<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 20, 1998
SECURITIES ACT FILE NO. 333-
INVESTMENT COMPANY ACT FILE NO. 811-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM N-2
/X/ REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
/_/ PRE-EFFECTIVE AMENDMENT NO.
/_/ POST-EFFECTIVE AMENDMENT NO.
AND/OR
/X/ REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
/_/ AMENDMENT NO.
(Check Appropriate Box or Boxes)
---------------
SALOMON BROTHERS HIGH YIELD BOND FUND 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 Yield Bond Fund 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.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
(212) 455-2000
---------------
<PAGE>
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. /X/
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
<TABLE>
<CAPTION>
================================================================================
TITLE OF AMOUNT BEING PROPOSED PROPOSED AMOUNT OF
SECURITIES BEING REGISTERED(1) MAXIMUM MAXIMUM REGISTRATION
REGISTERED OFFERING PRICE AGGREGATE FEE(2)
PER SHARE(1) OFFERING
PRICE(1)
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, 66,666 Shares $15.00 $999,990 $295
$.001 par value
================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee.
(2) Transmitted to the designated lockbox at Mellon Bank in Pittsburgh, PA.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
<PAGE>
CROSS-REFERENCE SHEET
PURSUANT TO RULE 481(a)
<TABLE>
<CAPTION>
N-2 ITEM NUMBER LOCATION IN PROSPECTUS (CAPTION)
--------------- --------------------------------
<S> <C>
PART A
1. Outside Front Cover....................... Outside Front Cover Page
2. Inside Front and Outside Back Cover
Page................................... Outside Front Cover Page; Inside Front
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 Registrant..... Outside Front Cover Page; Prospectus
Summary; The Fund; Investment
Objectives and Policies; Additional
Investment Activities; Risk Factors &
Special Considerations; Description of
Capital Stock
9. Management................................ Outside Prospectus Summary; Management
of the Fund; Custodian, Transfer Agent,
Dividend Paying Agent and Registrar
10. Capital Stock, Long-Term Debt, and
Other Securities....................... Outside Front Cover Page; Prospectus
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
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
PART B LOCATION IN PROSPECTUS (CAPTION)
--------------------------------
<S> <C>
14. Cover Page................................ Outside Front Cover Page
15. Table of Contents......................... Outside Front Cover Page
16. General Information and History........... The Fund
17. Investment Objectives and Policies........ Investment Objectives and Policies;
Investment Restrictions
18. Management................................ Management of the Fund
19. Control Persons and Principal
Holders of Securities.................. Not Applicable
Investment Advisory and Other
Services............................... Management of the Fund
21. Brokerage Allocation and Other
Practices.............................. Portfolio Transactions
22. Tax Status................................ Taxation
23. Financial Statements...................... Not Applicable
</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>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation, or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION, DATED MARCH 20, 1998
PROSPECTUS
[____] SHARES
SALOMON BROTHERS HIGH YIELD BOND FUND INC
COMMON STOCK
($.001 PAR VALUE)
---------------
The Salomon Brothers High Yield Bond Fund 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 in medium or lower rating categories or determined by the
investment manager to be of comparable quality. As a secondary objective, the
Fund will seek capital appreciation. 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 high yield foreign debt
securities. The 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
Investors Service, Inc. ("Moody's") or "BBB" or lower by Standard & Poor's
Corporation ("S&P") or, if not rated by Moody's or S&P, will be of comparable
quality as determined by the investment manager. 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. 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."
Salomon Brothers Asset Management Inc will serve as investment manager to
the Fund.
(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.
================================================================================
PRICE TO SALES LOAD PROCEEDS
PUBLIC(1) (1)(2) TO FUND(3)
- --------------------------------------------------------------------------------
Per Share................... $15.00 none $15.00
- --------------------------------------------------------------------------------
Total(4).................... $ none $
================================================================================
(1) The investment manager or an affiliate will pay the Underwriters a
commission in the amount of ___% 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 $______ to be paid to the Underwriters as reimbursement of
certain of their expenses in connection with the offering), estimated at
$[ ___ ].
<PAGE>
2
(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 the Fund will be $[_________]. See "Underwriting."
---------------
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 , 1998.
---------------
________________, 1998
<PAGE>
3
(Continued from cover page)
Application will be made to list the Common Stock on the New York Stock
Exchange under the symbol "[___]." PRIOR TO THIS OFFERING, THERE HAS BEEN NO
PUBLIC MARKET FOR THE FUND'S SHARES OF COMMON STOCK. HOWEVER, DURING AN INITIAL
PERIOD WHICH IS NOT EXPECTED TO EXCEED ONE WEEK FROM THE DATE OF THIS
PROSPECTUS, THE FUND'S COMMON STOCK WILL NOT BE LISTED ON ANY SECURITIES
EXCHANGE. DURING SUCH PERIOD, THE UNDERWRITERS DO NOT INTEND TO MAKE A MARKET
IN THE FUND'S COMMON STOCK. CONSEQUENTLY, IT IS ANTICIPATED THAT AN INVESTMENT
IN THE FUND WILL BE ILLIQUID DURING SUCH PERIOD.
At times, the Fund intends to 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. 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. There are
special risks and costs associated with leveraging. See "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. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
4
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.
Investment Objectives and
Policies............................ The Fund's investment objective is to
maximize current income by investing
primarily in a diversified portfolio
of high yield debt securities rated
in medium or lower rating categories
or determined by the investment
manager to be of comparable quality.
As a secondary objective, the Fund
will seek capital appreciation.
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 high
yield foreign debt securities. The
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, if not
rated by Moody's or S&P, will be of
comparable quality as determined by
the investment manager. Medium and
low-rated and comparable unrated
securities 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. A description of the ratings
used by Moody's and S&P is set forth
in Appendix A to this Prospectus.
