<PAGE>
Rule 497(h)
File No. 333-48351
PROSPECTUS
57,170,000 SHARES
SALOMON BROTHERS HIGH INCOME FUND II INC
COMMON STOCK
($.001 PAR VALUE)
------------
Salomon Brothers High Income Fund II Inc (the "Fund") is a newly organized,
closed-end management investment company that seeks to maximize current income
by investing primarily in a diversified portfolio of high yield debt
securities rated at the time of investment in medium or lower rating
categories ("Baa" or lower by Moody's Investors Service, Inc. ("Moody's") or
"BBB" or lower by Standard & Poor's Ratings Group ("S&P")) or in unrated
fixed-income securities determined by the Fund's investment manager to be of
comparable quality. As a secondary objective, the Fund will seek capital
appreciation to the extent consistent with its objective of seeking to
maximize current income. Under normal market conditions, the Fund will invest
at least 65% of its total assets in high yield debt securities. The Fund may
invest up to 35% of its total assets in foreign debt securities, which the
Fund expects will primarily consist of debt securities of issuers located in
emerging market countries. There can be no assurance that the Fund's
investment objectives will be achieved.
HIGH YIELD DEBT SECURITIES ARE CONSIDERED SPECULATIVE AND ARE SUBJECT TO
CERTAIN RISKS, INCLUDING GREATER PRICE VOLATILITY AND A GREATER RISK OF LOSS
OF PRINCIPAL AND INTEREST. The Fund is designed for investors willing to
assume additional risk in return primarily for the potential for high current
income and secondarily for capital appreciation. An investment in the Fund
should be considered speculative in that it involves a high degree of risk and
should not constitute a complete investment program. Investors should
carefully assess the risks associated with an investment in the Fund. SEE
"RISK FACTORS AND SPECIAL CONSIDERATIONS" AND "INVESTMENT OBJECTIVES AND
POLICIES."
Because the Fund is newly organized, its shares have no history of public
trading. Shares of closed-end investment companies frequently trade at a
discount from their net asset value. This risk may be greater for initial
investors expecting to sell their shares in a relatively short period after
completion of the public offering. See "Risk Factors and Special
Considerations."
(Continued on next page)
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO PUBLIC(1) SALES LOAD(1)(2) PROCEEDS TO FUND(3)(4)
- ---------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $15.00 none $15.00
- ---------------------------------------------------------------------
Total(4) $857,550,000 none $857,550,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Footnotes on the following page)
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The shares of Common Stock are being offered by the Underwriters named
herein, subject to prior sale, when, as and if accepted by them and subject to
certain conditions. It is expected that delivery of the shares of Common Stock
will be made in book-entry form through the facilities of The Depository Trust
Company on or about May 28, 1998.
------------
SALOMON SMITH BARNEY A.G. EDWARDS & SONS, INC. ADVEST, INC.
EVEREN SECURITIES, INC. FAHNESTOCK & CO. INC. JANNEY MONTGOMERY SCOTT INC.
LEGG MASON WOOD WALKER MCDONALD & COMPANY MORGAN KEEGAN & COMPANY, INC.
INCORPORATED SECURITIES, INC.
THE ROBINSON-HUMPHREY COMPANY TUCKER ANTHONY WEDBUSH MORGAN SECURITIES
INCORPORATED
May 21, 1998
<PAGE>
(Continued from previous page)
Salomon Brothers Asset Management Inc will serve as investment manager to
the Fund.
The Common Stock has been approved for listing on the New York Stock
Exchange under the symbol "HIX" subject to official notice of issuance. PRIOR
TO THIS OFFERING, THERE HAS BEEN NO PUBLIC MARKET FOR THE FUND'S SHARES OF
COMMON STOCK.
At times, the Fund may utilize leverage through borrowing or by issuing
shares of preferred stock or debt securities in an amount up to 33 1/3% of the
Fund's total assets including the amount obtained from leverage. The Fund
intends to utilize leverage in an initial amount equal to approximately 25% of
its total assets including the amount obtained from leverage. Through these
leveraging techniques, the Fund will seek to obtain a higher return for
holders of Common Stock than if the Fund did not use leverage. Leverage is a
speculative technique and there are special risks and costs associated with
leveraging. There can be no assurance that a leveraging strategy will be
successful during any period in which it is employed. See "Risk Factors and
Special Considerations--Leverage" and "Additional Investment Activities--
Leverage."
The address of the Fund is Seven World Trade Center, New York, New York
10048, and the Fund's telephone number is (888) 777-0102. Investors are
advised to read this Prospectus, which sets forth information about the Fund
that investors should know before investing, and to retain it for future
reference. The Securities and Exchange Commission (the "Commission") maintains
a web site (http://www.sec.gov) that contains material incorporated by
reference and other information regarding registrants that file electronically
with the Commission.
------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE MARKET PRICE OF THE COMMON
STOCK OF THE FUND, INCLUDING THE ENTRY OF STABILIZING BIDS, COVERING
TRANSACTIONS OR THE IMPOSITION OF PENALTY BIDS. SUCH TRANSACTIONS MAY BE
EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. FOR A DESCRIPTION OF
THESE ACTIVITIES, SEE "UNDERWRITING."
------------
(Footnotes from cover page)
(1) The investment manager or an affiliate will pay the Underwriters a
commission in the amount of 5.00% of the Price to Public per share in
connection with the sale of shares of Common Stock offered hereby. See
"Underwriting."
(2) The Fund and the investment manager have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
(3) Before deducting organizational and offering expenses payable by the
Fund (including $250,000 to be paid to the Underwriters as
reimbursement of certain of their expenses in connection with the
offering), estimated at $1,670,000.
(4) The Fund has granted the Underwriters an option exercisable for 45 days
after the date hereof to purchase up to an additional 8,575,500 shares
to cover over-allotments. If all such shares are purchased, the total
Price to Public and Proceeds to Fund will be $986,182,500. See
"Underwriting."
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus.
The Fund................ The Fund is a newly organized, closed-end management
investment company which seeks to maximize current
income. The investment manager believes that by
investing in high yield U.S. debt securities
supplemented by high yield foreign debt securities,
the Fund can diversify its risk and enhance the
overall credit quality of its portfolio while
maintaining a high level of current income. See
"The Fund."
Investment Objectives
and Policies........... The Fund's investment objective is to seek to
maximize current income by investing primarily in a
diversified portfolio of high yield debt securities
rated at the time of investment in medium or lower
rating categories ("Baa" or lower by Moody's or
"BBB" or lower by S&P) or in unrated fixed-income
securities determined by the Fund's investment
manager to be of comparable quality. As a secondary
objective, the Fund will seek capital appreciation
to the extent consistent with its objective of
seeking to maximize current income.
Under normal market conditions, the Fund will invest
at least 65% of its total assets in high yield debt
securities. The Fund may invest up to 35% of its
total assets in foreign debt securities, which the
Fund expects will primarily consist of debt
securities of issuers located in emerging market
countries. The Fund initially intends to invest
approximately 20% to 25% of its total assets in
debt securities of issuers located in emerging
market countries. Medium and low-rated and
comparable unrated securities, commonly known as
"junk bonds," offer yields that fluctuate over time
but generally are superior to yields on higher-
rated securities. However, such debt securities
also involve greater risks than higher-rated
securities. Certain of the debt securities
purchased by the Fund may be rated as low as "C" by
Moody's or "D" by S&P or may be comparable to
securities so rated. For a description of the
Moody's "C" rating and the S&P "D" rating, see
"Investment Objectives and Policies--General" and
Appendix A to this Prospectus. The Fund is designed
for investors willing to assume additional risk in
return primarily for the potential for high current
income and secondarily for capital appreciation.
The Fund is not intended to be a complete
investment program and there is no assurance that
the Fund will achieve its objectives. See
"Investment Objectives and Policies."
3
<PAGE>
The Fund may invest up to 30% of its total assets in
zero coupon securities, pay-in-kind bonds and
deferred payment securities, up to 20% of its total
assets in equity securities (certain equity
securities may be treated as debt securities for
purposes of the Fund's policy to invest at least
65% of its total assets, under normal
circumstances, in high yield debt securities) and
may invest in loan participations and assignments.
See "Investment Objectives and Policies--Other
Investments--Zero Coupon Securities, Pay-in-Kind
Bonds and Deferred Payment Securities," "--Loan
Participations and Assignments" and "--Equity
Securities."
At times, the Fund may utilize leverage through
borrowing or by issuing shares of preferred stock
or debt securities in an amount up to 33 1/3% of
the Fund's total assets including the amount
obtained from leverage. The Fund intends to utilize
leverage in an initial amount equal to
approximately 25% of its total assets including the
amount obtained from leverage. Through these
leveraging techniques, the Fund will seek to obtain
a higher return for holders of Common Stock than if
the Fund did not use leverage. Leverage is a
speculative technique and there are special risks
and costs associated with leveraging. The Fund will
seek to limit certain risks associated with
leverage by investing in certain floating rate debt
securities. There can be no assurance that a
leveraging strategy will be successful during any
period in which it is employed. See "Risk Factors
and Special Considerations--Leverage" and
"Additional Investment Activities--Leverage."
The Offering............ 57,170,000 shares of Common Stock, par value $.001
per share (the "Common Stock"), of the Fund are
being offered for sale through the several
underwriters (collectively, the "Underwriters") for
whom Salomon Smith Barney is acting as
representative. The initial public offering price
of the Common Stock is $15.00 per share. The
minimum purchase is 100 shares ($1,500.00). In
addition, the Fund has granted the Underwriters an
option to purchase up to 8,575,500 additional
shares to cover over-allotments. See
"Underwriting."
Listing................. Prior to this offering, there has been no public
market for the shares of Common Stock of the Fund.
The Common Stock has been approved for listing on
the New York Stock Exchange (the "NYSE") under the
symbol "HIX" subject to official notice of
issuance.
4
<PAGE>
Stock Symbol............ "HIX"
Investment Manager...... Salomon Brothers Asset Management Inc ("SBAM") is
the Fund's investment manager and will manage the
Fund's investment portfolio in accordance with the
Fund's investment objectives and policies. SBAM
provides a full range of fixed income and equity
investment advisory services for its individual and
institutional clients throughout the world and
provides investment advisory services to over 134
institutional accounts. As of March 31, 1998, SBAM
and its worldwide investment advisory affiliates
managed approximately $27.6 billion of assets. SBAM
has access to hundreds of affiliated economists and
bond, sovereign and equity analysts, including a
staff dedicated to high yield credit research and
to emerging markets sovereign credit research.
Peter J. Wilby is primarily responsible for the day-
to-day management of the Fund. Mr. Wilby, who
joined SBAM in 1989, is a Managing Director and a
Senior Portfolio Manager of SBAM, responsible for
SBAM's investment company and institutional
portfolios which invest in high yield U.S. and
foreign corporate debt securities and high yield
foreign sovereign debt securities. Mr. Wilby is
portfolio manager for, among others, Salomon
Brothers High Income Fund Inc; Salomon Brothers
Worldwide Income Fund Inc; The Emerging Markets
Income Fund Inc; The Emerging Markets Income Fund
II Inc; the foreign sovereign debt component of
Salomon Brothers 2008 Worldwide Dollar Government
Term Trust Inc; The Emerging Markets Floating Rate
Fund Inc.; Global Partners Income Fund Inc.;
Salomon Brothers High Yield Bond Fund and the high
yield and sovereign debt portions of Salomon
Brothers Strategic Bond Fund, each a portfolio of
Salomon Brothers Series Funds Inc; Salomon Brothers
Institutional High Yield Bond Fund and Salomon
Brothers Institutional Emerging Markets Debt Fund,
each a portfolio of Salomon Brothers Institutional
Series Funds Inc; and Salomon Brothers Variable
High Yield Bond Fund and the high yield and
sovereign debt portions of Salomon Brothers
Variable Strategic Bond Fund, each a portfolio of
Salomon Brothers Variable Series Funds Inc. See
"Management of the Fund."
Management and
Administration Fees.... The Fund will pay SBAM for its investment management
services a monthly fee at an annual rate of 1.00%
of the value of the Fund's average weekly net
assets (which includes any proceeds from the
issuance of preferred stock) plus the proceeds of
any outstanding
5
<PAGE>
borrowings used for leverage. See "Management of
the Fund--Investment Manager." This fee is higher
than fees paid by other comparable investment
companies. The Fund will also pay Mutual Management
Corp. (the "Administrator") for its administrative
services a monthly fee at an annual rate of .10% of
the value of the Fund's average weekly net assets
(which includes any proceeds from the issuance of
preferred stock) plus the proceeds of any
outstanding borrowings used for leverage. See
"Management of the Fund--Administrator." During
periods in which the Fund is utilizing financial
leverage, the fees which are payable to SBAM and
the Administrator as a percentage of the Fund's
assets will be higher than if the Fund did not
utilize a leveraged capital structure because the
fees are calculated as a percentage of the Fund's
assets, including those purchased with leverage.
See "Risk Factors and Special Considerations--
Leverage" and "Additional Investment Activities--
Leverage."
Dividends and Beginning with its initial distribution
Distributions.......... approximately 60 days after completion of this
offering, it is the Fund's present policy, which
may be changed by the Board of Directors, to make
regular monthly cash distributions to holders of
Common Stock at a level rate that reflects the past
and projected performance of the Fund, which over
time will result in the distribution of all net
investment income of the Fund, and to distribute
any net realized capital gains at least annually.
From and after the leveraging (if any) of the
Common Stock, monthly distributions to holders of
Common Stock will generally consist of net
investment income remaining after the payment of
interest or dividends on any outstanding leverage,
subject to the Fund's present policy of making
distributions at a level rate as described above.
For tax purposes, the Fund is currently required to
allocate net capital gains and other taxable income
between shares of Common Stock and shares of
preferred stock, if any. As a result of the Fund's
anticipated investment in certain Brady Bonds and
other sovereign debt obligations acquired at a
discount as well as its ability to invest in zero
coupon securities and pay-in-kind bonds, the Fund
expects to make distributions of net investment
income in amounts greater than the total amount of
cash interest actually received in order to satisfy
certain requirements under current federal income
tax law. See "Investment Objectives and Policies--
Other Investments--Zero Coupon Securities, Pay-in-
Kind Bonds and Deferred Payment Securities."
6
<PAGE>
Dividend Reinvestment Under the Fund's Dividend Reinvestment Plan (the
Plan................... "Plan"), shareholders will have all dividends and
distributions automatically reinvested in
additional shares of Common Stock of the Fund
unless the shareholder elects to receive cash or
the Board of Directors of the Fund declares a
dividend or distribution payable only in cash.
Shareholders whose shares are held in the name of a
broker or nominee should contact such broker or
nominee to confirm that they may participate in the
Plan. See "Dividends and Distributions; Dividend
Reinvestment Plan."
Taxation................ The Fund intends to elect and qualify to be treated
as a regulated investment company for U.S. federal
income tax purposes. As such, it will generally not
be subject to U.S. federal income tax on income and
gains that are distributed to shareholders. See
"Taxation."
Custodian, Transfer
Agent, Dividend Paying
Agent and Registrar....
PNC Bank, N.A. will act as custodian for the Fund's
assets. First Data Investor Services Group, Inc.
will act as transfer agent, dividend paying agent
and registrar for the Fund's Common Stock.
7
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
General Considerations
Relating to High Yield The net asset value of the Fund's shares will change
Debt Securities........ with fluctuations in the value of its portfolio
securities. The high yield corporate debt
securities, commonly known as "junk bonds," and
high yield foreign debt securities in which the
Fund will invest generally will be rated, at the
time of investment, in the categories "Baa" or
lower by Moody's or "BBB" or lower by S&P, or will
be of comparable quality. These lower-rated and
comparable unrated securities involve greater risks
than higher-rated securities. Under rating agency
guidelines, lower-rated securities and comparable
unrated securities will likely have some quality
and protective characteristics that are outweighed
by large uncertainties or major risk exposures to
adverse conditions. Lower-rated securities may have
poor prospects of ever attaining any real
investment standing, may have a current
identifiable vulnerability to default, may be
unlikely to have the capacity to pay interest and
repay principal when due in the event of adverse
business, financial or economic conditions and/or
may be in default or not current in the payment of
interest or principal. Such securities are
considered speculative with respect to the issuer's
capacity to pay interest and repay principal in
accordance with the terms of the obligations.
Accordingly, it is possible that these types of
factors could reduce the value and liquidity of
securities held by the Fund, with a commensurate
effect on the value of the Fund's shares.
Because the Fund will invest primarily in fixed-
income securities, the net asset value of the
Fund's portfolio, and hence its shares, can be
expected to change as general levels of interest
rates fluctuate, although the market values of
securities rated below investment grade and
comparable unrated securities tend to react less to
fluctuations in interest rate levels than do those
of higher-rated securities. Except to the extent
that values are affected independently by other
factors such as developments relating to a specific
issuer, when interest rates decline, the value of a
fixed-income portfolio can generally be expected to
rise. Conversely, when interest rates rise, the
value of a fixed-income portfolio can generally be
expected to decline. These fluctuations can be
expected to be greater with respect to investments
in fixed-income securities with longer maturities
than investments in securities with shorter
maturities. Although there is no limitation on the
average maturity of the Fund's portfolio, SBAM
currently expects
8
<PAGE>
that the Fund's high yield debt portfolio will
initially have an average maturity of 8 to 15
years. However, because many fixed-income
securities contain redemption features, the actual
average maturity of the Fund's portfolio may be
considerably less. See "--Considerations Relating
to High Yield Corporate Securities."
