9.375% due 5/1/12 663,250 Vintage Petroleum, Inc.: 1,210,000 BB- Sr. Notes, 8.250% due 5/1/12 (b) 1,194,875 395,000 B1* Sr. Sub. Notes, 9.750% due 6/30/09 387,100 - ------------------------------------------------------------------------------------------------- 16,642,650 - ------------------------------------------------------------------------------------------------- Oil Refining/Marketing -- 0.6% 1,380,000 BB+ Pennzoil-Quaker State, Company Guaranteed, 10.000% due 11/1/08 1,623,225 1,225,000 B+ Tesoro Petroleum Corp., Sr. Sub. Notes, 9.625% due 4/1/12 (b) 1,127,000 - ------------------------------------------------------------------------------------------------- 2,750,225 - ------------------------------------------------------------------------------------------------- Oilfield Services/Equipment -- 1.0% Compagnie Generale De Geophysique, Sr. Notes: 1,020,000 BB 10.625% due 11/15/07 1,050,600 520,000 BB 10.625% due 11/15/07 (b) 535,600 700,000 BB- Petroleum Helicopters, Series B, Company Guaranteed, 9.375% due 5/1/09 721,000 865,000 BB- Sesi, LLC, Company Guaranteed, 8.875% due 5/15/11 877,975 525,000 B Trico Marine Services, Inc., Series B, Sr. Notes, 8.875% due 5/15/12 (b) 522,375 960,000 Baa2* Windsor Petroleum Transport, Notes, 7.840% due 1/15/21 (b) 785,968 - ------------------------------------------------------------------------------------------------- 4,493,518 - -------------------------------------------------------------------------------------------------
See Notes to Financial Statements. - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 17 - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) (continued) June 30, 2002 - --------------------------------------------------------------------------------
FACE AMOUNT+ RATING(a) SECURITY VALUE ================================================================================================= Other Consumer Services -- 2.2% 1,370,000 B Coinmach Corp., Sr. Notes, 9.000% due 2/1/10 (b) $ 1,397,400 3,380,000 Ba2* SC International Services, Inc., Series B, Company Guaranteed, 9.250% due 9/1/07 2,636,400 Service Corp. International: 1,225,000 BB- Debentures, 7.875% due 2/1/13 1,117,812 Notes: 1,365,000 BB- 6.875% due 10/1/07 1,245,563 1,715,000 BB- 6.500% due 3/15/08 1,534,925 1,880,000 B+ Stewart Enterprises, Inc., Company Guaranteed, 10.750% due 7/1/08 2,086,800 - ------------------------------------------------------------------------------------------------- 10,018,900 - ------------------------------------------------------------------------------------------------- Other Metals/Minerals -- 0.4% 1,710,000 BBB- Phelps Dodge Corp., Sr. Notes, 8.750% due 6/1/11 1,766,798 - ------------------------------------------------------------------------------------------------- Property Casualty Insurance -- 0.2% 1,050,000 BB+ PXRE Capital Trust I Corp., Company Guaranteed, 8.850% due 2/1/27 745,774 - ------------------------------------------------------------------------------------------------- Publishing - Books/Magazines -- 1.3% 5,425,000 BB- Quebecor Media Inc., Sr. Notes, 11.125% due 7/15/11 5,370,750 700,000 B Von Hoffman Corp., Company Guaranteed, 10.250% due 3/15/09 (b) 721,000 - ------------------------------------------------------------------------------------------------- 6,091,750 - ------------------------------------------------------------------------------------------------- Publishing - Newspapers -- 1.6% 875,000 B+ Garden State Newspapers, Inc., Sr. Sub. Notes, Series B, 8.750% due 10/1/09 868,437 Hollinger International Publishing, Inc.: Company Guaranteed: 1,300,000 Ba3* 9.250% due 2/1/06 1,345,500 2,070,000 Ba3* 9.250% due 3/15/07 2,142,450 3,213,624 B Sr. Notes, 12.125% due 11/15/10 (b) 3,036,875 - ------------------------------------------------------------------------------------------------- 7,393,262 - ------------------------------------------------------------------------------------------------- Pulp and Paper -- 1.8% 1,730,000 BBB Bowater Canada Finance, Company Guaranteed, 7.950% due 11/15/11 1,787,929 Buckeye Technologies Inc., Sr. Sub. Notes: 875,000 B+ 9.250% due 9/15/08 787,500 2,930,000 B+ 8.000% due 10/15/10 2,417,250 3,395,000 BBB- Georgia-Pacific Corp., Notes, 7.500% due 5/15/06 3,273,215 - ------------------------------------------------------------------------------------------------- 8,265,894 - ------------------------------------------------------------------------------------------------- Real Estate Investment Trust -- 1.5% 875,000 Ba3* Crescent Real Estate Equities Co., Sr. Notes, 9.250% due 4/15/09 (b) 903,342 1,850,000 BB- HMH Properties, Inc., Company Guaranteed, Series A, 7.875% due 8/1/05 1,813,000
See Notes to Financial Statements. - -------------------------------------------------------------------------------- 18 2002 Quarterly Report to Shareholders - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) (continued) June 30, 2002 - --------------------------------------------------------------------------------
