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High Income Opportunity Fund Inc.
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Prospectus January 31, 1996
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388 Greenwich Street
New York, New York 10013
(212) 723-9218
The High Income Opportunity Fund Inc. is a diversified, closed-end
management investment company. The Fund's primary investment objective is to
seek high current income with capital appreciation as a secondary objective. The
Fund seeks to achieve its investment objectives by investing, under normal
circumstances, at least 65% of its assets in high-yielding corporate bonds,
debentures and notes. Up to 35% of the Fund's assets may be invested in common
stock or other equity-related securities, including convertible securities,
preferred stock, warrants and rights. Securities purchased by the Fund will
generally be rated in the lower rating categories of nationally recognized
securities rating organizations, as low as C by Moody's Investors Service, Inc.
or D by Standard & Poor's Ratings Group, or in non-rated income securities that
Smith Barney Mutual Funds Management Inc. determines to be of comparable
quality. The Fund will not purchase securities rated lower than B by both
Moody's and S&P, if, immediately after such purchase, more than 10% of the
Fund's total assets are invested in such securities. The Fund may invest in
securities rated higher than Ba by Moody's and BB by S&P without limitation when
the difference in yields between quality classifications is relatively narrow.
Investments in lower grade securities, also called "junk bonds", are
subject to special risks, including a greater risk of loss of principal and
non-payment of interest. There is no assurance that the Fund will achieve its
investment objectives. The shares of closed-end investment companies have in the
past frequently traded at discounts from their net asset values. Investors
should carefully assess the risks associated with an investment in the Fund. See
"Investment Objectives and Policies" and "Risk Factors and Special
Considerations."
(Continued on page 2)
SMITH BARNEY INC.
Distributor
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
1
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High Income Opportunity Fund Inc.
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Prospectus (continued) January 31, 1996
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This Prospectus sets forth concisely the information about the Fund that a
prospective investor ought to know before investing and should be retained for
future reference. A Statement of Additional Information dated January 31, 1996
containing additional information about the Fund has been filed with the
Securities and Exchange Commission and is hereby incorporated by reference in
its entirety into this Prospectus. A copy of the Statement of Additional
Information, the table of contents of which appears on page 26 of this
Prospectus, may be obtained without charge by calling or writing to the Fund at
the telephone number or address set forth above or by contacting a Smith Barney
Financial Consultant.
Smith Barney Inc. ("Smith Barney") intends to make a market in the Fund's
Common Stock, although it is not obligated to conduct market-making activities
and any such activities may be discontinued at any time, without notice by Smith
Barney. The shares of Common Stock that may be offered from time to time
pursuant to this Prospectus were issued and sold by the Fund on October 21, 1993
in an initial public offering at a price of $12.50 per share. No assurance can
be given as to the liquidity of, or the trading market for, the Common Stock as
a result of any market-making activities undertaken by Smith Barney. The Fund
will not receive any proceeds from the sale of any Common Stock offered pursuant
to this Prospectus. The Fund's shares of common stock have been approved for
listing on the New York Stock Exchange under the symbol "HIO".
All dealers effecting transactions in the registered securities, whether or
not participating in this distribution, may be required to deliver a Prospectus.
2
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High Income Opportunity Fund Inc.
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Table of Contents
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Prospectus Summary 4
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Fund Expenses 6
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Financial Highlights 7
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The Fund 8
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The Offering 8
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Use of Proceeds 8
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Investment Objectives and Policies 8
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Risk Factors and Special Considerations 10
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Investment Practices 12
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Share Price Data 16
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Taxation 17
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Management of the Fund 20
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Dividends and Distributions 21
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Dividend Reinvestment Plan 21
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Repurchase of Shares 23
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Description of Shares 24
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Custodian and Transfer Agent 25
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Experts 25
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Other Information 26
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Ratings (Appendix A) A-1
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No person has been authorized to give any information or to make any
representations in connection with this offering other than those contained in
this Prospectus and, if given or made, such other information and
representations must not be relied upon as having been authorized by the Fund or
the Distributor. This Prospectus does not constitute an offer by the Fund or the
Distributor to sell or a solicitation of an offer to buy any of the securities
offered hereby in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction.
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3
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High Income Opportunity Fund Inc.
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Prosectus Summary
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The following summary is qualified in its entirety by detailed information
included elsewhere in this Prospectus. Cross-references in this summary are to
headings in the body of the Prospectus.
THE FUND The High Income Opportunity Fund Inc. (the "Fund") is a
diversified, closed-end management investment company. See "The Fund."
INVESTMENT OBJECTIVES The Fund seeks high current income. Capital
appreciation is a secondary objective. See "Investment Objectives and Policies."
INVESTMENTS The Fund seeks to achieve its investment objectives by
investing, under normal circumstances, at least 65% of its assets in
high-yielding corporate debt obligations and preferred stock. Up to 35% of the
Fund's assets may be invested in common stock or common stock equivalents,
including options, warrants and rights. Although the Fund may invest in
securities of any maturity, under current market conditions the Fund intends
that its portfolio will have an average remaining maturity of between 5 and 10
years. Fixed-income securities purchased by the Fund generally will be rated in
the lower rating categories of nationally recognized security rating
organizations, as low as C by Moody's Investors Service, Inc. ("Moody's") or D
by Standard & Poor's Ratings Group ("S&P"), or in non-rated securities that
Smith Barney Mutual Funds Management Inc., the Fund's investment manager, deems
of comparable quality. However, the Fund will not purchase securities rated
lower than B by both Moody's and S&P if more than 10% of its total assets are
invested in such securities immediately after such purchase. The Fund may invest
up to 20% of its assets in the securities of foreign issuers that are
denominated in currencies other than the U.S. dollar and may invest without
limitation in securities of foreign issuers that are denominated in U.S.
dollars. There is no guarantee that the Fund's investment objectives will be
achieved. See "Investment Objectives and Policies."
THE OFFERING Smith Barney intends to make a market in the Common Stock in
addition to the trading of the Common Stock on the NYSE. Smith Barney, however,
is not obligated to conduct market-making activities and any such activities may
be discontinued at any time without notice, at the sole discretion of Smith
Barney.
LISTING NYSE.
SYMBOL HIO.
INVESTMENT MANAGER The Greenwich Street Advisors Division of Smith Barney
Mutual Funds Management Inc. is the Fund's investment manager (the "Investment
Manager"). The Investment Manager was incorporated in 1968 and currently manages
approximately $68 billion of assets. The Fund pays the Investment Manager a fee
for services provided to the Fund that is computed daily and paid monthly at the
4
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High Income Opportunity Fund Inc.
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Prosectus Summary (continued)
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annual rate of 1.15% of the value of the Fund's average daily net assets. This
fee is higher than the rates for similar services paid by other publicly
offered, closed-end, management investment companies that have investment
objectives and policies similar to those of the Fund. The Fund will bear other
expenses and costs in connection with its operation in addition to the costs of
investment management services. See "Management of the Fund."
CUSTODIAN PNC Bank, National Association ("PNC Bank") serves as the Fund's
custodian. See "Custodian and Transfer Agent."
