UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number 811-7920
High Income Opportunity Fund Inc.
(Exact name of registrant as specified in charter)
125 Broad Street, New York, NY 10004
(Address of principal executive offices) (Zip code)
Robert I. Frenkel, Esq.
Smith Barney Fund Management LLC
300 First Stamford Place
Stamford, CT 06902
(Name and address of agent for service)
Registrant's telephone number, including area code: (800) 451-2010
Date of fiscal year end: September 30
Date of reporting period: September 30, 2003
ITEM 1. REPORT TO STOCKHOLDERS.
The Annual Report to Stockholders is filed herewith.
HIGH INCOME
---------------------
Opportunity Fund Inc.
[GRAPHIC OMITTED]
Annual Report
September 30, 2003
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WHAT'S INSIDE
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Letter from the Chairman .................................................. 1
Manager Overview .......................................................... 2
Schedule of Investments ................................................... 7
Statement of Assets and Liabilities ....................................... 23
Statement of Operations ................................................... 24
Statements of Changes in Net Assets ....................................... 25
Notes to Financial Statements ............................................. 26
Financial Highlights ...................................................... 31
Independent Auditors' Report .............................................. 32
Financial Data ............................................................ 33
Additional Information .................................................... 34
Dividend Reinvestment Plan ................................................ 37
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LETTER FROM THE CHAIRMAN
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R. JAY GERKEN, CFA
Chairman, President and
Chief Executive Officer
Dear Shareholder,
As you know, the high-yield bond market has confronted its share of challenges
in recent years, including concerns about the economy, integrity of corporate
financial statements and the war, to name a few. Although it has recently
vacillated in reaction to a sharp rise in U.S. Treasury bond yields, the
high-yield market has made significant strides over the 12 months ended
September 30, 2003. Because the high-yield market is more closely linked to the
strength of corporate balance sheets than to interest rates, reports of
declining rates of defaults on bond payments and an improved corporate earnings
environment over the past year have contributed to the market's performance.
In this environment of four-decade-low money market yields, higher-yielding
bonds may seem to be even more appealing. Remember, however, that high-yield
bonds carry more credit risk than investment-grade issues. That is why it is
critical to perform a thorough analysis before carefully choosing these bonds.
In our opinion, this is all the more reason why investing in high-yield bonds
with a professional fund manager is a more prudent strategy than buying these
bonds directly. Fund managers can provide the diversification and thorough
credit analysis that is so important in managing risk.
As always, thank you for entrusting your assets to us. We look forward to
helping you continue to meet your financial goals.
Sincerely,
/s/ R. JAY GERKEN
R. Jay Gerken, CFA
Chairman, President and Chief Executive Officer
October 15, 2003
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High Income Opportunity Fund Inc. 1
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MANAGER OVERVIEW
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Performance Review
During the 12 months ended September 30, 2003, the High Income Opportunity Fund
Inc. distributed dividends to shareholders totaling $0.68(i) per share. The
table below shows the 12-month total return based on the fund's September 30,
2003 net asset value ("NAV") per share and its New York Stock Exchange ("NYSE")
closing price.(ii) Past performance is not indicative of future results.
Based on NAV, the fund underperformed the average of its Lipper peer group of
high current yield (closed-end) funds, which returned 30.85%(iii), and its
unmanaged benchmark Citigroup High-Yield Market Index ("High-Yield Index"),(iv)
which returned 33.27%, for the same period. In our experience, it's not uncommon
for actively managed mutual funds to lag their unmanaged benchmarks during
periods of robust returns, such as during the last 12 months.
12-Month
Price Per Share Total Return(v)
--------------- ---------------
$7.08 (NAV) 28.67%
$7.09 (NYSE) 31.00%
High-Yield Market Review(vi)
Early last fall the market began to rally as default rates started to decline,
the economy appeared to be showing signs of improvement, and additional reports
of fraudulent corporate accounting activity diminished. The Fed's reduction of a
key short-term interest rate target to 1.25% in November further contributed to
the improved environment for high-yield securities at the time.
Despite weak equity markets, a struggling economy, the conflict with Iraq and
heightened concerns about North Korea's nuclear program, the high-yield market
continued to gain momentum throughout the first quarter of 2003. Early in the
second quarter after major combat operations in Iraq came to an end, the market
rally gained further momentum as companies reported first-quarter earnings, many
of which were in line with estimates and aided a recovering equity market. These
events, coupled with expectations during May that the Fed may cut its short-term
interest rate targets again, all helped buoy high-yield securities through
mid-June.
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2 2003 Annual Report
Although the High-Yield Index recorded eight consecutive monthly increases from
last November through June, the bond markets in general performed less favorably
between the latter part of June through much of the summer. On June 25th, the
Fed cut its target for the federal funds rate(vii) by one-quarter of a
percentage point to a four-decade low of 1% to trigger a more accommodative
borrowing environment. Bond prices typically rise when interest rates are
expected to drop under the assumption that the yields on new bonds issued will
be lower than prevailing market yields, making outstanding bonds more valuable.
However, investors' reaction to the Fed's post-meeting statement suggesting that
additional rate cuts might not be needed, coupled with the fact that the market
had already partially factored a larger cut into bond prices, actually caused
the prices of bonds to retreat. The high-yield market lost ground between the
latter part of June into the middle of August as the prices of 10-year U.S.
Treasuries retreated and their yields soared from the low 3% range in mid-June
to almost 4.5% by the middle of August. These rising yields, the subsequent
outflows of cash from high-yield bond funds, and supply pressures due to the
over-abundant quantity of new issues on the market caused the high-yield market
to move lower during this time.
Toward the latter part of August, the market reversed course and rallied
through September as the prices of U.S. Treasury notes rose and yields dropped,
bottoming below 4% in September. During this time the momentum in the market
sparked the return of inflows into high-yield bond funds. As of the period's
close, the yield on the High-Yield Index exceeded 8.5%. While yields will
fluctuate, based upon this rate as of September's close, high-yield bonds
continued to offer very competitive yields relative to higher-rated bonds.
Analysis of High-Yield Fund Holdings
Rallying from distressed levels last year, bonds in the CCC credit range and
those falling into a variety of credit categories in the airlines, cable and
media, communications towers, energy, technology, telecommunications and
utilities sectors finished the period among the top performers in the High-Yield
Index. The fund benefited from its exposure to securities rated CCC. It also
benefited from its overweighted positions in the cable and media sector, which
it increased during the period, and from its overweighted exposure to the
communications towers and telecommunications sectors (it shifted from
underweight to overweight positions during the period.)
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High Income Opportunity Fund Inc. 3
However, the fund did not participate as strongly in the rally in the technology
sector, as it decreased its exposure to this industry during the period. The
fund's underweighted position in the utilities and energy sectors also detracted
from its performance. During the period, a particularly large number of bonds in
the utilities and energy sectors were added to the High-Yield Index. Although
the fund increased its exposure to the utilities and energy sectors during the
period, it remained underweighted in relation to this index, which detracted
from its relative performance.
As of September 30, 2003, the fund held underweight positions in the gaming,
healthcare, metals and mining and restaurants sectors. This approach proved
favorable given that these sectors were all among the underperformers during the
period. However, the fund remained overweighted in the textiles sector, which
also underperformed many other sectors.
Looking for Additional Information?
The fund is traded under the symbol "HIO" and its closing market price is
available in most newspapers under the New York Stock Exchange listings.
The daily NAV is available online under symbol XHIOX. Barron's and The Wall
Street Journal's Monday editions carry closed-end fund tables that will provide
additional information. In addition, the fund issues a quarterly allocation
press release that can be found on most major financial web sites.
In a continuing effort to provide information concerning the fund, shareholders
may call 1-888-735-6507, Monday through Friday from 8:00 a.m. to 6:00 p.m.
Eastern Time (ET), for the fund's current net asset value, market price and
other information regarding the fund's portfolio holdings and allocations.
Thank you for your investment in the High Income Opportunity Fund Inc.
We appreciate that you have entrusted us to manage your money and value our
relationship with you.
Sincerely,
/s/ Peter J. Wilby Beth A. Semmel
Peter J. Wilby, CFA Beth A. Semmel, CFA
Vice President and Vice President and
Investment Officer Investment Officer
October 15, 2003
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4 2003 Annual Report
The information provided in this letter by the Manager is not intended to be a
forecast of future events, a guarantee of future results or investment advice.
Views expressed may differ from those of the firm as a whole.
Portfolio holdings and breakdowns are as of September 30, 2003 and are subject
to change. Please refer to pages 7 through 21 for a list and percentage
breakdown of the fund's holdings.
(i) Includes a return of capital of $0.07 per share.
(ii) NAV is a price that reflects the value of the fund's underlying portfolio.
However, the price at which an investor may buy or sell shares of the fund
is at the fund's market price as determined by supply of and demand for
the fund's common shares.
(iii) Lipper is a major independent mutual-fund tracking organization. Average
annual returns are based on the 12-month period ended September 30, 2003,
calculated among five funds in the high current yield (closed-end) funds
category with reinvestment of dividends and capital gains.
(iv) The High-Yield Index is a broad-based unmanaged index of high-yield
securities. Please note that an investor cannot invest directly in an
index.
(v) 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.
(vi) Investments in high-yield securities and securities of foreign companies
and governments, including emerging markets, involve risks beyond those
inherent in solely higher-rated and domestic investments. The risks of
high-yield securities include, but are not limited to, price volatility
and the possibility of default in the timely payment of interest and
principal. Foreign investments involve additional risks, including
economic, political and social factors and currency fluctuations. These
risks are magnified in emerging markets. These and other risks are more
fully described in the prospectus. Derivatives, such as options and
futures, can be illiquid and harder to value, especially in declining
markets. A small investment in certain derivatives may have a potentially
large impact on the fund's performance. Derivatives can disproportionately
increase losses as stated in the prospectus.
(vii) The federal funds rate is the interest rate that banks with excess
reserves at a Federal Reserve district bank charge other banks that need
overnight loans.
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High Income Opportunity Fund Inc. 5
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Take Advantage of the Fund's Dividend Reinvestment Plan!
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), PFPC Inc. ("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 or 95% of
the market price. 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 37. To find out more detailed information about the
Plan and about how you can participate, please call PFPC Inc. at (800) 331-1710.
