As filed with the Securities and Exchange Commission on January
26, 1998
Securities Act Registration No. 33-66770
Investment Company Act Registration No. 811-7920
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.___
Post-Effective Amendment No. 5
and/or
REGISTRATION STATEMENT UNDER
THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 7
High Income Opportunity Fund Inc.
(a Maryland Corporation)
(Exact Name of Registrant as Specified in Charter)
388 Greenwich Street
New York, New York 10013
(Address of Principal Executive Offices)
(212) 723-9218
(Registrant's Telephone Number, including Area Code)
Christina T. Sydor, Secretary
High Income Fund Opportunity Inc.
388 Greenwich Street
New York, New York 10013
(Name and Address of Agent for Service)
Copies to:
John Baumgardner
Sullivan & Cromwell
125 Broad Street
30th Floor, Room 2704
New York, NY 10004
Approximate Date of Proposed Public Offering:
As soon as practicable after the effective date of this
Registration Statement.
If any securities being registered on this form will be
offered on a delayed or continuous basis in reliance on Rule 415
under the Securities Act of 1933, other than securities offered in
connection with a dividend reinvestment plan, check the following box. [ ]
This Registration Statement relates to the registration of
an indeterminate number of shares solely for market-making
transactions. Pursuant to Rule 429, this Registration Statement
relates to shares previously registered on Form N-2. (Registration
No. 33-66770).
It is proposed that this fiing will become effective:
[X] when declared effective pursuant to section 8(c).
HIGH INCOME OPPORTUNITY FUND INC.
Form N-2
Cross Reference Sheet
Part A
Item No. Caption Prospectus Caption
1. Outside Front Cover Outside Front Cover of
Prospectus
2. Inside Front and Outside Inside Front and
Outside Back Cover Page
Back Cover Page of Prospectus
3. Fee Table and Synopsis Prospectus Summary; Fund
Expenses
4. Financial Highlights Financial Highlights
5. Plan of Distribution Prospectus Summary; The
Offering; Repurchase of Shares
6. Selling Shareholders Not Applicable
7. Use of Proceeds Use of Proceeds;
Investment Objective and Policies
8. General Description of the Registrant The Fund; Investment Objective and
Policies; Risk Factors and Special
Considerations; Investment Practices
9. Management Management of the Fund;
Description of
Shares; Custodian and Transfer
Agent
10. Capital Stock, Long-Term Debt, Taxation; Dividend
and Other Securities Reinvestment Plan;
Description of Shares
11. Defaults and Arrears on Senior Not Applicable
Securities
12. Legal Proceedings Not Applicable
13. Table of Contents of the Statement Further Information
of Additional Information
Part B Statement of Additional
Item No. Information Caption
14. Cover Page Cover Page
15. Table of Contents Cover Page
16. General Information and History The Fund;
Description of Shares
(see Prospectus)
17. Investment Objective and Policies Investment Objective and Policies;
Investment Restrictions
18. Management Management of the Fund;
Officers and Directors
19. Control Persons and Principal Holders Not Applicable
of Securities
20. Investment Advisory and Other Management of the Fund
Services
21. Brokerage Allocation and Other Portfolio Transactions
Practices
22. Tax Status Taxation
23. Financial Statements Financial Statements
Part C
Item No.
Information required to be included in Part C is set forth,
under the appropriate item so numbered, in Part C of this
Registration Statement.
PART A
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Prospectus January 28, 1998
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High Income Opportunity Fund Inc.
388 Greenwich Street
New York, New York 10013
(800) 451-2010
The High Income Opportunity Fund Inc. (the "Fund") is a diversified,
closed-end management investment company. The Fund's primary investment
objective is 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, preferred stock and notes. Up to 35% of the Fund's
assets may be invested in common stock or other equity-related securities,
including convertible securities, warrants and rights. Fixed-income 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. ("Moody's") or D by Standard & Poor's Ratings Group
("S&P"), or in non-rated securities that the Fund's investment manager
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 many 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."
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 28, 1998
containing additional information about the Fund has been filed with the
Securities
(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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Prospectus (continued)
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and Exchange Commission (the "SEC") 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 the Fund's common stock that may be offered from time to
time pursuant to this Prospectus (the "Common Stock") 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 are listed for trading 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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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 17
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Taxation 18
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Management of the Fund 21
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Dividends and Distributions 21
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Dividend Reinvestment Plan 22
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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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Independent Auditors 26
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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.
================================================================================
3
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Prospectus 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 or D by S&P, or in non-rated securities
that the Fund's investment manager, Mutual Management Corp., formerly known as
Smith Barney Mutual Funds Management Inc. ("MMC" or 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
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 which occurs 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 Investment Manager was incorporated in 1968 and
currently manages in excess of $91 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 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
4
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Prospectus Summary (continued)
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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"), 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 generally 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 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
certain instances, reduce the value of securities held by the Fund, with a
commensurate effect on the net asset 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,
5
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Prospectus Summary (continued)
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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 0.06%
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TOTAL ANNUAL FUND OPERATING EXPENSES 1.21%
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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 $147
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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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Financial Highlights
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The following information for the three-year period ended September 30,
1997 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 1997 financial
statements and the independent auditors' report thereon appear in the September
30, 1997 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 year:
<TABLE>
<CAPTION>
1997 1996 1995 1994(1)(2)
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<S> <C> <C> <C> <C>
Net Asset Value, Beginning of Year $11.72 $11.48 $11.20 $12.50
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Income (Loss) From Operations:
Net investment income 1.15 1.14 1.14 1.01*
Net realized and unrealized gain (loss) 0.68 0.22 0.28 (1.30)
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Total Income (Loss) from Operations 1.83 1.36 1.42 (0.29)
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Less Distributions From:
Net investment income (1.12) (1.12) (1.12) (1.01)
Capital -- -- (0.02) --
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Total Distributions (1.12) (1.12) (1.14) (1.01)
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Net Asset Value, End of Year $12.43 $11.72 $11.48 $11.20
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Total Return Based on Market Value 18.18% 21.07% 9.90% (7.33)%++
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Total Return Based on Net Asset Value 16.48% 12.86% 13.99% (2.31)%++
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Net Assets, End of Year (millions) $883 $819 $802 $783
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Ratios to Average Net Assets:
Expenses 1.21% 1.21% 1.20% 1.15%+*
Net investment income 9.63% 9.85 10.02 9.09%+
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Portfolio Turnover Rate 87% 73% 59% 69%
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Market Value, End of Year $12.438 $11.500 $10.500 $10.625
=========================================================================================
</TABLE>
(1) For the period from October 22, 1993 (commencement of operations) to
September 30, 1994.
(2) Based on weighted average shares outstanding for period.
* The Manager waived a part of its fee for the period ended September 30,
1994. If such fees were not waived, the per share decrease in net
investment income would have been $0.01 and the ratio of expenses to
average net assets would have been 1.21% (annualized).
++ Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
7
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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, as amended (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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The Common Stock is listed for trading on the NYSE. In addition, Smith
Barney currently 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.
8
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Investment Objectives and Policies (continued)
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GENERAL
The Fund's primary investment objective is 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 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 this 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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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
adversely affect the ability of issuers' lower-rated securities to repay
principal and pay interest thereon.
10
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Risk Factors and Special Considerations (continued)
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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 and 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 investments 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 this Prospectus.
In general, the ratings of nationally recognized statistical rating
organizations such as Moody's and S&P represent the opinions of these
organizations as to the quality of securities that they rate. Such ratings,
however, are relative and subjective, and are not absolute standards of quality
and do not evaluate the market value risk of the securities. It is possible that
a ratings organization 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,
11
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Risk Factors and Special Considerations (continued)
- --------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------
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 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 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
12
<PAGE>
- --------------------------------------------------------------------------------
Investment Practices (continued)
- --------------------------------------------------------------------------------
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 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
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
13
<PAGE>
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Investment Practices (continued)
- --------------------------------------------------------------------------------
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.
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.
14
<PAGE>
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Investment Practices (continued)
- --------------------------------------------------------------------------------
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 purchase
illiquid and restricted securities, but the Fund will not invest more than 15%
of the Fund's net assets in illiquid securities. A sale of such securities by
the Fund may force the Fund to receive less than the amount at which the Fund
has valued them, or the Fund may not be able to liquidate them at the time the
Investment Manager believes it desirable to do so. In such a case, the value of
the Fund's net assets could be adversely affected. Under this policy, certain
securities that are restricted as to resale but which may otherwise be
determined to be liquid (such as those that are eligible for sale only to
qualified institutional buyers) will not be covered by the 15% limitation.
Determinations of which securities are deemed illiquid are made by, or under the
oversight of, the Fund's Board of Directors.
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 is generally
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
15
<PAGE>
- --------------------------------------------------------------------------------
Investment Practices (continued)
- --------------------------------------------------------------------------------
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.
Mortgage-Backed Securities. The Fund may invest in mortgage-backed
securities, which represent pools of mortgage loans assembled for sale to
investors by various governmental agencies and government-related organizations,
such as Government National Mortgage Association ("GNMA"), Federal National
Mortgage Association ("FNMA") and Federal Home Loan Mortgage Corporation
("FHLMC"), as well as by private issuers such as commercial banks, savings and
loan institutions, mortgage bankers and private mortgage insurance companies.
Mortgage-backed securities provide a monthly payment consisting of interest and
principal payments. Additional payments may be made out of unscheduled
repayments of principal resulting from the sale of the underlying residential
property, refinancing or foreclosure, net of fees or costs that may be incurred.
Prompt payment of principal and interest on GNMA mortgage pass-through
certificates is backed by the full faith and credit of the United States.
FNMA-guaranteed mortgage pass-through certificates are solely the obligations of
those entities but are supported by the discretionary authority of the U.S.
government to purchase the agencies' obligations. Mortgage pools created by
private organizations generally offer a higher rate of interest than
governmental and government-related pools because there are no direct or
indirect guarantees of payments in the former pools. Timely payment of interest
and principal in these pools, however, may be supported by various forms of
private insurance or guarantees, including individual loan, title, pool and
hazard insurance. There can be no assurance that the private insurers will meet
their obligations.
Mortgage-backed securities vary from traditional fixed-income securities
because of the potential for prepayment. These instruments are backed by a real
estate mortgage, and the mortgage loan may be repaid at any time without
penalty. While mortgage-backed securities tend to rise in value when interest
rates fall, faster than expected prepayments of the mortgage loans will reduce
both the market value and yield to maturity of the mortgage-backed securities.