<PAGE>
5
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 [ and
] are acting as representatives.
The initial public offering price of the
Common Stock is $15.00 per share. 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.
Application will be made to list the
Common Stock on the New York Stock
Exchange (the "NYSE") under the
symbol [ ]. However, during an
initial period which is not expected
to exceed one week from the date of
this Prospectus, the Fund's shares of
Common Stock will not be listed on
any securities exchange. During such
period, the Underwriters do not
intend to make a market in the Fund's
shares of Common Stock.
Consequently, it is anticipated that
an investment in the Fund will be
illiquid during such period. See
"Underwriting."
Stock Symbol.......................... [ "___" ]
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 [
] registered investment companies.
At March 31, 1998, SBAM had in excess
of $[ ] billion of assets under
management. SBAM has access to
hundreds
<PAGE>
6
of affiliated research professionals,
including an extensive 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 of Salomon Smith
Barney and SBAM and a Senior
Portfolio Manager of SBAM,
responsible for SBAM's investment
company and institutional portfolios
which invest in high yield non-U.S.
and U.S. 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 High Yield Bond Fund
and 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, Salomon Brothers Variable High
Yield Bond Fund and the high yield
and sovereign bond portions of
Salomon Brothers Variable Strategic
Bond Fund, each a portfolio of
Salomon Brothers Variable Series
Funds Inc, The Emerging Markets
Income Fund Inc, The Emerging Markets
Income Fund II Inc, The Emerging
Markets Floating Rate Fund Inc,
Global Partners Income Fund Inc.,
Salomon Brothers Worldwide Income
Fund Inc and the foreign sovereign
debt component of Salomon Brothers
2008 Worldwide Dollar Government Term
Trust Inc.
Management Fees....................... The Fund will pay SBAM for its
investment management services a
monthly fee at an annual rate of [
%] of the Fund's average weekly net
assets plus the proceeds of any
outstanding borrowings used for
leverage.
Dividends and Distributions........... Beginning with its initial
distribution approximately 60 days
after completion of this
<PAGE>
7
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. Shareholders will have
their dividends and other
distributions from the Fund
automatically reinvested in
additional shares of the Fund unless
they notify the Fund otherwise. See
"Dividends and Distributions-Dividend
Reinvestment and Cash Purchase Plan."
From and after the leveraging (if
any) of the Common Stock, monthly
distributions to holders of Common
Stock will consist of net investment
income remaining after the payment of
interest or dividends on any
outstanding leverage.
Dividend Reinvestment and Cash
Purchase Plan....................... Under the Fund's Dividend
Reinvestment and Cash Purchase Plan
(the "Plan"), shareholders will have
all dividends and distributions
automatically reinvested in
additional shares of Common Stock of
the Fund purchased in the open market
unless they notify the Fund
otherwise. 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 and Cash
Purchase Plan."
Taxation.............................. The Fund intends to qualify and elect
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."
<PAGE>
8
Custodian, Transfer Agent, Dividend
Paying Agent and Registrar........... [ ] will act as custodian
for the Fund's assets. [ ]
will act as transfer agent, dividend
paying agent and registrar for the
Fund's Common Stock.
<PAGE>
9
RISK FACTORS AND SPECIAL CONSIDERATIONS
General Considerations
Relating to High Yield Debt
Securities........................... The net asset value of the Fund's
shares will change with fluctuations
in the value of its portfolio
securities. The high yield corporate
debt securities, commonly known as
"junk bonds," and high yield
sovereign 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 are considered
to have extremely poor prospects of
ever attaining any real investment
standing, to have a current
identifiable vulnerability to default
or are in default, to 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 to 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
pay interest and repay principal in
accordance with the terms of the
obligations. Accordingly, it is
possible that these types of factors
could, in certain instances, 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
<PAGE>
10
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
that the Fund's high yield debt
portfolio will initially have an
average maturity of 10 to 15 years.
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.
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
<PAGE>
11
Directors to value the Fund's
portfolio securities and the Board
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 may be 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. For example, federal
legislation requiring the divestiture
by federally insured savings and loan
associations of their investments in
high yield bonds and limiting the
deductibility of interest by certain
corporate issuers of high yield bonds
adversely affected the market in
recent years.
General Considerations
Relating to High Yield
Corporate Securities................. While the market values of corporate
debt 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
certain of these securities also tend
to be more sensitive to
company-specific developments and
changes in economic conditions than
higher rated securities. Issuers of
these securities are often highly
leveraged, so that their ability to
service their debt obligations during
an economic downturn or
<PAGE>
12
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
such securities generally are
unsecured and frequently are
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 certain 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.
Considerations Relating
to High Yield Foreign
Sovereign and Non-U.S. Corporate
Debt Securities..................... Investments in foreign sovereign and
non-U.S. corporate debt securities
involve certain risks not typically
associated with U.S. corporate
investments. Investing in foreign
sovereign and non-U.S. corporate debt
securities will expose the Fund to
the direct or indirect consequences
of political, social or economic
changes in the countries that issue
the securities. The ability and
willingness of sovereign obligors in
developing and emerging countries or
the governmental authorities that
control repayment of their external
debt to pay principal and interest on
such debt when due may depend on
general economic and
political
<PAGE>
13
conditions within the relevant
country. Countries such as those in
which the Fund may invest 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 which 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.
The ability of a foreign sovereign
obligor 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 on 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, and
inflows of foreign investment. The
commitment on the
<PAGE>
14
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 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.
As a result of the foregoing, a
governmental obligor 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
<PAGE>
15
organizations and other financial
institutions. The 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 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.
Additional Investment
Strategies........................... The Fund may employ various
additional investment strategies that
entail certain additional or
different risks, such as entering
<PAGE>
16
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-Zero Coupon Securities,
Pay-in-Kind Bonds and Deferred
Payment Securities; -Loan
Participations and Assignments",
"Additional Investment Activities"
and Appendix B 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
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.