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6 2003 Annual Report
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Schedule of Investments September 30, 2003
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FACE
AMOUNT+ RATING(a) SECURITY VALUE
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CORPORATE BONDS AND NOTES -- 95.7%
Aerospace and Defense -- 0.3%
1,600,000 CCC+ Dunlop Standard Aerospace Holdings PLC, Sr. Notes,
11.875% due 5/15/09 $ 1,736,000
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Airlines -- 1.2%
1,745,000 D Air Canada, Sr. Notes, 10.250% due 3/15/11 (b) 680,550
Continental Airlines, Inc., Pass-Through Certificates:
1,555,000 BB- Series 99-2, 7.434% due 9/15/04 1,457,933
601,893 BB Series 00-2, 8.312% due 4/2/11 457,218
2,380,000 B Series D, 7.568% due 12/1/06 1,724,612
United Air Lines, Inc., Pass-Through Certificates:
962,969 CCC Series 00-1, 8.030% due 7/1/11 146,241
2,268,135 CCC+ Series 00-2, 7.811% due 10/1/09 625,608
Series 01-1:
1,045,000 CCC+ 6.831% due 9/1/08 139,548
460,000 B+ 6.932% due 9/1/11 126,818
884,367 A+ US Airways, Inc., Pass-Through Trust, Series 99-1,
8.360% due 1/20/19 868,974
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6,227,502
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Automotive -- 2.7%
695,000 B+ Arvin Capital I, Capital Securities, 9.500% due 2/1/27 677,625
Dana Corp., Notes:
1,925,000 BB 6.500% due 3/1/09 1,934,625
875,000 BB 10.125% due 3/15/10 982,188
2,200,000 B- Eagle-Picher Industries, Inc., Sr. Notes,
9.750% due 9/1/13 (c) 2,321,000
775,000 BBB Ford Motor Co., Notes, 7.450% due 7/16/31 716,720
1,325,000 BBB Ford Motor Credit Co., Notes, 7.250% due 10/25/11 1,384,875
General Motors Acceptance Corp.:
450,000 BBB Debentures, 8.375% due 7/15/33 471,845
1,275,000 BBB Notes, 6.875% due 8/28/12 1,321,327
2,125,000 BBB Sr. Notes, 7.125% due 7/15/13 2,233,003
175,000 CCC LDM Technologies Inc., Sr. Sub. Notes, Series B,
10.750% due 1/15/07 175,875
1,000,000 CCC+ Tenneco Automotive Inc., Secured Notes,
10.250% due 7/15/13 (c) 1,090,000
425,000 B+ TRW Automotive Inc., Sr. Sub. Notes,
11.000% due 2/15/13 (c) 497,250
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13,806,333
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Building Products -- 1.2%
435,000 B- Associated Materials Inc., Sr. Sub. Notes,
9.750% due 4/15/12 462,188
1,745,000 B- Atrium Cos., Inc., Sr. Sub. Notes, Series B,
10.500% due 5/1/09 1,875,875
See Notes to Financial Statements.
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High Income Opportunity Fund Inc. 7
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Schedule of Investments (continued) September 30, 2003
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FACE
AMOUNT+ RATING(a) SECURITY VALUE
==========================================================================================================
Building Products -- 1.2% (continued)
Nortek Holding Inc., Series B:
975,000 B+ Sr. Notes, 9.125% due 9/1/07 $ 1,009,125
2,185,000 B- Sr. Sub. Notes, 9.875% due 6/15/11 2,321,562
885,000 D Oglebay Norton Co., Sr. Sub. Notes,
10.000% due 2/1/09 (b) 393,825
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6,062,575
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Business -- 1.7%
2,000,000 B- Advanstar Communications Inc., Secured Notes,
8.630% due 8/15/08 (c)(d) 2,027,500
2,845,000 BBB- Avis Group Holdings Inc., Sr. Sub. Notes,
11.000% due 5/1/09 3,172,175
550,000 B Iron Mountain Inc., Sr. Sub. Notes, 8.625% due 4/1/13 588,500
1,460,000 BB- Mail-Well I Corp., Sr. Notes, 9.625% due 3/15/12 1,591,400
1,125,000 B Muzak LLC, Sr. Notes, 10.000% due 2/15/09 1,181,250
4,770,000 D Outsourcing Solutions Inc., Sr. Sub. Notes, Series B,
11.000% due 11/1/06 (b) 47,700
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8,608,525
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Cable and Media -- 11.1%
525,000 BB+ Avista Corp., Sr. Notes, 9.750% due 6/1/08 614,250
Charter Communications Holdings LLC:
Sr. Discount Notes:
10,855,000 CCC- Step bond to yield 12.087% due 1/15/10 7,707,050
2,735,000 CCC- Step bond to yield 11.668% due 1/15/11 1,723,050
3,880,000 CCC- Step bond to yield 17.391% due 5/15/11 2,153,400
2,600,000 CCC- Sr. Notes, 10.750% due 10/1/09 2,138,500
CSC Holdings Inc.:
2,425,000 BB- Debentures, 7.625% due 7/15/18 2,340,125
Sr. Notes:
1,025,000 BB- 7.875% due 12/15/07 1,053,187
Series B:
1,200,000 BB- 8.125% due 7/15/09 1,242,000
700,000 BB- 7.625% due 4/1/11 701,750
Sr. Sub. Debentures:
3,955,000 B+ 10.500% due 5/15/16 4,370,275
975,000 B+ 9.875% due 4/1/23 1,009,125
2,375,000 B DirecTV Holdings LLC, Sr. Notes, 8.375% due 3/15/13 2,689,687
EchoStar DBS Corp., Sr. Notes:
3,495,000 BB- 10.375% due 10/1/07 3,905,662
1,979,000 BB- 9.125% due 1/15/09 2,251,113
2,830,000 BB- 9.375% due 2/1/09 3,031,638
875,000 B+ Garden State Newspapers, Inc., Sr. Sub. Notes, Series B,
8.750% due 10/1/09 903,438
2,630,000 B- Insight Communications Co., Inc., Sr. Discount Notes,
step bond to yield 13.766% due 2/15/11 1,939,625
See Notes to Financial Statements.
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8 2003 Annual Report
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Schedule of Investments (continued) September 30, 2003
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FACE
AMOUNT+ RATING(a) SECURITY VALUE
==========================================================================================================
Cable and Media -- 11.1% (continued)
3,075,000 B+ Mediacom Broadband LLC, Sr. Notes,
11.000% due 7/15/13 $ 3,251,812
75,000 B+ Mediacom LLC, Sr. Notes, 9.500% due 1/15/13 71,438
Pegasus Communications Corp., Sr. Notes, Series B:
175,000 CCC- 9.625% due 10/15/05 139,125
710,000 CCC- 9.750% due 12/1/06 564,450
870,000 CCC- Pegasus Satellite Communications Inc., Sr. Discount
Notes, step bond to yield 19.102% due 3/1/07 561,150
4,500,000 BB- Rogers Cablesystems, Ltd., Sr. Sub. Notes,
11.000% due 12/1/15 5,118,750
2,575,000 BBB+ Time Warner Inc., Sr. Notes, 6.625% due 5/15/29 2,628,601
Vivendi Universal S.A., Sr. Notes:
3,200,000 B+ 6.250% due 7/15/08 (c) 3,312,000
1,200,000 B+ 9.250% due 4/15/10 (c) 1,384,500
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56,805,701
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Capital Goods -- 0.3%
1,150,000 B Terex Corp., Sr. Sub. Notes, Series B,
10.375% due 4/1/11 1,293,750
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Cellular and PCs -- 6.1%
250,000 B- ACC Escrow Corp., Sr. Notes, 10.000% due 8/1/11 (c) 270,000
2,170,000 C AirGate PCS Inc., Sr. Sub. Notes, step bond to yield
15.628% due 10/1/09 1,670,900
875,000 C Alamosa Delaware Inc., Sr. Notes, 13.625% due 8/15/11 853,125
4,430,000 C Alamosa Holdings, Inc., Sr. Discount Notes,
step bond to yield 18.865% due 2/15/10 3,521,850
AT&T Wireless Services Inc.:
3,825,000 BBB Notes, 8.125% due 5/1/12 4,550,216
Sr. Notes:
4,425,000 BBB 7.875% due 3/1/11 (d) 5,159,811
100,000 BBB 8.750% due 3/1/31 (d) 124,123
1,000,000 CCC+ Dobson Communications Corp., Sr. Notes,
8.875% due 10/1/13 (c) 1,016,250
1,640,000 NR Dobson/Sygnet Communications Corp., Sr. Notes,
12.250% due 12/15/08 1,767,100
890,000 D Horizon PCS Inc., Sr. Discount Notes, step bond to yield
14.482% due 10/1/10 (b) 173,550
Nextel Communications, Inc.:
8,655,000 B+ Sr. Discount Notes, 9.950% due 2/15/08 9,141,844
1,375,000 B+ Sr. Notes, 9.375% due 11/15/09 1,498,750
1,460,000 CCC+ Nextel Partners Inc., Sr. Notes, 12.500% due 11/15/09 1,671,700
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31,419,219
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Chemicals -- 4.4%
1,020,000 B+ Airgas Inc., Sr. Sub. Notes, 9.125% due 10/1/11 1,137,300
1,720,000 CCC+ Avecia Group PLC, Sr. Notes, 11.000% due 7/1/09 1,513,600
See Notes to Financial Statements.
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High Income Opportunity Fund Inc. 9
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Schedule of Investments (continued) September 30, 2003
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FACE
AMOUNT+ RATING(a) SECURITY VALUE
==========================================================================================================
Chemicals -- 4.4% (continued)
700,000 BB+ FMC Corp., Medium-Term Notes, Series A,
6.750% due 5/5/05 $ 713,125
15,785,000 CCC+ Huntsman International Holdings LLC, Sr. Discount Notes,
zero coupon bond to yield 13.091% due 12/31/09 6,314,000
870,000 B- Huntsman International LLC, Sr. Notes,
9.875% due 3/1/09 917,850
1,750,000 B+ IMC Global Inc., Sr. Notes, Series B, 11.250% due 6/1/11 1,828,750
1,750,000 BB- ISP Chemco Inc., Sr. Sub. Notes, Series B,
10.250% due 7/1/11 1,960,000
1,715,000 B+ ISP Holdings Inc., Secured Notes, Series B,
10.625% due 12/15/09 1,877,925
1,745,000 BB- Lyondell Chemical Co., Secured Notes,
11.125% due 7/15/12 1,718,825
700,000 BBB- Methanex Corp., Sr. Notes, 8.750% due 8/15/12 756,000
655,000 B- OM Group Inc., Sr. Sub. Notes, 9.250% due 12/15/11 653,363
1,250,000 BB- Rhodia S.A., Sr. Sub. Notes, 8.875% due 6/1/11 (c) 1,234,375
170,000 B+ Terra Capital Inc., Sr. Secured Notes,
12.875% due 10/15/08 188,700
1,450,000 B+ Westlake Chemical Corp., Sr. Notes,
8.750% due 7/15/11 (c) 1,511,625
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22,325,438
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Consumer Products -- 3.7%
2,100,000 B+ AKI, Inc., Sr. Notes, 10.500% due 7/1/08 2,215,500
American Greetings Corp.:
1,220,000 BBB- Notes, 6.100% due 8/1/28 1,241,350
790,000 BB+ Sr. Sub. Notes, 11.750% due 7/15/08 904,550
550,000 B- Home Interiors & Gifts Inc., Sr. Sub. Notes,
10.125% due 6/1/08 561,000
2,200,000 B- Icon Health & Fitness, Sr. Sub. Notes,
11.250% due 4/1/12 2,370,500
475,000 B- Salton Inc., Sr. Sub. Notes, 12.250% due 4/15/08 466,688
Sealy Mattress Co., Series B:
2,390,000 B- Sr. Sub. Discount Notes, 10.875% due 12/15/07 2,455,725
1,025,000 B- Sr. Sub. Notes, 9.875% due 12/15/07 1,035,250
Service Corp. International:
1,225,000 BB- Debentures, 7.875% due 2/1/13 1,188,250
Notes:
1,365,000 BB- 6.875% due 10/1/07 1,365,000
1,715,000 BB- 6.500% due 3/15/08 1,706,425
1,395,000 BB- Sola International Inc., Notes, 6.875% due 3/15/08 1,347,919
1,880,000 B+ Stewart Enterprises, Inc., Sr. Sub. Notes,
10.750% due 7/1/08 2,115,000
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18,973,157
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See Notes to Financial Statements.