FACE AMOUNT+ RATING(a) SECURITY VALUE ================================================================================================= Real Estate Investment Trust -- 1.5% (continued) 2,920,000 BB- Host Marriott L.P., Sr. Notes, 9.500% due 1/15/07 $ 2,960,150 665,000 BBB- Starwood Hotels and Resorts Worldwide, Inc., Notes, 6.750% due 11/15/05 657,553 525,000 BB- Ventas Realty L.P., Sr. Notes, 9.000% due 5/1/12 (b) 540,750 - ------------------------------------------------------------------------------------------------- 6,874,795 - ------------------------------------------------------------------------------------------------- Recreational Products -- 0.6% 2,920,000 BB Hasbro Inc., Debentures, 6.600% due 7/15/28 2,233,800 700,000 B The Hockey Co./Sport Maska Inc., Sr. Secured Notes, 11.250% due 4/15/09 (b) 703,500 - ------------------------------------------------------------------------------------------------- 2,937,300 - ------------------------------------------------------------------------------------------------- Restaurants -- 1.2% 885,000 CCC Advantica Restaurant Group, Sr. Notes, 11.250% due 1/15/08 695,831 525,000 B American Restaurant Group Inc., Series D, Company Guaranteed, 11.500% due 11/1/06 475,125 1,400,000 B- Carrols Corp., Company Guaranteed, 9.500% due 12/1/08 1,393,000 705,000 CCC+ CKE Restaurants Inc., Company Guaranteed, 9.125% due 5/1/09 683,850 445,000 B- Friendly Ice Cream Corp., Company Guaranteed, 10.500% due 12/1/07 438,325 525,000 B+ Perkins Family Restaurants, L.P., Series B, Sr. Notes, 10.125% due 12/15/07 527,625 1,395,000 B+ Sbarro Inc., Company Guaranteed, 11.000% due 9/15/09 1,401,975 - ------------------------------------------------------------------------------------------------- 5,615,731 - ------------------------------------------------------------------------------------------------- Savings Banks -- 1.9% 715,000 B3* Bay View Capital Corp., Sub. Notes, 9.125% due 8/15/07 700,700 5,500,000 B3* Ocwen Capital Trust I Corp., Company Guaranteed, 10.875% due 8/1/27 4,427,500 2,600,000 B1* Ocwen Financial Corp., Notes, 11.875% due 10/1/03 2,600,000 1,035,000 BB- Western Financial Bank, Sub. Debentures, 9.625% due 5/15/12 1,040,175 - ------------------------------------------------------------------------------------------------- 8,768,375 - ------------------------------------------------------------------------------------------------- Semiconductors -- 1.7% 2,195,000 Ba3* Cypress Semiconductor Corp., 3.750% due 7/1/05 1,882,212 2,765,000 Ba3* LSI Logic Corp., Notes, 4.000% due 2/15/05 2,357,162 2,425,000 B- TrinQuint Semiconductor, Inc., Sub. Notes, 4.000% due 3/1/07 1,843,000 2,185,000 B- Vitesse Semiconductor Corp., 4.000% due 3/15/05 1,704,300 - ------------------------------------------------------------------------------------------------- 7,786,674 - ------------------------------------------------------------------------------------------------- Services to the Health Industry -- 0.2% 875,000 B+ US Oncology, Inc., Company Guaranteed, 9.625% due 2/1/12 853,125 - -------------------------------------------------------------------------------------------------
See Notes to Financial Statements. - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 19 - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) (continued) June 30, 2002 - --------------------------------------------------------------------------------
FACE AMOUNT+ RATING(a) SECURITY VALUE ================================================================================================= Specialty Insurance -- 0.3% 1,680,000 Ba1* Markel Capital Trust I, Series B, Company Guaranteed, 8.710% due 1/1/46 $ 1,383,786 - ------------------------------------------------------------------------------------------------- Specialty Stores -- 1.2% 1,620,000 B Advance Stores Co. Inc., Company Guaranteed, Series B, 10.250% due 4/15/08 1,709,100 1,400,000 B- Jo-Ann Stores, Inc., Company Guaranteed, 10.375% due 5/1/07 1,442,000 Pep Boys - Manny, Moe & Jack, Series MTNA, Notes: 880,000 BB- 6.710% due 11/3/04 843,700 925,000 BB- 6.520% due 7/16/07 926,156 580,000 B- Petro Stopping Centers Holdings L.P., Sr. Notes, 10.500% due 2/1/07 559,700 - ------------------------------------------------------------------------------------------------- 5,480,656 - ------------------------------------------------------------------------------------------------- Specialty Telecommunications -- 0.3% 2,955,000(EUR) B+ Colt Telecom Group PLC, 2.000% due 4/3/07 (b) 1,202,322 1,555,000 Ca* GT Group Telecom Inc., Sr. Discount Notes, step bond to yield 15.233% due 2/1/10 11,662 - ------------------------------------------------------------------------------------------------- 1,213,984 - ------------------------------------------------------------------------------------------------- Steel -- 0.2% 525,000 B Steel Dynamics, Inc., Sr. Notes, 9.500% due 3/15/09 (b) 556,500 880,000 B- WCI Steel, Inc., Series B, Sr. Notes, 10.000% due 12/1/04 497,200 - ------------------------------------------------------------------------------------------------- 1,053,700 - ------------------------------------------------------------------------------------------------- Telecommunications Equipment -- 1.0% 1,005,000 Ba2* Avaya Inc., Secured Notes, 11.125% due 4/1/09 924,600 2,820,000 BB- Nortel Networks Corp., Notes, 6.125% due 2/15/06 1,621,500 4,040,000 BB Qwest Capital Funding, Inc., Company Guaranteed, 6.875% due 7/15/28 2,080,600 - ------------------------------------------------------------------------------------------------- 4,626,700 - ------------------------------------------------------------------------------------------------- Tobacco -- 0.4% 520,000 BB Dimon Inc., Company Guaranteed, Series B, 9.625% due 10/15/11 547,300 1,075,000 BB Standard Commercial Tobacco Co. Inc., Company Guaranteed, 8.875% due 8/1/05 1,112,625 - ------------------------------------------------------------------------------------------------- 1,659,925 - ------------------------------------------------------------------------------------------------- Trucks/Construction/Farm Machinery -- 1.3% Case Corp., Notes: 1,050,000 BB 7.250% due 8/1/05 978,391 435,000 BB 6.75% due 10/21/07 366,620 1,970,000 B Columbus McKinnon Corp., Company Guaranteed, 8.500% due 4/1/08 1,822,250 1,100,000(EUR) B+ The Manitowoc Co., Inc., Sr. Subordinated, 10.375 due 5/15/11 1,160,228
