<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 21, 1998
SECURITIES ACT FILE NO. 333-48351
INVESTMENT COMPANY ACT FILE NO. 811-08709
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
FORM N-2
[X] REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
[X] PRE-EFFECTIVE AMENDMENT NO. 2
[_] POST-EFFECTIVE AMENDMENT NO.
AND/OR
[X] REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
[X] AMENDMENT NO. 2
(CHECK APPROPRIATE BOX OR BOXES)
--------------
SALOMON BROTHERS HIGH INCOME FUND II INC
(EXACT NAME OF REGISTRANT AS SPECIFIED IN CHARTER)
--------------
SEVEN WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(888) 777-0102
ROBERT A. VEGLIANTE, ESQ.
SALOMON BROTHERS HIGH INCOME FUND II INC
SEVEN WORLD TRADE CENTER
NEW YORK, NEW YORK 10048
(212) 783-7000
(NAME AND ADDRESS OF AGENT FOR SERVICE)
--------------
COPIES TO:
GARY S. SCHPERO, ESQ. THOMAS A. DECAPO, ESQ.
SIMPSON THACHER & BARTLETT SKADDEN, ARPS, SLATE, MEAGHER & FLOM LLP
425 LEXINGTON AVENUE ONE BEACON STREET
NEW YORK, NEW YORK 10017 BOSTON, MASSACHUSETTS 02108
(212) 455-2000
(617) 573-4800
--------------
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,
as amended, other than securities offered in connection with a dividend
reinvestment plan, check the following box. [_]
It is proposed that this filing will become effective (check appropriate
box):
[X] When declared effective pursuant to section 8(c).
If appropriate, check the following box: [_] this [post-effective] amendment
designates a new effective date for a previously filed [post-effective
amendment] [registration statement].
[_] This form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act and the Securities Act
registration statement number of the earlier effective registration statement
for the same offering is .
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
--------------
CALCULATION OF REGISTRATION FEE UNDER THE SECURITIES ACT OF 1933
- -------------------------------------------------------------------------------
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM AMOUNT OF
AMOUNT BEING OFFERING PRICE AGGREGATE REGISTRATION
TITLE OF SECURITIES BEING REGISTERED REGISTERED(1)(3)(4) PER SHARE(1) OFFERING PRICE(1)(3) FEE(2)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.001 par
value................... 66,666,667 Shares $15.00 $1,000,000,005 $295,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee.
(2) $20,355 has previously been transmitted to the designated lockbox at
Mellon Bank in Pittsburgh, PA.
(3) Assuming exercise in full of the option granted by the Fund to the
Underwriters to purchase up to an additional 8,695,652 shares of Common
Stock to cover over-allotments. See "Underwriting."
(4) Includes shares that may be reoffered and resold by Salomon Smith Barney
in market-making transactions after trading in shares commences on the New
York Stock Exchange, Inc. or other national securities exchange.
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- -------------------------------------------------------------------------------
<PAGE>
CROSS-REFERENCE SHEET
PURSUANT TO RULE 481(A)
<TABLE>
<CAPTION>
N-2 ITEM NUMBER LOCATION IN PROSPECTUS (CAPTION)
--------------- --------------------------------
<C> <S> <C>
PART A
1. Outside Front Cover......... Outside Front Cover Page
2. Inside Front and Outside Outside Front Cover Page; Inside Front
Back Cover Page............ Cover Page; Outside Back Cover Page
3. Fee Table and Synopsis...... Prospectus Summary; Fee Table
4. Financial Highlights........ Not Applicable
5. Plan of Distribution........ Outside Front Cover Page; Prospectus
Summary; Management of the Fund;
Underwriting
6. Selling Shareholders........ Not Applicable
7. Use of Proceeds............. Use of Proceeds; Investment Objectives and
Policies
8. General Description of the Outside Front Cover Page; Prospectus
Registrant................. Summary; Risk Factors & Special
Considerations; The Fund; Investment
Objectives and Policies; Additional
Investment Activities; Description of
Capital Stock
9. Management.................. Outside Front Cover; Prospectus Summary;
Management of the Fund; Custodian,
Transfer Agent, Dividend Paying Agent and
Registrar
10. Capital Stock, Long-Term
Debt, and Other Outside Front Cover Page; Prospectus
Securities................. Summary; Investment Objectives and
Policies; Description of Capital Stock;
Taxation
11. Defaults and Arrears on
Senior Securities.......... Not Applicable
12. Legal Proceedings........... Not Applicable
13. Table of Contents of the
Statement of Additional
Information................ Not Applicable
PART B
14. Cover Page.................. Outside Front Cover Page
15. Table of Contents........... Outside Back Cover Page
16. General Information and
History.................... The Fund
17. Investment Objectives and Investment Objectives and Policies;
Policies................... Investment Restrictions
18. Management.................. Management of the Fund
19. Control Persons and
Principal Holders of
Securities................. Not Applicable
20. Investment Advisory and
Other Services............. Management of the Fund
21. Brokerage Allocation and
Other Practices............ Portfolio Transactions
22. Tax Status.................. Taxation
23. Financial Statements........ Report of Independent Accountants;
Statement of Assets and Liabilities
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
PROSPECTUS
SHARES
SALOMON BROTHERS HIGH INCOME FUND II INC
COMMON STOCK
($.001 PAR VALUE)
------------
Salomon Brothers High Income Fund II Inc (the "Fund") is a newly organized,
closed-end management investment company that seeks to maximize current income
by investing primarily in a diversified portfolio of high yield debt
securities rated at the time of investment in medium or lower rating
categories ("Baa" or lower by Moody's Investors Service, Inc. ("Moody's") or
"BBB" or lower by Standard & Poor's Ratings Group ("S&P")) or in unrated
fixed-income securities determined by the Fund's investment manager to be of
comparable quality. As a secondary objective, the Fund will seek capital
appreciation to the extent consistent with its objective of seeking to
maximize current income. Under normal market conditions, the Fund will invest
at least 65% of its total assets in high yield debt securities. The Fund may
invest up to 35% of its total assets in foreign debt securities, which the
Fund expects will primarily consist of debt securities of issuers located in
emerging market countries. There can be no assurance that the Fund's
investment objectives will be achieved.
HIGH YIELD DEBT SECURITIES ARE CONSIDERED SPECULATIVE AND ARE SUBJECT TO
CERTAIN RISKS, INCLUDING GREATER PRICE VOLATILITY AND A GREATER RISK OF LOSS
OF PRINCIPAL AND INTEREST. The Fund is designed for investors willing to
assume additional risk in return primarily for the potential for high current
income and secondarily for capital appreciation. An investment in the Fund
should be considered speculative in that it involves a high degree of risk and
should not constitute a complete investment program. Investors should
carefully assess the risks associated with an investment in the Fund. SEE
"RISK FACTORS AND SPECIAL CONSIDERATIONS" AND "INVESTMENT OBJECTIVES AND
POLICIES."
Because the Fund is newly organized, its shares have no history of public
trading. Shares of closed-end investment companies frequently trade at a
discount from their net asset value. This risk may be greater for initial
investors expecting to sell their shares in a relatively short period after
completion of the public offering. See "Risk Factors and Special
Considerations."
(Continued on next page)
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO PUBLIC(1) SALES LOAD(1)(2) PROCEEDS TO FUND(3)(4)
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $15.00 none $15.00
- ---------------------------------------------------------------------
Total(4) $ none $
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Footnotes on the following page)
------------
The shares of Common Stock are being offered by the Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. It is expected that delivery of the shares of Common Stock
will be made in book-entry form through the facilities of The Depository Trust
Company on or about May 28, 1998.
------------
SALOMON SMITH BARNEY A.G. EDWARDS & SONS, INC. ADVEST, INC.
EVEREN SECURITIES, INC. FAHNESTOCK & CO. INC. JANNEY MONTGOMERY SCOTT INC.
LEGG MASON WOOD WALKER MCDONALD & COMPANY MORGAN KEEGAN & COMPANY, INC.
INCORPORATED SECURITIES, INC.
THE ROBINSON-HUMPHREY COMPANY TUCKER ANTHONY WEDBUSH MORGAN SECURITIES
INCORPORATED
May 21, 1998
<PAGE>
(Continued from previous page)
Salomon Brothers Asset Management Inc will serve as investment manager to
the Fund.
The Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "HIX" subject to official notice of issuance. PRIOR
TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE FUND'S SHARES OF
COMMON STOCK.
At times, the Fund may utilize leverage through borrowing or by issuing
shares of preferred stock or debt securities in an amount up to 33 1/3% of the
Fund's total assets including the amount obtained from leverage. The Fund
intends to utilize leverage in an initial amount equal to approximately 25% of
its total assets including the amount obtained from leverage. Through these
leveraging techniques, the Fund will seek to obtain a higher return for
holders of Common Stock than if the Fund did not use leverage. Leverage is a
speculative technique and there are special risks and costs associated with
leveraging. There can be no assurance that a leveraging strategy will be
successful during any period in which it is employed. See "Risk Factors and
Special Considerations--Leverage" and "Additional Investment Activities--
Leverage."
The address of the Fund is Seven World Trade Center, New York, New York
10048, and the Fund's telephone number is (888) 777-0102. Investors are
advised to read this Prospectus, which sets forth information about the Fund
that investors should know before investing, and to retain it for future
reference. The Securities and Exchange Commission (the "Commission") maintains
a web site (http://www.sec.gov) that contains material incorporated by
reference and other information regarding registrants that file electronically
with the Commission.
------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK OF THE FUND, INCLUDING THE ENTRY OF STABILIZING BIDS, COVERING
TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. SUCH TRANSACTIONS MAY BE
EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
------------
(Footnotes from cover page)
(1) The investment manager or an affiliate will pay the Underwriters a
commission in the amount of 5.00% of the Price to Public per share in
connection with the sale of shares of Common Stock offered hereby. See
"Underwriting."
(2) The Fund and the investment manager have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
(3) Before deducting organizational and offering expenses payable by the
Fund (including $250,000 to be paid to the Underwriters as
reimbursement of certain of their expenses in connection with the
offering), estimated at $1,670,000.
(4) The Fund has granted the Underwriters an option exercisable for 45 days
after the date hereof to purchase up to an additional shares to
cover over-allotments. If all such shares are purchased, the total
Price to Public and Proceeds to Fund will be $ . See
"Underwriting."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
The Fund................ The Fund is a newly organized, closed-end management
investment company which seeks to maximize current
income. The investment manager believes that by
investing in high yield U.S. debt securities
supplemented by high yield foreign debt securities,
the Fund can diversify its risk and enhance the
overall credit quality of its portfolio while
maintaining a high level of current income. See
"The Fund."
Investment Objectives
and Policies........... The Fund's investment objective is to seek to
maximize current income by investing primarily in a
diversified portfolio of high yield debt securities
rated at the time of investment in medium or lower
rating categories ("Baa" or lower by Moody's or
"BBB" or lower by S&P) or in unrated fixed-income
securities determined by the Fund's investment
manager to be of comparable quality. As a secondary
objective, the Fund will seek capital appreciation
to the extent consistent with its objective of
seeking to maximize current income.
Under normal market conditions, the Fund will invest
at least 65% of its total assets in high yield debt
securities. The Fund may invest up to 35% of its
total assets in foreign debt securities, which the
Fund expects will primarily consist of debt
securities of issuers located in emerging market
countries. The Fund initially intends to invest
approximately 20% to 25% of its total assets in
debt securities of issuers located in emerging
market countries. Medium and low-rated and
comparable unrated securities, commonly known as
"junk bonds," offer yields that fluctuate over time
but generally are superior to yields on higher-
rated securities. However, such debt securities
also involve greater risks than higher-rated
securities. Certain of the debt securities
purchased by the Fund may be rated as low as "C" by
Moody's or "D" by S&P or may be comparable to
securities so rated. For a description of the
Moody's "C" rating and the S&P "D" rating, see
"Investment Objectives and Policies--General" and
Appendix A to this Prospectus. The Fund is designed
for investors willing to assume additional risk in
return primarily for the potential for high current
income and secondarily for capital appreciation.
The Fund is not intended to be a complete
investment program and there is no assurance that
the Fund will achieve its objectives. See
"Investment Objectives and Policies."
3
<PAGE>
The Fund may invest up to 30% of its total assets in
zero coupon securities, pay-in-kind bonds and
deferred payment securities, up to 20% of its total
assets in equity securities (certain equity
securities may be treated as debt securities for
purposes of the Fund's policy to invest at least
65% of its total assets, under normal
circumstances, in high yield debt securities) and
may invest in loan participations and assignments.
See "Investment Objectives and Policies--Other
Investments--Zero Coupon Securities, Pay-in-Kind
Bonds and Deferred Payment Securities," "--Loan
Participations and Assignments" and "--Equity
Securities."
At times, the Fund may utilize leverage through
borrowing or by issuing shares of preferred stock
or debt securities in an amount up to 33 1/3% of
the Fund's total assets including the amount
obtained from leverage. The Fund intends to utilize
leverage in an initial amount equal to
approximately 25% of its total assets including the
amount obtained from leverage. Through these
leveraging techniques, the Fund will seek to obtain
a higher return for holders of Common Stock than if
the Fund did not use leverage. Leverage is a
speculative technique and there are special risks
and costs associated with leveraging. The Fund will
seek to limit certain risks associated with
leverage by investing in certain floating rate debt
securities. There can be no assurance that a
leveraging strategy will be successful during any
period in which it is employed. See "Risk Factors
and Special Considerations--Leverage" and
"Additional Investment Activities--Leverage."
The Offering............
shares of Common Stock, par value $.001
per share (the "Common Stock"), of the Fund are
being offered for sale through the several
underwriters (collectively, the "Underwriters") for
whom Salomon Smith Barney is acting as
representative. The initial public offering price
of the Common Stock is $15.00 per share. The
minimum purchase is 100 shares ($1,500.00). In
addition, the Fund has granted the Underwriters an
option to purchase up to additional
shares to cover over-allotments. See
"Underwriting."
Listing.................
Prior to this offering, there has been no public
market for the shares of Common Stock of the Fund.
The Common Stock has been approved for listing on
the New York Stock Exchange (the "NYSE") under the
symbol "HIX" subject to official notice of
issuance.
4
<PAGE>
Stock Symbol............ "HIX"
Investment Manager...... Salomon Brothers Asset Management Inc ("SBAM") is
the Fund's investment manager and will manage the
Fund's investment portfolio in accordance with the
Fund's investment objectives and policies. SBAM
provides a full range of fixed income and equity
investment advisory services for its individual and
institutional clients throughout the world and
provides investment advisory services to over 134
institutional accounts. As of March 31, 1998, SBAM
and its worldwide investment advisory affiliates
managed approximately $27.6 billion of assets. SBAM
has access to hundreds of affiliated economists and
bond, sovereign and equity analysts, including a
staff dedicated to high yield credit research and
to emerging markets sovereign credit research.
Peter J. Wilby is primarily responsible for the day-
to-day management of the Fund. Mr. Wilby, who
joined SBAM in 1989, is a Managing Director and a
Senior Portfolio Manager of SBAM, responsible for
SBAM's investment company and institutional
portfolios which invest in high yield U.S. and
foreign corporate debt securities and high yield
foreign sovereign debt securities. Mr. Wilby is
portfolio manager for, among others, Salomon
Brothers High Income Fund Inc; Salomon Brothers
Worldwide Income Fund Inc; The Emerging Markets
Income Fund Inc; The Emerging Markets Income Fund
II Inc; the foreign sovereign debt component of
Salomon Brothers 2008 Worldwide Dollar Government
Term Trust Inc; The Emerging Markets Floating Rate
Fund Inc.; Global Partners Income Fund Inc.;
Salomon Brothers High Yield Bond Fund and the high
yield and sovereign debt portions of Salomon
Brothers Strategic Bond Fund, each a portfolio of
Salomon Brothers Series Funds Inc; Salomon Brothers
Institutional High Yield Bond Fund and Salomon
Brothers Institutional Emerging Markets Debt Fund,
each a portfolio of Salomon Brothers Institutional
Series Funds Inc; and Salomon Brothers Variable
High Yield Bond Fund and the high yield and
sovereign debt portions of Salomon Brothers
Variable Strategic Bond Fund, each a portfolio of
Salomon Brothers Variable Series Funds Inc. See
"Management of the Fund."
Management and
Administration Fees.... The Fund will pay SBAM for its investment management
services a monthly fee at an annual rate of 1.00%
of the value of the Fund's average weekly net
assets (which includes any proceeds from the
issuance of preferred stock) plus the proceeds of
any outstanding
5
<PAGE>
borrowings used for leverage. See "Management of
the Fund--Investment Manager." This fee is higher
than fees paid by other comparable investment
companies. The Fund will also pay Mutual Management
Corp. (the "Administrator") for its administrative
services a monthly fee at an annual rate of .10% of
the value of the Fund's average weekly net assets
(which includes any proceeds from the issuance of
preferred stock) plus the proceeds of any
outstanding borrowings used for leverage. See
"Management of the Fund--Administrator." During
periods in which the Fund is utilizing financial
leverage, the fees which are payable to SBAM and
the Administrator as a percentage of the Fund's
assets will be higher than if the Fund did not
utilize a leveraged capital structure because the
fees are calculated as a percentage of the Fund's
assets, including those purchased with leverage.
See "Risk Factors and Special Considerations--
Leverage" and "Additional Investment Activities--
Leverage."
Dividends and Beginning with its initial distribution
Distributions.......... approximately 60 days after completion of this
offering, it is the Fund's present policy, which
may be changed by the Board of Directors, to make
regular monthly cash distributions to holders of
Common Stock at a level rate that reflects the past
and projected performance of the Fund, which over
time will result in the distribution of all net
investment income of the Fund, and to distribute
any net realized capital gains at least annually.
From and after the leveraging (if any) of the
Common Stock, monthly distributions to holders of
Common Stock will generally consist of net
investment income remaining after the payment of
interest or dividends on any outstanding leverage,
subject to the Fund's present policy of making
distributions at a level rate as described above.
For tax purposes, the Fund is currently required to
allocate net capital gains and other taxable income
between shares of Common Stock and shares of
preferred stock, if any. As a result of the Fund's
anticipated investment in certain Brady Bonds and
other sovereign debt obligations acquired at a
discount as well as its ability to invest in zero
coupon securities and pay-in-kind bonds, the Fund
expects to make distributions of net investment
income in amounts greater than the total amount of
cash interest actually received in order to satisfy
certain requirements under current federal income
tax law. See "Investment Objectives and Policies--
Other Investments--Zero Coupon Securities, Pay-in-
Kind Bonds and Deferred Payment Securities."
6
<PAGE>
Dividend Reinvestment Under the Fund's Dividend Reinvestment Plan (the
Plan................... "Plan"), shareholders will have all dividends and
distributions automatically reinvested in
additional shares of Common Stock of the Fund
unless the shareholder elects to receive cash or
the Board of Directors of the Fund declares a
dividend or distribution payable only in cash.
Shareholders whose shares are held in the name of a
broker or nominee should contact such broker or
nominee to confirm that they may participate in the
Plan. See "Dividends and Distributions; Dividend
Reinvestment Plan."
Taxation................ The Fund intends to elect and qualify to be treated
as a regulated investment company for U.S. federal
income tax purposes. As such, it will generally not
be subject to U.S. federal income tax on income and
gains that are distributed to shareholders. See
"Taxation."
Custodian, Transfer
Agent, Dividend Paying
Agent and Registrar....
PNC Bank, N.A. will act as custodian for the Fund's
assets. First Data Investor Services Group, Inc.
will act as transfer agent, dividend paying agent
and registrar for the Fund's Common Stock.
7
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
General Considerations
Relating to High Yield The net asset value of the Fund's shares will change
Debt Securities........ with fluctuations in the value of its portfolio
securities. The high yield corporate debt
securities, commonly known as "junk bonds," and
high yield foreign debt securities in which the
Fund will invest generally will be rated, at the
time of investment, in the categories "Baa" or
lower by Moody's or "BBB" or lower by S&P, or will
be of comparable quality. These lower-rated and
comparable unrated securities involve greater risks
than higher-rated securities. Under rating agency
guidelines, lower-rated securities and comparable
unrated securities will likely have some quality
and protective characteristics that are outweighed
by large uncertainties or major risk exposures to
adverse conditions. Lower-rated securities may have
poor prospects of ever attaining any real
investment standing, may have a current
identifiable vulnerability to default, may be
unlikely to have the capacity to pay interest and
repay principal when due in the event of adverse
business, financial or economic conditions and/or
may be in default or not current in the payment of
interest or principal. Such securities are
considered speculative with respect to the issuer's
capacity to pay interest and repay principal in
accordance with the terms of the obligations.
Accordingly, it is possible that these types of
factors could reduce the value and liquidity of
securities held by the Fund, with a commensurate
effect on the value of the Fund's shares.
Because the Fund will invest primarily in fixed-
income securities, the net asset value of the
Fund's portfolio, and hence its shares, can be
expected to change as general levels of interest
rates fluctuate, although the market values of
securities rated below investment grade and
comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those
of higher-rated securities. Except to the extent
that values are affected independently by other
factors such as developments relating to a specific
issuer, when interest rates decline, the value of a
fixed-income portfolio can generally be expected to
rise. Conversely, when interest rates rise, the
value of a fixed-income portfolio can generally be
expected to decline. These fluctuations can be
expected to be greater with respect to investments
in fixed-income securities with longer maturities
than investments in securities with shorter
maturities. Although there is no limitation on the
average maturity of the Fund's portfolio, SBAM
currently expects
8
<PAGE>
that the Fund's high yield debt portfolio will
initially have an average maturity of 8 to 15
years. However, because many fixed-income
securities contain redemption features, the actual
average maturity of the Fund's portfolio may be
considerably less. See "--Considerations Relating
to High Yield Corporate Securities."
The secondary markets for high yield debt securities
are not as liquid as the secondary markets for
higher-rated securities. The secondary markets for
high yield debt securities are characterized by
relatively few market makers, participants in the
market being mostly institutional investors
including insurance companies, banks, other
financial institutions and mutual funds. In
addition, the trading volume for high yield debt
securities is generally lower than that for higher-
rated securities, and the secondary markets could
contract under adverse market or economic
conditions independent of any specific adverse
changes in the condition of a particular issuer.
Adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease
the values and liquidity of high yield securities,
especially in a thinly-traded market. These factors
may have an adverse effect on the Fund's ability to
dispose of particular portfolio investments and may
limit the ability of the Fund to obtain accurate
market quotations for purposes of valuing
securities and calculating net asset value. If the
Fund is not able to obtain precise or accurate
market quotations for a particular security, it
will become more difficult for the Board of
Directors or its delegate to value the Fund's
portfolio securities and the Board or its delegate
may have to use a greater degree of judgment in
making such valuations. Less liquid secondary
markets may also affect the Fund's ability to sell
securities at their fair value. The Fund may invest
without limitation in illiquid securities, which
are more difficult to value and to sell at fair
value. If the secondary markets for high yield debt
securities contract due to adverse economic
conditions or for other reasons, certain liquid
securities in the Fund's portfolio may become
illiquid and the proportion of the Fund's assets
invested in illiquid securities may increase.
Prices for high yield securities may be affected by
legislative and regulatory developments which could
adversely affect the Fund's net asset value and
investment practices, the secondary market for high
yield securities, the financial condition of
issuers of these securities and the value of
outstanding high yield securities.
9
<PAGE>
Considerations Relating
to High Yield While the market values of corporate debt securities
Corporate Securities... rated below investment grade and comparable unrated
securities tend to react less to fluctuations in
interest rate levels than do those of higher-rated
securities, the market values of the former also
tend to be more sensitive to company-specific
developments and changes in economic conditions
than higher-rated securities. Issuers of corporate
debt securities rated below investment grade and
comparable unrated securities are often highly
leveraged, so that their ability to service their
debt obligations during an economic downturn or
during sustained periods of rising interest rates
may be impaired. In addition, such issuers may not
have more traditional methods of financing
available to them, and may be unable to repay debt
at maturity by refinancing. The risk of loss due to
default in payment of interest or principal by such
issuers is significantly greater than with
investment grade securities because lower-rated
securities generally are unsecured and subordinated
to the prior payment of senior indebtedness. The
Fund may also 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.
Many fixed-income securities, including corporate
debt securities in which the Fund may invest,
contain call or buy-back features which permit the
issuer of the security to call or repurchase it.
Such securities may present risks based on payment
expectations. If an issuer exercises such a "call
option" and redeems the security, the Fund may have
to replace the called security with a lower
yielding security, resulting in a decreased rate of
return for the Fund. For additional risks relating
to high yield foreign corporate debt securities,
see "--Considerations Relating to High Yield
Foreign Corporate Debt Securities."
Considerations Relating
to High Yield Foreign
Sovereign Debt
Securities............. Investments in foreign sovereign debt securities
involve certain risks not typically associated with
U.S. corporate investments. Investing in foreign
sovereign debt securities, especially in emerging
market countries, will expose the Fund to the
direct or indirect consequences of political,
social or economic changes in the countries that
issue the securities or in which the issuers are
located. The ability and willingness of sovereign
obligors or the governmental authorities that
control repayment of their external debt to pay
principal and interest
10
<PAGE>
on such debt when due may depend on general
economic and political conditions within the
relevant country. Certain countries in which the
Fund may invest, especially emerging market
countries, have historically experienced, and may
continue to experience, high rates of inflation,
high interest rates, exchange rate fluctuations,
large amounts of external debt, balance of payments
and trade difficulties and extreme poverty and
unemployment. Many of these countries are also
characterized by political uncertainty or
instability. Additional factors that may influence
the ability or willingness to service debt include,
but are not limited to, a country's cash flow
situation, the availability of sufficient foreign
exchange on the date a payment is due, the relative
size of its debt service burden to the economy as a
whole, and its government's policy towards the
International Monetary Fund (the "IMF"), the
International Bank for Reconstruction and
Development (the "World Bank") and other
international agencies to which a government debtor
may be subject. A substantial portion of the Fund's
foreign sovereign and foreign corporate debt
securities portfolio is expected to be issued by
issuers located in countries considered to be
emerging markets, and investments in such
securities are particularly speculative.
The ability of a foreign sovereign obligor,
especially an obligor in an emerging market
country, to make timely and ultimate payments on
its external debt obligations will also be strongly
influenced by the obligor's balance of payments,
including export performance, its access to
international credits and investments, fluctuations
of interest rates and the extent of its foreign
reserves. A country whose exports are concentrated
in a few commodities or whose economy depends on
certain strategic imports could be vulnerable to
fluctuations in international prices of these
commodities or imports. To the extent that a
country receives payment for its exports in
currencies other than dollars, its ability to make
debt payments denominated in dollars could be
adversely affected. If a foreign sovereign obligor
cannot generate sufficient earnings from foreign
trade to service its external debt, it may need to
depend on continuing loans and aid from foreign
governments, commercial banks, and multilateral
organizations, as well as on inflows of foreign
investment. The commitment on the part of these
foreign governments, multilateral organizations and
others to make such disbursements may be
conditioned on the government's implementation of
economic reforms and/or economic performance and
the timely service of its obligations. Failure to
implement such
11
<PAGE>
reforms, achieve such levels of economic
performance or repay principal or interest when due
may result in the cancellation of such third
parties' commitments to lend funds, which may
further impair the obligor's ability or willingness
to timely service its debts. The cost of servicing
external debt will also generally be adversely
affected by rising international interest rates
because many external debt obligations bear
interest at rates which are adjusted based upon
international interest rates. The ability to
service external debt will also depend on the level
of the relevant government's international currency
reserves and its access to foreign exchange.
Currency devaluations may affect the ability of a
sovereign obligor to obtain sufficient foreign
exchange to service its external debt. The risks
enumerated above generally are heightened with
regard to issuers in emerging market countries.
As a result of the foregoing, a governmental
obligor, particularly in an emerging market
country, may default on its obligations. If such an
event occurs, the Fund may have limited legal
recourse against the issuer and/or guarantor.
Remedies must, in some cases, be pursued in the
courts of the defaulting party itself, and the
ability of the holder of foreign sovereign debt
securities to obtain recourse may be subject to the
political climate in the relevant country. In
addition, no assurance can be given that the
holders of commercial bank debt will not contest
payments to the holders of other foreign sovereign
debt obligations in the event of default under
their commercial bank loan agreements.
Sovereign obligors in developing and emerging
countries are among the world's largest debtors to
commercial banks, other governments, international
financial organizations and other financial
institutions. Certain issuers of the sovereign debt
securities in which the Fund expects to invest have
in the past experienced substantial difficulties in
servicing their external debt obligations, which
have led to defaults on certain obligations and the
restructuring of certain indebtedness.
Restructuring arrangements have included, among
other things, reducing and rescheduling interest
and principal payments by negotiating new or
amended credit agreements or converting outstanding
principal and unpaid interest to Brady Bonds (as
described herein) and obtaining new credit to
finance interest payments. Holders of certain
foreign sovereign debt securities may be requested
to participate in the restructuring of such
obligations and to extend further loans to their
issuers. There can be no assurance that the Brady
12
<PAGE>
Bonds and other foreign sovereign debt securities
in which the Fund may invest will not be subject to
similar defaults or restructuring arrangements
which may adversely affect the value of such
investments. Furthermore, certain participants in
the secondary market for such debt may be directly
involved in negotiating the terms of these
arrangements and may therefore have access to
information not available to other market
participants.
Payments to holders of the foreign sovereign debt
securities in which the Fund may invest may be
subject to withholding and other taxes imposed by a
foreign government. Although the holders may be
entitled to tax gross-up payments from the issuers
of such instruments, there is no assurance that
such payments will be made.
Considerations Relating
to High Yield Foreign
Corporate Debt
Securities.............
In addition to the risks cited under "--
Considerations Relating to High Yield Foreign
Sovereign Debt Securities," including political,
social and economic risks relating to foreign
issuers, investments in securities of foreign
issuers may involve additional risks arising from
differences between U.S. and foreign securities
markets (including, among other things, less
volume, much greater price volatility in and
illiquidity of certain foreign securities markets,
different trading and settlement practices and less
governmental supervision and regulation), from
changes in currency exchange rates, from high and
volatile rates of inflation and, as with domestic
multinational corporations, from fluctuating
interest rates. These risks are generally
heightened with respect to issuers in emerging
market countries.
Investment in certain foreign securities, especially
those of issuers in certain emerging market
countries, is restricted or controlled to varying
degrees by government regulation which may at times
limit or preclude investment in certain foreign
securities and increase the costs and expenses of
the Fund. Certain foreign countries require
governmental approval prior to investments by
foreign persons, limit the amount of investment by
foreign persons in a particular issuer, limit
investment by foreign persons to a specific class
of securities of an issuer that may have less
advantageous rights than other classes, restrict
investment opportunities in issuers in industries
deemed important to national interests and/or
impose additional taxes on foreign investors.
13
<PAGE>
Certain foreign countries, especially certain
emerging market countries, may require governmental
approval for the repatriation of investment income,
capital or the proceeds of sales of securities by
foreign investors which could adversely affect the
Fund. In addition, if a deterioration occurs in the
country's balance of payments, it could impose
temporary restrictions on foreign capital
remittances. Investing in local markets in foreign
countries may require the Fund to adopt special
procedures, seek local governmental approvals or
take other actions, each of which may involve
additional costs to the Fund.
Other investment risks include the possible
imposition of foreign withholding taxes on certain
amounts of the Fund's income, the possible seizure
or nationalization of foreign assets and the
possible establishment of exchange controls,
expropriation, confiscatory taxation, other foreign
governmental laws or restrictions which might
affect adversely payments due on securities held by
the Fund, the lack of extensive operating
experience of eligible foreign subcustodians and
legal limitations on the ability of the Fund to
recover assets held in custody by a foreign
subcustodian in the event of the subcustodian's
bankruptcy. Moreover, brokerage commissions and
other transaction costs on foreign securities
exchanges are generally higher than in the United
States.
In addition, there may be less publicly available
information about a foreign issuer, especially one
located in an emerging market country, than about
comparable U.S. issuers, and foreign issuers may
not be subject to the same accounting, auditing and
financial record-keeping standards and requirements
as U.S. issuers. In particular, the assets and
profits appearing on the financial statements of a
foreign issuer may not reflect its financial
position or results of operations in the way they
would be reflected if the financial statements had
been prepared in accordance with U.S. generally
accepted accounting principles. In addition, for an
issuer that keeps accounting records in local
currency, inflation accounting rules may require,
for both tax and accounting purposes, that certain
assets and liabilities be restated on the issuer's
balance sheet in order to express items in terms of
currency of constant purchasing power. Inflation
accounting may indirectly generate losses or
profits. Consequently, financial data may be
materially affected by restatements for inflation
and may not accurately reflect the real condition
of those issuers and securities markets. Finally,
in the event of a default in any such foreign
obligations, it may be more difficult for the Fund
to obtain or enforce a judgment against the issuers
of such obligations.
14
<PAGE>
Considerations Relating
to Foreign Currency
Exchange Rates.........
Since the Fund may invest in securities denominated
or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may
affect the value of securities held by the Fund and
the unrealized appreciation or depreciation of
investments. Currencies of certain countries may be
volatile and subject to risk of revaluation, which
may affect the value of securities denominated in
such currencies.
Leverage................ At times, the Fund may utilize leverage by borrowing
or by issuing shares of preferred stock or debt
securities in an amount up to 33 1/3% of the Fund's
total assets including the amount obtained from
leverage. The Fund intends to utilize leverage in
an initial amount equal to approximately 25% of its
total assets including the amount obtained from
leverage. The use of leverage will pose certain
risks for holders of Common Stock including the
possibility of higher volatility of both the net
asset value and market value of the Common Stock.
There can be no assurance that the Fund will be
able to realize a higher return on its investment
portfolio than the then current interest or
dividend rate on any leverage. In the event the
Fund realizes a return on its investment portfolio
which is less than the then current interest or
dividend rate on any leverage, the Fund's leveraged
capital structure would result in a lower yield to
the holders of Common Stock than if the Fund were
not leveraged. Moreover, any decline in the value
of the Fund's assets will be borne entirely by
holders of Common Stock in the form of reductions
in the Fund's net asset value, and any requirement
that the Fund sell assets at a loss in order to
redeem or repay any leverage or for other reasons
would make it more difficult for the net asset
value to recover. Accordingly, the effect of
leverage in a declining market is likely to be a
greater decline in the net asset value of the
Common Stock than if the Fund were not leveraged,
which may be reflected in a greater decline in the
market price of the Common Stock. The Fund will
seek to limit certain risks associated with
leverage by investing in certain floating rate debt
securities. See "Additional Investment Activities--
Leverage."
The Fund's use of leverage will be subject to the
provisions of the Investment Company Act of 1940,
as amended (the "1940 Act"), including asset
coverage requirements and restrictions on the
declaration of dividends and distributions to
holders of Common Stock or purchases of Common
Stock in the event such asset coverage requirements
are not met. In addition, the Fund may seek to have
15
<PAGE>
Moody's, S&P and/or any other nationally recognized
statistical rating organization rate any preferred
stock or debt it issues. As a condition to
obtaining such ratings, the terms of any preferred
stock or debt securities issued will include asset
coverage maintenance provisions which will require
the redemption of shares of preferred stock or the
repayment of debt in the event of non-compliance by
the Fund and may also prohibit dividends and other
distributions on the Common Stock in such
circumstances. In order to meet redemption or
repayment requirements, the Fund may have to
liquidate portfolio securities. Such liquidations
and redemptions would cause the Fund to incur
related transaction costs and could result in
capital losses to the Fund. Prohibitions on
dividends and other distributions on the Common
Stock could impair the Fund's ability to qualify as
a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"). The
1940 Act also requires that holders of preferred
stock, and in certain circumstances holders of debt
securities, have certain voting rights. See
"Additional Investment Activities--Leverage,"
"Taxation" and "Description of Capital Stock."
During periods in which the Fund is utilizing
financial leverage, the fees which are payable to
SBAM and the Administrator as a percentage of the
Fund's assets will be higher than if the Fund did
not utilize a leveraged capital structure because
the fees are calculated as a percentage of the
Fund's assets, including those purchased with
leverage. See "Management of the Fund."
Additional Investment The Fund may employ various additional investment
Strategies............. strategies that entail certain additional or
different risks, such as entering into interest
rate transactions and options and futures
transactions, entering into repurchase agreements,
purchasing securities on a when-issued or delayed
delivery basis, lending portfolio securities and
investing in zero coupon securities, pay-in-kind
bonds and loan participations and assignments. See
"Investment Objectives and Policies--Other
Investments--Zero Coupon Securities, Pay-in-Kind
Bonds and Deferred Payment Securities" and "--Loan
Participations and Assignments," "Additional
Investment Activities" and Appendix B (General
Characteristics and Risks of Hedging and Other
Strategic Transactions) to this Prospectus.
Trading Discount........ As a newly organized entity, the Fund has no
operating history. Shares of closed-end investment
companies frequently trade at a discount from net
asset value. This characteristic is a risk separate
and distinct from the risk that the Fund's net
asset value will decrease as a result of its
investment activities and may be greater for
investors expecting to sell their shares in a
relatively short period following completion of
16
<PAGE>
this offering. It should be noted, however, that
shares of some closed-end funds have traded at
premiums to net asset value. The Fund cannot
predict whether its shares will trade at, above or
below net asset value. The Fund is intended
primarily for long-term investors and should not be
considered as a vehicle for trading purposes.
Year 2000...............
The investment management services provided to the
Fund by SBAM depend in large part on the smooth
functioning of SBAM's computer systems. Many
computer software systems in use today cannot
recognize the year 2000, but revert to 1900 or some
other date, due to the manner in which dates were
encoded or calculated. The capability of these
systems to recognize the year 2000 could have a
negative impact on SBAM's provision of investment
advisory services, including the handling of
securities trades, pricing and account services.
SBAM has advised the Fund that it has been
reviewing all of its computer systems and actively
working on necessary changes to its systems to
prepare for the year 2000 and expects that given
the extensive testing which it is undertaking its
systems will be year 2000 compliant before such
date. In addition, SBAM has been advised by certain
of the Fund's service providers that they are also
in the process of modifying their systems with the
same goal. There can, however, be no assurance that
SBAM or any other service provider will be
successful in achieving year 2000 compliance, or
that interaction with other non-complying computer
systems will not impair services to the Fund at
that time.
Anti-Takeover
Provisions............. The Fund's Amended and Restated Articles of
Incorporation (the "Articles of Incorporation") and
Amended and Restated By-Laws (the "By-Laws")
contain certain anti-takeover provisions that may
have the effect of inhibiting the Fund's possible
conversion to open-end status and limiting the
ability of other persons to acquire control of the
Fund. In certain circumstances, these provisions
might also inhibit the ability of shareholders to
sell their shares at a premium over prevailing
market prices. The Fund's Board of Directors has
determined that these provisions are in the best
interests of shareholders generally. See
"Description of Capital Stock--Special Voting
Provisions."
--------------------
Investors should carefully consider their ability to
assume the foregoing risks before making an
investment in the Fund. An investment in shares of
the Fund may not be appropriate for all investors.
Given the above-described investment risks inherent
in the Fund, investment in shares of the Fund
should be considered speculative and should not be
considered a complete investment program.
17
<PAGE>
FEE TABLE
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load (as a percentage of offering price)................ None
Dividend Reinvestment Plan Fees....................................... None
ANNUAL EXPENSES (as a percentage of net assets attributable to Common
Stock):
Management and Administration Fees(a)(b).............................. 1.10%
Interest Payments on Borrowed Funds(b)................................ None
Other Expenses(b)..................................................... .10%
----
Total Annual Expenses(b)............................................ 1.20%
====
</TABLE>
EXAMPLE:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment, assuming (1) total
annual expenses of 1.20% (assuming no
leverage) and 3.63% (assuming leverage of 25%
of the Fund's total assets) and (2) a 5%
annual return throughout the periods:
Assuming No Leverage........................ $12 $ 38 $ 66 $145
Assuming 25% Leverage....................... $37 $111 $188 $389
</TABLE>
(a) See "Management of the Fund."
(b) In the event the Fund utilizes leverage by borrowing in an amount equal to
approximately 25% of the Fund's total assets (including the amount
obtained from leverage), it is estimated that, as a percentage of net
assets attributable to Common Stock, the Management and Administration
Fees would be 1.47%, Interest Payments on Borrowed Funds (assuming an
interest rate of approximately 6.2%, which interest rate is subject to
change based on prevailing market conditions) would be 2.06%, Other
Expenses would be .10% and Total Annual Expenses would be 3.63%. The Fund
may utilize leverage up to 33 1/3% of the Fund's total assets (including
the amount obtained from leverage), depending on economic conditions. See
"Risk Factors and Special Considerations--Leverage" and "Additional
Investment Activities-- Leverage."