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10 2003 Annual Report
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Schedule of Investments (continued) September 30, 2003
- --------------------------------------------------------------------------------
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==========================================================================================================
Container and Packaging -- 2.7%
Anchor Glass Container Corp., Secured Notes:
1,950,000 B+ 11.000% due 2/15/13 $ 2,193,750
325,000 B+ 11.000% due 2/15/13 (c) 365,625
3,420,000 BB Owens-Brockway, Sr. Secured Notes,
8.875% due 2/15/09 3,659,400
700,000 B+ Owens-Illinois Inc., Sr. Notes, 7.150% due 5/15/05 719,250
1,625,000 B+ Plastipak Holdings Inc., Sr. Notes, 10.750% due 9/1/11 1,787,500
Pliant Corp.:
1,100,000 B- Secured Notes, 11.125% due 9/1/09 (c) 1,188,000
245,000 B- Sr. Sub. Notes, 13.000% due 6/1/10 229,075
725,000 B Radnor Holdings Corp., Sr. Notes,
11.000% due 3/15/10 (c) 616,250
1,550,000 BBB Sealed Air Corp., Notes, 6.950% due 5/15/09 (c) 1,734,622
1,385,000 B- Tekni-Plex Inc., Sr. Sub. Notes, Series B,
12.750% due 6/15/10 1,364,225
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13,857,697
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Drillers and Service -- 0.7%
410,000 CCC+ Parker Drilling Co., Sub. Notes, 5.500% due 8/1/04 407,950
1,890,000 BB Pride International Inc., Sr. Notes, 10.000% due 6/1/09 2,050,650
865,000 BB- SESI, LLC, Sr. Notes, 8.875% due 5/15/11 921,225
525,000 CCC+ Trico Marine Services Inc., Sr. Notes,
8.875% due 5/15/12 385,875
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3,765,700
- ----------------------------------------------------------------------------------------------------------
Energy -- 7.3%
Dynegy Holdings Inc.:
4,500,000 CCC+ Debentures, 7.625% due 10/15/26 3,420,000
4,500,000 B- Secured Notes, 7.700% due 7/15/08 (c)(d) 4,645,597
El Paso Corp., Sr. Notes, Medium-Term Notes:
750,000 B 7.800% due 8/1/31 558,750
6,275,000 B 7.750% due 1/15/32 4,674,875
1,400,000 BB- El Paso Energy Partners L.P., Sr. Sub. Notes, Series B,
8.500% due 6/1/11 1,515,500
2,075,000 BB- Leviathan Gas Pipeline Partners, L.P., Sr. Sub. Notes,
Series B, 10.375% due 6/1/09 2,365,500
1,725,000 B+ Magnum Hunter Resource, Inc., Sr. Notes,
9.600% due 3/15/12 1,888,875
544,000 B Nuevo Energy Co., Sr. Sub. Notes, Series B,
9.500% due 6/1/08 574,600
Plains Exploration & Production Co., Sr. Sub. Notes:
1,250,000 B 8.750% due 7/1/12 (c) 1,343,750
875,000 B Series B, 8.750% due 7/1/12 940,625
Pogo Producing Co., Sr. Sub. Notes, Series B:
345,000 BB 10.375% due 2/15/09 371,738
520,000 BB 8.250% due 4/15/11 568,100
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 11
- --------------------------------------------------------------------------------
Schedule of Investments (continued) September 30, 2003
- --------------------------------------------------------------------------------
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==========================================================================================================
Energy -- 7.3% (continued)
Swift Energy Co., Sr. Sub. Notes:
1,600,000 B 10.250% due 8/1/09 $ 1,740,000
700,000 B 9.375% due 5/1/12 759,500
Vintage Petroleum Inc.:
1,210,000 BB- Sr. Notes, 8.250% due 5/1/12 1,309,825
Sr. Sub. Notes:
395,000 B 9.750% due 6/30/09 422,650
1,600,000 B 7.875% due 5/15/11 1,668,000
875,000 B+ Westport Resources Corp., Sr. Sub. Notes,
8.250% due 11/1/11 960,313
The Williams Cos., Inc.:
Notes:
1,825,000 B+ 7.625% due 7/15/19 1,706,375
2,950,000 B+ 7.875% due 9/1/21 2,802,500
700,000 B+ 8.750% due 3/15/32 694,750
2,500,000 B+ Sr. Notes, 8.625% due 6/1/10 2,668,750
- ----------------------------------------------------------------------------------------------------------
37,600,573
- ----------------------------------------------------------------------------------------------------------
Financial and Leasing -- 2.9%
9,956,016 CCC Airplanes Pass-Through Trust, Corporate Asset-Backed
Securities, Sub. Notes, Series D, 10.875% due 3/15/12 298,680
2,600,000 B Felcor Lodging L.P., Sr. Notes, 10.000% due 9/15/08 2,808,000
1,680,000 BB Markel Capital Trust I, Capital Securities, Series B,
8.710% due 1/1/46 1,724,412
2,550,000 CCC+ MeriStar Hospitality Operating Partnership, L.P.,
Sr. Notes, 10.500% due 6/15/09 2,766,750
5,500,000 CCC- Ocwen Capital Trust I, Capital Securities,
10.875% due 8/1/27 5,087,500
1,354,000 B- Ocwen Financial Corp., Notes, 11.875% due 10/1/03 1,354,000
1,050,000 BB+ PXRE Capital Trust I Corp., Capital Trust Pass-Through
Securities, 8.850% due 2/1/27 913,500
- ----------------------------------------------------------------------------------------------------------
14,952,842
- ----------------------------------------------------------------------------------------------------------
Food Processing/Beverages/Tobacco -- 1.3%
875,000 B+ Cott Beverages USA Inc., Sr. Sub. Notes,
8.000% due 12/15/11 946,094
995,000 BB- Dean Foods Co., Sr. Notes, 6.900% due 10/15/17 995,000
1,125,000 B Del Monte Corp., Sr. Sub. Notes, 8.625% due 12/15/12 (c) 1,234,688
175,000 CCC+ Doane Pet Care Co., Sr. Sub. Notes, 9.750% due 5/15/07 167,125
1,635,000 B- Michael Foods Inc., Sr. Sub. Notes, Series B,
11.750% due 4/1/11 1,921,125
175,000 B- Premier International Foods PLC, Sr. Notes,
12.000% due 9/1/09 192,500
1,075,000 BB+ Standard Commercial Tobacco Co., Sr. Notes,
8.875% due 8/1/05 1,100,531
- ----------------------------------------------------------------------------------------------------------
6,557,063
- ----------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
12 2003 Annual Report
- --------------------------------------------------------------------------------
Schedule of Investments (continued) September 30, 2003
- --------------------------------------------------------------------------------
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==========================================================================================================
Gaming -- 3.8%
2,170,000 B Ameristar Casinos Inc., Sr. Sub. Notes,
10.750% due 2/15/09 $ 2,479,225
625,000 B+ Horseshoe Gaming Holding Corp., Sr. Sub. Notes,
Series B, 8.625% due 5/15/09 672,656
Mandalay Resort Group:
700,000 BB- Sr. Sub. Debentures, 7.625% due 7/15/13 724,500
1,725,000 BB- Sr. Sub. Notes, Series B, 10.250% due 8/1/07 1,992,375
MGM Mirage, Sr. Sub. Notes:
875,000 BB- 9.750% due 6/1/07 994,219
2,050,000 BB- 8.375% due 2/1/11 2,265,250
Park Place Entertainment Corp., Sr. Sub. Notes:
1,300,000 BB- 9.375% due 2/15/07 1,439,750
1,325,000 BB- 8.875% due 9/15/08 1,470,750
2,545,000 BB- 8.125% due 5/15/11 2,754,963
1,780,000 B+ Station Casinos, Inc., Sr. Sub. Notes,
8.875% due 12/1/08 1,869,000
2,615,000 B- Venetian Casino Resort, LLC, Mortgage Secured Notes,
11.000% due 6/15/10 2,994,175
- ----------------------------------------------------------------------------------------------------------
19,656,863
- ----------------------------------------------------------------------------------------------------------
Healthcare -- 3.5%
500,000 B- aaiPharma Inc., Sr. Sub. Notes, 11.000% due 4/1/10 560,000
1,000,000 B- Ameripath, Inc., Sr. Sub. Notes, 10.500% due 4/1/13 1,075,000
2,900,000 CCC+ Athena Neurosciences Financial LLC, Sr. Notes,
7.250% due 2/21/08 2,363,500
2,000,000 B+ Dade Behring Holdings Inc., Sr. Sub. Notes,
11.910% due 10/3/10 2,270,000
1,059,000 B DaVita Inc., Sub. Notes, 7.000% due 5/15/09 1,110,626
775,000 B- Extendicare Health Services Inc., Sr. Sub. Notes,
9.500% due 7/1/10 844,750
1,755,000 B- Hanger Orthopedic Group Inc., Sr. Sub. Notes,
11.250% due 6/15/09 1,969,987
2,400,000 B- InSight Health Services Corp., Sr. Sub. Notes, Series B,
9.875% due 11/1/11 2,550,000
575,000 BB Tenet Healthcare Corp., Sr. Notes, 5.375% due 11/15/06 566,375
1,730,000 B- Universal Hospital Services, Sr. Notes,
10.250% due 3/1/08 1,807,850
2,450,000 CCC+ Vanguard Health Systems, Sr. Sub. Notes,
9.750% due 8/1/11 2,621,500
- ----------------------------------------------------------------------------------------------------------
17,739,588
- ----------------------------------------------------------------------------------------------------------
Home Builders -- 2.0%
D.R. Horton Inc.:
1,140,000 BB Sr. Notes, 8.000% due 2/1/09 1,251,150
910,000 B+ Sr. Sub. Notes, 9.375% due 3/15/11 996,450
1,350,000 BB- KB Home, Sr. Sub. Notes, 9.500% due 2/15/11 1,486,688
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 13
- --------------------------------------------------------------------------------
Schedule of Investments (continued) September 30, 2003
- --------------------------------------------------------------------------------
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==========================================================================================================
Home Builders-- 2.0% (continued)
1,490,000 BBB- Lennar Corp., Sr. Notes, Series B, 9.950% due 5/1/10 $ 1,725,369
650,000 BB+ Ryland Group, Inc., Sr. Notes, 9.750% due 9/1/10 745,875
1,715,000 B+ Schuler Homes Inc., Sr. Sub. Notes,
10.500% due 7/15/11 1,952,956
Standard-Pacific Corp.:
1,140,000 BB Sr. Notes, 8.500% due 4/1/09 1,185,600
875,000 B+ Sr. Sub. Notes, 9.250% due 4/15/12 960,313
- ----------------------------------------------------------------------------------------------------------
10,304,401
- ----------------------------------------------------------------------------------------------------------
Industrial -- 1.9%
1,235,000 NR Aqua-Chem Inc., Sr. Sub. Notes, 11.250% due 7/1/08 1,012,700
775,000 BB- Case Corp., Notes, 7.250% due 1/15/16 713,000
435,000 BB- Case Credit Corp., Notes, 6.750% due 10/21/07 443,700
375,000 BB- Case New Holland Inc., Sr. Notes, 9.250% due 8/1/11 (c) 405,000
1,400,000 B- Columbus McKinnon Corp., Secured Notes,
10.000% due 8/1/10 (c) 1,480,500
1,975,000 B FlowServe Corp., Sr. Sub. Notes, 12.250% due 8/15/10 2,291,000
690,000 B+ NMHG Holding Co., 10.000% due 5/15/09 762,450
625,000 B- Rexnord Corp., Sr. Sub. Notes, 10.125% due 12/15/12 696,875
1,705,000 B Williams Scotsman Inc., Sr. Notes, 9.875% due 6/1/07 1,687,950
- ----------------------------------------------------------------------------------------------------------
9,493,175
- ----------------------------------------------------------------------------------------------------------
Industrial Service -- 2.0%
Allied Waste North America:
Sr. Notes, Series B:
2,580,000 BB- 8.500% due 12/1/08 2,799,300
1,400,000 BB- 7.875% due 1/1/09 1,459,500
3,680,000 B+ Sr. Sub. Notes, 10.000% due 8/1/09 4,006,600
1,600,000 B- Brand Services Inc., Sr. Notes, 12.000% due 10/15/12 1,776,000