Leverage.............................. At times, the Fund intends to 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 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
<PAGE>
17
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. 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 Moody's, S&P and/or any other
nationally recognized statistical rating
organization rate any preferred stock or
debt which 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
<PAGE>
18
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."
Year 2000 Issue....................... Like other investment companies,
financial and business organizations
and individuals around the world, the
Fund could be adversely affected if
the computer systems used by SBAM and
the Fund's other service providers do
not properly process and calculate
date-related information and data
from and after January 1, 2000. This
is commonly known as the "Year 2000
Problem." SBAM is taking steps to
address the Year 2000 Problem with
respect to the computer systems that
it uses and to obtain assurances that
comparable steps are being taken by
the Fund's other major service
providers. At this time, however,
there can be no assurance that these
steps will be sufficient to avoid any
adverse impact on the Fund.
Anti-Takeover Provisions.............. The Fund's Articles of Incorporation
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
<PAGE>
19
provisions are in the best interests
of shareholders generally.
-------------------------
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 not be
considered a complete investment
program.
<PAGE>
20
FEE TABLE
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)..................... _____%
Interest Payments on Borrowed Funds (b)....................... None
Other Expenses (b)............................................
-----
Total Annual Expenses (b)...................................
=====
EXAMPLE: 1 3 5 10
YEAR YEARS YEARS YEARS
---- ----- ----- -----
An investor would pay the following expenses
on a $1,000 investment, assuming (1) total
annual expenses of [____]% (assuming no
leverage) and [____]% (assuming leverage of
___ of the Fund's total assets) and (2) a 5%
annual return throughout the periods:
Assuming No Leverage........................ $ __ $ __ $ __ $ __
Assuming [___]% Leverage.................... $ __ $ __ $ __ $ __
_______________
(a) See "Management of the Fund."
(b) In the event the Fund utilizes leverage by borrowing in an amount equal to
approximately ___ 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 Fees would be _____, Interest
Payments on Borrowed Funds would be _____, Other Expenses would be _____,
and Total Annual Expenses would be _____. 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 "Other Investment Policies-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.
<PAGE>
21
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 maximize current income by investing primarily in a
diversified portfolio of high yield debt securities rated 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. SBAM, the Fund's
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. 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 as a
complete investment program. See "Risk Factors and Special Considerations."
USE OF PROCEEDS
The net proceeds of this offering, estimated to be [$_________]
(assuming no exercise of the over-allotment option granted to the Underwriters)
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."
<PAGE>
22
INVESTMENT OBJECTIVES AND POLICIES
The Fund's investment objective is to maximize current income by investing
primarily in a diversified portfolio of high yield debt securities rated 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.
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 high yield foreign debt securities. The 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, if not
rated by Moody's or S&P, will be of comparable quality as determined by the
investment manager. 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. 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 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" above. 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 10 to 15 years.
In light of the risks associated with high yield corporate and sovereign
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
sovereign 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, 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 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
<PAGE>
23
on SBAM's credit analysis than would be the case if it invested in higher
quality debt securities.
HIGH YIELD CORPORATE DEBT SECURITIES
The development of a market for high yield non-U.S. corporate
securities has been a relatively recent phenomenon. On the other hand, the
market for high yield U.S. corporate debt securities is more established than
that for high yield non-U.S. corporate debt securities, but has undergone
significant changes in the past and may undergo significant changes in the
future.
High yield non-U.S. 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 debt securities will bear
interest at fixed rates. However, the Fund may also invest in corporate debt
securities with variable rates of interest of 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).
HIGH YIELD FOREIGN SOVEREIGN AND NON-U.S. CORPORATE DEBT SECURITIES
The Fund may invest up to 35% of its total assets in foreign fixed-income
securities all or a portion of which may be non-U.S. dollar denominated and
which 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 of the U.S. government issued in
non-dollar securities; (d) debt obligations and other fixed-income securities of
foreign corporate issuers (both dollar and non-dollar denominated); and (e) U.S.
corporate issuers (both Eurodollar and non-dollar denominated). 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 and
Non-U.S. Corporate Debt Securities" and "- Other Investments--Brady Bonds"
below. Moreover, substantial investments in foreign securities may have adverse
tax implications as described under "Taxation."
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 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
<PAGE>
24
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
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 which have issued or have announced plans to issue
Brady Bonds an attractive opportunity for investment.
Investors should recognize that Brady Bonds have been issued only in recent
years, and accordingly 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. The
Fund may purchase Brady Bonds with no or limited collateralization, and 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 invests are likely to be
acquired at a discount, which involves certain considerations discussed below
under "Other Investments--Zero Coupon Securities, Pay-in-Kind Bonds and Deferred
Payment Securities."
<PAGE>
25
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 and, as indicated above, a substantial portion of the Fund's
sovereign debt securities may be acquired at a discount. 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 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 below under "Other Investments--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 these instruments 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 a zero coupon
security, 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
<PAGE>
26
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.
Because the market for such instruments is not highly liquid, the Fund
anticipates 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 Assignments or Participations in response to a specific
economic event, such as deterioration in the creditworthiness of the borrower.
The Fund's Board of Directors has adopted policies and procedures for the
purpose of determining whether Assignments and Participations are liquid or
illiquid. Pursuant to these policies, the Board has delegated to SBAM the duty
to make this determination, subject to the periodic review by the Board. To the
extent that liquid Assignments and Participations that the Fund holds becomes
illiquid, the percentage of the Fund's assets invested in illiquid assets would
increase.
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. issuers when consistent with the Fund's objectives. The Fund
will generally 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.
<PAGE>
27
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 such 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" below, 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% of the shares represented at a meeting
at which more than 50% of the outstanding shares are represented or (ii) more
than 50% of the outstanding shares.