TRANSFER AGENT First Data Investor Services Group, Inc. ("First Data")
(formerly known as The Shareholder Services Group, Inc.), a subsidiary of First
Data Corporation, serves as the Fund's transfer agent, dividend-paying agent and
registrar. See "Custodian and Transfer Agent."
DIVIDENDS AND DISTRIBUTIONS The Fund expects to pay monthly dividends of
net investment income (income other than net realized capital gains) and to
distribute net realized capital gains, if any, annually. All dividends or
distributions with respect to shares of Common Stock are reinvested
automatically in additional shares through participation in the Fund's Dividend
Reinvestment Plan, unless a shareholder elects to receive cash. See "Dividends
and Distributions" and "Dividend Reinvestment Plan."
RISK FACTORS AND SPECIAL CONSIDERATIONS The Fund is a closed-end investment
company. The net asset value of the Common Stock will change with changes in the
value of the securities held by the Fund. Because the Fund invests primarily in
fixed-income securities, the net asset value of the Common Stock can be expected
to change as levels of interest rates fluctuate. The value of the fixed-income
securities held by the Fund, and thus the Fund's net asset value, may also be
affected by other economic, market and credit factors. See "Risk Factors and
Special Considerations."
The Fund will invest in lower-rated securities and non-rated securities of
comparable quality. Generally, these securities offer a higher return potential
than higher-rated securities but involve greater volatility of price and risk of
loss of income and principal including the possibility of default or bankruptcy
of the issuers of such securities. Lower-rated and comparable non-rated
securities will likely have large uncertainties or major risk exposures to
adverse conditions and are predominantly speculative with respect to the
issuer's capacity to pay interest and repay principal in accordance with the
terms of the obligation. Securities rated lower than B by both Moody's and S&P,
including bonds rated as low as C by Moody's or D by S&P, can be regarded as
having extremely poor prospects of ever attaining any real investment standing
and may be in default with payment of interest and/or repayment of principal in
arrears. Accordingly, it is possible that these types of factors could, in
5
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High Income Opportunity Fund Inc.
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Prosectus Summary (continued)
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certain instances, reduce the value of securities held by the Fund, with a
commensurate effect on the value of the Fund's shares. See "Investment
Objectives and Policies" and "Risk Factors and Special Considerations."
Certain of the instruments held by the Fund, and certain investment
techniques that the Fund may employ, might expose the Fund to special risks. The
instruments exposing the Fund to special risks include lower-rated and non-rated
securities, convertible and synthetic convertible securities, foreign
securities, non-publicly traded and illiquid securities and securities of
developing countries and unseasoned issuers. The Fund's use of investment
techniques such as financial futures and options transactions, currency exchange
and foreign currency option transactions, securities transactions on a
when-issued or delayed delivery basis, repurchase agreements and lending
portfolio securities likewise pose special risks to the Fund. See "Risk Factors
and Special Considerations" and "Investment Practices."
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund and of depriving shareholders of an opportunity to sell their shares
of Common Stock at a premium over prevailing market prices. See "Description of
Shares."
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Fund Expenses
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The following expense table lists the costs and expenses an investor will
incur either directly or indirectly as a shareholder of the Fund based, unless
otherwise noted, on the Fund's operating expenses for its most recent fiscal
year:
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Annual Expenses
(as a percentage of net assets)
Management Fees 1.15%
Other Expenses* 0.05%
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TOTAL ANNUAL FUND OPERATING EXPENSES 1.20%
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* "Other Expenses", as shown above, is based upon amounts of expenses for the
fiscal year ended September 30, 1995.
EXAMPLE The following example is intended to assist an investor in
understanding the various costs that an investor in the Portfolio will bear
directly or indirectly. The example assumes payment by the Portfolio of
operating expenses at the levels set forth in the table above. An investor would
pay the following expenses on a $1,000 investment in the Fund, assuming a 5.00%
annual return:
Year One Three Five Ten
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$12 $38 $66 $145
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The above example should not be considered a representation of past or
future expenses or performance, and the Fund's actual expenses may be more or
less than those shown. For a more complete description of these costs and
expenses, see "Management of the Fund."
6
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High Income Opportunity Fund Inc.
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Financial Highlights
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The following information for the year ended September 30, 1995 and for the
period from October 22, 1993 to September 30, 1994 has been audited in
conjunction with the annual audit of the financial statements of the Fund by
KPMG Peat Marwick LLP, independent auditors. The 1995 financial statements and
the independent auditors' report thereon appear in the September 30, 1995 Annual
Report to Shareholders. The information set out below should be read in
conjunction with the financial statements and related notes that also appear in
the Fund's Annual Report, which is incorporated by reference.
For a share of capital stock outstanding throughout each period:
1995 1994(a)(b)
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Net Asset Value, Beginning of Period $11.20 $12.50
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Income (Loss) From Operations:
Net investment income 1.14 1.01*
Net realized and unrealized gain (loss) 0.28 (1.30)
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Total income (Loss) from Operations 1.42 (0.29)
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Less Distributions From:
Net investment income (1.12) (1.01)
Capital (0.02) --
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Total Distributions (1.14) (1.01)
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Net Asset Value, End of Period $11.48 $11.20
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Total Return 13.99% (2.32)%++
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Net Assets, End of Year (000s) $802,050 $782,524
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Ratios to Average Net Assets:
Expenses 1.20% 1.15%+*
Net investment income 10.02 9.09%+
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Portfolio Turnover Rate 59.17% 68.56%
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Market Price at End of Period $10.500 $10.625
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(a) For the period from October 22, 1993 (commencement of operations) to
September 30, 1994.
(b) Based on weighted average shares outstanding for period.
++ Total return is not annualized as it may not be representative of the total
return for the year.
+ Annualized.
* The Manager has waived a part of its fee for the period ended September 30,
1994. If such fees were not waived, the per share decrease in net
investment income would have been $0.01 and the ratio of expenses to
average net assets would have been 1.21% (annualized).
7
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High Income Opportunity Fund Inc.
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The Fund
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The Fund is a diversified, closed-end management investment company. The
Fund was incorporated under the laws of the State of Maryland on July 30, 1993
and is registered under the Investment Company Act of 1940 (the "1940 Act"). The
Fund's principal office is located at 388 Greenwich Street, New York, New York
10013 and its telephone number is (212) 723-9218.
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The Offering
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Smith Barney intends to make a market in the Common Stock, although it is
not obligated to conduct market-making activities and any such activities may be
discontinued at any time without notice at the sole discretion of Smith Barney.
No assurance can be given as to the liquidity of, or the trading market for, the
Common Stock as a result of any market-making activities undertaken by Smith
Barney. This Prospectus is to be used by Smith Barney in connection with offers
and sales of the Common Stock in market-making transactions in the
over-the-counter market at negotiated prices related to prevailing market prices
at the time of the sale.
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Use of Proceeds
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The Fund will not receive any proceeds from the sale of any Common Stock
offered pursuant to this Prospectus. Proceeds received by Smith Barney as a
result of its market-making in Common Stock will be utilized by Smith Barney in
connection with its secondary market operations and for general corporate
purposes.