The secondary markets for high yield debt securities
are not as liquid as the secondary markets for
higher-rated securities. The secondary markets for
high yield debt securities are characterized by
relatively few market makers, participants in the
market being mostly institutional investors
including insurance companies, banks, other
financial institutions and mutual funds. In
addition, the trading volume for high yield debt
securities is generally lower than that for higher-
rated securities, and the secondary markets could
contract under adverse market or economic
conditions independent of any specific adverse
changes in the condition of a particular issuer.
Adverse publicity and investor perceptions, whether
or not based on fundamental analysis, may decrease
the values and liquidity of high yield securities,
especially in a thinly-traded market. These factors
may have an adverse effect on the Fund's ability to
dispose of particular portfolio investments and may
limit the ability of the Fund to obtain accurate
market quotations for purposes of valuing
securities and calculating net asset value. If the
Fund is not able to obtain precise or accurate
market quotations for a particular security, it
will become more difficult for the Board of
Directors or its delegate to value the Fund's
portfolio securities and the Board or its delegate
may have to use a greater degree of judgment in
making such valuations. Less liquid secondary
markets may also affect the Fund's ability to sell
securities at their fair value. The Fund may invest
without limitation in illiquid securities, which
are more difficult to value and to sell at fair
value. If the secondary markets for high yield debt
securities contract due to adverse economic
conditions or for other reasons, certain liquid
securities in the Fund's portfolio may become
illiquid and the proportion of the Fund's assets
invested in illiquid securities may increase.
Prices for high yield securities may be affected by
legislative and regulatory developments which could
adversely affect the Fund's net asset value and
investment practices, the secondary market for high
yield securities, the financial condition of
issuers of these securities and the value of
outstanding high yield securities.
9
<PAGE>
Considerations Relating
to High Yield While the market values of corporate debt securities
Corporate Securities... rated below investment grade and comparable unrated
securities tend to react less to fluctuations in
interest rate levels than do those of higher-rated
securities, the market values of the former also
tend to be more sensitive to company-specific
developments and changes in economic conditions
than higher-rated securities. Issuers of corporate
debt securities rated below investment grade and
comparable unrated securities are often highly
leveraged, so that their ability to service their
debt obligations during an economic downturn or
during sustained periods of rising interest rates
may be impaired. In addition, such issuers may not
have more traditional methods of financing
available to them, and may be unable to repay debt
at maturity by refinancing. The risk of loss due to
default in payment of interest or principal by such
issuers is significantly greater than with
investment grade securities because lower-rated
securities generally are unsecured and subordinated
to the prior payment of senior indebtedness. The
Fund may also incur additional expenses to the
extent that it is required to seek recovery upon a
default in the payment of principal or interest on
its portfolio holdings.
Many fixed-income securities, including corporate
debt securities in which the Fund may invest,
contain call or buy-back features which permit the
issuer of the security to call or repurchase it.
Such securities may present risks based on payment
expectations. If an issuer exercises such a "call
option" and redeems the security, the Fund may have
to replace the called security with a lower
yielding security, resulting in a decreased rate of
return for the Fund. For additional risks relating
to high yield foreign corporate debt securities,
see "--Considerations Relating to High Yield
Foreign Corporate Debt Securities."
Considerations Relating
to High Yield Foreign
Sovereign Debt
Securities............. Investments in foreign sovereign debt securities
involve certain risks not typically associated with
U.S. corporate investments. Investing in foreign
sovereign debt securities, especially in emerging
market countries, will expose the Fund to the
direct or indirect consequences of political,
social or economic changes in the countries that
issue the securities or in which the issuers are
located. The ability and willingness of sovereign
obligors or the governmental authorities that
control repayment of their external debt to pay
principal and interest
10
<PAGE>
on such debt when due may depend on general
economic and political conditions within the
relevant country. Certain countries in which the
Fund may invest, especially emerging market
countries, have historically experienced, and may
continue to experience, high rates of inflation,
high interest rates, exchange rate fluctuations,
large amounts of external debt, balance of payments
and trade difficulties and extreme poverty and
unemployment. Many of these countries are also
characterized by political uncertainty or
instability. Additional factors that may influence
the ability or willingness to service debt include,
but are not limited to, a country's cash flow
situation, the availability of sufficient foreign
exchange on the date a payment is due, the relative
size of its debt service burden to the economy as a
whole, and its government's policy towards the
International Monetary Fund (the "IMF"), the
International Bank for Reconstruction and
Development (the "World Bank") and other
international agencies to which a government debtor
may be subject. A substantial portion of the Fund's
foreign sovereign and foreign corporate debt
securities portfolio is expected to be issued by
issuers located in countries considered to be
emerging markets, and investments in such
securities are particularly speculative.
The ability of a foreign sovereign obligor,
especially an obligor in an emerging market
country, to make timely and ultimate payments on
its external debt obligations will also be strongly
influenced by the obligor's balance of payments,
including export performance, its access to
international credits and investments, fluctuations
of interest rates and the extent of its foreign
reserves. A country whose exports are concentrated
in a few commodities or whose economy depends on
certain strategic imports could be vulnerable to
fluctuations in international prices of these
commodities or imports. To the extent that a
country receives payment for its exports in
currencies other than dollars, its ability to make
debt payments denominated in dollars could be
adversely affected. If a foreign sovereign obligor
cannot generate sufficient earnings from foreign
trade to service its external debt, it may need to
depend on continuing loans and aid from foreign
governments, commercial banks, and multilateral
organizations, as well as on inflows of foreign
investment. The commitment on the part of these
foreign governments, multilateral organizations and
others to make such disbursements may be
conditioned on the government's implementation of
economic reforms and/or economic performance and
the timely service of its obligations. Failure to
implement such
11
<PAGE>
reforms, achieve such levels of economic
performance or repay principal or interest when due
may result in the cancellation of such third
parties' commitments to lend funds, which may
further impair the obligor's ability or willingness
to timely service its debts. The cost of servicing
external debt will also generally be adversely
affected by rising international interest rates
because many external debt obligations bear
interest at rates which are adjusted based upon
international interest rates. The ability to
service external debt will also depend on the level
of the relevant government's international currency
reserves and its access to foreign exchange.
Currency devaluations may affect the ability of a
sovereign obligor to obtain sufficient foreign
exchange to service its external debt. The risks
enumerated above generally are heightened with
regard to issuers in emerging market countries.
As a result of the foregoing, a governmental
obligor, particularly in an emerging market
country, may default on its obligations. If such an
event occurs, the Fund may have limited legal
recourse against the issuer and/or guarantor.
Remedies must, in some cases, be pursued in the
courts of the defaulting party itself, and the
ability of the holder of foreign sovereign debt
securities to obtain recourse may be subject to the
political climate in the relevant country. In
addition, no assurance can be given that the
holders of commercial bank debt will not contest
payments to the holders of other foreign sovereign
debt obligations in the event of default under
their commercial bank loan agreements.
Sovereign obligors in developing and emerging
countries are among the world's largest debtors to
commercial banks, other governments, international
financial organizations and other financial
institutions. Certain issuers of the sovereign debt
securities in which the Fund expects to invest have
in the past experienced substantial difficulties in
servicing their external debt obligations, which
have led to defaults on certain obligations and the
restructuring of certain indebtedness.
Restructuring arrangements have included, among
other things, reducing and rescheduling interest
and principal payments by negotiating new or
amended credit agreements or converting outstanding
principal and unpaid interest to Brady Bonds (as
described herein) and obtaining new credit to
finance interest payments. Holders of certain
foreign sovereign debt securities may be requested
to participate in the restructuring of such
obligations and to extend further loans to their
issuers. There can be no assurance that the Brady
12
<PAGE>
Bonds and other foreign sovereign debt securities
in which the Fund may invest will not be subject to
similar defaults or restructuring arrangements
which may adversely affect the value of such
investments. Furthermore, certain participants in
the secondary market for such debt may be directly
involved in negotiating the terms of these
arrangements and may therefore have access to
information not available to other market
participants.
Payments to holders of the foreign sovereign debt
securities in which the Fund may invest may be
subject to withholding and other taxes imposed by a
foreign government. Although the holders may be
entitled to tax gross-up payments from the issuers
of such instruments, there is no assurance that
such payments will be made.
Considerations Relating
to High Yield Foreign
Corporate Debt
Securities.............
In addition to the risks cited under "--
Considerations Relating to High Yield Foreign
Sovereign Debt Securities," including political,
social and economic risks relating to foreign
issuers, investments in securities of foreign
issuers may involve additional risks arising from
differences between U.S. and foreign securities
markets (including, among other things, less
volume, much greater price volatility in and
illiquidity of certain foreign securities markets,
different trading and settlement practices and less
governmental supervision and regulation), from
changes in currency exchange rates, from high and
volatile rates of inflation and, as with domestic
multinational corporations, from fluctuating
interest rates. These risks are generally
heightened with respect to issuers in emerging
market countries.
Investment in certain foreign securities, especially
those of issuers in certain emerging market
countries, is restricted or controlled to varying
degrees by government regulation which may at times
limit or preclude investment in certain foreign
securities and increase the costs and expenses of
the Fund. Certain foreign countries require
governmental approval prior to investments by
foreign persons, limit the amount of investment by
foreign persons in a particular issuer, limit
investment by foreign persons to a specific class
of securities of an issuer that may have less
advantageous rights than other classes, restrict
investment opportunities in issuers in industries
deemed important to national interests and/or
impose additional taxes on foreign investors.
13
<PAGE>
Certain foreign countries, especially certain
emerging market countries, may require governmental
approval for the repatriation of investment income,
capital or the proceeds of sales of securities by
foreign investors which could adversely affect the
Fund. In addition, if a deterioration occurs in the
country's balance of payments, it could impose
temporary restrictions on foreign capital
remittances. Investing in local markets in foreign
countries may require the Fund to adopt special
procedures, seek local governmental approvals or
take other actions, each of which may involve
additional costs to the Fund.
Other investment risks include the possible
imposition of foreign withholding taxes on certain
amounts of the Fund's income, the possible seizure
or nationalization of foreign assets and the
possible establishment of exchange controls,
expropriation, confiscatory taxation, other foreign
governmental laws or restrictions which might
affect adversely payments due on securities held by
the Fund, the lack of extensive operating
experience of eligible foreign subcustodians and
legal limitations on the ability of the Fund to
recover assets held in custody by a foreign
subcustodian in the event of the subcustodian's
bankruptcy. Moreover, brokerage commissions and
other transaction costs on foreign securities
exchanges are generally higher than in the United
States.
In addition, there may be less publicly available
information about a foreign issuer, especially one
located in an emerging market country, than about
comparable U.S. issuers, and foreign issuers may
not be subject to the same accounting, auditing and
financial record-keeping standards and requirements
as U.S. issuers. In particular, the assets and
profits appearing on the financial statements of a
foreign issuer may not reflect its financial
position or results of operations in the way they
would be reflected if the financial statements had
been prepared in accordance with U.S. generally
accepted accounting principles. In addition, for an
issuer that keeps accounting records in local
currency, inflation accounting rules may require,
for both tax and accounting purposes, that certain
assets and liabilities be restated on the issuer's
balance sheet in order to express items in terms of
currency of constant purchasing power. Inflation
accounting may indirectly generate losses or
profits. Consequently, financial data may be
materially affected by restatements for inflation
and may not accurately reflect the real condition
of those issuers and securities markets. Finally,
in the event of a default in any such foreign
obligations, it may be more difficult for the Fund
to obtain or enforce a judgment against the issuers
of such obligations.
14
<PAGE>
Considerations Relating
to Foreign Currency
Exchange Rates......... Since the Fund may invest in securities denominated
or quoted in currencies other than the U.S. dollar,
changes in foreign currency exchange rates may
affect the value of securities held by the Fund and
the unrealized appreciation or depreciation of
investments. Currencies of certain countries may be
volatile and subject to risk of revaluation, which
may affect the value of securities denominated in
such currencies.
Leverage................ At times, the Fund may utilize leverage by borrowing
or by issuing shares of preferred stock or debt
securities in an amount up to 33 1/3% of the Fund's
total assets including the amount obtained from
leverage. The Fund intends to utilize leverage in
an initial amount equal to approximately 25% of its
total assets including the amount obtained from
leverage. The use of leverage will pose certain
risks for holders of Common Stock including the
possibility of higher volatility of both the net
asset value and market value of the Common Stock.
There can be no assurance that the Fund will be
able to realize a higher return on its investment
portfolio than the then current interest or
dividend rate on any leverage. In the event the
Fund realizes a return on its investment portfolio
which is less than the then current interest or
dividend rate on any leverage, the Fund's leveraged
capital structure would result in a lower yield to
the holders of Common Stock than if the Fund were
not leveraged. Moreover, any decline in the value
of the Fund's assets will be borne entirely by
holders of Common Stock in the form of reductions
in the Fund's net asset value, and any requirement
that the Fund sell assets at a loss in order to
redeem or repay any leverage or for other reasons
would make it more difficult for the net asset
value to recover. Accordingly, the effect of
leverage in a declining market is likely to be a
greater decline in the net asset value of the
Common Stock than if the Fund were not leveraged,
which may be reflected in a greater decline in the
market price of the Common Stock. The Fund will
seek to limit certain risks associated with
leverage by investing in certain floating rate debt
securities. See "Additional Investment Activities--
Leverage."
The Fund's use of leverage will be subject to the
provisions of the Investment Company Act of 1940,
as amended (the "1940 Act"), including asset
coverage requirements and restrictions on the
declaration of dividends and distributions to
holders of Common Stock or purchases of Common
Stock in the event such asset coverage requirements
are not met. In addition, the Fund may seek to have
15
<PAGE>
Moody's, S&P and/or any other nationally recognized
statistical rating organization rate any preferred
stock or debt it issues. As a condition to
obtaining such ratings, the terms of any preferred
stock or debt securities issued will include asset
coverage maintenance provisions which will require
the redemption of shares of preferred stock or the
repayment of debt in the event of non-compliance by
the Fund and may also prohibit dividends and other
distributions on the Common Stock in such
circumstances. In order to meet redemption or
repayment requirements, the Fund may have to
liquidate portfolio securities. Such liquidations
and redemptions would cause the Fund to incur
related transaction costs and could result in
capital losses to the Fund. Prohibitions on
dividends and other distributions on the Common
Stock could impair the Fund's ability to qualify as
a regulated investment company under the Internal
Revenue Code of 1986, as amended (the "Code"). The
1940 Act also requires that holders of preferred
stock, and in certain circumstances holders of debt
securities, have certain voting rights. See
"Additional Investment Activities--Leverage,"
"Taxation" and "Description of Capital Stock."
During periods in which the Fund is utilizing
financial leverage, the fees which are payable to
SBAM and the Administrator as a percentage of the
Fund's assets will be higher than if the Fund did
not utilize a leveraged capital structure because
the fees are calculated as a percentage of the
Fund's assets, including those purchased with
leverage. See "Management of the Fund."
Additional Investment The Fund may employ various additional investment
Strategies............. strategies that entail certain additional or
different risks, such as entering into interest
rate transactions and options and futures
transactions, entering into repurchase agreements,
purchasing securities on a when-issued or delayed
delivery basis, lending portfolio securities and
investing in zero coupon securities, pay-in-kind
bonds and loan participations and assignments. See
"Investment Objectives and Policies--Other
Investments--Zero Coupon Securities, Pay-in-Kind
Bonds and Deferred Payment Securities" and "--Loan
Participations and Assignments," "Additional
Investment Activities" and Appendix B (General
Characteristics and Risks of Hedging and Other
Strategic Transactions) to this Prospectus.
Trading Discount........ As a newly organized entity, the Fund has no
operating history. Shares of closed-end investment
companies frequently trade at a discount from net
asset value. This characteristic is a risk separate
and distinct from the risk that the Fund's net
asset value will decrease as a result of its
investment activities and may be greater for
investors expecting to sell their shares in a
relatively short period following completion of
16
<PAGE>
this offering. It should be noted, however, that
shares of some closed-end funds have traded at
premiums to net asset value. The Fund cannot
predict whether its shares will trade at, above or
below net asset value. The Fund is intended
primarily for long-term investors and should not be
considered as a vehicle for trading purposes.
Year 2000............... The investment management services provided to the
Fund by SBAM depend in large part on the smooth
functioning of SBAM's computer systems. Many
computer software systems in use today cannot
recognize the year 2000, but revert to 1900 or some
other date, due to the manner in which dates were
encoded or calculated. The capability of these
systems to recognize the year 2000 could have a
negative impact on SBAM's provision of investment
advisory services, including the handling of
securities trades, pricing and account services.
SBAM has advised the Fund that it has been
reviewing all of its computer systems and actively
working on necessary changes to its systems to
prepare for the year 2000 and expects that given
the extensive testing which it is undertaking its
systems will be year 2000 compliant before such
date. In addition, SBAM has been advised by certain
of the Fund's service providers that they are also
in the process of modifying their systems with the
same goal. There can, however, be no assurance that
SBAM or any other service provider will be
successful in achieving year 2000 compliance, or
that interaction with other non-complying computer
systems will not impair services to the Fund at
that time.
Anti-Takeover The Fund's Amended and Restated Articles of
Provisions............. Incorporation (the "Articles of Incorporation") and
Amended and Restated By-Laws (the "By-Laws")
contain certain anti-takeover provisions that may
have the effect of inhibiting the Fund's possible
conversion to open-end status and limiting the
ability of other persons to acquire control of the
Fund. In certain circumstances, these provisions
might also inhibit the ability of shareholders to
sell their shares at a premium over prevailing
market prices. The Fund's Board of Directors has
determined that these provisions are in the best
interests of shareholders generally. See
"Description of Capital Stock--Special Voting
Provisions."