ADDITIONAL INVESTMENT ACTIVITIES
LEVERAGE
At times, the Fund intends to utilize leverage by borrowing or by
issuing shares of preferred stock or debt securities. The Fund intends to
leverage in an amount up to 33-1/3% of its total assets including the amount
obtained from leverage. It is anticipated 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. Whether to leverage and the terms of, and the
timing of leverage will be determined by the Fund's Board of Directors. 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.
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
<PAGE>
28
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 the 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.
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."
In addition, 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 both of 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 the 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 the Common Stock and could reduce the
Fund's net income in the future.
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29
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 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 will
be senior to the rights of the Fund's shareholders, and the terms of the Fund's
borrowings 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.
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
<PAGE>
30
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).
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, 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, it may purchase and sell (or write) exchange-listed and over-the-
counter put and call options on securities, financial indices and futures
contracts, it may enter into the interest rate and currency transactions
discussed below and it may 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
<PAGE>
31
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.
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 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 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
<PAGE>
32
purchase or sell exchange-traded or over-the-counter put or call options on
securities and indices based upon the prices 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
above 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 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.
Derivative Transactions present certain risks. In particular, the variable
degree or 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 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 tend to limit any
potential gain which might result from an increase in the value of such
position.
<PAGE>
33
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 that if a
Derivative Transaction had not been pursued. For example, if the Fund has
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 increases instead, the Fund would lost part or all of the benefit of
the increased value of its securities because it will 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.
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 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 delaying 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
<PAGE>
34
in accordance with procedures established by the Board of Directors. 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.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend portfolio securities. By doing so, the Fund attempts 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 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. The Fund will consider repurchase agreements which cannot be
liquidated within seven days to be illiquid securities.
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
<PAGE>
35
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 now be liquid, though no
assurance can be given that a liquid market for Rule 144A securities will
develop or be maintained. The Board of Directors has adopted policies and
procedures for the purpose of determining whether securities that are eligible
for resale under Rule 144A are liquid or illiquid, and has delegated to SBAM
that determination by requiring that consideration be given to, among other
things, the frequency of trades and quotes for the security, the number of
dealers willing to sell the security and the number of potential purchasers,
dealer undertakings to make a market in the security, the nature of the security
and the time needed to dispose of the security. The Board of Directors
periodically reviews the Fund's purchases and sales of Rule 144A securities and
SBAM's compliance with the above procedures.
<PAGE>
36
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 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 the Fund may (a) purchase and hold debt
instruments (including 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 of
securities; and (e) not consider as loans delays in the settlement of
securities transactions;
(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;
<PAGE>
37
(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).
<PAGE>
38
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., as its
investment manager under an investment management contract. SBAM was
incorporated in 1987 and together with affiliates in London, Frankfurt, Tokyo
and Hong Kong, provides a broad range of fixed-income and equity investment
advisory services to various individuals and institutional clients located
throughout the world, and serves as investment adviser to various investment
companies. As of March 31, 1998, SBAM and its worldwide investment advisory
affiliates managed approximately $[____] 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 advisory 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. 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 of SBAM
and Salomon Smith Barney and is responsible for SBAM's investment company and
institutional portfolios which invest in high yield foreign sovereign debt
securities and high yield non-U.S. and U.S. corporate debt securities. Mr.
Wilby is portfolio manager for, among others, Salomon Brothers High Income Fund
Inc, Salomon Brothers High Yield Bond Fund and 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, Salomon Brothers Variable High Yield Bond Fund and the high yield and
sovereign bond portions of the Salomon Brothers Variable Strategic Bond
portfolio of Salomon Brothers Variable Series Funds Inc, The Emerging Markets
Income Fund Inc, The Emerging Markets Income Fund II Inc, The Emerging Markets
Floating Rate Fund Inc, Global Partners Income Fund Inc., Salomon Bothers
Worldwide Income Fund Inc and the foreign sovereign debt component of Salomon
Brothers 2008 Worldwide Dollar Government Term Trust 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. In
addition, SBAM will make available research and statistical data to the Fund.
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 as 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 as are directors, officers
or employees of SBAM to the extent that such expenses relate
<PAGE>
39
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 to others. For its services, SBAM will receive from the
Fund a monthly fee at an annual rate of [ %] 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 the amount obtained from leverage and 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 assets at the last business day of a week with the net assets at the
last business day of the prior week.
Unless earlier terminated as described below, the Advisory Agreement
will remain in effect until [______, 2000] 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
outstanding shares of the Fund. The Advisory Agreement may be terminated
without penalty on 60 days' written notice by either party thereto or by vote of
the shareholders of the Fund and will terminate in the event it is assigned (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.
ADMINISTRATOR
Mutual Management Corp., a wholly-owned subsidiary of Salomon Smith
Barney Holdings Inc. (the "Administrator"), 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 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 [___%] of the
value of the Fund's average weekly net assets. The Administration Agreement was
approved by the Fund's Board of Directors on [_______, 1998], and is effective
until it is terminated. It is terminable on 60 days' prior written notice by
either party to the other.