Thus, changes in interest rates may have a greater effect on mortgage-backed
securities than on traditional fixed-income securities. In a period of declining
interest rates, prepayments rise because mortgage holders are in a
disadvantageous economic position. Therefore, the amounts available for
reinvestment in new mortgages increase, but are likely to be reinvested at lower
interest rates. As a result, mortgage-backed securities may benefit less from
declining interest rates than other fixed-income securities because of the risk
of increased prepayment.
16
<PAGE>
- --------------------------------------------------------------------------------
Investment Practices (continued)
- --------------------------------------------------------------------------------
Collateralized mortgage obligations are a type of bond secured by an
underlying pool of mortgages, or mortgage pass-through certificates that are
structured to direct payments on underlying collateral to different series of
classes of the obligations.
To the extent that the Fund purchases mortgage-related securities at a
premium, mortgage foreclosures and prepayments of principal may result in some
loss of the Fund's principal investment to the extent of the premium paid.
Other Asset-Backed Securities. The Fund may invest in asset-backed
securities arising through the grouping by governmental, government-related and
private organizations of loans, receivables and other assets originated by
various lenders. Interests in pools of these assets differ from other forms of
debt securities, which normally provide for periodic payment of interest in
fixed amounts with principal paid at maturity or specified call dates. Instead,
asset-backed securities provide periodic payments which generally consist of
both interest and principal payments.
The estimated life of an asset-backed security varies with the prepayment
experience with respect to the underlying debt instruments. The rate of such
prepayments, and hence the life of an asset-backed security, will primarily be a
function of current market interest rates, although other economic and
demographic factors may be involved. As is the case with mortgage-backed
securities, falling interest rates generally result in an increase in the rate
of prepayments on the underlying instruments while rising interest rates
generally decrease the rate of prepayments. An acceleration in prepayments in
response to sharply falling interest rates will shorten the security's average
maturity and limit the potential appreciation in the security's value relative
to a conventional debt security. Consequently, asset-backed securities are not
as effective in locking in high long-term yields.
See the Statement of Additional Information for more details pertaining to
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 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.
17
<PAGE>
- --------------------------------------------------------------------------------
Share Price Data (continued)
- --------------------------------------------------------------------------------
NYSE
NYSE NAV Price at NAV at
Three Months Price Price Quarter- Quarter- Premium
Ended Range Range End End (Discount)
================================================================================
12/31/97 $12.63-11.44 $12.57-12.24 $12.50 $12.24 2.12%
9/30/97 12.50-12.06 12.43-12.01 12.44 12.43 (.08)
6/30/97 12.25-11.50 12.20-11.61 12.06 12.10 (.33)
3/31/97 12.00-11.38 12.12-11.74 11.75 11.74 .09
12/31/96 11.63-11.13 11.92-11.49 11.50 11.92 (3.52)
9/30/96 11.50-10.75 11.72-11.43 11.50 11.72 (1.63)
6/30/96 11.25-10.63 11.65-11.46 10.75 11.50 (6.52)
3/31/96 11.38-10.63 11.89-11.61 11.13 11.61 (4.13)
12/31/95 11.00-10.50 11.47-11.62 10.50 11.62 (9.64)
================================================================================
As of January 16, 1998, the price per share of Common Stock as quoted on
the NYSE was $12.63, representing a 2.31% premium 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 the shareholders of its Common Stock; 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 shareholders 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 shareholders 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, 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 ny interest
that is not paid currently, over its issue price ("original issue discount")
that accrues on the security
18
<PAGE>
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Taxation (continued)
- --------------------------------------------------------------------------------
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 regulated investment company 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 the Fund actually
receives in interest or other distributions on the securities it owns. Those
distributions will be made from 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 stated redemption price of the
obligation over the purchase price at which it is acquired. 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 income, 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 shareholders. As a result, any such taxes imposed on the Fund would not
be deductible or creditable by the Fund's shareholders.
TAXATION OF SHAREHOLDERS
Distributions. In general, all distributions to shareholders 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 to the shareholder as long-term
capital gains, whether paid in cash or reinvested in additional shares of Common
Stock, regardless of how long the shareholder's 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
19
<PAGE>
- --------------------------------------------------------------------------------
Taxation (continued)
- --------------------------------------------------------------------------------
likely make an election which would require each shareholder 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 shareholder 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 to the extent that the credit exceeds such liabilities. In
addition, the shareholder 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.
Shareholders receiving distributions in the form of additional shares
purchased by First Data as purchasing agent pursuant to the Fund's Dividend
Reinvestment Plan will be treated for federal income tax purposes as receiving
the amount of cash received by First Data on their behalf. In general, the basis
of such shares will equal the price paid by First Data 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 shareholder 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 shareholder and the shareholder'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 shareholder 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 advisers
regarding the federal, state, local, foreign and other tax consequences to them
of investments in the Fund.
20
<PAGE>
- --------------------------------------------------------------------------------
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
MMC serves as the Fund's investment manager. MMC was incorporated in 1968
and currently manages investment companies with total assets in excess of $91
billion as of December 31, 1997. MMC is wholly owned by Salomon Smith Barney
Holdings Inc. ("Holdings"), the parent company of Smith Barney. Holdings 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. MMC, Holdings 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,
MMC 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 Smith Barney, has been
responsible for the day-to-day management of the Fund's portfolio within the
investment framework described above since the Fund's inception and has more
than 15 years of investment advisory experience. He joined MMC 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 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
21
<PAGE>
- --------------------------------------------------------------------------------
Dividends and Distributions (continued)
- --------------------------------------------------------------------------------
Fund's current policy, which may be changed at any time by the Board of
Directors, the Fund's monthly dividends will be paid 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 shareholder
whose shares of Common Stock are registered in his own name will have all
distributions from the Fund reinvested automatically by First Data as purchasing
agent under the Plan, unless the shareholder elects to receive cash.
Distributions with respect to shares registered in the name of a broker-dealer
or other nominee (that is, in "street name") will be reinvested by the broker or
nominee in additional shares under the Plan, unless the service is not provided
by the broker or nominee or the shareholder elects to receive distributions in
cash. Investors who own Common Stock registered in street name should consult
their broker-dealers for details regarding reinvestment. All distributions to
Fund shareholders who do not participate in the Plan will be paid by check
mailed directly to the record holder by or under the direction of First Data as
dividend-paying agent.
The number of shares of Common Stock distributed to participants in the
Plan in lieu of a cash dividend is determined in the following manner. Whenever
the market price of the Common Stock is equal to or exceeds the net asset value
per share on the date of valuation, Plan participants will be issued shares of
Common Stock at a price equal to the greater of (1) the net asset value per
share most recently determined (as described under "Net Asset Value" in the
Statement of Additional Information) or (2) 95% of the market price.
If the net asset value per share of Common Stock at the time of valuation
exceeds the market price of the Common Stock, or if the Fund declares a dividend
or capital gains distribution payable only in cash, First Data will buy Common
Stock in the open market, on the NYSE or elsewhere, for the participants'
accounts. If, following the commencement of the purchases and before First Data
has completed its purchases, the market price exceeds the net asset value of the
Common Stock, First Data will attempt to terminate purchases in the open market
and cause the Fund to issue the remaining portion of the dividend or
distribution by issuing shares at a price equal to the greater of (a) net asset
value or (b) 95% of the then current market price. In this case, the number of
shares of Common Stock received by a Plan participant will be based on the
weighted average of prices paid for shares purchased in the open market and the
price at which the Portfolio issues
22
<PAGE>
- --------------------------------------------------------------------------------
Dividends and Distributions
- --------------------------------------------------------------------------------
the remaining shares. To the extent First Data is unable to stop open market
purchases and cause the Fund to issue the remaining shares, the average per
share purchase price paid by First Data may exceed the net asset value of the
Common Stock, resulting in the acquisition of fewer shares than if the dividend
or capital gains distribution had been paid in Common Stock issued by the Fund
at net asset value. First Data will begin to purchase Common Stock on the open
market as soon as practicable after the payment date of the dividend or capital
gains distribution, but in no event shall such purchases continue later than 30
days after that date, except when necessary to comply with applicable provisions
of the federal securities laws.
First Data maintains all shareholder accounts in the Plan and furnishes
written confirmations of all transactions in each account, including information
needed by a shareholder for personal and tax records. The automatic reinvestment
of dividends and capital gains distributions will not relieve Plan participants
of any income tax that may be payable on the dividends or capital gains
distributions. Common Stock in the account of each Plan participant will be held
by First Data in uncertificated form in the name of each Plan participant.
Plan participants are subject to no charge for reinvesting dividends and
capital gains distributions under the Plan. First Data's fees for handling the
reinvestment of dividends and capital gains distributions will be paid by the
Fund. No brokerage charges apply with respect to shares of Common Stock issued
directly by the Fund under the Plan. Each Plan participant will, however, bear a
proportionate share of brokerage commissions incurred with respect to any open
market purchases made under the Plan.
Experience under the Plan may indicate that changes to it are desirable.
The Fund reserves the right to amend or terminate the Plan as applied to any
dividend or capital gains distribution paid subsequent to written notice of the
change sent to participants at least 30 days before the record date for the
dividend or capital gains distribution. The Plan also may be amended or
terminated by First Data, with the Fund's prior written consent, on at least 30
days' written notice to Plan participants. All correspondence concerning the
Plan should be directed by mail to First Data Investor Services Group, Inc.,
P.O. Box 1376, Boston, Massachusetts 02104 or by telephone at 1-800-331-1710.
- --------------------------------------------------------------------------------
Repurchase of Shares
- --------------------------------------------------------------------------------
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.
23
<PAGE>
- --------------------------------------------------------------------------------
Repurchase of Shares (continued)
- --------------------------------------------------------------------------------
Before authorizing any repurchase of Common Stock or tender offer to the
Common Stock shareholders, 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 shareholders 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 shareholders 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.
- --------------------------------------------------------------------------------
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.
COMMON STOCK
Amount
Outstanding
Exclusive of Shares
Held by Fund for Its
Amount Held Own Account as of
Amount by Fund for Its January 12,
Title of Class Authorized Own Account 1998
================================================================================
Common 500,000,000
Stock Shares 0 71,616,565,375
================================================================================
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 shareholders of an opportunity to sell their
shares of Common Stock at a premium over prevailing market prices by
discouraging a third party
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Description of Shares (continued)
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from seeking to obtain control of the Fund. Commencing with the first annual
meeting of shareholders, the Board of Directors was divided into three classes.
At the annual meeting of shareholders in each year, the term of one class
expires and each Director elected to the class holds 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 shareholders 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 shareholders necessary to approve such a transaction. See
"Repurchase of Shares and Conversion to Open-End Fund" in the Statement of
Additional Information.