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Investment Objectives and Policies
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Set out below is a general description of the investment objectives and
principal investment policies of the Fund. No assurance can be given that the
Fund will be able to achieve its investment objectives. See "Investment
Objectives and Policies" and "Investment Restrictions" in the Statement of
Additional Information.
GENERAL
The Fund's primary investment objective is high current income with capital
8
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High Income Opportunity Fund Inc.
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Investment Objectives and Policies (continued)
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appreciation as a secondary objective. The Fund seeks to achieve its investment
objectives by investing, under normal circumstances, at least 65% of its assets
in high-yielding corporate debt obligations and preferred stock. Although the
Fund may invest in securities of any maturity, under current market conditions
the Fund intends that its portfolio will have an average remaining maturity of
between 5 and 10 years. The Investment Manager may adjust the Fund's average
maturity when, based on interest rate trends and other market conditions, it
deems it appropriate to do so. Up to 35% of the Fund's assets may be invested in
common stock or common stock equivalents, including options, warrants and
rights. Equity investments may be made in securities of companies of any size
depending on the relative attractiveness of the company and the economic sector
in which it operates. Fixed income securities purchased by the Fund generally
will be rated in the lower rating categories of nationally recognized security
rating organizations, as low as C by Moody's or D by S&P, or in unrated
securities that the Investment Manager deems of comparable quality. However, the
Fund will not purchase securities rated lower than B by both Moody's and S&P if
more than 10% of its total assets would be invested in such securities
immediately after such purchase. The Fund may invest in securities rated higher
than Ba by Moody's and BB by S&P without limitation when the difference in
yields between quality classifications is relatively narrow.
For temporary defensive purposes when the Investment Manager anticipates
adverse market conditions, the Fund may invest in securities rated higher than
Ba by Moody's and BB by S&P. Investments in higher rated issues may serve to
lessen a decline in net asset value but may also affect the amount of current
income produced by the Fund, since the yields from such issues are usually lower
than those from lower rated issues. A general description of Moody's and S&P's
ratings of corporate bonds is set forth in Appendix A to the Prospectus. The
Fund may also invest without limitation in money market instruments, including
commercial paper of domestic and foreign corporations, certificates of deposit,
bankers' acceptances and other obligations of banker repurchase agreements and
short-term obligations issued or guaranteed by the United States government or
its agencies. The yield on these securities will tend to be lower than the yield
on other securities to be purchased by the Fund.
The Fund may lend its portfolio securities and purchase or sell securities
on a when-issued or delayed-delivery basis. The Fund does not intend to leverage
its investments although it reserves the right to do so. The Fund may hedge
against possible declines in the value of its investments by entering into
interest rate futures contracts and related options, swaps and other financial
instruments.
9
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High Income Opportunity Fund Inc.
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Investment Objectives and Policies (continued)
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The Fund may invest up to 20% of its assets in the securities of foreign
issuers that are denominated in currencies other than the U.S. dollar and may
invest without limitation in securities of foreign issuers that are denominated
in U.S. dollars. In order to mitigate the effects of uncertainty in future
currency exchange rates affecting the Fund's non-dollar investments, the Fund
may engage in various currency-related hedging transactions, currency exchange
transactions and currency futures contracts and related options and purchase
options on foreign currencies.
A more detailed description of the Fund's investment policies, restrictions
and techniques is included in the Statement of Additional Information.
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Risk Factors and Special Considerations
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Investments in lower-rated securities are subject to special risks,
including a greater risk of loss of principal and non-payment of interest. There
is no assurance that the Fund will achieve its investment objective. An investor
should carefully consider the following factors before purchasing shares of the
Fund's Common Stock:
LOWER-RATED AND NON-RATED SECURITIES.
Generally, lower-rated securities offer a higher return potential than
higher-rated securities but involve greater volatility of price and greater risk
of loss of income and principal, including the possibility of default or
bankruptcy of the issuers of such securities. Lower-rated securities and
comparable non-rated securities will likely have large uncertainties or major
risk exposure to adverse conditions and are predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. The occurrence of adverse
conditions and uncertainties would likely reduce the value of securities held by
the Fund, with a commensurate effect on the value of the Fund's shares.
The markets in which lower-rated securities or comparable non-rated
securities are traded generally are more limited than those in which
higher-rated securities are traded. The existence of limited markets for these
securities may restrict the availability of securities for the Fund to purchase
and also may restrict the ability of the Fund to obtain accurate market
quotations for purposes of valuing securities and calculating net asset value or
to sell securities at their fair value. The public market for lower-rated
securities and comparable non-rated securities is relatively new and has not
fully weathered a major economic recession. Any such economic downturn could
10
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High Income Opportunity Fund Inc.
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Risk Factors and Special Considerations (continued)
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adversely affect the ability of issuers' lower-rated securities to repay
principal and pay interest thereon.
While the market values of lower-rated securities and comparable non-rated
securities tend to react less to fluctuations in interest rate levels than do
those of higher-rated securities, the market values of certain of these
securities also tend to be more sensitive to individual corporate developments
and changes in economic conditions than higher-rated securities. In addition,
lower-rated securities and comparable non-rated securities generally present a
higher degree of credit risk. Issuers of lower-rated securities and comparable
non-rated securities are often highly leveraged and may not have more
traditional methods of financing available to them so that their ability to
service their debt obligations during an economic downturn or during sustained
periods of rising interest rates may be impaired. The risk of loss due to
default by such issuers is significantly greater because lower-rated securities
and comparable non-rated securities generally are unsecured and frequently are
subordinated to the prior payment of senior indebtedness. The Fund may incur
additional expenses to the extent that it is required to seek recovery upon a
default in the payment of principal or interest on its portfolio holdings.
Fixed-income securities, including lower-rated securities and comparable
non-rated securities, frequently have call and buy-back features that permit
their issuers to call or repurchase the securities from their holders, such as
the Fund. If an issuer exercises these rights during periods of declining
interest rates, the Fund may have to replace the security with a lower yielding
security, resulting in a decreased return to the Fund.
Up to 10% of the Fund's assets may be invested in securities rated lower
than B by both Moody's and S&P. Securities which are rated Ba by Moody's or BB
by S&P have speculative characteristics with respect to capacity to pay interest
and repay principal. Securities which are rated B generally lack characteristics
of the desirable investment and assurance of interest and principal payments
over any long period of time may be small. Securities which are rated Caa or CCC
or below are of poor standing. Those issues may be in default or present
elements of danger with respect to principal or interest. Securities rated C by
Moody's and D by S&P are the lowest rating class and indicate that payments are
in default, or that a bankruptcy petition has been filed with respect to the
issuer or that the issuer is regarded as having extremely poor prospects. A
general description of Moody's and S&P's ratings of corporate bonds is set forth
in Appendix A to the Prospectus.
In general, the ratings of nationally recognized statistical rating
organizations represent the opinions of these agencies as to the quality of
securities that they rate. Such ratings, however, are relative and subjective,
11
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High Income Opportunity Fund Inc.