EXPENSES OF THE FUND
<PAGE>
40
Except as indicated above, the Fund will pay all of its expenses,
including fees of the directors not affiliated with SBAM and board meeting
expenses; fees of SBAM and the Administrator; interest charges; taxes;
organization expenses; charges and expenses of the Fund's legal counsel and
independent accountants, and of the transfer agent, registrar and dividend
disbursing agent of the Fund; expenses of repurchasing shares; expenses of
printing and mailing share certificates, shareholder reports, notices, proxy
statements and reports to governmental offices; brokerage and other expenses
connected with the execution, recording and settlement of portfolio security
transactions; expenses connected with negotiating, effecting purchase or sale,
or registering privately issued portfolio securities; custodial fees and
expenses for all services to the Fund, including safekeeping of funds and
securities and maintaining required books and accounts; expenses of calculating
and publishing the net asset value of the Fund's shares; expenses of membership
in investment company associations; expenses of leverage; the fees of any rating
agencies retained to rate any preferred stock or debt securities issued by the
Fund; expenses of fidelity bonding and other insurance expenses including
insurance premiums; expenses of shareholders meetings; freight and other charges
in connection with the shipment of the Fund's portfolio securities; salaries of
shareholder relations personnel; Commission and state registration fees; New
York Stock Exchange listing fees; fees payable to the National Association of
Securities Dealers, Inc. in connection with this offering; and litigation and
other extraordinary or non-recurring expenses.
<PAGE>
41
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
NAME, ADDRESS AND AGE POSITION WITH THE FUND AND OTHER AFFILIATIONS
- --------------------- ---------------------- ----------------------
<S> <C> <C>
*Heath B. McLendon President and Director Managing Director, Smith
Age: 63 Barney Inc.; Director of 42
investment companies
associated with Smith Barney
Inc.; Director and President
of MMC and Travelers
Investment Adviser, Inc. ("of
principal and interest");
Chairman of Smith Barney
Strategy Advisers Inc. Prior
to July 1993, Senior
Executive Vice President of
Shearson Lehman Brothers,
Inc. Vice Chairman Shearson
Asset Management.
[OTHER DIRECTORS TO BE
ADDED]
Peter J. Wilby............ Executive Vice President Managing Director and
Salomon Brothers Asset Portfolio Manager, Salomon
Management Inc Brothers Asset Management
Seven World Trade Center Inc, 1989-Present; Managing
New York, NY 10048 Director, Salomon Smith
Age: 38 Barney.
Alan M. Mandel............ Treasurer Director of SBAM,
Salomon Brothers Asset 1995-present. Prior to 1995,
Management Inc Chief Financial Officer and
7 World Trade Center Vice President of Hyperion
New York, NY 10048 Capital Management Inc.
Age: 40
</TABLE>
<PAGE>
42
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION
NAME, ADDRESS AND AGE POSITION WITH THE FUND AND OTHER AFFILIATIONS
- --------------------- ---------------------- ----------------------
<S> <C> <C>
[TO BE NAMED]............. Secretary
Salomon Brothers Asset
Management Inc
7 World Trade Center
New York, NY 10048
Age:
Robert A. Vegliante....... Assistant Secretary
Salomon Brothers Asset
Management Inc
7 World Trade Center
New York, NY 10048
Age:
</TABLE>
__________________
* Director who is an "interested person" within the meaning of the 1940 Act.
<PAGE>
43
Directors who are not "interested persons" (as defined in the 1940
Act) of SBAM will be paid a fee of $[_____] per year, plus [$___] for every
meeting of the Board or committee thereof.
The officers of the Fund conduct and supervise the daily business
operations of the Fund, while the directors, in addition to their functions set
forth elsewhere under "Management of the Fund," review such actions and decide
on general policy.
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 stockholders, 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 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
to the fullest extent permitted by law. 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.
<PAGE>
44
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 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
<PAGE>
45
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.
<PAGE>
46
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT AND CASH PURCHASE 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 capital gains 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 income accrued on
portfolio assets less all expenses of the Fund. Net investment income for this
purpose is income other than net realized long- and short-term capital gains net
of expenses.
To permit the Fund to maintain a more stable monthly distribution, the
Fund will from time to time distribute less than the entire amount of net
investment income earned in a particular period. Such undistributed net
investment income would be available to 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. As a result, the
distributions paid by the Fund for any particular monthly period may be more or
less than the amount of net investment income actually earned by the Fund during
such period. 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 Fund's Dividend Reinvestment and Cash Purchase Plan
(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
[____________________] (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 [_________________],
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.
<PAGE>
47
The Plan Agent serves as agent for the shareholders in administering
the Plan. If the Board of Directors of the Fund declares a dividend or capital
gains distribution payable either in the Fund's shares or in cash, as
shareholders may have elected, participants in the Plan will receive shares of
the Fund, as outlined below. Whenever market price per share is equal to or
exceeds net asset value per share as of the valuation date, participants will be
issued new shares at a price per share equal to the greater of (a) the net asset
value per share on that date or (b) 95% of the market price per share on that
date. The valuation date will be the dividend or distribution payment date or,
if that date is not a trading day on the New York Stock Exchange, the
immediately preceding trading day. 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 valuation date, or if the Fund should
declare a dividend or capital gains distribution payable only in cash, 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 on or
shortly after the 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 purchase period or if the
market discount shifts to a market premium during the 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.
A shareholder may elect to withdraw from the Plan at any time upon
written notice to the Plan Agent. 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 commission.
Participants have the option of making additional cash payments to the
Plan Agent, monthly, in a minimum amount of $250, for investment in the Fund's
Common Stock. The Plan Agent will use all such funds received from participants
to purchase shares of Common Stock in the open market on or about the first
business day of each month. To avoid unnecessary cash accumulations, and also
to allow ample time for receipt and processing by the Plan Agent, it is
suggested that participants send in voluntary cash payments to be received by
the Plan Agent approximately ten days before an applicable purchase date
specified above. A participant may withdraw a voluntary cash payment by
<PAGE>
48
written notice, if the notice is received by the Plan Agent not less than 48
hours before such payment is to be invested.
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 or voluntary cash payments. The Plan Agent's fee
for the handling of reinvestment of dividends and distributions and voluntary
cash payments 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 or voluntary cash
payments.
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 shareholders of the Fund at least 90 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 by at least 90 days' prior written notice to all shareholders of the
Fund. All correspondence concerning the Plan should be directed to the Plan
Agent at [ ].