--------------------
Investors should carefully consider their ability to
assume the foregoing risks before making an
investment in the Fund. An investment in shares of
the Fund may not be appropriate for all investors.
Given the above-described investment risks inherent
in the Fund, investment in shares of the Fund
should be considered speculative and should not be
considered a complete investment program.
17
<PAGE>
FEE TABLE
<TABLE>
<S> <C>
SHAREHOLDER TRANSACTION EXPENSES:
Maximum Sales Load (as a percentage of offering price)................ None
Dividend Reinvestment Plan Fees....................................... None
ANNUAL EXPENSES (as a percentage of net assets attributable to Common
Stock):
Management and Administration Fees(a)(b).............................. 1.10%
Interest Payments on Borrowed Funds(b)................................ None
Other Expenses(b)..................................................... .10%
----
Total Annual Expenses(b)............................................ 1.20%
====
</TABLE>
EXAMPLE:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment, assuming (1) total
annual expenses of 1.20% (assuming no
leverage) and 3.63% (assuming leverage of 25%
of the Fund's total assets) and (2) a 5%
annual return throughout the periods:
Assuming No Leverage........................ $12 $ 38 $ 66 $145
Assuming 25% Leverage....................... $37 $111 $188 $389
</TABLE>
(a) See "Management of the Fund."
(b) In the event the Fund utilizes leverage by borrowing in an amount equal to
approximately 25% of the Fund's total assets (including the amount
obtained from leverage), it is estimated that, as a percentage of net
assets attributable to Common Stock, the Management and Administration
Fees would be 1.47%, Interest Payments on Borrowed Funds (assuming an
interest rate of approximately 6.2%, which interest rate is subject to
change based on prevailing market conditions) would be 2.06%, Other
Expenses would be .10% and Total Annual Expenses would be 3.63%. The Fund
may utilize leverage up to 33 1/3% of the Fund's total assets (including
the amount obtained from leverage), depending on economic conditions. See
"Risk Factors and Special Considerations--Leverage" and "Additional
Investment Activities-- Leverage."
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" are based on
estimated amounts through the end of the Fund's first fiscal year on an
annualized basis. The Example set forth above assumes reinvestment of all
dividends and distributions and utilizes a 5% annual rate of return as
mandated by Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF FUTURE EXPENSES OR ANNUAL RATE OF RETURN, AND ACTUAL
EXPENSES, LEVERAGE AMOUNT OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE.
18
<PAGE>
THE FUND
The Fund, incorporated in Maryland on March 19, 1998, is a closed-end
management investment company registered under the 1940 Act. The Fund's
investment objective is to seek to maximize current income by investing
primarily in a diversified portfolio of high yield debt securities rated at
the time of investment in medium or lower rating categories or determined by
SBAM to be of comparable quality. As a secondary objective, the Fund will seek
capital appreciation to the extent consistent with its objective of seeking to
maximize current income. SBAM, the Fund's investment manager, believes that by
investing in high yield U.S. debt securities supplemented by high yield
foreign debt securities (which the Fund expects will primarily consist of debt
securities of issuers located in emerging market countries), the Fund can
diversify its risk and enhance the overall credit quality of its portfolio
while maintaining a high level of current income. There can be no assurance
that the Fund's investment objectives will be achieved. Due to the risks
inherent in the securities in which the Fund may invest, the Fund should not
be considered a complete investment program. See "Risk Factors and Special
Considerations."
USE OF PROCEEDS
The net proceeds of this offering, estimated to be $855,880,000 (or
approximately $984,512,500 assuming the Underwriters exercise the over-
allotment option in full) after deducting offering and organizational
expenses, will be invested in accordance with the policies set forth under
"Investment Objectives and Policies" within three months from the date of this
Prospectus. Initially, the proceeds will be invested in high quality short-
term money market instruments as described under "Investment Objectives and
Policies--Other Investments--Higher Quality Debt Securities and Money Market
Instruments." There will be no sales load or underwriting discount imposed on
sales of shares of Common Stock in this offering. SBAM or an affiliate (not
the Fund) will pay a commission to the Underwriters from its own assets in
connection with sales of shares of Common Stock in this offering. See
"Underwriting."
19
<PAGE>
INVESTMENT OBJECTIVES AND POLICIES
GENERAL
The Fund's investment objective is to seek to maximize current income by
investing primarily in a diversified portfolio of high yield debt securities
rated at the time of investment in medium or lower rating categories ("Baa" or
lower by Moody's or "BBB" or lower by S&P) or in unrated fixed-income
securities determined by SBAM to be of comparable quality. As a secondary
objective, the Fund will seek capital appreciation to the extent consistent
with its objective of seeking to maximize current income. Under normal market
conditions, the Fund will invest at least 65% of its total assets in high
yield debt securities. The Fund may invest up to 35% of its total assets in
foreign debt securities, which the Fund expects will primarily consist of debt
securities of issuers located in emerging market countries. The Fund initially
intends to invest approximately 20% to 25% of its total assets in debt
securities of issuers located in emerging market countries. Certain of the
debt securities purchased by the Fund may be rated as low as "C" by Moody's or
"D" by S&P or may be comparable to securities so rated. Securities rated "C"
by Moody's are the lowest rated class of securities and can be regarded as
having extremely poor prospects of ever attaining any real investment
standing. Securities rated "D" by S&P are in default on their interest and/or
principal payments. Debt securities rated by both Moody's and S&P need only
satisfy the foregoing ratings standards with respect to either the Moody's or
the S&P rating. The Fund is not required to dispose of a debt security if its
credit rating or credit quality declines. However, SBAM will continue to
evaluate the appropriateness of maintaining such a debt security in the Fund's
portfolio in accordance with the approach described below. Medium and low-
rated and comparable unrated securities offer yields that fluctuate over time,
but generally such yields are superior to the yields offered by higher-rated
securities. However, such debt securities also involve greater risks than
higher-rated securities. See "Risk Factors and Special Considerations." A
description of the ratings used by Moody's and S&P is set forth in Appendix A
to this Prospectus.
SBAM will be free to invest in high yield debt securities of any maturity
and may adjust the average maturity of the Fund's portfolio from time to time,
depending on SBAM's assessment of the relative yields available on securities
of different maturities and its expectations of future changes in interest
rates. Long-term debt securities generally provide a higher yield than short-
term debt securities, and therefore SBAM expects that, based upon current
market conditions and following the investment of the proceeds of this
offering in accordance with the Fund's investment objectives and policies, the
Fund's high yield debt securities will initially have an average maturity of 8
to 15 years. However, because many fixed-income securities contain redemption
features, the actual average maturity of the Fund's portfolio may be
considerably less. See "Risk Factors and Special Considerations--
Considerations Relating to High Yield Corporate Securities."
In light of the risks associated with U.S. and foreign high yield debt
securities, SBAM will take various factors into consideration in evaluating
the creditworthiness of an issuer as well as the appropriateness of the
securities for inclusion in the Fund's portfolio. For corporate debt
securities, these will typically include the issuer's financial resources, its
sensitivity to economic conditions and trends, the operating history of the
issuer and the experience and track record of the issuer's management. For
foreign debt instruments, these will typically include the economic and
political conditions within the issuer's country, the issuer's overall and
external debt levels and debt service ratios (if applicable), the issuer's
access to capital markets and other sources of funding and the issuer's debt
service payment history. SBAM will also review the ratings, if any, assigned
to the security by any recognized
20
<PAGE>
rating agencies, although SBAM's judgment as to the quality of a debt security
may differ from that suggested by the rating published by a rating service. In
addition to the foregoing credit analysis, SBAM will evaluate the relative
value of an investment compared with its perceived credit risk. The Fund's
ability to achieve its investment objectives may be more dependent on SBAM's
credit analysis than would be the case if it invested in higher quality debt
securities.
HIGH YIELD CORPORATE DEBT SECURITIES
The market for high yield U.S. corporate debt securities is more established
than that for high yield foreign corporate debt securities, but has undergone
significant changes in the past and may undergo significant changes in the
future. See "Risk Factors and Special Considerations." High yield foreign and
U.S. corporate securities in which the Fund may invest include bonds,
debentures, notes, commercial paper and preferred stock and will generally be
unsecured. Most of the corporate debt securities will bear interest at fixed
rates. However, the Fund may also invest in corporate debt securities with
variable rates of interest or which involve equity features, such as
contingent interest or participations based on revenues, sales or profits
(i.e., interest or other payments, often in addition to a fixed rate of
return, that are based on the borrower's attainment of specified levels of
revenues, sales or profits and thus enable the holder of the security to share
in the potential success of the venture). It is the Fund's current intention
to seek to limit the possibility that its cost of leverage will adversely
affect its net income during a rising interest rate environment by investing a
portion of its total assets in high yield debt securities with floating
interest rates. See "Additional Investment Activities--Leverage."
HIGH YIELD FOREIGN SOVEREIGN AND FOREIGN CORPORATE DEBT SECURITIES
The Fund may invest up to 35% of its total assets in foreign fixed-income
securities, which the Fund expects will primarily consist of debt securities
of issuers located in emerging market countries. As used in this Prospectus,
an "emerging market country" is any country considered to be an emerging
market country by the World Bank at the time of investment. These countries
generally include every nation in the world except the United States, Canada,
Japan, Australia, New Zealand and most countries located in Western Europe.
These securities may be U.S. dollar denominated or non-U.S. dollar
denominated, including, among others, in hard currencies such as the British
Pound Sterling, the Belgian Franc, the Canadian Dollar, the German Deutsche
Mark, the Dutch Guilder, the European Currency Unit, the French Franc, the
Italian Lira, the Japanese Yen or the Swiss Franc and include: (a) debt
obligations issued or guaranteed by foreign national, provincial, state,
municipal or other governments with taxing authority or by their agencies or
instrumentalities, including Brady Bonds; (b) debt obligations of
supranational entities; (c) debt obligations and other fixed-income securities
of foreign corporate issuers; and (d) non-dollar denominated debt obligations
of U.S. corporate issuers. The Fund may also invest in securities denominated
in currencies of emerging market countries. There is no minimum rating
criteria for the Fund's investments in such securities. A description of Brady
Bonds is set forth below. The risks associated with these investments are
described under the captions "Risk Factors and Special Considerations--
Considerations Relating to High Yield Foreign Sovereign Debt Securities," "--
Considerations Relating to High Yield Foreign Corporate Debt Securities" and
"--Other Investments--Brady Bonds." Moreover, substantial investments in
foreign securities may have adverse tax implications as described under
"Taxation."
STATISTICAL INFORMATION REGARDING HIGH YIELD SECURITIES
The annualized compound total return since 1991 for emerging markets debt
securities, represented by the J.P. Morgan EMBI Index, is 19.40%. The
annualized compound total return since 1991 of high yield bonds,
21
<PAGE>
represented by the Merrill Lynch High Yield Master Index, is 15.65%. The
annualized compound total return since 1991 for long term treasuries,
represented by the Merrill Lynch Governments, U.S. Treasury, Long Term Index
(15+ Years), is 11.03%. The annualized compound total return since 1991 of
corporate bonds, represented by the Merrill Lynch Corporate Master Index (All
Maturities), is 9.97%. The annualized compound total return since 1991 for
intermediate term treasuries, represented by the Merrill Lynch Governments,
U.S. Treasury, Intermediate Term Index (1-9.99 Years), is 7.53%. The
annualized compound total return since 1991 of 91-day treasury bills,
represented by the Merrill Lynch U.S. Treasury, 91-Day Index, is 4.73%. The
J.P. Morgan EMBI Index is an unmanaged index comprised of Brady Bonds issued
by the following countries: Argentina, Brazil, Bulgaria, Ecuador, Mexico,
Panama, Peru, Poland, Russia, and Venezuela. The Merrill Lynch High Yield
Master Index is an unmanaged index of U.S. bonds and U.S. dollar denominated
bonds of non-U.S. issuers, in each case with at least $100 million par amount
outstanding, with a maturity equal to or greater than one year and rated by
S&P in the categories ranging from "BB+" to "C" and rated by Moody's in the
categories ranging from "Ba1" to "C." The Merrill Lynch Corporate Master Index
(All Maturities) is an unmanaged index of fixed-coupon U.S. investment grade
bonds with at least $100 million par amount outstanding with a quality range
between BBB3 and AAA based on composite Moody's and S&P ratings. The
calculation of composite ratings is based on an averaging that is biased to
the lower of the two ratings. The Merrill Lynch Governments, U.S. Treasury,
Long Term Index (15+ Years) is an unmanaged index of all U.S. treasury notes
and bonds with at least $100 million par amount outstanding and with a
maturity greater than or equal to fifteen years. The Merrill Lynch
Governments, U.S. Treasury, Intermediate Term Index (1-9.99 Years) is an
unmanaged index of all U.S. treasury notes and bonds with at least $100
million par amount outstanding and with a maturity greater than or equal to
one year and less than ten years. The Merrill Lynch U.S. Treasury, 91-Day
Index is an unmanaged index which, at the beginning of every month, is
comprised of the U.S. Treasury Bill with a maturity closest to, but not longer
than, 91 days from that date. It is assumed that this issue is held for one
month, then sold with the net proceeds reinvested in the bill selected at the
beginning of the next month. Differences exist between the securities that
comprise the indices shown above, particularly the Merrill Lynch High Yield
Master Index and the J.P. Morgan EMBI Index, and the securities in which the
Fund will invest. The Fund will not seek to match the composition or
performance of any such indices. The performance of the various indices should
not be viewed as indicative of the performance of the Fund. Information for
the J.P. Morgan EMBI Index is not available for periods prior to January 1991.
In addition, past performance is no guarantee of future performance. The
statistical information described above reflects a comparison of the
annualized compound total return percentages of various asset classes as
represented by their respective indices for the period from January 1991
through December 1997. The statistical information described above does not
reflect the past or future performance of the Fund. An investor cannot invest
directly in an index. High yield bonds and emerging markets debt are subject
to greater risks and uncertainties than other securities set forth in the
statistical information described above, including U.S. Treasury securities
which are guaranteed as to the payment of principal and interest by the U.S.
Government.
SBAM believes that the credit quality of outstanding U.S. high yield debt
has improved over the last decade. For example, the default loss rates
(defined as the percentage of high yield bonds (based on par value) which
missed any scheduled interest or principal payments (in that year, net of any
recovery)) for U.S. high yield bonds were approximately 1.66%, 2.93%, 8.42%,
7.16%, 1.91%, 0.56%, 0.96%, 1.24%, 0.65% and 0.65% for calendar years 1988,
1989, 1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1997, respectively. The
statistical information
22
<PAGE>
with respect to historical default loss rates is based on information
contained in Edward I. Altman and Vellore M. Kishore, Defaults and Returns on
High Yield Bonds: Analysis through 1997, New York University Salomon Center
(1998), and is intended to demonstrate default loss rate trends over the
period indicated. It should not be viewed as a definitive indication of the
relative magnitude of changes in credit quality from year to year. Although
other methods of analyzing default experience, such as comparing default
experience of seasoned issues, would produce different relative figures, SBAM
believes that the foregoing default loss rate data evidences a general trend
of improving credit quality.
For the period January 1, 1989 through December 31, 1997, the cumulative
gross default rate for high yield corporate bonds was 38.34%. This figure
represents the probability that a high yield bond issued on January 1, 1989
would default by December 31, 1997. The rate is based on the ratio of the
number of issuers that defaulted on high yield bonds outstanding on January 1,
1989 to the number of issuers at risk of defaulting on such bonds as of such
date and is based only on bonds that have been rated by Moody's. The foregoing
is derived from information obtained by the Fund from the February 1998 issue
of a Moody's publication entitled "Historical Default Rates of Corporate Bond
Issuers, 1920-1997."
The market of outstanding high yield securities has generally increased
since 1977. The aggregate outstanding principal amount of high yield
securities was approximately $24.0 billion, $26.0 billion, $28.0 billion,
$30.0 billion, $32.0 billion, $35.0 billion, $43.0 billion, $59.0 billion,
$83.3 billion, $138.4 billion, $182.8 billion, $207.3 billion, $244.2 billion,
$214.6 billion, $200.9 billion, $199.6 billion, $233.6 billion, $271.5
billion, $296.9 billion, $352.7 billion and $452.3 billion for calendar years
1977, 1978, 1979, 1980, 1981, 1982, 1983, 1984, 1985, 1986, 1987, 1988, 1989,
1990, 1991, 1992, 1993, 1994, 1995, 1996 and 1997, respectively. The
statistical information with respect to historical outstanding principal
amounts of high yield securities is based on information the Fund obtained
from Chase Securities Inc.
The market of outstanding emerging markets debt securities has increased
since 1991. The aggregate outstanding principal amount of emerging markets
debt securities was approximately $32.7 billion in 1991, $32.3 billion in
1992, $64.8 billion in 1993, $70.4 billion in 1994, $75.9 billion in 1995,
$96.8 billion in 1996 and $96.1 billion in 1997. The statistical information
with respect to historical outstanding principal amounts of emerging markets
debt securities is based on information the Fund obtained from J.P. Morgan &
Co.