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 shareholders generally.
Reference should be made to the Articles of Incorporation, which are on file
with the SEC, 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 management 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. Further detail about the Fund's
ability to convert to open-end status is contained in the Statement of
Additional Information.
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Custodian and Transfer Agent
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PNC Bank, 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.
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Independent Auditors
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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 ("KPMG"), independent auditors. KPMG has been selected as the Fund's
independent auditor to examine and report on the Fund's financial statements and
highlights for the fiscal year ending September 30, 1998.
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Other Information
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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 SEC. The complete Registration Statement may be obtained from the
SEC 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 .......................... 2
Investment Restrictions ..................................... 9
Net Asset Value ............................................. 10
Taxation .................................................... 11
Officers and Directors ...................................... 14
Portfolio Transactions ...................................... 17
Management of the Fund ...................................... 18
Repurchase of Shares and Conversion to Open-End Fund ........ 19
Financial Statements ........................................ 21
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.
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Appendix A
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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.
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.
A-1
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Appendix A (continued)
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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
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.
A-2
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Appendix A (continued)
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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 TravelersGroup [Logo]
High Income
Opportunity
Fund Inc.
Common Stock
388 Greenwich Street
New York, New York 10013
FD0859 1/98
PART B
HIGH INCOME OPPORTUNITY FUND INC.
388 Greenwich Street
New York, New York 10013
STATEMENT OF ADDITIONAL INFORMATION
High Income Opportunity Fund Inc. (the "Fund") is a
diversified, closed-end management investment company whose
investment objective is to provide shareholders with high current
income with capital appreciation. This Statement of Additional
Information is not a prospectus, but should be read in conjunction
with the Prospectus for the Fund dated January 31, 1998 (the
"Prospectus"). This Statement of Additional Information does not
include all information that a prospective investor should
consider before purchasing the Fund's shares of common stock, and
investors should obtain and read the Prospectus prior to
purchasing shares. A copy of the Prospectus may be obtained
without charge by calling (800) 451-2010. This Statement of
Additional Information incorporates by reference the entire
Prospectus.
TABLE OF CONTENTS
Page
Investment Objectives and Policies 2
Investment Restrictions 9
Net Asset Value 10
Taxation 11
Officers and Directors 14
Portfolio Transactions 17
Management of the Fund 18
Repurchase of Shares and Conversion to
Open-End Fund 19
Financial Statements 21
The Prospectus and this Statement of Additional Information
omit certain of the information contained in the registration
statement filed with the Securities and Exchange Commission,
Washington, D.C. (the "SEC"). These items may be obtained from
the SEC upon payment of the fee prescribed, or inspected at the
SEC's office at no charge.
This Statement of Additional Information is dated January 28, 1998
INVESTMENT OBJECTIVES AND POLICIES
Corporate Securities. The Fund may invest in corporate
fixed-income securities of both domestic and foreign issuers, such
as bonds, debentures, notes, equipment lease certificates,
equipment trust certificates and preferred stock. Certain of the
corporate fixed-income securities in which the Fund may invest may
involve equity characteristics. The Fund may, for example, invest
in warrants for the acquisition of stock of the same or of a
different issuer, or in corporate fixed-income securities that
have conversion or exchange rights permitting the holder to
convert or exchange the securities at a stated price within a
specified period of time into a specified number of shares of
common stock. In addition, the Fund may invest in participations
that are based on revenues, sales or profits of an issuer, or in
common stock offered as a unit with corporate fixed-income
securities.
Money Market Instruments. When Mutual Management Corp.,
formerly known as Smith Barney Mutual Funds Management Inc. ("MMC"
or the "Investment Manager") believes that economic circumstances
warrant a temporary defensive posture, the Fund may invest without
limitation in short-term money market instruments. The Fund may
also invest in money market instruments to help defray operating
expenses, to serve as collateral in connection with certain
investment techniques (see "Investment Practices" below) and to
hold as a reserve pending the payment of dividends to investors.
To the extent that the Fund invests in short-term money market
instruments it may not be pursuing its investment objectives.
Money market instruments that the Fund may acquire will be
securities rated in the two highest short-term rating categories
by Moody's Investors Service or Standard & Poor's Ratings Group or
the equivalent from another major rating service or comparable
unrated securities. Money market instruments in which the Fund
typically expects to invest include: U.S. government securities,
bank obligations (including certificates of deposit, time deposits
and bankers' acceptances of U.S. or foreign banks), commercial
paper and repurchase agreements.
The Fund may enter into repurchase agreement transactions
with certain member banks of the Federal Reserve System or with
certain dealers listed on the Federal Reserve Bank of New York's
list of reporting dealers. A repurchase agreement is a contract
under which the buyer of a security simultaneously commits to
resell the security to the seller at an agreed-upon price on an
agreed-upon date. Under the terms of a typical repurchase
agreement, the Fund would acquire an underlying obligation for a
relatively short period (usually not more than seven days) subject
to an obligation of the seller to repurchase, and the Fund to
resell, the obligation at an agreed-upon price and time, thereby
determining the yield during the Fund's holding period. This
arrangement results in a fixed rate of return that is not subject
to market fluctuations during the Fund's holding period. Under
each repurchase agreement, the selling institution will be
required to maintain the value of the securities subject to the
repurchase agreement at not less than their repurchase price.
Repurchase agreements could involve certain risks in the event of
default or insolvency of the seller, including possible delays or
restrictions on the Fund's ability to dispose of the underlying
securities. In evaluating these potential risks, the Investment
Manager, acting under the supervision of the Fund's Board of
Directors and on an ongoing basis, monitors (1) the value of the
collateral underlying each repurchase agreement of the Fund to
ensure that the value is at least equal to the total amount of the
repurchase obligation, including interest, and (2) the
creditworthiness of the banks and dealers with which the Fund
enters into repurchase agreements.
U.S. Government Securities. The Fund may invest in direct
obligations of the United States and obligations issued by U.S.
government agencies and instrumentalities ("U.S. government
securities"). Included among direct obligations of the United
States are Treasury bills, Treasury notes and Treasury bonds,
which differ principally in terms of their maturities. Included
among the securities issued by U.S. government agencies and
instrumentalities are: securities that are supported by the full
faith and credit of the United States (such as Government National
Mortgage Association certificates); securities that are supported
by the right of the issuer to borrow from the U.S. Treasury (such
as securities of Federal Home Loan Banks); and securities that are
supported by the credit of the instrumentality (such as Federal
National Mortgage Association and Federal Home Loan Mortgage
Corporation bonds).
Zero Coupon, Pay-In-Kind and Delayed Interest Securities.
The Fund may invest in zero coupon, pay-in-kind and delayed
interest securities, as well as custodial receipts or certificates
underwritten by securities dealers or banks that evidence
ownership of future interest payments, principal payments or both
on certain U.S. government securities. Zero coupon securities pay
no cash income to their holders until they mature and are issued
at substantial discounts from their value at maturity. When held
to maturity, their entire return comes from the difference between
their purchase price and their maturity value. Pay-in-kind
securities pay interest through the issuance to the holders of
additional securities, and delayed interest securities are
securities which do not pay interest for a specified period.
Because interest on zero coupon, pay-in-kind and delayed interest
securities is not paid on a current basis, the values of
securities of this type are subject to greater fluctuations than
are the values of securities that distribute income regularly and
may be more speculative than such securities. Accordingly, the
values of these securities may be highly volatile as interest
rates rise or fall. In addition, the Fund's investments in zero
coupon, pay-in-kind and delayed interest securities will result in
special tax consequences. Although zero coupon securities do not
make interest payments, for tax purposes a portion of the
difference between a zero coupon security's maturity value and its
purchase price is taxable income of the Fund each year.
Custodial receipts evidencing specific coupon or principal
payments have the same general attributes as zero coupon U.S.
government securities but are not considered to be U.S. government
securities. Although under the terms of a custodial receipt the
Fund is typically authorized to assert its rights directly against
the issuer of the underlying obligation, the Fund may be required
to assert through the custodian bank such rights as may exist
against the underlying issuer. Thus, in the event the underlying
issuer fails to pay principal and/or interest when due, the Fund
may be subject to delays, expenses and risks that are greater than
those that would have been involved if the Fund had purchased a
direct obligation of the issuer. In addition, in the event that
the trust or custodial account in which the underlying security
has been deposited is determined to be an association taxable as a
corporation instead of a non-taxable entity, the yield on the
underlying security would be reduced in respect of any taxes paid.
Investment Practices
The Fund may employ, among others, the investment techniques
described below:
Convertible Securities and Synthetic Convertible Securities.
Convertible securities generally offer lower interest or dividend
yields than non-convertible securities of similar quality because
of the potential for capital appreciation. A convertible
security, in addition to providing fixed income, offers the
potential for capital appreciation through the conversion feature,
which enables the holder to benefit from increases in the market
price of the underlying common stock. However, there can be no
assurance of capital appreciation because securities prices
fluctuate.
Convertible securities generally are subordinated to other
similar but non-convertible securities of the same issuer,
although convertible bonds enjoy seniority in right of payment to
all equity securities, and convertible preferred stock is senior
to common stock of the same issuer. Because of the subordination
feature, however, convertible securities typically have lower
ratings than similar non-convertible securities.
Unlike a convertible security, which is a single security, a
synthetic convertible security is comprised of distinct securities
that together resemble convertible securities in certain respects.
Synthetic convertible securities are typically created by
combining non-convertible bonds or preferred stocks with warrants
or stock call options. The options that will form elements of
synthetic convertible securities may be listed on a securities
exchange or on Nasdaq, or may be privately traded. The components
of a synthetic convertible security generally are not offered as a
unit and may be purchased and sold by the Fund at different times.
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.
Futures Contracts and Options on Futures Contracts. An
interest rate futures contract is a standardized contract for the
future delivery of a specified security (such as a Treasury bond
or Treasury note) or its equivalent at a future date at a price
set at the time of the contract. A currency futures contract is a
standardized contract for the future delivery of a specified
amount of currency at a future date at a price set at the time of
the contract. The Fund may only enter into futures contracts
traded on regulated commodity exchanges.
The Fund may either accept or make delivery of cash or the
underlying instrument specified at the expiration of a futures
contract or, prior to expiration, enter into a closing transaction
involving the purchase or sale of an offsetting contract. Closing
transactions with respect to futures contracts are effected on the
exchange on which the contract was entered into or on a linked
exchange.