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, reflects provisions of the Code
as of the date of this Prospectus. No attempt is made to present a detailed
explanation of all federal, state, local and foreign
<PAGE>
49
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 advisors regarding an investment in the Fund.
THE FUND
The Fund intends to qualify and elect 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
realized long-term capital gain over net realized 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 capital gains 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 gains, 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 65% of the amount of undistributed
capital gain included in the shareholder's income.
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 prior
<PAGE>
50
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
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, when 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.
The Fund may engage in various derivative transactions. See
"Additional Investment Activities--Derivative Instruments." Such 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
without receiving cash with which to pay dividends or make distributions in
amounts necessary to satisfy the distribution requirements for avoiding income
<PAGE>
51
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 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 investors.
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 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.
If the Fund purchases shares in certain foreign investment entities,
called "passive foreign investment companies" ("PFICs"), the Fund may be subject
to U.S. federal income tax on a portion of any "excess distribution" or gain
from the disposition of the shares even if the income is distributed as a
taxable dividend by the Fund to its shareholders Additional charges in the
nature of interest may be imposed on either the Fund or its shareholders with
respect to deferred taxes arising from the distributions or gain. If the Fund
were to invest in a PFIC and (if the Fund received the necessary information
available from the PFIC, which may be difficult to obtain) elected to treat the
PFIC as a "qualified electing
<PAGE>
52
fund" under the Code, in lieu of the foregoing requirements, the Fund might be
required to include in income each year a portion of the ordinary earnings and
net capital gain of the PFIC, even if not distributed to the Fund.
Alternatively, under recently enacted legislation, the Fund can elect to mark-
to-market at the end of each taxable year its shares in a PFIC; in this case,
the Fund would recognize as ordinary income any increase in the value of such
shares, and as ordinary loss any decrease in such value to the extent it did not
exceed prior increases included in income. Under either election, the Fund
might be required to recognize in a year income in excess of its distributions
from PFICs and its proceeds from dispositions of PFIC stock during that year,
and such income would nevertheless be subject to the 90% distribution
requirement and would be taken into account for purposes of the corporate income
and 4% excise tax.
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 a 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 a dividend or
capital gain distribution should be aware that, although the price of shares
purchased at that time may reflect the amount of the forthcoming distribution,
those who purchase just prior to a distribution will receive a distribution
which will nevertheless be taxable to them.
Dividends and distributions 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. Any distribution in
<PAGE>
53
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, will constitute capital gain to a shareholder who holds his
shares as capital assets.
A notice detailing the tax status of dividends and distributions paid
by the Fund will be mailed annually to the shareholders of the Fund.
Dispositions and Repurchases. 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.
A redemption by the Fund of shares generally will be treated as a sale
of the shares by a shareholder provided that after the redemption the
shareholder does not own, either directly or by attribution under Section 318 of
the Code, any shares. If after a redemption a shareholder continues to own,
directly or by attribution, any shares, it is possible that any amounts received
in the redemption by such shareholder will be taxable as a dividend to such
shareholder, and there is a risk that shareholders who do not have any of their
shares redeemed would be treated as having received a dividend distribution as a
result of their proportionate increase in the ownership of the Fund.
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. It is anticipated that the Fund will not invest more than 35% of its
total assets in foreign 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.
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. Backup withholding
is not an additional tax. Any amounts withheld under the backup
<PAGE>
54
withholding rules from payments made to a shareholder may be credited against
such shareholder's federal income tax liability.
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 dividends of net investment income, distributions of
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.
If the income from the Fund is not effectively connected with a United
States trade or business carried on by the foreign shareholder, (i) dividends of
net investment income will be subject to a 30% (or lower treaty rate) United
States federal withholding tax, and (ii) distributions of net capital gain and
gains 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."
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.
_______________
Investors should consult their own tax advisors regarding specific
questions as to the federal, state, local and foreign tax consequences of
ownership of shares in the Fund.
<PAGE>
55
NET ASSET VALUE
Net asset value 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). 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 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
<PAGE>
56
offering to existing shareholders or with the consent of a majority of the
Fund's outstanding shares of Common Stock.
PREFERRED STOCK
The Fund's Charter 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 Charter). The Fund
believes that it is likely that the liquidation preference, voting rights and
redemption provisions of the 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 stockholders 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 other 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 two years' dividends on any preferred
shares are unpaid. The 1940 Act also requires that, in addition to any approval
by stockholders 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 or changes in its fundamental investment restrictions. See "Description
of Capital Stock--Special Voting Provisions" concerning voting requirements for
conversion of the Fund to an open-end investment company and other matters. In
addition, in the discretion of the Board of Directors, subject to the 1940 Act,
the terms of any preferred stock may also provide for the 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 the previous sentence and except as
otherwise indicated in
<PAGE>
57
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 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 Charter. 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 Charter 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 stockholders, 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 stockholders 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
<PAGE>
58
only for cause and only by a vote of the holders of at least 75% of the shares
of the Fund entitled to be cast on the matter.
The affirmative vote of 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. The conversion also requires the affirmative vote of
the holders of 75% of the votes entitled to be cast thereon by the shareholders
of the Fund unless it is approved by a vote of 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 1, 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 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 Charter to change any of the provisions in this paragraph and the
preceding paragraph.
The affirmative votes of 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
<PAGE>
59
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 Charter 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 75% of the Continuing Directors. In
that case, if Maryland law requires, 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 at least 60 days prior to the meeting (or 10
days following the date notice of such meeting is given by the Fund if less than
70 days' notice of such meeting is given by the Fund).
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 shareholders
generally.
Reference is made to the Charter 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
[______________] will act as custodian for the Fund's assets.
[__________ _____________________________] will act as the transfer agent,
dividend paying agent and registrar for the Fund's Common Stock.