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" are based on
estimated amounts through the end of the Fund's first fiscal year on an
annualized basis. The Example set forth above assumes reinvestment of all
dividends and distributions and utilizes a 5% annual rate of return as
mandated by Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF FUTURE EXPENSES OR ANNUAL RATE OF RETURN, AND ACTUAL
EXPENSES, LEVERAGE AMOUNT OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE.
18
<PAGE>
THE FUND
The Fund, incorporated in Maryland on March 19, 1998, is a closed-end
management investment company registered under the 1940 Act. The Fund's
investment objective is to seek to maximize current income by investing
primarily in a diversified portfolio of high yield debt securities rated at
the time of investment in medium or lower rating categories or determined by
SBAM to be of comparable quality. As a secondary objective, the Fund will seek
capital appreciation to the extent consistent with its objective of seeking to
maximize current income. SBAM, the Fund's investment manager, believes that by
investing in high yield U.S. debt securities supplemented by high yield
foreign debt securities (which the Fund expects will primarily consist of debt
securities of issuers located in emerging market countries), the Fund can
diversify its risk and enhance the overall credit quality of its portfolio
while maintaining a high level of current income. There can be no assurance
that the Fund's investment objectives will be achieved. Due to the risks
inherent in the securities in which the Fund may invest, the Fund should not
be considered a complete investment program. See "Risk Factors and Special
Considerations."
USE OF PROCEEDS
The net proceeds of this offering, estimated to be $ (or approximately
$ assuming the Underwriters exercise the over-allotment option in full)
after deducting offering and organizational expenses, will be invested in
accordance with the policies set forth under "Investment Objectives and
Policies" within three months from the date of this Prospectus. Initially, the
proceeds will be invested in high quality short-term money market instruments
as described under "Investment Objectives and Policies--Other Investments--
Higher Quality Debt Securities and Money Market Instruments." There will be no
sales load or underwriting discount imposed on sales of shares of Common Stock
in this offering. SBAM or an affiliate (not the Fund) will pay a commission to
the Underwriters from its own assets in connection with sales of shares of
Common Stock in this offering. See "Underwriting."
19
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The Fund's investment objective is to seek to maximize current income by
investing primarily in a diversified portfolio of high yield debt securities
rated at the time of investment in medium or lower rating categories ("Baa" or
lower by Moody's or "BBB" or lower by S&P) or in unrated fixed-income
securities determined by SBAM to be of comparable quality. As a secondary
objective, the Fund will seek capital appreciation to the extent consistent
with its objective of seeking to maximize current income. Under normal market
conditions, the Fund will invest at least 65% of its total assets in high
yield debt securities. The Fund may invest up to 35% of its total assets in
foreign debt securities, which the Fund expects will primarily consist of debt
securities of issuers located in emerging market countries. The Fund initially
intends to invest approximately 20% to 25% of its total assets in debt
securities of issuers located in emerging market countries. Certain of the
debt securities purchased by the Fund may be rated as low as "C" by Moody's or
"D" by S&P or may be comparable to securities so rated. Securities rated "C"
by Moody's are the lowest rated class of securities and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing. Securities rated "D" by S&P are in default on their interest and/or
principal payments. Debt securities rated by both Moody's and S&P need only
satisfy the foregoing ratings standards with respect to either the Moody's or
the S&P rating. The Fund is not required to dispose of a debt security if its
credit rating or credit quality declines. However, SBAM will continue to
evaluate the appropriateness of maintaining such a debt security in the Fund's
portfolio in accordance with the approach described below. Medium and low-
rated and comparable unrated securities offer yields that fluctuate over time,
but generally such yields are superior to the yields offered by higher-rated
securities. However, such debt securities also involve greater risks than
higher-rated securities. See "Risk Factors and Special Considerations." A
description of the ratings used by Moody's and S&P is set forth in Appendix A
to this Prospectus.
SBAM will be free to invest in high yield debt securities of any maturity
and may adjust the average maturity of the Fund's portfolio from time to time,
depending on SBAM's assessment of the relative yields available on securities
of different maturities and its expectations of future changes in interest
rates. Long-term debt securities generally provide a higher yield than short-
term debt securities, and therefore SBAM expects that, based upon current
market conditions and following the investment of the proceeds of this
offering in accordance with the Fund's investment objectives and policies, the
Fund's high yield debt securities will initially have an average maturity of 8
to 15 years. However, because many fixed-income securities contain redemption
features, the actual average maturity of the Fund's portfolio may be
considerably less. See "Risk Factors and Special Considerations--
Considerations Relating to High Yield Corporate Securities."
In light of the risks associated with U.S. and foreign high yield debt
securities, SBAM will take various factors into consideration in evaluating
the creditworthiness of an issuer as well as the appropriateness of the
securities for inclusion in the Fund's portfolio. For corporate debt
securities, these will typically include the issuer's financial resources, its
sensitivity to economic conditions and trends, the operating history of the
issuer and the experience and track record of the issuer's management. For
foreign debt instruments, these will typically include the economic and
political conditions within the issuer's country, the issuer's overall and
external debt levels and debt service ratios (if applicable), the issuer's
access to capital markets and other sources of funding and the issuer's debt
service payment history. SBAM will also review the ratings, if any, assigned
to the security by any recognized
20
<PAGE>
rating agencies, although SBAM's judgment as to the quality of a debt security
may differ from that suggested by the rating published by a rating service. In
addition to the foregoing credit analysis, SBAM will evaluate the relative
value of an investment compared with its perceived credit risk. The Fund's
ability to achieve its investment objectives may be more dependent on SBAM's
credit analysis than would be the case if it invested in higher quality debt
securities.
HIGH YIELD CORPORATE DEBT SECURITIES
The market for high yield U.S. corporate debt securities is more established
than that for high yield foreign corporate debt securities, but has undergone
significant changes in the past and may undergo significant changes in the
future. See "Risk Factors and Special Considerations." High yield foreign and
U.S. corporate securities in which the Fund may invest include bonds,
debentures, notes, commercial paper and preferred stock and will generally be
unsecured. Most of the corporate debt securities will bear interest at fixed
rates. However, the Fund may also invest in corporate debt securities with
variable rates of interest or which involve equity features, such as
contingent interest or participations based on revenues, sales or profits
(i.e., interest or other payments, often in addition to a fixed rate of
return, that are based on the borrower's attainment of specified levels of
revenues, sales or profits and thus enable the holder of the security to share
in the potential success of the venture). It is the Fund's current intention
to seek to limit the possibility that its cost of leverage will adversely
affect its net income during a rising interest rate environment by investing a
portion of its total assets in high yield debt securities with floating
interest rates. See "Additional Investment Activities--Leverage."
HIGH YIELD FOREIGN SOVEREIGN AND FOREIGN CORPORATE DEBT SECURITIES
The Fund may invest up to 35% of its total assets in foreign fixed-income
securities, which the Fund expects will primarily consist of debt securities
of issuers located in emerging market countries. As used in this Prospectus,
an "emerging market country" is any country considered to be an emerging
market country by the World Bank at the time of investment. These countries
generally include every nation in the world except the United States, Canada,
Japan, Australia, New Zealand and most countries located in Western Europe.
These securities may be U.S. dollar denominated or non-U.S. dollar
denominated, including, among others, in hard currencies such as the British
Pound Sterling, the Belgian Franc, the Canadian Dollar, the German Deutsche
Mark, the Dutch Guilder, the European Currency Unit, the French Franc, the
Italian Lira, the Japanese Yen or the Swiss Franc and include: (a) debt
obligations issued or guaranteed by foreign national, provincial, state,
municipal or other governments with taxing authority or by their agencies or
instrumentalities, including Brady Bonds; (b) debt obligations of
supranational entities; (c) debt obligations and other fixed-income securities
of foreign corporate issuers; and (d) non-dollar denominated debt obligations
of U.S. corporate issuers. The Fund may also invest in securities denominated
in currencies of emerging market countries. There is no minimum rating
criteria for the Fund's investments in such securities. A description of Brady
Bonds is set forth below. The risks associated with these investments are
described under the captions "Risk Factors and Special Considerations--
Considerations Relating to High Yield Foreign Sovereign Debt Securities," "--
Considerations Relating to High Yield Foreign Corporate Debt Securities" and
"--Other Investments--Brady Bonds." Moreover, substantial investments in
foreign securities may have adverse tax implications as described under
"Taxation."
STATISTICAL INFORMATION REGARDING HIGH YIELD SECURITIES
The annualized compound total return since 1991 for emerging markets debt
securities, represented by the J.P. Morgan EMBI Index, is 19.40%. The
annualized compound total return since 1991 of high yield bonds,
21
<PAGE>
represented by the Merrill Lynch High Yield Master Index, is 15.65%. The
annualized compound total return since 1991 for long term treasuries,
represented by the Merrill Lynch Governments, U.S. Treasury, Long Term Index
(15+ Years), is 11.03%. The annualized compound total return since 1991 of
corporate bonds, represented by the Merrill Lynch Corporate Master Index (All
Maturities), is 9.97%. The annualized compound total return since 1991 for
intermediate term treasuries, represented by the Merrill Lynch Governments,
U.S. Treasury, Intermediate Term Index (1-9.99 Years), is 7.53%. The
annualized compound total return since 1991 of 91-day treasury bills,
represented by the Merrill Lynch U.S. Treasury, 91-Day Index, is 4.73%. The
J.P. Morgan EMBI Index is an unmanaged index comprised of Brady Bonds issued
by the following countries: Argentina, Brazil, Bulgaria, Ecuador, Mexico,
Panama, Peru, Poland, Russia, and Venezuela. The Merrill Lynch High Yield
Master Index is an unmanaged index of U.S. bonds and U.S. dollar denominated
bonds of non-U.S. issuers, in each case with at least $100 million par amount
outstanding, with a maturity equal to or greater than one year and rated by
S&P in the categories ranging from "BB+" to "C" and rated by Moody's in the
categories ranging from "Ba1" to "C." The Merrill Lynch Corporate Master Index
(All Maturities) is an unmanaged index of fixed-coupon U.S. investment grade
bonds with at least $100 million par amount outstanding with a quality range
between BBB3 and AAA based on composite Moody's and S&P ratings. The
calculation of composite ratings is based on an averaging that is biased to
the lower of the two ratings. The Merrill Lynch Governments, U.S. Treasury,
Long Term Index (15+ Years) is an unmanaged index of all U.S. treasury notes
and bonds with at least $100 million par amount outstanding and with a
maturity greater than or equal to fifteen years. The Merrill Lynch
Governments, U.S. Treasury, Intermediate Term Index (1-9.99 Years) is an
unmanaged index of all U.S. treasury notes and bonds with at least $100
million par amount outstanding and with a maturity greater than or equal to
one year and less than ten years. The Merrill Lynch U.S. Treasury, 91-Day
Index is an unmanaged index which, at the beginning of every month, is
comprised of the U.S. Treasury Bill with a maturity closest to, but not longer
than, 91 days from that date. It is assumed that this issue is held for one
month, then sold with the net proceeds reinvested in the bill selected at the
beginning of the next month. Differences exist between the securities that
comprise the indices shown above, particularly the Merrill Lynch High Yield
Master Index and the J.P. Morgan EMBI Index, and the securities in which the
Fund will invest. The Fund will not seek to match the composition or
performance of any such indices. The performance of the various indices should
not be viewed as indicative of the performance of the Fund. Information for
the J.P. Morgan EMBI Index is not available for periods prior to January 1991.
In addition, past performance is no guarantee of future performance. The
statistical information described above reflects a comparison of the
annualized compound total return percentages of various asset classes as
represented by their respective indices for the period from January 1991
through December 1997. The statistical information described above does not
reflect the past or future performance of the Fund. An investor cannot invest
directly in an index. High yield bonds and emerging markets debt are subject
to greater risks and uncertainties than other securities set forth in the
statistical information described above, including U.S. Treasury securities
which are guaranteed as to the payment of principal and interest by the U.S.
Government.
SBAM believes that the credit quality of outstanding U.S. high yield debt
has improved over the last decade. For example, the default loss rates
(defined as the percentage of high yield bonds (based on par value) which
missed any scheduled interest or principal payments (in that year, net of any
recovery)) for U.S. high yield bonds were approximately 1.66%, 2.93%, 8.42%,
7.16%, 1.91%, 0.56%, 0.96%, 1.24%, 0.65% and 0.65% for calendar years 1988,
1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1997, respectively. The
statistical information
22
<PAGE>
with respect to historical default loss rates is based on information
contained in Edward I. Altman and Vellore M. Kishore, Defaults and Returns on
High Yield Bonds: Analysis through 1997, New York University Salomon Center
(1998), and is intended to demonstrate default loss rate trends over the
period indicated. It should not be viewed as a definitive indication of the
relative magnitude of changes in credit quality from year to year. Although
other methods of analyzing default experience, such as comparing default
experience of seasoned issues, would produce different relative figures, SBAM
believes that the foregoing default loss rate data evidences a general trend
of improving credit quality.
For the period January 1, 1989 through December 31, 1997, the cumulative
gross default rate for high yield corporate bonds was 38.34%. This figure
represents the probability that a high yield bond issued on January 1, 1989
would default by December 31, 1997. The rate is based on the ratio of the
number of issuers that defaulted on high yield bonds outstanding on January 1,
1989 to the number of issuers at risk of defaulting on such bonds as of such
date and is based only on bonds that have been rated by Moody's. The foregoing
is derived from information obtained by the Fund from the February 1998 issue
of a Moody's publication entitled "Historical Default Rates of Corporate Bond
Issuers, 1920-1997."
The market of outstanding high yield securities has generally increased
since 1977. The aggregate outstanding principal amount of high yield
securities was approximately $24.0 billion, $26.0 billion, $28.0 billion,
$30.0 billion, $32.0 billion, $35.0 billion, $43.0 billion, $59.0 billion,
$83.3 billion, $138.4 billion, $182.8 billion, $207.3 billion, $244.2 billion,
$214.6 billion, $200.9 billion, $199.6 billion, $233.6 billion, $271.5
billion, $296.9 billion, $352.7 billion and $452.3 billion for calendar years
1977, 1978, 1979, 1980, 1981, 1982, 1983, 1984, 1985, 1986, 1987, 1988, 1989,
1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1997, respectively. The
statistical information with respect to historical outstanding principal
amounts of high yield securities is based on information the Fund obtained
from Chase Securities Inc.
The market of outstanding emerging markets debt securities has increased
since 1991. The aggregate outstanding principal amount of emerging markets
debt securities was approximately $32.7 billion in 1991, $32.3 billion in
1992, $64.8 billion in 1993, $70.4 billion in 1994, $75.9 billion in 1995,
$96.8 billion in 1996 and $96.1 billion in 1997. The statistical information
with respect to historical outstanding principal amounts of emerging markets
debt securities is based on information the Fund obtained from J.P. Morgan &
Co.
OTHER INVESTMENTS
Brady Bonds. The Fund expects that a substantial portion of the Fund's
sovereign debt securities will consist of Brady Bonds. Brady Bonds are debt
securities issued under the framework of the Brady Plan, an initiative
announced by U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism
for debtor nations (primarily emerging market countries) to restructure their
outstanding external indebtedness (generally, commercial bank debt). In
restructuring its external debt under the Brady Plan framework, a debtor
nation negotiates with its existing bank lenders as well as multilateral
institutions such as the World Bank and the IMF. The Brady Plan framework, as
it has developed, contemplates the exchange of commercial bank debt for newly
issued bonds (Brady Bonds). Brady Bonds may also be issued in respect of new
money being advanced by existing lenders in connection with the debt
restructuring. The World Bank and/or the IMF support the restructuring by
providing funds pursuant to loan agreements or other arrangements which enable
the debtor nation to collateralize the new Brady Bonds or to repurchase
outstanding bank debt at a discount. Under these arrangements with the World
Bank and/or the IMF, debtor nations have been required to agree to the
23
<PAGE>
implementation of certain domestic monetary and fiscal reforms. Such reforms
have included the liberalization of trade and foreign investment, the
privatization of state-owned enterprises and the setting of targets for public
spending and borrowing. These policies and programs seek to promote the debtor
country's economic growth and development. Investors should recognize that the
Brady Plan only sets forth general guiding principles for economic reform and
debt reduction, emphasizing that solutions must be negotiated on a case-by-
case basis between debtor nations and their creditors. SBAM believes that
economic reforms undertaken by countries in connection with the issuance of
Brady Bonds make the debt of countries that have issued or have announced
plans to issue Brady Bonds an attractive opportunity for investment.
Investors should recognize that Brady Bonds do not have a long payment
history. Agreements implemented under the Brady Plan to date are designed to
achieve debt and debt-service reduction through specific options negotiated by
a debtor nation with its creditors. As a result, the financial packages
offered by each country differ. The types of options have included the
exchange of outstanding commercial bank debt for bonds issued at 100% of face
value of such debt which carry a below-market stated rate of interest
(generally known as par bonds), bonds issued at a discount of face value of
such debt (generally known as discount bonds), bonds bearing an interest rate
which increases over time and bonds issued in exchange for the advancement of
new money by existing lenders. Regardless of the stated face amount and stated
interest rate of the various types of Brady Bonds, the Fund will purchase
Brady Bonds in secondary markets, as described below, in which the price and
yield to the investor reflect market conditions at the time of purchase.
Certain Brady Bonds have been collateralized as to principal due at maturity
by U.S. Treasury zero coupon bonds with a maturity equal to the final maturity
of such Brady Bonds, although the collateral is not available to investors
until the final maturity of the Brady Bonds. Collateral purchases are financed
by the IMF, the World Bank and the debtor nations' reserves. In addition, the
first two or three interest payments on certain types of Brady Bonds may be
collateralized by cash or securities agreed upon by creditors. Subsequent
interest payments may be uncollateralized or may be collateralized over
specified periods of time. A significant amount of the Brady Bonds that the
Fund may purchase have no or limited collateralization, and the Fund will be
relying for payment of interest and principal primarily on the willingness of
the foreign government to make payment in accordance with the terms of the
Brady Bonds. Brady Bonds issued to date are purchased and sold in secondary
markets through U.S. securities dealers and are generally maintained through
European transnational securities depositories. A substantial portion of the
Brady Bonds and other sovereign debt securities in which the Fund will invest
is likely to be acquired at a discount, which involves certain considerations
discussed under "--Zero Coupon Securities, Pay-in-Kind Bonds and Deferred
Payment Securities."
Zero Coupon Securities, Pay-in-Kind Bonds and Deferred Payment
Securities. The Fund may invest up to 30% of its total assets in zero coupon
securities and pay-in-kind bonds. In addition, as indicated above, a
substantial portion of the Fund's sovereign debt securities may be acquired at
a discount, and such purchases shall not be included in the 30% limit referred
to in the previous sentence. These investments involve special risk
considerations. Zero coupon securities are debt securities that pay no cash
income but are sold at substantial discounts from their value at maturity.
When a zero coupon security is held to maturity, its entire return, which
consists of the amortization of discount, comes from the difference between
its purchase price and its maturity value. This difference is known at the
time of purchase, so that investors holding zero coupon securities until
maturity know at the time of their investment what the return on their
investment will be. Zero coupon securities may have conversion features. The
Fund also may purchase pay-in-kind bonds. Pay-in-kind bonds pay all or a
24
<PAGE>
portion of their interest in the form of debt or equity securities. Any such
equity securities received in payment of interest will be subject to the 20%
limitation described under "--Equity Securities." Any such debt securities
received in payment of interest will not be subject to the Fund's credit
quality standards for new investments. Zero coupon securities and pay-in-kind
bonds may be issued by a wide variety of corporate and governmental issuers.
Deferred payment securities are securities that remain zero coupon securities
until a predetermined date, at which time the stated coupon becomes effective
and interest becomes payable at regular intervals.
Zero coupon securities, pay-in-kind bonds and deferred payment securities
tend to be subject to greater price fluctuations in response to changes in
interest rates than are ordinary interest-paying debt securities with similar
maturities. The value of zero coupon securities appreciates more during
periods of declining interest rates and depreciates more during periods of
rising interest rates than ordinary interest-paying securities with similar
maturities. Although zero coupon securities, pay-in-kind bonds and deferred
payment securities are generally not traded on a national securities exchange,
they are widely traded by brokers and dealers.
Current federal income tax law requires the holder of zero coupon
securities, certain pay-in-kind bonds, deferred payment securities and certain
other securities acquired at a discount (such as Brady Bonds) to accrue income
with respect to these securities prior to the receipt of cash payments.
Accordingly, to avoid liability for federal income and excise taxes the Fund
may be required to distribute income accrued with respect to these securities
and may have to dispose of portfolio securities under disadvantageous
circumstances in order to generate cash to satisfy certain distribution
requirements. See "Taxation--The Fund."
Loan Participations and Assignments. The Fund may invest in fixed and
floating rate loans ("Loans") arranged through private negotiations between a
corporate borrower or a foreign sovereign entity and one or more financial
institutions ("Lenders"). The Fund may invest in such Loans in the form of
participations in Loans ("Participations") and assignments of all or a portion
of Loans from third parties ("Assignments"). The Fund considers these
investments to be investments in debt securities for purposes of this
Prospectus. Participations typically will result in the Fund having a
contractual relationship only with the Lender, not with the borrower. The Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. In connection
with purchasing Participations, the Fund generally will have no right to
enforce compliance by the borrower with the terms of the loan agreement
relating to the Loan, nor any rights of set-off against the borrower, and the
Fund may not benefit directly from any collateral supporting the Loan in which
it has purchased the Participation. As a result, the Fund will assume the
credit risk of both the borrower and the Lender that is selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, the Fund may be treated as a general creditor of the Lender and
may not benefit from any set-off between the Lender and the borrower. The Fund
will acquire Participations only if the Lender interpositioned between the
Fund and the borrower is determined by SBAM to be creditworthy. When the Fund
purchases Assignments from Lenders, the Fund will acquire direct rights
against the borrower on the Loan, except that under certain circumstances such
rights may be more limited than those held by the assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations. In
certain cases, the market for such instruments is not highly liquid, and
therefore the Fund anticipates in such cases that such instruments could be
sold only to a limited number of institutional investors. The lack of a highly
liquid secondary market will have an adverse impact on the value of such
instruments and on the Fund's ability to dispose of particular
25
<PAGE>
Assignments or Participations in response to a specific economic event, such
as deterioration in the creditworthiness of the borrower.
Equity Securities. The Fund may invest up to 20% of its total assets in
common stock, convertible securities, warrants, preferred stock or other
equity securities of U.S. and foreign issuers when consistent with the Fund's
objectives. The Fund will generally, but not exclusively, hold such
investments as a result of purchases of unit offerings of debt securities
which include such securities or in connection with an actual or proposed
conversion or exchange of debt securities. The Fund will treat investments
acquired in this manner, together with any holdings of convertible securities,
as debt securities for purposes of its policy to invest at least 65% of its
total assets, under normal circumstances, in high yield debt securities. The
Fund may also purchase equity securities not associated with debt securities
when, in the opinion of the investment manager, such purchase is appropriate.
Higher Quality Debt Securities and Money Market Instruments. There may be
times when, in the judgment of SBAM, conditions in the securities markets
would make pursuing the Fund's basic investment strategy inconsistent with the
best interests of the Fund's shareholders. At such times, SBAM may employ
alternative strategies, including investment of a substantial portion of the
Fund's assets in securities rated higher than "Baa" by Moody's or "BBB" by
S&P, or in unrated securities of comparable quality. In addition, in order to
maintain liquidity, the Fund may invest up to 35% of its total assets in high-
quality short-term money market instruments. Such instruments may include
obligations of the U.S. Government or its agencies or instrumentalities;
commercial paper of issuers rated, at the time of purchase, A-2 or better by
S&P or P-2 or better by Moody's or which, in the opinion of SBAM, are of
comparable creditworthiness; certificates of deposit, banker's acceptances or
time deposits of United States banks with total assets of at least $1 billion
(including obligations of foreign branches of such banks) and of the 75
largest foreign commercial banks in terms of total assets (including domestic
branches of such banks); and repurchase agreements with respect to the
foregoing obligations.
If at some future date, in the opinion of SBAM, adverse conditions prevail
in the securities markets which makes the Fund's investment strategy
inconsistent with the best interests of the Fund's shareholders, the Fund may
invest its assets without limit in high-quality short-term money market
instruments.
---------------------
The Fund's investment objectives, together with the investment restrictions
set forth under "Investment Restrictions," are fundamental policies that may
not be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities. The other policies and investment restrictions
referred to in this Prospectus are not fundamental and may be changed by the
Board of Directors of the Fund without shareholder approval. As used in this
Prospectus, a "majority of the Fund's outstanding voting securities" means the
lesser of (i) 67% or more of the voting securities represented at a meeting at
which more than 50% of the outstanding voting securities are represented or
(ii) more than 50% of the outstanding voting securities.
ADDITIONAL INVESTMENT ACTIVITIES
LEVERAGE
At times, the Fund intends to utilize leverage by borrowing (including
borrowing through reverse repurchase agreements to the extent the Fund does
not maintain a segregated account with respect to a reverse repurchase
agreement as described below) or by issuing shares of preferred stock or debt
securities. The Fund may leverage
26
<PAGE>
in an amount up to 33 1/3% of its total assets including the amount obtained
from leverage. The Fund intends to utilize leverage in an initial amount equal
to approximately 25% of its total assets including the amount obtained from
leverage. SBAM anticipates that the interest payments on any borrowing or debt
securities or the dividends on any preferred stock will reflect short-term
rates, and that the net return on the Fund's portfolio, including the proceeds
of any leverage, will exceed the interest or dividend rate applicable to the
leverage, although no assurance can be given to that effect. Whether to
leverage and the terms and timing of such leverage will be determined by the
Fund's Board of Directors in consultation with SBAM. The extent to which the
Fund is leveraged from time to time will vary depending on the judgment of the
Board of Directors, in consultation with SBAM, regarding market conditions.
Through these leveraging techniques, the Fund will seek to obtain a higher
return for holders of Common Stock than if the Fund were not leveraged. There
can be no assurance, however, that the Fund will engage in any leveraging
techniques. During periods in which the Fund is utilizing financial leverage,
the fees which are payable to SBAM and the Administrator as a percentage of
the Fund's assets will be higher than if the Fund did not utilize a leveraged
capital structure because the fees are calculated as a percentage of the
Fund's assets, including those purchased with leverage. See "Management of the
Fund."
Utilization of leverage is a speculative investment technique and involves
certain risks to the holders of Common Stock. These include the possibility of
higher volatility of the net asset value of the Common Stock and potentially
more volatility in the market value of the Common Stock. So long as the Fund
is able to realize a higher net return on its investment portfolio than the
then current interest or dividend rate of any leverage together with other
related expenses, the effect of the leverage will be to cause holders of
Common Stock to realize a higher current net investment income than if the
Fund were not so leveraged. On the other hand, to the extent that the then
current interest or dividend rate on any leverage, together with other related
expenses, approaches the net return on the Fund's investment portfolio, the
benefit of leverage to holders of Common Stock will be reduced, and if the
then current interest or dividend rate on any leverage were to exceed the net
return on the Fund's portfolio, the Fund's leveraged capital structure would
result in a lower rate of return to holders of Common Stock than if the Fund
were not so leveraged. Similarly, since any decline in the net asset value of
the Fund's investments will be borne entirely by holders of Common Stock, the
effect of leverage in a declining market would be a greater decrease in net
asset value applicable to the Common Stock than if the Fund were not
leveraged. Any such decrease would likely be reflected in a decline in the
market price of the Common Stock. If the Fund's current investment income were
not sufficient to meet interest or dividend requirements on any leverage, it
could be necessary for the Fund to liquidate certain of its investments,
thereby reducing the net asset value attributable to the Common Stock.
It is the Fund's current intention to seek to limit the possibility that its
cost of leverage will adversely affect its net income during a rising interest
rate environment by investing a portion of its total assets in high yield debt
securities with floating interest rates determined with reference to the
short-term London Inter-Bank Offer Rate. SBAM anticipates that the Fund's cost
of borrowing or other leverage will similarly be tied to short-term interest
rates. Under current market conditions, the Fund expects that the aggregate
face amount of its investments in such floating rate securities will be
approximately equal to the aggregate face amount of the Fund's borrowings or
other proceeds of leverage. This strategy is commonly referred to as "matched
book funding." SBAM therefore expects that the relationship between the
interest income received by the Fund on the aforementioned floating rate
securities and the interest or dividend expense of the Fund relating to
borrowing or other leverage will generally remain stable and that changes in
the Fund's cost of borrowing or other leverage
27
<PAGE>
will be offset to a substantial degree by similar changes in the interest
income received on such floating rate securities. However, there can be no
assurance that such offsetting will occur or that SBAM will utilize a "matched
book funding" strategy at all times. The utilization of a "matched book
funding" strategy will also limit the ability of the Fund to lock in higher
yields during a falling interest rate environment.
The Fund's use of leverage will be subject to the provisions of the 1940
Act, including asset coverage requirements and restrictions on the declaration
of dividends and distributions to holders of Common Stock or purchases of
Common Stock in the event such asset coverage requirements are not met. The
1940 Act also requires that holders of preferred stock, and in certain
circumstances holders of debt securities, have certain voting rights. See
"Description of Capital Stock."
The Fund may apply for a rating from Moody's, S&P and/or any other
nationally recognized statistical rating organization on any preferred stock
or debt which it issues; however, no minimum rating is required for the
issuance of preferred stock or debt by the Fund. The Fund believes that
obtaining one or more such ratings for its preferred stock or debt securities
will enhance the marketability of the preferred stock or debt securities and
thereby reduce the dividend rate on such preferred stock or interest
requirements on such debt securities from that which the Fund would be
required to pay if the preferred stock or debt securities were not so rated.
The rating agencies for any preferred stock or debt securities may require
asset coverage maintenance ratios in addition to those imposed by the 1940
Act. The ability of the Fund to comply with such asset coverage maintenance
ratios may be subject to circumstances beyond the control of the Fund such as
market conditions for its portfolio securities. The Fund expects that the
terms of any preferred stock or debt securities will provide for mandatory
redemption of the preferred stock or repayment of debt in the event the Fund
fails to meet such asset coverage maintenance ratios. In such circumstances,
the Fund may have to liquidate portfolio securities in order to meet
redemption or repayment requirements. Such liquidations and redemptions would
cause the Fund to incur transaction costs and could result in capital losses
to the Fund. This would have the effect of reducing the net asset value to
holders of Common Stock and could reduce the Fund's net income in the future.
The issuance of preferred stock or debt will entail certain initial costs
and expenses such as underwriting discounts or placement fees, fees associated
with registration with the Commission, filings under state securities laws,
rating agency fees, legal and accounting fees, printing costs and certain
other ongoing expenses such as administrative and accounting fees. These costs
and expenses will be borne by the Fund and will reduce net assets available to
holders of the Common Stock.
The Fund expects that all of its bank borrowing will be made on a secured
basis. The Fund's custodian will either segregate the assets securing the
Fund's borrowing for the benefit of the Fund's lenders or arrangements will be
made with a suitable sub-custodian, which may include a lender. If the assets
used to secure the borrowing decrease in value, the Fund may be required to
pledge additional collateral to the lender in the form of cash or securities
to avoid liquidation of those assets.
The rights of any lenders to the Fund to receive payments of interest on and
repayments of principal of borrowings (including debt securities) will be
senior to the rights of the Fund's shareholders, and the terms of the Fund's
borrowings (including debt securities) may contain provisions that limit
certain activities of the Fund and could result in precluding the purchase of
instruments that the Fund would otherwise purchase.
28
<PAGE>
If the Fund leverages through preferred stock, under the requirements of the
1940 Act, the value of the Fund's total assets, less all liabilities and
indebtedness of the Fund not represented by senior securities, as defined in
the 1940 Act, must be equal, immediately after any such issuance of preferred
stock, to at least 200% of the aggregate amount of senior securities
representing indebtedness plus the aggregate liquidation preference of any
outstanding preferred stock. Such percentage must also be met any time the
Fund pays a dividend or makes any other distribution on Common Stock (other
than a distribution in Common Stock) or any time the Fund repurchases Common
Stock, in each case after giving effect to such dividend, distribution or
repurchase. The liquidation value of preferred stock is expected to equal the
aggregate original purchase price plus any accrued and unpaid dividends
thereon (whether or not earned or declared). See "Description of Capital
Stock."
If the Fund leverages through borrowing or issuing debt securities, under
the requirements of the 1940 Act, the value of the Fund's total assets, less
all liabilities and indebtedness of the Fund not represented by senior
securities, as defined in the 1940 Act, must at least be equal, immediately
after the issuance of senior securities consisting of debt, to 300% of the
aggregate principal amount of all outstanding senior securities of the Fund
which are debt. If the Fund leverages through the issuance of senior
securities consisting of debt, the 300% asset coverage maintenance ratio
referred to above must also be met any time the Fund declares a dividend or
other distribution on Common Stock (other than a distribution in Common Stock)
or any time the Fund repurchases Common Stock, in each case after giving
effect to such dividend, distribution or repurchase.
The Fund may enter into reverse repurchase agreements with any member bank
of the Federal Reserve System and any broker-dealer or any foreign bank that
has been determined by SBAM to be creditworthy. Under a reverse repurchase
agreement, the Fund would sell securities and agree to repurchase them at a
mutually agreed date and price. At the time the Fund enters into a reverse
repurchase agreement, it will establish and maintain a segregated account,
with its custodian or a designated sub-custodian, containing liquid assets in
an amount not less than the repurchase price marked to market daily (including
accrued interest), and will subsequently review the account to ensure that
such equivalent value is maintained, in accordance with procedures established
by the Board of Directors. Reverse repurchase agreements involve the risk that
the market value of the securities purchased with the proceeds of the sale of
securities received by the Fund may decline below the price of the securities
the Fund is obligated to repurchase. In the event the buyer of securities
under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, the buyer or its trustee or receiver may receive an extension of
time to determine whether to enforce the Fund's obligations to repurchase the
securities, and the Fund's use of proceeds of the reverse repurchase agreement
effectively may be restricted pending the decision. Reverse repurchase
agreements will be treated as borrowings for purposes of calculating the
Fund's borrowing limitation to the extent the Fund does not establish and
maintain a segregated account (as described above).
Assuming the utilization of leverage in the amount of approximately 25% of
the Fund's total assets, and an annual interest rate of 6.21% payable on such
leverage based on market rates as of the date of this Prospectus, the annual
return that the Fund's portfolio must experience (net of expenses) in order to
cover such interest payments would be 2.07%. The Fund's actual cost of
leverage will be based on market rates at the time the Fund undertakes a
leveraging strategy, and such actual cost of leverage may be higher or lower
than that assumed in the previous example.
The following table is designed to illustrate the effect on the return to a
holder of the Fund's Common Stock of leverage in the amount of approximately
25% of the Fund's total assets, assuming hypothetical annual returns of the
Fund's portfolio of minus 10% to plus 10%. As the table shows, leverage
generally increases the return to
29
<PAGE>
shareholders when portfolio return is positive and greater than the cost of
leverage and decreases the return when the portfolio return is negative or
less than the cost of leverage. The figures appearing in the table are
hypothetical and actual returns may be greater or less than those appearing in
the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return (net of
expenses).............................. (10)% (5)% 0 % 5% 10%
Corresponding Common Stock Return
Assuming 25% Leverage.................. (15.40)% (8.74)% (2.07)% 4.60% 11.26%
</TABLE>
Until the Fund borrows (including issuing debt securities) or issues shares
of preferred stock, the Fund's Common Stock will not be leveraged, and the
risks and special considerations related to leverage described in this
Prospectus will not apply. Such leveraging of the Common Stock cannot be fully
achieved until the proceeds resulting from the use of leverage have been
invested in debt instruments in accordance with the Fund's investment
objectives and policies.
The Fund may, in addition to engaging in the transactions described above,
borrow money for temporary or emergency purposes (including, for example,
clearance of transactions, share repurchases or payments of dividends to
shareholders) in an amount not exceeding 5% of the value of the Fund's total
assets (including the amount borrowed).
DERIVATIVE INSTRUMENTS
The Fund may from time to time engage in certain strategies generally for
hedging or other risk management purposes or in furtherance of the Fund's
investment objectives and policies. The Fund may use these strategies to
attempt to protect against possible changes in the market value of the Fund's
portfolio resulting from fluctuations in the securities markets and changes in
interest rates or in exchange rates, to protect the Fund's unrealized gains in
the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to establish a position in the securities
markets as a temporary substitute for purchasing particular securities, to
seek to enhance income or gain or to attempt to achieve the economic
equivalent of floating rate interest payments on fixed-rate debt securities it
holds. The Fund will engage in such activities from time to time in SBAM's
discretion, and may not necessarily be engaging in such activities when
movements occur in interest rates or in the securities markets generally that
could affect the value of the assets of the Fund. The Fund's ability to pursue
certain of these strategies may be limited by applicable regulations of the
Commodity Futures Trading Commission ("CFTC") and the federal income tax
requirements applicable to regulated investment companies.
As part of its strategies, the Fund may purchase and sell futures contracts,
purchase and sell (or write) exchange-listed and over-the-counter put and call
options on securities, financial indices and futures contracts, enter into the
interest rate and currency transactions discussed below and enter into other
similar transactions which may be developed in the future to the extent SBAM
determines that they are consistent with the Fund's investment objectives and
policies and applicable regulatory requirements (collectively, "Derivative
Transactions"). The Fund may use any or all of these techniques at any time,
and the use of any particular Derivative Transaction will depend on market
conditions. The Derivative Transactions that the Fund may use are described
below.
Derivative Transactions present certain risks. In particular, the variable
degree of correlation between price movements of instruments the Fund has
purchased or sold and price movements in the position being hedged creates the
possibility that losses on the hedge may be greater than gains in the value of
the Fund's position. In
30
<PAGE>
addition, certain derivative instruments and markets may not be liquid in all
circumstances. As a result, in volatile markets, the Fund may not be able to
close out a transaction without incurring losses substantially greater than
the initial deposit. Although the contemplated use of these instruments should
tend to minimize the risk of loss due to a decline in the value of the hedged
position, at the same time they may tend to limit any potential gain which
might result from an increase in the value of such position.
Successful use of Derivative Transactions by the Fund is subject to the
ability of SBAM to predict correctly movements in the direction of interest
rates and other factors affecting markets for securities. These skills are
different from those needed to select portfolio securities. If SBAM's
expectations are not met, the Fund would be in a worse position than if a
Derivative Transaction had not been pursued. For example, if the Fund hedged
against the possibility of an increase in interest rates which would adversely
affect the price of securities in its portfolio and the price of such
securities increased instead, the Fund would lose part or all of the benefit
of the increased value of its securities because it would have offsetting
losses in its futures positions. Losses due to Derivative Transactions will
reduce net asset value.
A detailed discussion of Derivative Transactions, including applicable
requirements of the CFTC, the requirement to segregate assets with respect to
these transactions and special risks associated with such strategies appears
as Appendix B to this Prospectus.
Interest Rate Transactions. The Fund may enter into interest rate swaps and
may purchase interest rate caps, floors and collars and may sell interest rate
caps, floors and collars that it has purchased. The Fund would enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to manage the duration of its
portfolio or to protect against any increase in the price of securities the
Fund anticipates purchasing at a later date.
The Fund may enter into interest rate swaps, caps, floors and collars on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or liabilities. The Fund will not enter into any interest
rate swap, cap, floor or collar transaction unless SBAM deems the counterparty
to be creditworthy at the time of entering into such transaction. If there is
a default by the other party to such a transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid. Caps, floors and collars are more recent innovations
for which standardized documentation has not yet been developed and,
accordingly, they are less liquid than swaps.
Futures Contracts and Options on Futures Contracts. The Fund may also enter
into (a) contracts for the purchase or sale for future delivery ("futures
contracts") of debt securities, aggregates of securities, indices based upon
the prices thereof and other financial indices and (b) put or call options on
such futures contracts. When the Fund enters into a futures contract, it must
allocate cash or securities as a deposit of initial margin and thereafter will
be required to pay or will be entitled to receive variation margin in an
amount equal to any change in the value of the contract since the preceding
day. If the value of a futures contract the Fund has entered into moves in an
adverse direction from the Fund's position, the Fund could be obligated to
make payments of variation margin at a disadvantageous time and might be
required to liquidate portfolio securities in order to make such margin
payments. Transactions in listed futures contracts and options on futures
contracts are usually settled by entering into an offsetting transaction, and
are subject to the risk that the position may not be able to
31
<PAGE>
be closed if no offsetting transaction can be arranged. Except for
transactions for which the sum of the premiums on options contracts and the
initial margin for futures contracts does not exceed 5% of the net liquidation
value of the Fund's assets, the Fund will engage in such transactions only for
bona fide hedging purposes, in each case, in accordance with the rules and
regulations of the CFTC. To the extent that the Fund engages in transactions
in futures contracts or options thereon in order to attempt to achieve the
economic equivalent of floating rate interest payments with respect to fixed
rate interest payments on fixed rate debt securities it holds, such
transactions will not be considered to be undertaken for bona fide hedging
purposes.