The Fund may purchase and write put and call options on
futures contracts in order to hedge all or a portion of its
investments and may enter into closing purchase transactions with
respect to options written by the Fund in order to terminate
existing positions. There is no guarantee that such closing
transactions can be effected at any particular time or at all. In
addition, daily limits on price fluctuations on exchanges on which
the Fund conducts its futures and options transactions may prevent
the prompt liquidation of positions at the optimal time, thus
subjecting the Fund to the potential of greater losses.
An option on a futures contract, as contrasted with the
direct investment in such a contract, gives the purchaser of the
option the right, in return for the premium paid, to assume a
position in a futures contract at a specified exercise price at
any time on or before the expiration date of the option. Upon
exercise of an option, the delivery of the futures position by the
writer of the option to the holder of the option will be
accomplished by delivery of the accumulated balance in the
writer's futures margin account, which represents the amount by
which the market price of the futures contract exceeds, in the
case of a call, or is less than, in the case of a put, the
exercise price of the option on the futures contract. The
potential loss related to the purchase of an option on a futures
contract is limited to the premium paid for the option, plus
transaction costs. With respect to options purchased by the Fund,
there are no daily cash payments made by the Fund to reflect
changes in the value of the underlying contract; however, the
value of the option does change daily and that change would be
reflected in the net asset value of the Fund.
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 any such 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. Securities of many foreign issuers and
their markets may be less liquid, and their prices more volatile,
than those of securities of comparable domestic issuers. In
addition, with respect to certain foreign countries, there is the
possibility of expropriation, nationalization, confiscatory
taxation and limitations on the use or removal of funds or other
assets of the Fund, including the withholding of dividends.
Foreign securities may be subject to foreign government taxes that
could reduce the yield on such securities. Because the Fund will
invest in securities denominated or quoted in currencies other
than the U.S. dollar, changes in foreign currency exchange rates
may adversely affect the value of portfolio securities and the
appreciation or depreciation of investments. Investments in
foreign securities also may result in higher expenses due to the
cost of converting foreign currency to U.S. dollars, the payment
of fixed brokerage commissions on foreign exchanges, the expense
of maintaining securities with foreign custodians and the
imposition of transfer taxes or transaction charges associated
with foreign exchanges.
Currency Exchange Transactions. In order to protect against
uncertainty in the level of future exchange rates, the Fund may
engage in currency exchange transactions and purchase exchange-
traded put and call options on foreign currencies. The Fund will
conduct its currency exchange transactions either on a spot (i.e.,
cash) basis at the rate prevailing in the currency exchange market
or through entering into forward contracts to purchase or sell
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. These
contracts are entered into in the interbank market conducted
directly between currency traders (usually large commercial banks)
and their customers. 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.
The Fund's dealings in forward currency exchange
transactions will be limited to hedging involving either specific
transactions or portfolio positions. Transaction hedging is the
purchase or sale of forward currency contracts with respect to
specific receivables or payable to the Fund generally arising in
connection with the purchase or sale of its securities. Position
hedging, generally, is the sale of forward currency contracts with
respect to portfolio security positions denominated or quoted in
the currency. The Fund will not position hedge with respect to a
particular currency to an extent greater than the aggregate market
value at any time of the security or securities held in its
portfolio denominated or quoted in or currently convertible (such
as through exercise of an option or consummation of a forward
currency contract) in that particular currency. If the Fund
enters into a transaction hedging or position hedging transaction,
it will cover the transaction through one or more of the following
methods: (a) ownership of the underlying currency or an option to
purchase such currency; (b) ownership of an option to enter into
an offsetting forward currency contract; (c) entering into a
forward contract to purchase currency being sold or to sell
currency being purchased, provided that such covering contract is
itself covered by any one of these methods unless the covering
contract closes out the first contract; or (d) depositing into a
segregated account with the custodian or a sub-custodian of the
Fund cash or readily marketable securities in an amount equal to
the value of the Fund's total assets committed to the consummation
of the forward currency contract and not otherwise covered. In
the case of transaction hedging, any securities placed in the
account must be liquid debt securities. In any case, if the value
of the securities placed in the segregated account declines,
additional cash or securities will be placed in the account so
that the value of the account will equal the above amount.
Hedging transactions may be made from any foreign currency into
dollars or into other appropriate currencies.
Although the foreign currency market may not necessarily be
more volatile than the market in other commodities, the foreign
currency market offers less protection against defaults in the
forward trading of currencies than is available when trading in
currencies occurs on an exchange. Because a forward currency
contract is not guaranteed by an exchange or clearing-house,
default on the contract would deprive the Fund of unrealized
profits or force the Fund to cover its commitments for the
purchase or resale, if any, at the current market price. In
addition, if a devaluation is generally anticipated, the Fund may
not be able to contract to sell the currency at a price above the
anticipated devaluation level.
Options on Foreign Currencies. The Fund may purchase put
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 Fund may purchase a call option on a foreign
currency to hedge against an adverse exchange rate of the currency
in which a security that it anticipates purchasing is denominated
in relation to the currency in which the exercise price is
denominated. Put options convey the right to sell the underlying
currency at a price which is anticipated to be higher than the
spot price of the currency at the time the option expires. Call
options convey the right to buy the underlying currency at a price
which is expected to be lower than the spot price of the currency
at the time that the option expires.
The Fund may use foreign currency options under the same
circumstances that it could use forward currency exchange
transactions. A decline in the dollar value of a foreign currency
in which the Fund's securities are denominated, for example, will
reduce the dollar value of the securities even if their value in
the foreign currency remains constant. In order to protect
against such diminution in the value of securities that it holds,
the Fund may purchase put options on the foreign currency. If the
value of the currency does decline, the Fund will have the right
to sell the currency for a fixed amount in dollars and will
thereby offset, in whole or in part, the adverse effect on its
securities that otherwise would have resulted. Conversely, if a
rise in the dollar value of a currency in which securities to be
acquired are denominated is projected, thereby potentially
increasing the cost of the securities, the Fund may purchase call
options on the particular currency. The purchase of these options
could offset, at least partially, the effects of the adverse
movements in exchange rates. 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 will
not accrue income with respect to a when-issued or delayed-
delivery security prior to its stated delivery date. The Fund
will establish with the PNC Bank, N.A. ("PNC Bank"), the Fund's
Custodian, a segregated account consisting of cash, U.S.
government securities, equity securities or debt securities of any
grade, in an amount equal to the amount of the Fund's when-issued
and delayed-delivery purchase commitments, provided such
securities are liquid and unecumbered and are marked to market
daily pursuant to guidelines established by the Board of
Directors. Placing securities rather than cash in the segregated
account may have a leveraging effect on the Fund's net asset value
per share; that is, to the extent that the Fund remains
substantially fully invested in securities at the same time that
it has committed to purchase securities on a when-issued or
delayed-delivery basis, greater fluctuations in its net asset
value per share may occur than if it had set aside cash to satisfy
its purchase commitments. 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.
Lending Securities. Loans of the Fund's securities, if and
when made, may not exceed 20% of the Fund's assets taken at value.
The Fund's loans of securities will be collateralized by cash,
letters of credit or U.S. government securities that will be
maintained at all times in a segregated account with PNC Bank in
an amount equal to the current market value of the loaned
securities. From time to time, the Fund may pay a part of the
interest earned from the investment of collateral received for
securities loaned to the borrower and/or a third party that is
unaffiliated with the Fund and that is acting as a "finder."
By lending its securities, the Fund can increase its income
by continuing to receive interest on the loaned securities, by
investing the cash collateral in short-term instruments or by
obtaining yield in the form of interest paid by the borrower when
U.S. government securities are used as collateral. The portfolio
will adhere to the following conditions whenever it lends its
securities: (1) the Fund must receive at least 100% cash
collateral or equivalent securities from the borrower, which
amount of collateral will be maintained by daily marking to
market; (2) the borrower must increase the collateral whenever the
market value of the securities loaned rises above the level of the
collateral; (3) the Fund must be able to terminate the loan at any
time; (4) the Fund must receive reasonable interest on the loan,
as well as any dividends, interest or other distributions on the
loaned securities, and any increase in market value; (5) the Fund
may pay only reasonable custodian fees in connection with the
loan; and (6) voting rights on the loaned securities may pass to
the borrower, except that, if a material event adversely affecting
the investment in the loaned securities occurs, the Fund's Board
of Directors must terminate the loan and regain the Fund's right
to vote the securities.
Short Sales Against the Box. The broker-dealer that
executes a short sale generally invests the cash proceeds of the
sale until they are paid to the Fund. Arrangements may be made
with the broker-dealer to obtain a portion of the interest earned
by the broker on the investment of short sale proceeds. The Fund
will segregate the securities against which short sales against
the box have been made in a special account with PNC Bank. Not
more than 10% of the Fund's net assets (taken at current value)
may be held as collateral for such sales at any one time.
Mortgage-Backed Securities. The Fund may invest in mortgage-
backed securities, which are securities representing interests in
"pools" of mortgage loans. Monthly payments of interest and
principal by the individual borrowers on mortgages are "passed
through" to the holders of the securities (net of fees paid to the
issuer or guarantor of the securities) as the mortgages in the
underlying mortgage pools are paid off. The average lives of
mortgage pass-throughs are variable when issued because their
average lives depend on prepayment rates. The average life of
these securities is likely to be substantially shorter than their
stated final maturity as a result of unscheduled principal
prepayment. Prepayments on underlying mortgages result in a loss
of anticipated interest, and all or part of a premium if any has
been paid, and the actual yield (or total return) to the Fund may
be different than the quoted yield on the securities. Mortgage
prepayments generally increase with falling interest rates and
decrease with rising interest rates. Like other fixed-income
securities, when interest rates rise the value of mortgage pass-
through securities generally will decline; however, when interest
rates are declining, the value of mortgage pass-through securities
with prepayment features may not increase as much as that of other
fixed-income securities.
Interests in pools of mortgage-related securities differ
from other forms of debt securities, which normally provide for
periodic payment of interest in fixed amounts with principal
payments at maturity or specified call dates. Instead, these
securities provide a monthly payment which consists of both
interest and principal payments. In effect, these payments are a
"pass-through" of the monthly payments made by the individual
borrowers on their mortgage loans, net of any fees paid to the
issuer or guarantor of such securities. Additional payments are
caused by prepayments of principal resulting from the sale,
refinancing or foreclosure of the underlying property, net of fees
or costs which may be incurred. Some mortgage pass-through
securities (such as securities issued by the Government National
Mortgage Association ("GNMA")) are described as "modified pass-
through." These securities entitle the holder to receive all
interests and principal payments owed on the mortgages in the
mortgage pool, net of certain fees, at the scheduled payment dates
regardless of whether the mortgagor actually makes the payment.