OTHER INVESTMENTS
Brady Bonds. The Fund expects that a substantial portion of the Fund's
sovereign debt securities will consist of Brady Bonds. Brady Bonds are debt
securities issued under the framework of the Brady Plan, an initiative
announced by U.S. Treasury Secretary Nicholas F. Brady in 1989 as a mechanism
for debtor nations (primarily emerging market countries) to restructure their
outstanding external indebtedness (generally, commercial bank debt). In
restructuring its external debt under the Brady Plan framework, a debtor
nation negotiates with its existing bank lenders as well as multilateral
institutions such as the World Bank and the IMF. The Brady Plan framework, as
it has developed, contemplates the exchange of commercial bank debt for newly
issued bonds (Brady Bonds). Brady Bonds may also be issued in respect of new
money being advanced by existing lenders in connection with the debt
restructuring. The World Bank and/or the IMF support the restructuring by
providing funds pursuant to loan agreements or other arrangements which enable
the debtor nation to collateralize the new Brady Bonds or to repurchase
outstanding bank debt at a discount. Under these arrangements with the World
Bank and/or the IMF, debtor nations have been required to agree to the
23
<PAGE>
implementation of certain domestic monetary and fiscal reforms. Such reforms
have included the liberalization of trade and foreign investment, the
privatization of state-owned enterprises and the setting of targets for public
spending and borrowing. These policies and programs seek to promote the debtor
country's economic growth and development. Investors should recognize that the
Brady Plan only sets forth general guiding principles for economic reform and
debt reduction, emphasizing that solutions must be negotiated on a case-by-
case basis between debtor nations and their creditors. SBAM believes that
economic reforms undertaken by countries in connection with the issuance of
Brady Bonds make the debt of countries that have issued or have announced
plans to issue Brady Bonds an attractive opportunity for investment.
Investors should recognize that Brady Bonds do not have a long payment
history. Agreements implemented under the Brady Plan to date are designed to
achieve debt and debt-service reduction through specific options negotiated by
a debtor nation with its creditors. As a result, the financial packages
offered by each country differ. The types of options have included the
exchange of outstanding commercial bank debt for bonds issued at 100% of face
value of such debt which carry a below-market stated rate of interest
(generally known as par bonds), bonds issued at a discount of face value of
such debt (generally known as discount bonds), bonds bearing an interest rate
which increases over time and bonds issued in exchange for the advancement of
new money by existing lenders. Regardless of the stated face amount and stated
interest rate of the various types of Brady Bonds, the Fund will purchase
Brady Bonds in secondary markets, as described below, in which the price and
yield to the investor reflect market conditions at the time of purchase.
Certain Brady Bonds have been collateralized as to principal due at maturity
by U.S. Treasury zero coupon bonds with a maturity equal to the final maturity
of such Brady Bonds, although the collateral is not available to investors
until the final maturity of the Brady Bonds. Collateral purchases are financed
by the IMF, the World Bank and the debtor nations' reserves. In addition, the
first two or three interest payments on certain types of Brady Bonds may be
collateralized by cash or securities agreed upon by creditors. Subsequent
interest payments may be uncollateralized or may be collateralized over
specified periods of time. A significant amount of the Brady Bonds that the
Fund may purchase have no or limited collateralization, and the Fund will be
relying for payment of interest and principal primarily on the willingness of
the foreign government to make payment in accordance with the terms of the
Brady Bonds. Brady Bonds issued to date are purchased and sold in secondary
markets through U.S. securities dealers and are generally maintained through
European transnational securities depositories. A substantial portion of the
Brady Bonds and other sovereign debt securities in which the Fund will invest
is likely to be acquired at a discount, which involves certain considerations
discussed under "--Zero Coupon Securities, Pay-in-Kind Bonds and Deferred
Payment Securities."
Zero Coupon Securities, Pay-in-Kind Bonds and Deferred Payment
Securities. The Fund may invest up to 30% of its total assets in zero coupon
securities and pay-in-kind bonds. In addition, as indicated above, a
substantial portion of the Fund's sovereign debt securities may be acquired at
a discount, and such purchases shall not be included in the 30% limit referred
to in the previous sentence. These investments involve special risk
considerations. Zero coupon securities are debt securities that pay no cash
income but are sold at substantial discounts from their value at maturity.
When a zero coupon security is held to maturity, its entire return, which
consists of the amortization of discount, comes from the difference between
its purchase price and its maturity value. This difference is known at the
time of purchase, so that investors holding zero coupon securities until
maturity know at the time of their investment what the return on their
investment will be. Zero coupon securities may have conversion features. The
Fund also may purchase pay-in-kind bonds. Pay-in-kind bonds pay all or a
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<PAGE>
portion of their interest in the form of debt or equity securities. Any such
equity securities received in payment of interest will be subject to the 20%
limitation described under "--Equity Securities." Any such debt securities
received in payment of interest will not be subject to the Fund's credit
quality standards for new investments. Zero coupon securities and pay-in-kind
bonds may be issued by a wide variety of corporate and governmental issuers.
Deferred payment securities are securities that remain zero coupon securities
until a predetermined date, at which time the stated coupon becomes effective
and interest becomes payable at regular intervals.
Zero coupon securities, pay-in-kind bonds and deferred payment securities
tend to be subject to greater price fluctuations in response to changes in
interest rates than are ordinary interest-paying debt securities with similar
maturities. The value of zero coupon securities appreciates more during
periods of declining interest rates and depreciates more during periods of
rising interest rates than ordinary interest-paying securities with similar
maturities. Although zero coupon securities, pay-in-kind bonds and deferred
payment securities are generally not traded on a national securities exchange,
they are widely traded by brokers and dealers.
Current federal income tax law requires the holder of zero coupon
securities, certain pay-in-kind bonds, deferred payment securities and certain
other securities acquired at a discount (such as Brady Bonds) to accrue income
with respect to these securities prior to the receipt of cash payments.
Accordingly, to avoid liability for federal income and excise taxes the Fund
may be required to distribute income accrued with respect to these securities
and may have to dispose of portfolio securities under disadvantageous
circumstances in order to generate cash to satisfy certain distribution
requirements. See "Taxation--The Fund."
Loan Participations and Assignments. The Fund may invest in fixed and
floating rate loans ("Loans") arranged through private negotiations between a
corporate borrower or a foreign sovereign entity and one or more financial
institutions ("Lenders"). The Fund may invest in such Loans in the form of
participations in Loans ("Participations") and assignments of all or a portion
of Loans from third parties ("Assignments"). The Fund considers these
investments to be investments in debt securities for purposes of this
Prospectus. Participations typically will result in the Fund having a
contractual relationship only with the Lender, not with the borrower. The Fund
will have the right to receive payments of principal, interest and any fees to
which it is entitled only from the Lender selling the Participation and only
upon receipt by the Lender of the payments from the borrower. In connection
with purchasing Participations, the Fund generally will have no right to
enforce compliance by the borrower with the terms of the loan agreement
relating to the Loan, nor any rights of set-off against the borrower, and the
Fund may not benefit directly from any collateral supporting the Loan in which
it has purchased the Participation. As a result, the Fund will assume the
credit risk of both the borrower and the Lender that is selling the
Participation. In the event of the insolvency of the Lender selling a
Participation, the Fund may be treated as a general creditor of the Lender and
may not benefit from any set-off between the Lender and the borrower. The Fund
will acquire Participations only if the Lender interpositioned between the
Fund and the borrower is determined by SBAM to be creditworthy. When the Fund
purchases Assignments from Lenders, the Fund will acquire direct rights
against the borrower on the Loan, except that under certain circumstances such
rights may be more limited than those held by the assigning Lender.
The Fund may have difficulty disposing of Assignments and Participations. In
certain cases, the market for such instruments is not highly liquid, and
therefore the Fund anticipates in such cases that such instruments could be
sold only to a limited number of institutional investors. The lack of a highly
liquid secondary market will have an adverse impact on the value of such
instruments and on the Fund's ability to dispose of particular
25
<PAGE>
Assignments or Participations in response to a specific economic event, such
as deterioration in the creditworthiness of the borrower.
Equity Securities. The Fund may invest up to 20% of its total assets in
common stock, convertible securities, warrants, preferred stock or other
equity securities of U.S. and foreign issuers when consistent with the Fund's
objectives. The Fund will generally, but not exclusively, hold such
investments as a result of purchases of unit offerings of debt securities
which include such securities or in connection with an actual or proposed
conversion or exchange of debt securities. The Fund will treat investments
acquired in this manner, together with any holdings of convertible securities,
as debt securities for purposes of its policy to invest at least 65% of its
total assets, under normal circumstances, in high yield debt securities. The
Fund may also purchase equity securities not associated with debt securities
when, in the opinion of the investment manager, such purchase is appropriate.
Higher Quality Debt Securities and Money Market Instruments. There may be
times when, in the judgment of SBAM, conditions in the securities markets
would make pursuing the Fund's basic investment strategy inconsistent with the
best interests of the Fund's shareholders. At such times, SBAM may employ
alternative strategies, including investment of a substantial portion of the
Fund's assets in securities rated higher than "Baa" by Moody's or "BBB" by
S&P, or in unrated securities of comparable quality. In addition, in order to
maintain liquidity, the Fund may invest up to 35% of its total assets in high-
quality short-term money market instruments. Such instruments may include
obligations of the U.S. Government or its agencies or instrumentalities;
commercial paper of issuers rated, at the time of purchase, A-2 or better by
S&P or P-2 or better by Moody's or which, in the opinion of SBAM, are of
comparable creditworthiness; certificates of deposit, banker's acceptances or
time deposits of United States banks with total assets of at least $1 billion
(including obligations of foreign branches of such banks) and of the 75
largest foreign commercial banks in terms of total assets (including domestic
branches of such banks); and repurchase agreements with respect to the
foregoing obligations.
If at some future date, in the opinion of SBAM, adverse conditions prevail
in the securities markets which makes the Fund's investment strategy
inconsistent with the best interests of the Fund's shareholders, the Fund may
invest its assets without limit in high-quality short-term money market
instruments.
---------------------
The Fund's investment objectives, together with the investment restrictions
set forth under "Investment Restrictions," are fundamental policies that may
not be changed without the approval of the holders of a majority of the Fund's
outstanding voting securities. The other policies and investment restrictions
referred to in this Prospectus are not fundamental and may be changed by the
Board of Directors of the Fund without shareholder approval. As used in this
Prospectus, a "majority of the Fund's outstanding voting securities" means the
lesser of (i) 67% or more of the voting securities represented at a meeting at
which more than 50% of the outstanding voting securities are represented or
(ii) more than 50% of the outstanding voting securities.
ADDITIONAL INVESTMENT ACTIVITIES
LEVERAGE
At times, the Fund intends to utilize leverage by borrowing (including
borrowing through reverse repurchase agreements to the extent the Fund does
not maintain a segregated account with respect to a reverse repurchase
agreement as described below) or by issuing shares of preferred stock or debt
securities. The Fund may leverage
26
<PAGE>
in an amount up to 33 1/3% of its total assets including the amount obtained
from leverage. The Fund intends to utilize leverage in an initial amount equal
to approximately 25% of its total assets including the amount obtained from
leverage. SBAM anticipates that the interest payments on any borrowing or debt
securities or the dividends on any preferred stock will reflect short-term
rates, and that the net return on the Fund's portfolio, including the proceeds
of any leverage, will exceed the interest or dividend rate applicable to the
leverage, although no assurance can be given to that effect. Whether to
leverage and the terms and timing of such leverage will be determined by the
Fund's Board of Directors in consultation with SBAM. The extent to which the
Fund is leveraged from time to time will vary depending on the judgment of the
Board of Directors, in consultation with SBAM, regarding market conditions.
Through these leveraging techniques, the Fund will seek to obtain a higher
return for holders of Common Stock than if the Fund were not leveraged. There
can be no assurance, however, that the Fund will engage in any leveraging
techniques. During periods in which the Fund is utilizing financial leverage,
the fees which are payable to SBAM and the Administrator as a percentage of
the Fund's assets will be higher than if the Fund did not utilize a leveraged
capital structure because the fees are calculated as a percentage of the
Fund's assets, including those purchased with leverage. See "Management of the
Fund."
Utilization of leverage is a speculative investment technique and involves
certain risks to the holders of Common Stock. These include the possibility of
higher volatility of the net asset value of the Common Stock and potentially
more volatility in the market value of the Common Stock. So long as the Fund
is able to realize a higher net return on its investment portfolio than the
then current interest or dividend rate of any leverage together with other
related expenses, the effect of the leverage will be to cause holders of
Common Stock to realize a higher current net investment income than if the
Fund were not so leveraged. On the other hand, to the extent that the then
current interest or dividend rate on any leverage, together with other related
expenses, approaches the net return on the Fund's investment portfolio, the
benefit of leverage to holders of Common Stock will be reduced, and if the
then current interest or dividend rate on any leverage were to exceed the net
return on the Fund's portfolio, the Fund's leveraged capital structure would
result in a lower rate of return to holders of Common Stock than if the Fund
were not so leveraged. Similarly, since any decline in the net asset value of
the Fund's investments will be borne entirely by holders of Common Stock, the
effect of leverage in a declining market would be a greater decrease in net
asset value applicable to the Common Stock than if the Fund were not
leveraged. Any such decrease would likely be reflected in a decline in the
market price of the Common Stock. If the Fund's current investment income were
not sufficient to meet interest or dividend requirements on any leverage, it
could be necessary for the Fund to liquidate certain of its investments,
thereby reducing the net asset value attributable to the Common Stock.
It is the Fund's current intention to seek to limit the possibility that its
cost of leverage will adversely affect its net income during a rising interest
rate environment by investing a portion of its total assets in high yield debt
securities with floating interest rates determined with reference to the
short-term London Inter-Bank Offer Rate. SBAM anticipates that the Fund's cost
of borrowing or other leverage will similarly be tied to short-term interest
rates. Under current market conditions, the Fund expects that the aggregate
face amount of its investments in such floating rate securities will be
approximately equal to the aggregate face amount of the Fund's borrowings or
other proceeds of leverage. This strategy is commonly referred to as "matched
book funding." SBAM therefore expects that the relationship between the
interest income received by the Fund on the aforementioned floating rate
securities and the interest or dividend expense of the Fund relating to
borrowing or other leverage will generally remain stable and that changes in
the Fund's cost of borrowing or other leverage
27
<PAGE>
will be offset to a substantial degree by similar changes in the interest
income received on such floating rate securities. However, there can be no
assurance that such offsetting will occur or that SBAM will utilize a "matched
book funding" strategy at all times. The utilization of a "matched book
funding" strategy will also limit the ability of the Fund to lock in higher
yields during a falling interest rate environment.
The Fund's use of leverage will be subject to the provisions of the 1940
Act, including asset coverage requirements and restrictions on the declaration
of dividends and distributions to holders of Common Stock or purchases of
Common Stock in the event such asset coverage requirements are not met. The
1940 Act also requires that holders of preferred stock, and in certain
circumstances holders of debt securities, have certain voting rights. See
"Description of Capital Stock."
The Fund may apply for a rating from Moody's, S&P and/or any other
nationally recognized statistical rating organization on any preferred stock
or debt which it issues; however, no minimum rating is required for the
issuance of preferred stock or debt by the Fund. The Fund believes that
obtaining one or more such ratings for its preferred stock or debt securities
will enhance the marketability of the preferred stock or debt securities and
thereby reduce the dividend rate on such preferred stock or interest
requirements on such debt securities from that which the Fund would be
required to pay if the preferred stock or debt securities were not so rated.
The rating agencies for any preferred stock or debt securities may require
asset coverage maintenance ratios in addition to those imposed by the 1940
Act. The ability of the Fund to comply with such asset coverage maintenance
ratios may be subject to circumstances beyond the control of the Fund such as
market conditions for its portfolio securities. The Fund expects that the
terms of any preferred stock or debt securities will provide for mandatory
redemption of the preferred stock or repayment of debt in the event the Fund
fails to meet such asset coverage maintenance ratios. In such circumstances,
the Fund may have to liquidate portfolio securities in order to meet
redemption or repayment requirements. Such liquidations and redemptions would
cause the Fund to incur transaction costs and could result in capital losses
to the Fund. This would have the effect of reducing the net asset value to
holders of Common Stock and could reduce the Fund's net income in the future.
The issuance of preferred stock or debt will entail certain initial costs
and expenses such as underwriting discounts or placement fees, fees associated
with registration with the Commission, filings under state securities laws,
rating agency fees, legal and accounting fees, printing costs and certain
other ongoing expenses such as administrative and accounting fees. These costs
and expenses will be borne by the Fund and will reduce net assets available to
holders of the Common Stock.
The Fund expects that all of its bank borrowing will be made on a secured
basis. The Fund's custodian will either segregate the assets securing the
Fund's borrowing for the benefit of the Fund's lenders or arrangements will be
made with a suitable sub-custodian, which may include a lender. If the assets
used to secure the borrowing decrease in value, the Fund may be required to
pledge additional collateral to the lender in the form of cash or securities
to avoid liquidation of those assets.
The rights of any lenders to the Fund to receive payments of interest on and
repayments of principal of borrowings (including debt securities) will be
senior to the rights of the Fund's shareholders, and the terms of the Fund's
borrowings (including debt securities) may contain provisions that limit
certain activities of the Fund and could result in precluding the purchase of
instruments that the Fund would otherwise purchase.
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<PAGE>
If the Fund leverages through preferred stock, under the requirements of the
1940 Act, the value of the Fund's total assets, less all liabilities and
indebtedness of the Fund not represented by senior securities, as defined in
the 1940 Act, must be equal, immediately after any such issuance of preferred
stock, to at least 200% of the aggregate amount of senior securities
representing indebtedness plus the aggregate liquidation preference of any
outstanding preferred stock. Such percentage must also be met any time the
Fund pays a dividend or makes any other distribution on Common Stock (other
than a distribution in Common Stock) or any time the Fund repurchases Common
Stock, in each case after giving effect to such dividend, distribution or
repurchase. The liquidation value of preferred stock is expected to equal the
aggregate original purchase price plus any accrued and unpaid dividends
thereon (whether or not earned or declared). See "Description of Capital
Stock."