Put and Call Options on Securities and Indices of Securities. In order to
reduce fluctuations in net asset value or to seek to enhance the Fund's income
or gain, the Fund may purchase or sell exchange-traded or over-the-counter put
or call options on securities and indices based upon the prices, yields or
spreads of securities. A call option sold by the Fund exposes the Fund during
the term of the option to possible loss of opportunity to realize appreciation
in the market price of the underlying security or securities index and may
require the Fund to hold an instrument which it might otherwise have sold. In
selling put options, the Fund incurs the risk that it may be required to buy
the underlying securities at a price higher than the current market price of
the securities. In buying put or call options, the Fund is exposed to the risk
that such options may expire worthless.
Currency Transactions. The Fund may engage in currency transactions with
counterparties to hedge the value of portfolio securities denominated in
particular currencies against fluctuations in relative value or to generate
income or gain. Currency transactions include currency forward contracts,
exchange-listed currency futures contracts and options thereon, exchange-
listed and OTC options on currencies, and currency swaps. A forward currency
contract involves a privately negotiated obligation to purchase or sell (with
delivery generally required) a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. A currency swap is an
agreement to exchange cash flows based on the notional difference among two or
more currencies and operates similarly to an interest rate swap, which is
described under "--Interest Rate Transactions." The Fund may enter into
currency transactions with counterparties that the investment manager deems to
be creditworthy.
Segregation and Cover Requirements. Futures contracts, interest rate swaps,
caps, floors and collars, and options on securities, indices and futures
contracts sold by the Fund are generally subject to segregation and coverage
requirements of either the CFTC or the Commission. If the Fund does not hold
the security or futures contract underlying the instrument, the Fund will be
required to segregate on an ongoing basis with its custodian liquid assets in
an amount at least equal to the current amount of the Fund's obligations with
respect to such instruments in accordance with procedures established by the
Board of Directors. Such amounts fluctuate as the obligations increase or
decrease. The segregation requirement can result in the Fund maintaining
securities positions it would otherwise liquidate or segregating assets at a
time when it might be disadvantageous to do so.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements for cash management purposes.
A repurchase agreement is a transaction in which the seller of a security
commits itself at the time of the sale to repurchase that security from the
buyer at a mutually agreed upon time and price. The Fund will enter into
repurchase agreements only with dealers, domestic banks or recognized
financial institutions which, in the opinion of SBAM based on guidelines
established by the Fund's Board of Directors, are deemed creditworthy. SBAM
will monitor the value
32
<PAGE>
of the securities underlying the repurchase agreement at the time the
transaction is entered into and at all times during the term of the repurchase
agreement to ensure that the value of the securities always exceeds the
repurchase price. In the event of default by the seller under the repurchase
agreement, the Fund may incur losses and experience time delays in connection
with the disposition of the underlying securities. To the extent that, in the
meantime, the value of the securities that the Fund has purchased has
decreased, the Fund could experience a loss.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase securities on a when-issued or delayed delivery basis.
Securities purchased on a when-issued or delayed delivery basis are purchased
for delivery beyond the normal settlement date at a stated price and yield. No
income accrues to the purchaser of a security on a when-issued or delayed
delivery basis prior to delivery. Such securities are recorded as an asset and
are subject to changes in value based upon changes in the general level of
interest rates. Purchasing a security on a when-issued or delayed delivery
basis can involve a risk that the market price at the time of delivery may be
lower than the agreed-upon purchase price, in which case there could be an
unrealized loss at the time of delivery. The Fund will only make commitments
to purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities but may sell them before the
settlement date if it is deemed advisable. The Fund will establish a
segregated account in which it will maintain liquid assets in an amount at
least equal in value to the Fund's commitments to purchase securities on a
when-issued or delayed delivery basis. If the value of these assets declines,
the Fund will place additional liquid assets in the account on a daily basis
so that the value of the assets in the account is equal to the amount of such
commitments. As an alternative, the Fund may elect to treat when-issued or
delayed delivery securities as senior securities representing indebtedness,
which are subject to asset coverage requirements under the 1940 Act.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend portfolio securities. By doing so, the Fund will attempt
to increase its income through the receipt of interest on the loan. In the
event of the bankruptcy of the other party to either a securities loan or a
repurchase agreement, the Fund could experience delays in recovering either
the securities it lent or its cash. To the extent that, in the meantime, the
value of the securities the Fund lent has increased or the value of the
securities it purchased has decreased, the Fund could experience a loss.
The Fund may lend securities from its portfolio if liquid assets in an
amount at least equal to the current market value of the securities loaned
(including accrued interest thereon) plus the interest payable to the Fund
with respect to the loan is maintained by the Fund in a segregated account.
Any securities that the Fund may receive as collateral will not become a part
of its portfolio at the time of the loan and, in the event of a default by the
borrower, the Fund will, if permitted by law, dispose of such collateral
except for such part thereof that is a security in which the Fund is permitted
to invest. During the time securities are on loan, the borrower will pay the
Fund any accrued income on those securities, and the Fund may invest the cash
collateral and earn additional income or receive an agreed-upon fee from a
borrower that has delivered cash equivalent collateral. Cash collateral
received by the Fund will be invested in securities in which the Fund is
permitted to invest. The value of securities loaned will be marked to market
daily. Portfolio securities purchased with cash collateral are subject to
possible depreciation. Loans of securities by the Fund will be subject to
termination at the Fund's or the
33
<PAGE>
borrower's option. The Fund may pay reasonable negotiated fees in connection
with loaned securities, so long as such fees are set forth in a written
contract and approved by the Fund's Board of Directors. The Fund does not
currently intend to make loans of portfolio securities with a value in excess
of 33 1/3% of the value of its total assets.
ILLIQUID OR RESTRICTED SECURITIES
The Fund may invest without limitation in illiquid securities, for which
there is a limited trading market and for which a low trading volume of a
particular security may result in abrupt and erratic price movements. The Fund
may be unable to dispose of its holdings in illiquid securities at then
current market prices and may have to dispose of such securities over extended
periods of time.
Certain securities in which the Fund may invest are subject to legal or
contractual restrictions as to resale ("Restricted Securities") and may
therefore be illiquid by their terms. Restricted Securities may involve added
expense to the Fund should the Fund be required to bear registration costs
with respect to such securities. In the absence of registration, the Fund
would have to dispose of its Restricted Securities pursuant to an exemption
from registration under the Securities Act of 1933, as amended (the
"Securities Act"), including a transaction in compliance with Rule 144 under
the Securities Act, which permits only limited sales under specified
conditions unless the Fund has held the securities for at least two years and
is unaffiliated with the issuer. Companies whose securities are not publicly
traded are also not subject to the same disclosure and other legal
requirements as are applicable to companies with publicly traded securities.
The Fund may purchase certain Restricted Securities ("Rule 144A securities")
eligible for sale to qualified institutional buyers as contemplated by Rule
144A under the Securities Act. Rule 144A provides an exemption from the
registration requirements of the Securities Act for the resale of certain
restricted securities to certain qualified institutional buyers. One effect of
Rule 144A is that certain restricted securities may be liquid, though no
assurance can be given that a liquid market for Rule 144A securities will
develop or be maintained.
INVESTMENT RESTRICTIONS
The following restrictions, along with the Fund's investment objectives, are
the Fund's only fundamental policies--that is, policies that cannot be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities. See "Description of Capital Stock--Preferred Stock" and
"Description of Capital Stock--Special Voting Provisions" for additional
information with respect to the voting rights of holders of preferred stock,
if any. The other policies and investment restrictions referred to in this
Prospectus are not fundamental policies of the Fund and may be changed by the
Fund's Board of Directors without shareholder approval. The percentage
restrictions set forth below, as well as those contained elsewhere in this
Prospectus, apply at the time a transaction is effected, and a subsequent
change in a percentage resulting from market fluctuations or any other cause
other than an action by the Fund will not require the Fund to dispose of
portfolio securities or take other action to satisfy the percentage
restriction. Under its fundamental restrictions, the Fund may not:
(1) purchase any securities which would cause more than 25% of the value of
its total assets at the time of such purchase to be invested in securities of
one or more issuers conducting their principal business activities in the same
industry, provided that there is no limitation with respect to investment in
obligations issued or
34
<PAGE>
guaranteed by the U.S. Government, its agencies or instrumentalities or
repurchase agreements collateralized by any of such obligations;
(2) make any investment inconsistent with the Fund's classification as a
diversified company under the 1940 Act;
(3) issue senior securities or borrow money except as permitted by Section
18 of the 1940 Act;
(4) purchase or sell commodities or commodity contracts, except that the
Fund may engage in Derivative Transactions;
(5) make loans, except that (1) the Fund may (a) purchase and hold debt
instruments (including, without limitation, commercial paper notes, bonds,
debentures or other secured or unsecured obligations and certificates of
deposit, bankers' acceptances and fixed time deposits) in accordance with its
investment objectives and policies; (b) invest in or purchase loans through
Participations and Assignments; (c) enter into repurchase agreements with
respect to portfolio securities; (d) make loans of portfolio securities,
provided that collateral arrangements with respect to options, forward
currency and futures transactions will not be deemed to involve loans; and (2)
delays in the settlement of securities transactions shall not be considered
loans;
(6) underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, it may be deemed
to be an underwriter;
(7) purchase real estate, real estate mortgage loans or real estate limited
partnership interests (other than securities secured by real estate or
interests therein or securities issued by companies that invest in real estate
or interests therein, including real estate investment trusts); or
(8) invest for the purpose of exercising control over management of any
company.
Additional investment restrictions adopted by the Fund, which are deemed
non-fundamental and which may be changed by the Board of Directors, provide
that the Fund may not:
(1) purchase shares of other investment companies in an amount exceeding the
limits set forth in the 1940 Act and the rules thereunder; or
(2) make short sales of securities or purchase securities on margin (except
for delayed delivery or when-issued transactions, such short-term credits as
are necessary for the clearance of transactions and margin deposits in
connection with transactions in futures contracts, options on futures
contracts and options on securities and securities indices).
MANAGEMENT OF THE FUND
INVESTMENT MANAGER
The Fund retains SBAM, a wholly-owned subsidiary of Salomon Brothers Holding
Company Inc, which is in turn wholly-owned by Salomon Smith Barney Holdings
Inc., which is in turn wholly-owned by Travelers Group Inc. ("Travelers"), as
its investment manager under an investment management agreement. SBAM was
incorporated in 1987 and, together with affiliates in London, Frankfurt, Tokyo
and Hong Kong, provides a broad
35
<PAGE>
range of fixed-income and equity investment advisory services to various
individuals and over 134 institutional accounts located throughout the world
and serves as investment adviser to various investment companies. In providing
advisory services, SBAM has access to hundreds of affiliated economists and
bond, sovereign and equity analysts, including a staff dedicated to high yield
credit research and to emerging markets sovereign credit research. As of March
31, 1998, SBAM and its worldwide investment advisory affiliates managed
approximately $27.6 billion of assets. SBAM's business offices are located at
7 World Trade Center, New York, New York 10048.
Under the terms of an investment management agreement between the Fund and
SBAM (the "Advisory Agreement"), SBAM will manage the investment and
reinvestment of the assets of the Fund, subject to the supervision of the
Fund's Board of Directors. SBAM will make the investment decisions for the
Fund and place purchase and sale orders for the Fund's portfolio securities
pursuant to the Advisory Agreement. In addition, SBAM will make available
research and statistical data to the Fund. Peter J. Wilby, Executive Vice
President of the Fund, will be primarily responsible for the day-to-day
management of the Fund's portfolio. Mr. Wilby, who joined SBAM in 1989, is a
Managing Director and Senior Portfolio Manager of SBAM and is responsible for
SBAM's investment company and institutional portfolios which invest in high
yield foreign sovereign debt securities and high yield foreign and U.S.
corporate debt securities. Mr. Wilby is portfolio manager for, among others,
Salomon Brothers High Income Fund Inc; Salomon Brothers Worldwide Income Fund
Inc; The Emerging Markets Income Fund Inc; The Emerging Markets Income Fund II
Inc; the foreign sovereign debt component of Salomon Brothers 2008 Worldwide
Dollar Government Term Trust Inc; The Emerging Markets Floating Rate Fund
Inc.; Global Partners Income Fund Inc.; Salomon Brothers High Yield Bond Fund
and the high yield and sovereign debt portions of Salomon Brothers Strategic
Bond Fund, each a portfolio of Salomon Brothers Series Funds Inc; Salomon
Brothers Institutional High Yield Bond Fund and Salomon Brothers Institutional
Emerging Markets Debt Fund, each a portfolio of Salomon Brothers Institutional
Series Funds Inc; and Salomon Brothers Variable High Yield Bond Fund and the
high yield and sovereign debt portions of Salomon Brothers Variable Strategic
Bond Fund, each a portfolio of Salomon Brothers Variable Series Funds Inc.
From 1984 to 1989, Mr. Wilby was employed by Prudential Capital Management
Group ("PCMG"). He served as director of PCMG's credit research unit and as a
corporate and sovereign credit analyst with PCMG. Mr. Wilby later managed high
yield bonds and leveraged equities in mutual funds and institutional
portfolios at PCMG.
SBAM will pay the reasonable salaries and expenses of such of the Fund's
officers and employees and any fees and expenses of such of the Fund's
directors who are directors, officers or employees of SBAM or Salomon Smith
Barney, except that the Fund shall bear travel expenses or an appropriate
portion thereof of directors and officers of the Fund who are directors,
officers or employees of SBAM to the extent that such expenses relate to the
attendance at meetings of the Fund's Board of Directors or any committees
thereof. The Advisory Agreement provides that SBAM may render similar
investment management services to others. For its services, SBAM will receive
from the Fund a monthly fee at an annual rate of 1.00% of the value of the
Fund's average weekly net assets plus the proceeds of any outstanding
borrowings used for leverage ("average weekly net assets" means the average
weekly value of the total assets of the Fund, including any proceeds from the
issuance of preferred stock, minus the sum of (i) accrued liabilities of the
Fund, (ii) any accrued and unpaid interest on outstanding borrowings and (iii)
accumulated dividends on shares of preferred stock). For purposes of this
calculation, average weekly net assets is determined at the end of each month
on the basis of the average net assets of the Fund for each week during the
month. The assets for each weekly period are determined by averaging the net
36
<PAGE>
assets at the last business day of a week with the net assets at the last
business day of the prior week. The advisory fee is higher than fees paid by
other comparable investment companies. During periods in which the Fund is
utilizing financial leverage, the fee which is payable to SBAM as a percentage
of the Fund's assets will be higher than if the Fund did not utilize a
leveraged capital structure because the fee is calculated as a percentage of
the Fund's assets, including those purchased with leverage.
Unless earlier terminated as described below, the Advisory Agreement will
remain in effect for two years from the date of this Prospectus and from year
to year thereafter if it is approved annually (i) by a majority of the non-
interested directors of the Fund and (ii) by the Board of Directors of the
Fund or by a majority of the Fund's outstanding voting securities. The
Advisory Agreement may be terminated without penalty on 60 days' written
notice by either party thereto or by a vote of a majority of the Fund's
outstanding voting securities and will terminate in the event of its
assignment (as defined in the 1940 Act). In case of termination or failure to
renew the Advisory Agreement, the Fund's Board of Directors will select a
successor investment adviser. Any such successor will be a registered
investment adviser under U.S. law.
On April 6, 1998, Travelers announced that it had entered into a merger
agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also
subject to approval by the stockholders of each of Travelers and Citicorp.
Upon consummation of the merger, the surviving corporation would be a bank
holding company subject to regulation under the Bank Holding Company Act of
1956 (the "BHCA"), the requirements of the Glass-Steagall Act and certain
other laws and regulations. Although the effects of the merger of Travelers
and Citicorp and compliance with the requirements of the BHCA and the Glass-
Steagall Act are still under review, SBAM does not believe that its compliance
with applicable law following the merger of Travelers and Citicorp will have a
material adverse effect on its ability to provide the Fund with SBAM's
customary level of investment advisory services.
ADMINISTRATOR
Mutual Management Corp., a wholly-owned subsidiary of Salomon Smith Barney
Holdings Inc., will act as administrator for the Fund. Under the
Administration Agreement with the Fund (the "Administration Agreement"), the
Administrator administers the Fund's corporate affairs subject to the
supervision of the Fund's Board of Directors and in connection therewith
furnishes the Fund with office facilities together with such ordinary clerical
and bookkeeping services (e.g., preparation of annual and other reports to
shareholders and the Commission and filing of federal, state and local income
tax returns) as are not being furnished by SBAM or the Fund's custodian. In
connection with its administration of the corporate affairs of the Fund, the
Administrator will bear the expenses of the salaries and expenses of all of
its personnel and all expenses incurred by the Administrator or by the Fund in
connection with administering the ordinary course of the Fund's business,
other than those assumed by the Fund, as described below. The Administration
Agreement provides that the Fund shall pay to the Administrator a monthly fee
for its services and the facilities furnished by the Administrator at an
annual rate of .10% of the value of the Fund's average weekly net assets (as
defined and determined with respect to the Advisory Agreement) plus the
proceeds of any outstanding borrowings used for leverage. The Administration
Agreement will remain in effect for two years from the date of this Prospectus
and from year to year thereafter if it is approved annually by the Board of
Directors of the Fund. The Administration Agreement is terminable, without
penalty, on 60 days' written notice by the Board of Directors or by a vote of
holders of a
37
<PAGE>
majority of the Fund's shares, or upon 90 days' written notice by the
Administrator. During periods in which the Fund is utilizing financial
leverage, the fee which is payable to the Administrator as a percentage of the
Fund's assets will be higher than if the Fund did not utilize a leveraged
capital structure because the fee is calculated as a percentage of the Fund's
assets, including those purchased with leverage.
EXPENSES OF THE FUND
Except as indicated above, the Fund will pay all of its expenses, including,
without limitation, organizational and offering expenses (which include out-
of-pocket expenses, but not overhead or employee costs of SBAM); expenses for
legal, accounting and auditing services; taxes and governmental fees; dues and
expenses incurred in connection with membership in investment company
organizations; fees and expenses incurred in connection with listing the
Fund's shares on any stock exchange; costs of printing and distributing
shareholder reports, proxy materials, prospectuses, stock certificates and
distribution of dividends; charges of the Fund's custodians, sub-custodians,
administrators and sub-administrators, registrars, transfer agents, dividend
disbursing agents and dividend reinvestment plan agents; payment for portfolio
pricing services to a pricing agent, if any; fees of the Commission; expenses
of registering or qualifying securities of the Fund for sale; freight and
other charges in connection with the shipment of the Fund's portfolio
securities; fees and expenses of non-interested directors; travel expenses or
an appropriate portion thereof of directors and officers of the Fund who are
directors, officers or employees of SBAM to the extent that such expenses
relate to attendance at meetings of the Board of Directors or any committee
thereof; salaries of shareholder relations personnel; costs of shareholders
meetings; insurance; interest; brokerage costs; litigation and other
extraordinary or non-recurring expenses.
DIRECTORS AND OFFICERS
The names of the directors and principal officers of the Fund are set forth
below, together with their positions and their principal occupations during
the past five years.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND
NAME, ADDRESS AND AGE POSITION WITH THE FUND OTHER AFFILIATIONS
--------------------- ------------------------ ------------------------
<C> <C> <S>
*Heath B. McLendon.......... Chairman of the Board of Managing Director,
Salomon Smith Barney Directors and President Salomon Smith Barney;
388 Greenwich Street, 22nd Director of 42
Fl. investment companies
New York, NY 10013 associated with Salomon
Age: 64 Smith Barney; Director
and President of Mutual
Management Corp. and
Travelers Investment
Adviser, Inc.; Chairman
of Smith Barney Strategy
Advisers Inc. Prior to
July 1993, Senior
Executive Vice President
of Shearson Lehman
Brothers, Inc. and Vice
Chairman, Shearson Asset
Management.
</TABLE>
- ------------
* Director who is an "interested person" within the meaning of the 1940 Act.
38
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH THE FUND PRINCIPAL OCCUPATION AND OTHER AFFILIATIONS
--------------------- ------------------------- -------------------------------------------
<C> <C> <S>
Charles F. Barber............ Director Consultant, formerly Chairman
66 Glenwood Drive of the Board, ASARCO
Greenwich, CT 06830 Incorporated.
Age: 81
Daniel P. Cronin............. Director Vice President and General
Pfizer Inc. Counsel, Pfizer International
235 East 42nd Street Inc.; Senior Assistant General
New York, NY 10017 Counsel, Pfizer, Inc.
Age: 52
Dr. Riordan Roett............ Director Professor and Director, Latin
Johns Hopkins University American Studies Program, Paul
1740 Massachusetts H. Nitze School of Advanced
Avenue, NW International Studies, Johns
Washington D.C. 20036 Hopkins University.
Age: 59
Jeswald W. Salacuse.......... Director Henry J. Braker Professor of
220 Stone Route Lane Commercial Law and formerly
Concord, MA 01742 Dean, The Fletcher School of
Age: 60 Law and Diplomacy, Tufts
University.
Peter J. Wilby............... Executive Vice President Managing Director and Senior
Salomon Brothers Asset Portfolio Manager of SBAM since
Management Inc 1989.
Seven World Trade Center
New York, NY 10048
Age: 38
Christina T. Sydor, Esq...... Executive Vice President, Managing Director of Smith
Salomon Smith Barney General Counsel Barney Inc.; General Counsel
388 Greenwich Street and Secretary of Mutual
New York, NY 10013 Management Corp.; Secretary of
Age: 46 42 investment companies
associated with Salomon Smith
Barney.
Robert A. Vegliante, Esq. ... Executive Vice President, Director of Smith Barney Inc.;
Salomon Brothers Asset Associate General Counsel Deputy General Counsel of
Management Inc Mutual Management Corp. Prior
7 World Trade Center to 1994, Associate General
New York, NY 10048 Counsel of Connecticut Mutual
Age: 36 Life Insurance Company.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH THE FUND PRINCIPAL OCCUPATION AND OTHER AFFILIATIONS
--------------------- ------------------------ -------------------------------------------
<C> <C> <S>
Beth A. Semmel............... Executive Vice President Director of SBAM since January
Salomon Brothers Asset 1996. From May 1993 to December
Management Inc 1995, Vice President of SBAM. From
7 World Trade Center January 1989 to May 1993, Vice
New York, NY 10048 President of Morgan Stanley Asset
Age: 36 Management.
Maureen O'Callaghan.......... Executive Vice President Director of SBAM since December
Salomon Brothers Asset 1997. Vice President of SBAM from
Management Inc October 1988 to December 1996.
7 World Trade Center
New York, NY 10048
Age: 34
James E. Craige.............. Executive Vice President Director of SBAM since December
Salomon Brothers Asset 1997. Vice President of SBAM from
Management Inc 1992 to December 1997.
7 World Trade Center
New York, NY 10048
Age: 30
Thomas K. Flanagan........... Executive Vice President Director of SBAM since 1991.
Salomon Brothers Asset
Management Inc
7 World Trade Center
New York, NY 10048
Age: 44
Lewis E. Daidone............. Treasurer and Chief Managing Director of Smith Barney
Salomon Smith Barney Financial Officer Inc.; Director and Senior Vice
388 Greenwich Street President of Mutual Management
New York, NY 10013 Corp.; Senior Vice President and
Age: 40 Treasurer of 42 investment
companies associated with Salomon
Smith Barney.
Alan M. Mandel............... Controller Director of SBAM since 1995. Prior
Salomon Smith Barney to 1995, Chief Financial Officer
388 Greenwich Street and Vice President of Hyperion
New York, NY 10013 Capital Management Inc.
Age: 40
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH THE FUND PRINCIPAL OCCUPATION AND OTHER AFFILIATIONS
--------------------- ---------------------- -------------------------------------------
<C> <C> <S>
Noel B. Daugherty........... Secretary Employee of SBAM since November 1996.
Salomon Brothers Asset From August 1993 to October 1996, an
Management Inc employee of Chancellor LGT Asset
7 World Trade Center Management. From October 1989 to August
New York, NY 10048 1993, an employee of The Dreyfus
Age: 31 Corporation.
Anthony Pace................ Assistant Controller Assistant Controller of investment
Salomon Brothers Asset companies associated with Salomon Smith
Management Inc Barney, including SBAM.
7 World Trade Center
New York, NY 10048
Age: 33
</TABLE>
COMPENSATION TABLE
The following table provides estimated information concerning the
compensation expected to be paid during the current fiscal year ending April
30, 1999 to each director of the Fund and, for the calendar year ending
December 31, 1997, the aggregate compensation paid by all investment companies
advised by SBAM and its affiliates. The Fund does not provide any pension or
retirement benefits to directors. In addition, no remuneration will be paid
during the fiscal year ending April 30, 1999 by the Fund to officers of the
Fund, including Mr. McLendon, who as an officer of Salomon Smith Barney is an
"interested person," as defined in the 1940 Act.
<TABLE>
<CAPTION>
ESTIMATED TOTAL COMPENSATION
AGGREGATE FROM OTHER FUNDS
COMPENSATION ADVISED BY SBAM
NAME OF PERSON, POSITION FROM THE FUND AND AFFILIATES(A)
- ------------------------ ------------- ------------------
<S> <C> <C>
Charles F. Barber
Director..................................... $8,500 $139,437(22)*
Daniel P. Cronin
Director..................................... $8,500 $ 39,200(7)
Dr. Riordan Roett
Director..................................... $8,500 $ 68,100(10)
Jeswald W. Salacuse
Director..................................... $8,500 $ 58,800(8)
</TABLE>
(A) The numbers in parentheses indicate the applicable number of investment
company directorships held by that director.
* Includes compensation from investment companies advised by affiliates of
Salomon Smith Barney which are affiliates of SBAM.
Directors who are not officers, directors or employees of SBAM or of any
"interested person" thereof (as defined in the 1940 Act) will be paid a fee of
$5,000 per year, plus $700 for every meeting of the Board of Directors or
committee thereof.
The officers of the Fund conduct and supervise the daily business operations
of the Fund, while the directors, in addition to performing their functions
set forth under "Management of the Fund," review such actions and determine
general policy.
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<PAGE>
The Fund's Board of Directors may have an Executive Committee, which may
exercise the powers of the Board to conduct the current and ordinary business
of the Fund while the Board is not in session.
Commencing with the first annual meeting of shareholders, the Board of
Directors will be divided into three classes, having terms of one, two and
three years, respectively. At the annual meeting of shareholders in each year
thereafter, the term of one class will expire and directors will be elected to
serve in that class for terms of three years. See "Description of Capital
Stock."
The Articles of Incorporation and By-Laws of the Fund provide that the Fund
will indemnify, to the fullest extent permitted by law, its directors and
officers and may indemnify employees or agents of the Fund against liabilities
and expenses incurred in connection with litigation in which they may be
involved because of their offices with the Fund. In addition, the Fund's
Articles of Incorporation provide that the Fund's directors and officers will
not be liable to shareholders for money damages, except in limited instances.
However, nothing in the Articles of Incorporation or By-Laws of the Fund
protects or indemnifies a director, officer, employee or agent against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
PORTFOLIO TRANSACTIONS
The Fund has no obligation to deal with any brokers or dealers in the
execution of transactions in portfolio securities. Subject to policy
established by the Fund's Board of Directors, SBAM is primarily responsible
for the Fund's portfolio decisions and the placing of the Fund's portfolio
transactions.
Debt securities normally will be purchased from or sold to issuers directly
or to dealers serving as market makers for the securities at a net price,
which may include dealer spreads and underwriting commissions. Equity
securities will normally be purchased through brokers to which commissions
will be payable. In placing orders, it is the policy of the Fund to obtain the
best results taking into account the general execution and operational
facilities of the broker or dealer, the type of transaction involved and other
factors such as the risk of the broker or dealer in positioning the securities
involved. The purchase by the Fund of Participations or Assignments may be
pursuant to privately negotiated transactions pursuant to which the Fund may
be required to pay fees to the seller or forego a portion of payments in
respect of the Participation or Assignment. While SBAM generally seeks the
best price in placing its orders, the Fund may not necessarily be paying the
lowest price available. Subject to obtaining the best price and execution,
securities firms which provide supplemental research to SBAM may receive
orders for transactions by the Fund. Information so received will be in
addition to and not in lieu of the services required to be performed by SBAM
under the Advisory Agreement, and the expenses of SBAM will not necessarily be
reduced as a result of the receipt of such supplemental information.
The Fund anticipates that, in connection with the execution of portfolio
transactions on its behalf by SBAM, certain Underwriters may from time to time
act as a broker or dealer. In addition, affiliated persons (as such term is
defined in the 1940 Act) of the Fund, or affiliated persons of such persons,
may from time to time be selected to perform brokerage services for the Fund,
subject to the considerations discussed above, but are prohibited by
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<PAGE>
the 1940 Act from dealing with the Fund as principal in the purchase or sale
of securities. In order for such an affiliated person to be permitted to
effect any portfolio transactions for the Fund, the commissions, fees or other
remuneration received by such affiliated person must be reasonable and fair
compared to the commissions, fees or other remuneration received by other
brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a
comparable period of time. This standard would allow such an affiliated person
to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker in a commensurate arm's-length transaction.
The Fund is prohibited by the 1940 Act from purchasing securities in primary
offerings in which an affiliate acts as an underwriter unless certain
conditions established under the 1940 Act are satisfied.
Investment decisions for the Fund are made independently from those for
other funds and accounts advised or managed by SBAM. Such other funds and
accounts may also invest in the same securities as the Fund. If those funds or
accounts are prepared to invest in, or desire to dispose of, the same security
at the same time as the Fund, however, transactions in such securities will be
made, insofar as feasible, for the respective funds and accounts in a manner
deemed by SBAM to be equitable to all. 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. In addition, because of
different investment objectives, a particular security may be purchased for
one or more funds or accounts when one or more funds or accounts are selling
the same security.
Although the Advisory Agreement contains no restrictions on portfolio
turnover, it is not the Fund's policy to engage in transactions with the
objective of seeking profits from short-term trading. It is expected that the
annual portfolio turnover rate of the Fund will not exceed 100%. The portfolio
turnover rate is calculated by dividing the lesser of sales or purchases of
portfolio securities by the average monthly value of the Fund's portfolio
securities. For purposes of this calculation, portfolio securities exclude all
securities having a maturity when purchased of one year or less.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
Beginning with its initial distribution approximately 60 days after
completion of this offering, it is the Fund's present policy, which may be
changed by the Board of Directors, to make regular monthly cash distributions
to holders of Common Stock at a level rate that reflects the past and
projected performances of the Fund, which over time will result in the
distribution of all net investment income of the Fund (i.e., net investment
income remaining after the payment of any dividends on preferred stock if any
such stock is outstanding) and to distribute any net realized long term and
short term capital gain at least annually. The Fund's initial and subsequent
distribution level will be determined by the Fund after giving consideration
to a number of factors including the Fund's undistributed net investment
income and historical and projected investment income and expenses. Net income
consists of all interest and dividend income accrued on portfolio assets less
all expenses of the Fund. Net investment income for this purpose is income
other than net realized long term and short term capital gain.
To permit the Fund to maintain a more stable monthly distribution, the Fund
will from time to time distribute more or less than the entire amount of net
investment income earned in a particular period. Any undistributed net
investment income, to the extent permitted by income tax regulations, would be
available to
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<PAGE>
supplement future distributions which might otherwise have been reduced by a
decrease in the Fund's monthly net income due to fluctuation in investment
income or expenses. Undistributed net investment income will be added to the
Fund's net asset value and, correspondingly, distributions from undistributed
net investment income will be deducted from the Fund's net asset value.
Pursuant to the Plan, shareholders whose shares are registered in their own
names will be deemed to have elected to have all distributions (net of any
applicable U.S. withholding tax) reinvested automatically in additional shares
of the Fund by First Data Investor Services Group, Inc. (the "Plan Agent") as
agent under the Plan, unless such shareholders elect to receive distributions
in cash. Shareholders who elect to receive distributions in cash will receive
all distributions in cash paid by check in U.S. dollars mailed directly to the
shareholder by First Data Investor Services Group, Inc., as dividend paying
agent. In the case of shareholders such as banks, brokers or nominees, which
hold shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the record shareholders as representing the total amount registered
in the record shareholder's name and held for the account of beneficial owners
that have not elected to receive distributions in cash. Investors that own
shares registered in the name of a bank, broker or other nominee should
consult with such nominee as to participation in the Plan through such
nominee, and may be required to have their shares registered in their own
names in order to participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the
Plan. Unless the Board of Directors of the Fund declares a dividend or capital
gains distribution payable only in cash, non-participants in the Plan will
receive cash and participants in the Plan will receive shares of the Fund, to
be issued by the Fund or purchased by the Plan Agent in the open market as
outlined below. Whenever market price per share is equal to or exceeds net
asset value per share as of the determination date (defined as the fourth New
York Stock Exchange trading day preceding the payment date for the dividend or
distribution), participants will be issued new shares at a price per share
equal to the greater of (a) the net asset value per share on the valuation
date or (b) 95% of the market price per share on the valuation date. Except as
noted below, the valuation date generally will be the dividend or distribution
payment date. The Fund will not issue shares under the Plan at a price below
net asset value. If net asset value exceeds the market price of the Fund's
shares as of the determination date, the Plan Agent will, as agent for the
participants, buy shares in the open market, on the New York Stock Exchange or
elsewhere, for the participants' accounts as soon as practicable commencing on
the trading day following the determination date and generally terminating no
later than 30 days after the dividend or distribution payment date. If, before
the Plan Agent has completed its purchases, the market price exceeds the net
asset value of a share, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the dividend or capital gains distribution
has been paid in shares issued by the Fund. Because of the foregoing
difficulty with respect to open-market purchases, the Plan provides that if
the Plan Agent is unable to invest the full dividend amount in open-market
purchases during the permissible purchase period or if the market discount
shifts to a market premium during such purchase period, the Plan Agent will
cease making open-market purchases and will receive the uninvested portion of
the dividend amount in newly issued shares (in which case the valuation date
will be the date such shares are issued) at a price per share equal to the
greater of (a) the net asset value per share on the valuation date or (b) 95%
of the market price per share on the valuation date.
44
<PAGE>
A shareholder may elect to withdraw from the Plan at any time upon written
notice to the Plan Agent or by calling the Plan Agent at 1-800-331-1710. When
a participant withdraws from the Plan, or upon termination of the Plan as
provided below, certificates for whole shares credited to his or her account
under the Plan will be issued and a cash payment will be made for any
fractional shares credited to such account. An election to withdraw from the
Plan will, until such election is changed, be deemed to be an election by a
shareholder to take all subsequent dividends and distributions in cash.
Elections will be effective immediately if notice is received by the Plan
Agent not less than ten days prior to any dividend or distribution record
date; otherwise such termination will be effective after the investment of the
then current dividend or distribution. If a withdrawing shareholder requests
the Plan Agent to sell the shareholder's shares upon withdrawal from
participation in the Plan, the withdrawing shareholder will be required to pay
a $2.50 fee plus brokerage commissions.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmation of all transactions in the accounts, including
information needed by shareholders for personal and tax records. Shares in the
account of each Plan participant will be held by the Plan Agent in
noncertificated form in the name of the participant, and each shareholder's
proxy will include those shares purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Plan Agent's fee for the handling of reinvestment of
dividends and distributions will be paid by the Fund. There will be no
brokerage charges with respect to shares issued directly by the Fund as a
result of dividends or capital gains distributions payable either in shares or
in cash. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open market purchases in
connection with the reinvestment of dividends or capital gains distributions.
The automatic reinvestment of dividends and distributions will not relieve
participants of any U.S. federal income tax that may be payable on such
dividends or distributions. To the extent dividends and distributions are
reinvested in additional shares issued by the Fund, participants should be
treated for U.S. federal income tax purposes as receiving a distribution in an
amount equal to the fair market value, determined as of the valuation date, of
the shares received (regardless of the net asset value of the shares on the
valuation date), and should have a cost basis in such shares equal to such
fair market value. Shareholders receiving a distribution in the form of shares
purchased by the Plan Agent in the open market will be treated for U.S.
federal income tax purposes as receiving a distribution of the cash
distribution that such shareholder would have received had it not elected to
have such distribution reinvested.
Experience under the Plan may indicate that changes thereto may be
desirable. Accordingly, the Fund reserves the right to amend or terminate the
Plan as applied to any dividend or distribution paid (i) subsequent to notice
of the change sent to all participants at least 30 days before the record date
for such dividend or distribution or (ii) otherwise in accordance with the
terms of the Plan. The Plan also may be amended or terminated by the Plan
Agent, with the Fund's prior written consent, on at least 30 days' prior
written notice to all participants. All correspondence concerning the Plan
should be directed to the Plan Agent at P.O. Box 8030, Boston, Massachusetts
02266-8030.
45
<PAGE>
TAXATION
The following is a general summary of certain United States federal income
tax considerations affecting the Fund and United States and foreign
shareholders and, except as otherwise indicated, is based upon federal income
tax laws in effect on the date of this Prospectus. Such tax laws are subject
to change by legislative, judicial or administrative action, possibly with
retroactive effect. No attempt is made to present a detailed explanation of
all federal, state, local and foreign income tax considerations, and this
discussion is not intended as a substitute for careful tax planning.
Accordingly, potential investors are urged to consult their own tax advisers
regarding an investment in the Fund.
THE FUND
The Fund intends to elect and qualify to be treated as a regulated
investment company for federal income tax purposes under Subchapter M of the
Code. In order to so qualify, the Fund must, among other things, (a) derive in
each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to loans of securities, gains from the sale or other
disposition of stock or securities, or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities or
currencies (including, but not limited to, gains from options, futures or
forward contracts); and (b) diversify its holdings so that, at the end of each
quarter of each taxable year, (i) at least 50% of the value of the Fund's
assets is represented by cash, 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 issuer (other than U.S. Government
securities or the securities of other regulated investment companies) or of
any two or more issuers that the Fund controls and that are engaged in the
same, similar or related trades or business.
If the Fund qualifies as a regulated investment company and distributes to
its holders of Common Stock at least 90% of its net investment income (i.e.,
the Fund's investment company taxable income, as that term is defined in the
Code, without regard to the deduction for dividends paid), the Fund will not
be subject to federal income tax on the portion of its net investment income
and net capital gain (i.e., the excess of the Fund's net long-term capital
gain over net short-term capital loss) that it distributes to shareholders.
However, the Fund would be subject to corporate income tax (currently at a
rate of 35%) on any undistributed income and gain. If the Fund retains amounts
attributable to its net capital gain, it will designate such retained amounts
as undistributed net capital gain in a notice to its shareholders who (i) will
be required to include in income for United States federal income tax
purposes, as long-term capital gain, their proportionate shares of the
undistributed amount, (ii) will be entitled to credit their proportionate
shares of the 35% tax paid by the Fund on the undistributed amount against
their United States federal income tax liabilities and to claim refunds to the
extent such credits exceed their liabilities and (iii) will be entitled to
increase their tax basis, for United States federal income tax purposes, in
their shares by an amount currently equal to the difference between the amount
of includible gain and their proportionate shares of the 35% tax paid by the
Fund.
In addition, the Fund will be subject to a nondeductible 4% excise tax on
the amount by which the aggregate income it distributes in any calendar year
is less than the sum of: (a) 98% of the Fund's ordinary income for such
calendar year; (b) 98% of the Fund's capital gain net income for the one-year
period generally ending on October 31 of each year; and (c) 100% of the
undistributed ordinary income and capital gain net income from
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<PAGE>
prior years. For this purpose, any income or gain retained by the Fund subject
to corporate income tax will be considered to have been distributed by year-
end.
The Fund intends to distribute sufficient income so as to avoid both the
corporate income tax and the excise tax.
The Internal Revenue Service ("IRS") has taken the position in a revenue
ruling that a regulated investment company that has two or more classes of
shares must designate distributions made to each class in any year as
consisting of no more than such class's proportionate share of each type of
income for each tax year based on the total dividends distributed to each
class for such year, including dividends qualifying for the corporate
dividends-received deduction and net capital gain. Consequently, if both
Common Stock and preferred stock are outstanding, the Fund intends to
allocate, to the fullest extent practicable, income distributed to the classes
as consisting of particular types of income in accordance with each class's
proportionate share of such income. Thus, the Fund will designate dividends
qualifying for the corporate dividends-received deduction, income not
qualifying for the dividends-received deduction and net capital gain income in
a manner that allocates such income between the holders of Common Stock and
preferred stock in proportion to the total distributions made to each class
during the taxable year, or otherwise as required by applicable law.