See Notes to Financial Statements. - -------------------------------------------------------------------------------- 20 2002 Quarterly Report to Shareholders - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) (continued) June 30, 2002 - --------------------------------------------------------------------------------
FACE AMOUNT+ RATING(a) SECURITY VALUE ================================================================================================= Trucks/Construction/Farm Machinery -- 1.3% (continued) 1,035,000 BB+ Navistar International, Corp., Company Guaranteed, Series B, 9.375% due 6/1/06 $ 1,071,225 690,000 B+ NMHG Holding Co., Company Guaranteed, 10.000% due 5/15/09 (b) 703,800 - ------------------------------------------------------------------------------------------------- 6,102,514 - ------------------------------------------------------------------------------------------------- Wireless Telecommunications -- 2.0% 2,270,000 CCC AirGate PCS Inc., Sr. Sub. Notes, step bond to yield 15.694% due 10/1/09 465,350 1,505,000 CCC Alamosa PCS Holdings, Inc., Company Guaranteed, step bond to yield 12.701% due 2/15/10 233,275 Crown Castle International Corp.: 1,760,000 B Sr. Discount Notes, step bond to yield 11.125% due 5/15/11 818,400 1,845,000 B Sr. Notes, 10.750% due 8/1/11 1,226,925 1,640,000 B3* Dobson Communications Corp./Sygnet Communications Corp., Sr. Notes, 12.250% due 12/15/08 992,200 890,000 CCC Horizon PCS Inc., Company Guaranteed, step bond to yield 14.482% due 10/1/10 164,650 7,355,000 B Nextel Communications, Inc., Sr. Discount Notes, step bond to yield 10.637% due 2/15/08 3,548,788 Nextel Partners, Inc., Sr. Notes: 1,460,000 B3* 12.500% due 11/15/09 620,500 880,000 B3* 11.000% due 3/15/10 354,200 830,000 BBB+ VoiceStream Wireless Co., Sr. Discount Notes, step bond to yield 11.870% due 11/15/09 585,150 - ------------------------------------------------------------------------------------------------- 9,009,438 - ------------------------------------------------------------------------------------------------- TOTAL CORPORATE BONDS AND NOTES (Cost -- $475,196,699) 436,002,334 ================================================================================================= SHARES SECURITY VALUE ================================================================================================= COMMON STOCK -- 0.0% Food - Major Diversified -- 0.0% 73,499 Aurora Foods Inc. (d) 110,248 - ------------------------------------------------------------------------------------------------- Specialty Telecommunications -- 0.0% 3,736 McLeodUSA Inc., Class A Shares (d) 1,569 20,125 Pagemart Nationwide Inc. (d) 201 - ------------------------------------------------------------------------------------------------- 1,770 - ------------------------------------------------------------------------------------------------- Wireless Telecommunications -- 0.0% 8,382 Crown Castle International Corp. (d) 32,941 - ------------------------------------------------------------------------------------------------- TOTAL COMMON STOCK (Cost -- $341,941) 144,959 =================================================================================================
See Notes to Financial Statements. - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 21 - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) (continued) June 30, 2002 - --------------------------------------------------------------------------------
SHARES SECURITY VALUE ================================================================================================= PREFERRED STOCK -- 0.2% Aerospace and Defense -- 0.1% 1,700 Northrop Grumman Corp., 7.250% $ 225,267 - ------------------------------------------------------------------------------------------------- Electronic Components -- 0.0% 4,453 Viasystems Inc., Payment-in-kind, Series B 45 - ------------------------------------------------------------------------------------------------- Major Telecommunications -- 0.0% 1,400 Broadwing Communications, Inc. 213,500 - ------------------------------------------------------------------------------------------------- Specialty Telecommunications -- 0.0% 5,800 Global Crossing Holding Ltd., 6.750% (e) 290 - ------------------------------------------------------------------------------------------------- Wireless Telecommunications -- 0.1% 19,800 Crown Castle International Corp., 6.250% 363,825 1,120 Dobson Communications Corp., Payment-in-kind, Exchangeable 13.000% 52,920 4,300 Motorola, Inc. 197,241 - ------------------------------------------------------------------------------------------------- 613,986 - ------------------------------------------------------------------------------------------------- TOTAL PREFERRED STOCK (Cost -- $3,077,057) 1,053,088 ================================================================================================= WARRANTS SECURITY VALUE ================================================================================================= WARRANTS -- 0.0% Broadcasting -- 0.0% 14,825 UIH Australia/Pacific, Inc., Expires 5/15/06 148 - ------------------------------------------------------------------------------------------------- Commercial Printing/Forms -- 0.0% 1,765 Merrill Corp., Expires 5/1/09 177 - ------------------------------------------------------------------------------------------------- Containers/Packaging -- 0.0% 245 Pliant Corp., Expires 6/1/10 2,511 - ------------------------------------------------------------------------------------------------- Internet Software/ Services -- 0.0% 1,705 Cybernet Internet Services International, Inc., Expires 7/1/09 3 6,135 WAM!NET Inc., Expires 3/1/05 61 - ------------------------------------------------------------------------------------------------- 64 - ------------------------------------------------------------------------------------------------- Specialty Telecommunications -- 0.0% 1,555 GT Group Telecom Inc., Expires 2/1/10 2,332 43,470 Pagemart, Inc., Expires 12/31/03 435 6,975 RSL Communications, Ltd., Expires 11/15/06 981 - ------------------------------------------------------------------------------------------------- 3,748 - ------------------------------------------------------------------------------------------------- Wireless Telecommunications -- 0.0% 1,155 Horizon PCS Inc., Expires 10/1/10 58 6,725 Iridium World Communications Ltd., Expires 7/15/05 (b) 67 1,185 IWO Holdings Inc., Expires 1/15/11 444 - ------------------------------------------------------------------------------------------------- 569 - ------------------------------------------------------------------------------------------------- TOTAL WARRANTS (Cost -- $1,383,827) 7,217 =================================================================================================
See Notes to Financial Statements. - -------------------------------------------------------------------------------- 22 2002 Quarterly Report to Shareholders - -------------------------------------------------------------------------------- Schedule of Investments (unaudited) (continued) June 30, 2002 - --------------------------------------------------------------------------------
FACE AMOUNT RATING(a) SECURITY VALUE ================================================================================================= REPURCHASE AGREEMENT -- 5.4% $24,900,000 J.P. Morgan Chase & Co., 1.800% due 7/1/02; Proceeds at maturity -- $24,903,735; (Fully collateralized by U.S. Treasury Bonds, 7.250% to 13.875% due 5/15/09 to 2/15/20; Market value -- $25,398,000) (Cost -- $24,900,000) $ 24,900,000 ================================================================================================= TOTAL INVESTMENTS -- 100% (Cost -- $504,899,524**) $462,107,598 =================================================================================================
+ Face amount denominated in U.S. dollars unless otherwise indicated. ++ Subsequent to the reporting period, on August 11, 2002, the company filed for bankruptcy. (a) All ratings are by Standard & Poor's Ratings Service, except for those identified by an asterisk(*), which are rated by Moody's Investors Service, Inc. (b) 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. (c) Security is in default. (d) Non-income producing security. (e) On January 28, 2002, the company filed for bankruptcy. ** Aggregate cost for Federal income tax purposes is substantially the same. See page 24 for definitions of ratings. Currency abbreviations used in this schedule: --------------------------------------------- EUR -- Euro. GBP -- British Pound. See Notes to Financial Statements. - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 23 - -------------------------------------------------------------------------------- Bond Ratings (unaudited) - -------------------------------------------------------------------------------- The definitions of the applicable rating symbols are set forth below: Standard & Poor's Ratings Service ("Standard & Poor's") -- Ratings from "AA" to "CCC" may be modified by the addition of a plus (+) or a minus (-) sign to show relative standings within the major rating categories. AA -- Bonds rated "AA" have a very strong capacity to pay interest and repay principal and differs from the highest rated issue only in a small degree. A -- Bonds rated "A" have a strong capacity to pay interest and repay principal although they are somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated 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. D -- Bonds rated "D" are in default, and payment of interest and/or repayment of principal is in arrears Moody's Investors Service, Inc. ("Moody's") -- Numerical modifiers 1, 2 and 3 may be applied to each generic rating from "A" to "Ca", where 1 is the highest and 3 the lowest rating within its generic category. A -- Bonds rated "A" possess many favorable investment attributes and are to be considered as upper medium grade obligations. Factors giving security to principal and interest are considered adequate but elements may be present which suggest a susceptibility to impairment some time in the future. 