If the Fund leverages through borrowing or issuing debt securities, under
the requirements of the 1940 Act, the value of the Fund's total assets, less
all liabilities and indebtedness of the Fund not represented by senior
securities, as defined in the 1940 Act, must at least be equal, immediately
after the issuance of senior securities consisting of debt, to 300% of the
aggregate principal amount of all outstanding senior securities of the Fund
which are debt. If the Fund leverages through the issuance of senior
securities consisting of debt, the 300% asset coverage maintenance ratio
referred to above must also be met any time the Fund declares a dividend or
other distribution on Common Stock (other than a distribution in Common Stock)
or any time the Fund repurchases Common Stock, in each case after giving
effect to such dividend, distribution or repurchase.
The Fund may enter into reverse repurchase agreements with any member bank
of the Federal Reserve System and any broker-dealer or any foreign bank that
has been determined by SBAM to be creditworthy. Under a reverse repurchase
agreement, the Fund would sell securities and agree to repurchase them at a
mutually agreed date and price. At the time the Fund enters into a reverse
repurchase agreement, it will establish and maintain a segregated account,
with its custodian or a designated sub-custodian, containing liquid assets in
an amount not less than the repurchase price marked to market daily (including
accrued interest), and will subsequently review the account to ensure that
such equivalent value is maintained, in accordance with procedures established
by the Board of Directors. Reverse repurchase agreements involve the risk that
the market value of the securities purchased with the proceeds of the sale of
securities received by the Fund may decline below the price of the securities
the Fund is obligated to repurchase. In the event the buyer of securities
under a reverse repurchase agreement files for bankruptcy or becomes
insolvent, the buyer or its trustee or receiver may receive an extension of
time to determine whether to enforce the Fund's obligations to repurchase the
securities, and the Fund's use of proceeds of the reverse repurchase agreement
effectively may be restricted pending the decision. Reverse repurchase
agreements will be treated as borrowings for purposes of calculating the
Fund's borrowing limitation to the extent the Fund does not establish and
maintain a segregated account (as described above).
Assuming the utilization of leverage in the amount of approximately 25% of
the Fund's total assets, and an annual interest rate of 6.21% payable on such
leverage based on market rates as of the date of this Prospectus, the annual
return that the Fund's portfolio must experience (net of expenses) in order to
cover such interest payments would be 2.07%. The Fund's actual cost of
leverage will be based on market rates at the time the Fund undertakes a
leveraging strategy, and such actual cost of leverage may be higher or lower
than that assumed in the previous example.
The following table is designed to illustrate the effect on the return to a
holder of the Fund's Common Stock of leverage in the amount of approximately
25% of the Fund's total assets, assuming hypothetical annual returns of the
Fund's portfolio of minus 10% to plus 10%. As the table shows, leverage
generally increases the return to
29
<PAGE>
shareholders when portfolio return is positive and greater than the cost of
leverage and decreases the return when the portfolio return is negative or
less than the cost of leverage. The figures appearing in the table are
hypothetical and actual returns may be greater or less than those appearing in
the table.
<TABLE>
<S> <C> <C> <C> <C> <C>
Assumed Portfolio Return (net of
expenses).............................. (10)% (5)% 0 % 5% 10%
Corresponding Common Stock Return
Assuming 25% Leverage.................. (15.40)% (8.74)% (2.07)% 4.60% 11.26%
</TABLE>
Until the Fund borrows (including issuing debt securities) or issues shares
of preferred stock, the Fund's Common Stock will not be leveraged, and the
risks and special considerations related to leverage described in this
Prospectus will not apply. Such leveraging of the Common Stock cannot be fully
achieved until the proceeds resulting from the use of leverage have been
invested in debt instruments in accordance with the Fund's investment
objectives and policies.
The Fund may, in addition to engaging in the transactions described above,
borrow money for temporary or emergency purposes (including, for example,
clearance of transactions, share repurchases or payments of dividends to
shareholders) in an amount not exceeding 5% of the value of the Fund's total
assets (including the amount borrowed).
DERIVATIVE INSTRUMENTS
The Fund may from time to time engage in certain strategies generally for
hedging or other risk management purposes or in furtherance of the Fund's
investment objectives and policies. The Fund may use these strategies to
attempt to protect against possible changes in the market value of the Fund's
portfolio resulting from fluctuations in the securities markets and changes in
interest rates or in exchange rates, to protect the Fund's unrealized gains in
the value of its portfolio securities, to facilitate the sale of such
securities for investment purposes, to establish a position in the securities
markets as a temporary substitute for purchasing particular securities, to
seek to enhance income or gain or to attempt to achieve the economic
equivalent of floating rate interest payments on fixed-rate debt securities it
holds. The Fund will engage in such activities from time to time in SBAM's
discretion, and may not necessarily be engaging in such activities when
movements occur in interest rates or in the securities markets generally that
could affect the value of the assets of the Fund. The Fund's ability to pursue
certain of these strategies may be limited by applicable regulations of the
Commodity Futures Trading Commission ("CFTC") and the federal income tax
requirements applicable to regulated investment companies.
As part of its strategies, the Fund may purchase and sell futures contracts,
purchase and sell (or write) exchange-listed and over-the-counter put and call
options on securities, financial indices and futures contracts, enter into the
interest rate and currency transactions discussed below and enter into other
similar transactions which may be developed in the future to the extent SBAM
determines that they are consistent with the Fund's investment objectives and
policies and applicable regulatory requirements (collectively, "Derivative
Transactions"). The Fund may use any or all of these techniques at any time,
and the use of any particular Derivative Transaction will depend on market
conditions. The Derivative Transactions that the Fund may use are described
below.
Derivative Transactions present certain risks. In particular, the variable
degree of correlation between price movements of instruments the Fund has
purchased or sold and price movements in the position being hedged creates the
possibility that losses on the hedge may be greater than gains in the value of
the Fund's position. In
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<PAGE>
addition, certain derivative instruments and markets may not be liquid in all
circumstances. As a result, in volatile markets, the Fund may not be able to
close out a transaction without incurring losses substantially greater than
the initial deposit. Although the contemplated use of these instruments should
tend to minimize the risk of loss due to a decline in the value of the hedged
position, at the same time they may tend to limit any potential gain which
might result from an increase in the value of such position.
Successful use of Derivative Transactions by the Fund is subject to the
ability of SBAM to predict correctly movements in the direction of interest
rates and other factors affecting markets for securities. These skills are
different from those needed to select portfolio securities. If SBAM's
expectations are not met, the Fund would be in a worse position than if a
Derivative Transaction had not been pursued. For example, if the Fund hedged
against the possibility of an increase in interest rates which would adversely
affect the price of securities in its portfolio and the price of such
securities increased instead, the Fund would lose part or all of the benefit
of the increased value of its securities because it would have offsetting
losses in its futures positions. Losses due to Derivative Transactions will
reduce net asset value.
A detailed discussion of Derivative Transactions, including applicable
requirements of the CFTC, the requirement to segregate assets with respect to
these transactions and special risks associated with such strategies appears
as Appendix B to this Prospectus.
Interest Rate Transactions. The Fund may enter into interest rate swaps and
may purchase interest rate caps, floors and collars and may sell interest rate
caps, floors and collars that it has purchased. The Fund would enter into
these transactions primarily to preserve a return or spread on a particular
investment or portion of its portfolio, to manage the duration of its
portfolio or to protect against any increase in the price of securities the
Fund anticipates purchasing at a later date.
The Fund may enter into interest rate swaps, caps, floors and collars on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or liabilities. The Fund will not enter into any interest
rate swap, cap, floor or collar transaction unless SBAM deems the counterparty
to be creditworthy at the time of entering into such transaction. If there is
a default by the other party to such a transaction, the Fund will have
contractual remedies pursuant to the agreements related to the transaction.
The swap market has grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, the swap market has
become relatively liquid. Caps, floors and collars are more recent innovations
for which standardized documentation has not yet been developed and,
accordingly, they are less liquid than swaps.
Futures Contracts and Options on Futures Contracts. The Fund may also enter
into (a) contracts for the purchase or sale for future delivery ("futures
contracts") of debt securities, aggregates of securities, indices based upon
the prices thereof and other financial indices and (b) put or call options on
such futures contracts. When the Fund enters into a futures contract, it must
allocate cash or securities as a deposit of initial margin and thereafter will
be required to pay or will be entitled to receive variation margin in an
amount equal to any change in the value of the contract since the preceding
day. If the value of a futures contract the Fund has entered into moves in an
adverse direction from the Fund's position, the Fund could be obligated to
make payments of variation margin at a disadvantageous time and might be
required to liquidate portfolio securities in order to make such margin
payments. Transactions in listed futures contracts and options on futures
contracts are usually settled by entering into an offsetting transaction, and
are subject to the risk that the position may not be able to
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<PAGE>
be closed if no offsetting transaction can be arranged. Except for
transactions for which the sum of the premiums on options contracts and the
initial margin for futures contracts does not exceed 5% of the net liquidation
value of the Fund's assets, the Fund will engage in such transactions only for
bona fide hedging purposes, in each case, in accordance with the rules and
regulations of the CFTC. To the extent that the Fund engages in transactions
in futures contracts or options thereon in order to attempt to achieve the
economic equivalent of floating rate interest payments with respect to fixed
rate interest payments on fixed rate debt securities it holds, such
transactions will not be considered to be undertaken for bona fide hedging
purposes.
Put and Call Options on Securities and Indices of Securities. In order to
reduce fluctuations in net asset value or to seek to enhance the Fund's income
or gain, the Fund may purchase or sell exchange-traded or over-the-counter put
or call options on securities and indices based upon the prices, yields or
spreads of securities. A call option sold by the Fund exposes the Fund during
the term of the option to possible loss of opportunity to realize appreciation
in the market price of the underlying security or securities index and may
require the Fund to hold an instrument which it might otherwise have sold. In
selling put options, the Fund incurs the risk that it may be required to buy
the underlying securities at a price higher than the current market price of
the securities. In buying put or call options, the Fund is exposed to the risk
that such options may expire worthless.
Currency Transactions. The Fund may engage in currency transactions with
counterparties to hedge the value of portfolio securities denominated in
particular currencies against fluctuations in relative value or to generate
income or gain. Currency transactions include currency forward contracts,
exchange-listed currency futures contracts and options thereon, exchange-
listed and OTC options on currencies, and currency swaps. A forward currency
contract involves a privately negotiated obligation to purchase or sell (with
delivery generally required) a specific currency at a future date, which may
be any fixed number of days from the date of the contract agreed upon by the
parties, at a price set at the time of the contract. A currency swap is an
agreement to exchange cash flows based on the notional difference among two or
more currencies and operates similarly to an interest rate swap, which is
described under "--Interest Rate Transactions." The Fund may enter into
currency transactions with counterparties that the investment manager deems to
be creditworthy.
Segregation and Cover Requirements. Futures contracts, interest rate swaps,
caps, floors and collars, and options on securities, indices and futures
contracts sold by the Fund are generally subject to segregation and coverage
requirements of either the CFTC or the Commission. If the Fund does not hold
the security or futures contract underlying the instrument, the Fund will be
required to segregate on an ongoing basis with its custodian liquid assets in
an amount at least equal to the current amount of the Fund's obligations with
respect to such instruments in accordance with procedures established by the
Board of Directors. Such amounts fluctuate as the obligations increase or
decrease. The segregation requirement can result in the Fund maintaining
securities positions it would otherwise liquidate or segregating assets at a
time when it might be disadvantageous to do so.
REPURCHASE AGREEMENTS
The Fund may enter into repurchase agreements for cash management purposes.
A repurchase agreement is a transaction in which the seller of a security
commits itself at the time of the sale to repurchase that security from the
buyer at a mutually agreed upon time and price. The Fund will enter into
repurchase agreements only with dealers, domestic banks or recognized
financial institutions which, in the opinion of SBAM based on guidelines
established by the Fund's Board of Directors, are deemed creditworthy. SBAM
will monitor the value
32
<PAGE>
of the securities underlying the repurchase agreement at the time the
transaction is entered into and at all times during the term of the repurchase
agreement to ensure that the value of the securities always exceeds the
repurchase price. In the event of default by the seller under the repurchase
agreement, the Fund may incur losses and experience time delays in connection
with the disposition of the underlying securities. To the extent that, in the
meantime, the value of the securities that the Fund has purchased has
decreased, the Fund could experience a loss.
WHEN-ISSUED AND DELAYED DELIVERY SECURITIES
The Fund may purchase securities on a when-issued or delayed delivery basis.
Securities purchased on a when-issued or delayed delivery basis are purchased
for delivery beyond the normal settlement date at a stated price and yield. No
income accrues to the purchaser of a security on a when-issued or delayed
delivery basis prior to delivery. Such securities are recorded as an asset and
are subject to changes in value based upon changes in the general level of
interest rates. Purchasing a security on a when-issued or delayed delivery
basis can involve a risk that the market price at the time of delivery may be
lower than the agreed-upon purchase price, in which case there could be an
unrealized loss at the time of delivery. The Fund will only make commitments
to purchase securities on a when-issued or delayed delivery basis with the
intention of actually acquiring the securities but may sell them before the
settlement date if it is deemed advisable. The Fund will establish a
segregated account in which it will maintain liquid assets in an amount at
least equal in value to the Fund's commitments to purchase securities on a
when-issued or delayed delivery basis. If the value of these assets declines,
the Fund will place additional liquid assets in the account on a daily basis
so that the value of the assets in the account is equal to the amount of such
commitments. As an alternative, the Fund may elect to treat when-issued or
delayed delivery securities as senior securities representing indebtedness,
which are subject to asset coverage requirements under the 1940 Act.
LOANS OF PORTFOLIO SECURITIES
The Fund may lend portfolio securities. By doing so, the Fund will attempt
to increase its income through the receipt of interest on the loan. In the
event of the bankruptcy of the other party to either a securities loan or a
repurchase agreement, the Fund could experience delays in recovering either
the securities it lent or its cash. To the extent that, in the meantime, the
value of the securities the Fund lent has increased or the value of the
securities it purchased has decreased, the Fund could experience a loss.
The Fund may lend securities from its portfolio if liquid assets in an
amount at least equal to the current market value of the securities loaned
(including accrued interest thereon) plus the interest payable to the Fund
with respect to the loan is maintained by the Fund in a segregated account.
Any securities that the Fund may receive as collateral will not become a part
of its portfolio at the time of the loan and, in the event of a default by the
borrower, the Fund will, if permitted by law, dispose of such collateral
except for such part thereof that is a security in which the Fund is permitted
to invest. During the time securities are on loan, the borrower will pay the
Fund any accrued income on those securities, and the Fund may invest the cash
collateral and earn additional income or receive an agreed-upon fee from a
borrower that has delivered cash equivalent collateral. Cash collateral
received by the Fund will be invested in securities in which the Fund is
permitted to invest. The value of securities loaned will be marked to market
daily. Portfolio securities purchased with cash collateral are subject to
possible depreciation. Loans of securities by the Fund will be subject to
termination at the Fund's or the
33
<PAGE>
borrower's option. The Fund may pay reasonable negotiated fees in connection
with loaned securities, so long as such fees are set forth in a written
contract and approved by the Fund's Board of Directors. The Fund does not
currently intend to make loans of portfolio securities with a value in excess
of 33 1/3% of the value of its total assets.
ILLIQUID OR RESTRICTED SECURITIES
The Fund may invest without limitation in illiquid securities, for which
there is a limited trading market and for which a low trading volume of a
particular security may result in abrupt and erratic price movements. The Fund
may be unable to dispose of its holdings in illiquid securities at then
current market prices and may have to dispose of such securities over extended
periods of time.
Certain securities in which the Fund may invest are subject to legal or
contractual restrictions as to resale ("Restricted Securities") and may
therefore be illiquid by their terms. Restricted Securities may involve added
expense to the Fund should the Fund be required to bear registration costs
with respect to such securities. In the absence of registration, the Fund
would have to dispose of its Restricted Securities pursuant to an exemption
from registration under the Securities Act of 1933, as amended (the
"Securities Act"), including a transaction in compliance with Rule 144 under
the Securities Act, which permits only limited sales under specified
conditions unless the Fund has held the securities for at least two years and
is unaffiliated with the issuer. Companies whose securities are not publicly
traded are also not subject to the same disclosure and other legal
requirements as are applicable to companies with publicly traded securities.
The Fund may purchase certain Restricted Securities ("Rule 144A securities")
eligible for sale to qualified institutional buyers as contemplated by Rule
144A under the Securities Act. Rule 144A provides an exemption from the
registration requirements of the Securities Act for the resale of certain
restricted securities to certain qualified institutional buyers. One effect of
Rule 144A is that certain restricted securities may be liquid, though no
assurance can be given that a liquid market for Rule 144A securities will
develop or be maintained.