If at any time when leverage is outstanding the Fund does not meet the asset
coverage requirements of the 1940 Act or of any rating agency that has rated
such leverage, the Fund will be required to suspend distributions to holders
of Common Stock until the asset coverage is restored. See "Additional
Investment Activities--Leverage." This may prevent the Fund from distributing
at least 90% of its net investment income, and may therefore jeopardize the
Fund's qualification for taxation as a regulated investment company or cause
the Fund to incur a corporate income tax or a non-deductible 4% excise tax on
the undistributed taxable income (including gain). Upon any failure to meet
the asset coverage requirements of the 1940 Act, or those imposed by a rating
agency, the Fund may, in its sole discretion, purchase or redeem any preferred
stock or short-term debt securities in order to maintain or restore the
requisite asset coverage and avoid the adverse consequences to the Fund and
its shareholders of failing to qualify as a regulated investment company.
There can be no assurance, however, that any such redemption would achieve
such objectives.
Various transactions in which the Fund may engage, including Derivative
Transactions, will be subject to special provisions of the Code that, among
other things, may affect the character of gain and loss realized by the Fund
(that is, may affect whether gain or loss is ordinary or capital), accelerate
recognition of income to the Fund, affect the holding period of the Fund's
assets and defer recognition of certain of the Fund's losses. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. In addition, these provisions (1) may require the Fund to mark
to market certain types of positions in its portfolio (that is, treat them as
if they were closed out at the end of each taxable year) and (2) may cause the
Fund to recognize income or gain without receiving cash with which to pay
dividends or make distributions in amounts necessary to satisfy the
distribution requirements for avoiding income and excise taxes. The Fund
intends to monitor its transactions, will make the appropriate tax elections
and will make the appropriate entries in its books and records when it
acquires any forward contract, option, futures contract, or hedged investment
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
The Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in pay-in-
kind bonds or in obligations such as certain Brady Bonds
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<PAGE>
or other obligations having original issue discount (i.e., an amount equal to
the excess of the security's stated redemption price at maturity over its
issue price), or market discount (i.e., an amount equal to the excess of the
security's stated redemption price at maturity over its basis immediately
after it was acquired) if the Fund elects, as it intends, to accrue market
discount on a current basis. In addition, income may continue to accrue for
federal income tax purposes with respect to a non-performing investment. Any
of the foregoing income would be treated as income earned by the Fund and
therefore would be subject to the distribution requirements of the Code.
Because such income may not be matched by a corresponding cash distribution to
the Fund, the Fund may be required to dispose of other securities to be able
to make distributions to its shareholders.
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 IRS examination of the
issuers of such securities or of the Fund could result in adjustments to the
income of the Fund. An upward adjustment by the IRS to the income of the Fund
may result in the failure of the Fund to satisfy the 90% distribution
requirement described in this Prospectus necessary for the Fund to maintain
its status as a regulated investment company under the Code. In such event,
the Fund may be able to make a "deficiency dividend" distribution to its
shareholders with respect to the year under examination to satisfy this
requirement. Such distribution will be taxable as a dividend to the
shareholders receiving the distribution (whether or not the Fund has
sufficient current or accumulated earnings and profits for the year in which
such distribution is made). A downward adjustment by the IRS to the income of
the Fund may cause a portion of the previously made distribution with respect
to the year under examination not to be treated as a dividend. In such event,
the portion of distributions to such shareholder not treated as a dividend
would be recharacterized as a tax-free return of capital and reduce the
shareholder's basis in the shares held at the time of the previously made
distributions. Accordingly, this reduction in basis could cause a shareholder
to recognize additional gain upon the sale of such shareholder's shares.
SHAREHOLDERS
Distributions. Distributions to shareholders of net investment income will
be taxable as ordinary income whether paid in cash or reinvested in additional
shares. It is not anticipated that a significant portion of such dividends, if
any, will qualify for the dividends received deduction generally available to
corporate shareholders under the Code. Shareholders receiving distributions
from the Fund in the form of additional shares pursuant to the Plan will be
treated for federal income tax purposes as receiving a distribution in an
amount equal to the fair market value of the additional shares on the date of
such distribution.
Distributions to shareholders of net capital gain that are designated by the
Fund as "capital gain dividends" will be taxable as long-term capital gain,
whether paid in cash or reinvested in additional shares, regardless of how
long the shares have been held by such shareholders. These distributions will
not be eligible for the dividends received deduction. The current maximum
federal income tax rate imposed on long-term capital gain of individuals is
28% with respect to capital assets held for more than one year but less than
18 months and 20% with respect to capital assets held for more than 18 months.
The current maximum federal income tax rate imposed on individuals with
respect to ordinary income (and short-term capital gain, which is taxed at the
same rates as ordinary income) is 39.6%. With respect to corporate taxpayers,
long-term capital gain is taxed at the same federal income tax rates as
ordinary income and short-term capital gain.
Investors considering buying shares just prior to an ordinary income
dividend or capital gain dividend should be aware that, although the price of
shares purchased at that time may reflect the amount of the
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<PAGE>
forthcoming distribution, those who purchase just prior to a distribution will
receive a distribution which will nevertheless be taxable to them.
Dividends and distributions paid by the Fund are generally taxable to the
shareholders at the time the dividend or distribution is made (even if paid or
reinvested in additional shares). Any dividend declared by the Fund in
October, November or December of any calendar year, however, which is payable
to shareholders of record on a specified date in such a month will be treated
as received by the shareholders as of December 31 of such year, provided that
the dividend is paid during January of the following year. In general, any
distribution in excess of the Fund's net investment income and net capital
gain would first reduce a shareholder's basis in his shares and, after the
shareholder's basis is reduced to zero, would constitute capital gain to a
shareholder who holds his shares as capital assets. However, such excess would
first be treated as an ordinary income dividend to the extent of the Fund's
remaining current and accumulated earnings and profits.
A notice detailing the amounts and tax status of dividends and distributions
paid by the Fund, and the amount of undistributed net capital gain (if any),
as well as the portions of the Fund's capital gain dividends and undistributed
net capital gain that are subject to the 28% and 20% maximum tax rates, will
be mailed annually to the shareholders of the Fund.
Dispositions. Gain or loss, if any, recognized on the sale or other
disposition of shares of the Fund will be taxed as capital gain or loss if the
shares are capital assets in the shareholder's hands. Generally, a
shareholder's gain or loss will be a long-term gain or loss if the shares have
been held for more than one year. If a shareholder sells or otherwise disposes
of a share of the Fund before holding it for more than six months, any loss on
the sale or other disposition of such share shall be treated as a long-term
capital loss to the extent of any capital gain dividends received by the
shareholder with respect to such share. A loss realized on a sale or exchange
of shares may be disallowed if other shares are acquired (whether under the
Plan or otherwise) within a 61-day period beginning 30 days before and ending
30 days after the date the shares are disposed of. If disallowed, the loss
will be reflected by an upward adjustment to the basis of the shares acquired.
Foreign Taxes. The Fund may be subject to certain taxes imposed by foreign
countries with respect to dividends, capital gain and interest income. The
United States has entered into tax treaties with many foreign countries which
would entitle the Fund to a reduced rate of, or exemption from, such taxes.
The Fund may invest up to 35% of its total assets in foreign debt securities.
Accordingly, the Fund will not be eligible to elect to pass through to
shareholders of the Fund the ability to use the foreign tax deduction or
foreign tax credit for foreign taxes paid with respect to qualifying taxes.
Foreign Shareholders. Taxation of a shareholder who, as to the United
States, is a non-resident alien individual, foreign trust or estate, foreign
corporation or foreign partnership ("foreign shareholder") depends, in part,
on whether the shareholder's income from the Fund is "effectively connected"
with a United States trade or business carried on by the shareholder. If a
shareholder is a resident alien or if dividends or distributions from the Fund
are effectively connected with a United States trade or business carried on by
a foreign shareholder, then ordinary income dividends, capital gain dividends,
undistributed net capital gain and gain realized upon the sale of shares of
the Fund will be subject to United States federal income tax at the rates
applicable to United States citizens or domestic corporations. Foreign
shareholders that are corporations may also be subject to an additional
"branch profits tax" with respect to income from the Fund that is effectively
connected with a United States trade or business.
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<PAGE>
If the income from the Fund is not effectively connected with a United
States trade or business carried on by the foreign shareholder, (i) ordinary
income dividends will be subject to a 30% (or lower applicable treaty rate)
United States federal withholding tax and (ii) distributions of net capital
gain dividends, undistributed net capital gain and gain realized upon the sale
of shares of the Fund will not be subject to United States federal income tax
as long as such foreign shareholder is not a non-resident alien individual who
was physically present in the United States for more than 182 days during the
taxable year and, in the case of gains realized upon the sale of Fund shares,
certain other conditions are met. However, certain foreign shareholders may
nonetheless be subject to 31% backup withholding on distributions of net
capital gain and gross proceeds paid to them upon the sale of their shares of
the Fund. See "--Backup Withholding."
The United States Treasury Department recently issued regulations generally
effective for payments made after December 31, 1999 concerning the withholding
of tax and reporting for certain amounts paid to nonresident aliens and
foreign corporations (the "Final Withholding Regulations"). Among other
things, the Final Withholding Regulations may require shareholders that are
not United States persons within the meaning of the Code to furnish new
certification of their foreign status after December 31, 1999. Prospective
investors should consult their tax advisers concerning the applicability and
effect of the Final Withholding Regulations on an investment in shares of the
Fund.
Transfer by gift of shares of the Fund by a foreign shareholder who is a
non-resident alien individual will not be subject to United States federal
gift tax, but the value of shares of the Fund held by such a shareholder at
his death will be includible in such shareholder's gross estate for United
States federal estate tax purposes.
The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may be different from those described in this
section. Shareholders may be required to provide appropriate documentation to
establish their entitlement to the benefits of such a treaty. Foreign
investors are advised to consult their own tax advisers with respect to (a)
whether their income from the Fund is or is not effectively connected with a
U.S. trade or business carried on by them, (b) whether they may claim the
benefits of an applicable tax treaty and (c) any other tax consequences to
them of an investment in the Fund.
Backup Withholding. The Fund may be required to withhold federal income tax
at a rate of 31% ("backup withholding") from dividends and redemption proceeds
paid to non-corporate shareholders. This tax may be withheld from dividends if
(i) the shareholder fails to furnish the Fund with the shareholder's correct
taxpayer identification number, (ii) the IRS notifies the Fund that the
shareholder has failed to report properly certain interest and dividend income
to the IRS and to respond to notices to that effect, or (iii) when required to
do so, the shareholder fails to certify that he or she is not subject to
backup withholding. Redemption proceeds may be subject to withholding under
the circumstances described in (i) above. The Fund must report annually to the
IRS and to each foreign shareholder the amount of dividends paid to such
shareholder and the amount, if any, of tax withheld pursuant to the backup
withholding rules with respect to such dividends. This information may also be
made available to the tax authorities in the foreign shareholder's country of
residence. Backup withholding is not an additional tax. Any amounts withheld
under the backup withholding rules from payments made to a shareholder may be
refunded or credited against such shareholder's United States federal income
tax liability, if any, provided that the required information is furnished to
the IRS.
---------------------
Investors should consult their own tax advisers regarding specific questions
as to the federal, state, local and foreign tax consequences of the ownership
and disposition of shares in the Fund.
50
<PAGE>
NET ASSET VALUE
Net asset value per share will be determined no less frequently than weekly,
on the last business day of each week and at such other times as the Board of
Directors may determine, by dividing the value of the securities held by the
Fund plus any cash or other assets (including interest accrued but not yet
received) minus all liabilities (including accrued expenses) and the aggregate
liquidation value of any outstanding shares of preferred stock by the total
number of shares of Common Stock outstanding. In valuing the Fund's assets,
all securities for which market quotations are readily available are valued
(except as described below) (i) at the last sale price prior to the time of
determination if there was a sales price on the date of determination, (ii) at
the mean between the last current bid and asked prices if there was no sales
price on such date and bid and asked quotations are available, and (iii) at
the bid price if there was no sales price on such date and only bid quotations
are available. Publicly traded sovereign debt instruments are typically traded
internationally on the over-the-counter market, and will be valued at the mean
between the last current bid and asked price as at the close of business of
that market. In instances where a price determined above is deemed not to
represent fair market value, the price is determined in such manner as the
Board of Directors may prescribe. Securities may be valued by independent
pricing services which use prices provided by market-makers or estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics. Short-term investments having a maturity of 60
days or less are valued at amortized cost, unless the Board of Directors
determines that such valuation does not constitute fair value. Securities for
which reliable quotations or pricing services are not readily available and
all other securities and assets are valued at fair value as determined in good
faith by, or under procedures established by, the Board of Directors.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The authorized capital stock of the Fund is 100,000,000 shares of Common
Stock ($.001 par value per share). The Common Stock of the Fund, when issued,
will be fully paid and nonassessable. All shares of Common Stock are equal as
to dividends, distributions and voting privileges. There are no conversion,
preemptive or other subscription rights. In the event of liquidation, each
share of Common Stock is entitled to its proportion of the Fund's assets after
debts and expenses. There are no cumulative voting rights for the election of
directors. Prior to the offering, SBAM will own 100% of the outstanding shares
of Common Stock of the Fund and, consequently, will be a controlling person of
the Fund until the shares offered hereby are issued and sold. The Fund will
hold annual meetings of shareholders.
The Fund has no present intention of offering additional shares of its
Common Stock. Other offerings of its Common Stock, if made, will require
approval of the Fund's Board of Directors. Any additional offering will be
subject to the requirements of the 1940 Act that shares of Common Stock may
not be sold at a price below the then current net asset value (exclusive of
underwriting discounts and commissions) except in connection with an offering
to existing shareholders or with the consent of a majority of the Fund's
outstanding shares of Common Stock.
51
<PAGE>
PREFERRED STOCK
The Fund's Articles of Incorporation provides that the Board of Directors
may classify or reclassify any unissued shares of capital stock into one or
more additional or other classes or series, with rights as determined by the
Board of Directors, by action by the Board of Directors without the approval
of the holders of Common Stock. Holders of Common Stock have no preemptive
right to purchase any shares of preferred stock that might be issued.
The terms of any preferred stock, including its dividend rate, liquidation
preference and redemption provisions will be determined by the Board of
Directors (subject to applicable law and the Fund's Articles of
Incorporation). The Fund believes that it is likely that the liquidation
preference, voting rights and redemption provisions of any preferred stock
will be similar to those stated below.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of preferred
stock will be entitled to receive a preferential liquidating distribution
(expected to equal the original purchase price per share plus accrued and
unpaid dividends, whether or not declared) before any distribution of assets
is made to holders of Common Stock. After payment of the full amount of the
liquidating distribution to which they are entitled, the preferred
shareholders will not be entitled to any further participation in any
distribution of assets by the Fund. A consolidation or merger of the Fund with
or into any corporation or corporations or a sale of all or substantially all
assets of the Fund will not be deemed to be a liquidation, dissolution or
winding upon of the Fund.
Voting Rights. The 1940 Act requires that the holders of any preferred
stock, voting separately as a single class, have the right to elect at least
two directors at all times and, subject to the prior rights, if any, of the
holders of any other class of senior securities outstanding, to elect a
majority of the directors at any time dividends on any preferred shares are
unpaid for a period of two years. The 1940 Act also requires that, in addition
to any approval by shareholders that might otherwise be required, the approval
of the holders of a majority of any outstanding preferred shares, voting
separately as a class, would be required to (a) adopt any plan of
reorganization that would adversely affect the preferred shares and (b) take
any action requiring a vote of security holders pursuant to Section 13(a) of
the 1940 Act, including, among other things, changes in the Fund's
subclassification as a closed-end investment company to an open-end investment
company or changes in its fundamental investment restrictions. See "--Special
Voting Provisions" concerning voting requirements for conversion of the Fund
to an open-end investment company and other matters. As a result of these
voting rights, the Fund's ability to take any such actions may be impeded to
the extent there is any preferred stock outstanding at such time. In addition,
in the discretion of the Board of Directors, subject to the 1940 Act, the
terms of any preferred stock may also require a vote of up to 75% of the
preferred stock, voting separately as a class, regarding certain transactions
involving a merger or sale of assets or conversion of the Fund to open-end
status and other matters. The Board of Directors presently intends that,
except for the matters discussed in this Prospectus and as otherwise required
by applicable law, holders of shares of preferred stock will have equal voting
rights with holders of Common Stock (one vote per share, unless otherwise
required by the 1940 Act), and will vote together with holders of Common Stock
as a single class.
It is presently intended that in connection with the election of the Fund's
directors, on and after issuance of any preferred stock, the holders of all
outstanding shares of preferred stock, voting as a separate class, would be
entitled to elect two directors of the Fund, and the remaining directors would
be elected by holders of Common
52
<PAGE>
Stock and preferred stock, voting together as a single class. The Fund's By-
Laws provide that the Board of Directors shall consist of no more than 12
directors, as may be determined from time to time by vote of a majority of
directors then in office.
The affirmative vote of the holders of a majority of the outstanding shares
of preferred stock, voting as a separate class, will be required to amend,
alter or repeal any of the preferences, rights or powers of holders of shares
of preferred stock so as to affect materially and adversely such preferences,
rights, or powers, or increase or decrease the numbers of shares of preferred
stock. The class vote of holders of preferred stock described above will in
each case be in addition to any other vote required to authorize the action in
question.
Redemption, Purchase and Sale of Preferred Stock by the Fund. Any redemption
or purchase of shares of preferred stock by the Fund will reduce the leverage
applicable to shares of Common Stock, while any resale of such shares of
preferred stock by the Fund will increase such leverage. See "Additional
Investment Activities--Leverage."
The discussion above describes the present intention of the Board of
Directors with respect to an offering of preferred stock if the Board elects
to utilize preferred stock in order to leverage the Fund's Common Stock. If
the Board of Directors determines to proceed with such an offering, the terms
of the preferred stock may be the same as, or different from, the terms
described above, subject to applicable law and the Fund's Articles of
Incorporation. The Board of Directors, without the approval of the holders of
Common Stock, may authorize an offering of preferred stock or may determine
not to authorize such an offering, and may fix the terms of the preferred
stock to be offered.
SPECIAL VOTING PROVISIONS
The Fund has provisions in its Articles of Incorporation and By-Laws that
could have the effect of limiting the ability of other entities or persons to
acquire control of the Fund, to cause it to engage in certain transactions or
to modify its structure. Commencing with the first annual meeting of
shareholders, the Board of Directors will be divided into three classes,
having initial terms of one, two and three years, respectively. At the annual
meeting of shareholders in each year thereafter, the term of one class will
expire and directors will be elected to serve in that class for terms of three
years. This provision could delay for up to two years the replacement of a
majority of the Board of Directors. A director may be removed from office only
for cause and only by a vote of the holders of at least 75% of the outstanding
shares of the Fund entitled to be cast on the matter.
The affirmative vote of at least 75% of the entire Board of Directors is
required to authorize the conversion of the Fund from a closed-end to an open-
end investment company. Such conversion also requires the affirmative vote of
the holders of at least 75% of the votes entitled to be cast thereon by the
shareholders of the Fund unless it is approved by a vote of at least 75% of
the Continuing Directors (as defined below), in which event such conversion
requires the approval of the holders of a majority of the votes entitled to be
cast thereon by the shareholders of the Fund. A "Continuing Director" is any
member of the Board of Directors of the Fund who (i) is not a person or
affiliate of a person who enters or proposes to enter into a Business
Combination (as defined below) with the Fund (an "Interested Party") and (ii)
who has been a member of the Board of Directors of the Fund for a period of at
least 12 months, or has been a member of the Board of Directors since April
24, 1998, 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 on the Board of Directors of the
53
<PAGE>
Fund. The affirmative vote of at least 75% of the votes entitled to be cast
thereon by shareholders of the Fund will be required to amend the Articles of
Incorporation to change any of the provisions in this paragraph and the
preceding paragraph.
The affirmative votes of at least 75% of the entire Board of Directors and
the holders of at least (i) 80% of the votes entitled to be cast thereon by
the shareholders of the Fund and (ii) in the case of a Business Combination
(as defined below), 66 2/3% of the votes entitled to be cast thereon by the
shareholders of the Fund other than votes held by an Interested Party who is
(or whose affiliate is) a party to a Business Combination (as defined below)
or an affiliate or associate of the Interested Party, are required to
authorize any of the following transactions:
(i) merger, consolidation or statutory share exchange of the Fund with or
into any other person;
(ii) 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 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 issuances or
transfers of debt securities of the Fund, 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, issuances of
securities of the Fund upon the exercise of any stock subscription rights
distributed by the Fund and portfolio transactions effected by the Fund in the
ordinary course of business;
(iii) 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 or entity of any assets of the Fund having an aggregate fair
market value of $1,000,000 or more except for portfolio transactions
(including pledges of portfolio securities in connection with borrowings)
effected by the Fund in the ordinary course of its business (transactions
within clauses (i), (ii) and (iii) above being known individually as a
"Business Combination");
(iv) any voluntary liquidation or dissolution of the Fund or an amendment to
the Fund's Articles of Incorporation to terminate the Fund's existence; or
(v) unless the 1940 Act or federal law requires a lesser vote, any
shareholder proposal as to specific investment decisions made or to be made
with respect to the Fund's assets as to which shareholder approval is required
under federal or Maryland law.
However, the shareholder vote described above will not be required with
respect to the foregoing transactions (other than those set forth in (v)
above) if they are approved by a vote of at least 75% of the Continuing
Directors. In that case, if Maryland law requires shareholder approval, the
affirmative vote of a majority of votes entitled to be cast thereon shall be
required. The Fund's By-Laws contain provisions the effect of which is to
prevent matters, including nominations of directors, from being considered at
a shareholders' meeting where the Fund has not received notice of the matters
generally at least 60 but no more than 90 days prior to the first anniversary
of the preceding year's annual meeting.
54
<PAGE>
The Board of Directors has determined that the foregoing voting
requirements, which are generally greater than the minimum requirements under
Maryland law and the 1940 Act, are in the best interest of the Fund's
shareholders generally.
Reference is made to the Articles of Incorporation and By-Laws of the Fund,
on file with the Commission, for the full text of these provisions. See
"Further Information." These provisions could have the effect of depriving
shareholders of an opportunity to sell their shares 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 opinion
of SBAM, however, these provisions offer several possible advantages. They may
require persons seeking control of the Fund to negotiate with its management
regarding the price to be paid for the shares required to obtain such control,
they promote continuity and stability and they enhance the Fund's ability to
pursue long-term strategies that are consistent with its investment
objectives.
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
PNC Bank, N.A., Airport Business Center, International Court 2, 200 Stevens
Drive, Lester, Pennsylvania 19113, will act as custodian for the Fund's
assets. First Data Investor Services Group, Inc., P.O. Box 5127, Westborough,
Massachusetts 01581-5127, will act as the transfer agent, dividend paying
agent and registrar for the Fund's Common Stock.
55
<PAGE>
UNDERWRITING
The Underwriters named herein, for whom Smith Barney Inc., 388 Greenwich
Street, New York, New York 10013 is acting as Representative (the
"Representative"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement among the Fund, SBAM and the several
Underwriters (the "Underwriting Agreement"), to purchase from the Fund the
number of shares of Common Stock set forth below opposite their respective
names.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Smith Barney Inc..........................................
A.G. Edwards & Sons, Inc..................................
Advest, Inc...............................................
EVEREN Securities, Inc....................................
Fahnestock & Co. Inc......................................
Janney Montgomery Scott Inc...............................
Legg Mason Wood Walker, Incorporated......................
McDonald & Company Securities, Inc........................
Morgan Keegan & Company, Inc..............................
The Robinson-Humphrey Company, LLC........................
Tucker Anthony Incorporated...............................
Wedbush Morgan Securities.................................
----
Total...................................................
====
</TABLE>
The Representative has informed the Fund that the Underwriters do not intend
to confirm shares of Common Stock to any accounts over which they exercise
discretionary authority.
The Underwriters, through their Representative, have advised the Fund that
they propose to offer the shares of Common Stock initially at the public
offering price set forth on the cover page of this Prospectus. There is no
sale charge or underwriting discount charged to investors on purchases of
shares of Common Stock in the offering. SBAM or an affiliate has agreed to pay
the Underwriters from its own assets a commission in connection with the sale
of shares of Common Stock in the offering in the amount of $0.75 per share.
Such payment is equal to 5.00% of the initial public offering price per share.
From this amount, the Underwriters may allow to selected dealers a payment in
the amount of $0.45 per share sold by such dealers and such dealers may
reallow a payment of $.10 per share to certain other dealers. The Underwriters
reserve the right to reject orders in whole or in part. After the initial
offering of the Common Stock to the public, the offering price and other
selling terms may be changed by the Representative. The Fund is obligated to
sell, and the Underwriters are obligated to purchase, all of the shares of
Common Stock offered hereby (other than shares covered by the over-allotment
option described below) if any are sold. Investors must pay for any shares of
Common Stock purchased on or before May 28, 1998.
The Fund has granted to the Underwriters an option, exercisable within 45
days of this Prospectus, to purchase up to additional shares of Common
Stock at the same price to public as set forth on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose
of covering over-allotments, if any, incurred in the sale of the shares of
Common Stock offered hereby. To the extent the
56
<PAGE>
Underwriters exercise such option, each of the Underwriters will be obligated,
subject to certain conditions, to purchase the same proportion of such
additional shares as the number of shares set forth opposite such
Underwriter's name in the preceding table bears to the total number of shares
set forth in such table.
The Fund and SBAM have each agreed to indemnify the several Underwriters or
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act.
The Fund has agreed to pay the Underwriters $250,000 as partial
reimbursement of expenses incurred in connection with the offering.
In connection with the requirements for listing the Fund's shares of Common
Stock on the NYSE, the Underwriters have undertaken to sell lots of 100 or
more shares of Common Stock to a minimum of 2,000 beneficial owners in the
United States. The minimum investment requirement is 100 shares of Common
Stock.
Prior to the offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price has been determined by
negotiation between the Fund, SBAM and the Representative. The Common Stock
has been approved for listing on the NYSE subject to official notice of
issuance. Smith Barney Inc. intends to make a market in the Common Stock after
trading in the Common Stock has commenced on the NYSE. Smith Barney Inc.,
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 Inc. 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 Inc. This Prospectus is to be
used by Smith Barney Inc. in connection with this offering and 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.
The Underwriters have advised the Fund that, pursuant to Regulation M under
the Securities Exchange Act of 1934, as amended, certain persons participating
in the offering may engage in transactions, including stabilizing bids,
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the Common Stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Common Stock on behalf
of an Underwriter for the purpose of fixing or maintaining the price of the
Common Stock. A "covering transaction" is a bid for or purchase of the Common
Stock on behalf of an Underwriter to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an
arrangement permitting an Underwriter to reclaim the selling concession
otherwise accruing to the Underwriters in connection with the offering if any
of the Common Stock originally sold by the Underwriters is purchased in a
covering transaction and has therefore not been effectively placed by the
Underwriters. The Underwriters have advised the Fund that such transactions
may be effected on the NYSE or otherwise and, if commenced, may be
discontinued at any time.
The Underwriting Agreement provides that it may be terminated in the
absolute discretion of the Representative without liability on the part of any
Underwriter to the Fund or SBAM if, prior to delivery of and payment for the
shares of Common Stock, (i) trading in the Fund's Common Stock shall have been
suspended by the Commission or the NYSE or trading in securities generally on
the NYSE shall have been suspended or limited or minimum prices shall have
been established on the NYSE, (ii) a banking moratorium shall have been
declared either by Federal or New York State authorities or (iii) there shall
have occurred any outbreak or escalation of hostilities, declaration by the
United States of a national emergency or war or other calamity or
57
<PAGE>
crisis the effect of which on financial markets is such as to make it, in the
judgment of the Representative, impracticable or inadvisable to proceed with
the offering or delivery of the securities as contemplated by this Prospectus
(exclusive of any supplement thereto).
The Underwriters have taken certain actions to discourage short-term trading
of shares of Common Stock during a period of time following the initial
offering date. Included in these actions is the withholding of payments to
Underwriters and concessions to dealers in connection with shares of Common
Stock which were sold by such Underwriters or dealers and which are
repurchased for the account of the Underwriters during such period.
The Fund anticipates that from time to time the Representative of the
Underwriters and certain other Underwriters may act as brokers or dealers in
connection with the execution of the Fund's portfolio transactions after they
have ceased to be Underwriters and, subject to certain restrictions, may act
as brokers while they are Underwriters.
The Fund has agreed not to offer or sell any additional shares of Common
Stock for a period of 180 days after the date of this Prospectus, without the
prior written consent of the Smith Barney Inc.
SBAM and Smith Barney Inc. are each wholly-owned subsidiaries of Salomon
Smith Barney Holdings Inc., which is in turn wholly-owned by Travelers Group
Inc.
EXPERTS
The financial statement of the Fund included in this Prospectus has been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
LEGAL MATTERS
The validity of the shares offered hereby will be passed on for the Fund by
Simpson Thacher & Bartlett, New York, New York, and certain legal matters in
connection with the offering of the shares will be passed on for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
Counsel for the Fund and the Underwriters will rely, as to matters of Maryland
law, on Piper & Marbury L.L.P., Baltimore, Maryland.
FURTHER INFORMATION
Prior to the registration statement becoming effective, the Underwriters or
other appropriate party may have distributed advertising or other solicitation
material which discusses (i) economic and market conditions and trends
generally; (ii) historical and current conditions and trends in the high yield
debt securities market and risk and reward potential in such market; (iii)
comparative information, including statistical analysis and performance-
related information, related to high yield securities generally and investing
in high yield securities; (iv) the special considerations and potential
benefits of investing in closed-end management investment companies and (v)
information about SBAM and the Fund's portfolio managers, including honors or
awards received and information and commentary on investment strategy or other
matters of general interest to investors.
Further information concerning these securities and their issuer may be
found in the Registration Statement, of which this Prospectus constitutes a
part, on file with the Commission.
58
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors of
Salomon Brothers High Income Fund II Inc
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of Salomon Brothers
High Income Fund II Inc (the "Fund") at May 20, 1998, in conformity with
generally accepted accounting principles. This financial statement is the
responsibility of the Fund's management; our responsibility is to express an
opinion on this financial statement based on our audit. We conducted our audit
of this financial statement in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
New York, New York
May 21, 1998
59
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC (NOTE 1)
STATEMENT OF ASSETS AND LIABILITIES
MAY 20, 1998
<TABLE>
<S> <C>
Assets:
Cash................................................................. $100,005
Deferred organization expenses (Note 2).............................. 125,000
--------
Total assets........................................................ 225,005
Liabilities:
Accrued organization expenses (Note 2)............................... 125,000
Commitments (Note 2)................................................. --
--------
Net Assets (6,667 shares of $.001 par value shares of common stock
issued and outstanding; 100,000,000 shares authorized)............... $100,005
========
Net asset value per share............................................. $ 15.00
========
</TABLE>
NOTES TO FINANCIAL STATEMENT
NOTE 1
The Salomon Brothers High Income Fund II Inc (the "Fund") was incorporated
as a Maryland corporation on March 19, 1998, and has had no operations to date
other than matters relating to its organization and registration as a
diversified, closed-end management investment company under the Investment
Company Act of 1940, as amended, and the sale and issuance to Salomon Brothers
Asset Management Inc ("SBAM") of 6,667 shares of its common stock for an
aggregate purchase price of $100,005. The books and records of the Fund will
be maintained in U.S. dollars.
NOTE 2
Organization expenses relating to the Fund incurred and to be incurred by
SBAM will be reimbursed by the Fund. Such expenses, estimated at $125,000,
will be deferred and amortized on a straight-line basis for a five-year period
beginning at the commencement of operations of the Fund. However, in
accordance with the AICPA Statement of Position No. 98-5, "Reporting on the
Costs of Start-up Activities", the Fund will be required to expense the
unamortized amount of this asset on the first day of its second fiscal year
which is expected to be May 1, 1999. Offering costs, estimated at $1,545,000,
will be paid from the proceeds of the offering and will be charged to capital
at the time of the issuance of such shares.
NOTE 3
The Fund retains SBAM, a wholly-owned subsidiary of Salomon Brothers Holding
Company Inc, which is in turn wholly-owned by Salomon Smith Barney Holdings
Inc, which is in turn wholly-owned by Travelers Group Inc., as its investment
manager under an investment management agreement (the "Advisory Agreement").
Under the terms of the Advisory Agreement, SBAM will manage the investment and
reinvestment of the assets of the Fund, subject to the supervision of the
Fund's Board of Directors. SBAM will make the investment decisions for the
Fund and place purchase and sale orders for the Fund's portfolio securities
pursuant
60
<PAGE>
to the Advisory Agreement. For its services, SBAM will receive from the Fund a
monthly fee at an annual rate of 1.00% of the value of the Fund's average
weekly net assets plus the proceeds of any outstanding borrowings used for
leverage. ("Average weekly net assets" means the average weekly value of the
total assets of the Fund, including any proceeds from the issuance of
preferred stock, minus the sum of (i) accrued liabilities of the Fund, (ii)
any accrued and unpaid interest on outstanding borrowings and (iii) accrued
accumulated dividends on shares of preferred stock.)
Mutual Management Corp. (the "Administrator"), a wholly-owned subsidiary of
Salomon Smith Barney Holdings Inc., will act as administrator for the Fund.
Under the Administration Agreement with the Fund (the "Administration
Agreement"), the Administrator administers the Fund's corporate affairs
subject to the supervision of the Fund's Board of Directors and in connection
therewith furnishes the Fund with office facilities together with such
ordinary clerical and bookkeeping services (e.g., preparation of annual and
other reports to shareholders and the Securities and Exchange Commission and
filing of federal, state and local income tax returns) as are not being
furnished by SBAM or the Fund's custodian. The Administration Agreement
provides that the Fund shall pay to the Administrator a monthly fee for its
services and the facilities furnished by the Administrator at an annual rate
of .10% of the value of the Fund's average weekly net assets (as defined and
determined with respect to the Advisory Agreement) plus the proceeds of any
outstanding borrowings used for leverage.
Certain officers and/or directors of the Fund are officers and/or directors
of SBAM or the Administrator.
61
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<PAGE>
APPENDIX A
DESCRIPTION OF RATINGS
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S AND S&P WITH RESPECT TO
BONDS APPEARS BELOW.
MOODY'S CORPORATE BOND RATINGS
AAA--Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
AA--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A--Bonds which 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 are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
BAA--Bonds which are rated "Baa" are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments 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. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
BA--Bonds which 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
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of a desirable
investment. 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 which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
CA--Bonds which 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 which 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 numerical modifiers "1", "2" and "3" in each generic rating
classification from Aa to Caa. The modifier "1" indicates that the security
ranks in the higher end of its generic rating category; the
A-1
<PAGE>
modifier "2" indicates a mid-range ranking; and the modifier "3" indicates
that the issue ranks in the lower end of its generic rating category.
S&P'S CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to repay principal and pay interest.
AA--Bonds rated "AA" also qualify as high quality debt obligations. Capacity
to pay principal and interest is very strong, and differs from "AAA" issues
only in small degree.
A--Bonds rated "A" have a strong capacity to repay principal and pay
interest, although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB--Bonds rated "BBB" are regarded as having an adequate capacity to repay
principal and pay interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for higher-rated categories.
BB-B-CCC-CC-C--Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
CI--Bonds rated "CI" are income bonds on which no interest is being paid.
D--Bonds rated "D" are in default. The "D" category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such payments
will be made during such grace period. The "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior ability for repayment of short-term debt obligations. Prime-1
repayment ability will often be evidenced by leading market positions in well-
established industries, high rates or return on funds employed, conservative
capitalization structures with moderate reliance on debt and ample asset
protection, broad margins in earnings coverage of fixed financial charges and
high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong ability for repayment of short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
A-2
<PAGE>
lesser degree. Earning trends and coverage ratio, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable ability for repayment of short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Not Prime--Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The categories are as follows:
"A-1'--A short-term obligation rated "A-1' is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
"A-2'--A short-term obligation rated "A-2' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
"A-3'--A short-term obligation rated "A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
"B'--A short-term obligation rated "B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet
its financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet
its financial commitment on the obligation.
"C'--A short-term obligation rated "C' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation.
"D'--A short-term obligation rated "D' is in payment default. The "D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D'
rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
A-3
<PAGE>
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<PAGE>
APPENDIX B
GENERAL CHARACTERISTICS AND RISKS OF HEDGING
AND OTHER STRATEGIC TRANSACTIONS
The Fund may engage in certain hedging and other strategic transactions. The
Fund will engage in such activities from time to time in SBAM's discretion and
may not necessarily be engaging in such activities when movements occur in
interest rates that could affect the value of the assets of the Fund. The
Fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable regulations of the CFTC and the
federal income tax requirements applicable to regulated investment companies
which are not operated as commodity pools.
INTEREST RATE TRANSACTIONS
The Fund may enter into interest rate swaps and may purchase interest rate
caps, floors and collars and may sell interest rate caps, floors and collars
that it has purchased. The Fund would enter into these transactions primarily
to preserve a return or spread on a particular investment or portion of its
portfolio, to manage the duration of its portfolio, to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date or to further the Fund's investment objectives and policies. Interest
rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional
amount of principal. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate cap. The purchase of an interest
rate floor entitles the purchaser, to the extent that a specified index falls
below a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate floor. A
collar is a combination of a cap and a floor that preserves a certain return
within a predetermined range of interest rates or values.
The Fund may enter into interest rate swaps, caps, floors and collars on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or liabilities, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments on the payment date. To the extent these Derivative Transactions are
entered into for good faith hedging purposes, SBAM believes such obligations
do not constitute senior securities and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will accrue the net
amount of the excess, if any, of the Fund's obligations over its entitlements
with respect to each interest rate swap on a daily basis and will segregate
with a custodian an amount of cash or liquid securities having an aggregate
net asset value at least equal to the accrued excess. The Fund will not enter
into any interest rate swap, cap, floor or collar transaction unless the other
party thereto has been determined by SBAM to be creditworthy at the time of
entering into such transaction. If there is a default by the other party to
such a transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and as agents utilizing standardized swap
documentation. Caps, floors and collars are less liquid than swaps.
B-1
<PAGE>
PUT AND CALL OPTIONS ON SECURITIES AND INDICES
The Fund may purchase and sell put and call options on securities and
indices based upon the prices of securities. A put option on a security gives
the purchaser of the option the right to sell and the writer the obligation to
buy the underlying security at the exercise price during the option period.
The Fund may also purchase and sell options on indices based upon the prices
of securities ("index options"). Index options are similar to options on
securities except that, rather than taking or making delivery of securities
underlying the option at a specified price upon exercise, an index option
gives the holder the right to receive cash upon exercise of the option if the
level of the index upon which the option is based is greater, in the case of a
call, or less in the case of a put, than the exercise price of the option. The
purchase of a put option on a security would be designed to protect against a
decline in the market value of a security held by the Fund. A call option on a
security gives the purchaser of the option the right to buy and the writer the
obligation to sell the underlying security at the exercise price during the
option period. The purchase of a call option on a security would be intended
to protect the Fund against an increase in the price of a security that it
intended to purchase in the future. In the case of either put or call options
that it has purchased, if the option expires without being sold or exercised,
the Fund will experience a loss in the amount of the option premium plus any
related commissions. When the Fund sells put and call options, it receives a
premium as the seller of the option. The premium that the Fund receives for
writing the option will serve as a partial hedge, in the amount of the option
premium, against changes in the value of the securities in its portfolio.
During the term of the option, however, a covered call seller has, in return
for the premium on the option, given up the opportunity for capital
appreciation above the exercise price of the option if the value of the
underlying security increases, but has retained the risk of loss should the
price of the underlying security decline. Conversely, a secured put seller
retains the risk of loss should the market value of the underlying security
decline below the exercise price of the option, less the premium received on
the sale of the option. The Fund is authorized to purchase and sell exchange
listed options and over-the-counter options ("OTC Options") which are
privately negotiated with the counterparty to such contract. Listed options
are issued by the Options Clearing Corporation ("OCC"), which guarantees the
performance of the obligations of the parties to such options.
All such call options sold (written) by the Fund will be "covered" as long
as the call is outstanding (i.e., the Fund will own the instrument subject to
the call or other securities or assets acceptable under applicable segregation
and coverage rules). All such put options sold (written) by the Fund will be
secured by segregated assets consisting of cash or liquid assets having a
value not less than the exercise price.
The Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent upon the existence of a liquid
secondary market. Among the possible reasons for the absence of a liquid
secondary market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange;
(iii) trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities; (iv)
interruption of the normal operations on an exchange; (v) inadequacy of the
facilities of an exchange or OCC to handle current trading volume; or (vi) a
decision by one or more exchanges to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options on that exchange that had been listed by the OCC
as a result of trades on that exchange would generally continue to be
exercisable in accordance with their terms. OTC Options are purchased from or
sold to dealers, financial institutions or other counterparties which have
entered into direct
B-2
<PAGE>
agreements with the Fund. With OTC Options, such variables as expiration date,
exercise price and premium will be agreed upon between the Fund and the
counterparty, without the intermediation of a third party such as the OCC. If
the counterparty fails to make or take delivery of the securities underlying
an option it has written, or otherwise fails to settle the transaction in
accordance with the terms of that option as written, the Fund would lose the
premium paid for the option as well as any anticipated benefit of the
transaction. As the Fund must rely on the credit quality of the counterparty
rather than the guarantee of the OCC, it will only enter into OTC options with
counterparties with the highest long-term credit ratings, and with primary
United States government securities dealers recognized by the Federal Reserve
Bank of New York.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the option markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Characteristics. The Fund may purchase and sell futures contracts on
interest rates and securities indices and purchase and sell (write) put and
call options on such futures contracts traded on recognized domestic exchanges
as a hedge against anticipated interest rate changes or other market
movements. The sale of a futures contract creates an obligation by the Fund,
as seller, to deliver the specific type of financial instrument called for in
the contract at a specified future time for a specified price. Options on
futures contracts are similar to options on securities except that an option
on a futures contract gives the purchaser the right in return for the premium
paid to assume a position in a futures contract (a long position if the option
is a call and a short position if the option is a put).
Margin Requirements. At the time a futures contract is purchased or sold,
the Fund must allocate cash or securities as a deposit payment ("initial
margin"). It is expected that the initial margin that the Fund will pay may
range from approximately 1% to approximately 5% of the value of the
instruments underlying the contract. In certain circumstances, however, such
as during periods of high volatility, the Fund may be required by an exchange
to increase the level of its initial margin payment. Additionally, initial
margin requirements may be increased in the future pursuant to regulatory
action. An outstanding futures contract is valued daily and the payment in
cash of "variation margin" may be required, a process known as "marking to the
market." Transactions in listed options and futures are usually settled by
entering into an offsetting transaction, and are subject to the risk that the
position may not be able to be closed if no offsetting transaction can be
arranged.
Limitations on Use of Futures Contracts and Options on Futures
Contracts. The Fund's use of futures contracts and options on futures
contracts will in all cases be consistent with applicable regulatory
requirements and in particular, the rules and regulations of the CFTC. In
addition, the Fund may not sell futures contracts if the value of such futures
contracts exceeds the total market value of the Fund's portfolio securities.
The Fund may engage in transactions in futures contracts or options thereon
for speculative purposes or as a hedge against changes resulting from market
conditions in the values of securities in its portfolio. The Fund may enter
into futures contracts or options thereon for purposes other than bona fide
hedging if, immediately thereafter, the sum of the amount of its initial
margin and premiums on open contracts and options would not exceed 5% of the
liquidation value of the Fund's portfolio; provided further that in the case
of an option that is
B-3
<PAGE>
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. Also, when required, a segregated
account of cash or cash equivalents will be maintained and marked to market in
an amount equal to the market value of the contract. SBAM reserves the right
to comply with such different standards as may be established from time to
time by CFTC rules and regulations with respect to the purchase and sale of
futures contracts and options thereon.
Segregation and Cover Requirements. Futures contracts, interest rate swaps,
caps, floors and collars, and options on securities, indices and futures
contracts sold by the Fund are generally subject to segregation and coverage
requirements established by either the CFTC or the Commission, with the result
that, if the Fund does not hold the instrument underlying the futures contract
or option, the Fund will be required to segregate on an ongoing basis with its
custodian, cash, U.S. government securities, or other liquid assets in an
amount at least equal to the Fund's obligations with respect to such
instruments. Such amounts will fluctuate as the market value of the
obligations increases or decreases. The segregation requirement can result in
the Fund maintaining positions it would otherwise liquidate and consequently
segregating assets with respect thereto at a time when it might be
disadvantageous to do so. In addition, with respect to futures contracts
purchased by the Fund, the Fund will also be subject to the segregation
requirements with respect to the value of the instruments underlying the
futures contract.
Derivative Transactions present certain risks. In particular, the variable
degree of correlation between price movements of hedging instruments and price
movements in the position being hedged creates the possibility that losses on
the hedge may be greater than gains in the value of the Fund's positions. In
addition, certain hedging instruments and markets may not be liquid in all
circumstances. As a result, in volatile markets, the Fund may not be able to
close out a transaction in certain of these instruments without incurring
losses substantially greater than the initial deposit. Although the
contemplated use of these instruments should tend to minimize the risk of loss
due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in the
value of such position. The ability of the Fund to hedge successfully will
depend on SBAM's ability to predict pertinent market movements, which cannot
be assured. Finally, the daily variation margin deposit requirements in
futures contracts that the Fund has sold create an ongoing greater potential
financial risk than do transactions in which the Fund has purchased options
where the exposure is limited to the cost of the initial premium and
transaction costs paid by the Fund. While the Fund may enter into Derivative
Transactions to hedge all or a portion of its portfolio, changes in the
directions of markets that are the subject of a hedge and fluctuations in
interest rates may result in a poorer overall performance for the Fund than if
it had not engaged in any such transactions. Losses due to Derivative
Transactions will reduce the Fund's net asset value.
The Fund's investments in Derivative Transactions may be limited by certain
provisions of the Internal Revenue Code of 1986, as amended. See "Taxation" in
this Prospectus.
CURRENCY TRANSACTIONS
As discussed in the Prospectus, the Fund may engage in currency transactions
with counterparties to hedge the value of portfolio securities denominated in
particular currencies against fluctuations in relative value or to generate
income or gain. The types of currency transactions the Fund may engage in are
described in the Prospectus. Transaction hedging is entering into a currency
transaction with respect to specific assets or liabilities of the Fund, which
will generally arise in connection with the purchase or sale of the Fund's
portfolio securities
B-4
<PAGE>
or the receipt of income from them. Position hedging is entering into a
currency transaction with respect to portfolio securities positions
denominated or generally quoted in that currency. The Fund will not enter into
a transaction to hedge currency exposure to an extent greater, after netting
all transactions intended wholly or partially to offset other transactions,
than the aggregate market value (at the time of entering into the transaction)
of the securities held by the Fund that are denominated or generally quoted in
or currently convertible into the currency, other than with respect to proxy
hedging as described below.
The Fund may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to increase or
decline in value relative to other currencies to which the Fund has or in
which the Fund expects to have exposure. To reduce the effect of currency
fluctuations on the value of existing or anticipated holdings of its
securities, the Fund may also engage in proxy hedging. Proxy hedging is often
used when the currency to which the Fund's holdings is exposed is difficult to
hedge generally or difficult to hedge against the U.S. dollar. Proxy hedging
entails entering into a forward contract to sell a currency, the changes in
the value of which are generally considered to be linked to a currency or
currencies in which some or all of the Fund's securities are or are expected
to be denominated, and buying U.S. dollars. The amount of the contract would
not exceed the market value of the Fund's securities denominated in linked
currencies.
Currency transactions are subject to risks different from those of other
portfolio transactions. Currency hedging involves some of the same risks and
considerations as other transactions with similar instruments. Currency
transactions can result in losses to the Fund if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, the risk exists that the perceived linkage between various currencies
may not be present or may not be present during the particular time that the
Fund is engaging in proxy hedging. Currency transactions are also subject to
risks different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related
instruments can be adversely affected by government exchange controls,
limitations or restrictions on repatriation of currency, and manipulations or
exchange restrictions imposed by governments. These forms of governmental
actions can result in losses to the Fund if it is unable to deliver or receive
currency or monies in settlement of obligations and could also cause hedges it
has entered into to be rendered useless, resulting in full currency exposure
as well as the incurrence of transaction costs. Buyers and sellers of currency
futures contracts are subject to the same risks that apply to the use of
futures contracts generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures contracts is relatively
new, and the ability to establish and close out positions on these options is
subject to the maintenance of a liquid market that may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
a country's economy.
B-5
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS OFFERING, OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND, ITS INVESTMENT ADVISER OR THE UNDERWRIT-
ERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF OR THAT THE INFORMA-
TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCE IN WHICH SUCH AN OFFER OR SOLICITA-
TION IS UNLAWFUL.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors and Special Considerations.................................. 8
Fee Table................................................................ 18
The Fund................................................................. 19
Use of Proceeds.......................................................... 19
Investment Objectives and Policies....................................... 20
Additional Investment Activities......................................... 26
Investment Restrictions.................................................. 34
Management of the Fund................................................... 35
Portfolio Transactions................................................... 42
Dividends and Distributions; Dividend Reinvestment Plan.................. 43
Taxation................................................................. 46
Net Asset Value.......................................................... 51
Description of Capital Stock............................................. 51
Custodian, Transfer Agent, Dividend Paying Agent and Registrar........... 55
Underwriting............................................................. 56
Experts.................................................................. 58
Legal Matters............................................................ 58
Further Information...................................................... 58
Report of Independent Accountants........................................ 59
Statement of Assets and Liabilities...................................... 60
Appendix A: Description of Ratings....................................... A-1
Appendix B: General Characteristics and Risks of Hedging and Other
Strategic Transactions.................................................. B-1
</TABLE>
-----------
UNTIL JUNE 15, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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SHARES
SALOMON BROTHERS
HIGH INCOME
FUND II INC
COMMON STOCK
($.001 PAR VALUE)
-------
PROSPECTUS
MAY 21, 1998
-------
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
ADVEST, INC.
EVEREN SECURITIES, INC.
FAHNESTOCK & CO. INC.
JANNEY MONTGOMERY SCOTT INC.
LEGG MASON WOOD WALKER
INCORPORATED
MCDONALD & COMPANY
SECURITIES, INC.
MORGAN KEEGAN & COMPANY, INC.
THE ROBINSON-HUMPHREY COMPANY
TUCKER ANTHONY
INCORPORATED
WEDBUSH MORGAN SECURITIES
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<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements
Exhibits
<TABLE>
<C> <S>
(2)(a) --Amended and Restated Articles of Incorporation
(b) --Amended and Restated By-Laws
(c) --Not Applicable
(d)(1) --Specimen Stock Certificate is incorporated herein by reference to
Exhibit 2(d)(1) of Registrant's Registration Statement on Form N-2
filed on April 29, 1998.
(2) --Articles V and VIII of Registrant's Articles of Incorporation and
Article II of Registrant's By-Laws are incorporated herein by
reference to Exhibits 2(a) and 2(b) hereof, respectively.
(e) --Form of Dividend Reinvestment Plan is incorporated herein by
reference to Exhibit 2(e) of Registrant's Registration Statement on
Form N-2 filed on April 29, 1998.
(f) --Not Applicable
(g) --Form of Investment Management Agreement is incorporated herein by
reference to Exhibit 2(g) of Registrant's Registration Statement on
Form N-2 filed on April 29, 1998.
(h)(1) --Form of Underwriting Agreement
(2) --Form of Master Agreement Among Underwriters is incorporated herein
by reference to Exhibit 2(h)(2) of Registrant's Registration
Statement on Form N-2 filed on April 29, 1998.
(3) --Form of Selling Agreement is incorporated herein by reference to
Exhibit 2(h)(3) of Registrant's Registration Statement on Form N-2
filed on April 29, 1998.
(i) --Not Applicable
(j) --Form of Custodian Agreement
(k)(1) --Form of Administration Agreement is incorporated herein by reference
to Exhibit 2(k)(1) of Registrant's Registration Statement on Form N-2
filed on April 29, 1998.
(2) --Form of Transfer Agency and Services Agreement is incorporated
herein by reference to Exhibit 2(k)(2) of Registrant's Registration
Statement on Form N-2 filed on April 29, 1998.
(l) --Opinion and Consent of Counsel
(m) --Not Applicable
(n) --Consent of Independent Accountants
(o) --Not Applicable
(p) --Form of Stock Purchase Agreement is incorporated herein by reference
to Exhibit 2(p) of Registrant's Registration Statement on Form N-2
filed on April 29, 1998.
(q) --Not Applicable
(r) --Financial Data Schedule
(s) --Power of Attorney of Heath B. McClendon, Charles F. Barber, Daniel
P. Cronin, Riordan Roett and Jeswald W. Salacuse is incorporated by
reference to Page C-4 of Registrant's Registration Statement on Form
N-2 filed on April 29, 1998.
</TABLE>
C-1
<PAGE>
ITEM 25. MARKETING ARRANGEMENTS
See Exhibits 2(h)(1), 2(h)(2) and 2(h)(3) to this 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:
<TABLE>
<S> <C>
SEC Registration fees............................................ $ 295,000
New York Stock Exchange listing fee.............................. 300,433
Printing and engraving expenses.................................. 341,300
Legal fees and expenses.......................................... 138,000
NASD Fees........................................................ 38,500
Miscellaneous.................................................... 431,767
----------
Total.......................................................... $1,545,000
==========
</TABLE>
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not Applicable.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES (AS OF MAY 20, 1998)
<TABLE>
<CAPTION>
TITLE OF CLASS NUMBER OF RECORD HOLDERS
-------------- ------------------------
<S> <C>
Common Stock, par value $.001 per share............. 1
</TABLE>
ITEM 29. INDEMNIFICATION
Under the Registrant's Amended and Restated Articles of Incorporation and
Amended and Restated By-Laws, the directors and officers of the Registrant
will be (and employees and agents of the Registrant may be) indemnified to the
fullest extent allowed and in the manner provided by Maryland law and
applicable provisions of the Investment Company Act of 1940, as amended,
including advancing of expenses incurred in connection therewith.
Indemnification shall not be provided, however, to any person against any
liability to the Registrant or its security-holders to which he or she would
otherwise be subject by reasons of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
or her office.
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to the directors and officers, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such Act and is
therefore unenforceable. If a claim for indemnification against such
liabilities under the Securities Act of 1933 (other than for expenses incurred
in a successful defense) is asserted against the Registrant by the directors
or officers in connection with the Common Stock, the Registrant 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 of
whether such indemnification by it is against public policy as expressed in
such Act and will be governed by the final adjudication of such issue.
Reference is made to Section Eight of the Underwriting Agreement, a form of
which is filed as Exhibit 2(h)(1) hereto, for provisions relating to the
indemnification of the Underwriters.
ITEM 30. BUSINESS AND OTHER CONNECTIONS OF ADVISER
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and directors of Salomon Brothers
Asset Management Inc ("SBAM"), reference is made to SBAM's current Form ADV
filed under the Investment Advisers Act of 1940, incorporated herein by
reference.
ITEM 31. LOCATION OF ACCOUNTS AND RECORDS
The accounts and records of the Registrant are maintained at the office of
(i) SBAM at Seven World Trade Center, New York, New York 10048, (ii) at PNC
Bank, N.A., the Registrant's custodian, at Airport Business Center,
International Court 2, 200 Stevens Drive, Lester, Pennsylvania 19113, (iii)
First Data Investor Services
C-2
<PAGE>
Group, Inc., the Registrant's transfer agent, at P.O. Box 5127, Westborough,
Massachusetts 01581-5127; and (iv) Mutual Management Corp., the Registrant's
administrator, at 388 Greenwich Street, New York, New York 10013.
ITEM 32. MANAGEMENT SERVICES
Not Applicable
ITEM 33. UNDERTAKINGS
(1) Registrant undertakes to suspend the offering of Common Stock until the
prospectus is amended, if subsequent to the effective date of this
registration statement, its net asset value declines more than ten percent
from its net asset value as of the effective date of the registration
statement or its net asset value increases to an amount greater than its net
proceeds as stated in the prospectus.
(2) Not Applicable
(3) Not Applicable
(4) Not Applicable
(5) Registrant undertakes that, for the purpose of determining any liability
under the Securities Act, the information omitted from the form of prospectus
filed as part of the Registration Statement in reliance upon Rule 430A and
contained in the form of prospectus filed by the Registrant pursuant to Rule
497(h) will be deemed to be a part of the Registration Statement as of the
time it was declared effective.
Registrant undertakes that, for the purpose of determining any liability
under the Securities Act, each post-effective amendment that contains a form
of prospectus will be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at that
time will be deemed to be the initial bona fide offering thereof.
(6) Not Applicable
C-3
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933 AND THE INVESTMENT
COMPANY ACT OF 1940, THE REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, HEREUNTO DULY AUTHORIZED, IN THE
CITY OF NEW YORK, STATE OF NEW YORK ON THE 21ST DAY OF MAY, 1998.
Salomon Brothers High Income Fund II
Inc
/s/ Heath B. McLendon
By: _________________________________
HEATH B. MCLENDON
PRESIDENT
/s/ Lewis E. Daidone
By: _________________________________
LEWIS E. DAIDONE
TREASURER & CHIEF FINANCIAL
OFFICER
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS REGISTRATION
STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE
DATES INDICATED.
SIGNATURE TITLE DATE
/s/ Heath B. McLendon Chairman of the
- ------------------------------------- Board and President May 21, 1998
HEATH B. MCLENDON
Director
* Charles F. Barber May 21, 1998
- -------------------------------------
CHARLES F. BARBER
Director
* Daniel P. Cronin May 21, 1998
- -------------------------------------
DANIEL P. CRONIN
Director
* Riordan Roett May 21, 1998
- -------------------------------------
RIORDAN ROETT
Director
* Jeswald W. Salacuse May 21, 1998
- -------------------------------------
JESWALD W. SALACUSE
/s/ Heath B. McLendon
* By: __________________________
HEATH B. MCLENDON, ATTORNEY-IN-FACT
C-4
<PAGE>
SCHEDULE OF EXHIBITS TO FORM N-2
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
------- -------
<C> <S> <C>
Exhibit 2(a) Amended and Restated Articles of Incorporation
Exhibit 2(b) Amended and Restated By-Laws
Exhibit 2(h)(l) Form of Underwriting Agreement
Exhibit 2(j) Form of Custodian Agreement
Exhibit 2(l) Opinion and Consent of Counsel
Exhibit 2(n) Consent of Independent Accountants
Exhibit 2(r) Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<SERIES>
<NUMBER> 001
<NAME> SALOMON BROTHERS HIGH INCOME FUND II INC
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAY-20-1998
<INVESTMENTS-AT-COST> 0
<INVESTMENTS-AT-VALUE> 0
<RECEIVABLES> 0
<ASSETS-OTHER> 225,005
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 225,005
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 125,000
<TOTAL-LIABILITIES> 125,000
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 6,667
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 100,005
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 0
<OTHER-INCOME> 0
<EXPENSES-NET> 0
<NET-INVESTMENT-INCOME> 0
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 0
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,667
<NUMBER-OF-SHARES-REDEEMED> 0
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 15.00
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
<PAGE>
EXHIBIT 99.2(a)
SALOMON BROTHERS HIGH INCOME FUND II INC
ARTICLES OF AMENDMENT AND RESTATEMENT
Salomon Brothers High Income Fund II Inc, a Maryland corporation, having
its principal office in Baltimore City, Maryland (which is hereinafter called
the "Corporation"), hereby certifies to the State Department of Assessments and
Taxation of Maryland that:
FIRST: The Charter of the Corporation is hereby amended and restated in
its entirety to read as follows:
ARTICLE I
THE UNDERSIGNED, David Wohl, whose post office address is 425 Lexington
Avenue, New York, NY 10017-3909, being at least eighteen years of age, does
hereby act as an incorporator and form a corporation under and by virtue of the
Maryland General Corporation Law.
ARTICLE II
NAME
----
The name of the corporation (which is hereinafter called the "Corporation")
is "Salomon Brothers High Income Fund II Inc".
ARTICLE III
PURPOSE AND POWER
-----------------
The purpose for which the Corporation is formed is to conduct and carry on
the business of a closed-end investment company registered under the Investment
Company Act of 1940, as amended (the "1940 Act"). The Corporation shall have all
of the powers granted to corporations by the Maryland General Corporation Law
now or hereafter in force.
ARTICLE IV
PRINCIPAL OFFICE AND RESIDENT AGENT
-----------------------------------
The post office address of the principal office of the Corporation in the
State of Maryland is c/o The Corporation Trust Incorporated, 32 South Street,
Baltimore, Maryland 21202. The name of the resident agent of the Corporation in
the State of Maryland is The
-1-
<PAGE>
Corporation Trust Incorporated, a Maryland corporation. The post office address
of the resident agent is 32 South Street, Baltimore, Maryland 21202.
ARTICLE V
CAPITAL STOCK
-------------
(1) The total number of shares of capital stock that the Corporation
shall have authority to issue is one hundred million (100,000,000) shares, of
the par value of one mill ($.001) per share and of the aggregate par value of
one hundred thousand dollars ($100,000), all of which one hundred million
(100,000,000) shares are initially classified as "Common Stock."
(2) The Corporation may issue fractional shares. Any fractional share
shall carry proportionately the rights of a whole share including, without
limitation, the right to vote and the right to receive dividends. The holder of
a fractional share shall not, however, have the right to receive a certificate
evidencing it.
(3) All persons who shall acquire shares of capital stock in the
Corporation shall acquire the same subject to the provisions of these Articles
of Incorporation and the By-Laws of the Corporation.
(4) No holder of shares of capital stock of the Corporation by virtue
of being such a holder shall have any preemptive or other right to purchase or
subscribe for any shares of the Corporation's capital stock or any other
security that the Corporation may issue or sell other than a right that the
Board of Directors in its discretion may determine to grant.
(5) The Board of Directors shall have authority by resolution to
classify and reclassify any authorized but unissued shares of capital stock from
time to time by setting or changing in any one or more respects the preferences,
conversion or other rights, voting powers, restrictions, limitations as to
dividends, qualifications or terms or conditions of redemption of the capital
stock.
(6) Notwithstanding any provision of law requiring any action to be
taken or authorized by the affirmative vote of the holders of a greater
proportion of the votes of all classes or of any class of stock of the
Corporation, such action shall be effective and valid if taken or authorized by
the affirmative vote of a majority of the total number of votes entitled to be
cast thereon, except as otherwise provided in these Articles of Incorporation.
-2-
<PAGE>
ARTICLE VI
BOARD OF DIRECTORS
------------------
(1) The number of directors constituting the Board of Directors shall
be five (5). This number may be changed pursuant to the By-Laws of the
Corporation, but shall at no time be less than the minimum number required under
the Maryland General Corporation Law nor more than twelve (12).
(2) Beginning with the first annual meeting of stockholders of the
Corporation (the "first annual meeting") and if at such time, the number of
directors shall be three (3) or more, the Board of Directors of the Corporation
shall be divided into three classes: Class I, Class II and Class III. At the
first annual meeting, directors of Class I shall be elected to the Board of
Directors for a term expiring at the next succeeding annual meeting of
stockholders, directors of Class II shall be elected to the Board of Directors
for a term expiring at the second succeeding annual meeting of stockholders and
directors of Class III shall be elected to the Board of Directors for a term
expiring at the third succeeding annual meeting of stockholders. At each
subsequent annual meeting of stockholders, the directors chosen to succeed those
whose terms are expiring shall be identified as being of the same class as the
directors whom they succeed and shall be elected for a term expiring at the time
of the third succeeding annual meeting of stockholders subsequent to their
election, or thereafter in each case when their respective successors are
elected and qualified. If the number of directors is changed, any increase or
decrease shall be apportioned among the classes by resolution of the Board of
Directors so as to maintain the number of directors in each class as nearly
equal as possible, but in no case shall a decrease in the number of directors
shorten the term of any incumbent director.
(3) A director of the Corporation may be removed from office only for
cause and then only by vote of the holders of at least seventy-five percent
(75%) of the votes entitled to be cast for the election of directors.
(4) In furtherance, and not in limitation, of the powers conferred by
the laws of the State of Maryland, the Board of Directors is expressly
authorized:
(i) To make, alter or repeal the By-Laws of the Corporation,
except as otherwise required by the 1940 Act.
(ii) From time to time to determine whether and to what extent
and at what times and places and under what conditions and regulations the
books and accounts of the Corporation, or any of them other than the stock
ledger, shall be open to the inspection of the stockholders. No
stockholder shall have any right to inspect any account or book or document
of the Corporation, except as conferred by law or authorized by resolution
of the Board of Directors.
-3-
<PAGE>
(iii) Without the assent or vote of the stockholders, to
authorize the issuance from time to time of shares of the capital stock of
any class of the Corporation, whether now or hereafter authorized, and
securities convertible into shares of capital stock of the Corporation of
any class or classes, whether now or hereafter authorized, for such
consideration as the Board of Directors may deem advisable.
(iv) Without the assent or vote of the stockholders, to
authorize and issue obligations of the Corporation, secured or unsecured,
as the Board of Directors may determine, and to authorize and cause to be
executed mortgages and liens upon the real or personal property of the
Corporation.
(v) To establish the basis or method for determining the value
of the assets and the amount of the liabilities of the Corporation and the
net asset value of each share of the Corporation's capital stock.
(vi) To determine what accounting periods shall be used by the
Corporation for any purpose; to set apart out of any funds of the
Corporation reserves for such purposes as it shall determine and to abolish
the same; to declare and pay any dividends and distributions in cash,
securities or other property from any funds legally available therefor, at
such intervals as it shall determine; to declare dividends or distributions
by means of a formula or other method of determination, at meetings held
less frequently than the frequency of the effectiveness of such
declarations; and to establish payment dates for dividends or any other
distributions on any basis, including dates occurring less frequently than
the effectiveness of declarations thereof.
(vii) In addition to the powers and authorities granted in
these Articles of Incorporation and by statute expressly conferred upon it,
the Board of Directors is authorized to exercise all powers and do all acts
that may be exercised or done by the Corporation pursuant to the provisions
of the laws of the State of Maryland, these Articles of Incorporation and
the By-Laws of the Corporation.
(5) Any determination made in good faith, and in accordance
with these Articles of Incorporation, if applicable, by or pursuant to the
direction of the Board of Directors, with respect to the amount of assets,
obligations or liabilities of the Corporation, as to the amount of net income of
the Corporation from dividends and interest for any period or amounts at any
time legally available for the payment of dividends, as to the amount of any
reserves or charges set up and the propriety thereof, as to the time of or
purpose for creating reserves or as to the use, alteration or cancellation of
any reserves or charges (whether or not any obligation or liability for which
the reserves or charges have been created has been paid or discharged or is then
or thereafter required to be paid or discharged), as to the value of any
security owned by the Corporation, as to the determination of the net asset
value of shares of any class of the Corporation's capital stock, or as to any
other matters relating to the issuance, sale or other acquisition or disposition
of securities or shares of capital stock of the Corporation, and any reasonable
determination made in good faith by the Board of Directors whether any
transaction constitutes a purchase of securities on "margin," a sale of
securities
-4-
<PAGE>
"short," or an underwriting or the sale of, or a participation in any
underwriting or selling group in connection with the public distribution of, any
securities, shall be final and conclusive, and shall be binding upon the
Corporation and all holders of shares of its capital stock, past, present and
future, and shares of the capital stock of the Corporation are issued and sold
on the condition and understanding, evidenced by the purchase of shares of
capital stock or acceptance of share certificates, that any and all such
determinations shall be binding as aforesaid. No provision of these Articles of
Incorporation shall be effective to require a waiver of compliance with any
provision of the Securities Act of 1933, as amended, or the 1940 Act, or of any
valid rule, regulation or order of the Securities and Exchange Commission under
those Acts.
ARTICLE VII
LIABILITY AND INDEMNIFICATION
-----------------------------
(1) To the fullest extent that limitations on the liability of
directors and officers are permitted by the Maryland General Corporation Law, no
director or officer of the Corporation shall have any personal liability to the
Corporation or its stockholders for monetary damages. This limitation on
liability applies to events occurring at the time a person serves as a director
or officer of the Corporation whether or not such person is a director or
officer at the time of any proceeding in which liability is asserted.
(2) The Corporation shall indemnify and advance expenses to its
currently acting and its former directors to the fullest extent that
indemnification of directors is permitted by the Maryland General Corporation
Law. The Corporation shall indemnify and advance expenses to its officers to the
same extent as its directors and may do so to such further extent as is
consistent with law. The Board of Directors may by By-Law, resolution or
agreement make further provision for indemnification of directors, officers,
employees and agents to the fullest extent permitted by the Maryland General
Corporation Law. This indemnification applies to events occurring at the time a
person serves as a director or officer of the Corporation whether or not such
person is a director or officer at the time of any proceeding in which liability
is asserted.
(3) No provision of these Articles of Incorporation shall be effective
to protect or purport to protect any director or officer of the Corporation
against any liability to the Corporation or its security holders to which he
would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
office.
(4) References to the Maryland General Corporation Law in this Article
VII are to that law as from time to time amended. No amendment to the
Corporation's Articles of Incorporation shall affect any right of any person
under this Article VII based on any event, omission or proceeding prior to such
amendment.
-5-
<PAGE>
ARTICLE VIII
SHAREHOLDER VOTE
----------------
(1) Notwithstanding any other provision of these Articles of
Incorporation, the affirmative vote of the holders of (i) eighty percent (80%)
of the votes entitled to be cast thereon by shareholders of the Corporation and
(ii) in the case of a Business Combination (as defined below), 66-2/3% of the
votes entitled to be cast thereon by shareholders of the Corporation other than
votes entitled to be cast thereon by an Interested Party (as defined below) who
is (or whose Affiliate (as defined below) is) a party to a Business Combination
(as defined below) or an Affiliate or associate of the Interested Party, in
addition to the affirmative vote of seventy-five percent (75%) of the entire
Board of Directors, shall be required to advise, approve, adopt or authorize any
of the following:
(i) a merger, consolidation or statutory share exchange of the
Corporation with or into another person;
(ii) issuance or transfer by the Corporation (in one or a
series of transactions in any 12 month period) of any securities of the
Corporation to any 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 issuances or transfers of debt
securities of the Corporation, sales of securities of the Corporation
in connection with a public offering, issuances of securities of the
Corporation pursuant to a dividend reinvestment plan adopted by the
Corporation, issuances of securities of the Corporation upon the
exercise of any stock subscription rights distributed by the
Corporation and portfolio transactions effected by the Corporation in
the ordinary course of business;
(iii) sale, lease, exchange, mortgage, pledge, transfer or other
disposition by the Corporation (in one or a series of transactions in
any 12 month period) to or with any person or entity of any assets of
the Corporation having an aggregate fair market value of $1,000,000 or
more except for portfolio transactions (including pledges of portfolio
securities in connection with borrowings) effected by the Corporation
in the ordinary course of its business (transactions within clauses
(i), (ii) and (iii) above being known individually as a "Business
Combination");
(iv) the voluntary liquidation or dissolution of the
Corporation, or an amendment to these Articles of Incorporation to
terminate the Corporation's existence; or
(v) unless the 1940 Act or federal law requires a lesser vote,
any shareholder proposal as to specific investment decisions made or to
be made with respect to the Corporation's assets as to which
stockholder approval is required under Federal or Maryland law.
-6-
<PAGE>
However, the shareholder vote described in Paragraph (1) of this Article
VIII will not be required with respect to the foregoing transactions (other than
those set forth in (v) above) if they are approved by a vote of seventy-five
percent (75%) of the Continuing Directors (as defined below). In that case, if
Maryland law requires shareholder approval, the affirmative vote of a majority
of the votes entitled to be cast shall be required.
(i) "Continuing Director" means any member of the Board of
Directors of the Corporation who is not an Interested Party or an Affiliate
of an Interested Party and has been a member of the Board of Directors for
a period of at least 12 months, or has been a member of the Board of
Directors since April 24, 1998, 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 on the
Board of Directors .
(ii) "Interested Party" shall mean any person, other than an
investment company advised by the Corporation's initial investment manager
or any of its Affiliates, which enters, or proposes to enter, into a
Business Combination with the Corporation.
(iii) "Affiliate" shall have the meaning ascribed to
such term in Rule 12b-2 of the General Rules and Regulations under the
Securities Exchange Act of 1934, as amended.
(2) Notwithstanding any other provision of these Articles of
Incorporation, the affirmative vote of seventy-five percent (75%) of the entire
Board of Directors shall be required to advise, approve, adopt or authorize the
conversion of the Corporation from a closed-end company to an open-end company,
and any amendments necessary to effect the conversion. Such conversion or any
such amendment shall also require the approval of the holders of seventy-five
percent (75%) of the votes entitled to be cast thereon by stockholders of the
Corporation unless approved by a vote of seventy-five percent (75%) of the
Continuing Directors, in which event such conversion shall require the approval
of the holders of a majority of the votes entitled to be cast thereon by
stockholders of the Corporation.
ARTICLE IX
AMENDMENTS
----------
(1) The Corporation reserves the right from time to time to make any
amendment to these Articles of Incorporation, now or hereafter authorized by
law, including any amendment that alters the contract rights, as expressly set
forth in these Articles of Incorporation, of any outstanding capital stock of
the Corporation.
(2) In addition to the voting requirements imposed by law or by any
other provision of these Articles of Incorporation, the provisions set forth in
this Article IX, the
-7-
<PAGE>
provisions of Article III hereof, the provisions of Sections (2) and (3) of
Article VI hereof, the provisions of these Articles of Incorporation setting the
maximum number of Directors at twelve (12), the provisions of Article VIII and
the provisions of Article X (except as provided in Section (1) of Article VIII)
hereof, may not be amended, altered or repealed in any respect, nor may any
provision inconsistent with this Article IX, the provisions of Sections (2) and
(3) of Article VI hereof, the provision setting the maximum number of Directors
or the provisions of Article VIII hereof be adopted, unless such action is
advised by seventy-five percent (75%) of the entire Board of Directors and
approved by the affirmative vote of the holders of at least seventy-five percent
(75%) of the votes entitled to be cast by stockholders of the Corporation.
ARTICLE X
PERPETUAL EXISTENCE
-------------------
The duration of the Corporation shall be perpetual.
SECOND: The amendment and restatement does not increase the authorized
capital stock of the Corporation.
THIRD: The foregoing amendment and restatement to the Charter of the
Corporation has been declared advisable by the Board of Directors and approved
by the sole stockholder of the Corporation.
-8-
<PAGE>
IN WITNESS WHEREOF, Salomon Brothers High Income Fund II Inc has caused
these presents to be signed in its name and on its behalf by its President and
witnessed by its Secretary on May 20, 1998.
WITNESS: SALOMON BROTHERS HIGH INCOME FUND
II INC
/s/ Noel B. Daugherty By: /s/ Heath B. McLendon
- --------------------- ---------------------
Noel B. Daugherty Heath B. McLendon
Secretary President
THE UNDERSIGNED, President of Salomon Brothers High Income Fund II Inc,
who executed on behalf of the Corporation the foregoing Articles of Amendment
and Restatement of which this certificate is made a part, hereby acknowledges in
the name and on behalf of said Corporation the foregoing Articles of Amendment
and Restatement to be the corporate act of said Corporation and hereby certifies
that to the best of his knowledge, information, and belief the matters and facts
set forth therein with respect to the authorization and approval thereof are
true in all material respects under the penalties of perjury.
/s/ Heath B. McLendon
---------------------
Heath B. McLendon
President
-9-
<PAGE>
EXHIBIT 99.2(b)
AMENDED AND RESTATED BY-LAWS
OF
SALOMON BROTHERS HIGH INCOME FUND II INC
A Maryland Corporation
ARTICLE I
---------
OFFICES
-------
SECTION 1. PRINCIPAL OFFICE IN MARYLAND. Salomon Brothers High
----------------------------
Income Fund II Inc (the "Corporation") shall have a principal office in the City
of Baltimore, State of Maryland.
SECTION 2. OTHER OFFICES. The Corporation may have offices also
-------------
at such other places within and without the State of Maryland as the Board of
Directors may from time to time determine or as the business of the Corporation
may require.
ARTICLE II
----------
STOCKHOLDERS
------------
SECTION 1. ANNUAL MEETINGS. The annual meeting of the
---------------
stockholders of the Corporation shall be held on a date not less than ninety
(90) days nor more than one hundred twenty (120) days following the end of the
Corporation's fiscal year fixed from time to time by the Board of Directors. An
annual meeting may be held at any place in or out of the State of Maryland and
at any time, each as may be determined by the Board of Directors and designated
in the notice of the meeting. Any business of the Corporation may be transacted
at an annual meeting without the purposes having been specified in the notice
unless otherwise provided by statute, the Corporation's Articles of
Incorporation, as amended from time to time (the "Charter"), or these By-Laws.
SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders
----------------
for any purpose or purposes, unless otherwise prescribed by statute or by the
Corporation's Charter, may be held at any place within the United States, and
may be called at any time by the Board of Directors or by the Chairman or the
President, and shall be called by the Secretary (or in his absence, an Assistant
Secretary) at the request in writing of stockholders entitled to
<PAGE>
2
cast at least a majority of the votes entitled to be cast at the meeting upon
payment by such stockholders to the Corporation of the reasonably estimated cost
of preparing and mailing a notice of the meeting (which estimated cost shall be
provided to such stockholders by the Secretary of the Corporation). A written
request shall state the purpose or purposes of the proposed meeting.
SECTION 3. NOTICE OF MEETINGS. Written or printed notice of the
------------------
purpose or purposes and of the time and place of every meeting of the
stockholders shall be given by the Secretary of the Corporation to each
stockholder of record entitled to vote at or to notice of the meeting, by
placing the notice in the mail at least ten (10) days, but not more than ninety
(90) days, prior to the date designated for the meeting addressed to each
stockholder at his address appearing on the books of the Corporation or supplied
by the stockholder to the Corporation for the purpose of notice. Notice of any
meeting of stockholders shall be deemed waived by any stockholder who attends
the meeting in person or by proxy, or who before or after the meeting submits a
signed waiver of notice that is filed with the records of the meeting.
SECTION 4. NOTICE OF STOCKHOLDER BUSINESS.
------------------------------
(a) At any annual or special meeting of the stockholders, only
such business shall be conducted as shall have been properly brought before the
meeting. To be properly brought before an annual meeting, the business must be
(i) (A) specified in the notice of meeting (or any supplement thereto) given by
or at the direction of the Board of Directors, (B) otherwise properly brought
before the meeting by or at the direction of the Board of Directors, or (C)
otherwise properly brought before the meeting by a stockholder in accordance
with Section 4(b) below and (ii) a proper subject under applicable law for
stockholder action. To be properly brought before a special meeting, the
business must be (i) (A) specified in the notice of meeting (or any supplement
thereto) given by or at the direction of the Board of Directors, or (B)
otherwise properly brought before the meeting by or at the direction of the
Board of Directors and (ii) a proper subject under applicable law for
stockholder action.
(b) For any stockholder proposal to be presented in connection
with an annual meeting of stockholders of the Corporation (other than proposals
made under Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act")), including any proposal relating to the nomination of a
director to be elected to the Board of Directors of the Corporation, the
stockholder must have given timely notice thereof in writing to the Secretary of
the Corporation. To be timely, a stockholder's notice shall be delivered to the
Secretary at the principal executive offices of the Corporation not less than 60
days nor more than 90 days prior to the first anniversary of the preceding
year's annual meeting; provided, however, that in the event that the date of the
annual meeting is advanced by more than 30 days or delayed by more than 60 days
from such anniversary date, notice by the stockholder to be timely must be so
delivered not earlier than the 90th day prior to such annual meeting and not
later than the close of business on the later of the 60th day prior to such
annual meeting or the tenth day following the day on which public announcement
of the date of such meeting is first
<PAGE>
3
made. Such stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or re-election as a director all
information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors, or is otherwise required, in
each case pursuant to Regulation 14A under the Exchange Act (including such
person's written consent to being named in the proxy statement as a nominee and
to serving as a director if elected); (b) as to any other business that the
stockholder proposes to bring before the meeting, a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest in such business of such
stockholder and of the beneficial owner, if any, on whose behalf the proposal is
made; and (c) as to the stockholder giving the notice and the beneficial owner,
if any, on whose behalf the nomination or proposal is made, (i) the name and
address of such stockholder, as they appear on the Corporation's books, and of
such beneficial owner and (ii) the class and number of shares of stock of the
Corporation which are owned beneficially and of record by such stockholder and
such beneficial owner. For the 1999 annual meeting the previous year's meeting
shall be deemed to have taken place on August 1, 1998; provided that this
sentence shall cease to be a part of the By-Laws after the holding of the 1998
annual meeting and any adjournments thereof.
(c) Notwithstanding anything in the By-Laws to the contrary, no
business shall be conducted at any stockholder meeting except in accordance with
the procedures set forth in this Section 4. The Chairman of the stockholder
meeting shall, if the facts warrant, determine and declare to the meeting that
business was not properly brought before the meeting and in accordance with the
provisions of this Section 4, and if he should so determine, he shall so declare
to the meeting that any such business not properly brought before the meeting
shall not be considered or transacted.
SECTION 5. QUORUM; VOTING. Except as otherwise provided by
--------------
statute or by the Corporation's Charter, the presence in person or by proxy of
stockholders of the Corporation entitled to cast at least a majority of the
votes entitled to be cast shall constitute a quorum at each meeting of the
stockholders. A majority of the votes cast at a meeting at which a quorum is
present is sufficient to approve any matter which properly comes before the
meeting, except that a plurality of the votes cast at a meeting at which a
quorum is present shall be sufficient to elect directors. In the absence of a
quorum, the stockholders present in person or by proxy at the meeting, by
majority vote and without notice other than by announcement at the meeting, may
adjourn the meeting from time to time as provided in this Section 5 until a
quorum shall attend. The stockholders present at any duly organized meeting may
continue to do business until adjournment, notwithstanding the withdrawal of
enough stockholders to leave less than a quorum.