- ----------------------------------------------------------------------------------------------------------
10,041,400
- ----------------------------------------------------------------------------------------------------------
International Cable -- 0.2%
1,420,000(GBP) C TeleWest Communications PLC, Sr. Notes,
5.250% due 2/19/07 (b)(c) 1,026,772
- ----------------------------------------------------------------------------------------------------------
Leisure -- 0.9%
AMC Entertainment Inc., Sr. Sub. Notes:
2,670,000 CCC+ 9.500% due 3/15/09 2,780,137
1,175,000 CCC+ 9.500% due 2/1/11 1,239,625
660,000 CCC Imax Corp., Sr. Notes, 7.875% due 12/1/05 658,350
- ----------------------------------------------------------------------------------------------------------
4,678,112
- ----------------------------------------------------------------------------------------------------------
Lodging -- 1.9%
1,550,000 CCC+ Courtyard By Marriott II L.P., Sr. Notes, Series B,
10.750% due 2/1/08 1,548,062
Hilton Hotels Corp.:
275,000 BBB- Notes, 7.625% due 12/1/12 301,813
1,360,000 BBB- Sr. Notes, 7.950% due 4/15/07 1,496,000
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
14 2003 Annual Report
- --------------------------------------------------------------------------------
Schedule of Investments (continued) September 30, 2003
- --------------------------------------------------------------------------------
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==========================================================================================================
Lodging -- 1.9% (continued)
1,587,000 B+ Host Marriott Corp., Sr. Secured Notes, Series A,
7.875% due 8/1/05 $ 1,634,610
2,920,000 B+ Host Marriott L.P., Notes, Series I, 9.500% due 1/15/07 3,212,000
1,250,000 BB+ Starwood Hotels & Resorts Worldwide Inc., Notes,
7.875% due 5/1/12 1,375,000
- ----------------------------------------------------------------------------------------------------------
9,567,485
- ----------------------------------------------------------------------------------------------------------
Machinery -- 0.4%
2,280,000 CCC+ Park-Ohio Industries Inc., Sr. Sub. Notes,
9.250% due 12/1/07 2,166,000
- ----------------------------------------------------------------------------------------------------------
Networks -- 5.8%
AT&T Corp., Sr. Notes:
2,250,000 BBB 7.800% due 11/15/11 2,605,405
3,400,000 BBB 8.500% due 11/15/31 4,039,571
2,955,000(EUR) B- Colt Telecom Group PLC, 2.000% due 4/3/07 (c) 3,322,654
1,650,000 CCC+ Qwest Communications International, Sr. Notes,
Series B, 7.500% due 11/1/08 1,592,250
Qwest Corp.:
2,100,000 B- Debentures, 6.875% due 9/15/33 1,858,500
Notes:
4,025,000 B- 8.875% due 3/15/12 (c) 4,487,875
1,583,000 CCC+ 14.000% due 12/15/14 (c) 1,911,472
Sprint Capital Corp.:
5,550,000 BBB- Notes, 8.750% due 3/15/32 6,617,848
3,250,000 BBB- Sr. Notes, 6.875% due 11/15/28 3,180,518
- ----------------------------------------------------------------------------------------------------------
29,616,093
- ----------------------------------------------------------------------------------------------------------
Paper and Forest Products -- 4.0%
2,000,000 BB+ Bowater Inc., Debentures, 9.500% due 10/15/12 2,215,360
Buckeye Technologies Inc., Sr. Sub. Notes:
875,000 B 9.250% due 9/15/08 883,750
2,930,000 B 8.000% due 10/15/10 2,724,900
1,875,000 B JSG Funding PLC, Sr. Notes, 9.625% due 10/1/12 2,062,500
3,290,000 B+ Louisiana-Pacific Corp., Sr. Sub. Notes,
10.875% due 11/15/08 3,841,075
1,250,000 B+ Millar Western Forest Products Ltd., Sr. Notes,
9.875% due 5/15/08 1,306,250
4,635,000 B Stone Container Finance, Sr. Notes,
11.500% due 8/15/06 (c) 4,942,069
2,450,000 BB Tembec Industries, Inc., Sr. Notes, 8.625% due 6/30/09 2,425,500
- ----------------------------------------------------------------------------------------------------------
20,401,404
- ----------------------------------------------------------------------------------------------------------
Publishing and Printing -- 1.9%
1,050,000 B Dex Media East LLC, Notes, 12.125% due 11/15/12 1,273,125
1,450,000 B Dex Media West LLC, Sr. Sub. Notes,
9.875% due 8/15/13 (c) 1,645,750
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 15
- --------------------------------------------------------------------------------
Schedule of Investments (continued) September 30, 2003
- --------------------------------------------------------------------------------
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==========================================================================================================
Publishing and Printing -- 1.9% (continued)
2,813,602 B- Hollinger Participation Trust, Sr. Notes, Payment-in-Kind,
12.125% due 11/15/10 (c) $ 3,182,888
1,350,000 B Houghton Mifflin Co., Sr. Discount Notes,
step bond to yield 11.500% due 10/15/13 (c) 768,960
875,000 B PEI Holdings Inc., Sr. Notes, 11.000% due 3/15/10 971,250
500,000 B+ R.H. Donnelley Finance Corp. I, Sr. Sub. Notes,
10.875% due 12/15/12 (c) 592,500
625,000 B- Vertis Inc., Secured Notes, 9.750% due 4/1/09 (c) 660,938
601,000 B+ Yell Finance B.V., Sr. Discount Notes, step bond to yield
12.263% due 8/1/11 537,895
- ----------------------------------------------------------------------------------------------------------
9,633,306
- ----------------------------------------------------------------------------------------------------------
Radio -- 1.2%
3,602,000 B- Emmis Communications Corp., Sr. Discount Notes,
step bond to yield 12.307% due 3/15/11 3,223,790
375,000 B- Nextmedia Operating Inc., Sr. Sub. Notes,
10.750% due 7/1/11 421,875
1,235,000 B- Radio One, Inc., Sr. Sub. Notes, Series B,
8.875% due 7/1/11 1,349,237
850,000 B- Spanish Broadcasting System, Sub. Notes,
9.625% due 11/1/09 903,125
- ----------------------------------------------------------------------------------------------------------
5,898,027
- ----------------------------------------------------------------------------------------------------------
Restaurants -- 0.5%
525,000 CCC+ American Restaurant Group, Sr. Secured Notes, Series D,
11.500% due 11/1/06 370,125
1,230,000 CCC CKE Restaurants Inc., Sr. Sub. Notes, 9.125% due 5/1/09 1,242,300
885,000 CCC- Denny's Corp., Sr. Notes, 11.250% due 1/15/08 513,300
445,000 B- Friendly Ice Cream Corp., Sr. Notes, 10.500% due 12/1/07 461,688
- ----------------------------------------------------------------------------------------------------------
2,587,413
- ----------------------------------------------------------------------------------------------------------
Retail -- 3.0%
500,000 B Cole National Group, Inc., Sr. Sub. Notes,
8.625% due 8/15/07 495,000
1,250,000 CCC+ Eye Care Centers of America, Inc., Sr. Sub. Notes,
9.125% due 5/1/08 1,237,500
The Gap Inc., Notes:
525,000 BB+ 9.900% due 12/15/05 590,625
250,000 BB+ 6.900% due 9/15/07 270,000
1,800,000 BB+ 10.550% due 12/15/08 2,173,500
J.C. Penney Co. Inc., Notes:
2,325,000 BB+ 8.000% due 3/1/10 2,563,312
2,177,000 BB+ 9.000% due 8/1/12 2,470,895
1,013,000 B- Jo-Ann Stores Inc., Sr. Sub. Notes, 10.375% due 5/1/07 1,068,715
705,000 CCC Mrs. Field's Original Cookies, Sr. Sub. Notes, Series B,
10.125% due 12/1/04 356,025
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
16 2003 Annual Report
- --------------------------------------------------------------------------------
Schedule of Investments (continued) September 30, 2003
- --------------------------------------------------------------------------------
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==========================================================================================================
Retail -- 3.0% (continued)
897,000 NR Pennzoil-Quaker State Co., Sr. Notes,
10.000% due 11/1/08 $ 1,081,917
880,000 BB- The Pep Boys - Manny, Moe & Jack, Medium-Term
Notes, Series A, 6.710% due 11/3/04 893,200
1,944,000 BB Saks Inc., Notes, 9.875% due 10/1/11 2,303,640
- ----------------------------------------------------------------------------------------------------------
15,504,329
- ----------------------------------------------------------------------------------------------------------
Retail - Food and Drug -- 0.9%
165,000 NR Fleming Cos. Inc., Sr. Notes, 10.125% due 4/1/08 (b) 28,050
Rite Aid Corp.:
1,845,000 B- Notes, 7.125% due 1/15/07 1,877,288
Sr. Notes:
2,680,000 B- 7.625% due 4/15/05 2,760,400
75,000 B- 11.250% due 7/1/08 84,375
- ----------------------------------------------------------------------------------------------------------
4,750,113
- ----------------------------------------------------------------------------------------------------------
Steel/Metal -- 0.8%
1,315,000 BB Luscar Coal Ltd., Sr. Notes, 9.750% due 10/15/11 1,505,675
1,710,000 BBB- Phelps Dodge Corp., Sr. Notes, 8.750% due 6/1/11 2,072,973
535,000 BB- Wolverine Tube Inc., Sr. Notes, 10.500% due 4/1/09 540,350
- ----------------------------------------------------------------------------------------------------------
4,118,998
- ----------------------------------------------------------------------------------------------------------
Supermarkets -- 0.2%
425,000 B+ Ahold Finance USA, Inc., Notes, 8.250% due 7/15/10 459,000
840,000 B Great Atlantic & Pacific Tea Co., Notes,
7.750% due 4/15/07 793,800
- ----------------------------------------------------------------------------------------------------------
1,252,800
- ----------------------------------------------------------------------------------------------------------
Technology -- 2.5%
1,980,000 CCC+ Amkor Technology Inc., Sub. Notes, 5.000% due 3/15/07 1,811,700
1,005,000 B+ Avaya Inc., Secured Notes, 11.125% due 4/1/09 1,168,312
1,555,000 D GT Group Telecom Inc., Sr. Discount Notes,
step bond to yield 15.233% due 2/1/10 (b) 156
2,765,000 B LSI Logic Corp., Sub. Notes, 4.000% due 2/15/05 2,744,263
1,950,000 B Nortel Networks Corp., Notes, 6.875% due 9/1/23 1,794,000
895,000 B Northern Telecom Capital, Notes, 7.875% due 6/15/26 863,675
4,405,000 B Sanmina-SCI Corp., Sub. Debentures, zero coupon bond
to yield 10.665% due 9/12/20 2,196,994
2,060,000 BBB- Thomas & Betts Corp., Medium-Term Notes,
6.625% due 5/7/08 2,090,900
- ----------------------------------------------------------------------------------------------------------
12,670,000
- ----------------------------------------------------------------------------------------------------------
Television - Other -- 0.4%
Paxson Communications Corp.:
1,370,000 CCC+ Sr. Sub. Discount Notes, step bond to yield
12.309% due 1/15/09 1,092,575
665,000 CCC+ Sr. Sub. Notes, 10.750% due 7/15/08 705,731
- ----------------------------------------------------------------------------------------------------------
1,798,306
- ----------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 17