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Risk Factors and Special Considerations (continued)
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and are not absolute standards of quality and do not evaluate the market value
risk of the securities. It is possible that an agency might not change its
rating of a particular issue to reflect subsequent events. These ratings will be
used by the Fund as initial criteria for the selection of portfolio securities,
but the Fund also will rely upon the independent advice of the Investment
Manager to evaluate potential investments.
In light of these risks, the Investment Manager will take various factors
into consideration in evaluating the creditworthiness of an issue, whether rated
or non-rated. These factors may include, among others, the issuer's financial
resources, its sensitivity to economic conditions and trends, the operating
history of and the community support for the facility financed by the issue, the
ability of the issuer's management and regulatory matters.
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Investment Practices
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In connection with the investment objectives and policies described above,
the Fund may, but is not required to, utilize various investment techniques to
earn income, facilitate portfolio management and mitigate risk. These investment
techniques utilize convertible securities, interest rate and currency futures
contracts, put and call options on such futures contracts, currency exchange
transactions, illiquid securities, securities of unseasoned issuers and
securities of foreign governments and corporations including those of developing
countries. Such techniques are generally accepted by modern portfolio managers
and are regularly utilized by many investment companies and other institutional
investors. These investment practices entail risks. Although the Investment
Manager believes that these investment techniques may assist the Fund in
achieving its investment objective, no assurance can be given. Any or all of the
investment techniques available to the Investment Manager described below may be
used at any time and there is no particular strategy that dictates the use of
one technique rather than another, since the use of any investment technique is
a function of numerous variables including market conditions.
Convertible Securities and Synthetic Convertible Securities. Convertible
securities are fixed-income securities that may be converted at either a stated
price or stated rate into underlying shares of common stock. Convertible
securities have general characteristics similar to both fixed-income and equity
securities. Although to a lesser extent than with fixed-income securities, the
market value of convertible securities tends to decline as interest rates
increase and, conversely, tends to increase as interest rates decline. In
addition, because of the conversion feature, the market value of convertible
12
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High Income Opportunity Fund Inc.
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Investment Practices (continued)
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securities tends to vary with fluctuations in the market value of the underlying
common stocks and, therefore, also will react to variations in the general
market for equity securities.
Convertible securities are investments which provide for a stable stream of
income with generally higher yields than common stocks. There can be no
assurance of current income because the issuers of the convertible securities
may default on their obligations. Synthetic convertible securities differ from
convertible securities in certain respects, including that each component of a
synthetic convertible security has a separate market value and responds
differently to market fluctuations. Investing in synthetic convertible
securities involves the risk normally involved in holding the securities
comprising the synthetic convertible security.
Futures Contracts and Options on Futures Contracts. The Fund may enter into
interest rate and currency futures contracts and may purchase and sell put and
call options on such futures contracts. The Fund will enter into such
transactions for hedging purposes or for other appropriate risk-management
purposes permitted under the rules and regulations of the Commodity Futures
Trading Commission and the Securities and Exchange Commission (the "SEC").
While the Fund may enter into futures contracts and options on futures
contracts for bona fide hedging and other appropriate risk management purposes,
the use of futures contracts and options on futures contracts might result in a
poorer overall performance for the Fund than if it had not engaged in these
particular types of transactions. If, for example, the Fund had insufficient
cash, it may have to sell a portion of its underlying portfolio of securities in
order to meet daily variation margin requirements on its futures contracts or
options on futures contracts at a time when it may be disadvantageous to do so.
There may be an imperfect correlation between the Fund's portfolio holdings and
futures contracts or options on futures contracts entered into by the Fund,
which may prevent the Fund from achieving the intended hedge or expose the Fund
to risk of loss. Further, the Fund's use of futures contracts and options on
futures contracts to reduce risk involves cost and will be subject to the
Investment Manager's ability to predict correctly changes in interest rate
relationships or other factors. No assurance can be given that the Investment
Manager's judgment in this respect will be correct.
Foreign Securities. There are certain risks involved in investing in
securities of companies and governments of foreign nations which are in addition
to the usual risk inherent in domestic investments. These risks include those
resulting from devaluation of currencies, future adverse political and economic
developments and the possible imposition of currency exchange blockages or other
foreign governmental laws or restrictions, the relative lack of public
13
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High Income Opportunity Fund Inc.
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Investment Practices (continued)
================================================================================
information concerning issuers and the lack of uniform accounting, auditing and
financial reporting standards or of other regulatory practices and requirements
comparable to those applicable to domestic companies. The net asset value of the
Fund may be adversely affected by fluctuations in value of one or more foreign
currencies relative to the U.S. dollar.
Currency Exchange Transactions. The Fund may engage in currency exchange
transactions and purchase exchange-traded put and call options on foreign
currencies. A forward currency contract involves an obligation to purchase or
sell a specific currency for an agreed-upon price at an agreed-upon date, which
may be any fixed number of days from the date of the contract agreed upon by the
parties. Although these contracts are intended to minimize the risk of loss due
to a decline in the value of the hedged currency, at the same time they tend to
limit any potential gain that might result should the value of the currency
increase.
At or before the maturity of a forward contract, the Fund either may sell a
portfolio security and make delivery of the currency, or retain the security and
offset its contractual obligation to deliver the currency by purchasing a second
contract pursuant to which the Fund will obtain, on the same maturity date, the
same amount of the security which it is obligated to deliver. If the Fund
retains the portfolio security and engages in an offsetting transaction, the
Fund, at the time of execution of the offsetting transaction, will incur a gain
or loss to the extent that movement has occurred in forward contract prices.
Should forward prices decline during the period between the Fund's entering into
a forward contract for the sale of a currency and the date that it enters into
an offsetting contract for the purchase of the currency, the Fund will realize a
gain to the extent that the price of the currency that it has agreed to sell
exceeds the price of the currency that it has agreed to purchase. Should forward
prices increase, the Fund will suffer a loss to the extent that the price of the
currency that it has agreed to purchase exceeds the price of the currency that
it has agreed to sell.
The cost to the Fund of engaging in currency transactions varies with the
factors such as the currency involved, the length of the contract period and the
market conditions then prevailing. Because transactions in currency exchange are
usually conducted on a principal basis, no fees or commissions are involved. The
use of forward currency contracts does not eliminate fluctuations in the
underlying prices of the securities, but it does establish a rate of exchange
that can be achieved in the future. In addition, although forward currency
contracts limit the risk of loss due to a decline in the value of the hedged
currency, at the same time, they limit any potential gain that might result
should the value of the currency increase.
14
<PAGE>
High Income Opportunity Fund Inc.
================================================================================
Investment Practices (continued)
================================================================================
Options on Foreign Currencies. The Fund may purchase options on a foreign
currency in which securities held by the Fund are denominated to protect against
a decline in the value of the currency in relation to the currency in which the
exercise price is denominated. The benefit to the Fund derived from purchase of
foreign currency options, like the benefit derived from other types of options,
will be reduced by the amount of the premium and related transaction costs. In
addition, if currency rates do not move in the direction or to the extent
anticipated, the Fund could sustain losses on transactions in foreign currency
options that would require it to forego a portion or all of the benefits of
advantageous changes in the rates. Options on foreign currencies purchased by
the Fund may be traded on domestic and foreign exchanges or traded
over-the-counter.