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. Ca -- Bonds rated "Ca" represent obligations which are speculative in a high degree. Such issues are often in default or have other marked shortcomings. NR -- Indicates that the bond is not rated by Standard & Poor's or Moody's. - -------------------------------------------------------------------------------- 24 2002 Quarterly Report to Shareholders - -------------------------------------------------------------------------------- Statement of Assets and Liabilities (unaudited) June 30, 2002 - -------------------------------------------------------------------------------- ASSETS: Investments, at value (Cost -- $504,899,524) $ 462,107,598 Cash 603 Interest and dividends receivable 10,982,020 Receivable for securities sold 6,422,154 - ----------------------------------------------------------------------------------- Total Assets 479,512,375 - ----------------------------------------------------------------------------------- LIABILITIES: Payable for securities purchased 3,785,032 Dividends payable 1,014,454 Management fee payable 467,583 Accrued expenses 95,192 - ----------------------------------------------------------------------------------- Total Liabilities 5,362,261 - ----------------------------------------------------------------------------------- Total Net Assets $ 474,150,114 =================================================================================== NET ASSETS: Par value of capital shares $ 72,331 Capital paid in excess of par value 897,242,219 Overdistributed net investment income (9,189,563) Accumulated net realized loss from security transactions (371,189,198) Net unrealized depreciation of investments and foreign currencies (42,785,675) - ----------------------------------------------------------------------------------- Total Net Assets (Equivalent to $6.56 per share on 72,330,625 shares of $0.001 par value outstanding; 500,000,000 shares authorized) $ 474,150,114 ===================================================================================
See Notes to Financial Statements. - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 25 - -------------------------------------------------------------------------------- Statement of Operations (unaudited) - -------------------------------------------------------------------------------- For the Nine Months Ended June 30, 2002 INVESTMENT INCOME: Interest $ 42,269,818 Dividends 490,134 - ------------------------------------------------------------------------------- Total Investment Income 42,759,952 - ------------------------------------------------------------------------------- EXPENSES: Management fee (Note 2) 4,421,995 Shareholder and system servicing fees 92,049 Shareholder communications 85,014 Audit and legal 43,330 Custody 27,795 Listing fees 19,454 Pricing service fees 19,338 Directors' fees 2,417 Other 11,421 - ------------------------------------------------------------------------------- Total Expenses 4,722,813 - ------------------------------------------------------------------------------- Net Investment Income 38,037,139 - ------------------------------------------------------------------------------- REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS AND FOREIGN CURRENCIES (NOTE 3): Realized Loss From: Security transactions (excluding short-term securities) (75,047,908) Foreign currency transactions (1,434,119) - ------------------------------------------------------------------------------- Net Realized Loss (76,482,027) - ------------------------------------------------------------------------------- Change in Net Unrealized Depreciation From: Security transactions 36,129,194 Foreign currency transactions 398,845 - ------------------------------------------------------------------------------- Decrease in Net Unrealized Depreciation 36,528,039 - ------------------------------------------------------------------------------- Net Loss on Investments and Foreign Currencies (39,953,988) - ------------------------------------------------------------------------------- Decrease in Net Assets From Operations $ (1,916,849) =============================================================================== See Notes to Financial Statements. - -------------------------------------------------------------------------------- 26 2002 Quarterly Report to Shareholders - -------------------------------------------------------------------------------- Statements of Changes in Net Assets - -------------------------------------------------------------------------------- For the Nine Months Ended June 30, 2002 (unaudited) and the Year Ended September 30, 2001