- --------------------------------------------------------------------------------
Schedule of Investments (continued) September 30, 2003
- --------------------------------------------------------------------------------
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==========================================================================================================
Textile/Apparel -- 1.3%
Levi Strauss & Co.:
1,255,000 B Notes, 7.000% due 11/1/06 $ 985,175
Sr. Notes:
2,135,000 B 11.625% due 1/15/08 1,761,375
1,365,000 B 12.250% due 12/15/12 1,098,825
1,335,000 B- Tropical Sportswear International Corp., Sr. Sub. Notes,
Series A, 11.000% due 6/15/08 1,294,950
1,195,000 B The William Carter Co., Sr. Sub. Notes, Series B,
10.875% due 8/15/11 1,338,400
- ----------------------------------------------------------------------------------------------------------
6,478,725
- ----------------------------------------------------------------------------------------------------------
Towers -- 2.9%
3,925,000 CCC American Tower Corp., Sr. Notes, 9.375% due 2/1/09 4,023,125
985,000 CCC American Tower Escrow Corp., Discount Notes,
zero coupon bond to yield 14.330% due 8/1/08 659,950
Crown Castle International Corp.:
2,435,000 CCC Sr. Discount Notes, step bond to yield
12.873% due 5/15/11 2,459,350
2,420,000 CCC Sr. Notes, 10.750% due 8/1/11 2,698,300
SBA Communications Corp.:
2,000,000 CC Sr. Discount Notes, 12.000% due 3/1/08 2,120,000
1,075,000 CC Sr. Notes, 10.250% due 2/1/09 972,875
1,700,000 CCC+ SpectraSite Inc., Sr. Notes, 8.250% due 5/15/10 (c) 1,802,000
- ----------------------------------------------------------------------------------------------------------
14,735,600
- ----------------------------------------------------------------------------------------------------------
Transportation - Other -- 0.5%
1,000,000 B+ General Maritime Corp., Sr. Notes, 10.000% due 3/15/13 1,122,500
505,000 B- Petro Stopping Centers L.P., Sr. Notes,
10.500% due 2/1/07 510,050
960,000 BB+ Windsor Petroleum Transport Corp., Notes,
7.840% due 1/15/21 (c) 889,200
- ----------------------------------------------------------------------------------------------------------
2,521,750
- ----------------------------------------------------------------------------------------------------------
Utilities -- 5.6%
The AES Corp.:
3,455,000 B- Sr. Notes, 9.500% due 6/1/09 3,575,925
Sr. Sub. Notes:
100,000 B- 8.375% due 8/15/07 97,750
400,000 B- 8.500% due 11/1/07 391,000
Avon Energy Partners Holdings:
2,375,000 CC Notes, 6.460% due 3/4/08 (c) 2,030,625
1,975,000 CC Sr. Notes, 7.050% due 12/11/07 (c) 1,688,625
8,770,000 CCC+ Calpine Canada Energy Finance ULC, Sr. Notes,
8.500% due 5/1/08 6,358,250
Calpine Corp.:
325,000 B Secured Notes, 8.500% due 7/15/10 (c) 300,625
1,690,000 CCC+ Sr. Notes, 8.625% due 8/15/10 1,199,900
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
18 2003 Annual Report
- --------------------------------------------------------------------------------
Schedule of Investments (continued) September 30, 2003
- --------------------------------------------------------------------------------
FACE
AMOUNT+ RATING(a) SECURITY VALUE
==========================================================================================================
Utilities -- 5.6% (continued)
845,000 B+ CMS Energy Corp., Sr. Notes, 7.625% due 11/15/04 $ 861,900
Edison Mission Energy, Sr. Notes:
1,750,000 BB- 10.000% due 8/15/08 1,548,750
800,000 BB- 7.730% due 6/15/09 656,000
3,100,000 BB- 9.875% due 4/15/11 2,666,000
1,225,000 D Mirant Americas Generation LLC, Sr. Notes,
9.125% due 5/1/31 (b) 973,875
3,150,000 B- Orion Power Holdings Inc., Sr. Notes,
12.000% due 5/1/10 3,575,250
Reliant Resources Inc., Secured Notes:
425,000 B 9.250% due 7/15/10 (c) 386,750
2,725,000 B 9.500% due 7/15/13 (c) 2,466,125
- ----------------------------------------------------------------------------------------------------------
28,777,350
- ----------------------------------------------------------------------------------------------------------
TOTAL CORPORATE BONDS AND NOTES
(Cost -- $469,942,896) 489,410,085
==========================================================================================================
SHARES SECURITY VALUE
==========================================================================================================
CONVERTIBLE PREFERRED STOCK -- 0.2%
Aerospace and Defense -- 0.0%
1,700 Northrop Grumman Corp., 7.250% due 11/16/04 166,260
- ----------------------------------------------------------------------------------------------------------
Networks -- 0.0%
5,800 Global Crossing Ltd., 6.750% due 4/15/12 (e) 116
- ----------------------------------------------------------------------------------------------------------
Technology -- 0.0%
4,300 Motorola, Inc., 7.000% due 11/16/04 163,056
- ----------------------------------------------------------------------------------------------------------
Tower -- 0.2%
19,800 Crown Castle International Corp., 6.250% due 8/15/12 777,150
- ----------------------------------------------------------------------------------------------------------
TOTAL CONVERTIBLE PREFERRED STOCK
(Cost -- $1,904,600) 1,106,582
==========================================================================================================
COMMON STOCK (e) -- 0.1%
Communication -- 0.0%
20,125 WebLink Wireless, Inc. 201
- ----------------------------------------------------------------------------------------------------------
Competitive Local Exchange Carrier -- 0.0%
3,736 McLeodUSA Inc., Class A Shares 5,193
- ----------------------------------------------------------------------------------------------------------
Food -- 0.0%
73,499 Aurora Foods Inc. 7,717
- ----------------------------------------------------------------------------------------------------------
Networks -- 0.0%
50,120 Cincinnati Bell Inc. 255,111
- ----------------------------------------------------------------------------------------------------------
Tower -- 0.1%
29,229 Crown Castle International Corp. 275,045
- ----------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCK
(Cost -- $705,200) 543,267
==========================================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 19
- --------------------------------------------------------------------------------
Schedule of Investments (continued) September 30, 2003
- --------------------------------------------------------------------------------
SHARES SECURITY VALUE
==========================================================================================================
PREFERRED STOCK -- 0.2%
Cable and Media -- 0.2%
9,850 CSC Holdings Inc., Series M, 11.125% due 4/1/08 $ 1,031,787
- ----------------------------------------------------------------------------------------------------------
Cellular and PCs -- 0.0%
1,309 Dobson Communications Corp., Payment-in-Kind,
13.000% due 5/1/09 (f) 140,415
- ----------------------------------------------------------------------------------------------------------
TOTAL PREFERRED STOCK
(Cost -- $770,117) 1,172,202
==========================================================================================================
WARRANTS SECURITY VALUE
==========================================================================================================
WARRANTS (e) -- 0.0%
Cable and Media -- 0.0%
6,725 Iridium World Communications Ltd., Expire 7/15/05 (c) 67
- ----------------------------------------------------------------------------------------------------------
Cellular and PCs -- 0.0%
1,155 Horizon PCS Inc., Expire 10/1/10 (c) 0
1,185 IWO Holdings Inc., Expire 1/15/11 (c) 12
- ----------------------------------------------------------------------------------------------------------
12
- ----------------------------------------------------------------------------------------------------------
Communication -- 0.0%
43,470 Pagemart, Inc., Expire 12/31/03 435
- ----------------------------------------------------------------------------------------------------------
Competitive Local Exchange Carrier -- 0.0%
6,975 RSL Communications, Ltd., Expire 11/15/06 981
- ----------------------------------------------------------------------------------------------------------
Containers and Packaging -- 0.0%
245 Pliant Corp., Expire 6/1/10 (c) 43
- ----------------------------------------------------------------------------------------------------------
Financial and Leasing -- 0.0%
1,765 Merrill Lynch Corp., Expire 5/1/09 0
14,825 UIH Australia Pacific, Inc., Expire 5/15/06 0
- ----------------------------------------------------------------------------------------------------------
0
- ----------------------------------------------------------------------------------------------------------
Networks -- 0.0%
1,000 Jazztel PLC, Expire 7/15/10 (c) 0
- ----------------------------------------------------------------------------------------------------------
Technology -- 0.0%
1,705 Cybernet Internet Services International, Inc., Expire 7/1/09 (c) 3
1,555 GT Group Telecom Inc., Expire 2/1/10 (c) 1,166
3,511 Viasystems Group Inc., Expire 1/31/10 0
6,135 WAM!NET Inc., Expire 3/1/05 61
- ----------------------------------------------------------------------------------------------------------
1,230
- ----------------------------------------------------------------------------------------------------------
Tower -- 0.0%
985 American Tower Corp., Expire 8/1/08 (c) 121,155
- ----------------------------------------------------------------------------------------------------------
TOTAL WARRANTS
(Cost -- $1,494,546) 123,923
==========================================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
20 2003 Annual Report
- --------------------------------------------------------------------------------
Schedule of Investments (continued) September 30, 2003
- --------------------------------------------------------------------------------
FACE
AMOUNT SECURITY VALUE
==========================================================================================================
REPURCHASE AGREEMENT -- 3.8%
$19,414,000 Merrill Lynch & Co., Inc., 0.950% due 10/1/03; Proceeds
at maturity -- $19,414,512; (Fully collateralized by
various U.S. government agency obligations,
0.000% to 7.500% due 10/2/03 to 11/15/16;
Market value -- $19,802,309) (Cost -- $19,414,000) $ 19,414,000
==========================================================================================================
TOTAL INVESTMENTS -- 100.0%
(Cost -- $494,231,359**) $511,770,059
==========================================================================================================
+ Face amount denominated in U.S. dollars unless otherwise indicated.