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued basis, or may purchase or sell securities for
delayed delivery. In when-issued or delayed delivery transactions, delivery of
the securities occurs beyond normal settlement periods, but no payment or
delivery will be made by the Fund prior to the actual delivery or payment by the
other party to the transaction. Securities purchased on a when-issued or delayed
delivery basis may expose the Fund to risk because the securities may experience
fluctuations in value prior to their delivery. Purchasing securities on a
when-issued or delayed delivery basis can involve the additional risk that the
yield available in the market when the delivery takes place may be higher than
that obtained in the transaction itself.
Lending Securities. The Fund is authorized to lend securities it holds to
brokers, dealers and other financial organizations, but it will not lend
securities to any affiliate of the Investment Manager, including Smith Barney,
unless the Fund applies for and receives specific authority to do so from the
SEC.
Short Sales Against the Box. The Fund may make short sales of securities in
order to reduce market exposure and/or to increase its income if, at all times
when a short position is open, the Fund owns an equal or greater amount of such
securities or owns preferred stock, debt or warrants convertible or exchangeable
into an equal or greater number of the shares of the securities sold short.
Short sales of this kind are referred to as short sales "against the box."
Non-Publicly Traded and Illiquid Securities. The Fund may invest up to 20%
of its assets in illiquid securities. The sale of securities that are not
publicly traded is typically restricted under the federal securities laws. As a
result, the Fund may be forced to sell these securities at less than fair market
value or may not be able to sell them when the Investment Manager believes it
desirable to do so. The Fund's investments in illiquid securities are subject to
the risk that should the Fund desire to sell any of these securities when a
buyer is not available at a price that the Fund deems representative of its
15
<PAGE>
High Income Opportunity Fund Inc.
================================================================================
Investment Practices (continued)
================================================================================
value, the value of the Fund's net assets could be adversely affected.
Securities of Unseasoned Issuers. Securities in which the Fund may invest
may have limited marketability and, therefore, may be subject to wide
fluctuations in market value. In addition, the issuers of certain securities may
lack a significant operating history and be dependent on products or services
without an established market share.
Securities of Developing Countries. A developing country generally is
considered to be a country that is in the initial stages of its
industrialization cycle. Investing in the equity and fixed-income markets of
developing countries involves exposure to economic structures that are generally
less diverse and mature, and to political systems that can be expected to have
less stability, than those of developed countries. Historical experience
indicates that the markets of developing countries have been more volatile and
have provided higher returns than the markets of the more mature economies of
developed countries.
See the Statement of Additional Information for a detailed description of
the Fund's investment practices.
================================================================================
Share Price Data
================================================================================
The Fund's Common Stock is listed on the NYSE under the symbol "HIO." Smith
Barney also intends to make a market in the Common Stock.
The following table sets forth for the Fund's Common Stock the following
information for each quarterly period during the last two fiscal years: high
and low sales prices and net asset values; sales price and net asset value at
quarter-end, and the premium (discount) of the sales price to net asset
value at quarter-end.
NYSE
NYSE NAV Price at NAV at
Price Price Quarter- Quarter- Premium
Three Months Ended Range Range End End (Discount)
================================================================================
12/31/93* $12.50-$12.25 $12.69-$12.49 $12.38 $12.56 (1.47)%
3/31/94 12.63- 11.00 12.79- 12.06 11.00 12.06 (8.79)
6/30/94 11.88- 10.63 12.02- 11.65 11.38 11.67 (2.53)
9/30/94 11.38- 10.69 11.67- 11.18 10.63 11.20 (5.13)
12/31/94 10.63- 9.63 11.21- 10.66 9.75 10.78 (9.55)
3/31/95 11.06- 9.88 11.11- 10.72 10.38 11.11 (6.66)
6/30/95 11.25- 10.38 11.50- 11.11 10.63 11.36 (6.47)
9/30/95 10.88- 10.50 11.58- 11.37 10.50 11.48 (8.54)
12/31/95 11.00- 10.50 11.47- 11.62 10.50 11.62 (9.64)
================================================================================
*The Fund commenced operations on October 22, 1993.
16
<PAGE>
High Income Opportunity Fund Inc.
================================================================================
Share Price Data (continued)
================================================================================
As of January 22, 1996, the price per share of Common Stock as quoted on
the NYSE was $10.9375, representing a 6.36% discount from the Common Stock's net
asset value calculated on that day.
================================================================================
Taxation
================================================================================
The following is a summary of the material Federal tax considerations
affecting the Fund and its Common Stockholders; see the Statement of Additional
Information for a further discussion. In addition to the considerations
described below and in the Statement of Additional Information, which are
applicable to any investment in the Fund, there may be other Federal, state,
local or foreign tax considerations applicable to particular investors.
Prospective stockholders are therefore urged to consult their tax advisers with
respect to the tax consequences to them of an investment in the Fund.
TAXATION OF THE FUND
The Fund intends to qualify each year and elect to be treated as a
regulated investment company for federal income tax purposes. In order to so
qualify, the Fund must satisfy certain tests regarding the nature of its income
and assets. If the Fund qualifies as a regulated investment company and
distributes to its stockholders at least 90% of its net investment income, then
the Fund will not be subject to federal income tax on the income so distributed.
However, the Fund would be subject to corporate income tax on any undistributed
income. In addition, the Fund will be subject to a nondeductible 4% excise tax
on the amount by which the income it distributes in any calendar year is less
than a required amount.
The Fund may acquire securities which do not pay interest currently in an
amount equal to their effective interest rate, such as zero coupon, pay-in-kind,
or delayed interest securities. As the holder of such a security, the Fund is
required to include in taxable income the portion of the excess of the stated
value of the security at maturity, plus any interest that is not paid currently,
over its issue price ("original issue discount") that accrues on the security
for the taxable year, even if the Fund receives no payment on the security
during the year. Because the Fund must distribute annually substantially all of
its investment company taxable income, including any original issue discount, in
order to qualify as a RIC and to avoid imposition of the 4% excise tax, the Fund
may be required in a particular year to distribute dividends in an amount that
is greater than the total amount of cash the Fund actually receives as
distributions on the securities it owns. Those distributions will be made from
17
<PAGE>
High Income Opportunity Fund Inc.
================================================================================
Taxation (continued)
================================================================================
the Fund's cash assets or from the proceeds of sales of portfolio securities, if
necessary. The Fund may realize capital gains or losses from those sales, which
would increase or decrease the Fund's investment company taxable income or net
capital gain.
The Fund may also acquire securities at a market discount. Market discount
is generally equal to (other than in the case of an obligation issued with
original issue discount) the excess of the price of the obligation at issuance
over the purchase price at which it is acquired by a subsequent purchaser.