INVESTMENT RESTRICTIONS
The following restrictions, along with the Fund's investment objectives, are
the Fund's only fundamental policies--that is, policies that cannot be changed
without the approval of the holders of a majority of the Fund's outstanding
voting securities. See "Description of Capital Stock--Preferred Stock" and
"Description of Capital Stock--Special Voting Provisions" for additional
information with respect to the voting rights of holders of preferred stock,
if any. The other policies and investment restrictions referred to in this
Prospectus are not fundamental policies of the Fund and may be changed by the
Fund's Board of Directors without shareholder approval. The percentage
restrictions set forth below, as well as those contained elsewhere in this
Prospectus, apply at the time a transaction is effected, and a subsequent
change in a percentage resulting from market fluctuations or any other cause
other than an action by the Fund will not require the Fund to dispose of
portfolio securities or take other action to satisfy the percentage
restriction. Under its fundamental restrictions, the Fund may not:
(1) purchase any securities which would cause more than 25% of the value of
its total assets at the time of such purchase to be invested in securities of
one or more issuers conducting their principal business activities in the same
industry, provided that there is no limitation with respect to investment in
obligations issued or
34
<PAGE>
guaranteed by the U.S. Government, its agencies or instrumentalities or
repurchase agreements collateralized by any of such obligations;
(2) make any investment inconsistent with the Fund's classification as a
diversified company under the 1940 Act;
(3) issue senior securities or borrow money except as permitted by Section
18 of the 1940 Act;
(4) purchase or sell commodities or commodity contracts, except that the
Fund may engage in Derivative Transactions;
(5) make loans, except that (1) the Fund may (a) purchase and hold debt
instruments (including, without limitation, commercial paper notes, bonds,
debentures or other secured or unsecured obligations and certificates of
deposit, bankers' acceptances and fixed time deposits) in accordance with its
investment objectives and policies; (b) invest in or purchase loans through
Participations and Assignments; (c) enter into repurchase agreements with
respect to portfolio securities; (d) make loans of portfolio securities,
provided that collateral arrangements with respect to options, forward
currency and futures transactions will not be deemed to involve loans; and (2)
delays in the settlement of securities transactions shall not be considered
loans;
(6) underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of portfolio securities, it may be deemed
to be an underwriter;
(7) purchase real estate, real estate mortgage loans or real estate limited
partnership interests (other than securities secured by real estate or
interests therein or securities issued by companies that invest in real estate
or interests therein, including real estate investment trusts); or
(8) invest for the purpose of exercising control over management of any
company.
Additional investment restrictions adopted by the Fund, which are deemed
non-fundamental and which may be changed by the Board of Directors, provide
that the Fund may not:
(1) purchase shares of other investment companies in an amount exceeding the
limits set forth in the 1940 Act and the rules thereunder; or
(2) make short sales of securities or purchase securities on margin (except
for delayed delivery or when-issued transactions, such short-term credits as
are necessary for the clearance of transactions and margin deposits in
connection with transactions in futures contracts, options on futures
contracts and options on securities and securities indices).
MANAGEMENT OF THE FUND
INVESTMENT MANAGER
The Fund retains SBAM, a wholly-owned subsidiary of Salomon Brothers Holding
Company Inc, which is in turn wholly-owned by Salomon Smith Barney Holdings
Inc., which is in turn wholly-owned by Travelers Group Inc. ("Travelers"), as
its investment manager under an investment management agreement. SBAM was
incorporated in 1987 and, together with affiliates in London, Frankfurt, Tokyo
and Hong Kong, provides a broad
35
<PAGE>
range of fixed-income and equity investment advisory services to various
individuals and over 134 institutional accounts located throughout the world
and serves as investment adviser to various investment companies. In providing
advisory services, SBAM has access to hundreds of affiliated economists and
bond, sovereign and equity analysts, including a staff dedicated to high yield
credit research and to emerging markets sovereign credit research. As of March
31, 1998, SBAM and its worldwide investment advisory affiliates managed
approximately $27.6 billion of assets. SBAM's business offices are located at
7 World Trade Center, New York, New York 10048.
Under the terms of an investment management agreement between the Fund and
SBAM (the "Advisory Agreement"), SBAM will manage the investment and
reinvestment of the assets of the Fund, subject to the supervision of the
Fund's Board of Directors. SBAM will make the investment decisions for the
Fund and place purchase and sale orders for the Fund's portfolio securities
pursuant to the Advisory Agreement. In addition, SBAM will make available
research and statistical data to the Fund. Peter J. Wilby, Executive Vice
President of the Fund, will be primarily responsible for the day-to-day
management of the Fund's portfolio. Mr. Wilby, who joined SBAM in 1989, is a
Managing Director and Senior Portfolio Manager of SBAM and is responsible for
SBAM's investment company and institutional portfolios which invest in high
yield foreign sovereign debt securities and high yield foreign and U.S.
corporate debt securities. Mr. Wilby is portfolio manager for, among others,
Salomon Brothers High Income Fund Inc; Salomon Brothers Worldwide Income Fund
Inc; The Emerging Markets Income Fund Inc; The Emerging Markets Income Fund II
Inc; the foreign sovereign debt component of Salomon Brothers 2008 Worldwide
Dollar Government Term Trust Inc; The Emerging Markets Floating Rate Fund
Inc.; Global Partners Income Fund Inc.; Salomon Brothers High Yield Bond Fund
and the high yield and sovereign debt portions of Salomon Brothers Strategic
Bond Fund, each a portfolio of Salomon Brothers Series Funds Inc; Salomon
Brothers Institutional High Yield Bond Fund and Salomon Brothers Institutional
Emerging Markets Debt Fund, each a portfolio of Salomon Brothers Institutional
Series Funds Inc; and Salomon Brothers Variable High Yield Bond Fund and the
high yield and sovereign debt portions of Salomon Brothers Variable Strategic
Bond Fund, each a portfolio of Salomon Brothers Variable Series Funds Inc.
From 1984 to 1989, Mr. Wilby was employed by Prudential Capital Management
Group ("PCMG"). He served as director of PCMG's credit research unit and as a
corporate and sovereign credit analyst with PCMG. Mr. Wilby later managed high
yield bonds and leveraged equities in mutual funds and institutional
portfolios at PCMG.
SBAM will pay the reasonable salaries and expenses of such of the Fund's
officers and employees and any fees and expenses of such of the Fund's
directors who are directors, officers or employees of SBAM or Salomon Smith
Barney, except that the Fund shall bear travel expenses or an appropriate
portion thereof of directors and officers of the Fund who are directors,
officers or employees of SBAM to the extent that such expenses relate to the
attendance at meetings of the Fund's Board of Directors or any committees
thereof. The Advisory Agreement provides that SBAM may render similar
investment management services to others. For its services, SBAM will receive
from the Fund a monthly fee at an annual rate of 1.00% of the value of the
Fund's average weekly net assets plus the proceeds of any outstanding
borrowings used for leverage ("average weekly net assets" means the average
weekly value of the total assets of the Fund, including any proceeds from the
issuance of preferred stock, minus the sum of (i) accrued liabilities of the
Fund, (ii) any accrued and unpaid interest on outstanding borrowings and (iii)
accumulated dividends on shares of preferred stock). For purposes of this
calculation, average weekly net assets is determined at the end of each month
on the basis of the average net assets of the Fund for each week during the
month. The assets for each weekly period are determined by averaging the net
36
<PAGE>
assets at the last business day of a week with the net assets at the last
business day of the prior week. The advisory fee is higher than fees paid by
other comparable investment companies. During periods in which the Fund is
utilizing financial leverage, the fee which is payable to SBAM as a percentage
of the Fund's assets will be higher than if the Fund did not utilize a
leveraged capital structure because the fee is calculated as a percentage of
the Fund's assets, including those purchased with leverage.
Unless earlier terminated as described below, the Advisory Agreement will
remain in effect for two years from the date of this Prospectus and from year
to year thereafter if it is approved annually (i) by a majority of the non-
interested directors of the Fund and (ii) by the Board of Directors of the
Fund or by a majority of the Fund's outstanding voting securities. The
Advisory Agreement may be terminated without penalty on 60 days' written
notice by either party thereto or by a vote of a majority of the Fund's
outstanding voting securities and will terminate in the event of its
assignment (as defined in the 1940 Act). In case of termination or failure to
renew the Advisory Agreement, the Fund's Board of Directors will select a
successor investment adviser. Any such successor will be a registered
investment adviser under U.S. law.
On April 6, 1998, Travelers announced that it had entered into a merger
agreement with Citicorp. The transaction, which is expected to be completed
during the third quarter of 1998, is subject to various regulatory approvals,
including approval by the Federal Reserve Board. The transaction is also
subject to approval by the stockholders of each of Travelers and Citicorp.
Upon consummation of the merger, the surviving corporation would be a bank
holding company subject to regulation under the Bank Holding Company Act of
1956 (the "BHCA"), the requirements of the Glass-Steagall Act and certain
other laws and regulations. Although the effects of the merger of Travelers
and Citicorp and compliance with the requirements of the BHCA and the Glass-
Steagall Act are still under review, SBAM does not believe that its compliance
with applicable law following the merger of Travelers and Citicorp will have a
material adverse effect on its ability to provide the Fund with SBAM's
customary level of investment advisory services.
ADMINISTRATOR
Mutual Management Corp., a wholly-owned subsidiary of Salomon Smith Barney
Holdings Inc., will act as administrator for the Fund. Under the
Administration Agreement with the Fund (the "Administration Agreement"), the
Administrator administers the Fund's corporate affairs subject to the
supervision of the Fund's Board of Directors and in connection therewith
furnishes the Fund with office facilities together with such ordinary clerical
and bookkeeping services (e.g., preparation of annual and other reports to
shareholders and the Commission and filing of federal, state and local income
tax returns) as are not being furnished by SBAM or the Fund's custodian. In
connection with its administration of the corporate affairs of the Fund, the
Administrator will bear the expenses of the salaries and expenses of all of
its personnel and all expenses incurred by the Administrator or by the Fund in
connection with administering the ordinary course of the Fund's business,
other than those assumed by the Fund, as described below. The Administration
Agreement provides that the Fund shall pay to the Administrator a monthly fee
for its services and the facilities furnished by the Administrator at an
annual rate of .10% of the value of the Fund's average weekly net assets (as
defined and determined with respect to the Advisory Agreement) plus the
proceeds of any outstanding borrowings used for leverage. The Administration
Agreement will remain in effect for two years from the date of this Prospectus
and from year to year thereafter if it is approved annually by the Board of
Directors of the Fund. The Administration Agreement is terminable, without
penalty, on 60 days' written notice by the Board of Directors or by a vote of
holders of a
37
<PAGE>
majority of the Fund's shares, or upon 90 days' written notice by the
Administrator. During periods in which the Fund is utilizing financial
leverage, the fee which is payable to the Administrator as a percentage of the
Fund's assets will be higher than if the Fund did not utilize a leveraged
capital structure because the fee is calculated as a percentage of the Fund's
assets, including those purchased with leverage.
EXPENSES OF THE FUND
Except as indicated above, the Fund will pay all of its expenses, including,
without limitation, organizational and offering expenses (which include out-
of-pocket expenses, but not overhead or employee costs of SBAM); expenses for
legal, accounting and auditing services; taxes and governmental fees; dues and
expenses incurred in connection with membership in investment company
organizations; fees and expenses incurred in connection with listing the
Fund's shares on any stock exchange; costs of printing and distributing
shareholder reports, proxy materials, prospectuses, stock certificates and
distribution of dividends; charges of the Fund's custodians, sub-custodians,
administrators and sub-administrators, registrars, transfer agents, dividend
disbursing agents and dividend reinvestment plan agents; payment for portfolio
pricing services to a pricing agent, if any; fees of the Commission; expenses
of registering or qualifying securities of the Fund for sale; freight and
other charges in connection with the shipment of the Fund's portfolio
securities; fees and expenses of non-interested directors; travel expenses or
an appropriate portion thereof of directors and officers of the Fund who are
directors, officers or employees of SBAM to the extent that such expenses
relate to attendance at meetings of the Board of Directors or any committee
thereof; salaries of shareholder relations personnel; costs of shareholders
meetings; insurance; interest; brokerage costs; litigation and other
extraordinary or non-recurring expenses.
DIRECTORS AND OFFICERS
The names of the directors and principal officers of the Fund are set forth
below, together with their positions and their principal occupations during
the past five years.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND
NAME, ADDRESS AND AGE POSITION WITH THE FUND OTHER AFFILIATIONS
--------------------- ------------------------ ------------------------
<C> <C> <S>
*Heath B. McLendon.......... Chairman of the Board of Managing Director,
Salomon Smith Barney Directors and President Salomon Smith Barney;
388 Greenwich Street, 22nd Director of 42
Fl. investment companies
New York, NY 10013 associated with Salomon
Age: 64 Smith Barney; Director
and President of Mutual
Management Corp. and
Travelers Investment
Adviser, Inc.; Chairman
of Smith Barney Strategy
Advisers Inc. Prior to
July 1993, Senior
Executive Vice President
of Shearson Lehman
Brothers, Inc. and Vice
Chairman, Shearson Asset
Management.
</TABLE>
- ------------
* Director who is an "interested person" within the meaning of the 1940 Act.
38
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH THE FUND PRINCIPAL OCCUPATION AND OTHER AFFILIATIONS
--------------------- ------------------------- -------------------------------------------
<C> <C> <S>
Charles F. Barber............ Director Consultant, formerly Chairman
66 Glenwood Drive of the Board, ASARCO
Greenwich, CT 06830 Incorporated.
Age: 81
Daniel P. Cronin............. Director Vice President and General
Pfizer Inc. Counsel, Pfizer International
235 East 42nd Street Inc.; Senior Assistant General
New York, NY 10017 Counsel, Pfizer, Inc.
Age: 52
Dr. Riordan Roett............ Director Professor and Director, Latin
Johns Hopkins University American Studies Program, Paul
1740 Massachusetts H. Nitze School of Advanced
Avenue, NW International Studies, Johns
Washington D.C. 20036 Hopkins University.
Age: 59
Jeswald W. Salacuse.......... Director Henry J. Braker Professor of
220 Stone Route Lane Commercial Law and formerly
Concord, MA 01742 Dean, The Fletcher School of
Age: 60 Law and Diplomacy, Tufts
University.
Peter J. Wilby............... Executive Vice President Managing Director and Senior
Salomon Brothers Asset Portfolio Manager of SBAM since
Management Inc 1989.
Seven World Trade Center
New York, NY 10048
Age: 38
Christina T. Sydor, Esq...... Executive Vice President, Managing Director of Smith
Salomon Smith Barney General Counsel Barney Inc.; General Counsel
388 Greenwich Street and Secretary of Mutual
New York, NY 10013 Management Corp.; Secretary of
Age: 46 42 investment companies
associated with Salomon Smith
Barney.
Robert A. Vegliante, Esq. ... Executive Vice President, Director of Smith Barney Inc.;
Salomon Brothers Asset Associate General Counsel Deputy General Counsel of
Management Inc Mutual Management Corp. Prior
7 World Trade Center to 1994, Associate General
New York, NY 10048 Counsel of Connecticut Mutual
Age: 36 Life Insurance Company.
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH THE FUND PRINCIPAL OCCUPATION AND OTHER AFFILIATIONS
--------------------- ------------------------ -------------------------------------------
<C> <C> <S>
Beth A. Semmel............... Executive Vice President Director of SBAM since January
Salomon Brothers Asset 1996. From May 1993 to December
Management Inc 1995, Vice President of SBAM. From
7 World Trade Center January 1989 to May 1993, Vice
New York, NY 10048 President of Morgan Stanley Asset
Age: 36 Management.
Maureen O'Callaghan.......... Executive Vice President Director of SBAM since December
Salomon Brothers Asset 1997. Vice President of SBAM from
Management Inc October 1988 to December 1996.
7 World Trade Center
New York, NY 10048
Age: 34
James E. Craige.............. Executive Vice President Director of SBAM since December
Salomon Brothers Asset 1997. Vice President of SBAM from
Management Inc 1992 to December 1997.
7 World Trade Center
New York, NY 10048
Age: 30
Thomas K. Flanagan........... Executive Vice President Director of SBAM since 1991.
Salomon Brothers Asset
Management Inc
7 World Trade Center
New York, NY 10048
Age: 44
Lewis E. Daidone............. Treasurer and Chief Managing Director of Smith Barney
Salomon Smith Barney Financial Officer Inc.; Director and Senior Vice
388 Greenwich Street President of Mutual Management
New York, NY 10013 Corp.; Senior Vice President and
Age: 40 Treasurer of 42 investment
companies associated with Salomon
Smith Barney.
Alan M. Mandel............... Controller Director of SBAM since 1995. Prior
Salomon Smith Barney to 1995, Chief Financial Officer
388 Greenwich Street and Vice President of Hyperion
New York, NY 10013 Capital Management Inc.
Age: 40
</TABLE>
40
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND AGE POSITION WITH THE FUND PRINCIPAL OCCUPATION AND OTHER AFFILIATIONS
--------------------- ---------------------- -------------------------------------------
<C> <C> <S>
Noel B. Daugherty........... Secretary Employee of SBAM since November 1996.
Salomon Brothers Asset From August 1993 to October 1996, an
Management Inc employee of Chancellor LGT Asset
7 World Trade Center Management. From October 1989 to August
New York, NY 10048 1993, an employee of The Dreyfus
Age: 31 Corporation.
Anthony Pace................ Assistant Controller Assistant Controller of investment
Salomon Brothers Asset companies associated with Salomon Smith
Management Inc Barney, including SBAM.
7 World Trade Center
New York, NY 10048
Age: 33
</TABLE>
COMPENSATION TABLE
The following table provides estimated information concerning the
compensation expected to be paid during the current fiscal year ending April
30, 1999 to each director of the Fund and, for the calendar year ending
December 31, 1997, the aggregate compensation paid by all investment companies
advised by SBAM and its affiliates. The Fund does not provide any pension or
retirement benefits to directors. In addition, no remuneration will be paid
during the fiscal year ending April 30, 1999 by the Fund to officers of the
Fund, including Mr. McLendon, who as an officer of Salomon Smith Barney is an
"interested person," as defined in the 1940 Act.