(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.
(b) Security is currently in default.
(c) 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.
(d) Interest rate shown reflects current rate on instruments with multi-coupon
or variable rates.
(e) Non-income producing security.
(f) Payment-in-Kind security for which all or part of the dividend earned is
paid by the issuance of additional stock until May 1, 2004.
** Aggregate cost for Federal income tax purposes is $495,241,642.
Currency abbreviations used in this schedule:
EUR -- Euro
GBP -- British Pound
See page 22 for definitions of ratings.
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 21
- --------------------------------------------------------------------------------
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.
AAA -- Bonds rated "AAA" have the highest rating assigned by Standard &
Poor's. Capacity to pay interest and repay principal is extremely
strong.
AA -- Bonds rated "AA" have a very strong capacity to pay interest and
repay principal and differ 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
bonds 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", "CCC", "CC" and "C" are regarded, on balance,
CCC, CC as predominantly speculative with respect to capacity to pay interest
and C and repay principal in accordance with the terms of the obligation.
"BB" represents the lowest degree of speculation and "C" 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 ("Moody's") -- Numerical modifiers 1, 2 and 3 may be
applied to each generic rating from "Aa" to "Caa", where 1 is the highest and 3
the lowest rating within its generic category.
Aa -- Bonds rated "Aa" are judged to be of high quality by all standards.
Together with the "Aaa" group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because
margins of protection may not be as large in "Aaa" securities or
fluctuation of protective elements may be of greater amplitude or
there may be other elements present which make the long-term risks
appear somewhat larger than in "Aaa" securities.
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 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.
C -- Bonds rated "C" are the lowest rated class of bonds, and issues so
rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
NR -- Indicates that the bond is not rated by Standard & Poor's or Moody's.
- --------------------------------------------------------------------------------
22 2003 Annual Report
- --------------------------------------------------------------------------------
Statement of Assets and Liabilities September 30, 2003
- --------------------------------------------------------------------------------
ASSETS:
Investments, at value (Cost -- $494,231,359) $ 511,770,059
Cash 1,487,825
Interest and dividends receivable 10,826,941
Receivable for securities sold 868,678
Other assets 170,704
- --------------------------------------------------------------------------------------
Total Assets 525,124,207
- --------------------------------------------------------------------------------------
LIABILITIES:
Payable for securities purchased 1,431,799
Management fee payable 490,893
Dividends payable 241,083
Accrued expenses 237,098
- --------------------------------------------------------------------------------------
Total Liabilities 2,400,873
- --------------------------------------------------------------------------------------
Total Net Assets $ 522,723,334
======================================================================================
NET ASSETS:
Par value of capital shares $ 73,845
Capital paid in excess of par value 880,078,765
Overdistributed net investment income (1,246,817)
Accumulated net realized loss from investment transactions (373,722,137)
Net unrealized appreciation of investments and foreign currencies 17,539,678
- --------------------------------------------------------------------------------------
Total Net Assets
(Equivalent to $7.08 per share on 73,844,760 shares of
$0.001 par value outstanding; 500,000,000 shares authorized) $ 522,723,334
======================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 23
- --------------------------------------------------------------------------------
Statement of Operations For the Year Ended September 30, 2003
- --------------------------------------------------------------------------------
INVESTMENT INCOME:
Interest $ 51,824,732
Dividends 116,739
- --------------------------------------------------------------------------------
Total Investment Income 51,941,471
- --------------------------------------------------------------------------------
EXPENSES:
Management fee (Note 2) 5,560,047
Shareholder communications 393,915
Audit and legal 78,903
Custody 68,809
Listing fees 41,518
Shareholder servicing fees 30,000
Directors' fees 8,406
Other 8,633
- --------------------------------------------------------------------------------
Total Expenses 6,190,231
- --------------------------------------------------------------------------------
Net Investment Income 45,751,240
- --------------------------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FOREIGN CURRENCIES (NOTE 3):
Realized Gain (Loss) From:
Investment transactions (12,133,788)
Foreign currency transactions 25,316
- --------------------------------------------------------------------------------
Net Realized Loss (12,108,472)
- --------------------------------------------------------------------------------
Change in Net Unrealized Appreciation From:
Investments 87,565,507
Foreign currencies (1,952)
- --------------------------------------------------------------------------------
Increase in Net Unrealized Appreciation 87,563,555
- --------------------------------------------------------------------------------
Net Gain on Investments and Foreign Currencies 75,455,083
- --------------------------------------------------------------------------------
Increase in Net Assets From Operations $ 121,206,323
================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
24 2003 Annual Report
- --------------------------------------------------------------------------------
Statements of Changes in Net Assets
- --------------------------------------------------------------------------------
For the Years Ended September 30,
2003 2002
======================================================================================
OPERATIONS:
Net investment income $ 45,751,240 $ 49,815,686
Net realized loss (12,108,472) (81,293,110)
Increase in net unrealized appreciation 87,563,555 9,289,837
- --------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets From Operations 121,206,323 (22,187,587)
- --------------------------------------------------------------------------------------
DISTRIBUTIONS TO SHAREHOLDERS FROM:
Net investment income (44,735,429) (47,759,275)
Capital (5,250,728) (5,887,863)
- --------------------------------------------------------------------------------------
Decrease in Net Assets From
Distributions to Shareholders (49,986,157) (53,647,138)
- --------------------------------------------------------------------------------------
FUND SHARE TRANSACTIONS (NOTE 5):
Net asset value of shares issued
for reinvestment of dividends 9,892,385 10,499,298
- --------------------------------------------------------------------------------------
Increase in Net Assets From
Fund Share Transactions 9,892,385 10,499,298
- --------------------------------------------------------------------------------------
Increase (Decrease) in Net Assets 81,112,551 (65,335,427)
NET ASSETS:
Beginning of year 441,610,783 506,946,210
- --------------------------------------------------------------------------------------
End of year* $ 522,723,334 $ 441,610,783
======================================================================================
* Includes overdistributed net investment income of: $ (1,246,817) $ (2,903,381)
======================================================================================
See Notes to Financial Statements.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 25
- --------------------------------------------------------------------------------
Notes to Financial Statements
- --------------------------------------------------------------------------------
1. Significant Accounting Policies
The High Income Opportunity Fund Inc. ("Fund"), a Maryland corporation, is
registered under the Investment Company Act of 1940, as amended, as a
diversified, closed-end management investment company.
The significant accounting policies consistently followed by the Fund are: (a)
security transactions are accounted for on trade date; (b) securities are valued
at the mean between the quoted bid and 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; securities listed on
the NASDAQ National Market System for which market quotations are available are
valued at the official closing price or, if there is no official closing price
on that day, at the last sale price; (c) securities for which market quotations
are not available will be valued in good faith at fair value by or under the
direction of the Board of Directors; (d) securities maturing within 60 days are
valued at cost plus accreted discount, or minus amortized premium, which
approximates value; (e) gains or losses on the sale of securities are calculated
by using the specific identification method; (f) 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; (g) interest
income, adjusted for amortization of premium and accretion of discount, is
recorded on an accrual basis; (h) dividends and distributions to shareholders
are recorded on the ex-dividend date; the Fund distributes dividends monthly and
capital gains, if any, at least annually; (i) 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; (j) the character of income and
gains to be distributed is determined in accordance with income tax regulations
which may differ from accounting principles generally accepted in the United
States of America. At September 30, 2003, reclassifications were made to the
capital accounts of the Fund to reflect permanent book/tax differences and
income and gains available for distributions under income tax regulations.