Market discount is treated as interest income, rather than as capital gain, when
ultimately recognized by the purchaser. The market discount rules may cause the
Fund to recognize more ordinary, and less capital gain, than would be the case
if the Fund had acquired securities at a price equal to that at which the
securities had originally been issued.
Foreign Taxes. Dividends and interest on foreign securities held by the
Fund may be subject to income, withholding or other taxes imposed by foreign
countries and U.S. possessions that would reduce the yield on the Fund's
securities. Tax conventions between certain countries and the United States may
reduce or eliminate these taxes, however, and foreign countries generally do not
impose taxes on capital gains in respect of investments by foreign investors.
The Fund does not expect to be eligible to pass through any such taxes to the
Fund's stockholders. As a result, any such taxes imposed on the Fund would not
be deductible or creditable by the Fund's stockholders.
TAXATION OF STOCKHOLDERS
Distributions. In general, all distributions to stockholders attributable
to the Fund's net investment income will be taxable as ordinary income whether
paid in cash or reinvested in additional shares of Common Stock pursuant to the
Dividend Reinvestment Plan.
Although the Fund does not expect to realize significant net capital gains,
to the extent the Fund does realize net capital gains, it intends to distribute
such gains at least annually and designate them as capital gain dividends.
Capital gain dividends are taxable as long-term capital gains, whether paid in
cash or reinvested in additional shares of Common Stock, regardless of how long
the shares have been held. The Fund may elect to retain its net capital gain and
pay corporate income tax thereon. In such event, the Fund would most likely make
an election which would require each stockholder of record on the last day of
the Fund's taxable year to include in income for tax purposes his proportionate
share of the Fund's undistributed net capital gain. If such an election is made,
each stockholder would be entitled to credit his proportionate share of the tax
paid by the Fund against his federal income tax liabilities and to claim refunds
18
<PAGE>
High Income Opportunity Fund Inc.
================================================================================
Taxation (continued)
================================================================================
to the extent that the credit exceeds such liabilities. In addition, the
stockholder would be entitled to increase the basis of his shares for federal
income tax purposes by an amount equal to 65% of his proportionate share of the
undistributed net capital gain.
Stockholders receiving distributions in the form of additional shares
purchased by the Plan Agent pursuant to the Dividend Reinvestment Plan will be
treated for federal income tax purposes as receiving the amount of cash received
by the Plan Agent on their behalf. In general, the basis of such shares will
equal the price paid by the Plan Agent for such shares, including brokerage
commissions.
Sales of Shares. In general, if a share of Common Stock is sold, the seller
will recognize gain or loss equal to the difference between the amount realized
on the sale and the seller's adjusted basis in the share. However, any loss
recognized by a stockholder within six months of purchasing the shares will be
treated as a long-term capital loss to the extent of any capital gain dividends
received by the stockholder and the stockholder's share of undistributed net
capital gain. In addition, any loss realized on a sale of shares of Common Stock
will be disallowed to the extent the shares disposed of are replaced within a
61-day period beginning 30 days before and ending 30 days after the disposition
of the shares. In such a case, the basis of the shares acquired will be adjusted
to reflect the disallowed loss. Any gain or loss realized upon a sale of shares
by a stockholder who is not a dealer in securities will be treated as capital
gain or loss.
Backup Withholding. The Fund may be required to withhold federal income tax
at the rate of 31% of any payments made to a stockholder if the stockholder has
not provided a correct taxpayer identification number and certain required
certifications to the Fund, or if the Secretary of the Treasury notifies the
Fund that the number provided by a stockholder is not correct or that the
stockholder has not reported all interest and dividend income required to be
shown on the stockholder's federal income tax return.
The foregoing discussion is a summary of certain of the current federal
income tax laws regarding the Fund and investors in the shares of Common Stock
and does not deal with all of the federal income tax consequences applicable to
the Fund, or to all categories of investors, some of which may be subject to
special rules. Prospective investors should consult their own tax advisors
regarding the federal, state, local, foreign and other tax consequences to them
of investments in the Fund.
19
<PAGE>
High Income Opportunity Fund Inc.
================================================================================
Management of the Fund
================================================================================
BOARD OF DIRECTORS
The business and affairs of the Fund, including the general supervision of
the duties performed by the Investment Manager under the Investment Management
Agreement, are the responsibility of the Fund's Board of Directors.
INVESTMENT MANAGER
The Greenwich Street Advisors Division of Smith Barney Mutual Funds
Management Inc. ("SBMFM" or the "Manager") serves as the Fund's investment
manager. Smith Barney Mutual Funds Management Inc. was incorporated in 1968 and
currently manages investment companies with total assets of approximately $68
billion at November 30, 1995. SBMFM is wholly-owned by Smith Barney Holdings
Inc., the parent company of Smith Barney. Smith Barney Holdings Inc. is a
wholly-owned subsidiary of Travelers Group Inc. ("Travelers"), a financial
services holding company engaged, through its subsidiaries, principally in four
business segments: Investment Services, Consumer Finance Services, Life
Insurance Services and Property & Casualty Insurance Services. SBMFM, Smith
Barney Holdings Inc. and Smith Barney are each located at 388 Greenwich Street,
New York, New York 10013.
Subject to the supervision and direction of the Fund's Board of Directors,
SBMFM manages the securities held by the Fund in accordance with the Fund's
stated investment objectives and policies, makes investment decisions for the
Fund, places orders to purchase and sell securities on behalf of the Fund and
employs managers and securities analysts who provide research services to the
Fund. The Fund pays the Investment Manager a fee for the services provided to
the Fund that is computed daily and paid monthly at the annual rate of 1.15% of
the value of the Fund's average daily net assets. This fee is higher than the
rates for similar services paid by other publicly offered, closed-end,
management investment companies that have investment objectives and policies
similar to those of the Fund.
Mr. John C. Bianchi, a Managing Director of the Greenwich Street Advisors
division of SBMFM, has been responsible for management of the Fund's portfolio
within the investment framework described above since the Fund's inception. Mr.
Bianchi acts as principal portfolio manager for the Fund and for the following
other funds: Smith Barney High Income Fund and Zenix Income Fund.
Mr. Bianchi has more than fourteen years of investment advisory experience.
He joined Greenwich Street Advisors in 1985. Prior thereto, Mr. Bianchi was
employed as a Senior Investment Analyst at Metropolitan Life Insurance Company,
where he worked in all sectors of the bond market, specializing in high grade
20
<PAGE>
High Income Opportunity Fund Inc.
================================================================================
Management of the Fund (continued)
================================================================================
and high yield corporate bonds and notes. Mr. Bianchi holds a B.A. from Seton
Hall University and an M.B.A. in Finance from Fairleigh Dickenson University.
================================================================================
Dividends and Distributions
================================================================================
The Fund expects to pay monthly dividends of net investment income (income
other than net realized gains) to the holders of the Common Stock. Under the
Fund's current policy, which may be changed at any time by the Board of
Directors, the Fund's monthly dividends will be made at a level that reflects
the past and projected performance of the Fund, which policy over time will
result in the distribution of all net investment income of the Fund. Net income
of the Fund consists of all interest income accrued on the Fund's assets less
all expenses of the Fund. Expenses of the Fund are accrued each day. Net
realized capital gains, if any, will be distributed to the stockholders at least
once a year.