2002 2001 ======================================================================================= OPERATIONS: Net investment income $ 38,037,139 $ 66,303,792 Net realized loss (76,482,027) (135,560,175) (Increase) decrease in net unrealized depreciation 36,528,039 (19,553,937) - --------------------------------------------------------------------------------------- Decrease in Net Assets From Operations (1,916,849) (88,810,320) - --------------------------------------------------------------------------------------- DISTRIBUTIONS TO SHAREHOLDERS FROM: Net investment income (41,277,681) (70,580,614) - --------------------------------------------------------------------------------------- Decrease in Net Assets From Distributions to Shareholders (41,277,681) (70,580,614) - --------------------------------------------------------------------------------------- Fund Share Transactions (Note 8): Net asset value of shares issued for reinvestment of dividends 10,398,434 13,962,090 - --------------------------------------------------------------------------------------- Increase in Net Assets From Fund Share Transactions 10,398,434 13,962,090 - --------------------------------------------------------------------------------------- Decrease in Net Assets (32,796,096) (145,428,844) NET ASSETS: Beginning of period 506,946,210 652,375,054 - --------------------------------------------------------------------------------------- End of period* $ 474,150,114 $ 506,946,210 ======================================================================================= * Includes overdistributed net investment income of: $ (9,189,563) $ (3,270,222) =======================================================================================
See Notes to Financial Statements. - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 27 - -------------------------------------------------------------------------------- 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 asked 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 amortization of premium and accretion of 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 accounting principles generally accepted in the United States of America. At September 30, 2001, 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. Net investment income, net realized gains and net assets were not affected by this adjustment; (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 - -------------------------------------------------------------------------------- 28 2002 Quarterly Report to Shareholders - -------------------------------------------------------------------------------- Notes to Financial Statements (unaudited) (continued) - -------------------------------------------------------------------------------- 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. 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. In November 2000, the American Institute of Certified Public Accountants ("AICPA") issued a revised Audit and Accounting Guide for Investment Companies ("Guide"). This revised version is effective for financial statements issued for fiscal years beginning after December 15, 2000. The revised Guide requires the Fund to amortize premium and all discounts on all fixed-income securities. The Fund adopted this requirement October 1, 2001. This change does not affect the Fund's net asset value, but does change the classification of certain amounts in the statement of operations. For the nine months ended June 30, 2002, interest income decreased by $371,897, net realized loss decreased by $821,291 and the change in net unrealized depreciation of investments decreased by $449,394. In addition, the Fund recorded an adjustment to decrease the cost of securities and increase overdistributed net investment income by $1,244,680 to reflect the cumulative effect of this change up to the date of the adoption. 2. Management Agreement and Other Transactions Smith Barney Fund Management LLC ("SBFM"), a subsidiary of Salomon Smith Barney Holdings Inc. ("SSBH"), which, in turn, is a subsidiary of Citigroup Inc. ("Citigroup"), acts as investment manager of the Fund. The Fund pays SBFM 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 two directors of the Fund are employees of Citigroup or its affiliates. - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 29 - -------------------------------------------------------------------------------- Notes to Financial Statements (unaudited) (continued) - -------------------------------------------------------------------------------- 3. Investments During the nine months ended June 30, 2002, the aggregate cost of purchases and proceeds from sales of investments (including maturities, but excluding short-term securities) were as follows: ================================================================================ Purchases $316,282,556 - -------------------------------------------------------------------------------- Sales 280,827,496 ================================================================================ At June 30, 2002, the aggregate gross unrealized appreciation and depreciation of investments for Federal income tax purposes were substantially as follows: ================================================================================ Gross unrealized appreciation $ 14,958,557 Gross unrealized depreciation (57,750,483) - -------------------------------------------------------------------------------- Net unrealized depreciation $ (42,791,926) ================================================================================ 4. 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, 2002, the Fund did not hold any futures contracts. 