The principal governmental guarantor of mortgage pass-
through securities is the GNMA. GNMA is a wholly owned U.S.
government corporation within the Department of Housing and Urban
Development. GNMA is authorized to guarantee, with the full faith
and credit of the U.S. government, the timely payment of principal
and interest on securities issued by institutions approved by GNMA
(such as savings and loan institutions, commercial banks and
mortgage bankers) and backed by pools of FHA-insured or VA-
guaranteed mortgages. These guarantees, however, do not apply to
the market value or yield of mortgage pass-through securities.
GNMA securities are often purchased at a premium over the maturity
value of the underlying mortgages. This premium is not guaranteed
and will be lost if prepayment occurs.
Government-related guarantors (i.e., whose guarantees are
not backed by the full faith and credit of the U.S. government)
include the Federal National Mortgage Association ("FNMA") and the
Federal Home Loan Mortgage Corporation ("FHLMC"). FNMA is a
government-sponsored corporation owned entirely by private
shareholders. It is subject to general regulation by the Secretary
of Housing and Urban Development. FNMA purchases conventional
residential mortgages (i.e., mortgages not insured or guaranteed
by any governmental agency) from a list of approved
seller/servicers which include state and federally-chartered
savings and loan associations, mutual savings banks, commercial
banks, credit unions and mortgage bankers. Pass-through securities
issued by FNMA are guaranteed as to timely payment of principal
and interest by FNMA.
FHLMC is also a government-sponsored corporation owned by
private shareholders. FHLMC issues Participation Certificates
("PCs") which represent interests in conventional mortgages (i.e.,
not federally insured or guaranteed) from FHLMC's national
portfolio. FHLMC guarantees timely payment of interest and
ultimate collection of principal regardless of the status of the
underlying mortgage loans.
Commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers and other secondary market
issuers also create pass-through pools of mortgage loans. Such
issuers may also be the originators and/or servicers of the
underlying mortgage-related securities. Pools created by such non-
governmental issuers generally offer a higher rate of interest
than government and government-related pools because there are no
direct or indirect government or agency guarantees of payments in
the former pools. However, timely payment of interest and
principal of mortgage loans in these pools may be supported by
various forms of insurance or guarantees, including individual
loan, title, pool and hazard insurance, and letters of credit. The
insurance and guarantees are issued by governmental entities,
private insurers and the mortgage poolers. There can be no
assurance that the private insurers or guarantors can meet their
obligations under the insurance policies or guarantee
arrangements. The Fund may also buy mortgage-related securities
without insurance or guarantees.
Other Asset-Backed Securities. Corporate asset-backed
securities present certain risks. For instance, in the case of
credit card receivables, these securities may not have the benefit
of any security interest in the related collateral. Credit card
receivables are generally unsecured and the debtors are entitled
to the protection of a number of state and federal consumer credit
laws, many of which give such debtors the right to set off certain
amounts owed on the credit cards, thereby reducing the balance
due. Most issuers of automobile receivables permit the servicers
to retain possession of the underlying obligations. If the
servicer were to sell these obligations to another party, there is
a risk that the purchaser would acquire an interest superior to
that of the holders of the related automobile receivables. In
addition, because of the large number of vehicles involved in a
typical issuance and technical requirements under state laws, the
trustee for the holders of the automobile receivables may not have
a proper security interest in all of the obligations backing such
receivables. Therefore, there is the possibility that recoveries
on repossessed collateral may not, in some cases, be available to
support payments on these securities.
Corporate asset-backed securities are often backed by pools
of assets representing the obligations of a number of different
parties. To lessen the effect of failures by obligors to make
payments on underlying assets, the securities may contain elements
of credit support which fall into two categories: (i) liquidity
protection and (ii) protection against losses resulting from
ultimate default by an obligor on the underlying assets. Liquidity
protection refers to the provision of advances, generally by the
entity administering the pool of assets, to ensure that the
receipt of payments on the underlying pool occurs in a timely
fashion. Protection against losses resulting from ultimate default
ensures payment through insurance policies or letters of credit
obtained by the issuer or sponsor from third parties. The Fund
will not pay any additional or separate fees for credit support.
The degree of credit support provided for each issue is generally
based on historical information respecting the level of credit
risk associated with the underlying assets. Delinquency or loss in
excess of that anticipated, or failure of the credit support,
could adversely affect the return on an instrument in such a
security.
INVESTMENT RESTRICTIONS
The investment restrictions numbered 1 through 12 below have
been adopted by the Fund as fundamental policies. Under the
Investment Company Act of 1940, as amended (the "1940 Act"), a
fundamental policy may not be changed without the vote of a
majority of the outstanding voting securities of the Fund, as
defined in the 1940 Act. This is defined in the 1940 Act as the
lesser of (a) 67% or more of the shares present at a meeting, if
the holders of more than 50% of the outstanding shares of the Fund
are present or represented by proxy, or (b) more than 50% of the
outstanding shares.
The investment policies adopted by the Fund prohibit the
Fund from:
1. Purchasing the securities of any issuer (other than
U.S. government securities) if, as a result, more than
5% of the value of the Fund's total assets would be
invested in the securities of the issuer, except that
up to 25% of the value of the Fund's total assets may
be invested without regard to this 5% limitation.
2. Purchasing more than 10% of the voting securities of
any one issuer (other than U.S. government
securities), except that up to 25% of the value of the
Fund's total assets may be invested without regard to
this 10% limitation.
3. Purchasing securities on margin, except that the Fund
may obtain any short-term credits necessary for the
clearance of purchases and sales of securities. For
purposes of this restriction, the deposit or payment
of initial or variation margin in connection with
futures contracts or related options will not be
deemed to be a purchase of securities on margin.
4. Making short sales of securities, except that the Fund
may engage in short sales "against the box."
5. Borrowing money, except that (a) the Fund may borrow
from banks for temporary or emergency (not leveraging)
purposes in an amount not exceeding 10% of the value
of the Fund's total assets (including the amount
borrowed) valued at market less liabilities (not
including the amount borrowed) at the time the
borrowing is made and (b) the Fund may enter into
futures contracts. Whenever borrowings described in
(a) exceed 5% of the value of the Fund's total assets,
the Fund will not make any additional investments.
6. Pledging, hypothecating, mortgaging or otherwise
encumbering the Fund's assets except to secure
borrowings and as margin for commodities transactions.
7. Underwriting the securities of other issuers, except
insofar as the Fund may be deemed an underwriter in
the course of disposing of portfolio securities.
8. Purchasing or selling real estate or interests in real
estate, except that the Fund may purchase and sell
securities that are secured by real estate or
interests in real estate and may purchase securities
issued by companies that invest in or deal in real
estate.
9. Investing in commodities, except that the Fund may
invest in futures contracts, options on futures
contracts and options on currencies.
10. Making loans to others, except through the purchase of
qualified debt obligations, the entry into repurchase
agreements and loans of portfolio securities
consistent with the Fund's investment objectives and
policies.
11. Investing in securities of other investment companies
registered or required to be registered under the 1940
Act, except as they may be acquired as part of a
merger, consolidation, reorganization, acquisition of
assets or an offer of exchange, or to the extent
permitted by the 1940 Act.
12. Purchasing any securities which would cause more than
25% of the value of the Fund's total assets at the
time of purchase to be invested in the securities of
issuers conducting their principal business activities
in the same industry; provided that there shall be no
limit on the purchase of U.S. government securities.
NET ASSET VALUE
The net asset value of the common stock ("Common Stock")
will be calculated as of the close of regular trading on the New
York Stock Exchange (the "NYSE"), currently 4:00 p.m., New York
time, on the last day on which the NYSE is open for trading of
each week and month. The Fund reserves the right to cause its net
asset value to be calculated on a less frequent basis as
determined by the Fund's Board of Directors. For purposes of
determining net asset value, futures contracts and options on
futures contracts will be valued 15 minutes after the close of
regular trading on the NYSE.
Net asset value per share of Common Stock is calculated by
dividing the value of the Fund's total assets less liabilities,
and then dividing by the number of shares outstanding. In
general, the Fund's investments will be valued at market value, or
in the absence of market value, at fair value as determined by, or
under the direction of, the Fund's Board of Directors. Fund
securities which are traded primarily on foreign exchanges are
generally valued at the preceding closing values of such
securities on their respective exchanges, except that when an
occurrence subsequent to the time a value was so established is
likely to have changed such value, then the fair market value of
those securities will be determined by consideration of other
factors by or under the direction of the Board of Directors or
delegates. A security that is traded primarily on an exchange is
valued at the last sale price on that exchange or, if there were
no sales during the day, at the current quoted bid price. Over-
the-counter securities are valued on the basis of the bid price at
the close of business on each day. Investments in U.S. government
securities (other than short-term securities) are valued at the
average of the quoted bid and asked prices in the over-the-counter
market. Short-term investments that mature in 60 days or less are
valued on the basis of amortized cost (which involves valuing an
investment at its cost and, thereafter, assuming a constant
amortization to maturity of any discount or premium, regardless of
the effect of fluctuating interest rates on the market value of
the investment) when the Board of Directors has determined that
amortized cost represents fair value.
The valuation of the Fund's assets is made by the Investment
Manager after consultation with an independent pricing service
(the "Service") approved by the Fund's Board of Directors. When,
in the judgment of the Service, quoted bid prices for investments
are readily available and are representative of the bid side of
the market, these investments are priced by the Service at the
mean between the quoted bid prices and asked prices. Investments
for which, in the judgment of the Service, no readily obtainable
market quotation is available are priced by the Service at its
determination at fair value, based on methods that include
consideration of: yields or prices of securities of comparable
quality, coupon, maturity and type; indication as to values from
dealers; and general market conditions. The Service may use
electronic data processing techniques and/or matrix system to
determine valuations. The Investment Manager reviews the
Service's price information and, unless the Investment Manager has
information which leads it to use a different valuation, it will
generally use the Service's prices in establishing net asset
value. The procedures of the Service are reviewed periodically by
the officers of the Fund under the general supervision and
responsibility of the Board of Directors, which may replace the
Service at any time if it determines it to be in the best
interests of the Fund to do so.