Accordingly, a portion of net realized losses amounting to $16,016,598 has been
reclassified to paid-in-capital. Net investment income, net realized gains and
net assets were not affected by this adjustment; (k) the Fund intends to comply
with the requirements of the Internal Revenue Code of
- --------------------------------------------------------------------------------
26 2003 Annual Report
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
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 (l) estimates and assumptions are required
to be made regarding assets, liabilities and changes in net assets resulting
from operations when financial statements are prepared. Changes in the economic
environment, financial markets and any other parameters used in determining
these estimates could cause actual results to differ.
In addition, the Fund may enter into forward foreign 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 or offset by entering into another forward
foreign exchange contract.
In addition, the Fund invests in high-yield instruments that are subject to
certain credit and market risks. The yields of high-yield debt obligations
reflect, among other things, perceived credit risk. The Fund's investment in
securities rated below investment grade typically involve risks not associated
with higher rated securities including, among others, greater risk of timely and
ultimate payment of interest and principal, greater market price volatility and
less liquid secondary market trading.
2. Management Agreement
Smith Barney Fund Management LLC ("SBFM"), an indirect wholly-owned 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 one Director of the Fund are employees of Citigroup or its
affiliates.
3. Investments
During the year ended September 30, 2003, the aggregate cost of purchases and
proceeds from sales of investments (including maturities of long-term
investments, but excluding short-term investments) were as follows:
================================================================================
Purchases $169,321,878
- --------------------------------------------------------------------------------
Sales 172,965,412
================================================================================
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 27
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
At September 30, 2003, the aggregate gross unrealized appreciation and
depreciation of investments for Federal income tax purposes were as follows:
================================================================================
Gross unrealized appreciation $ 51,290,741
Gross unrealized depreciation (34,762,324)
- --------------------------------------------------------------------------------
Net unrealized appreciation $ 16,528,417
================================================================================
4. Repurchase Agreements
The Fund purchases (and the custodian takes possession of) U.S. government
securities from 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.
5. Capital Shares
Capital stock transactions were as follows:
Year Ended Year Ended
September 30, 2003 September 30, 2002
----------------------- ------------------------
Shares Amount Shares Amount
=================================================================================================
Shares issued on reinvestment 1,497,997 $9,892,385 1,460,183 $10,499,298
=================================================================================================
6. Capital Loss Carryforward
At September 30, 2003, the Fund had, for Federal income tax purposes, a capital
loss carryforward of approximately $361,791,000 available to offset future
capital gains, if any. To the extent that these carryforward losses are used to
offset capital gains, it is probable that the gains so offset will not be
distributed. The amount and date of expiration of the carryforward losses for
the Fund is indicated below. Expiration occurs on September 30 of the year
indicated:
2004 2007 2008 2009 2010 2011
==========================================================================================================
Carryforward
amounts $38,118,000 $11,075,000 $39,806,000 $69,257,000 $141,418,000 $62,117,000
==========================================================================================================
In addition, the Fund had $11,913,489 of capital losses realized after October
31, 2002, which were deferred for tax purposes to the first day of the following
fiscal year.
- --------------------------------------------------------------------------------
28 2003 Annual Report
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
7. Income Tax Information and Distributions to Shareholders
At September 30, 2003, the tax basis components of distributable earnings were:
================================================================================
Accumulated capital loss $(361,790,511)
- --------------------------------------------------------------------------------
Unrealized appreciation 16,529,395
================================================================================
The difference between book basis and tax basis unrealized appreciation
and depreciation is attributable to wash sales, treatment of accretion of
discounts and amortization of premiums and consent fees.
The tax character of distributions paid during the year ended September 30, 2003
was:
================================================================================
Ordinary income $44,735,429
Capital 5,250,728
- --------------------------------------------------------------------------------
Total $49,986,157
================================================================================
8. Subsequent Event
The Fund has received the following information from Citigroup Asset Management
("CAM"), the Citigroup business unit which includes the Fund's Investment
Manager and other investment advisory companies, all of which are indirect,
wholly-owned subsidiaries of Citigroup. CAM is reviewing its entry, through an
affiliate, into the transfer agent business in the period 1997-1999. As CAM
currently understands the facts, at the time CAM decided to enter the transfer
agent business, CAM sub-contracted for a period of five years certain of the
transfer agency services to a third party and also concluded a revenue guarantee
agreement with this sub-contractor providing that the sub-contractor would
guarantee certain benefits to CAM or its affiliates (the "Revenue Guarantee
Agreement"). In connection with the subsequent purchase of the sub-contractor's
business by an affiliate of the current sub-transfer agent (PFPC Inc.) used by
CAM on many of the funds it manages, this Revenue Guarantee Agreement was
amended eliminating those benefits in exchange for arrangements that included a
one-time payment from the sub-contractor.
The Boards of CAM-managed funds (the "Boards") were not informed of the Revenue
Guarantee Agreement with the sub-contractor at the time the Boards considered
and approved the transfer agent arrangements. Nor were the Boards
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 29
- --------------------------------------------------------------------------------
Notes to Financial Statements (continued)
- --------------------------------------------------------------------------------
informed of the subsequent amendment to the Revenue Guarantee Agreement when
that occurred.
CAM has begun to take corrective actions. CAM will pay to the applicable funds
$16 million (plus interest) that CAM and its affiliates received from the
Revenue Guarantee Agreement and its amendment. CAM also plans an independent
review to verify that the transfer agency fees charged by CAM were fairly priced
as compared to competitive alternatives. CAM is instituting new procedures and
making changes designed to ensure no similar arrangements are entered into in
the future.
CAM has briefed the SEC, the New York State Attorney General and other
regulators with respect to this matter, as well as the U.S. Attorney who is
investigating the matter. CAM is cooperating with governmental authorities on
this matter, the ultimate outcome of which is not yet determined.
The Fund's transfer agent is PFPC Inc., which is not affiliated with CAM.
- --------------------------------------------------------------------------------
30 2003 Annual Report
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each year ended September
30, unless otherwise noted:
2003(1) 2002 2001 2000 1999
========================================================================================================
Net Asset Value, Beginning of Year $ 6.10 $ 7.15 $ 9.42 $ 10.45 $ 11.24
- --------------------------------------------------------------------------------------------------------
Income (Loss) From Operations:
Net investment income(2) 0.63 0.66 0.94 1.06 1.03
Net realized and
unrealized gain (loss)(2) 1.03 (0.96) (2.20) (1.13) (0.79)
- --------------------------------------------------------------------------------------------------------
Total Income (Loss)
From Operations 1.66 (0.30) (1.26) (0.07) 0.24
- --------------------------------------------------------------------------------------------------------
Gain From Repurchase of
Treasury Stock -- -- -- 0.05 --
- --------------------------------------------------------------------------------------------------------
Less Distributions From:
Net investment income (0.61) (0.67) (1.01) (1.01) (1.03)
Capital (0.07) (0.08) -- -- (0.00)*
- --------------------------------------------------------------------------------------------------------
Total Distributions (0.68) (0.75) (1.01) (1.01) (1.03)
- --------------------------------------------------------------------------------------------------------
Net Asset Value, End of Year $ 7.08 $ 6.10 $ 7.15 $ 9.42 $ 10.45
- --------------------------------------------------------------------------------------------------------
Total Return, Based on
Market Price(3) 31.00% (8.20)% (7.85)% 9.75% (9.36)%
- --------------------------------------------------------------------------------------------------------
Total Return, Based on
Net Asset Value(3) 28.67% (4.85)% (14.25)% 0.98% 2.74%
- --------------------------------------------------------------------------------------------------------
Net Assets, End of Year (millions) $ 523 $ 442 $ 507 $ 652 $ 755
- --------------------------------------------------------------------------------------------------------
Ratios to Average Net Assets:
Expenses 1.28% 1.23% 1.26% 1.22% 1.20%
Net investment income(2) 9.46 10.04 11.22 10.21 9.28
- --------------------------------------------------------------------------------------------------------
Portfolio Turnover Rate 37% 77% 83% 69% 83%
- --------------------------------------------------------------------------------------------------------
Market Price, End of Year $ 7.09 $ 6.00 $ 7.290 $ 8.938 $ 9.125
========================================================================================================
(1) Per share amounts have been calculated using the monthly average shares
method.
(2) Effective October 1, 2001, the Fund adopted a change in the accounting
method that requires the Fund to amortize premiums and accrete all
discounts. Without the adoption of this change, for the year ended
September 30, 2002, the net investment income, net realized and unrealized
loss and the ratio of net investment income to average net assets would
have been $0.68, $0.98 and 10.13%, respectively. Per share information,
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.
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 31
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
The Shareholders and Board of Directors of
High Income Opportunity Fund Inc.:
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of High Income Opportunity Fund Inc. ("Fund") as of
September 30, 2003, and the related statement of operations for the year then
ended, the statements of changes in net assets for each of the years in the
two-year period then ended and financial highlights for each of the years in the
five-year period then ended. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements and financial highlights are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. Our procedures included confirmation of
securities owned as of September 30, 2003, by correspondence with the custodian.
As to securities purchased or sold but not yet received or delivered, we
performed other appropriate auditing procedures. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
Fund as of September 30, 2003, and the results of its operations for the year
then ended, the changes in its net assets for each of the years in the two-year
period then ended and the financial highlights for each of the years in the
five-year period then ended, in conformity with accounting principles generally
accepted in the United States of America.
/s/ KPMG LLP
New York, New York
November 11, 2003, except for Note 8
Subsequent Event which is dated November 28, 2003
- --------------------------------------------------------------------------------
32 2003 Annual Report
- --------------------------------------------------------------------------------
Financial Data (unaudited)
- --------------------------------------------------------------------------------
For a share of capital stock outstanding throughout each period:
Dividend
NYSE Net Asset Distribution Reinvestment
Closing Price Value Paid Price
================================================================================
2002
October 23 $7.28 $7.24 $0.0700 $7.240
November 27 7.74 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
July 23 5.55 6.31 0.0570 5.810
August 27 6.18 6.25 0.0570 6.210
September 24 5.87 6.12 0.0570 6.060
2003
October 22 5.69 5.86 0.0570 5.830
November 25 6.36 6.26 0.0570 6.260
December 23 6.17 6.28 0.0570 6.280
January 28 6.70 6.40` 0.0570 6.400
February 25 6.88 6.40 0.0570 6.540
March 25 6.91 6.51 0.0570 6.570
April 22 6.92 6.73 0.0570 6.730
May 27 7.13 6.88 0.0570 6.880
June 24 7.25 7.07 0.0570 7.070
July 22 6.93 7.05 0.0570 7.040
August 26 7.04 6.90 0.0570 6.900
September 23 7.00 7.05 0.0570 7.050
================================================================================
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 33
- --------------------------------------------------------------------------------
Additional Information (unaudited)
- --------------------------------------------------------------------------------
Information about Directors and Officers
The business and affairs of the High Income Opportunity Fund Inc. ("Fund") are
managed under the direction of the Board of Directors. Information pertaining to
the Directors and Officers of the Fund is set forth below. The Statement of
Additional Information includes additional information about Directors and is
available, without charge, upon request by calling the Fund's transfer agent
(PFPC Inc. at 1-800-331-1710).