================================================================================
Dividend Reinvestment Plan
================================================================================
Under the Fund's Dividend Reinvestment Plan (the "Plan"), a stockholder
whose shares of Common Stock are registered in his own name will have all
distributions from the Fund reinvested automatically by First Data as agent
under the Plan, unless the stockholder 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 stockholder elects to receive distributions in cash.
Investors who own Common Stock registered in street name should consult their
broker-dealers for details regarding reinvestment. All distributions to Fund
stockholders who do not participate in the Plan will be paid by check mailed
directly to the record holder by or under the direction of First Data as
dividend-paying agent.
If the Fund declares a dividend or capital gains distribution payable
either in shares of Common Stock or in cash, stockholders who are not Plan
participants will receive cash, and Plan participants will receive the
equivalent amount in shares of Common Stock. When the market price of the Common
Stock is equal to or exceeds the net asset value per share of the Common Stock
on the Valuation Date (as defined below), Plan participants will be issued
shares of Common Stock valued at the net asset value most recently determined as
21
<PAGE>
High Income Opportunity Fund Inc.
================================================================================
Dividend Reinvestment Plan (continued)
================================================================================
described in the Statement of Additional Information under "Net Asset Value" or,
if net asset value is less than 95% of the then current market price of the
Common Stock, then at 95% of the market value. The Valuation Date is the
dividend or capital gains distribution payment date or, if that date is not a
NYSE trading day, the immediately preceding trading day.
If the market price of the Common Stock is less than the net asset value of
the Common Stock, or if the Fund declares a dividend or capital gains
distribution payable only in cash, a broker-dealer not affiliated with Smith
Barney, as purchasing agent for Plan participants (the "Purchasing Agent"), will
buy Common Stock in the open market, on the NYSE or elsewhere, for the
participants' accounts. If, following the commencement of the purchases and
before the Purchasing Agent has completed its purchases, the market price
exceeds the net asset value of the Common Stock, the average per share purchase
price paid by the Purchasing Agent may exceed the net asset value of the Common
Stock, resulting in the acquisition of fewer shares than if the dividend or
capital gains distribution had been paid in Common Stock issued by the Fund at
net asset value. Additionally, if the market price exceeds the net asset value
of shares before the Purchasing Agent has completed its purchases, the
Purchasing Agent is permitted to cease purchasing shares and the Fund may issue
the remaining shares at a price equal to the greater of (a) net asset value or
(b) 95% of the then current market price. In a case where the Purchasing Agent
has terminated open market purchases and the Fund has issued the remaining
shares, the number of shares received by the participant in respect of the cash
dividend or distribution 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. First Data will apply all cash received as a dividend or
capital gains distribution to purchase Common Stock on the open market as soon
as practicable after the payment date of the dividend or capital gains
distribution, but in no event later than 30 days after that date, except when
necessary to comply with applicable provisions of the federal securities laws.
First Data maintains all stockholder accounts in the Plan and furnishes
written confirmations of all transactions in each account, including information
needed by a stockholder for personal and tax records. The automatic reinvestment
of dividends and capital gains will not relieve Plan participants of any income
tax that may be payable on the dividends or capital gains distributions. Common
Stock in the account of each Plan participant will be held by First Data on
behalf of the Plan participant, and each stockholder's proxy will include those
shares purchased pursuant to the Plan.
22
<PAGE>
High Income Opportunity Fund Inc.
================================================================================
Dividend Reinvestment Plan (continued)
================================================================================
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions. First Data 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
as a result of dividends or capital gains distributions payable either in Common
Stock or in cash. Each Plan participant will, however, bear a proportionate
share of brokerage commissions incurred with respect to open market purchases
made in connection with the reinvestment of dividends or capital gains
distributions.
Experience under the Plan may indicate that changes to it are desirable.
The Fund reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by First Data, with the Fund's prior written consent, on at least 30
days' written notice to Plan participants. All correspondence concerning the
Plan should be directed by mail to First Data Investor Services Group, Inc.,
P.O. Box 1376, Boston, Massachusetts 02104.
================================================================================
Repurchase of Shares
================================================================================
The Fund's Board of Directors currently intends to consider from time to
time repurchases of Common Stock on the open market or in private transactions
or the making of tender offers for Common Stock. The Fund may repurchase shares
of its Common Stock in the open market or in privately negotiated transactions
when the Fund can do so at prices below their then current net asset value per
share on terms that the Board of Directors believes represent a favorable
investment opportunity.
Before authorizing any repurchase of Common Stock or tender offer to the
Common Stock stockholders, the Fund's Board of Directors will consider all
relevant factors, including the market price of the Common Stock, its net asset
value per share, the liquidity of the Fund's securities positions, the effect an
offer or repurchase might have on the Fund or its stockholders and relevant
market conditions. Any offer will be made in accordance with the requirements of
the 1940 Act and the Securities Exchange Act of 1934. Although the matter will
be subject to Board of Directors review, at this time a tender offer is not
expected to be made if the anticipated benefit to stockholders and the Fund
would not be commensurate with the anticipated cost to the Fund, or if the
number of shares expected to be tendered would not be material. See the
Statement of Additional Information for additional information concerning the
repurchase of Common Stock.
23
<PAGE>
High Income Opportunity Fund Inc.
================================================================================
Description of Shares
================================================================================
The Fund was incorporated under the laws of the State of Maryland on July
30, 1993 by the Articles of Incorporation (the "Articles of Incorporation"). The
Articles of Incorporation authorize issuance of the Common Stock. The Articles
of Incorporation provide that the Fund shall continue without limitation of
time.
COMMON STOCK
Amount
Outstanding
Exclusive of Shares
Held by Fund for Its
Amount Held Own Account as of
Amount by Fund for Its January 15,
Title of Class Authorized Own Account 1996
================================================================================
Common 500,000,000
Stock Shares 0 69,858,000
================================================================================
No shares, other than those currently outstanding, are offered for sale
pursuant to this Prospectus. All shares of Common Stock have equal
non-cumulative voting rights and equal rights with respect to dividends, assets
and liquidation. Shares of Common Stock will be fully paid and non-assessable
when issued and have no preemptive, conversion or exchange rights.
ANTI-TAKEOVER PROVISIONS IN THE ARTICLES OF INCORPORATION
The Fund's Articles of Incorporation include provisions that could have the
effect of limiting the ability of other entities or persons to acquire control
of the Fund or to change the composition of its Board of Directors, and could
have the effect of depriving stockholders of an opportunity to sell their shares
of Common Stock at a premium over prevailing market prices by discouraging a
third party from seeking to obtain control of the Fund. Commencing with the
first annual meeting of stockholders, the Board of Directors will be divided
into three classes. At the annual meeting of stockholders, in each year
thereafter, the term of one class will expire and each Director elected to the
class will hold office for a term of three years. The classification of the
Board of Directors in this manner could delay for an additional year the
replacement of a majority of the Board of Directors. A Director may be removed
from office only by vote of the holders of at least 75% of the shares of Common
Stock entitled to be voted on the matter. In addition, the Articles of
Incorporation require the affirmative vote of at least 75% of the Board of
Directors and stockholders to authorize certain Fund transactions not in the
ordinary course of business (including a merger) unless certain conditions are
met which would have the result of reducing the number of Directors and
stockholders necessary to approve such a transaction. See "Repurchase of Shares
and Conversion to Open-End Fund" in the Statement of Additional Information.