TAXATION
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, among other
things: (a) derive at least 90% of its gross income from
dividends, interest, payments with respect to loans of securities
and gains from the sale or other disposition of securities or
certain other related income; and (b) diversify its holdings so
that at the end of each fiscal quarter (i) at least 50% of the
value of the Fund's assets is represented by cash or cash items,
U.S. government securities, securities of other regulated
investment companies, and other securities which, with respect to
any one issuer, do not represent more than 5% of the value of the
Fund's assets nor more than 10% of the voting securities of such
issuer, and (ii) not more than 25% of the value of the Fund's
assets is invested in the securities of any one issuer (other than
U.S. government securities or the securities of other regulated
investment companies), or two or more issuers which the taxpayer
(the Fund) controls and which are determined to be engaged in the
same or similar trades or businesses or related trades or
businesses.
If the Fund qualifies as a regulated investment company and
distributes to its shareholders 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. For purposes of the excise tax, the
required distribution for any calendar year equals the sum of: (a)
98% of the Fund's ordinary income for such calendar year; (b) 98%
of the excess of capital gains over capital losses for the one-
year period ending on October 31 (or another date if elected by
the Fund) of that year; and (c) 100% of the undistributed ordinary
income and gains from prior years. For purposes of the excise
tax, any ordinary income or capital gains retained by, and taxed
in the hands of, the Fund will be treated as having been
distributed.
The Fund may elect to retain all or a portion of its net
capital gain, as described under "Taxation of Shareholders--
Distributions" below.
Any capital losses resulting from the disposition of
securities can only be used to offset capital gains and cannot be
used to reduce the Fund's ordinary income. Such capital losses
may be carried forward by the Fund for eight years.
If the Fund owns shares in a foreign corporation that
constitutes a "passive foreign investment company" for federal
income tax purposes, and the Fund does not elect to treat the
foreign corporation as a "qualified electing fund" within the
meaning of the Internal Revenue Code of 1986 (the "Code"), the
Fund may be subject to United States federal income taxation on a
portion of any "excess distribution" it receives from the foreign
corporation or any gain it derives from the disposition of such
shares, even if such income is distributed as a taxable dividend
by the Fund to its shareholders. The Fund may also be subject to
additional tax in the nature of an interest charge with respect to
deferred taxes arising from such distributions or gains. Any tax
paid by the Fund as a result of its ownership of shares in a
"passive foreign investment company" will not give rise to any
deduction or credit to the Fund or any shareholders. A "passive
foreign investment company" means any foreign corporation if, for
any taxable year during which its stock was held by the Fund,
either (i) it derives at least 75% of its gross income from
"passive income" (including, but not limited to, interest,
dividends, royalties, rents and annuities), or (ii) at least 50%
of the value (or adjusted tax basis, if elected) of its assets
produce "passive income" or are held for the production of
"passive income." If the Fund owns shares in a "passive foreign
investment company" and the Fund does elect to treat the foreign
corporation as a "qualified electing fund" under the Code, the
Fund may be required to include in its income each year a portion
of the ordinary income and net capital gain of the foreign
corporation, even if this income is not distributed to the Fund.
Any such income would be subject to the 90% excise tax
distribution requirements described above.
Under Regulations proposed by the Treasury Department, a
regulated investment company may be entitled to make an
irrevocable election to mark to market (i.e., treat as disposed
of) as of the end of each taxable year for which such election to
treat such stock as a "qualified electing fund" was made. Any
gain recognized as the result of such an election would be treated
as gain derived from the sale of securities held for not less than
three months. No loss would be recognizable, however, as a result
of the mark to market election. In the event these proposed
Regulations are adopted, the Fund will determine whether such an
election will be in the best interests of the Fund and its
shareholders.
Hedging and Option Income Strategies and Foreign Currencies.
The use of hedging and option income strategies, such as writing
(selling) and purchasing options and futures contracts and
entering into forward contracts, involves complex rules that will
determine for income tax purposes the character and timing of
recognition of the income received in connection therewith by the
Fund.
Gains or losses attributable to fluctuations in exchange
rates that occur between the time the Fund accrues receivables or
liabilities denominated in a foreign currency and the time the
Fund actually collects such receivables or pays such liabilities
generally are treated as ordinary income or ordinary loss.
Similarly, on disposition of foreign currency or debt securities
denominated in foreign currency and on disposition of certain
futures, forward contracts and options, gains or losses
attributable to fluctuations in the value of foreign currency
between the date of acquisition of the currency, security, or
contract and the date of disposition also are treated as ordinary
income or loss. Such income or losses may increase or decrease
the amount of the Fund's investment company taxable income to be
distributed to its shareholders as ordinary income, rather than
the amount distributed as capital gain.
The hedging transactions undertaken by the Fund may result
in "straddles" for U.S. federal income tax purposes. The straddle
rules may affect the character of gains (or losses) realized by
the Fund. In addition, losses or deductions realized by the Fund
on positions that are part of a straddle may be deferred under the
straddle rules, rather than being taken into account in
calculating the taxable income for the taxable year in which such
losses are realized. Because only a few regulations implementing
the straddle rules have been promulgated, the tax consequences of
hedging transactions to the Fund are not entirely clear. The Fund
may make one or more of the elections available under the Code
which are applicable to straddles. If the Fund makes any of the
elections, the amount, character and timing of the recognition of
gains, losses or deductions from the affected straddle positions
will be determined under rules that vary according to the
election(s) made. The rules applicable under certain elections
operate to accelerate the recognition of gains, losses or
deductions from the affected straddle positions. Because
application of the straddle rules may affect the character and
timing of gains, losses or deductions from the affected straddle
positions, the amount which must be distributed to shareholders,
and taxed to shareholders as ordinary income or long-term capital
gain, may be increased or decreased substantially as compared to a
fund that did not engage in such hedging transactions.
The Fund's taxable income will in most cases be determined
on the basis of reports made to the Fund by the issuers of the
securities in which the Fund invests. The tax treatment of
certain securities in which the Fund may invest is not free from
doubt and it is possible that an Internal Revenue Service
examination of the issuers of such securities or of the Fund could
result in adjustments to the income of the Fund.
Taxation of Shareholders
Distributions. In general, all distributions to
shareholders 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 Fund's
dividend reinvestment plan.
Dividends distributed by the Fund will not generally be
eligible for the dividends received deduction in the hands of
corporate shareholders, except to the extent that the Fund's
taxable income consists of dividends received from domestic
corporations.
Dividends and other distributions by the Fund are generally
taxable to the shareholders at the time the dividend or
distribution is made. Any dividends declared by the Fund in
October, November or December and made payable to shareholders of
record in such a month would be taxable to shareholders as of
December 31, provided that the dividend is paid in the following
January.
If a shareholder purchases shares of Common Stock at a cost
that reflects an anticipated dividend, such dividend will be
taxable even though it represents economically in whole or in part
a return of the purchase price. Investors should consider the tax
implications of buying shares shortly prior to a dividend
distribution.
The Fund will, within 60 days after the close of its taxable
year, send written notices to shareholders regarding the tax
status of all distributions made during the year.
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 shareholder 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 shareholder and the
shareholder'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 shareholder 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
shareholder if the shareholder 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 shareholder is not correct or that the
shareholder has not reported all interest and dividend income
required to be shown on the shareholder'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
advisers regarding the federal, state, local, foreign and other
tax consequences to them of investments in the Fund.
OFFICERS AND DIRECTORS
The Officers and Directors of the Fund and their principal
occupations for at least the last five years are set forth below.
Those Directors who are "interested persons" of the Fund, as
defined in the 1940 Act, are indicated by asterisk. Each person
indicated below as a Director of the Fund is also a director,
trustee and/or general partner of other investment companies
registered under the 1940 Act with which Smith Barney or one or
more of its affiliates is an affiliated person.
Name, Address and Age
Positions Held with
the Fund
Principal Occupations During
Past Five Years
* Heath B. McLendon
388 Greenwich Street
New York, NY 10013
Age 64
Chairman of the
Board, President
and Chief Executive
Officer
Managing Director Smith Barney;
Director of 42 investment
companies associated with Smith
Barney; Director and President
of MMC and Travelers Investment
Adviser, Inc. ("of principal and
interest"); Chairman of Smith
Barney Strategy Advisers Inc.
Prior to July 1993, Senior
Executive Vice President of
Shearson Lehman Brothers, Inc.
Vice Chairman Shearson Asset
Management.
Donald R. Foley
3668 Freshwater Drive
Jupiter, FL 33477
Age 75
Director
Retired; Director of 10
investment companies associated
with Smith Barney. Formerly,
Vice President of Edwin Bird
Wilson, Incorporated
(advertising).
Paul Hardin
60134 Davie Street
Chapel Hill, NC 27599
Age 66
Director
Professor of Law at the
University of North Carolina at
Chapel Hill, Director of 12
investment companies associated
with Smith Barney; Director of
the Summit Bancorporation;
Formerly, Chancellor of the
University of North Carolina at
Chapel Hill.
Roderick C. Rasmussen
9 Cadence Court
Morristown, NJ 07960
Age 71
Director
Investment Counselor; Director
of 10 investment companies
associated with Smith Barney
Formerly, Vice President of
Dresdner and Company Inc.
(investment counselors).
John P. Toolan
13 Chadwell Place
Morristown, NJ 07960
Age 67
Director
Retired; Director of 10
investment companies associated
with Smith Barney; Director of
John Hancock Funds. Formerly,
Trustee and Chairman of Smith
Barney Trust Company, Trustee of
Smith Barney Holdings Inc. and
the Manager and Senior Executive
Vice President, Trustee and
Member of the Executive
Committee of Smith Barney.
*Lewis E. Daidone
388 Greenwich Street
New York, NY 10013
Age 40
Treasurer
Managing Director of Smith
Barney; Senior Vice President
and Treasurer of 42 investment
companies associated with Smith
Barney; Director and Senior Vice
President of MMC and TIA.
*Christina T. Sydor
388 Greenwich Street
New York, NY 10013
Age 46
Secretary
Managing Director of Smith
Barney and Secretary of 42
investment companies associated
with Smith Barney; Secretary
and General Counsel of MMC and
TIA.
*John C. Bianchi
388 Greenwich Street
New York, NY 10013
Age 41
Vice President
Managing Director of Smith
Barney and investment officer of
other investment companies
associated with Smith Barney.
*Thomas M. Reynolds
388 Greenwich Street
New York, NY 10013
Age 39
Controller and
Assistant Secretary
Director of Smith Barney and
Controller and Assistant
Secretary of other investment
companies associated with Smith
Barney.
The Fund pays each of its Directors who is not a director,
officer or employee of MMC, or any of its affiliates, an annual
fee of $5,000 plus $500 for each in-person Board meeting and $100
for each telephonic Board meeting attended. In addition, the Fund
will reimburse these Directors for travel and out-of-pocket
expenses incurred in connection with Board of Directors meetings.