<TABLE>
<CAPTION>
ESTIMATED TOTAL COMPENSATION
AGGREGATE FROM OTHER FUNDS
COMPENSATION ADVISED BY SBAM
NAME OF PERSON, POSITION FROM THE FUND AND AFFILIATES(A)
- ------------------------ ------------- ------------------
<S> <C> <C>
Charles F. Barber
Director..................................... $8,500 $139,437(22)*
Daniel P. Cronin
Director..................................... $8,500 $ 39,200(7)
Dr. Riordan Roett
Director..................................... $8,500 $ 68,100(10)
Jeswald W. Salacuse
Director..................................... $8,500 $ 58,800(8)
</TABLE>
(A) The numbers in parentheses indicate the applicable number of investment
company directorships held by that director.
* Includes compensation from investment companies advised by affiliates of
Salomon Smith Barney which are affiliates of SBAM.
Directors who are not officers, directors or employees of SBAM or of any
"interested person" thereof (as defined in the 1940 Act) will be paid a fee of
$5,000 per year, plus $700 for every meeting of the Board of Directors or
committee thereof.
The officers of the Fund conduct and supervise the daily business operations
of the Fund, while the directors, in addition to performing their functions
set forth under "Management of the Fund," review such actions and determine
general policy.
41
<PAGE>
The Fund's Board of Directors may have an Executive Committee, which may
exercise the powers of the Board to conduct the current and ordinary business
of the Fund while the Board is not in session.
Commencing with the first annual meeting of shareholders, the Board of
Directors will be divided into three classes, having terms of one, two and
three years, respectively. At the annual meeting of shareholders in each year
thereafter, the term of one class will expire and directors will be elected to
serve in that class for terms of three years. See "Description of Capital
Stock."
The Articles of Incorporation and By-Laws of the Fund provide that the Fund
will indemnify, to the fullest extent permitted by law, its directors and
officers and may indemnify employees or agents of the Fund against liabilities
and expenses incurred in connection with litigation in which they may be
involved because of their offices with the Fund. In addition, the Fund's
Articles of Incorporation provide that the Fund's directors and officers will
not be liable to shareholders for money damages, except in limited instances.
However, nothing in the Articles of Incorporation or By-Laws of the Fund
protects or indemnifies a director, officer, employee or agent against any
liability to which he would otherwise be subject by reason of willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties
involved in the conduct of his office.
PORTFOLIO TRANSACTIONS
The Fund has no obligation to deal with any brokers or dealers in the
execution of transactions in portfolio securities. Subject to policy
established by the Fund's Board of Directors, SBAM is primarily responsible
for the Fund's portfolio decisions and the placing of the Fund's portfolio
transactions.
Debt securities normally will be purchased from or sold to issuers directly
or to dealers serving as market makers for the securities at a net price,
which may include dealer spreads and underwriting commissions. Equity
securities will normally be purchased through brokers to which commissions
will be payable. In placing orders, it is the policy of the Fund to obtain the
best results taking into account the general execution and operational
facilities of the broker or dealer, the type of transaction involved and other
factors such as the risk of the broker or dealer in positioning the securities
involved. The purchase by the Fund of Participations or Assignments may be
pursuant to privately negotiated transactions pursuant to which the Fund may
be required to pay fees to the seller or forego a portion of payments in
respect of the Participation or Assignment. While SBAM generally seeks the
best price in placing its orders, the Fund may not necessarily be paying the
lowest price available. Subject to obtaining the best price and execution,
securities firms which provide supplemental research to SBAM may receive
orders for transactions by the Fund. Information so received will be in
addition to and not in lieu of the services required to be performed by SBAM
under the Advisory Agreement, and the expenses of SBAM will not necessarily be
reduced as a result of the receipt of such supplemental information.
The Fund anticipates that, in connection with the execution of portfolio
transactions on its behalf by SBAM, certain Underwriters may from time to time
act as a broker or dealer. In addition, affiliated persons (as such term is
defined in the 1940 Act) of the Fund, or affiliated persons of such persons,
may from time to time be selected to perform brokerage services for the Fund,
subject to the considerations discussed above, but are prohibited by
42
<PAGE>
the 1940 Act from dealing with the Fund as principal in the purchase or sale
of securities. In order for such an affiliated person to be permitted to
effect any portfolio transactions for the Fund, the commissions, fees or other
remuneration received by such affiliated person must be reasonable and fair
compared to the commissions, fees or other remuneration received by other
brokers in connection with comparable transactions involving similar
securities being purchased or sold on a securities exchange during a
comparable period of time. This standard would allow such an affiliated person
to receive no more than the remuneration which would be expected to be
received by an unaffiliated broker in a commensurate arm's-length transaction.
The Fund is prohibited by the 1940 Act from purchasing securities in primary
offerings in which an affiliate acts as an underwriter unless certain
conditions established under the 1940 Act are satisfied.
Investment decisions for the Fund are made independently from those for
other funds and accounts advised or managed by SBAM. Such other funds and
accounts may also invest in the same securities as the Fund. If those funds or
accounts are prepared to invest in, or desire to dispose of, the same security
at the same time as the Fund, however, transactions in such securities will be
made, insofar as feasible, for the respective funds and accounts in a manner
deemed by SBAM to be equitable to all. In some cases, this procedure may
adversely affect the size of the position obtained for or disposed of by the
Fund or the price paid or received by the Fund. In addition, because of
different investment objectives, a particular security may be purchased for
one or more funds or accounts when one or more funds or accounts are selling
the same security.
Although the Advisory Agreement contains no restrictions on portfolio
turnover, it is not the Fund's policy to engage in transactions with the
objective of seeking profits from short-term trading. It is expected that the
annual portfolio turnover rate of the Fund will not exceed 100%. The portfolio
turnover rate is calculated by dividing the lesser of sales or purchases of
portfolio securities by the average monthly value of the Fund's portfolio
securities. For purposes of this calculation, portfolio securities exclude all
securities having a maturity when purchased of one year or less.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
Beginning with its initial distribution approximately 60 days after
completion of this offering, it is the Fund's present policy, which may be
changed by the Board of Directors, to make regular monthly cash distributions
to holders of Common Stock at a level rate that reflects the past and
projected performances of the Fund, which over time will result in the
distribution of all net investment income of the Fund (i.e., net investment
income remaining after the payment of any dividends on preferred stock if any
such stock is outstanding) and to distribute any net realized long term and
short term capital gain at least annually. The Fund's initial and subsequent
distribution level will be determined by the Fund after giving consideration
to a number of factors including the Fund's undistributed net investment
income and historical and projected investment income and expenses. Net income
consists of all interest and dividend income accrued on portfolio assets less
all expenses of the Fund. Net investment income for this purpose is income
other than net realized long term and short term capital gain.
To permit the Fund to maintain a more stable monthly distribution, the Fund
will from time to time distribute more or less than the entire amount of net
investment income earned in a particular period. Any undistributed net
investment income, to the extent permitted by income tax regulations, would be
available to
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supplement future distributions which might otherwise have been reduced by a
decrease in the Fund's monthly net income due to fluctuation in investment
income or expenses. Undistributed net investment income will be added to the
Fund's net asset value and, correspondingly, distributions from undistributed
net investment income will be deducted from the Fund's net asset value.
Pursuant to the Plan, shareholders whose shares are registered in their own
names will be deemed to have elected to have all distributions (net of any
applicable U.S. withholding tax) reinvested automatically in additional shares
of the Fund by First Data Investor Services Group, Inc. (the "Plan Agent") as
agent under the Plan, unless such shareholders elect to receive distributions
in cash. Shareholders who elect to receive distributions in cash will receive
all distributions in cash paid by check in U.S. dollars mailed directly to the
shareholder by First Data Investor Services Group, Inc., as dividend paying
agent. In the case of shareholders such as banks, brokers or nominees, which
hold shares for others who are the beneficial owners, the Plan Agent will
administer the Plan on the basis of the number of shares certified from time
to time by the record shareholders as representing the total amount registered
in the record shareholder's name and held for the account of beneficial owners
that have not elected to receive distributions in cash. Investors that own
shares registered in the name of a bank, broker or other nominee should
consult with such nominee as to participation in the Plan through such
nominee, and may be required to have their shares registered in their own
names in order to participate in the Plan.
The Plan Agent serves as agent for the shareholders in administering the
Plan. Unless the Board of Directors of the Fund declares a dividend or capital
gains distribution payable only in cash, non-participants in the Plan will
receive cash and participants in the Plan will receive shares of the Fund, to
be issued by the Fund or purchased by the Plan Agent in the open market as
outlined below. Whenever market price per share is equal to or exceeds net
asset value per share as of the determination date (defined as the fourth New
York Stock Exchange trading day preceding the payment date for the dividend or
distribution), participants will be issued new shares at a price per share
equal to the greater of (a) the net asset value per share on the valuation
date or (b) 95% of the market price per share on the valuation date. Except as
noted below, the valuation date generally will be the dividend or distribution
payment date. The Fund will not issue shares under the Plan at a price below
net asset value. If net asset value exceeds the market price of the Fund's
shares as of the determination date, the Plan Agent will, as agent for the
participants, buy shares in the open market, on the New York Stock Exchange or
elsewhere, for the participants' accounts as soon as practicable commencing on
the trading day following the determination date and generally terminating no
later than 30 days after the dividend or distribution payment date. If, before
the Plan Agent has completed its purchases, the market price exceeds the net
asset value of a share, the average per share purchase price paid by the Plan
Agent may exceed the net asset value of the Fund's shares, resulting in the
acquisition of fewer shares than if the dividend or capital gains distribution
has been paid in shares issued by the Fund. Because of the foregoing
difficulty with respect to open-market purchases, the Plan provides that if
the Plan Agent is unable to invest the full dividend amount in open-market
purchases during the permissible purchase period or if the market discount
shifts to a market premium during such purchase period, the Plan Agent will
cease making open-market purchases and will receive the uninvested portion of
the dividend amount in newly issued shares (in which case the valuation date
will be the date such shares are issued) at a price per share equal to the
greater of (a) the net asset value per share on the valuation date or (b) 95%
of the market price per share on the valuation date.
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A shareholder may elect to withdraw from the Plan at any time upon written
notice to the Plan Agent or by calling the Plan Agent at 1-800-331-1710. When
a participant withdraws from the Plan, or upon termination of the Plan as
provided below, certificates for whole shares credited to his or her account
under the Plan will be issued and a cash payment will be made for any
fractional shares credited to such account. An election to withdraw from the
Plan will, until such election is changed, be deemed to be an election by a
shareholder to take all subsequent dividends and distributions in cash.
Elections will be effective immediately if notice is received by the Plan
Agent not less than ten days prior to any dividend or distribution record
date; otherwise such termination will be effective after the investment of the
then current dividend or distribution. If a withdrawing shareholder requests
the Plan Agent to sell the shareholder's shares upon withdrawal from
participation in the Plan, the withdrawing shareholder will be required to pay
a $2.50 fee plus brokerage commissions.
The Plan Agent maintains all shareholder accounts in the Plan and furnishes
written confirmation of all transactions in the accounts, including
information needed by shareholders for personal and tax records. Shares in the
account of each Plan participant will be held by the Plan Agent in
noncertificated form in the name of the participant, and each shareholder's
proxy will include those shares purchased pursuant to the Plan.
There is no charge to participants for reinvesting dividends or capital
gains distributions. The Plan Agent's fee for the handling of reinvestment of
dividends and distributions will be paid by the Fund. There will be no
brokerage charges with respect to shares issued directly by the Fund as a
result of dividends or capital gains distributions payable either in shares or
in cash. However, each participant will pay a pro rata share of brokerage
commissions incurred with respect to the Plan Agent's open market purchases in
connection with the reinvestment of dividends or capital gains distributions.
The automatic reinvestment of dividends and distributions will not relieve
participants of any U.S. federal income tax that may be payable on such
dividends or distributions. To the extent dividends and distributions are
reinvested in additional shares issued by the Fund, participants should be
treated for U.S. federal income tax purposes as receiving a distribution in an
amount equal to the fair market value, determined as of the valuation date, of
the shares received (regardless of the net asset value of the shares on the
valuation date), and should have a cost basis in such shares equal to such
fair market value. Shareholders receiving a distribution in the form of shares
purchased by the Plan Agent in the open market will be treated for U.S.
federal income tax purposes as receiving a distribution of the cash
distribution that such shareholder would have received had it not elected to
have such distribution reinvested.
Experience under the Plan may indicate that changes thereto may be
desirable. Accordingly, the Fund reserves the right to amend or terminate the
Plan as applied to any dividend or distribution paid (i) subsequent to notice
of the change sent to all participants at least 30 days before the record date
for such dividend or distribution or (ii) otherwise in accordance with the
terms of the Plan. The Plan also may be amended or terminated by the Plan
Agent, with the Fund's prior written consent, on at least 30 days' prior
written notice to all participants. All correspondence concerning the Plan
should be directed to the Plan Agent at P.O. Box 8030, Boston, Massachusetts
02266-8030.
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TAXATION
The following is a general summary of certain United States federal income
tax considerations affecting the Fund and United States and foreign
shareholders and, except as otherwise indicated, is based upon federal income
tax laws in effect on the date of this Prospectus. Such tax laws are subject
to change by legislative, judicial or administrative action, possibly with
retroactive effect. No attempt is made to present a detailed explanation of
all federal, state, local and foreign income tax considerations, and this
discussion is not intended as a substitute for careful tax planning.
Accordingly, potential investors are urged to consult their own tax advisers
regarding an investment in the Fund.
THE FUND
The Fund intends to elect and qualify to be treated as a regulated
investment company for federal income tax purposes under Subchapter M of the
Code. In order to so qualify, the Fund must, among other things, (a) derive in
each taxable year at least 90% of its gross income from dividends, interest,
payments with respect to loans of securities, gains from the sale or other
disposition of stock or securities, or foreign currencies, or other income
derived with respect to its business of investing in such stock, securities or
currencies (including, but not limited to, gains from options, futures or
forward contracts); and (b) diversify its holdings so that, at the end of each
quarter of each taxable year, (i) at least 50% of the value of the Fund's
assets is represented by cash, cash items, U.S. Government securities,
securities of other regulated investment companies, and other securities
which, with respect to any one issuer, do not represent more than 5% of the
value of the Fund's assets nor more than 10% of the voting securities of such
issuer, and (ii) not more than 25% of the value of the Fund's assets is
invested in the securities of any issuer (other than U.S. Government
securities or the securities of other regulated investment companies) or of
any two or more issuers that the Fund controls and that are engaged in the
same, similar or related trades or business.
If the Fund qualifies as a regulated investment company and distributes to
its holders of Common Stock at least 90% of its net investment income (i.e.,
the Fund's investment company taxable income, as that term is defined in the
Code, without regard to the deduction for dividends paid), the Fund will not
be subject to federal income tax on the portion of its net investment income
and net capital gain (i.e., the excess of the Fund's net long-term capital
gain over net short-term capital loss) that it distributes to shareholders.
However, the Fund would be subject to corporate income tax (currently at a
rate of 35%) on any undistributed income and gain. If the Fund retains amounts
attributable to its net capital gain, it will designate such retained amounts
as undistributed net capital gain in a notice to its shareholders who (i) will
be required to include in income for United States federal income tax
purposes, as long-term capital gain, their proportionate shares of the
undistributed amount, (ii) will be entitled to credit their proportionate
shares of the 35% tax paid by the Fund on the undistributed amount against
their United States federal income tax liabilities and to claim refunds to the
extent such credits exceed their liabilities and (iii) will be entitled to
increase their tax basis, for United States federal income tax purposes, in
their shares by an amount currently equal to the difference between the amount
of includible gain and their proportionate shares of the 35% tax paid by the
Fund.
In addition, the Fund will be subject to a nondeductible 4% excise tax on
the amount by which the aggregate income it distributes in any calendar year
is less than the sum of: (a) 98% of the Fund's ordinary income for such
calendar year; (b) 98% of the Fund's capital gain net income for the one-year
period generally ending on October 31 of each year; and (c) 100% of the
undistributed ordinary income and capital gain net income from
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prior years. For this purpose, any income or gain retained by the Fund subject
to corporate income tax will be considered to have been distributed by year-
end.
The Fund intends to distribute sufficient income so as to avoid both the
corporate income tax and the excise tax.
The Internal Revenue Service ("IRS") has taken the position in a revenue
ruling that a regulated investment company that has two or more classes of
shares must designate distributions made to each class in any year as
consisting of no more than such class's proportionate share of each type of
income for each tax year based on the total dividends distributed to each
class for such year, including dividends qualifying for the corporate
dividends-received deduction and net capital gain. Consequently, if both
Common Stock and preferred stock are outstanding, the Fund intends to
allocate, to the fullest extent practicable, income distributed to the classes
as consisting of particular types of income in accordance with each class's
proportionate share of such income. Thus, the Fund will designate dividends
qualifying for the corporate dividends-received deduction, income not
qualifying for the dividends-received deduction and net capital gain income in
a manner that allocates such income between the holders of Common Stock and
preferred stock in proportion to the total distributions made to each class
during the taxable year, or otherwise as required by applicable law.