24
<PAGE>
High Income Opportunity Fund Inc.
================================================================================
Description of Shares (continued)
================================================================================
The Board of Directors has determined that the 75% voting requirements
described above, which are greater than the minimum requirements under Maryland
law or the 1940 Act, are in the best interests of stockholders generally.
Reference should be made to the Articles of Incorporation on file with the
Securities and Exchange Commission for the full text of these provisions.
CONVERSION TO OPEN-END FUND
The Fund's Articles of Incorporation require the favorable vote of the
holders of at least two-thirds of the shares of Common Stock then entitled to be
voted on the matter to authorize the conversion of the Fund from a closed-end to
an open-end investment company as defined in the 1940 Act, unless two-thirds of
certain members of the Board of Directors approve such a conversion. In the
latter case, the affirmative vote of a majority of the shares outstanding and
entitled to vote on the matter will be required to approve an amendment to the
Fund's Articles of Incorporation providing for the conversion of the Fund to an
open-end investment company. A detailed description of the Fund's ability to
convert to open-end status is discussed in the Statement of Additional
Information.
================================================================================
Custodian and Transfer Agent
================================================================================
PNC Bank, National Association, 17th and Chestnut Streets, Philadelphia,
Pennsylvania 19103 acts as custodian of the Fund's investments. First Data,
located at Exchange Place, Boston, Massachusetts 02109, serves as agent in
connection with the Plan and serves as the Fund's transfer agent,
dividend-paying agent and registrar.
================================================================================
Experts
================================================================================
The audited financial statements have been incorporated by reference in the
Statement of Additional Information in reliance upon the report of KPMG Peat
Marwick LLP, independent auditors, and upon the authority of said firm as
experts in accounting and auditing.
25
<PAGE>
High Income Opportunity Fund Inc.
================================================================================
Other Information
================================================================================
The Prospectus and the Statement of Additional Information do not contain
all of the information set forth in the Registration Statement that the Fund has
filed with the Securities and Exchange Commission. The complete Registration
Statement may be obtained from the Securities and Exchange Commission upon
payment of the fee prescribed by its Rules and Regulations.
The table of contents of the Statement of Additional Information is as
follows:
Page
----
Investment Objectives and Policies .............................. B-2
Investment Restrictions ......................................... B-9
Net Asset Value ................................................. B-11
Taxation ........................................................ B-12
Officers and Directors .......................................... B-17
Portfolio Transactions .......................................... B-20
Management of the Fund .......................................... B-21
Repurchase of Shares and Conversion to Open-End Fund ............ B-22
Financial Statements ............................................ B-25
No person has been authorized to give any information or to make any
representations not contained in this Prospectus and, if given or made, the
information or representations must not be relied upon as having been authorized
by the Fund, the Fund's investment manager or Smith Barney. This Prospectus does
not constitute an offer to sell or a solicitation of an offer to buy any
security other than the shares of Common Stock offered by this Prospectus, nor
does it constitute an offer to sell or a solicitation of an offer to buy the
shares of Common Stock by anyone in any jurisdiction in which the offer or
solicitation would be unlawful. Neither the delivery of this Prospectus nor any
sale made hereunder will, under any circumstances, create any implication that
there has been no change in the affairs of the Fund since the date of this
Prospectus. If any material change occurs while this Prospectus is required by
law to be delivered, however, this Prospectus will be supplemented or amended
accordingly.
26
<PAGE>
High Income Opportunity Fund Inc.
================================================================================
Appendix A
================================================================================
DESCRIPTION OF RATINGS
DESCRIPTION OF MOODY'S CORPORATE BOND RATINGS:
Aaa -- Bonds that are rated Aaa are judged to be of the best quality,
carry the smallest degree of investment risk and are generally referred to as
"gilt edge." Interest payments with respect to these bonds are protected by a
large or by an exceptionally stable margin, and principal is secure. Although
the various protective elements applicable to these bonds are likely to change,
those changes are most unlikely to impair the fundamentally strong position of
these bonds.
Aa -- Bonds that are rated Aa are judged to be of high quality by all
standards and together with the Aaa group 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 as in Aaa securities, or fluctuation of
protective elements may be of greater amplitude, or other elements may be
present that make the long-term risks appear somewhat larger than in Aaa
securities.
A -- Bonds that are rated A possess many favorable investment
attributes and are to be considered as upper medium grade obligations. Factors
giving security to principal and interest with respect to these bonds are
considered adequate, but elements may be present that suggest a susceptibility
to impairment sometime 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 may
have speculative characteristics as well.
Ba -- Bonds that are rated Ba are judged to have speculative elements;
their future cannot be considered as well assured. Often the protection of
interest and principal payments may be very moderate and thereby not well
safe-guarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B -- Bonds that are rated B generally lack characteristics of desirable
investments. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
A-1
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High Income Opportunity Fund Inc.
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Appendix A (continued)
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Caa -- Bonds that are rated Caa are of poor standing. These issues may
be in default or present elements of danger may exist with respect to principal
or interest.
Ca -- Bonds that are rated Ca represent obligations which are
speculative in a high degree. Such issues are often in default or have other
marked shortcomings.
C -- Bonds that are 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.
Moody's applies the numerical modifiers 1, 2 and 3 in each generic
rating classification from Aa through B. The modifier 1 indicates that the
security ranks in the higher end of its generic rating category; the modifier 2
indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks
in the lower end of its generic ranking category.
DESCRIPTION OF S&P CORPORATE BOND RATINGS:
AAA -- Bonds rated AAA have the highest rating assigned by S&P to a
debt obligation. 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 issues only in 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 and CCC -- Bonds rated BB and B are regarded, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
A-2
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High Income Opportunity Fund Inc.
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Appendix A (continued)
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principal in accordance with the terms of the obligation. BB represents a lower
degree of speculation than B and CCC the highest degree of speculation. While
such bonds will likely have some quality and protective characteristics, these
are outweighed by large uncertainties or major risk exposures to adverse
conditions.
C -- The rating C is reserved for income bonds on which no interest is
being paid.
D -- Bonds rated D are in default, and payment of interest and/or
repayment of principal is in arrears.
S&P's letter ratings may be modified by the addition of a plus or a
minus sign, which is used to show relative standing within the major rating
categories, except in the AAA-Prime Grade category.
A-3
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SMITH BARNEY
------------
A Member of Travelers Group[LOGO]
Smith Barney
High Income
Opportunity
Fund Inc.
388 Greenwich Street
New York, New York 10013
(212) 723-9218
Fund 167, 226, 240
FD 0249 G4