SECTION 6. ADJOURNMENT. Any meeting of the stockholders may be
-----------
adjourned from time to time, without notice other than by announcement at the
meeting at which the adjournment is taken. At any adjourned meeting at which a
quorum shall be present any action may be taken that could have been taken at
the meeting originally called.
<PAGE>
4
A meeting of the stockholders may not be adjourned to a date more than one
hundred twenty (120) days after the original record date.
SECTION 7. ORGANIZATION. At every meeting of the stockholders,
------------
the Chairman of the Board, or in his absence or inability to act, the President,
or in his absence or inability to act, a Vice President, or in the absence or
inability to act of all the Vice Presidents, a chairman chosen by the
stockholders, shall act as chairman of the meeting. The Secretary, or in his or
her absence or inability to act, a person appointed by the chairman of the
meeting, shall act as secretary of the meeting and keep the minutes of the
meeting.
SECTION 8. ORDER OF BUSINESS. The order of business at all
-----------------
meetings of the stockholders shall be as determined by the chairman of the
meeting.
SECTION 9. PROXIES. A stockholder may vote the stock he owns of
-------
record either in person or by written proxy signed by the stockholder or by his
duly authorized agent. Stockholders may authorize others to act as proxies by
means of facsimile signatures, electronic transmissions, internet transmissions,
telegrams, datagrams, proxygrams and other reasonable means authorized or
accepted by the Corporation, subject to the reasonable satisfaction of the
Corporation that the stockholder has authorized the creation of the proxy. No
proxy shall be valid after the expiration of eleven (11) months from the date
thereof, unless otherwise provided in the proxy. Every proxy shall be revocable
at the pleasure of the stockholder executing it, except in those cases in which
the proxy states that it is irrevocable and in which an irrevocable proxy is
permitted by law.
SECTION 10. FIXING OF RECORD DATE FOR DETERMINING STOCKHOLDERS
--------------------------------------------------
ENTITLED TO VOTE AT MEETING. The Board of Directors shall set a record date for
- ---------------------------
the purpose of determining stockholders entitled to vote at any meeting of the
stockholders. The record date for a particular meeting shall be not more than
ninety (90) nor fewer than ten (10) days before the date of the meeting. All
persons who were holders of record of shares as of the record date of a meeting,
and no others, shall be entitled to notice of and to vote at such meeting and
any adjournment thereof.
SECTION 11. INSPECTORS. The Board of Directors may, in advance of
----------
any meeting of stockholders, appoint one (1) or more inspectors to act at the
meeting or at any adjournment of the meeting. If the inspectors shall not be so
appointed or if any of them shall fail to appear or act, the chairman of the
meeting may appoint inspectors. Each inspector, before entering upon the
discharge of his duties, shall, if required by the chairman of the meeting, take
and sign an oath to execute faithfully the duties of inspector at the meeting
with strict impartiality and according to the best of his ability. The
inspectors, if appointed, shall determine the number of shares outstanding and
the voting power of each share, the number of shares represented at the meeting,
the existence of a quorum and the validity and effect of proxies, and shall
receive votes, ballots or consents, hear and determine all challenges and
questions arising in connection with the right to vote, count and tabulate all
votes, ballots or consents, determine the result, and do those acts as are
proper to conduct the election or vote with fairness to all stockholders. On
request of the chairman of the meeting
<PAGE>
5
or any stockholder entitled to vote at the meeting, the inspectors shall make a
report in writing of any challenge, request or matter determined by them and
shall execute a certificate of any fact found by them. No director or candidate
for the office of director shall act as inspector of an election of directors.
Inspectors need not be stockholders of the Corporation.
SECTION 12. CONSENT OF STOCKHOLDERS IN LIEU OF MEETING. Except as
------------------------------------------
otherwise provided by statute or the Corporation's Charter, any action required
or permitted to be taken at any annual or special meeting of stockholders may be
taken without a meeting, without prior notice and without a vote, if the
following are filed with the records of stockholders' meetings: (a) a unanimous
written consent that sets forth the action and is signed by each stockholder
entitled to vote on the matter and (b) a written waiver of any right to dissent
signed by each stockholder entitled to notice of the meeting but not entitled to
vote at the meeting.
ARTICLE III
-----------
BOARD OF DIRECTORS
------------------
SECTION 1. GENERAL POWERS. Except as otherwise provided in the
--------------
Corporation's Charter, the business and affairs of the Corporation shall be
managed under the direction of the Board of Directors. All powers of the
Corporation may be exercised by or under authority of the Board of Directors
except as conferred on or reserved to the stockholders by law, by the
Corporation's Charter or by these By-Laws.
SECTION 2. NUMBER, ELECTION AND TERM OF DIRECTORS. The number of
--------------------------------------
directors constituting the entire Board of Directors (which initially was fixed
at one (1) in the Corporation's Charter) may be changed from time to time by a
majority of the entire Board of Directors; provided, however, that the number of
directors shall in no event be fewer than that required by law, nor more than
twelve (12). Beginning with the first annual meeting of stockholders of the
Corporation and if at such time, the number of directors shall be three (3) or
more, (the "First Annual Meeting"), the Board of Directors of the Corporation
shall be divided into three classes: Class I, Class II and Class III. At the
First Annual Meeting, directors of Class I shall be elected to the Board of
Directors for a term expiring at the next succeeding annual meeting of
stockholders, directors of Class II shall be elected to the Board of Directors
for a term expiring at the second succeeding annual meeting of stockholders and
directors of Class III shall be elected to the Board of Directors for a term
expiring at the third succeeding annual meeting of stockholders. At each
subsequent annual meeting of stockholders, the directors chosen to succeed those
whose terms are expiring shall be identified as being of the same class as the
directors whom they succeed and shall be elected for a term expiring at the time
of the third succeeding annual meeting of stockholders subsequent to their
election. The directors shall be elected at the annual meeting of the
stockholders, except as provided in Section 5 of this Article III, and each
director elected shall hold office for the term provided above and until his
successor shall have been elected
<PAGE>
6
and shall have qualified, or until his death, or until he shall have resigned or
have been removed as provided in these By-Laws, or as otherwise provided by
statute or the Corporation's Charter. Any vacancy created by an increase in
directors may be filled in accordance with Section 5 of this Article III. No
reduction in the number of directors shall have the effect of removing any
director from office prior to the expiration of his term unless the director is
specifically removed pursuant to Section 4 of this Article III at the time of
the decrease.
SECTION 3. RESIGNATION. A director of the Corporation may resign
-----------
at any time by giving written notice of his resignation to the Board of
Directors or the Chairman of the Board or to the Vice-Chairman of the Board or
the President or the Secretary of the Corporation. Any resignation shall take
effect at the time specified in it or, should the time when it is to become
effective not be specified in it, immediately upon its receipt. Acceptance of a
resignation shall not be necessary to make it effective unless the resignation
states otherwise.
SECTION 4. REMOVAL OF DIRECTORS. A director of the Corporation
--------------------
may be removed from office only for cause and then only by vote of the holders
of at least seventy-five percent (75%) of the votes entitled to be cast for the
election of directors.
SECTION 5. VACANCIES. Subject to the provisions of the Investment
---------
Company Act of 1940 (the "1940 Act"), any vacancies in the Board of Directors,
whether arising from death, resignation, removal or any other cause except an
increase in the number of directors, shall be filled by a vote of the majority
of the remaining Directors whether or not sufficient to constitute a quorum. A
majority of the entire Board may fill a vacancy that results from an increase in
the number of directors. Notwithstanding the foregoing, if the stockholders of
any class of the Corporation's capital stock are entitled separately to elect
one or more directors, a majority of the remaining directors elected by that
class or the sole remaining director elected by that class may fill any vacancy
among the number of directors elected by that class. Any director appointed by
the Board of Directors to fill a vacancy shall hold office only until the next
annual meeting of stockholders of the Corporation and until a successor has been
elected and qualifies. Any director elected by the stockholders to fill a
vacancy shall hold office for the balance of the term of the director he
replaced.
SECTION 6. PLACE OF MEETINGS. Meetings of the Board may be held
-----------------
at any place that the Board of Directors may from time to time determine or that
is specified in the notice of the meeting.
SECTION 7. REGULAR MEETINGS. Regular meetings of the Board of
----------------
Directors may be held without notice at the time and place determined by the
Board of Directors.
SECTION 8. SPECIAL MEETINGS. Special meetings of the Board of
----------------
Directors may be called by two (2) or more directors of the Corporation or by
the Chairman of the Board or the President.
<PAGE>
7
SECTION 9. ANNUAL MEETING. The annual meeting of the newly
--------------
elected and other directors shall be the first meeting after the meeting of the
stockholders at which the newly elected directors were elected. No notice of
such annual meeting shall be necessary if such meeting is held immediately after
the adjournment, and at the site, of the meeting of stockholders. If not so
held, notice shall be given as hereinafter provided for special meetings of the
Board of Directors.
SECTION 10. NOTICE OF SPECIAL MEETINGS. Notice of each special
--------------------------
meeting of the Board of Directors shall be given by the Secretary as hereinafter
provided. Each notice shall state the time and place of the meeting and shall be
delivered to each director, either personally or by telephone or other standard
form of telecommunication, at least twenty-four (24) hours before the time at
which the meeting is to be held, or by first-class mail, postage prepaid,
addressed to the director at his residence or usual place of business, and
mailed at least three (3) days before the day on which the meeting is to be
held.
SECTION 11. WAIVER OF NOTICE OF MEETINGS. Notice of any special
----------------------------
meeting need not be given to any director who shall, either before or after the
meeting, sign a written waiver of notice that is filed with the records of the
meeting or who shall attend the meeting.
SECTION 12. QUORUM AND VOTING. A majority of the entire Board of
-----------------
Directors shall constitute a quorum for the transaction of business, and except
as otherwise expressly required by statute, the Corporation's Charter or these
By-Laws, the act of a majority of the directors present at any meeting at which
a quorum is present shall be the act of the Board.
SECTION 13. ORGANIZATION. The Chairman of the Board shall preside
------------
at each meeting of the Board. In the absence or inability of the Chairman of the
Board to act, the President (if he is a director), or, in his absence or
inability to act, another director chosen by a majority of the directors
present, shall act as chairman of the meeting and preside at the meeting. The
Secretary (or, in his or her absence or inability to act, any person appointed
by the chairman) shall act as secretary of the meeting and keep the minutes of
the meeting.
SECTION 14. COMMITTEES. The Board of Directors may designate one
----------
(1) or more committees of the Board of Directors, including an executive
committee, each consisting of one (1) or more directors. To the extent provided
in the resolutions adopted by the Board of Directors, and permitted by law, the
committee or committees shall have and may exercise the powers of the Board of
Directors in the management of the business and affairs of the Corporation. Any
committee or committees shall have the name or names determined from time to
time by resolution adopted by the Board of Directors. Each committee shall keep
regular minutes of its meetings and provide those minutes to the Board of
Directors when required. The members of a committee present at any meeting,
whether or not they constitute a quorum, may appoint a director to act in the
place of an absent member.
<PAGE>
8
SECTION 15. WRITTEN CONSENT OF DIRECTORS IN LIEU OF A MEETING.
-------------------------------------------------
Subject to the provisions of the 1940 Act, any action required or permitted to
be taken at any meeting of the Board of Directors or of any committee of the
Board may be taken without a meeting if all members of the Board or committee,
as the case may be, consent thereto in writing, and the writing or writings are
filed with the minutes of the proceedings of the Board or committee.
SECTION 16. TELEPHONE CONFERENCE. Members of the Board of
--------------------
Directors or any committee of the Board may participate in any Board or
committee meeting by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other at the same time. Participation by such means shall constitute
presence in person at the meeting, provided, however, that such participation
shall not constitute presence in person with respect to matters which the 1940
Act, and the rules thereunder require the approval of directors by vote cast in
person at a meeting.
SECTION 17. COMPENSATION. Each director shall be entitled to
------------
receive compensation, if any, as may from time to time be fixed by the Board of
Directors, including a fee for each meeting of the Board or any committee
thereof, regular or special, he attends. Directors may also be reimbursed by the
Corporation for all reasonable expenses incurred in traveling to and from the
place of a Board or committee meeting.
ARTICLE IV
----------
OFFICERS, AGENTS AND EMPLOYEES
------------------------------
SECTION 1. NUMBER AND QUALIFICATIONS. The officers of the
-------------------------
Corporation shall be a Chairman, a President, a Secretary, a Treasurer, and an
Assistant Secretary, each of whom shall be elected by the Board of Directors.
The Board of Directors may elect or appoint a Chairman of the Board of
Directors, and one (1) or more Vice Presidents and may also appoint any other
officers, assistant officers, agents and employees it deems necessary or proper.
Any two (2) or more offices may be held by the same person, except the offices
of President and Vice President, but no officer shall execute, acknowledge or
verify in more than one (1) capacity any instrument required by law to be
executed, acknowledged or verified by more than one officer. Officers shall be
elected by the Board of Directors each year at its first meeting held after the
annual meeting of stockholders, each to hold office until the meeting of the
Board following the next annual meeting of the stockholders and until his
successor shall have been duly elected and shall have qualified, or until his
death, or until he shall have resigned or have been removed, as provided in
these By-Laws. The Board of Directors may from time to time elect such officers
(including one or more Assistant Vice Presidents, one or more Assistant
Treasurers and one or more Assistant Secretaries) and may appoint, or delegate
to the President the power to appoint, such agents as may be necessary or
desirable for the business of the Corporation. Such other officers and agents
shall have such
<PAGE>
9
duties and shall hold their offices for such terms as may be prescribed by the
Board or by the appointing authority.
SECTION 2. RESIGNATIONS. Any officer of the Corporation may
------------
resign at any time by giving written notice of his resignation to the Board of
Directors, the Chairman of the Board, the President or the Secretary. Any
resignation shall take effect at the time specified therein or, if the time when
it shall become effective is not specified therein, immediately upon its
receipt. The acceptance of a resignation shall not be necessary to make it
effective unless otherwise stated in the resignation.
SECTION 3. REMOVAL OF OFFICER, AGENT OR EMPLOYEE. Any officer,
-------------------------------------
agent or employee of the Corporation may be removed by the Board of Directors
with or without cause at any time, and the Board may delegate the power of
removal as to agents and employees not elected or appointed by the Board of
Directors. Removal shall be without prejudice to the person's contract rights,
if any, but the appointment of any person as an officer, agent or employee of
the Corporation shall not of itself create contract rights.
SECTION 4. VACANCIES. A vacancy in any office, whether arising
---------
from death, resignation, removal or any other cause, may be filled for the
unexpired portion of the term of the office that shall be vacant, in the manner
prescribed in these By-Laws for the regular election or appointment to the
office.
SECTION 5. COMPENSATION. The compensation of the officers of
------------
the Corporation shall be fixed by the Board of Directors, but this power may be
delegated to any officer with respect to other officers under his control.
SECTION 6. BONDS OR OTHER SECURITY. If required by the Board, any
-----------------------
officer, agent or employee of the Corporation shall give a bond or other
security for the faithful performance of his duties, in an amount and with any
surety or sureties as the Board may require.
SECTION 7. CHAIRMAN OF THE BOARD OF DIRECTORS. The Chairman of
----------------------------------
the Board of Directors shall be the chief executive officer of the Corporation
and shall have, subject to the control of the Board of Directors, general and
active management and supervision of the business, affairs, and property of the
Corporation and its several officers and may employ and discharge employees and
agents of the Corporation, except those elected or appointed by the Board, and
he may delegate these powers. The Chairman shall preside at all meetings of the
stockholders and of the Board of Directors. He shall execute on behalf of the
Corporation all instruments requiring such execution except to the extent that
signing and execution thereof shall be required by the President of the
Corporation or shall be expressly delegated by the Board of Directors to some
other officer or agent of the Corporation.
SECTION 8. VICE-CHAIRMAN OF THE BOARD OF DIRECTORS. The
---------------------------------------
Vice-Chairman of the Board of Directors shall, in the absence of the Chairman of
the Board, preside at all meetings of the stockholders and directors. He shall
have and exercise all the powers and
<PAGE>
10
authority of the Chairman of the Board in the event of the Chairman's absence or
inability to act or during a vacancy in the office of Chairman of the Board. He
shall also have such other duties and responsibilities as shall be assigned to
him by the Chairman or the Board of Directors.
SECTION 9. PRESIDENT. The President shall, in the absence of the
---------
Chairman and Vice-Chairman of the Board of Directors, preside at all meetings of
the stockholders and directors. He shall have and exercise all the powers and
authority of the Chairman of the Board in the event of the Chairman's and
Vice-Chairman's absence or inability to act or during a vacancy in the offices
of Chairman and Vice-Chairman of the Board. He shall sign and execute all
instruments required to be signed and executed by the President of the
Corporation. He shall also have such other duties and responsibilities as shall
be assigned to him by the Chairman or the Board of Directors.
SECTION 10. VICE PRESIDENT. Each Vice President shall have the
--------------
powers and perform the duties that the Board of Directors or the Chairman of the
Board may from time to time prescribe.
SECTION 11. TREASURER. Subject to the provisions of any contract
---------
that may be entered into with any custodian pursuant to authority granted by the
Board of Directors, the Treasurer shall have charge of all receipts and
disbursements of the Corporation and shall have or provide for the custody of
the Corporation's funds and securities; he shall have full authority to receive
and give receipts for all money due and payable to the Corporation, and to
endorse checks, drafts, and warrants, in its name and on its behalf and to give
full discharge for the same; he shall deposit all funds of the Corporation,
except those that may be required for current use, in such banks or other places
of deposit as the Board of Directors may from time to time designate; and, in
general, he shall perform all duties incident to the office of Treasurer and
such other duties as may from time to time be assigned to him by the Board of
Directors or the Chairman of the Board.
SECTION 12. ASSISTANT TREASURERS. The Assistant Treasurers in the
--------------------
order of their seniority, unless otherwise determined by the Chairman of the
Board or the Board of Directors, shall, in the absence or disability of the
Treasurer, perform the duties and exercise the powers of the Treasurer. They
shall perform such other duties and have such other powers as the Chairman or
the Board of Directors may from time to time prescribe.
SECTION 13. SECRETARY. The Secretary shall:
---------
(a) keep or cause to be kept in one or more books provided for
the purpose, the minutes of all meetings of the Board of Directors, the
committees of the Board and the stockholders;
(b) see that all notices are duly given in accordance with the
provisions of these By-Laws and as required by law;
<PAGE>
11
(c) be custodian of the records and the seal of the Corporation
and affix and attest the seal to all stock certificates of the
Corporation (unless the seal of the Corporation on such certificates
shall be a facsimile, as hereinafter provided) and affix and attest the
seal to all other documents to be executed on behalf of the Corporation
under its seal;
(d) see that the books, reports, statements, certificates and
other documents and records required by law to be kept and filed are
properly kept and filed; and
(e) in general, perform all the duties incident to the office of
Secretary and such other duties as from time to time may be assigned to
him by the Board of Directors or the Chairman of the Board.
SECTION 14. ASSISTANT SECRETARIES. The Assistant Secretaries in
---------------------
the order of their seniority, unless otherwise determined by the Chairman of the
Board or the Board of Directors, shall, in the absence or disability of the
Secretary, perform the duties and exercise the powers of the Secretary. They
shall perform such other duties and have such other powers as the President or
the Board of Directors may from time to time prescribe.
SECTION 15. DELEGATION OF DUTIES. In case of the absence of any
--------------------
officer of the Corporation, or for any other reason that the Board of Directors
may deem sufficient, the Board may confer for the time being the powers or
duties, or any of them, of such officer upon any other officer or upon any
director.
ARTICLE V
---------
STOCK
-----
SECTION 1. STOCK CERTIFICATES. Unless otherwise provided by the
------------------
Board of Directors and permitted by law, each holder of stock of the Corporation
shall be entitled upon specific written request to such person as may be
designated by the Corporation to have a certificate or certificates, in a form
approved by the Board, representing the number of shares of stock of the
Corporation owned by him; provided, however, that certificates for fractional
shares will not be delivered in any case. The certificates representing shares
of stock shall be signed by or in the name of the Corporation by the Chairman of
the Board, the Vice-Chairman of the Board, the President or a Vice President and
by the Secretary or an Assistant Secretary or the Treasurer or an Assistant
Treasurer and may be sealed with the seal of the Corporation. Any or all of the
signatures or the seal on the certificate may be facsimiles. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before the certificate is issued, it may be issued
by the Corporation with the same effect as if the officer, transfer agent or
registrar was still in office at the date of issue.
<PAGE>
12
SECTION 2. STOCK LEDGER. There shall be maintained a stock ledger
------------
containing the name and address of each stockholder and the number of shares of
stock of each class the shareholder holds. The stock ledger may be in written
form or any other form which can be converted within a reasonable time into
written form for visual inspection. The original or a duplicate of the stock
ledger shall be kept at the principal office of the Corporation or at any other
office or agency specified by the Board of Directors.
SECTION 3. TRANSFERS OF SHARES. Transfers of shares of stock of
-------------------
the Corporation shall be made on the stock records of the Corporation only by
the registered holder of the shares, or by his attorney thereunto authorized by
power of attorney duly executed and filed with the Secretary or with a transfer
agent or transfer clerk, and on surrender of the certificate or certificates, if
issued, for the shares properly endorsed or accompanied by a duly executed stock
transfer power and the payment of all taxes thereon. Except as otherwise
provided by law, the Corporation shall be entitled to recognize the exclusive
right of a person in whose name any share or shares stand on the record of
stockholders as the owner of the share or shares for all purposes, including,
without limitation, the rights to receive dividends or other distributions and
to vote as the owner, and the Corporation shall not be bound to recognize any
equitable or legal claim to or interest in any such share or shares on the part
of any other person.
SECTION 4. REGULATIONS. The Board of Directors may authorize the
-----------
issuance of uncertificated securities if permitted by law. If stock certificates
are issued, the Board of Directors may make any additional rules and
regulations, not inconsistent with these By-Laws, as it may deem expedient
concerning the issue, transfer and registration of certificates for shares of
stock of the Corporation. The Board may appoint, or authorize any officer or
officers to appoint, one or more transfer agents or one or more transfer clerks
and one or more registrars and may require all certificates for shares of stock
to bear the signature or signatures of any of them.
SECTION 5. LOST, DESTROYED OR MUTILATED CERTIFICATES. The holder
-----------------------------------------
of any certificate representing shares of stock of the Corporation shall
immediately notify the Corporation of its loss, destruction or mutilation and
the Corporation may issue a new certificate of stock in the place of any
certificate issued by it that has been alleged to have been lost or destroyed or
that shall have been mutilated. The Board may, in its discretion, require the
owner (or his legal representative) of a lost, destroyed or mutilated
certificate to give to the Corporation a bond in a sum, limited or unlimited,
and in a form and with any surety or sureties, as the Board in its absolute
discretion shall determine, to indemnify the Corporation against any claim that
may be made against it on account of the alleged loss or destruction of any such
certificate, or issuance of a new certificate. Anything herein to the contrary
notwithstanding, the Board of Directors, in its absolute discretion, may refuse
to issue any such new certificate, except pursuant to legal proceedings under
the laws of the State of Maryland.
SECTION 6. FIXING OF RECORD DATE FOR DIVIDENDS, DISTRIBUTIONS,
--------------------------------------------------
ETC. The Board may fix, in advance, a date not more than ninety (90) days
- ---
preceding the date fixed for
<PAGE>
13
the payment of any dividend or the making of any distribution or the allotment
of rights to subscribe for securities of the Corporation, or for the delivery of
evidences of rights or evidences of interests arising out of any change,
conversion or exchange of common stock or other securities, as the record date
for the determination of the stockholders entitled to receive any such dividend,
distribution, allotment, rights or interests, and in such case only the
stockholders of record at the time so fixed shall be entitled to receive such
dividend, distribution, allotment, rights or interests.
ARTICLE VI
----------
INDEMNIFICATION AND INSURANCE
-----------------------------
SECTION 1. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Any person
-----------------------------------------
who was or is a party or is threatened to be made a party in any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by reason of the fact that such person is a
current or former director or officer of the Corporation, or is or was serving
while a director or officer of the Corporation at the request of the Corporation
as a director, officer, partner, trustee, employee, agent or fiduciary of
another corporation, partnership, joint venture, trust, enterprise or employee
benefit plan, shall be indemnified by the Corporation against judgments,
penalties, fines, excise taxes, settlements and reasonable expenses (including
attorneys' fees) actually incurred by such person in connection with such
action, suit or proceeding to the full extent permissible under the Maryland
General Corporation Law, the Securities Act of 1933, as amended (the "1933
Act"), and the 1940 Act, as those statutes are now or hereafter in force, except
that such indemnity shall not protect any such person against any liability to
the Corporation or any stockholder thereof to which such person would otherwise
be subject by reason of willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of his office
("disabling conduct"). Any repeal or modification of the 1933 Act, the 1940 Act
or these By-Laws shall not in any way diminish any rights to indemnification
hereunder except as required by law.
SECTION 2. ADVANCES. Any current or former director or officer of
--------
the Corporation claiming indemnification within the scope of this Article VI
shall be entitled to advances from the Corporation for payment of the reasonable
expenses incurred by him in connection with proceedings to which he is a party
in the manner and to the full extent permissible under the Maryland General
Corporation Law, the 1933 Act, and the 1940 Act, as those statutes are now or
hereafter in force; provided, however, that the person seeking indemnification
shall provide to the Corporation a written affirmation of his good faith belief
that the standard of conduct necessary for indemnification by the Corporation
has been met and a written undertaking to repay any such advance, if it should
ultimately be determined that the standard of conduct has not been met, and
provided further that at least one of the following additional conditions is
met: (a) the person seeking indemnification shall provide a security in form and
amount acceptable to the Corporation for his undertaking; (b) the Corporation is
insured against losses arising by reason of the advance; or (c) a majority of a
<PAGE>
14
quorum of directors of the Corporation who are neither "interested persons" as
defined in Section 2(a)(19) of the 1940 Act, nor parties to the proceeding
("disinterested non-party directors"), or independent legal counsel, in a
written opinion, shall determine, based on a review of facts readily available
to the Corporation at the time the advance is proposed to be made, that there is
reason to believe that the person seeking indemnification will ultimately be
found to be entitled to indemnification.
SECTION 3. PROCEDURE. At the request of any current or former
---------
director or officer, or any employee or agent whom the Corporation proposes to
indemnify, the Board of Directors shall determine, or cause to be determined, in
a manner consistent with the Maryland General Corporation Law, the 1933 Act, and
the 1940 Act, as those statutes are now or hereafter in force, whether the
standards required by this Article VI have been met; provided, however, that
indemnification shall be made only following: (a) a final decision on the merits
by a court or other body before whom the proceeding was brought, finding that
the person to be indemnified was not liable by reason of disabling conduct or
(b) in the absence of such a decision, a reasonable determination, based upon a
review of the facts, that the person to be indemnified was not liable by reason
of disabling conduct, by (i) the vote of a majority of a quorum of disinterested
non-party directors or (ii) an independent legal counsel in a written opinion.
SECTION 4. INDEMNIFICATION OF EMPLOYEES AND AGENTS. Employees and
---------------------------------------
agents who are not officers or directors of the Corporation may be indemnified,
and reasonable expenses may be advanced to such employees or agents, in
accordance with the procedures set forth in this Article VI to the extent
permissible under the Maryland General Corporation Law, the 1933 Act, and the
1940 Act, as those statutes are now or hereafter in force, and to such further
extent, consistent with the foregoing, as may be provided by action of the Board
of Directors or by contract.
SECTION 5. OTHER RIGHTS. The indemnification provided by this
------------
Article VI shall not be deemed exclusive of any other right, with respect to
indemnification or otherwise, to which those seeking such indemnification may be
entitled under any insurance or other agreement, vote of stockholders or
disinterested directors or otherwise, both as to action by a director or officer
of the Corporation in his official capacity and as to action by such person in
another capacity while holding such office or position, and shall continue as to
a person who has ceased to be a director or officer and shall inure to the
benefit of the heirs, executors and administrators of such a person.
SECTION 6. INSURANCE. The Corporation shall have the power to
---------
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or who, while a
director, officer, employee or agent of the Corporation, is or was serving at
the request of the Corporation as a director, officer, partner, trustee,
employee, agent or fiduciary of another corporation, partnership, joint venture,
trust, enterprise or employee benefit plan, against any liability asserted
against and incurred by him in any such capacity, or arising out of his status
as such, provided that no insurance may be
<PAGE>
15
obtained by the Corporation for liabilities against which it would not have the
power to indemnify him under this Article VI or applicable law.
ARTICLE VII
-----------
SEAL
----
The seal of the Corporation shall be circular in form and shall
bear the name of the Corporation, the year of its incorporation, the words
"Corporate Seal" and "Maryland" and any emblem or device approved by the Board
of Directors. The seal may be used by causing it or a facsimile to be impressed
or affixed or in any other manner reproduced. In lieu of affixing the seal, it
shall be sufficient to meet the requirements of any law, rule or regulation
relating to a corporate seal to place the word "(seal)" adjacent to the
signature of the person authorized to sign the document on behalf of the
Corporation.
ARTICLE VIII
------------
AMENDMENTS
----------
These By-Laws may be amended by the Board of Directors, subject
to the requirements of the 1940 Act; provided, however, that no amendment of
these By-Laws shall affect any right of any person under Article VI hereof based
on any event, omission or proceeding prior to the amendment. These By-Laws may
not be amended by the stockholders of the Corporation.
<PAGE>
EXHIBIT 99.2(h)(1)
Salomon Brothers High Income Fund II Inc
Shares/*/
Common Stock
UNDERWRITING
------------
AGREEMENT
---------
New York, New York
May 21, 1998
Salomon Smith Barney
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
As Representative of the several Underwriters
listed in Schedule I hereto
Ladies and Gentlemen:
Salomon Brothers High Income Fund II Inc, a Maryland corporation (the
"Fund"), and Salomon Brothers Asset Management Inc (the "Investment Manager")
each confirms its agreement with you with respect to the sale by the Fund to the
underwriters named in Schedule I hereto (the "Underwriters"), for whom you (the
"Representative") are acting as representative, of shares of Common
Stock, par value $.001 per share, of the Fund ("Common Stock") (said shares to
be issued and sold by the Fund being hereinafter called the "Underwritten
Securities"). The Fund also proposes to grant to the Underwriters, upon the
terms and subject to the conditions set forth in Section 2(b) hereof, an option
to purchase up to additional shares of Common Stock (the "Option
Securities" and together with the Underwritten Securities, the "Securities").
1. Representations and Warranties. (a) Each of the Fund and the
------------------------------
Investment Manager, jointly and
- ----------
/*/ Plus an option to purchase from Salomon Brothers High Income Fund II Inc up
to additional shares to cover over-allotments.
<PAGE>
severally, represents and warrants to, and agrees with, each Underwriter as set
forth below in this Section 1. Certain terms used in this Section 1 are defined
in Section 1(iii) hereof.
(i) The Fund meets the requirements for use of Form N-2 under the
Securities Act of 1933 (the "Act") and the Investment Company Act of 1940
(the "Investment Company Act") and the rules and regulations (the "Rules
and Regulations") of the Securities and Exchange Commission (the
"Commission") under each of the Act and the Investment Company Act; the
Fund has filed with the Commission a registration statement (file number
333-48351) on such Form, including a related preliminary prospectus and a
notification of registration on Form N-8A under the Investment Company Act
(file number 811-08709). The Fund may have filed one or more amendments
thereto, including the related preliminary prospectus, each of which has
previously been furnished to you. The Fund will next file with the
Commission one of the following: (A) prior to effectiveness of such
registration statement, a further amendment to such registration statement,
including the form of final prospectus or (B) after effectiveness of such
registration statement, a final prospectus in accordance with Rule 497(b)
or Rules 430A and 497(h), as the case may be. In the case of clause (B),
the Fund has included in such registration statement, as amended at the
Effective Date, all information (other than Rule 430A Information) required
by the Act and the Investment Company Act and the Rules and Regulations to
be included in the Prospectus with respect to the Securities and the
offering thereof. As filed, such amendment and form of final prospectus,
or such final prospectus, shall contain all Rule 430A Information, together
with all other such required information, with respect to the Securities
and the offering thereof and, except to the extent the Representative shall
agree in writing to a modification, shall be in all substantive respects in
the form furnished to you prior to the Execution Time or, to the extent not
completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as
2
<PAGE>
the Fund has advised you, prior to the Execution Time, will be included or
made therein.
(ii) On the Effective Date, the Registration Statement and the
notification of registration on Form N-8A did or will, and when the
Prospectus is first filed in accordance with Rule 497(b) or (h), as the
case may be, and if subsequently filed pursuant to Rule 497(d), and on
the Closing Date, the Prospectus (and any supplements thereto) will, comply
in all material respects with the applicable requirements of the Act and
the Investment Company Act and the Rules and Regulations; on the Effective
Date, the Registration Statement and the notification of registration on
Form N-8A did not or will not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary in order to make the statements therein not misleading; and, on
the Effective Date, the Prospectus, if not filed pursuant to Rule 497(b)
or (h), as the case may be, did not or will not, and on the date of any
filing pursuant to Rule 497(b) or (h), as the case may be, and on the date
of any filing pursuant to Rule 497(d), and on the Closing Date, the
Prospectus (together with any supplement thereto) will not, include any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
--------
however, that the Fund makes no representations or warranties as to the
-------
information contained in or omitted from the Registration Statement, the
Prospectus (or any supplement thereto) or the notification of registration
on Form N-8A, in reliance upon and in conformity with (A) information
furnished in writing to the Fund by or on behalf of any Underwriter through
the Representative specifically for inclusion in the Registration
Statement, the Prospectus (or any supplement thereto) or the notification
on Form N-8A or (B) information relating to the Investment Manager and
furnished to the Fund by the Investment Manager specifically for inclusion
in the Registration Statement, the Prospectus (or any supplement thereto)
or the notification of registration on Form N-8A.
3
<PAGE>
(iii) The terms which follow, when used in this Agreement, shall have
the meanings indicated. The term "Effective Date" shall mean each date that
the Registration Statement and any post-effective amendment or amendments
thereto became or become effective. "Execution Time" shall mean the date
and time that this Agreement is executed and delivered by the parties
hereto. "Preliminary Prospectus" shall mean any preliminary prospectus
referred to in Section 1(i) above and any preliminary prospectus included
in the Registration Statement at the Effective Date that omits Rule 430A
Information. "Prospectus" shall mean the prospectus relating to the
Securities that is first filed pursuant to Rule 497(b) or (h), as the case
may be, after the Execution Time, or as subsequently filed pursuant to
Rule 497(d) under the Act or, if no filing pursuant to Rule 497 is
required, shall mean the form of final prospectus relating to the
Securities included in the Registration Statement at the Effective Date.
"Registration Statement" shall mean the registration statement referred to
in Section 1(i) above, including incorporated documents, exhibits and
financial statements, as amended at the Execution Time (or, if not
effective at the Execution Time, in the form in which it shall become
effective) and, in the event any post-effective amendment thereto becomes
effec tive prior to the Closing Date (as hereinafter defined), shall also
mean such registration statement as so amended and such term shall
include any Rule 430A Information deemed to be included therein at the
Effective Date as provided by Rule 430A. "Rule 430A" and "Rule 497" refer
to such rules under the Act. "Rule 430A Information" means information
with respect to the Securities and the offering thereof permitted to be
omitted from the Registration Statement when it becomes effective
pursuant to Rule 430A.
(iv) The Fund has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Maryland,
with full corporate power and authority to own its property and conduct
its business as described in the Prospectus, and is duly qualified to do
business as a foreign corporation and is in good standing under the laws of
each jurisdiction which requires such
4
<PAGE>
qualification wherein it owns or leases material properties or conducts
material business; the Fund has no subsidiaries; and the Fund holds all
licenses, certificates and permits from all governmental authorities
necessary for the conduct of its business as described in the Prospectus
(other than the order of the Commission declaring the Registration
Statement effective under the Act and similar orders under the securities
or blue sky laws of the various states of the United States).
(v) The Fund has an authorized equity capitalization as set forth
in the Prospectus; the capital stock of the Fund conforms to the
description thereof contained in the Prospectus; there are no shares of
Common Stock owned of record except 6,667 shares of Common Stock owned of
record by the Investment Manager or an affiliate; the outstanding shares
of Common Stock of the Fund have been duly and validly authorized and
issued and are fully paid and nonassessable; the Securities have been duly
and validly authorized and, when issued and delivered to and paid for by
the Underwriters pursuant to this Agreement, will be validly issued, fully
paid and nonassessable; the Securities have been duly authorized for
listing, subject to official notice of issuance, on the New York Stock
Exchange; the certificates representing the Securities are in valid and
sufficient form; and no holder of outstanding shares of capital stock of
the Fund is entitled to preemptive or other rights to subscribe for the
Securities.
(vi) There is not pending or, to the best knowledge of the Fund,
threatened, any action, suit or proceeding before any court or governmental
agency, authority or body or any arbitrator involving the Fund of a
character required to be disclosed in the Registration Statement by the
Act, the Investment Company Act or the Rules and Regulations which is not
disclosed in the Prospectus, and there is no franchise, contract, agreement
or document of a character required to be described in the Registration
Statement or Prospectus by the Act, the Investment Company Act or the Rules
and Regulations, or to be filed as an exhibit, which is not described or
filed as required.
5
<PAGE>
(vii) Except as stated or contemplated in the Prospectus, subsequent
to the respective dates as of which information is given in the
Registration Statement and the Prospectus, (A) the Fund has not incurred
any liabilities or obligations, direct or contingent, or entered into any
transactions, not in the ordinary course of business, that are material to
the Fund and (B) the Fund has not incurred any indebtedness for borrowed
money.
(viii) No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Fund of
the transactions contemplated herein, except such as may be required under
the Act, the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the Investment Company Act, the Rules and Regulations, the rules and
regulations of the Commission under the Exchange Act or state securities or
blue sky laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters.
(ix) The Investment Management Agreement (the "Management
Agreement") to be dated as of the Effective Date, between the Fund and the
Investment Manager, the Custodian Agreement (the "Custodian Agreement") to
be dated as of the Effective Date, between the Fund and PNC Bank, N.A. (the
"Custodian"), and the Transfer Agency and Services Agreement (the
"Transfer Agency Agreement") to be dated as of the Effective Date, between
the Fund and First Data Investor Services Group, Inc., (this Agreement, the
Management Agreement, the Custodian Agreement, and the Transfer Agency
Agreement, collectively, the "Company Agreements") have been duly
authorized, executed and delivered by the Fund; the Management Agreement,
the Custodian Agreement and the Transfer Agency Agreement comply as to form
with all applicable provisions of the Act and each constitutes a legal,
valid and binding instrument enforceable against the Fund in accordance
with its terms (subject, as to enforcement of remedies, to applicable
bankruptcy, reorganization, insolvency, moratorium or other laws affecting
creditors' rights generally from time to time in effect).
6
<PAGE>
(x) The Fund is registered with the Commission under the Investment
Company Act as a closed-end diversified management investment company and
all required action has been taken under the Act and the Investment Company
Act to make the public offering and consummate the sale of the Securities
under this Agreement, and the provisions of the Fund's articles of
incorporation and by-laws do not violate the Investment Company Act or the
Rules and Regulations of the Commission thereunder.
(xi) The Fund is not in violation of its articles of incorporation
or by-laws or of any law, ordinance, administrative or governmental rule or
regulation applicable to the Fund or of any decree of the Commission, the
National Association of Securities Dealers, Inc. (the "NASD"), any state
securities commission, any national securities exchange, any arbitrator,
any court or any other governmental, regulatory, self-regulatory or
administrative agency or any official having jurisdiction over the Fund or
in default in any material respect in the performance of any obligation,
agreement or condition contained in any bond, debenture, note or any other
evidence of indebtedness or in any mate rial agreement, indenture, lease or
other instrument to which the Fund is a party or by which it or any of its
properties may be bound.
(xii) Neither (A) the issuance and sale of the Securities, (B) the
performance by the Fund of the Fund Agreements, nor (C) the consummation of
the transactions contemplated herein or in the Prospec tus will conflict
with, or result in a breach of or violation of any of the terms and
provisions of, or constitute a default under, any statute, any agree ment
or instrument to which the Fund is a party or by which it is bound or to
which any of the property of the Fund is subject, the Fund's articles of
incorporation or by-laws, or any order, rule or regulation of any court or
governmental agency, authority or body having jurisdiction over the Fund or
any of its properties.