5. Options Contracts Premiums paid when call or put 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 - -------------------------------------------------------------------------------- 30 2002 Quarterly Report to Shareholders - -------------------------------------------------------------------------------- Notes to Financial Statements (unaudited) (continued) - -------------------------------------------------------------------------------- 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, 2002, the Fund did not hold any purchased call or put option contracts. 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 nine months ended June 30, 2002, the Fund did not enter into any written call or put option contracts. 6. 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 (plus accrued interest) of the collateral in amounts at least equal to the repurchase price. - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 31 - -------------------------------------------------------------------------------- Notes to Financial Statements (unaudited) (continued) - -------------------------------------------------------------------------------- 7. Capital Loss Carryforward At September 30, 2001, the Fund had, for Federal income tax purposes, approximately $174,273,000 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 2007 2008 2009 =========================================================================================== Carryforward amounts $16,017,000 $38,118,000 $11,075,000 $39,806,000 $69,257,000 ===========================================================================================
8. Capital Shares At June 30, 2002, the Fund had 500,000,000 shares of common stock authorized with a par value of $0.001. Capital stock transactions were as follows:
Nine Months Ended Year Ended June 30, 2002 September 30, 2001 ------------------------ ------------------------ Shares Amount Shares Amount ===================================================================================== Shares issued on reinvestment 1,444,045 $10,398,434 1,659,328 $13,962,090 - ------------------------------------------------------------------------------------- Net Increase 1,444,045 $10,398,434 1,659,328 $13,962,090 =====================================================================================
- -------------------------------------------------------------------------------- 32 2002 Quarterly Report to Shareholders - -------------------------------------------------------------------------------- Financial Highlights - -------------------------------------------------------------------------------- For a share of capital stock outstanding throughout each year ended September 30, unless otherwise noted:
2002(1) 2001 2000 1999 1998 1997 ==================================================================================================== Net Asset Value, Beginning of Period $ 7.15 $ 9.42 $ 10.45 $ 11.24 $ 12.43 $ 11.72 - ---------------------------------------------------------------------------------------------------- Income (Loss) From Operations: Net investment income(2) 0.50 0.94 1.06 1.03 1.08 1.15 Net realized and unrealized gain (loss)(2) (0.51) (2.20) (1.13) (0.79) (1.14) 0.68 - ---------------------------------------------------------------------------------------------------- Total Income (Loss) From Operations (0.01) (1.26) (0.07) 0.24 (0.06) 1.83 - ---------------------------------------------------------------------------------------------------- Gain From Repurchase of Treasury Stock -- -- 0.05 -- -- -- - ---------------------------------------------------------------------------------------------------- Less Distributions From: Net investment income (0.58) (1.01) (1.01) (1.03) (1.13) (1.12) Capital -- -- -- (0.00)* -- -- - ---------------------------------------------------------------------------------------------------- Total Distributions (0.58) (1.01) (1.01) (1.03) (1.13) (1.12) - ---------------------------------------------------------------------------------------------------- Net Asset Value, End of Period $ 6.56 $ 7.15 $ 9.42 $ 10.45 $ 11.24 $ 12.43 - ---------------------------------------------------------------------------------------------------- Total Return, Based on Market Value(3) (8.38)%++ (7.85)% 9.75% (9.36)% (1.65)% 18.18% - ---------------------------------------------------------------------------------------------------- Total Return, Based on Net Asset Value(3) (0.52)%++ (14.25)% 0.98% 2.74% (0.58)% 16.48% - ---------------------------------------------------------------------------------------------------- Net Assets, End of Period (millions) $ 474 $ 507 $ 652 $ 755 $ 810 $ 883 - ---------------------------------------------------------------------------------------------------- Ratios to Average Net Assets: Expenses 1.24%+ 1.26% 1.22% 1.20% 1.18% 1.21% Net investment income(2) 9.96+ 11.22 10.21 9.28 8.81 9.63 - ---------------------------------------------------------------------------------------------------- Portfolio Turnover Rate 58% 83% 69% 83% 98% 87% - ---------------------------------------------------------------------------------------------------- Market Value, End of Period $ 6.160 $ 7.290 $ 8.938 $ 9.125 $11.125 $12.438 ====================================================================================================