For the fiscal year ended September 30, 1997, such expenses
totaled $14,264.
Compensation Table
<TABLE>
<CAPTION>
Total
Number
Compensation of Funds
Aggregate Pension or from Fund for Which
Compensation Retirement and Fund Director
from Fund Benefits Complex Serves
for the fiscal Accrued as for the Within
year ended part of Fund year ended Fund
Name 9/30/97 Expenses 12/31/97 Complex
<S> <C> <C> <C> <C>
Joseph H. Fleiss+@ $986 $0 $33,900 10
Donald R. Foley 986 0 34,400 10
Paul Hardin 1,372 0 73,000 12
Heath B. McLendon* 0 0 0 42
Roderick C. Rasmussen 1,372 0 55,400 10
John P. Toolan+ 1,372 0 55,400 10
Youngdahl, C. Richard@ 835 0 26,100 10
</TABLE>
* Designates a director who is an "interested person" of the
Fund.
+ Pursuant to the Fund's deferred compensation plan, the
indicated Directors have elected to defer the following payment
of some or all of their compensation: Joseph H. Fleiss: $493,
Donald R. Foley: $493 and John P. Toolan: $835.
@ Effective January 1, 1997, Mr. Youngdahl, and effective January
1, 1998, Mr. Fleiss have elected to become Director Emeritus.
Upon attainment of age 72 the Fund's current directors may
elect to change to emeritus status. Any directors elected or
appointed to the Board of Directors in the future will be
required to change to emeritus status upon attainment of age
80. Directors Emeritus are entitled to serve in emeritus status
for a maximum of 10 years during which time they are paid 50%
of the annual retainer fee and meeting fees otherwise
applicable to the Fund's directors, together with reasonable
out-of-pocket expenses for each meeting attended.
At the close of business on January 12, 1998, 70,039,993.906
shares of Common Stock, equal to 97.78% of the Fund's total shares
outstanding on that date, were held of record but not beneficially
owned by, CEDE & Co., c/o Depository Trust Company, Box 20,
Bowling Green Station, NY, NY 10004-9998. As of that date, the
officers and Directors of the Fund beneficially owned less than 1%
of the outstanding shares of the Fund.
PORTFOLIO TRANSACTIONS
General
The Fund's securities ordinarily are purchased from and sold
to parties acting as either principal or agent. Newly issued
securities ordinarily are purchased directly from the issuer or
from an underwriter; other purchases and sales usually are placed
with those dealers from which the Investment Manager determines
that the best execution will be obtained. Usually no brokerage
commissions, as such, are paid by the Fund for purchases and sales
of fixed-income securities, which are typically undertaken through
principal transactions, although the price paid usually includes
compensation to the dealer actingin the form of a spread or mark-
up. The prices paid to underwriters of newly issued securities
typically include a concession paid by the issuer to the
underwriter, and purchasers of after-market fixed-income
securities from dealers ordinarily are executed at a price between
the bid and asked price.
Transactions on behalf of the Fund are allocated to various
broker-dealers by the Investment Manager in its best judgment.
The primary consideration is prompt and effective execution of
orders at the most favorable price. Subject to that primary
consideration, broker-dealers may be selected for research,
statistical or other services to enable the Investment Manager to
supplement its own research and analysis with the views and
information of other securities firms. The Fund may utilize Smith
Barney Inc. ("Smith Barney") or a Smith Barney-affiliated broker
in connection with a purchase or sale of securities when the
Investment Manager believes that the broker's charge for the
transactions does not exceed usual and customary levels. The same
standard applies to the use of Smith Barney as a commodities
broker in connection with entering into options and futures
contracts.
Research services furnished by broker-dealers through which
the Fund effects securities transactions may be used by the
Investment Manager in managing other investment funds and,
conversely, research services furnished to the Investment Manager
by broker-dealers in connection with other funds the Investment
Manager advises may be used by the Investment Manager in advising
the Fund. Although it is not possible to place a dollar value on
these services, the Investment Manager is of the view that the
receipt of the services should not reduce the overall costs of its
research services.
Investment decisions for the Fund are made independently
from those of other investment companies managed by the Investment
Manager. If those investment companies are prepared to invest in,
or desire to dispose of, investments at the same time as the Fund,
however, available investments or opportunities for sales will be
allocated equitably to each client of the Investment Manager. In
some cases, this procedure may adversely affect the size of the
position obtained for or disposed of by the Fund or the price paid
or received by the Fund.
The Fund's Board of Directors will review periodically the
commissions paid by the Fund to determine if the commissions paid
over representative periods of time were reasonable in relation to
the benefits inuring to the Fund.
Turnover
The Fund cannot accurately predict its turnover rate, but
anticipates that its annual turnover rate will not exceed 150%.
The Fund's turnover rate is calculated by dividing the lesser of
the Fund's sales or purchases of securities during a year
(excluding any security the maturity of which at the time of
acquisition is one year or less) by the average monthly value of
the Fund's securities for the year. Higher turnover rates can
result in transaction costs, and corresponding increases in the
Fund's expense ratio. The Fund will not consider turnover rate a
limiting factor in making investment decisions consistent with its
investment objectives and policies. For the fiscal years ended
September 30, 1995, 1996 and 1997, the portfolio turnover rate was
59%, 73% and 87%, respectively.
MANAGEMENT OF THE FUND
Investment Manager
MMC, 388 Greenwich Street, New York, New York 10013, is
controlled by Salomon Smith Barney Holdings Inc., the parent
company of Smith Barney. Salomon Smith Barney Holdings Inc. is a
direct wholly owned subsidiary of Travelers Group Inc.
Subject to the supervision and direction of the Fund's Board
of Directors, MMC 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 MMC a fee for 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 the Fund. For
the years ended September 30, 1995, 1996 and 1997, the Fund paid
$8,981,404, $9,318,853 and $9,638,822, respectively, in management
fees to MMC.
Custodian and Transfer Agent
PNC Bank, located at 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103, acts as custodian of the Fund's
investments. First Data Investor Services Group, Inc. ("First
Data"), 53 State Street, Boston, Massachusetts, 02109, serves as
the Fund's transfer agent, dividend-paying agent and registrar.
Independent Auditors
KPMG Peat Marwick LLP, 345 Park Avenue, New York, New York
10154, has been selected as independent auditors for the Fund for
its fiscal year ending September 30, 1998 to examine and report on
the financial statements of the Fund.
REPURCHASE OF SHARES AND CONVERSION TO OPEN-END FUND
Repurchase Of Common Shares
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, but has no obligation to do so.
No assurance can be given that repurchases and/or tenders
will result in the Common Stock's trading at a price that is close
or equal to net asset value. The market price of the Common Stock
will, among other things, be determined by the relative demand
for, and supply of, the Common Stock in the market, the Fund's
investment performance, the Fund's dividends and investor
perception of the Fund's overall attractiveness as an investment
as compared with other investment alternatives. The Fund's
acquisition of Common Stock will decrease the total assets of the
Fund and therefore have the effect of increasing the Fund's
expense ratio. The Fund may borrow money to finance the
repurchase of shares subject to certain limitations. See
"Investment Restrictions." Any interest on the borrowings will
reduce the Fund's net income.
If the Fund liquidates securities in order to repurchase
shares of Common Stock, the Fund may realize gains and losses. The
Fund's turnover rate may or may not be affected by the Fund's
repurchases of shares of Common Stock pursuant to a tender offer.
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 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 the Continuing
Directors (as defined below) approve such a conversion. In the
latter case, the affirmative vote of a majority of the shares
outstanding will be required to approve the amendment to the
Fund's Articles of Incorporation providing for the conversion of
the Fund.
Anti-Takeover Provisions
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 shareholders 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 shareholders,
the Board of Directors will be divided into three classes. At the
annual meeting of shareholders 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. The
Articles of Incorporation provide that the maximum number of
Directors that may constitute the Fund's entire board is 12. A
Director may be removed from office, or the maximum number of
Directors increased, only by vote of the holders of at least 75%
of the shares of Common Stock entitled to be voted on the matter.
The affirmative votes of at least 75% of the Directors and
the holders of at least 75% of the shares of the Fund are required
to authorize any of the following transactions (referred to
individually as a "Business Combination"): (1) a merger,
consolidation or share exchange of the Fund with or into any other
person (referred to individually as a "Reorganization
Transaction"); (2) the issuance or transfer by the Fund (in one or
a series of transactions in any 12-month period) of any securities
of the Fund to any other person or entity for cash, securities or
other property (or combination thereof) having an aggregate fair
market value of $1,000,000 or more, excluding sales of securities
of the Fund in connection with a public offering, issuances of
securities of the Fund pursuant to a dividend reinvestment plan
adopted by the Fund and issuances of securities of the Fund upon
the exercise of any stock subscription rights distributed by the
Fund; (3) a sale, lease, exchange, mortgage, pledge, transfer or
other disposition by the Fund (in one or a series of transactions
in any 12-month period) to or with any person of any assets of the
Fund having an aggregate fair market value of $1,000,000 or more,
except for transactions in securities effected by the Fund in the
ordinary course of its business (each such sale, lease, exchange,
mortgage, pledge, transfer or other disposition being referred to
individually as a "Transfer Transaction"). The same affirmative
votes are required with respect to: any proposal as to the
voluntary liquidation or dissolution of the Fund or any amendment
to the Fund's Articles of Incorporation to terminate its existence
(referred to individually as a "Termination Transaction"), and any
shareholder proposal as to specific investment decisions made or
to be made with respect to the Fund's assets.
A 75% shareholder vote will not be required with respect to
a Business Combination if the transaction is approved by a vote of
at least 75% of the Continuing Directors (as defined below) or if
certain conditions regarding the consideration paid by the person
entering into, or proposing to enter into, a Business Combination
with the Fund and various other requirements are satisfied. In
such case, a majority of the votes entitled to be cast by
shareholders of the Fund will be required to approve the
transaction if it is a Reorganization Transaction or a Transfer
Transaction that involves substantially all of the Fund's assets
and no shareholder vote will be required to approve the
transaction if it is any other Business Combination. In addition,
a 75% shareholder vote will not be required with respect to a
Termination Transaction if it is approved by a vote of at least
75% of the Continuing Directors, in which case a majority of the
votes entitled to be cast by shareholders of the Fund will be
required to approve the transaction.