(xiii) Since the date as of which information is given in the
Registration Statement and the
7
<PAGE>
Prospectus (and any amendment or supplement to either of them), except as
otherwise stated therein, (A) there has been no material, adverse change in
the condition (financial or other), business, properties, net assets or
results of operations of the Fund or business prospects of the Fund,
whether or not arising in the ordinary course of business and (B) there has
been no dividend or distribution of any kind declared, paid or made by the
Fund on any class of its capital stock.
(xiv) The accountants, Price Waterhouse LLP who have certified or
shall certify the financial statements included in the Registration
Statement and the Prospectus (and any amendment or supplement to either of
them), are an independent public accounting firm as required by the Act,
the Investment Company Act and the Rules and Regulations.
(xv) The Statement of Assets and Liabilities, together with related
notes, included in the Registration Statement or the Prospectus (or any
amendment or supplement to either of them) presents fairly the financial
position of the Fund on the basis stated in the Registration Statement at
the respective dates or for the respective periods to which they apply;
such financial statements and related schedules and notes have been
prepared in accordance with generally accepted accounting principles
consistently applied throughout the periods involved except as disclosed
therein.
(xvi) The Fund has not distributed and, prior to the later to occur
of (A) the Closing Date and (B) completion of the distribution of the
Securities, will not distribute to the public any offering material in
connection with the offering and sale of the Securities other than the
Registration Statement, the prospectus included in Pre-Effective Amendment
No. 1 to the Registration Statement, the Prospectus and the sales
literature filed with the NASD on April 23, 1998 (the "NASD Sales
Literature").
(xvii) The Fund believes that it maintains a system of internal
accounting controls sufficient to provide reasonable assurances that (A)
transactions
8
<PAGE>
are executed in accordance with the investment policies and restrictions of
the Fund and the applicable requirements of the Investment Company Act,
the Investment Company Act Rules and Regulations and the Internal Revenue
Code of 1986, as amended; (B) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles, to calculate net asset value and to
maintain material compliance with the books and records requirements under
the Investment Company Act and the Investment Company Act Rules and
Regulations; and (C) the internal books and records of the Fund accurately
reflect the Fund's actual assets in all material respects.
(xviii) Except as stated in this Agreement and in the Prospectus (and
any amendment or supplement thereto), the Fund has not taken and will not
take, directly or indirectly, any action designed to or which might
reasonably be expected to cause or result in or which will constitute
stabilization or manipulation of the price of shares of Common Stock and
the Fund is not aware of any such action taken or to be taken by any
affiliates of the Fund.
(xix) The NASD Sales Literature complied and comply in all material
respects with the applicable requirements of the Act, the Act Rules and
Regulations and the rules and interpretations of the NASD, and neither
the NASD Sales Literature nor any other advertising, sales literature or
other promotional material (including "prospectus wrappers," "broker kits,"
"road show slides" and "road show scripts") authorized by or prepared by or
on behalf of the Fund or the Investment Manager for use in connection with
the offering and sale of the Securities contained or contains an untrue
statement of a material fact or omitted or omits to state a material fact
required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading.
(xx) No holder of any security of the Fund has any right to require
registration of shares of Common Stock or any other security of the Fund
because of the filing of the Registration Statement
9
<PAGE>
or consummation of the transactions contemplated by this Agreement.
(b) The Investment Manager represents and warrants to, and agrees
with, each Underwriter that:
(i) The Investment Manager is duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with full corporate power and authority to own its property and
conduct its business as described in the Prospectus, and is duly qualified
to do business as a foreign corporation and is in good standing under the
laws of each jurisdiction which requires such qualification wherein it owns
or leases material properties or conducts material business.
(ii) The Investment Manager is duly registered as an investment
adviser under the Investment Advisers Act of 1940, as amended (the
"Advisers Act") and is not prohibited by the Advisers Act or the Investment
Company Act, or the rules and regulations under such Acts, from acting as
investment adviser for the Fund under the Management Agreement and as
contemplated by the Prospectus.
(iii) This Agreement and the Management Agreement (collectively, the
"Investment Manager Agreements"), have been duly authorized, executed and
delivered by the Investment Manager; the Management Agreement complies as
to form with all applicable provisions of the Act and the Investment
Company Act and constitutes a legal, valid and binding instrument
enforceable against the Investment Manager in accordance with its terms
(subject, as to enforce ment of remedies, to applicable bankruptcy,
reorganization, insolvency, moratorium or other laws affecting creditors'
rights generally from time to time in effect).
(iv) neither (A) the operations and activities of the Investment
Manager as contemplated in the Prospectus, (B) the performance by the
Investment Manager of the Investment Manager Agreements, nor (C) the
consummation of the transactions contemplated herein or in the Prospectus
will conflict
10
<PAGE>
with, or result in a breach of or violation of any of the terms and
provisions of, or constitute a default under, any statute, any agreement or
instrument to which the Investment Manager is a party or by which it is
bound or to which any of the property of the Investment Manager is subject,
the Investment Manager's certificate of incorporation or by-laws, or any
order, rule or regulation of any court or governmental agency, authority or
body having jurisdiction over the Investment Manager or any of its
properties; and no consent, approval, authorization or order of, or filing
with, any court or governmental agency, authority or body is required for
the consummation of the transactions contemplated by the Investment Manager
Agreements in connection with the issuance or sale of the Securities by the
Fund, except such as may be required under the Act, the Exchange Act, the
Investment Company Act or state securities laws or blue sky laws.
(v) On the Effective Date, the Registration Statement did not or will
not contain any untrue statement of a material fact relating to the
description of the Investment Manager or the Investment Manager Agreements
or omit to state a material fact relating to the description of the
Investment Manager or the Investment Manager Agreements required to be
stated therein or necessary to make the statements therein not misleading;
and on the Effective Date, the Prospectus, if not filed pursuant to Rule
497(b) or (h), as the case may be, did not or will not, and on the date of
any filing pursuant to rule 497(b) or (h), as the case may be, and on the
date of any filing pursuant to Rule 497(d), and on the Closing Date, the
Prospectus (together with any supplements thereto) will not, include any
untrue statement of a material fact relating to the description of the
Investment Manager or the Invest ment Manager Agreements or omit to state a
material fact relating to the description of the Investment Manager or the
Investment Manager Agreements necessary to make the statements therein, in
the light of the circumstances under which they were made, not misleading.
(vi) There has not been any material change in the management of the
Investment Manager or any
11
<PAGE>
material adverse change in the condition (financial or other) of the
Investment Manager since the date of the Prospectus (or, if the Prospectus
is not in existence, the Preliminary Prospectus).
(vii) There is not pending, or to the best knowledge of the
Investment Manager, threatened, any action, suit, proceeding, inquiry or
investigation before or brought by any court or governmental agency,
authority or body or any arbitration involving the Investment Manager (A)
relating to any of the transactions contemplated by the Investment Manager
Agreements or (B) which might, in the reasonable judgment of the
Investment Manager, individually or in the aggregate, result in any
material adverse change in the condition (financial or other), business,
prospectus or net worth of the Investment Manager, or might materially and
adversely affect the properties or assets thereof.
(viii) Except as stated in this Agreement and in the Prospectus (and
in any amendment or supplement thereto), the Investment Manager has not
taken and will not take, directly or indirectly, any action designed to or
which might reasonably be expected to cause or result in or which will
constitute, stabilization or manipulation of the price of shares of Common
Stock and the Investment Manager is not aware of any such action taken or
to be taken by any affiliates of the Investment Manager.
2. Purchase and Sale. (a) Subject to the terms and conditions and in
-----------------
reliance upon the representations and warranties herein set forth, the Fund
agrees to sell to each Underwriter, and each Underwriter agrees, severally and
not jointly, to purchase from the Fund, at a purchase price of $15.00 per share,
the amount of the Underwritten Securities set forth opposite such Underwriter's
name in Schedule I hereto.
(b) Subject to the terms and conditions and in reliance upon the
representations and warranties herein set forth, the Fund hereby grants an
option to the several Underwriters to purchase, severally and not jointly, up
to shares of Option Securities at the same purchase price per share as
the Underwriters shall pay for the Underwritten Securities. Said option may be
12
<PAGE>
exercised only to cover over-allotments in the sale of the Underwritten
Securities by the Underwriters. Said option may be exercised in whole or from
time to time in part at any time on or before the 45th day after the date of the
Prospectus upon written or telegraphic notice by the Representative to the Fund
setting forth the number of shares of the Option Securities as to which the
several Underwriters are exercising the option and the settlement date. Delivery
of certificates for the shares of Option Securities, and payment therefor, shall
be made as provided in Section 3 hereof. The number of shares of the Option
Securities to be purchased by each Underwriter shall be the same percentage of
the total number of shares of the Option Securities to be purchased by the
several Underwriters as such Underwriter is purchasing of the Underwritten
Securities, subject to such adjustments as you in your absolute discretion shall
make to eliminate any fractional shares.
3. Delivery and Payment. Delivery of and payment for the
--------------------
Underwritten Securities and the Option Securities (if the option provided for in
Section 2(b) hereof shall have been exercised on or before the third business
day prior to the Closing Date) shall be made at 10:00 AM, New York City time, on
May 28, 1998, or such later date (not later than June 4, 1998) as the
Representative shall designate, which date and time may be postponed by
agreement between the Representative and the Fund or as provided in Section 9
hereof (such date and time of delivery and payment for the Securities being
herein called the "Closing Date"). Delivery of the Securities shall be made to
the Representative for the respective accounts of the several Underwriters
against payment by the several Underwriters through the Representative of the
purchase price therefor in immediately available funds. Delivery of the
Underwritten Securities and the Option Securities shall be made at such location
as the Representative shall reasonably designate at least one business day in
advance of the Closing Date and payment for such Securities shall be made at the
office of Skadden, Arps, Slate, Meagher & Flom LLP in New York, New York.
Certificates for the Securities shall be registered in such names and in such
denominations as the Representative may request not less than three full
business days in advance of the Closing Date.
13
<PAGE>
The Fund agrees to have the Securities available for inspection,
checking and packaging by the Representative in New York, New York, not later
than 1:00 PM on the business day prior to the Closing Date.
If the option provided for in Section 2(b) hereof is exercised after
the third business day prior to the Closing Date, the Fund will deliver (at the
expense of the Fund) to the Representative, at 388 Greenwich Street, New York,
New York, on the date specified by the Representative (which shall in no event
be earlier than three business days nor later than ten business days after
exercise of said option), certificates for the Option Securities in such names
and denominations as the Representative shall have requested against payment of
the purchase price therefor in immediately available funds. If settlement for
the Option Securities occurs after the Closing Date, the Fund will deliver to
the Representative on the settlement date for the Option Securities, and the
obligation of the Underwriters to purchase the Option Securities shall be
conditioned upon receipt of, supplemental opinions, certificates and letters
confirming as of such date the opinions, certificates and letters delivered on
the Closing Date pursuant to Section 6 hereof.
4. Offering by Underwriters. It is understood that the several
------------------------
Underwriters propose to offer the Securities for sale to the public as set
forth in the Prospectus.
5. Agreements. The Fund agrees with the several Underwriters that:
----------
(a) The Fund will use its best efforts to cause the Registration
Statement, if not effective at the Execution Time, and any amendment thereof, to
become effective. Prior to the termination of the offering of the Securities,
the Fund will not file any amendment of the Registration Statement or supplement
(whether pursuant to the Act, the Investment Company Act, or otherwise) to the
Prospectus unless the Fund has furnished you a copy for your review prior to
filing and will not file any such proposed amendment or supplement to which you
reasonably object. Subject to the foregoing sentence, if the Registration
Statement has become or becomes effective pursuant to Rule 430A, or filing of
the Prospectus
14
<PAGE>
is otherwise required under Rule 497, the Fund will cause the Prospectus,
properly completed, and any supplement thereto to be filed with the Commission
pursuant to the applicable paragraph of Rule 497 within the time period
prescribed and will provide evidence satisfactory to the Representative of such
timely filing. The Fund will promptly advise the Representative (i) when the
Registration Statement, if not effective at the Execution Time, and any
amendment thereto, shall have become effective, (ii) when the Prospectus, and
any supplement thereto, shall have been filed (if required) with the Commission
pursuant to Rule 497, (iii) when, prior to termination of the offering of the
Securities, any amendment to the Registration Statement shall have been filed or
become effective, (iv) of any request by the Commission for any amendment of the
Registration Statement or supplement to the Prospectus or for any additional
information, (v) of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement under the Act or the issuance of
any notice or order under Section 8(e) of the Investment Company Act or the
institution or threatening of any proceeding for either such purpose and (vi) of
the receipt by the Fund of any notification with respect to the suspension of
the qualification of the Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose. The Fund will use
its best efforts to prevent the issuance of any such stop order and, if issued,
to obtain as soon as possible the withdrawal thereof.
(b) If, at any time when a prospectus relating to the Securities is
required to be delivered under the Act, any event occurs as a result of which
the Prospectus as then supplemented would include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein in the light of the circumstances under which they were made
not misleading, or if it shall be necessary to amend the Registration
Statement or supplement the Prospectus to comply with the Act, the Investment
Company Act or the Rules and Regulations, the Fund promptly will prepare and
file with the Commission, subject to the second sentence of para graph (a) of
this Section 5, an amendment or supplement which will correct such statement or
omission or effect such compliance.
15
<PAGE>
(c) As soon as practicable, the Fund will make generally available to
its security holders and to the Representative an earnings statement or
statements of the Fund and its subsidiaries which will satisfy the provisions
of Section ll(a) of the Act and Rule 158 under the Act.
(d) The Fund will furnish to the Representative and counsel for the
Underwriters, without charge, signed copies of the Registration Statement
(including exhibits thereto) and to each other Underwriter a copy of the
Registration Statement (without exhibits thereto) and, so long as delivery of a
prospectus by an Underwriter or dealer may be required by the Act, as many
copies of each Preliminary Prospectus and the Prospectus and any supplement
thereto as the Representative may reasonably request.
(e) The Fund will arrange for the qualification of the Securities for
sale under the laws of such jurisdictions as the Representative may designate,
will maintain such qualifications in effect so long as required for the
distribution of the Securities and will pay the fee of the National Association
of Securities Dealers, Inc., in connection with its review of the offering.
(f) The Fund will not, for a period of 180 days following the date of
the Prospectus, without the prior written consent of the Representative, offer,
sell or contract to sell, register with the Commission or otherwise dispose of,
directly or indirectly, or announce the offering of, any shares of Common Stock
other than the Securities or any securities convertible into, or exchangeable
for, shares of Common Stock; provided, however, that the Fund may issue and sell
-------- -------
Common Stock pursuant to any dividend reinvestment plan of the Fund in effect at
the Execution Time.
(g) The Fund will apply the net proceeds from the sale of the
Underwritten Securities, and of the Option Securities, if any, for the purposes
set forth in the Prospectus.
(h) The Fund will use its best efforts to list, subject to notice of
issuance, the Securities to be
16
<PAGE>
sold by it on the New York Stock Exchange simultaneously with the effectiveness
of the Registration Statement.
6. Conditions to the Obligations of the Underwriters. The
-------------------------------------------------
obligations of the Underwriters to purchase the Underwritten Securities and the
Option Securities, as the case may be, shall be subject to the accuracy of the
representations and warranties on the part of the Fund and the Investment
Manager contained herein as of the Execution Time, the Closing Date and any
settlement date pursuant to Section 3 hereof, to the accuracy of the statements
of the Fund and the Investment Manager made in any certificates pursuant to the
provisions hereof, to the performance by the Fund and the Investment Manager of
their respective obligations hereunder and to the following additional
conditions:
(a) If the Registration Statement has not become effective prior to
the Execution Time, unless the Representative agree in writing to a later time,
the Registration Statement will become effective not later than (i) 6:00 PM New
York City time, on the date of determination of the public offering price, if
such determination occurred at or prior to 3:00 PM New York City time on such
date or (ii) 12:00 Noon on the business day following the day on which the
public offering price was determined, if such determination occurred after 3:00
PM New York City time on such date; if filing of the Prospectus, or any
supplement thereto, is required pursuant to Rule 497(b), (d) or (h), the
Prospectus, and any such supplement, will be filed in the manner and within the
time period required by Rule 497(b), (d) or (h), as the case may be; and no stop
order suspending the effectiveness of the Registration Statement under the Act
and no notice or order under Section 8(e) of the Investment Company Act shall
have been issued and no proceedings for either purpose shall have been
instituted or threatened.
(b) The Fund shall have furnished to the Representative the opinion of
Simpson Thacher & Bartlett, counsel for the Fund, dated the Closing Date, to the
effect that:
(i) the Fund has been duly incorporated and is validly existing and
in good standing as a corporation under the laws of the State of Maryland
and has full corporate power and authority to conduct its
17
<PAGE>
business as described in the Prospectus, and is duly registered and
qualified to conduct its business and is in good standing in the State of
New York;
(ii) all outstanding shares of the Fund's Common Stock,
have been duly authorized, and are validly issued, fully paid and
nonassessable; the Securities have been duly authorized and, upon payment
and delivery in accordance with this Agreement, will be validly issued,
fully paid and nonassessable.
(iii) the statements made in the Prospectus under the caption
"Description of Capital Stock - Common Stock," insofar as they purport to
constitute summaries of the terms of the Fund's Common Stock (including the
Securities), constitute accurate summaries of the terms of such Common
Stock in all material respects; the Securities have been authorized for
listing, subject to official notice of issuance and evidence of
satisfactory distribution, on the New York Stock Exchange; the form of
certificates for the Securities conforms to the require ments of the
General Corporation Law of Maryland; there are no preemptive rights under
federal or Maryland law to subscribe for or purchase shares of the Fund's
capital stock and there are no preemptive or other rights to subscribe for
or to purchase, nor any restriction upon the voting or transfer of, any
shares of the Fund's capital stock pursuant to the Fund's articles of
incorporation or by-laws or any agreement or other instrument filed or
incorporated by reference as an exhibit to the Registration Statement.
(iv) to the knowledge of such counsel, there is no pending or
threatened legal or governmental proceeding required to be described in the
Prospectus which is not described as required, or any contracts or
documents of a character required to be described in the Registration
Statement or Prospectus or to be filed as exhibits to the Registration
Statement or incorporated by reference therein, which are not described and
filed or incorporated by reference as required;
18
<PAGE>
(v) the statements in the Prospectus under the captions "Management
of the Fund - Investment Manager," "Management of the Fund - Directors
and Officers" and "Description of Capital Stock - Common Stock," insofar as
they purport to constitute summaries of the terms of Maryland or federal
statutes, rules and regulations thereunder or contracts and other
documents, constitute accurate summaries of the terms of such statutes,
rules and regulations or contracts and other documents in all material re-
spects;
(vi) the statements in the Prospectus under the captions "Dividends
and Distributions; Dividend Reinvestment Plan" and "Taxation," insofar as
they purport to constitute summaries of matters of United States federal
tax law and regulations or legal conclusions with respect thereto,
constitute accurate summaries of the matters described therein in all
material respects;
(vii) the Registration Statement has become effective under the Act
(such counsel may, to the extent necessary, rely on oral confirmation from
the Commission to this effect in rendering such opinion); any required
filing of the Prospectus, and any supplements thereto, pursuant to Rule
497(b), (d) or (h) has been made in the manner and within the time period
required by Rule 497(b), (d) or (h) under the Act; and, to the knowledge of
such counsel, no stop order suspending the effectiveness of the Registra
tion Statement has been issued; and, to the knowledge of such counsel, no
proceeding for that purpose has been instituted or threatened by the
Commission;
(viii) this Agreement has been duly authorized, executed and
delivered by the Fund;
(ix) no consent, approval, authorization, order, registration or
qualification of or with any federal, Maryland or New York governmental
agency or body is required for the issue and sale of the Securities by the
Fund and the compliance by the Fund with all of the provisions of this
Agreement, except for the registration under the Act, the Exchange Act and
the Investment Company Act of the Securities, and such consents, approvals,
authoriza-
19
<PAGE>
tions, registrations or qualifications as may be required under state
securities or Blue Sky laws in connection with the purchase and
distribution of the Securities by the Underwriters.
(x) the issue and sale of the Securities by the Fund and the
compliance by the Fund with all of the provisions of this Agreement will
not breach or result in a default under, any indenture, mortgage, deed of
trust, loan agreement or other agreement or instrument filed or
incorporated by reference as an exhibit to the Registration Statement, nor
will such action violate the articles of incorporation or by-laws of the
Fund or any federal, Maryland or New York statute or any rule or regulation
that has been issued pursuant to any federal, Maryland or New York statute
or any order known to such counsel issued pursuant to any federal, Maryland
or New York stat ute by any court or governmental agency or body or court
having jurisdiction over the Fund or any of its properties;
(xi) the Management Agreement, the Custodian Agreement and the
Transfer Agency Agreement have been duly authorized, executed and delivered
by the Fund, comply as to form with all applicable provisions of the
Investment Company Act and are legal, valid, binding and enforceable
obligations of the Fund, subject, to the effects of bankruptcy, insol-
vency, fraudulent conveyance, reorganization, moratorium and other
similar laws relating to or affecting creditors' rights generally,
general equitable principles (whether considered in a proceeding in equity
or at law) and an implied covenant of good faith and fair dealing; and
(xii) the Fund is registered with the Commission under the Investment
Company Act as a closed-end diversified management investment company,
and the provisions of the articles of incorporation and by-laws of the
Fund do not violate the Investment Company Act or the Rules and Regulations
of the Commission thereunder;
In rendering such opinion, such counsel may limit such opinion to matters
involving the application of the laws of the State of New York, the State of
Maryland and the
20
<PAGE>
United States and may rely (A) as to matters involving the application of laws
of the State of Maryland, to the extent they deem proper and specified in such
opinion, upon the opinion of Piper & Marbury L.L.P. or other counsel of good
standing whom they believe to be reliable and who are satisfactory to counsel
for the Underwriters and (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Fund, the Investment
Manager and public officials. References to the Prospectus in this Section 6(b)
include any supplements thereto at the Closing Date.
Such counsel has not independently verified the accuracy, completeness
or fairness of the statements made or included in the Registration Statement or
the Prospectus and takes no responsibility therefor, except as and to the extent
set forth in Sections 6(b)(iii), 6(b)(v) and 6(b)(vi) above. In the course of
the preparation by the Fund of the Registration Statement and the Prospectus,
such counsel has participated in conferences with certain officers and emp1oyees
of the Fund and the Investment Manager, with representatives of Price Waterhouse
LLP and with counsel to the Investment Manager. Based upon such counse1's
examination of the Registration Statement and the Prospectus, such counse1's
investigations made in connection with the preparation of the Registration
Statement and the Prospectus and such counsel's participation in the conferences
referred to above, (i) such counsel is of the opinion that the Registration
Statement, as of its effective date, and the Prospectus, as of May 21, 1998,
complied as to form in all material respects with the requirements of the Act
and the Investment Company Act and the applicable rules and regulations of the
Commission thereunder, except that in each case such counsel expresses no
opinion with respect to the financial statements or other financial or
statistical data contained in the Registration Statement or the Prospectus, and
(ii) such counsel has no reason to believe that the Registration Statement, as
of its effective date, contained any untrue statement of a material fact or
omitted to state any material fact required to be stated therein or necessary in
order to make the statements therein not misleading or that the Prospectus
contains any untrue statement of a material fact or omits to state any material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, except that in each
case such counsel
21
<PAGE>
expresses no belief with respect to the financial state ments or other financial
or statistical data contained in the Registration Statement or the Prospectus.
(c) The Investment Manager shall have furnished to the Representative
the opinion of internal counsel for the Investment Manager reasonably acceptable
to the Representative, dated the Closing Date, to the effect that:
(i) the Investment Manager is duly incorporated and is validly
existing as a corporation in good standing under the laws of the State of
Delaware, with full corporate power and authority to own its property and
conduct its business as described in the Prospectus, and is duly qualified
to do business as a foreign corporation and is in good standing under the
laws of each jurisdiction which requires such qualification wherein it owns
or leases material properties or conducts material business;
(ii) the Investment Manager is duly registered as an investment
adviser under the Advisers Act and is not prohibited by the Advisers Act or
the Investment Company Act, or the rules and regulations under either,
from acting as Investment Manager for the Fund under the Management
Agreement and as contemplated in the Prospectus;
(iii) this Agreement and the Management Agreement have each been duly
authorized, executed and delivered by the Investment Manager, and the
Management Agreement constitutes a legal, valid and binding instrument
enforceable against the Investment Manager in accordance with its terms
(subject, as to enforcement of remedies, to applicable bankruptcy,
reorganization, insolvency, moratorium and other laws affecting creditors'
rights generally from time to time in effect);
(iv) neither (A) the operations and activities of the Investment
Manager as contemplated in the Prospectus, (B) the performance by the
Investment Manager of its obligations under the Investment Management
Agreements, nor (C) the consummation of the transactions contemplated
herein or in the
22
<PAGE>
Prospectus will conflict with, or result in a breach of, or constitute a
default under the certificate of incorporation or by-laws of the Investment
Manager or the terms of any indenture or other agreement or instrument
known to such counsel to which the Investment Manager or any of its
affiliates is a party or by which it is bound, or any law, order or regu
lation known to such counsel to be applicable to the Investment Manager of
any court, regulatory body, administrative agency, governmental body, stock
exchange or securities association or any other authority or arbitrator
having jurisdiction over the Investment Manager or any of its affiliates.
Although such counsel has not undertaken, except as otherwise
indicated in their opinion, to determine independently and does not assume any
responsibility for, the accuracy or completeness of the statements in the
Registration Statement, such counsel has participated in the preparation of the
Registration Statement and the Prospectus, including review and discussion of
the contents thereof and nothing has come to the attention of such counsel
that has caused it to believe that the Registration Statement, at the time the
Registration Statement became effective or the Prospectus, as of its date and
as of the Closing Date, as the case may be, or the date of any closing of the
sale of any Option Securities, contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that any amendment or
supplement to the Prospectus, as of the Closing Date or the date of any closing
of the sale of any Option Securities, contained an untrue statement of a
material fact or omitted to state a material fact necessary in order to make the
statements therein, in light of the circumstances under which they were made,
not misleading (it being understood that such counsel need express no opinion
with respect to the financial statements and the notes thereto and the schedules
and other financial and statistical data included in the Registration
Statement or the Prospectus).
(d) The Representative shall have received from Skadden, Arps, Slate,
Meagher & Flom LLP counsel for the Underwriters, such opinion or opinions, dated
the Closing Date, with respect to the issuance and sale of the Securities, the
Registration Statement, the Prospec-
23
<PAGE>
tus (together with any supplement thereto) and other related matters as the
Representative may reasonably require, and the Fund shall have furnished to such
counsel such documents as they request for the purpose of enabling them to pass
upon such matters.
(e) The Fund shall have furnished to the Representative a
certificate of the Fund, signed by the Chairman of the Board or the President
and the principal financial or accounting officer of the Fund, dated the Closing
Date, to the effect that the signers of such certificate have carefully examined
the Registration Statement, the Prospectus, any supplement to the Prospectus and
this Agreement and that:
(i) the representations and warranties of the Fund in this Agreement
are true and correct in all material respects on and as of the Closing Date
with the same effect as if made on the Closing Date and the Fund has
complied with all the agreements and satisfied all the conditions on its
part to be performed or satisfied at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of the Registration
Statement under the Act and no notice or order under Section 8(e) of the
Invest ment Company Act has been issued and no proceedings for either
purpose have been instituted or, to the Fund's knowledge, threatened; and
(iii) since the date of the most recent financial statements included
in the Prospectus (exclusive of any supplement thereto), there has been
no material adverse change in the condition (financial or other), earnings,
business or properties of the Fund, whether or not arising from
transactions in the ordinary course of business, except as set forth in or
contemplated in the Prospectus (exclusive of any supplement thereto).
(f) The Investment Manager shall have furnished to the Representative
a certificate of the Investment Manager, signed by the Chairman of the Board,
the President or any Vice President and the principal financial or accounting
officer of the Investment Manager, dated the Closing Date, to the effect that
the signers of
24
<PAGE>
such certificate have carefully examined the Registration Statement, the
Prospectus, any supplement to the Prospectus and this Agreement and that the
representations and warranties of the Investment Manager in this Agreement are
true and correct in all material respects on and as of the Closing Date with the
same effect as if made on the Closing Date and the Investment Manager has
complied with all the agreements and satisfied all the conditions on its part to
be performed or satisfied at or prior to the Closing Date;
(g) At the Execution Time and at the Closing Date, Price Waterhouse
LLP shall have furnished to the Representative a letter or letters, dated
respectively as of the Execution Time and as of the Closing Date, in form and
substance satisfactory to the Representative, confirming that they are
independent accountants within the meaning of the Act and the respective
applicable published rules and regulations thereunder and stating in effect
that:
(i) in their opinion the statement of assets and liabilities and
related notes included in the Registration Statement and the Prospectus and
reported on by them comply in form in all material respects with the
applicable accounting requirements of the Act and the Investment Company
Act and the Rules and Regulations;
(ii) on the basis of carrying out certain specified procedures (but
not an examination in accordance with generally accepted auditing stan-
dards) which would not necessarily reveal matters of significance with
respect to the comments set forth in such letter, a reading of the minutes
of the meetings of the stockholders, directors and committees thereof of
the Fund, and inquiries of certain officials of the Fund who have
responsibility for financial and accounting matters of the Fund, nothing
came to their attention which caused them to believe that at a specified
date no more than five business days prior to the date of the letter there
was any change in the shares of Common Stock or net assets or shareholders'
equity of the Fund as compared with the amounts shown on the statement of
assets and liabilities included in the Prospectus, except in all instances
for changes or decreases set
25
<PAGE>
forth in such letter, in which case the letter shall be accompanied by an
explanation by the Fund as to the significance thereof unless said
explanation is not deemed necessary by the Representative.
References to the Prospectus in this paragraph (g) include any supplement
thereto at the date of the letter.
(h) Subsequent to the Execution Time or, if earlier, the dates as of
which information is given in the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement thereto),
there shall not have been (i) any change or decrease specified in the letter or
letters referred to in paragraph (g) of this Section 6 or (ii) any change, or
any development involving a prospective change, in or affecting the business or
properties of the Fund the effect of which, in any case referred to in clause
(i) or (ii) above, is, in the judgment of the Representative, so material and
adverse as to make it impractical or inadvisable to proceed with the offering
or the delivery of the Securities as contemplated by the Registration Statement
(exclusive of any amendment thereof) and the Prospectus (exclusive of any
supplement thereto).
(i) Prior to the Closing Date, the Fund shall have furnished to the
Representative such further information, certificates and documents as the
Representative may reasonably request.
If any of the conditions specified in this Section 6 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
or if any of the opinions and certificates mentioned above or elsewhere in this
Agreement shall not be in all material respects reasonably satisfactory in form
and substance to the Representative and counsel for the Underwriters, this
Agreement and all obligations of the Underwriters hereunder may be canceled
at, or at any time prior to, the Closing Date by the Representative. Notice of
such cancellation shall be given to the Fund in writing or by telephone or
telegraph confirmed in writing.
26
<PAGE>
7. Reimbursement of Underwriters' Expenses.
---------------------------------------
The Fund will pay all costs, expenses, fees and taxes incident to the
performance of its obligations under this Agreement, including, but not limited
to, expenses relating to (i) the preparation, printing and filing of the
Registration Statement as originally filed and of each amendment thereto, of the
Preliminary Prospectuses, and of the Prospectus and any amendments or
supplements thereto, (ii) the preparation of the Fund Agreements, (iii) the
preparation, issuance and delivery of the certificates for the Securities to the
Underwriters, including stock transfer taxes, if any, payable upon the sale,
issuance and delivery of the Securities, (iv) the fees and disbursements of the
Fund's counsel and accountants, (v) the qualification of the Securities under
securities laws in accordance with the provisions of Section 5(e) of this
Agreement, including filing fees and any fees or disbursements of counsel for
the Under writers in connection therewith and in connection with the
preparation of a Blue Sky Survey, (vi) the reproduction and delivery to the
Underwriters of copies of the Registration Statement as originally filed and of
each amendment thereto, of the Preliminary Prospectuses, and of the Prospectus
and any amendments or supplements thereto, (vii) the reproduction and delivery
to the Underwriters of copies of the Blue Sky Survey, (viii) the fees and
expenses incurred with respect to filings with the National Association of
Securities Dealers, Inc., (ix) the preparation and delivery to the Underwriters
of any marketing brochure (excluding any brochures distributed to brokers) and
any tombstone advertisement placed by the Fund or placed by the Underwriters at
the request of the Fund, (x) the fees and expenses incurred with respect to the
listing of the Securities on the New York Stock Exchange and the registration
thereof under the Exchange Act, and (xi) an amount of $250,000 payable on the
Closing Date to the Underwriters in partial reimbursement of their expenses in
connection with the offering.
If the sale of the Securities provided for herein is not consummated
because any condition to the obligations of the Underwriters set forth in
Section 6 hereof is not satisfied, because of any termination pursuant to
Section 10 hereof or because of any refusal, inability or failure on the part of
the Fund to perform
27
<PAGE>
any agreement herein or comply with any provision hereof other than by reason of
a default by any of the Underwriters, the Fund will remain liable to pay all of
the costs, expenses, fees and taxes specified in the preceding paragraph and
will reimburse the Underwriters severally upon demand for all out-of-pocket
expenses (includ ing reasonable fees and disbursements of counsel) that shall
have been incurred by them in connection with the proposed purchase and sale of
the Securities.
8. Indemnification and Contribution. (a) The Fund and the Investment
--------------------------------
Manager jointly and severally agree to indemnify and hold harmless each
Underwriter, the directors, officers, employees and agents of each Underwriter,
and each person who controls any Underwriter within the meaning of either the
Act or the Exchange Act against any and all losses, claims, damages or
liabilities, joint or several, to which they or any of them may become subject
under the Act, the Exchange Act or other Federal or state statutory law or
regulation, at common law or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
the registration statement for the registration of the Securities as originally
filed or in any amendment thereof, or in any Preliminary Prospectus or the
Prospectus, or in any amendment thereof or supplement thereto, or arise out of
or are based upon the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, and agrees to reimburse each such indemnified party, as
incurred, for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Fund and the Investment Manager
-------- -------
will not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein in
reliance upon and in conformity with written information furnished to the Fund
by or on behalf of any Underwriter through the Representative specifically for
inclusion therein. This indemnity agreement will be in addition to any liability
which the Fund or the Investment Manager may otherwise have.
28
<PAGE>
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Fund and the Investment Manager, each of its respective directors, each of
its respective officers who signs the Registration Statement, and each person
who controls the Fund and the Investment Manager within the meaning of either
the Act or the Exchange Act, to the same extent as the foregoing indemnity to
each Underwriter, but only with reference to written information relating to
such Underwriter furnished to the Fund by or on behalf of such Underwriter
through the Representative specifically for inclusion in the documents referred
to in the foregoing indemnity. This indemnity agreement will be in addition to
any liability which any Underwriter may otherwise have. The Fund and the
Investment Manager acknowledge that the statements set forth in the last
paragraph of the cover page and under the heading "Underwriting" in any
Preliminary Prospectus and the Prospectus constitute the only information
furnished in writing by or on behalf of the several Underwriters for inclusion
in any Preliminary Prospectus or the Prospectus, and you, as the Representa
tive, confirm that such statements are correct.
(c) Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement thereof;
but the failure so to notify the indemnifying party (i) will not relieve it from
liability under paragraph (a) or (b) above unless and to the extent it did not
otherwise learn of such action and such failure results in the forfeiture by the
indemnifying party of substantial rights and defenses and (ii) will not, in any
event, relieve the indemnifying party from any obligations to any indemnified
party other than the indemnification obligation provided in paragraph (a) or (b)
above. The indemnifying party shall be entitled to appoint counsel of the
indemnifying party's choice at the indemnifying party's expense to represent the
indemnified party in any action for which indemnification is sought (in which
case the indemnifying party shall not thereafter be responsible for the fees and
expenses of any separate counsel retained by the indemnified party or parties
except as set forth below); provided, however, that such counsel shall be
-------- -------
satisfactory to the indemnified party. Notwithstanding the indemnify-
29
<PAGE>
ing party's election to appoint counsel to represent the indemnified party in an
action, the indemnified party shall have the right to employ separate counsel
(including local counsel), and the indemnifying party shall bear the reasonable
fees, costs and expenses of such separate counsel if (i) the use of counsel
chosen by the indemnifying party to represent the indemnified party would
present such counsel with a conflict of interest, (ii) the actual or potential
defendants in, or targets of, any such action include both the indemnified party
and the indemnifying party and the indemnified party shall have reasonably
concluded that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available to
the indemnifying party, (iii) the indemnifying party shall not have employed
counsel satisfactory to the indemnified party to represent the indemnified party
within a reasonable time after notice of the institution of such action or (iv)
the indemnifying party shall authorize the indemnified party to employ separate
counsel at the expense of the indemnifying party. An indem nifying party will
not, without the prior written consent of the indemnified parties, settle or
compromise or consent to the entry of any judgment with respect to any pending
or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding.
(d) In the event that the indemnity provided in paragraph (a) or (b)
of this Section 8 is unavailable to or insufficient to hold harmless an
indemnified party for any reason, the Fund and the Investment Manager, jointly
and severally, and the Underwriters agree to contribute to the aggregate losses,
claims, damages and liabilities (including legal or other expenses reasonably
incurred in connection with investigating or defending same) (collectively
"Losses") to which the Fund, the Investment Manager and one or more of the
Underwriters may be subject in such proportion as is appropriate to reflect the
relative benefits received by the Fund and the Investment Manager on the one
hand and by the Underwriters on the other from the offering of the Securities;
30
<PAGE>
provided, however, that in no case shall any Underwriter (except as may be
- -------- -------
provided in any agreement among underwriters relating to the offering of the
Securities) be responsible for any amount in excess of the underwriting discount
or commission applicable to the Securities purchased by such Underwriter
hereunder. If the allocation provided by the immediately preceding sentence
is unavailable for any reason, the Fund and the Investment Manager, jointly and
severally, and the Underwriters shall contribute in such proportion as is
appropriate to reflect not only such relative benefits but also the relative
fault of the Fund and the Investment Manager on the one hand and of the
Underwriters on the other in connection with the statements or omissions which
resulted in such Losses as well as any other relevant equitable considerations.
Benefits received by the Fund and the Investment Manager shall be deemed to be
equal to the total net proceeds from the offering (before deducting expenses),
and benefits received by the Underwriters shall be deemed to be equal to the
total underwriting discounts and commissions, in each case as set forth on the
cover page of the Prospectus. Relative fault shall be determined by reference to
whether any alleged untrue statement or omission relates to information provided
by the Fund, the Investment Manager or by the Underwriters. The Fund, the
Investment Manager and the Underwriters agree that it would not be just and
equitable if contribution were determined by pro rata allocation or any other
method of allocation which does not take account of the equitable considerations
referred to above. Notwithstanding the provisions of this Section 8(d), no
person guilty of fraudulent misrepresentation (within the mean ing of Section
ll(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. For purposes of this Section 8,
each person who controls an Underwriter within the meaning of either the Act or
the Exchange Act and each director, officer, employee and agent of an
Underwriter shall have the same rights to contribution as such Underwriter, and
each person who controls the Fund or the Investment Manager within the meaning
of either the Act or the Exchange Act, each officer of the Fund who shall have
signed the Registration Statement and each director of the Fund shall have the
same rights to contribution as the Fund, subject in each case to the applicable
terms and conditions of this Section 8(d).
31
<PAGE>
9. Default by an Underwriter. If any one or more Underwriters shall
-------------------------
fail to purchase and pay for any of the Securities agreed to be purchased by
such Underwriter or Underwriters hereunder and such failure to purchase shall
constitute a default in the performance of its or their obligations under this
Agreement, the remaining Underwriters shall be obligated severally to take up
and pay for (in the respective proportions which the amount of Securities set
forth opposite their names in Schedule I hereto bears to the aggregate amount of
Securities set forth opposite the names of all the remaining Underwriters) the
Securities which the defaulting Underwriter or Underwriters agreed but failed
to purchase; provided, however, that in the event that the aggregate amount of
-------- -------
Securities which the defaulting Underwriter or Underwriters agreed but failed to
purchase shall exceed 10% of the aggregate amount of Securities set forth in
Schedule I hereto, the remaining Underwriters shall have the right to purchase
all, but shall not be under any obligation to purchase any, of the Securities,
and if such nondefaulting Underwriters do not purchase all the Securities, this
Agreement will terminate without liability to any nondefaulting Underwriter,
the Investment Manager or the Fund. In the event of a default by any
Underwriter as set forth in this Section 9, the Closing Date shall be postponed
for such period, not exceeding seven days, as the Representative shall determine
in order that the required changes in the Registration Statement and the
Prospectus or in any other documents or arrangements may be effected. Nothing
contained in this Agreement shall relieve any defaulting Underwriter of its
liability, if any, to the Fund, the Investment Manager, and any nondefaulting
Underwriter for damages occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to termination in
-----------
the absolute discretion of the Representative, by notice given to the Fund prior
to delivery of and payment for the Securities, if prior to such time (i) trading
in the Fund's Common Stock shall have been suspended by the Commission or the
New York Stock Exchange or trading in securities generally on the New York Stock
Exchange shall have been suspended or limited or minimum prices shall have been
established on such Exchange, (ii) a banking moratorium shall have been declared
either by Federal or New York State authorities or (iii) there shall have
occurred any outbreak or esca-
32
<PAGE>
lation of hostilities, declaration by the United States of a national emergency
or war or other calamity or crisis the effect of which on financial markets is
such as to make it, in the judgment of the Representative, impracticable or
inadvisable to proceed with the offering or delivery of the securities as
contemplated by the Prospectus (exclusive of any supplement thereto).