(1) For the nine months ended June 30, 2002 (unaudited). (2) Without the adoption of the change in the accounting method discussed in Note 1 to the financial statements, for the nine months ended June 30, 2002, those amounts would have been $0.52, $0.53 and 10.06% for the net investment income, net realized and unrealized loss and the annualized ratio of net investment income to average net assets, respectively. Per share, ratios and supplemental data for the periods prior to October 1, 2001 have not been restated to reflect this change in presentation. (3) The total return calculation assumes that dividends are reinvested in accordance with the Fund's dividend reinvestment plan. * Amount represents less than $0.01 per share. ++ Total return is not annualized, as it may not be representative of the total return for the year. + Annualized. - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 33 - -------------------------------------------------------------------------------- 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 ================================================================================ 2000 October 22 $8.63 $10.36 $0.0840 $9.190 November 18 8.94 10.40 0.0840 8.570 December 22 8.56 10.49 0.0840 8.490 January 21 9.00 10.42 0.0840 8.940 February 17 8.56 10.35 0.0840 8.430 March 24 8.63 10.07 0.0840 8.570 April 20 8.63 9.96 0.0840 8.670 May 19 8.81 9.71 0.0840 8.850 June 23 9.00 9.85 0.0840 9.070 July 25 9.50 9.78 0.0840 9.350 August 22 9.19 9.76 0.0840 9.230 September 26 9.94 9.42 0.0840 8.780 2001 October 24 7.94 8.99 0.0840 8.200 November 20 7.88 8.61 0.0840 7.880 December 26 8.06 8.99 0.0840 8.477 December 29 8.19 8.50 0.0290 8.500 January 23 9.31 9.04 0.0840 9.040 February 20 9.51 9.07 0.0840 9.070 March 27 9.04 8.66 0.0840 8.660 April 24 8.85 8.38 0.0810 8.410 May 22 9.00 8.41 0.0810 8.550 June 26 8.17 7.87 0.0810 7.870 July 24 8.30 7.78 0.0780 7.890 August 28 8.08 7.78 0.0780 7.780 September 25 7.13 7.23 0.0780 7.200 2002 October 23 7.28 7.24 0.0700 7.240 November 27 7.24 7.42 0.0700 7.420 December 24 7.24 7.26 0.0700 7.260 January 23 7.63 7.27 0.0650 7.270 February 19 7.27 7.07 0.0650 7.070 March 19 7.50 7.13 0.0650 7.130 April 23 7.18 7.13 0.0570 7.130 May 28 7.12 7.02 0.0570 7.020 June 25 6.33 6.71 0.0570 6.240 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 34 2002 Quarterly Report to Shareholders - -------------------------------------------------------------------------------- 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 PFPC Global Fund Services ("PFPC"), 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 PFPC 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 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, PFPC 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 PFPC has completed its purchases, the market price exceeds the NAV of the common stock as of the valuation time, PFPC 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 PFPC is unable to stop open market purchases and cause the Fund to issue the remaining shares, the average per share purchase price paid by PFPC may exceed the NAV of the common stock as of the valuation time, resulting in the acquisition of fewer shares than if the - -------------------------------------------------------------------------------- High Income Opportunity Fund Inc. 35 - -------------------------------------------------------------------------------- Dividend Reinvestment Plan (unaudited) (continued) - -------------------------------------------------------------------------------- dividend or capital gains distribution had been paid in common stock issued by the Fund at such net asset value. PFPC 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. PFPC 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 PFPC 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. PFPC'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 PFPC, 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 PFPC Global Fund Services, P.O. Box 8030, Boston, Massachusetts 02266-8030 or by telephone at 1-800-331-1710. - -------------------------------------------------------------------------------- Additional Shareholder Information (unaudited) - -------------------------------------------------------------------------------- Notice is hereby given in accordance with Section 23(c) of the Investment Company Act of 1940, as amended, that from time to time the Fund may purchase, at market prices, shares of its common stock in the open market. - -------------------------------------------------------------------------------- 36 2002 Quarterly Report to Shareholders - -------------------------------------------------------------------------------- HIGH INCOME Opportunity Fund Inc. - -------------------------------------------------------------------------------- DIRECTORS Lee Abraham Allan J. Bloostein Jane F. Dasher Donald R. Foley R. Jay Gerken Richard E. Hanson, Jr. 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 R. Jay Gerken Executive Vice President Lewis E. Daidone Senior Vice President and Chief Administrative Officer Richard L. Peteka Chief Financial Officer and Treasurer Kaprel Ozsolak Controller Christina T. Sydor Secretary INVESTMENT MANAGER Smith Barney Fund Management LLC 333 W. 34th Street New York, New York 10001 CUSTODIAN State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 TRANSFER AGENT PFPC Global Fund Services P.O. Box 8030 Boston, Massachusetts 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. 125 Broad Street 10th Floor, MF-2 New York, New York 10004 FD01006 8/02 02-3602 -----END PRIVACY-ENHANCED MESSAGE-----