<PAGE>
60
UNDERWRITING
Upon the terms and subject to the conditions contained in an
Underwriting Agreement dated the date hereof, each Underwriter named below for
whom [____________] and
[____________] are acting as representatives has severally agreed to purchase,
and the Fund has agreed to sell to such Underwriter, the number of shares of
Common Stock set forth opposite the name of such Underwriter.
NUMBER OF
NAME SHARES
- ---- ---------
............................................................
___________________ ........................................
___________________ ........................................
___________________ ........................................
Total..............................................
------
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by counsel
and to certain other conditions. The Underwriters are obligated to take and pay
for all shares of Common Stock offered hereby if any are taken.
The Underwriters propose to offer the shares of Common Stock offered
hereby directly to the public 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 [$____] per share. Such payment is equal to [____%] of the
initial public offering price per share. The Underwriters also have advised the
Fund that from this amount the Underwriters may pay a concession to certain
dealers not in excess of [$_____] per share on sales by such dealers. After the
initial offering of the shares of Common Stock to the public, the public
offering price and such concessions may be changed by the Underwriters.
Investors must pay for any shares of Common Stock purchased on or before
[________], 1998.
The Fund has granted to the Underwriters options, exercisable within
45 days of this Prospectus, to purchase up to ________ additional shares of
Common Stock at the same price to public as set forth on the cover page of this
Prospectus. The Underwriters may exercise such options solely for the purpose
of covering over-allotments, if any, incurred in the sale of the shares of
Common Stock offered hereby. To the extent the Underwriters exercise such
options, each of the Underwriters will be obligated, subject to certain
conditions, to purchase the same proportion of such additional shares as the
number of shares set forth opposite such Underwriter's name in the preceding
table bears to ___________.
<PAGE>
61
The Fund and SBAM have agreed to indemnify the Underwriters against
certain liabilities, including liabilities under the Securities Act of 1933, as
amended.
The Fund has agreed to pay the Underwriters [$______] as partial
reimbursement of expenses incurred in connection with the offering.
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 Underwriters may act from time to time, during and subsequent to
the completion of the offering of Common Stock hereunder, as a broker or dealer
in connection with the execution of portfolio transactions for the Fund. See
"Portfolio Transactions".
Prior to the offering, there has been no public market for the Common
Stock. Application will be made to list the Common Stock on the NYSE. However,
during an initial period, which is not expected to exceed one week from the date
of this Prospectus, the Common Stock will not be listed on any securities
exchange. During such period, the Underwriters do not intend to make a market
in the Common Stock. Consequently, it is anticipated that an investment in the
Common Stock will be illiquid during such period. In order to meet the
requirements for listing, the Underwriters have undertaken to sell lots of 100
or more to a minimum of 2,000 beneficial owners.
EXPERTS
The financial statement of the Fund included in this Prospectus has
been so included in reliance on the report of ________________, 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 [___________], New
<PAGE>
62
York, New York. Counsel for the Fund and the Underwriters will rely, as to
matters of Maryland law, on Piper & Marbury, Baltimore, Maryland.
FURTHER INFORMATION
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.
<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 and carry
the smallest degree of investment risk. 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 risks appear somewhat larger than in Aaa
securities.
A--Bonds which are rated "A" possess many favorable investment qualities 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 sometime 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 and
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.
A-1
<PAGE>
Ca--Bonds which are rated "Ca" represent obligations which are speculative to 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" to certain of its rating
classifications. The modifier "1" indicates that the security ranks in the
higher end of its generic rating category; the modifier "2" indicates a mid-
range ranking; and the modifier "3" indicates that the issue ranks in the lower
end of its generic 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.
A-2
<PAGE>
MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior capacity for repayment of short-term promissory obligations. Prime-1
repayment capacity will normally 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 capacity for repayment of short-term promissory obligations. This will
normally be evidenced by many of the characteristics cited above but to a lesser
degree. Earning trends and coverage rations, 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 capacity for repayment of short-term promissory obligations. The
effect of industry characteristics and market composition may be more
pronounced. Variability in earnings and profitability may result in changes in
the level of debt protection measurements and the requirement for 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" for the highest
quality obligations to "D" for the lowest. The four categories are as follows:
A -- Issues assigned this highest rating are regarded as having the
greatest capacity for timely payment. Issues in this category are delineated
with the numbers 1, 2 and 3 to indicate the relative degree of safety.
A-1--This designation indicates that the degree of safety regarding timely
payment is either overwhelming or very strong. Those issues determined to
possess overwhelming safety characteristics are denoted with a plus (+) sign
designation.
A-2--Capacity for timely payment on issues with this designation is strong.
However, the relative degree of safety is not as high as for issues designated
"A-1".
A-3
<PAGE>
A-3--Issues carrying this designation have a satisfactory capacity for
timely payment. They are, however, somewhat more vulnerable to the adverse
effects of changes in circumstances than obligations carrying the higher
designations.
B--Issues rated "B" are regarded as having only an adequate capacity for
timely payment. However, such capacity may be damaged by changing conditions or
short-term adversities.
C--This rating is assigned to short-term debt obligations with a doubtful
capacity for repayment.
D--Debt rated "D" is in payment default. The "D" rating 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.
A-4
<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 Commodity
Futures Trading Commission ("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, the Fund's Investment Manager and
Investment Adviser believe 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
B-1
<PAGE>
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.
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 high grade debt
securities 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:
B-2
<PAGE>
(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 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
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
B-3
<PAGE>
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 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 high grade debt
obligations 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
B-4
<PAGE>
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 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 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 to buy 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 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.
B-5
<PAGE>
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 has entered into to be rendered useless, resulting in
full currency exposure as well as incurring 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
that country's economy.
B-6
<PAGE>
================================================================================
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING, OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, 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 UNDERWRITERS.
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 INFORMATION 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 PROSPECTUS 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 SOLICITATION IS
UNLAWFUL.