11. Representations and Indemnities to Survive. The respective
------------------------------------------
agreements, representations, warranties, indemnities and other statements of
the Fund or its officers and of the Underwriters set forth in or made pursuant
to this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of any Underwriter, the Investment Manager,
or the Fund or any of the officers, directors or controlling persons referred to
in Section 8 hereof, and will survive delivery of and payment for the
Securities. The provisions of Sections 7 and 8 hereof shall survive the
termination or cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing and
-------
effective only on receipt, and, if sent to the Representative, will be mailed,
delivered or telegraphed and confirmed to them, care of Smith Barney Inc. at 388
Greenwich Street, New York, New York, 10013, attention: Counsel; or, if sent to
the Fund, will be mailed, delivered or telegraphed and confirmed to care of
Salomon Brothers Asset Management Inc, Seven World Trade Center, New York, New
York 10048, attention: Counsel.
13. Successors. This Agreement will inure to the benefit of and be
----------
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 8 hereof, and no
other person will have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and construed
--------------
in accordance with the laws of the State of New York applicable to contracts
made and to be performed within the State of New York.
15. Counterparts. This agreement may be signed in any number of
------------
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
33
<PAGE>
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicate hereof, whereupon
this letter and your acceptance shall represent a binding agreement between the
Fund and the several Underwriters.
Very truly yours,
SALOMON BROTHERS HIGH INCOME
FUND II INC
By:__________________________
Name:
Title:
SALOMON BROTHERS ASSET
MANAGEMENT INC
By:__________________________
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the date
first above written.
SMITH BARNEY INC.
By:______________________
Managing Director
For itself and the several
Underwriters named in Schedule I to the
foregoing Agreement.
34
<PAGE>
SCHEDULE I
Underwriters Number of Shares
------------ ----------------
Salomon Smith Barney..................
---------
A.G. Edwards & Sons, Inc. ............
---------
Advest, Inc. .........................
---------
EVEREN Securities, Inc. ..............
---------
Fahnestock & Co. Inc. ................
---------
Janney Montgomery Scott Inc. .........
---------
Legg Mason Wood Walker, Incorporated .
---------
McDonald & Company Securities, Inc. ..
---------
Morgan Keegan & Company, Inc. ........
---------
The Robinson-Humphrey Company, LLC....
---------
Tucker Anthony Incorporated...........
---------
Wedbush Morgan Securities.............
---------
Total..............................
---------
35
<PAGE>
EXHIBIT 99.2(j)
Form of Agreement
CUSTODIAN SERVICES AGREEMENT
----------------------------
THIS AGREEMENT is made as of _______________, 1998 by and between PNC BANK,
NATIONAL ASSOCIATION, a national banking association ("PNC Bank"), and SALOMON
BROTHERS HIGH INCOME FUND II INC., a Maryland corporation (the "Fund").
W I T N E S S E T H:
WHEREAS, the Fund is registered as a closed-end management investment
company under the Investment Company Act of 1940, as amended (the "1940 Act");
and
WHEREAS, the Fund wishes to retain PNC Bank to provide custodian services
and PNC Bank wishes to furnish custodian services, either directly or through an
affiliate or affiliates, as more fully described herein.
NOW, THEREFORE, In consideration of the premises and mutual covenants
herein contained, and intending to be legally bound hereby, the parties hereto
agree as follows:
1. DEFINITIONS. AS USED IN THIS AGREEMENT:
----------------------------------------
(a) "1933 Act" means the Securities Act of 1933, as amended.
----------
(b) "1934 Act" means the Securities Exchange Act of 1934, as amended.
----------
(c) "Authorized Person" means any officer of the Fund and any other
-------------------
person duly authorized by the Fund's Board of Directors to give Oral
Instructions and Written Instructions on behalf of the Fund and listed on the
Authorized Persons Appendix attached hereto and made a part hereof or any
amendment thereto as may be received by PNC Bank. An Authorized Person's scope
of authority may be limited by the Fund by setting forth such limitation in the
Authorized
<PAGE>
Persons Appendix.
(d) "Book-Entry System" means Federal Reserve Treasury book-entry
-------------------
system for United States and federal agency securities, its successor or
successors, and its nominee or nominees and any book-entry system maintained by
an exchange registered with the SEC under the 1934 Act.
(e) "CEA" means the
-----
Commodities Exchange Act, as amended.
(f) "Oral Instructions" mean oral instructions received by PNC Bank
-------------------
from an Authorized Person or from a person reasonably believed by PNC Bank to be
an Authorized Person.
(g) "PNC Bank" means PNC Bank, National Association or
----------
a subsidiary or affiliate of PNC Bank, National Association.
(h) "SEC" means the Securities and Exchange Commission.
-----
(i) "Securities Laws" mean the 1933 Act, the 1934 Act, the 1940 Act
-----------------
and the CEA.
(j) "Shares" mean the shares of beneficial interest of any
--------
series or class of the Fund.
(k) "Property" means:
----------
(i) any and all securities and other investment items which the
Fund may from time to time deposit, or cause to be
deposited, with PNC Bank or which PNC Bank may from time to
time hold for the Fund;
(ii) all income in respect of any of such securities or other
investment items;
(iii) all proceeds of the sale of any of such securities or
investment items; and
(iv) all proceeds of the sale of securities issued by the Fund,
which are received by PNC Bank from time to time, from or on
behalf of the Fund.
2
<PAGE>
(k) "Written Instructions" mean written instructions signed by two
----------------------
Authorized Persons and received by PNC Bank. The instructions may be delivered
by hand, mail, tested telegram, cable, telex or facsimile sending device.
2. APPOINTMENT. The Fund hereby appoints PNC Bank to provide custodian
-----------
services to the Fund and PNC Bank accepts such appointment and agrees to furnish
such services.
3. DELIVERY OF DOCUMENTS. The Fund has provided or, where applicable,
---------------------
will provide PNC Bank with the following:
(a) certified or authenticated copies of the resolutions of the
Fund's Board of Directors, approving the appointment of PNC Bank
or its affiliates to provide services;
(b) a copy of the Fund's most recent effective registration
statement;
(c) a copy of the advisory agreement;
(d) a copy of the distribution agreement with respect to each class
of Shares;
(e) a copy of the administration agreement if PNC Bank is not
providing such services;
(f) copies of any shareholder servicing agreements made in respect of
the Fund; and
(g) certified or authenticated copies of any and all amendments or
supplements to the foregoing.
4. COMPLIANCE WITH LAWS.
--------------------
PNC Bank undertakes to comply with all applicable requirements of the
Securities Laws and any laws, rules and regulations of governmental authorities
having jurisdiction with respect to the duties to be performed by PNC Bank
hereunder. Except as specifically set forth herein, PNC Bank assumes no
responsibility for such compliance by the Fund.
3
<PAGE>
5. INSTRUCTIONS.
------------
(a) Unless otherwise provided in this Agreement, PNC Bank shall act
only upon Oral Instructions and Written Instructions.
(b) PNC Bank shall be entitled to rely upon any Oral Instructions and
Written Instructions it receives from an Authorized Person (or from a person
reasonably believed by PNC Bank to be an Authorized Person) pursuant to this
Agreement. PNC Bank may assume that any Oral Instructions or Written
Instructions received hereunder are not in any way inconsistent with the
provisions of organizational documents of the Fund or of any vote, resolution or
proceeding of the Fund's Board of Directors or of the Fund's shareholders,
unless and until PNC Bank receives Written Instructions to the contrary.
(c) The Fund agrees to forward to PNC Bank Written Instructions
confirming Oral Instructions (except where such Oral Instructions are given by
PNC Bank or its affiliates) so that PNC Bank receives the Written Instructions
by the close of business on the same day that such Oral Instructions are
received. The fact that such confirming Written Instructions are not received
by PNC Bank shall in no way invalidate the transactions or enforceability of the
transactions authorized by the Oral Instructions. Where Oral Instructions or
Written Instructions reasonably appear to have been received from an Authorized
Person, PNC Bank shall incur no liability to the Fund in acting upon such Oral
Instructions or Written Instructions provided that PNC Bank's actions comply
with the other provisions of this Agreement.
6. RIGHT TO RECEIVE ADVICE.
-----------------------
(a) Advice of the Fund. If PNC Bank is in doubt as to any action it
------------------
should or should not take, PNC Bank may request directions or advice, including
Oral Instructions or
4
<PAGE>
Written Instructions, from the Fund.
(b) Advice of Counsel. If PNC Bank shall be in doubt as to any
-----------------
question of law pertaining to any action it should or should not take, PNC Bank
may request advice at its own cost from such counsel of its own choosing (who
may be counsel for the Fund, the Fund's investment adviser or PNC Bank, at the
option of PNC Bank).
(c) Conflicting Advice. In the event of a conflict between
------------------
directions, advice or Oral Instructions or Written Instructions PNC Bank
receives from the Fund, and the advice it receives from counsel, PNC Bank shall
be entitled to rely upon and follow the advice of counsel. In the event PNC
Bank so relies on the advice of counsel, PNC Bank remains liable for any action
or omission on the part of PNC Bank which constitutes willful misfeasance, bad
faith, gross negligence or reckless disregard by PNC Bank of any duties,
obligations or responsibilities set forth in this Agreement.
(d) Protection of PNC Bank. PNC Bank shall be protected in any action
----------------------
it takes or does not take in reliance upon directions, advice or Oral
Instructions or Written Instructions it receives from the Fund or from counsel
and which PNC Bank believes, in good faith, to be consistent with those
directions, advice or Oral Instructions or Written Instructions. Nothing in
this section shall be construed so as to impose an obligation upon PNC Bank (i)
to seek such directions, advice or Oral Instructions or Written Instructions, or
(ii) to act in accordance with such directions, advice or Oral Instructions or
Written Instructions unless, under the terms of other provisions of this
Agreement, the same is a condition of PNC Bank's properly taking or not taking
such action. Nothing in this subsection shall excuse PNC Bank when an action
or omission on the part of PNC Bank constitutes willful misfeasance, bad faith,
gross
5
<PAGE>
negligence or reckless disregard by PNC Bank of any duties, obligations or
responsibilities set forth in this Agreement.
7. RECORDS; VISITS. The books and records pertaining to the Fund, which
---------------
are in the possession or under the control of PNC Bank, shall be the property of
the Fund. Such books and records shall be prepared and maintained as required
by the 1940 Act and other applicable securities laws, rules and regulations.
The Fund and Authorized Persons shall have access to such books and records at
all times during PNC Bank's normal business hours. Upon the reasonable request
of the Fund, copies of any such books and records shall be provided by PNC Bank
to the Fund or to an authorized representative of the Fund, at the Fund's
expense.
8. CONFIDENTIALITY. PNC Bank agrees to keep confidential all records of
---------------
the Fund and information relating to the Fund and its shareholders, unless the
release of such records or information is otherwise consented to, in writing, by
the Fund. The Fund agrees that such consent shall not be unreasonably withheld
and may not be withheld where PNC Bank may be exposed to civil or criminal
contempt proceedings or when required to divulge such information or records to
duly constituted authorities.
9. COOPERATION WITH ACCOUNTANTS. PNC Bank shall cooperate with the Fund's
----------------------------
independent public accountants and shall take all reasonable action in the
performance of its obligations under this Agreement to ensure that the necessary
information is made available to such accountants for the expression of their
opinion, as required by the Fund.
10. DISASTER RECOVERY. PNC Bank shall enter into and shall maintain in
-----------------
effect with appropriate parties one or more agreements making reasonable
provisions for emergency use of electronic data processing equipment to the
extent appropriate equipment is available. In the
6
<PAGE>
event of equipment failures, PNC Bank shall, at no additional expense to the
Fund, take reasonable steps to minimize service interruptions. PNC Bank shall
have no liability with respect to the loss of data or service interruptions
caused by equipment failure provided such loss or interruption is not caused by
PNC Bank's own willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties or obligations under this Agreement.
11. COMPENSATION. As compensation for custody services rendered by PNC
------------
Bank during the term of this Agreement, the Fund will pay to PNC Bank a fee or
fees as may be agreed to in writing from time to time by the Fund and PNC Bank.
12. INDEMNIFICATION. The Fund agrees to indemnify and hold harmless PNC
---------------
Bank and its affiliates from all taxes, charges, expenses, assessments, claims
and liabilities (including, without limitation, liabilities arising under the
Securities Laws and any state and foreign securities and blue sky laws, and
amendments thereto, and expenses, including (without limitation) attorneys' fees
and disbursements, arising directly or indirectly from any action or omission to
act which PNC Bank takes (i) at the request or on the direction of or in
reliance on the advice of the Fund or (ii) upon Oral Instructions or Written
Instructions. Neither PNC Bank, nor any of its affiliates, shall be indemnified
against any liability (or any expenses incident to such liability) arising out
of PNC Bank's or its affiliates' own willful misfeasance, bad faith, gross
negligence or reckless disregard of its duties under this Agreement.
13. RESPONSIBILITY OF PNC BANK.
--------------------------
(a) PNC Bank shall be under no duty to take any action on behalf of
the Fund except as specifically set forth herein or as may be specifically
agreed to by PNC Bank in writing. PNC Bank shall be obligated to exercise care
and diligence in the performance of its
7
<PAGE>
duties hereunder, to act in good faith and to use its best efforts, within
reasonable limits, in performing services provided for under this Agreement. PNC
Bank shall be liable for any damages arising out of PNC Bank's failure to
perform its duties under this agreement to the extent such damages arise out of
PNC Bank's willful misfeasance, bad faith, gross negligence or reckless
disregard of its duties under this Agreement.
(b) Without limiting the generality of the foregoing or of any other
provision of this Agreement, (i) PNC Bank shall not be under any duty or
obligation to inquire into and shall not be liable for (A) the validity or
invalidity or authority or lack thereof of any Oral Instruction or Written
Instruction, notice or other instrument which conforms to the applicable
requirements of this Agreement, and which PNC Bank reasonably believes to be
genuine; or (B) subject to section 10, delays or errors or loss of data
occurring by reason of circumstances beyond PNC Bank's control, including acts
of civil or military authority, national emergencies, fire, flood, catastrophe,
acts of God, insurrection, war, riots or failure of the mails, transportation,
communication or power supply.
(c) Notwithstanding anything in this Agreement to the contrary, neither
PNC Bank nor its affiliates shall be liable to the Fund for any consequential,
special or indirect losses or damages which the Fund may incur or suffer by or
as a consequence of PNC Bank's or its affiliates' performance of the services
provided hereunder, whether or not the likelihood of such losses or damages was
known by PNC Bank or its affiliates.
14. DESCRIPTION OF SERVICES.
-----------------------
(a) Delivery of the Property. The Fund will deliver or arrange for
------------------------
delivery to PNC Bank, all the Property owned by the Fund, including cash
received as a result of the
8
<PAGE>
distribution of Shares, during the period that is set forth in this Agreement.
PNC Bank will not be responsible for such property until actual receipt.
(b) Receipt and Disbursement of Money. PNC Bank, acting upon Written
---------------------------------
Instructions, shall open and maintain separate accounts in the Fund's name using
all cash received from or for the account of the Fund, subject to the terms of
this Agreement. In addition, upon Written Instructions, PNC Bank shall open
separate custodial accounts for each separate series of the Fund (collectively,
the "Accounts") and shall hold in the Accounts all cash received from or for the
Accounts of the Fund specifically designated to each separate series.
PNC Bank shall make cash payments from or for the Accounts of a Fund only
for:
(i) purchases of securities in the name of the Fund or PNC Bank or
PNC Bank's nominee as provided in sub-section (j) and for which
PNC Bank has received a copy of the broker's or dealer's
confirmation or payee's invoice, as appropriate;
(ii) purchase or redemption of Shares of the Fund delivered to PNC
Bank;
(iii) payment of, subject to Written Instructions, interest, taxes,
administration, accounting, distribution, advisory, management
fees or similar expenses which are to be borne by the Fund;
(iv) payment to, subject to receipt of Written Instructions, the
Fund's transfer agent, as agent for the shareholders, an amount
equal to the amount of dividends and distributions stated in the
Written Instructions to be distributed in cash by the transfer
agent to shareholders, or, in lieu of paying the Fund's transfer
agent, PNC Bank may arrange for the direct payment of cash
dividends and distributions to shareholders in accordance with
procedures mutually agreed upon from time to time by and among
the Fund, PNC Bank and the Fund's transfer agent.
(v) payments, upon receipt Written Instructions, in connection with
the conversion, exchange or surrender of securities owned or
subscribed to by the Fund and held by or delivered to PNC Bank;
(vi) payments of the amounts of dividends received with respect to
securities
9
<PAGE>
sold short;
(vii) payments made to a sub-custodian pursuant to provisions in sub-
section (c) of this Section; and
(viii) payments, upon Written Instructions, made for other proper
Fund purposes.
PNC Bank is hereby authorized to endorse and collect all checks, drafts or
other orders for the payment of money received as custodian for the Accounts.
(c) Receipt of Securities; Subcustodians.
------------------------------------
(i) PNC Bank shall hold all securities received by it for the
Accounts in a separate account that physically segregates
such securities from those of any other persons, firms or
corporations, except for securities held in a Book-Entry
System. All such securities shall be held or disposed of
only upon Written Instructions of the Fund pursuant to the
terms of this Agreement. PNC Bank shall have no power or
authority to assign, hypothecate, pledge or otherwise
dispose of any such securities or investment, except upon
the express terms of this Agreement and upon Written
Instructions, accompanied by a certified resolution of the
Fund's Board of Directors, authorizing the transaction. In
no case may any member of the Fund's Board of Directors, or
any officer, employee or agent of the Fund withdraw any
securities.
At PNC Bank's own expense and for its own convenience, PNC
Bank may enter into sub-custodian agreements with other
United States banks or trust companies to perform duties
described in this sub-section (c). Such bank or trust
company shall have an aggregate capital, surplus and
undivided profits, according to its last published report,
of at least one million dollars ($1,000,000), if it is a
subsidiary or affiliate of PNC Bank, or at least twenty
million dollars ($20,000,000) if such bank or trust company
is not a subsidiary or affiliate of PNC Bank. In addition,
such bank or trust company must be qualified to act as
custodian and agree to comply with the relevant provisions
of the 1940 Act and other applicable rules and regulations.
Any such arrangement will not be entered into without prior
written notice to the Fund.
PNC Bank shall remain responsible for the performance of all
of its duties as described in this Agreement and shall hold
the Fund
10
<PAGE>
harmless from its own acts or omissions, under the standards
of care provided for herein, or the acts and omissions of
any sub-custodian chosen by PNC Bank under the terms of this
sub-section (c).
(d) Transactions Requiring Instructions. Upon receipt of Oral
-----------------------------------
Instructions or Written Instructions and not otherwise, PNC Bank, directly or
through the use of the Book-Entry System, shall:
(i) deliver any securities held for the Fund against the receipt of
payment for the sale of such securities;
(ii) execute and deliver to such persons as may be designated in such
Oral Instructions or Written Instructions, proxies, consents,
authorizations, and any other instruments whereby the authority
of an owner of any securities may be exercised;
(iii) deliver any securities to the issuer thereof, or its agent,
when such securities are called, redeemed, retired or otherwise
become payable; provided that, in any such case, the cash or
other consideration is to be delivered to PNC Bank;
(iv) deliver any securities held against receipt of other securities
or cash issued or paid in connection with the liquidation,
reorganization, refinancing, tender offer, merger, consolidation
or recapitalization of any corporation, or the exercise of any
conversion privilege;
(v) deliver any securities held to any protective committee,
reorganization committee or other person in connection with the
reorganization, refinancing, merger, consolidation,
recapitalization or sale of assets of any corporation, and
receive and hold under the terms of this Agreement such
certificates of deposit, interim receipts or other instruments or
documents as may be issued to it to evidence such delivery;
(vi) make such transfer or exchanges of the assets of the Fund and
take such other steps as shall be stated in said Oral
Instructions or Written Instructions to be for the purpose of
effectuating a duly authorized plan of liquidation,
reorganization, merger, consolidation or recapitalization of the
Fund;
(vii) release securities belonging to the Fund to any bank or trust
company for
11
<PAGE>
the purpose of a pledge or hypothecation to secure any loan
incurred by the Fund; provided, however, that securities shall be
released only upon payment to PNC Bank of the monies borrowed,
except that in cases where additional collateral is required to
secure a borrowing already made subject to proper prior
authorization, further securities may be released for that
purpose; and repay such loan upon redelivery to it of the
securities pledged or hypothecated therefor and upon surrender of
the note or notes evidencing the loan;
(viii) release and deliver securities owned by the Fund in connection
with any repurchase agreement entered into on behalf of the Fund,
but only on receipt of payment therefor; and pay out moneys of
the Fund in connection with such repurchase agreements, but only
upon the delivery of the securities;
(ix) release and deliver or exchange securities owned by the Fund in
connection with any conversion of such securities, pursuant to
their terms, into other securities;
(x) release and deliver securities owned by the fund for the purpose
of redeeming in kind shares of the Fund upon delivery thereof to
PNC Bank; and
(xi) release and deliver or exchange securities owned by the Fund for
other corporate purposes.
PNC Bank must also receive a certified resolution describing the
nature of the corporate purpose and the name and address of the
person(s) to whom delivery shall be made when such action is
pursuant to sub-paragraph d.
(e) Use of Book-Entry System. The Fund shall deliver to PNC Bank
------------------------
certified resolutions of the Fund's Board of Directors approving, authorizing
and instructing PNC Bank on a continuous basis, to deposit in the Book-Entry
System all securities belonging to the Fund eligible for deposit therein and to
utilize the Book-Entry System to the extent possible in connection with
settlements of purchases and sales of securities by the Fund, and deliveries and
returns of securities loaned, subject to repurchase agreements or used as
collateral in connection with borrowings. PNC Bank shall continue to perform
such duties until it receives Written
12
<PAGE>
Instructions or Oral Instructions authorizing contrary actions.
PNC Bank shall administer the Book-Entry System as follows:
(i) With respect to securities which are maintained in the Book-Entry
System, the records of PNC Bank shall identify by Book-Entry or
otherwise those securities belonging to the Fund. PNC Bank shall
furnish to the Fund a detailed statement of the Property held
under this Agreement at least monthly and from time to time and
upon written request.
(ii) Securities and any cash of the Fund deposited in the Book-Entry
System will at all times be segregated from any assets and cash
controlled by PNC Bank in other than a fiduciary or custodian
capacity but may be commingled with other assets held in such
capacities. PNC Bank and its sub-custodian, if any, will pay out
money only upon receipt of securities and will deliver securities
only upon the receipt of money.
(iii) All books and records maintained by PNC Bank which relate to
the Fund's participation in the Book-Entry System will at all
times during PNC Bank's regular business hours be open to the
inspection of Authorized Persons, and PNC Bank will furnish to
the Fund all information in respect of the services rendered as
it may require.
PNC Bank will also provide the Fund with such reports on its own system of
internal control as the Fund may reasonably request from time to time.
(f) Registration of Securities. All Securities held for the Fund
--------------------------
which are issued or issuable only in bearer form, except such securities held in
the Book-Entry System, shall be held by PNC Bank in bearer form; all other
securities held for the Fund may be registered in the name of the Fund, PNC
Bank, the Book-Entry System, a sub-custodian, or any duly appointed nominees of
the Fund, PNC Bank, Book-Entry System or sub-custodian. The Fund reserves the
right to instruct PNC Bank as to the method of registration and safekeeping of
the securities of the Fund. The Fund agrees to furnish to PNC Bank appropriate
instruments to enable PNC Bank to hold or deliver in proper form for transfer,
or to register in the name of its nominee or in the
13
<PAGE>
name of the Book-Entry System, any securities which it may hold for the Accounts
and which may from time to time be registered in the name of the Fund.
(g) Voting and Other Action. Neither PNC Bank nor its nominee shall
-----------------------
vote any of the securities held pursuant to this Agreement by or for the
account of a Portfolio, except in accordance with Written Instructions. PNC
Bank, directly or through the use of the Book-Entry System, shall execute in
blank and promptly deliver all notices, proxies and proxy soliciting materials
to the registered holder of such securities. If the registered holder is not
the Fund then Written Instructions or Oral Instructions must designate the
person who owns such securities.
(h) Transactions Not Requiring Instructions.
---------------------------------------
In the absence of contrary Written Instructions, PNC Bank is authorized to take
the following actions:
(i) Collection of Income and Other Payments.
----------------------------------------
(A) collect and receive for the account of the Fund, all
income, dividends, distributions, coupons, option
premiums, other payments and similar items, included or
to be included in the Property, and, in addition,
promptly advise the Fund of such receipt and credit
such income, as collected, to the Fund's custodian
account;
(B) endorse and deposit for collection, in the name of the
Fund, checks, drafts, or other orders for the payment
of money;
(C) receive and hold for the account of the Fund all
securities received as a distribution on the Fund's
securities as a result of a stock dividend, share
split-up or reorganization, recapitalization,
readjustment or other rearrangement or distribution of
rights or similar securities issued with respect to any
securities belonging to the Fund and held by PNC Bank
hereunder;
(D) present for payment and collect the amount payable
upon all securities which may mature or be called,
redeemed, or retired, or otherwise become payable on
the date such
14
<PAGE>
securities become payable; and
(E) take any action which may be necessary and proper in
connection with the collection and receipt of such
income and other payments and the endorsement for
collection of checks, drafts, and other negotiable
instruments.
(ii) Miscellaneous Transactions.
--------------------------
(A) deliver or cause to be delivered Property against
payment or other consideration or written receipt
therefor in the following cases:
(1) for examination by a broker or dealer selling for
the account of the Fund in accordance with street
delivery custom;
(2) for the exchange of interim receipts or temporary
securities for definitive securities; and
(3) for transfer of securities into the name of the
Fund or PNC Bank or nominee of either, or for
exchange of securities for a different number of
bonds, certificates, or other evidence,
representing the same aggregate face amount or
number of units bearing the same interest rate,
maturity date and call provisions, if any;
provided that, in any such case, the new
securities are to be delivered to PNC Bank.
(B) Unless and until PNC Bank receives Oral Instructions or
Written Instructions to the contrary, PNC Bank shall:
(1) pay all income items held by it which call for
payment upon presentation and hold the cash
received by it upon such payment for the account
of the Fund;
(2) collect interest and cash dividends received, with
notice to the Fund, to the account of the Fund;
(3) hold for the account of the Fund all stock
dividends, rights and similar securities issued
with respect to any securities held by PNC Bank;
and
15
<PAGE>
(4) execute as agent on behalf of the Fund all
necessary ownership certificates required by the
Internal Revenue Code or the Income Tax Regulations
of the United States Treasury Department or under
the laws of any state now or hereafter in effect,
inserting the Fund's name on such certificate as
the owner of the securities covered thereby, to the
extent it may lawfully do so.
(i) Segregated Accounts.
-------------------
(i) PNC Bank shall upon receipt of Written Instructions or Oral
Instructions establish and maintain a segregated accounts on
its records for and on behalf of the Fund. Such accounts
may be used to transfer cash and securities, including
securities in the Book-Entry System:
(A) for the purposes of compliance by the Fund with the
procedures required by a securities or option exchange,
providing such procedures comply with the 1940 Act and
any releases of the SEC relating to the maintenance of
segregated accounts by registered investment companies;
and
(B) Upon receipt of Written Instructions, for other proper
corporate purposes.
(ii) PNC Bank shall arrange for the establishment of IRA
custodian accounts for such shareholders holding Shares
through IRA accounts, in accordance with the Fund's
prospectuses, the Internal Revenue Code of 1986, as amended
(including regulations promulgated thereunder), and with
such other procedures as are mutually agreed upon from time
to time by and among the Fund, PNC Bank and the Fund's
transfer agent.
(j) Purchases of Securities. PNC Bank shall settle purchased securities
-----------------------
upon receipt of Oral Instructions or Written Instructions from the
Fund or its investment advisers that specify:
(i) the name of the issuer and the title of the securities,
including CUSIP number if applicable;
(ii) the number of shares or the principal amount purchased and
accrued interest, if any;
16
<PAGE>
(iii) the date of purchase and settlement;
(iv) the purchase price per unit;
(v) the total amount payable upon such purchase;
(vi) the name of the person from whom or the broker through whom the
purchase was made. PNC Bank shall upon receipt of securities
purchased by the Fund pay out of the moneys held for the account
of the Fund the total amount payable to the person from whom or
the broker through whom the purchase was made, provided that the
same conforms to the total amount payable as set forth in such
Oral Instructions or Written Instructions.
(k) Sales of Securities. PNC Bank shall settle sold securities upon
-------------------
receipt of Oral Instructions or Written Instructions from the Fund
that specify:
(i) the name of the issuer and the title of the security,
including CUSIP number if applicable;
(ii) the number of shares or principal amount sold, and accrued
interest, if any;
(iii) the date of trade and settlement;
(iv) the sale price per unit;
(v) the total amount payable to the Fund upon such sale;
(vi) the name of the broker through whom or the person to whom
the sale was made; and
(vii) the location to which the security must be delivered and
delivery deadline, if any;
PNC Bank shall deliver the securities upon receipt of the total amount
payable to the Fund upon such sale, provided that the total amount payable is
the same as was set forth in the Oral Instructions or Written Instructions.
Subject to the foregoing, PNC Bank may accept
17
<PAGE>
payment in such form as shall be satisfactory to it, and may deliver securities
and arrange for payment in accordance with the customs prevailing among dealers
in securities.
(l) Reports; Proxy Materials.
------------------------
(i) PNC Bank shall furnish to the Fund the following reports:
(A) such periodic and special reports as the Fund may
reasonably request;
(B) a monthly statement summarizing all transactions and
entries for the account of the Fund, listing securities
belonging to the Fund with the adjusted average cost
of each issue and the market value at the end of such
month and stating the cash account of the Fund
including disbursements;
(C) the reports required to be furnished to the Fund
pursuant to Rule 17f-4; and
(D) such other information as may be agreed upon from time
to time between the Fund and PNC Bank.
(ii) PNC Bank shall transmit promptly to the Fund any proxy
statement, proxy material, notice of a call or conversion or
similar communication received by it as custodian of the
Property. PNC Bank shall be under no other obligation to
inform the Fund as to such actions or events.
(m) Collections. All collections of monies or other property in respect,
-----------
or which are to become part, of the Property (but not the safekeeping
thereof upon receipt by PNC Bank) shall be at the sole risk of the
Fund. If payment is not received by PNC Bank within a reasonable time
after proper demands have been made, PNC Bank shall notify the Fund in
writing, including copies of all demand letters, any written responses,
memoranda of all oral responses and shall await instructions from the
Fund. PNC Bank shall not be obliged to take legal action for collection
unless and until reasonably indemnified to its satisfaction. PNC Bank
shall also notify the Fund as soon as reasonably practicable whenever
income due on securities is not collected in due course and shall
provide the Fund with periodic status reports of such income collected
after a reasonable time.
18
<PAGE>
15. DURATION AND TERMINATION. This Agreement shall continue until
------------------------
terminated by the Fund or by PNC Bank on sixty (60) days' prior written notice
to the other party. In the event this Agreement is terminated (pending
appointment of a successor to PNC Bank or vote of the shareholders of the Fund
to dissolve or to function without a custodian of its cash, securities or other
property), PNC Bank shall not deliver cash, securities or other property to the
Fund. It may deliver them to a bank or trust company of PNC Bank's choice,
having an aggregate capital, surplus and undivided profits, as shown by its last
published report, of not less than twenty million dollars ($20,000,000), as a
custodian for the Fund to be held under terms similar to those of this
Agreement. PNC Bank shall not be required to make any such delivery or payment
until full payment shall have been made to PNC Bank of all of its fees,
compensation, costs and expenses. PNC Bank shall have a security interest in
and shall have a right of setoff against the Property as security for the
payment of such fees, compensation, costs and expenses.
16. NOTICES. All notices and other communications, including Written
-------
Instructions, shall be in writing or by confirming telegram, cable, telex or
facsimile sending device. Notice shall be addressed (a) if to PNC Bank at
Airport Business Center, International Court 2, 200 Stevens Drive, Lester,
Pennsylvania 19113, marked for the attention of the Custodian Services
Department (or its successor) (b) if to the Fund, at _______________________,
Attn:________________ or (c) if to neither of the foregoing, at such other
address as shall have been given by like notice to the sender of any such notice
or other communication by the other party. If notice is sent by confirming
telegram, cable, telex or facsimile sending device, it shall be deemed to have
been given immediately. If notice is sent by first-class mail, it shall be
deemed to have been given
19
<PAGE>
five days after it has been mailed. If notice is sent by messenger, it shall be
deemed to have been given on the day it is delivered.
17. AMENDMENTS. This Agreement, or any term hereof, may be changed or
----------
waived only by a written amendment, signed by the party against whom enforcement
of such change or waiver is sought.
18. DELEGATION; ASSIGNMENT. PNC Bank may assign its rights and delegate
----------------------
its duties hereunder to any wholly-owned direct or indirect subsidiary of PNC
Bank, National Association or PNC Bank Corp., provided that (i) PNC Bank gives
the Fund thirty (30) days' prior written notice; (ii) the delegate (or assignee)
agrees with PNC Bank and the Fund to comply with all relevant provisions of the
1940 Act; and (iii) PNC Bank and such delegate (or assignee) promptly provide
such information as the Fund may request, and respond to such questions as the
Fund may ask, relative to the delegation (or assignment), including (without
limitation) the capabilities of the delegate (or assignee).
19. COUNTERPARTS. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
20. FURTHER ACTIONS. Each party agrees to perform such further acts and
---------------
execute such further documents as are necessary to effectuate the purposes
hereof.
21. MISCELLANEOUS.
-------------
(a) Entire Agreement. This Agreement embodies the entire agreement
----------------
and understanding between the parties and supersedes all prior agreements and
understandings relating to the subject matter hereof, provided that the parties
may embody in one or more
20
<PAGE>
separate documents their agreement, if any, with respect to delegated duties and
Oral Instructions.
(b) Captions. The captions in this Agreement are included for
--------
convenience of reference only and in no way define or delimit any of the
provisions hereof or otherwise affect their construction or effect.
(c) Governing Law. This Agreement shall be deemed to be a contract
-------------
made in Pennsylvania and governed by Pennsylvania law, without regard to
principles of conflicts of law.
(d) Partial Invalidity. If any provision of this Agreement shall be
------------------
held or made invalid by a court decision, statute, rule or otherwise, the
remainder of this Agreement shall not be affected thereby.
(e) Successors and Assigns. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of the parties hereto and their respective successors
and permitted assigns.
(f) Facsimile Signatures. The facsimile signature of any party to
--------------------
this Agreement shall constitute the valid and binding execution hereof by such
party.
21
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed as of the day and year first above written.
PNC BANK, NATIONAL ASSOCIATION
By:_________________________________________
Title:______________________________________
SALOMON BROTHERS HIGH INCOME FUND II INC
By:_______________________________________
Title:____________________________________
22
<PAGE>
AUTHORIZED PERSONS APPENDIX
NAME (TYPE) SIGNATURE
- --------------------- ---------------------------------
- --------------------- ---------------------------------
- --------------------- ---------------------------------
- --------------------- ---------------------------------
- --------------------- ---------------------------------
- --------------------- ---------------------------------
23
<PAGE>
EXHIBIT 99.2(l)
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, NY 10017
May 21, 1998
Salomon Brothers High Income Fund II Inc
Seven World Trade Center
New York, New York 10048
Ladies and Gentlemen:
We have acted as counsel to Salomon Brothers High Income Fund II Inc,
a Maryland corporation (the "Fund"), in connection with the preparation of a
Registration Statement on Form N-2 filed by the Fund under the Securities Act of
1933 and the Investment Company Act of 1940, both as amended (the "Registration
Statement"), relating to the offer and sale of up to 66,666,667 shares of
Common Stock of the Fund, par value $.001 per share (the "Shares").
We have examined the Registration Statement and such corporate
records, agreements, documents and other instruments and such certificates or
comparable documents of public officials and of officers and representatives of
the Fund, and have made such other and further investigations, as we have deemed
relevant and necessary as a basis for the opinions hereinafter set forth.
<PAGE>
Salomon Brothers High Income Fund II Inc -2- May 21, 1998
Based upon the foregoing, and subject to the qualifications and
limitations stated herein, we are of the opinion that the Shares to be issued by
the Fund have been duly authorized and, upon payment and delivery in accordance
with the underwriting agreement among the Fund, Salomon Brothers Asset
Management Inc and Smith Barney Inc., as representative of the several
underwriters listed in Schedule I thereto, the Shares will be validly issued,
fully paid and nonassessable.
Insofar as the opinions expressed herein relate to or are dependent
upon matters governed by the laws of the State of Maryland, we have relied upon
the opinion of Piper & Marbury L.L.P., a copy of which is attached hereto. We
are members of the Bar of the State of New York, and we do not express any
opinion herein concerning any law other than the law of the State of New York,
the federal law of the United States, and, to the extent set forth herein, the
laws of the State of Maryland.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the reference to us under the caption "Legal
Matters" in the prospectus forming a part thereof.
Very truly yours,
/s/ SIMPSON THACHER & BARTLETT
SIMPSON THACHER & BARTLETT
<PAGE>
PIPER & MARBURY
L.L.P.
CHARLES CENTER SOUTH
36 SOUTH CHARLES STREET WASHINGTON
BALTIMORE, MARYLAND 21201-3018 NEW YORK
410-539-2530 PHILADELPHIA
FAX: 410-539-0489 EASTON
May 21, 1998
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017-3954
Re: Salomon Brothers High Income Fund II Inc
66,666,667 Shares of Common Stock
----------------------------------------
Ladies and Gentlemen:
We have acted as special Maryland counsel to Salomon Brothers High Income
Fund II Inc, a Maryland corporation (the "Company"), in connection with the
Company's Registration Statement on Form N-2, including all amendments or
supplements thereto, filed with the Securities and Exchange Commission (the
"Commission") under the Securities Act of 1933, as amended (the "Act"), and the
Investment Company Act of 1940, as amended (File Nos. 333-48351 and 811-08709)
and the issuance of up to 66,666,667 shares of the Company's Common Stock, par
value of $0.001 per share (the "Shares"), pursuant to the Registration
Statement.
In this capacity, we have examined the Company's Charter and By-Laws, the
proceedings of the Board of Directors of the Company relating to the issuance of
the Shares and such other statutes, certificates, instruments and documents
relating to the Company and matters of law as we have deemed necessary to the
issuance of this opinion. In such examination, we have assumed the genuineness
of all signatures, the legal capacity of all individuals who have executed any
of the aforesaid documents, the conformity of final documents in all material
respects to the versions thereof submitted to us in draft form, the authenticity
of all documents submitted to us as originals, the conformity with originals of
all documents submitted to us as copies and the due authorization, validity and
binding effect of all such documents (other than the authorization, execution
and delivery of the documents by the Company).
<PAGE>
Piper Marbury
L.L.P.
Simpson Thacher & Bartlett
May 21, 1998
Page 2
Based upon the foregoing, and limited in all respects to applicable
Maryland law, we are of the opinion and advise you that:
1. The Company has been duly incorporated and is validly existing as a
corporation under the laws of the State of Maryland.
2. The issuance and the sale of the Shares have been duly authorized, and
upon payment and delivery in accordance with the underwriting agreement among
the Company, Salomon Brothers Asset Management, Inc and Smith Barney, Inc., as
representative of the several underwriters listed in Schedule I thereto, the
Shares will be validly issued, fully paid and nonassessable.
You may rely upon this opinion in rendering your opinion to the Company
which is to be filed as an exhibit to the Registration Statement. We hereby
consent to the filing of this opinion as an exhibit to the Registration
Statement and to the reference to our firm under the heading "Legal Matters" in
the Prospectus included in the Registration Statement.
Very truly yours,
/s/ Piper & Marbury L.L.P.
Piper & Marbury L.L.P.
<PAGE>
EXHIBIT 99.2(n)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this Pre-
Effective Amendment No. 2 to the Registration Statement on Form N-2 of our
report, dated May 21, 1998, relating to the statement of assets and liabilities
of Salomon Brothers High Income Fund II Inc, which appears in such Prospectus.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
New York, New York
May 21, 1998