The voting provisions described above could have the effect
of depriving shareholders of the Fund of an opportunity to sell
their Common Stock at a premium over prevailing market prices by
discouraging a third party from seeking to obtain control of the
Fund in a tender offer or similar transaction. In the view of the
Fund's Board of Directors, however, these provisions offer several
possible advantages, including: (1) requiring persons seeking
control of the Fund to negotiate with its management regarding the
price to be paid for the amount of Common Stock required to obtain
control; (2) promoting continuity and stability; and (3) enhancing
the Fund's ability to pursue long-term strategies that are
consistent with its investment objective and the management
policies. The Board of Directors has determined that the voting
requirements described above, which are generally greater than the
minimum requirements under Maryland law and the 1940 Act, are in
the best interests of shareholders generally.
A "Continuing Director," as used in the discussion above, is
any member of the Fund's Board of Directors (1) who is not a
person or affiliate of a person who enters or proposes to enter
into a Business Combination with the Fund (such a person or
affiliate being referred to individually as an "Interested Party")
and (2) who has been a member of the Board of Directors for a
period of at least 12 months (or since the commencement of the
Fund's operations, if less than 12 months), or is a successor of a
Continuing Director who is unaffiliated with an Interested Party
and is recommended to succeed a Continuing Director by a majority
of the Continuing Directors then members of the Board of
Directors.
FINANCIAL STATEMENTS
The financial information contained under the following
headings is hereby incorporated by reference from the Fund's
September 30, 1997 Annual Report to Shareholders, copies of which
are furnished with this Statement of Additional Information:
Statement of Assets and Liabilities; Statement of Changes in Net
Assets; Statement of Operations; Notes to Financial Statements;
Financial Highlights and Independent Auditors' Report.
PART C OTHER INFORMATION
Item 24. Financial Statements and Exhibits.
(a) Financial Statements
Included in Part A:
Financial Highlights
Included in Part B:
The Registrant's Annual Report for the year ended September
30, 1997 and the Independent Auditors' Report dated November
15, 1997 are incorporated by reference into the Statement of
Additional Information and by reference to the Definitive N-
30D filed on December 31, 1997, Accession # 91155-97-000528.
(b) Exhibits:
Exhibit
Number Description
(1)(a) Articles of Incorporation*
(b) Amendment to Articles of Incorporation**
(2) By-Laws*
(3) Not Applicable
(4) Specimen Certificate of Common Stock***
(5) Copy of Fund's Dividend Reinvestment Plan***
(6) Not Applicable
(7)(a) Form of Investment Management Agreement between the
Fund and Mutual Management Corp.***
(b) Form of Transfer and Assumption of Investment
Management Agreement between the Registrant, Mutual
Management Corp. and Smith Barney Mutual Funds
Management Inc. +
(8)(a) Form of Underwriting Agreement**
(b) Form of Smith Barney Shearson Master Agreement among
Underwriters**
(9) Not applicable.
(10) Form of Custodian Agreement between the Fund and PNC
Bank***
(11) Form of Transfer Agency and Service Agreement between
the Fund and TSSG (to be filed by amendment)
(12) Opinion and consent of Miles & Stockbridge***
(13) Not Applicable
(14) Consent of KPMG Peat Marwick LLP, independent auditors
for the Fund (filed herewith)
(15) Not Applicable
(16) Form of Subscription Agreement***
(17) Not Applicable
(18) Financial Data Schedule (filed herewith)
_____________
* Previously filed by Registrant with its initial Registration
Statement (No. 33-66770) on July 30, 1993.
** Previously filed by the Registrant with Pre-Effective
Amendment No. 1 to its Registration Statement (No. 33-66770)
on September 10, 1993.
*** Previously filed by the Registrant with Pre-Effective
Amendment No. 2 to its Registration Statement (No. 33-66770)
on October 21, 1993.
+ Previously filed by the Registrant with Post-Effective
Amendment No.1 to its Registration Statement (No. 33-66770)
on December 30, 1994.
Item 25. Marketing Arrangements.
Reference is made to the Underwriting Agreement filed as
Exhibit 8(a) by Registrant with Pre-Effective Amendment No. 2 to
its Registration Statement.
Item 26. Other Expenses of Issuance and Distribution.
The following table sets forth the estimated expenses to be
incurred in connection with the offering described in this
Registration Statement:
Securities and Exchange Commission registration fees $0
Printing (other than stock certificates) 5,000.00
Legal fees and expenses 0
Accounting fees and expenses 0
Miscellaneous 0
Total $5,000.00
Item 27. Persons Controlled by or Under Common Control with
Registrant.
None.
Item 28. Number of Holders of Securities.
(1) (2)
Number of Record Holders
Title of Class at January 12, 1998
69,858,000 1,492
Shares of Common Stock,
$.001 Par Value
Item 29. Indemnification.
Section 2-418 of the General Corporation Law of the State of
Maryland, Article VI of the Fund's By-Laws and the Investment
Management Agreement filed as Exhibit 7(a) to Pre-Effective
Amendment No. 2 to its Registration Statement provide for
indemnification.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be provided to directors, officers
and controlling persons of the Fund, pursuant to the foregoing
provisions or otherwise, the Fund has been advised that in the
opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than
the payment by the Fund of expenses incurred or paid by a
director, officer or controlling person of the Fund in
connection with any successful defense of any action, suit or
proceeding) is asserted by such director, officer or
controlling person in connection with the securities being
registered, the Fund will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such
issue.
Reference is made to Section 8 of the Underwriting Agreement, a
form of which is filed as Exhibit 8(a) with Pre-Effective
Amendment No. 1 to its Registration Statement for provisions
relating to the indemnification of the agent.
Item 30. Business and Other Connections of Investment Manager.
Mutual Management Corp. ("MMC"), formerly known as Smith Barney
Mutual Funds Management Inc., was incorporated in December 1968
under the laws of the State of Delaware. MMC is a registered
investment adviser and is a wholly owned subsidiary of Smith
Barney Holdings Inc., which in turn is a wholly owned
subsidiary of Travelers Group Inc. MMC is primarily engaged in
the investment advisory business. Information as to executive
officers and directors of MMC is included in its Form ADV filed
with the SEC (Registration number 801-8314) and is incorporated
herein by reference.
Item 31. Location of Accounts and Records.
All accounts, books and other documents required to be
maintained by Section 31(a) of the Investment Company Act of
1940, as amended and the rules promulgated thereunder are
maintained at the office of Investment Manager at 388 Greenwich
Street, New York, New York 10013.
Item 32. Management Services.
Not applicable.
Item 33. Undertakings.
(1) Not applicable.
(2) Not applicable.
(3) Not applicable.
(4)(a) Registrant undertakes to file, during any period in
which offers or sales are being made, a post-effective
amendment to this Registration Statement:
(1) to include any prospectus required by Section
10(a)(3) of the Securities Act of 1933;
(2) to reflect in the prospectus any facts or events
after the effective date of this Registration
Statement (or the most recent post-effective
amendment hereof) which, individually or in the
aggregate, represent a fundamental change in the
information set forth in this Registration
Statement; and
(3) to include any material information with respect
to the plan of distribution not previously
disclosed in this Registration Statement or any
material change to such information in this
Registration Statement.
(4)(b) Registrant undertakes that, for the
purpose of determining any liability under the
Securities Act of 1933, each subsequent post-
effective amendment shall be deemed to be a new
registration statement relating to the
securities offered therein, and the offering of
those securities at that time shall be deemed to
be the initial bona fide offering thereof.
(4)(c) Not applicable.
(5) Not applicable.
(6) Registrant undertakes to send by first class
mail or other means designed to ensure equally
prompt delivery, within two business days of
receipt of a written or oral request, any
Statement of Additional Information.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant has duly caused
this Amendment to the Registration Statement on Form N-2 to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, and State of New York, on the
26th day of January, 1998 .
HIGH INCOME OPPORTUNITY FUND INC.
(Registrant)
By: /s/Heath B. McLendon
(Heath B. McLendon, Chairman of the
Board, President and Chief Executive
Officer)
Pursuant to the requirements of the Securities Act of 1933, this
Amendment to the Registration Statement has been signed below by
the following in the capacities and on the date indicated.
Signatures Title Date
/s/Heath B, McLendon * Chairman of the Board January 26, 1998
Heath B. McLendon (President; Chief
Executive Officer)
/s/Donald R. Foley* Director January 26, 1998
Donald R. Foley
/s/ Paul Hardin* Director January 26, 1998
Paul Hardin
/s/Roderick C. Rasmussen* Director January 26, 1998
Roderick C. Rasmussen
/s/John P. Toolan* Director January 26, 1998
John P. Toolan
/s/Lewis E. Daidone* Treasurer January 26, 1998
Lewis E. Daidone (Principal Financial
and Accounting Officer)
*By /s/Lewis E. Daidone
Lewis E. Daidone
Pursuant to Power of Attorney
HIGH INCOME OPPORTUNITY FUND INC.
EXHIBIT INDEX
Exhibit No. Description of Exhibit
(14) Consent of KPMG Peat Marwick LLP,
Independent Auditors for the Fund
(18) Financial Data Schedule
Independent Auditors' Consent
To the Shareholders and Board of Directors of
High Income Opportunity Fund Inc.:
We consent to the use of our report dated November
15, 1997, for the High Income Opportunity Fund Inc.
incorporated herein by reference and to the
references to our Firm under the headings "Financial
Highlights" and "Experts" in the Prospectus, and
"Independent Auditors" in the Statement of
Additional Information.
KPMG
Peat Marwick LLP
New York, New York
January 26, 1998
<TABLE> <S> <C>
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<CIK> 0000910068
<NAME> HIGH INCOME OPPORTUNITY FUND INC.
<S> <C>
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<PERIOD-END> SEP-30-1997
<INVESTMENTS-AT-COST> 804,728,726
<INVESTMENTS-AT-VALUE> 861,726,267
<RECEIVABLES> 32,013,285
<ASSETS-OTHER> 731
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 893,740,283
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<TOTAL-LIABILITIES> 11,051,666
<SENIOR-EQUITY> 0
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<SHARES-COMMON-PRIOR> 69,858,000
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<OVERDISTRIBUTION-GAINS> 62,691,736
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<NET-ASSETS> 882,688,617
<DIVIDEND-INCOME> 7,090,976
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<NET-INVESTMENT-INCOME> 80,776,721
<REALIZED-GAINS-CURRENT> 7,070,567
<APPREC-INCREASE-CURRENT> 40,292,499
<NET-CHANGE-FROM-OPS> 47,363,066
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 78,232,239
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<PER-SHARE-GAIN-APPREC> 00.68
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