Number of
Term of Portfolios
Office* Principal in Fund Other
Position(s) and Length Occupation(s) Complex Directorships
Held with of Time During Past Overseen Held by
Name, Address and Age Fund Served Five Years by Director Director
==============================================================================================================================
Non-Interested Directors:
Lee Abraham Director Since Retired; Former 28 Signet Group
13732 LeHavre Drive 1999 Director of Galey & PLC
Frenchman's Creek Lord, Liz Claiborne,
Palm Beach Gardens, FL 33410 R.G. Barry Corp.
Age 75
Allan J. Bloostein Director Since President of Allan 35 Taubman
27 West 67th Street 1999 Bloostein Associates, a Centers Inc.
New York, NY 10023 consulting firm;
Age 73 former Director of
CVS Corp.
Jane F. Dasher Director Since Controller of PBK 28 None
Korsant Partners 1999 Holdings Inc., a family
283 Greenwich Avenue investment company
3rd Floor
Greenwich, CT 06830
Age 53
Donald R. Foley Director Since Retired 28 None
3668 Freshwater Drive 1993
Jupiter, FL 33477
Age 79
Richard E. Hanson, Jr. Director Since Retired; Former Head of 28 None
2751 Vermont Route 140 1999 the New Atlanta Jewish
Poultney, VT 05764 Community High School
Age 61
Paul Hardin Director Since Professor of Law & 35 None
12083 Morehead 1996 Chancellor Emeritus at
Chapel Hill, NC 27514-8426 the University of
Age 71 North Carolina
Roderick C. Rasmussen Director Since Investment Counselor 28 None
9 Cadence Court 1993
Morristown, NJ 07960
Age 76
John P. Toolan Director Since Retired 28 John Hancock
13 Chadwell Place 1993 Funds
Morristown, NJ 07960
Age 72
- --------------------------------------------------------------------------------
34 2003 Annual Report
- --------------------------------------------------------------------------------
Additional Information (unaudited) (continued)
- --------------------------------------------------------------------------------
Number of
Term of Portfolios
Office* Principal in Fund Other
Position(s) and Length Occupation(s) Complex Directorships
Held with of Time During Past Overseen Held by
Name, Address and Age Fund Served Five Years by Director Director
- ------------------------------------------------------------------------------------------------------------------------------
Interested Director:
R. Jay Gerken, CFA** Chairman, Since Managing Director of 219 None
Citigroup Asset Management President 2002 Citigroup Global Markets
("CAM") and Chief Inc. ("CGM"); Chairman,
399 Park Avenue Executive President and Chief
4th Floor Officer Executive Officer of Smith
New York, NY 10022 Barney Fund Management
Age 52 LLC ("SBFM"), Travelers
Investment Adviser, Inc.
("TIA") and Citi Fund
Management, Inc. ("CFM");
President and Chief
Executive Officer of
certain mutual funds
associated with Citigroup
Inc.; Formerly Portfolio
Manager of Smith Barney
Allocation Series Inc.
(from 1996-2001) and Smith
Barrney Growth and Income
Fund (from 1996-2000)
Officers:
Andrew B. Shoup*** Senior Vice Since Director of CAM; Senior N/A N/A
CAM President 2003 Vice President and Chief
125 Broad Street and Chief Administrative Officer of
10th Floor Administrative mutual funds associated
New York, NY 10004 Officer with Citigroup Inc.; Head
Age 47 of International Funds
Administration of CAM from
2001 to 2003; Director of
Global Funds Administration
of CAM from 2000 to 2001;
Head of U.S. Citibank Funds
Administration of CAM from
1999 to 2000
Richard L. Peteka Chief Since Director of CGM; Chief N/A N/A
CAM Financial 2002 Financial Officer and
125 Broad Street Officer and Treasurer of certain mutual
11th Floor Treasurer funds associated with
New York, NY 10004 Citigroup Inc.; Director and
Age 42 Head of Internal Control for
Citigroup Asset Manage-
ment U.S. Mutual Fund
Administration from
1999-2002; Vice President,
Head of Mutual Fund
Administration and
Treasurer at Oppenheimer
Capital from 1996-1999
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 35
- --------------------------------------------------------------------------------
Additional Information (unaudited) (continued)
- --------------------------------------------------------------------------------
Number of
Term of Portfolios
Office* Principal in Fund Other
Position(s) and Length Occupation(s) Complex Directorships
Held with of Time During Past Overseen Held by
Name, Address and Age Fund Served Five Years by Director Director
- ------------------------------------------------------------------------------------------------------------------------------
Beth A. Semmel, CFA Vice Since Managing Director N/A N/A
CAM President 2002 of CGM
399 Park Avenue and
4th Floor Investment
New York, NY 10022 Officer
Age 42
Peter J. Wilby, CFA Vice Since Managing Director, Chief N/A N/A
CAM President 2002 Investment Officer of CGM
399 Park Avenue and
4th Floor Investment
New York, NY 10022 Officer
Age 44
Kaprel Ozsolak Controller Since Vice President of CGM; N/A N/A
CAM 2002 Controller of certain
125 Broad Street funds associated with
11th Floor Citigroup Inc.
New York, NY 10004
Age 38
Robert I. Frenkel*** Secretary Since Managing Director and N/A N/A
CAM and Chief 2003 General Counsel of Global
300 First Stamford Place Legal Officer Mutual Funds for CAM and its
4th Floor predecessor (since 1994);
Stamford, CT 06902 Secretary of CFM; Secretary
Age 48 and Chief Legal Officer of
mutual funds associated with
Citigoup Inc.
- -----------
* Each Director and Officer serves until his or her successor has been duly
elected and qualified.
** Mr. Gerken is a Director who is an "interested person" of the Fund as
defined in the Investment Company Act of 1940, as amended, because Mr.
Gerken is an officer of SBFM and certain of its affiliates.
*** As of November 25, 2003.
- --------------------------------------------------------------------------------
36 2003 Annual Report
- --------------------------------------------------------------------------------
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 Inc. ("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) 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 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
- --------------------------------------------------------------------------------
High Income Opportunity Fund Inc. 37
- --------------------------------------------------------------------------------
Dividend Reinvestment Plan (unaudited) (continued)
- --------------------------------------------------------------------------------
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 Inc., P.O. Box 8030, Boston,
Massachusetts 02266-8030 or by telephone at 1-800-331-1710.
--------------------
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.
- --------------------------------------------------------------------------------
38 2003 Annual Report
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(This page intentionally left blank.)
- --------------------------------------------------------------------------------
HIGH INCOME
Opportunity Fund Inc.
- --------------------------------------------------------------------------------
DIRECTORS
Lee Abraham
Allan J. Bloostein
Jane F. Dasher
Donald R. Foley
R. Jay Gerken, CFA
Chairman
Richard E. Hanson, Jr.
Paul Hardin
Roderick C. Rasmussen
John P. Toolan
OFFICERS
R. Jay Gerken, CFA
President and
Chief Executive Officer
Andrew B. Shoup*
Senior Vice President and
Chief Administrative Officer
Richard L. Peteka
Chief Financial Officer
and Treasurer
Beth A. Semmel, CFA
Vice President and
Investment Officer
Peter J. Wilby, CFA
Vice President and
Investment Officer
Kaprel Ozsolak
Controller
Robert I. Frenkel*
Secretary and Chief
Legal Officer
INVESTMENT MANAGER
Smith Barney Fund Management LLC
399 Park Avenue
New York, New York 10022
CUSTODIAN
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
TRANSFER AGENT
PFPC Inc.
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.
* As of November 25, 2003.
[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
FD0802 11/03
03-5644
ITEM 2. CODE OF ETHICS.
The registrant has adopted a code of ethics that applies to the
registrant's principal executive officer, principal financial officer,
principal accounting officer or controller.
ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT.
The Board of Directors of the registrant has determined that Jane
Dasher, the Chairman of the Board's Audit Committee, possesses the
technical attributes identified in Instruction 2(b) of Item 3 to Form
N-CSR to qualify as an "audit committee financial expert," and has
designated Ms. Dasher as the Audit Committee's financial expert. Ms.
Dasher is an "independent" Director pursuant to paragraph (a)(2) of
Item 3 to Form N-CSR.
ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Not applicable.
ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS.
Not applicable.
ITEM 6. [RESERVED]
ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END
MANAGEMENT INVESTMENT COMPANIES.
Not applicable.
ITEM 8. [RESERVED]
ITEM 9. CONTROLS AND PROCEDURES.
(a) The registrant's principal executive officer and principal
financial officer have concluded that the registrant's disclosure
controls and procedures (as defined in Rule 30a- 3(c) under the
Investment Company Act of 1940, as amended (the "1940 Act")) are
effective as of a date within 90 days of the filing date of this
report that includes the disclosure required by this paragraph,
based on their evaluation of the disclosure controls and
procedures required by Rule 30a-3(b) under the 1940 Act and
15d-15(b) under the Securities Exchange Act of 1934.
(b) There were no changes in the registrant's internal control over
financial reporting (as defined in Rule 30a-3(d) under the 1940
Act) that occurred during the registrant's last fiscal half-year
(the registrant's second fiscal half-year in the case of an
annual report) that have materially affected, or are likely to
materially affect the registrant's internal control over
financial reporting.
ITEM 10. EXHIBITS.
(a) Code of Ethics attached hereto.
Exhibit 99.CODE ETH
(b) Attached hereto.
Exhibit 99.CERT Certifications pursuant to section 302 of the
Sarbanes-Oxley Act of 2002
Exhibit 99.906CERT Certifications pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this Report
to be signed on its behalf by the undersigned, there unto duly authorized.
High Income Opportunity Fund Inc.
By: /s/ R. Jay Gerken
R. Jay Gerken
Chief Executive Officer of
High Income Opportunity Fund Inc.
Date: December 15, 2003
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By: /s/ R. Jay Gerken
R. Jay Gerken
Chief Executive Officer of
High Income Opportunity Fund Inc.
Date: December 15, 2003
By: /s/ Richard L. Peteka
Richard L. Peteka
Chief Financial Officer of
High Income Opportunity Fund Inc.
Date: December 15, 2003