---------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary...................................................... 4
Risk Factors and Special Considerations................................. 9
Fee Table............................................................... 20
The Fund................................................................ 21
Use of Proceeds......................................................... 21
Investment Objective and Policies....................................... 22
Additional Investment Activities........................................ 27
Investment Restrictions................................................. 36
Management of the Fund.................................................. 38
Portfolio Transactions.................................................. 44
Dividends and Distributions; Dividend Reinvestment
and Cash Purchase Plan................................................ 46
Taxation................................................................ 48
Net Asset Value......................................................... 55
Description of Capital Stock............................................ 55
Custodian, Transfer Agent, Dividend Paying Agent and Registrar.......... 59
Underwriting............................................................ 60
Experts................................................................. 61
Legal Matters........................................................... 61
Further Information..................................................... 63
Appendix A: Ratings..................................................... A-1
Appendix B: Derivatives................................................. B-1
================================================================================
[__________] SHARES
SALOMON BROTHERS
HIGH YIELD
BOND FUND INC
Common Stock ($.001 par value)
---------------
PROSPECTUS
_____, 1998
-------------------
================================================================================
<PAGE>
UNTIL ______, 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.
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(1) Financial Statements(1)
(2) (a) -- Articles of Incorporation
(b) -- By-Laws(1)
(c) -- Not Applicable
(d) -- Specimen Stock Certificate(1); Articles V and VIII of
Registrant's Articles of Incorporation are incorporated
herein by reference.
(e) -- Automatic Dividend Reinvestment and Cash Purchase Plan(1)
(f) -- Not Applicable
(g) -- Management Contract(1)
(h) (1) -- Form of Underwriting Agreement(1)
(2) -- Form of Master Agreement Among Underwriters(1)
(i) -- Not Applicable
(j) -- Custodian Agreement(1)
(k) -- Not Applicable
(l) -- Opinion and Consent of Counsel(1)
(m) -- Not Applicable
(n) -- Consent of independent accountants(1)
(o) -- Not Applicable
(p) -- Not Applicable
(q) -- Not Applicable
(r) -- Financial Data Schedule(1)
- ------------
(1) To be filed by amendment.
ITEM 25. MARKETING ARRANGEMENTS
See Exhibit 2(h) to this Registration Statement.
C-1
<PAGE>
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:
SEC Registration fees................................................ $295
New York Stock Exchange listing fee..................................
Printing and engraving expenses......................................
Auditing fees and expenses...........................................
Legal fees and expenses..............................................
NASD Fees............................................................
Miscellaneous........................................................
----
Total............................................................. $
====
ITEM 27. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not Applicable.
ITEM 28. NUMBER OF HOLDERS OF SECURITIES
NUMBER OF
TITLE OF CLASS RECORD HOLDERS
- -------------- --------------
Common Stock, par value $.001 per share........ None
ITEM 29. INDEMNIFICATION
Under the Fund's Articles of Incorporation and By-Laws, the directors
and officers of the Company and Fund will 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 officer or director 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 Company by the directors or
officers
C-2
<PAGE>
in connection with the shares, 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.
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 SBAM at Seven World Trade Center, New York, New York 10048.
ITEM 32. MANAGEMENT SERVICES
Not applicable.
ITEM 33. UNDERTAKINGS
(1) Registrant undertakes to suspend the offering of shares 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) Registrant undertakes:
a. to file, during any period in which offers or sales are being
made, a post-effective amendment to the registration statement:
(1) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(2) to reflect in the prospectus any facts or events after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set
forth in the registration statement; and
(3) to include any material information with respect to the plan
of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
C-3
<PAGE>
b. that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be
deemed to be a new registration statement relating to the
securities offered therein, and the offering of those securities
at that time shall be deemed to be the initial bona fide offering
thereof; and
c. to remove from registration by means of a post-effective
amendment any of the securities being registered which remain
unsold at the termination of the offering.
(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-4
<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 20th day of March,
1998.
SALOMON BROTHERS HIGH YIELD BOND FUND INC
By: /s/ HEATH B. MCLENDON
---------------------------------
Heath B. McLendon
President
By: /s/ ALAN M. MANDEL
---------------------------------
Alan M. Mandel
Treasurer & Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following person in the capacity
and on the date indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Heath B. McLendon Sole Director and President March 20, 1998
- ---------------------------
Heath B. McLendon
C-5
<PAGE>
SCHEDULE OF EXHIBITS TO FORM N-2
EXHIBIT PAGE
NUMBER EXHIBIT NUMBER
------- ------- ------
Exhibit A Articles of Incorporation.....................
<PAGE>
EXHIBIT 99.A
ARTICLES OF INCORPORATION
OF
SALOMON BROTHERS HIGH YIELD BOND FUND INC
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 Yield Bond Fund 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 Corporation Trust Incorporated, a Maryland
corporation. The post office address of the resident agent is 32 South Street,
Baltimore, Maryland 21202.
<PAGE>
2
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.
ARTICLE VI
BOARD OF DIRECTORS
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(1) The number of directors constituting the Board of Directors shall
initially be one (1). This number may be changed pursuant to the By-Laws of the
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Corporation, but shall at no time be less than the minimum number required under
the Maryland General Corporation Law nor more than twelve (12). The name of the
initial director is: Heath B. McLendon.
(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.
(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.
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(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 "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
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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
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(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.
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ARTICLE VIII
SHAREHOLDER VOTE
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(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.
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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 1, 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
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(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.
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(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 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
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The duration of the Corporation shall be perpetual.
IN WITNESS WHEREOF, I have adopted and signed these Articles of
Incorporation and do hereby acknowledge that these Articles of Incorporation are
my act.
/s/ David Wohl
______________________________
David Wohl
Incorporator
Dated: March 19, 1998