If at any time when leverage is outstanding the Fund does not meet the asset
coverage requirements of the 1940 Act or of any rating agency that has rated
such leverage, the Fund will be required to suspend distributions to holders
of Common Stock until the asset coverage is restored. See "Additional
Investment Activities--Leverage." This may prevent the Fund from distributing
at least 90% of its net investment income, and may therefore jeopardize the
Fund's qualification for taxation as a regulated investment company or cause
the Fund to incur a corporate income tax or a non-deductible 4% excise tax on
the undistributed taxable income (including gain). Upon any failure to meet
the asset coverage requirements of the 1940 Act, or those imposed by a rating
agency, the Fund may, in its sole discretion, purchase or redeem any preferred
stock or short-term debt securities in order to maintain or restore the
requisite asset coverage and avoid the adverse consequences to the Fund and
its shareholders of failing to qualify as a regulated investment company.
There can be no assurance, however, that any such redemption would achieve
such objectives.
Various transactions in which the Fund may engage, including Derivative
Transactions, will be subject to special provisions of the Code that, among
other things, may affect the character of gain and loss realized by the Fund
(that is, may affect whether gain or loss is ordinary or capital), accelerate
recognition of income to the Fund, affect the holding period of the Fund's
assets and defer recognition of certain of the Fund's losses. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. In addition, these provisions (1) may require the Fund to mark
to market certain types of positions in its portfolio (that is, treat them as
if they were closed out at the end of each taxable year) and (2) may cause the
Fund to recognize income or gain without receiving cash with which to pay
dividends or make distributions in amounts necessary to satisfy the
distribution requirements for avoiding income and excise taxes. The Fund
intends to monitor its transactions, will make the appropriate tax elections
and will make the appropriate entries in its books and records when it
acquires any forward contract, option, futures contract, or hedged investment
in order to mitigate the effect of these rules and prevent disqualification of
the Fund as a regulated investment company.
The Fund may make investments that produce income that is not matched by a
corresponding cash distribution to the Fund, such as investments in pay-in-
kind bonds or in obligations such as certain Brady Bonds
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or other obligations having original issue discount (i.e., an amount equal to
the excess of the security's stated redemption price at maturity over its
issue price), or market discount (i.e., an amount equal to the excess of the
security's stated redemption price at maturity over its basis immediately
after it was acquired) if the Fund elects, as it intends, to accrue market
discount on a current basis. In addition, income may continue to accrue for
federal income tax purposes with respect to a non-performing investment. Any
of the foregoing income would be treated as income earned by the Fund and
therefore would be subject to the distribution requirements of the Code.
Because such income may not be matched by a corresponding cash distribution to
the Fund, the Fund may be required to dispose of other securities to be able
to make distributions to its shareholders.
The Fund's taxable income will in most cases be determined on the basis of
reports made to the Fund by the issuers of the securities in which the Fund
invests. The tax treatment of certain securities in which the Fund may invest
is not free from doubt and it is possible that an IRS examination of the
issuers of such securities or of the Fund could result in adjustments to the
income of the Fund. An upward adjustment by the IRS to the income of the Fund
may result in the failure of the Fund to satisfy the 90% distribution
requirement described in this Prospectus necessary for the Fund to maintain
its status as a regulated investment company under the Code. In such event,
the Fund may be able to make a "deficiency dividend" distribution to its
shareholders with respect to the year under examination to satisfy this
requirement. Such distribution will be taxable as a dividend to the
shareholders receiving the distribution (whether or not the Fund has
sufficient current or accumulated earnings and profits for the year in which
such distribution is made). A downward adjustment by the IRS to the income of
the Fund may cause a portion of the previously made distribution with respect
to the year under examination not to be treated as a dividend. In such event,
the portion of distributions to such shareholder not treated as a dividend
would be recharacterized as a tax-free return of capital and reduce the
shareholder's basis in the shares held at the time of the previously made
distributions. Accordingly, this reduction in basis could cause a shareholder
to recognize additional gain upon the sale of such shareholder's shares.
SHAREHOLDERS
Distributions. Distributions to shareholders of net investment income will
be taxable as ordinary income whether paid in cash or reinvested in additional
shares. It is not anticipated that a significant portion of such dividends, if
any, will qualify for the dividends received deduction generally available to
corporate shareholders under the Code. Shareholders receiving distributions
from the Fund in the form of additional shares pursuant to the Plan will be
treated for federal income tax purposes as receiving a distribution in an
amount equal to the fair market value of the additional shares on the date of
such distribution.
Distributions to shareholders of net capital gain that are designated by the
Fund as "capital gain dividends" will be taxable as long-term capital gain,
whether paid in cash or reinvested in additional shares, regardless of how
long the shares have been held by such shareholders. These distributions will
not be eligible for the dividends received deduction. The current maximum
federal income tax rate imposed on long-term capital gain of individuals is
28% with respect to capital assets held for more than one year but less than
18 months and 20% with respect to capital assets held for more than 18 months.
The current maximum federal income tax rate imposed on individuals with
respect to ordinary income (and short-term capital gain, which is taxed at the
same rates as ordinary income) is 39.6%. With respect to corporate taxpayers,
long-term capital gain is taxed at the same federal income tax rates as
ordinary income and short-term capital gain.
Investors considering buying shares just prior to an ordinary income
dividend or capital gain dividend should be aware that, although the price of
shares purchased at that time may reflect the amount of the
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forthcoming distribution, those who purchase just prior to a distribution will
receive a distribution which will nevertheless be taxable to them.
Dividends and distributions paid by the Fund are generally taxable to the
shareholders at the time the dividend or distribution is made (even if paid or
reinvested in additional shares). Any dividend declared by the Fund in
October, November or December of any calendar year, however, which is payable
to shareholders of record on a specified date in such a month will be treated
as received by the shareholders as of December 31 of such year, provided that
the dividend is paid during January of the following year. In general, any
distribution in excess of the Fund's net investment income and net capital
gain would first reduce a shareholder's basis in his shares and, after the
shareholder's basis is reduced to zero, would constitute capital gain to a
shareholder who holds his shares as capital assets. However, such excess would
first be treated as an ordinary income dividend to the extent of the Fund's
remaining current and accumulated earnings and profits.
A notice detailing the amounts and tax status of dividends and distributions
paid by the Fund, and the amount of undistributed net capital gain (if any),
as well as the portions of the Fund's capital gain dividends and undistributed
net capital gain that are subject to the 28% and 20% maximum tax rates, will
be mailed annually to the shareholders of the Fund.
Dispositions. Gain or loss, if any, recognized on the sale or other
disposition of shares of the Fund will be taxed as capital gain or loss if the
shares are capital assets in the shareholder's hands. Generally, a
shareholder's gain or loss will be a long-term gain or loss if the shares have
been held for more than one year. If a shareholder sells or otherwise disposes
of a share of the Fund before holding it for more than six months, any loss on
the sale or other disposition of such share shall be treated as a long-term
capital loss to the extent of any capital gain dividends received by the
shareholder with respect to such share. A loss realized on a sale or exchange
of shares may be disallowed if other shares are acquired (whether under the
Plan or otherwise) within a 61-day period beginning 30 days before and ending
30 days after the date the shares are disposed of. If disallowed, the loss
will be reflected by an upward adjustment to the basis of the shares acquired.
Foreign Taxes. The Fund may be subject to certain taxes imposed by foreign
countries with respect to dividends, capital gain and interest income. The
United States has entered into tax treaties with many foreign countries which
would entitle the Fund to a reduced rate of, or exemption from, such taxes.
The Fund may invest up to 35% of its total assets in foreign debt securities.
Accordingly, the Fund will not be eligible to elect to pass through to
shareholders of the Fund the ability to use the foreign tax deduction or
foreign tax credit for foreign taxes paid with respect to qualifying taxes.
Foreign Shareholders. Taxation of a shareholder who, as to the United
States, is a non-resident alien individual, foreign trust or estate, foreign
corporation or foreign partnership ("foreign shareholder") depends, in part,
on whether the shareholder's income from the Fund is "effectively connected"
with a United States trade or business carried on by the shareholder. If a
shareholder is a resident alien or if dividends or distributions from the Fund
are effectively connected with a United States trade or business carried on by
a foreign shareholder, then ordinary income dividends, capital gain dividends,
undistributed net capital gain and gain realized upon the sale of shares of
the Fund will be subject to United States federal income tax at the rates
applicable to United States citizens or domestic corporations. Foreign
shareholders that are corporations may also be subject to an additional
"branch profits tax" with respect to income from the Fund that is effectively
connected with a United States trade or business.
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If the income from the Fund is not effectively connected with a United
States trade or business carried on by the foreign shareholder, (i) ordinary
income dividends will be subject to a 30% (or lower applicable treaty rate)
United States federal withholding tax and (ii) distributions of net capital
gain dividends, undistributed net capital gain and gain realized upon the sale
of shares of the Fund will not be subject to United States federal income tax
as long as such foreign shareholder is not a non-resident alien individual who
was physically present in the United States for more than 182 days during the
taxable year and, in the case of gains realized upon the sale of Fund shares,
certain other conditions are met. However, certain foreign shareholders may
nonetheless be subject to 31% backup withholding on distributions of net
capital gain and gross proceeds paid to them upon the sale of their shares of
the Fund. See "--Backup Withholding."
The United States Treasury Department recently issued regulations generally
effective for payments made after December 31, 1999 concerning the withholding
of tax and reporting for certain amounts paid to nonresident aliens and
foreign corporations (the "Final Withholding Regulations"). Among other
things, the Final Withholding Regulations may require shareholders that are
not United States persons within the meaning of the Code to furnish new
certification of their foreign status after December 31, 1999. Prospective
investors should consult their tax advisers concerning the applicability and
effect of the Final Withholding Regulations on an investment in shares of the
Fund.
Transfer by gift of shares of the Fund by a foreign shareholder who is a
non-resident alien individual will not be subject to United States federal
gift tax, but the value of shares of the Fund held by such a shareholder at
his death will be includible in such shareholder's gross estate for United
States federal estate tax purposes.
The tax consequences to a foreign shareholder entitled to claim the benefits
of an applicable tax treaty may be different from those described in this
section. Shareholders may be required to provide appropriate documentation to
establish their entitlement to the benefits of such a treaty. Foreign
investors are advised to consult their own tax advisers with respect to (a)
whether their income from the Fund is or is not effectively connected with a
U.S. trade or business carried on by them, (b) whether they may claim the
benefits of an applicable tax treaty and (c) any other tax consequences to
them of an investment in the Fund.
Backup Withholding. The Fund may be required to withhold federal income tax
at a rate of 31% ("backup withholding") from dividends and redemption proceeds
paid to non-corporate shareholders. This tax may be withheld from dividends if
(i) the shareholder fails to furnish the Fund with the shareholder's correct
taxpayer identification number, (ii) the IRS notifies the Fund that the
shareholder has failed to report properly certain interest and dividend income
to the IRS and to respond to notices to that effect, or (iii) when required to
do so, the shareholder fails to certify that he or she is not subject to
backup withholding. Redemption proceeds may be subject to withholding under
the circumstances described in (i) above. The Fund must report annually to the
IRS and to each foreign shareholder the amount of dividends paid to such
shareholder and the amount, if any, of tax withheld pursuant to the backup
withholding rules with respect to such dividends. This information may also be
made available to the tax authorities in the foreign shareholder's country of
residence. Backup withholding is not an additional tax. Any amounts withheld
under the backup withholding rules from payments made to a shareholder may be
refunded or credited against such shareholder's United States federal income
tax liability, if any, provided that the required information is furnished to
the IRS.
---------------------
Investors should consult their own tax advisers regarding specific questions
as to the federal, state, local and foreign tax consequences of the ownership
and disposition of shares in the Fund.
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NET ASSET VALUE
Net asset value per share will be determined no less frequently than weekly,
on the last business day of each week and at such other times as the Board of
Directors may determine, by dividing the value of the securities held by the
Fund plus any cash or other assets (including interest accrued but not yet
received) minus all liabilities (including accrued expenses) and the aggregate
liquidation value of any outstanding shares of preferred stock by the total
number of shares of Common Stock outstanding. In valuing the Fund's assets,
all securities for which market quotations are readily available are valued
(except as described below) (i) at the last sale price prior to the time of
determination if there was a sales price on the date of determination, (ii) at
the mean between the last current bid and asked prices if there was no sales
price on such date and bid and asked quotations are available, and (iii) at
the bid price if there was no sales price on such date and only bid quotations
are available. Publicly traded sovereign debt instruments are typically traded
internationally on the over-the-counter market, and will be valued at the mean
between the last current bid and asked price as at the close of business of
that market. In instances where a price determined above is deemed not to
represent fair market value, the price is determined in such manner as the
Board of Directors may prescribe. Securities may be valued by independent
pricing services which use prices provided by market-makers or estimates of
market values obtained from yield data relating to instruments or securities
with similar characteristics. Short-term investments having a maturity of 60
days or less are valued at amortized cost, unless the Board of Directors
determines that such valuation does not constitute fair value. Securities for
which reliable quotations or pricing services are not readily available and
all other securities and assets are valued at fair value as determined in good
faith by, or under procedures established by, the Board of Directors.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The authorized capital stock of the Fund is 100,000,000 shares of Common
Stock ($.001 par value per share). The Common Stock of the Fund, when issued,
will be fully paid and nonassessable. All shares of Common Stock are equal as
to dividends, distributions and voting privileges. There are no conversion,
preemptive or other subscription rights. In the event of liquidation, each
share of Common Stock is entitled to its proportion of the Fund's assets after
debts and expenses. There are no cumulative voting rights for the election of
directors. Prior to the offering, SBAM will own 100% of the outstanding shares
of Common Stock of the Fund and, consequently, will be a controlling person of
the Fund until the shares offered hereby are issued and sold. The Fund will
hold annual meetings of shareholders.
The Fund has no present intention of offering additional shares of its
Common Stock. Other offerings of its Common Stock, if made, will require
approval of the Fund's Board of Directors. Any additional offering will be
subject to the requirements of the 1940 Act that shares of Common Stock may
not be sold at a price below the then current net asset value (exclusive of
underwriting discounts and commissions) except in connection with an offering
to existing shareholders or with the consent of a majority of the Fund's
outstanding shares of Common Stock.
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PREFERRED STOCK
The Fund's Articles of Incorporation provides that the Board of Directors
may classify or reclassify any unissued shares of capital stock into one or
more additional or other classes or series, with rights as determined by the
Board of Directors, by action by the Board of Directors without the approval
of the holders of Common Stock. Holders of Common Stock have no preemptive
right to purchase any shares of preferred stock that might be issued.
The terms of any preferred stock, including its dividend rate, liquidation
preference and redemption provisions will be determined by the Board of
Directors (subject to applicable law and the Fund's Articles of
Incorporation). The Fund believes that it is likely that the liquidation
preference, voting rights and redemption provisions of any preferred stock
will be similar to those stated below.
Liquidation Preference. In the event of any voluntary or involuntary
liquidation, dissolution or winding up of the Fund, the holders of preferred
stock will be entitled to receive a preferential liquidating distribution
(expected to equal the original purchase price per share plus accrued and
unpaid dividends, whether or not declared) before any distribution of assets
is made to holders of Common Stock. After payment of the full amount of the
liquidating distribution to which they are entitled, the preferred
shareholders will not be entitled to any further participation in any
distribution of assets by the Fund. A consolidation or merger of the Fund with
or into any corporation or corporations or a sale of all or substantially all
assets of the Fund will not be deemed to be a liquidation, dissolution or
winding upon of the Fund.
Voting Rights. The 1940 Act requires that the holders of any preferred
stock, voting separately as a single class, have the right to elect at least
two directors at all times and, subject to the prior rights, if any, of the
holders of any other class of senior securities outstanding, to elect a
majority of the directors at any time dividends on any preferred shares are
unpaid for a period of two years. The 1940 Act also requires that, in addition
to any approval by shareholders that might otherwise be required, the approval
of the holders of a majority of any outstanding preferred shares, voting
separately as a class, would be required to (a) adopt any plan of
reorganization that would adversely affect the preferred shares and (b) take
any action requiring a vote of security holders pursuant to Section 13(a) of
the 1940 Act, including, among other things, changes in the Fund's
subclassification as a closed-end investment company to an open-end investment
company or changes in its fundamental investment restrictions. See "--Special
Voting Provisions" concerning voting requirements for conversion of the Fund
to an open-end investment company and other matters. As a result of these
voting rights, the Fund's ability to take any such actions may be impeded to
the extent there is any preferred stock outstanding at such time. In addition,
in the discretion of the Board of Directors, subject to the 1940 Act, the
terms of any preferred stock may also require a vote of up to 75% of the
preferred stock, voting separately as a class, regarding certain transactions
involving a merger or sale of assets or conversion of the Fund to open-end
status and other matters. The Board of Directors presently intends that,
except for the matters discussed in this Prospectus and as otherwise required
by applicable law, holders of shares of preferred stock will have equal voting
rights with holders of Common Stock (one vote per share, unless otherwise
required by the 1940 Act), and will vote together with holders of Common Stock
as a single class.
It is presently intended that in connection with the election of the Fund's
directors, on and after issuance of any preferred stock, the holders of all
outstanding shares of preferred stock, voting as a separate class, would be
entitled to elect two directors of the Fund, and the remaining directors would
be elected by holders of Common
52
<PAGE>
Stock and preferred stock, voting together as a single class. The Fund's By-
Laws provide that the Board of Directors shall consist of no more than 12
directors, as may be determined from time to time by vote of a majority of
directors then in office.
The affirmative vote of the holders of a majority of the outstanding shares
of preferred stock, voting as a separate class, will be required to amend,
alter or repeal any of the preferences, rights or powers of holders of shares
of preferred stock so as to affect materially and adversely such preferences,
rights, or powers, or increase or decrease the numbers of shares of preferred
stock. The class vote of holders of preferred stock described above will in
each case be in addition to any other vote required to authorize the action in
question.
Redemption, Purchase and Sale of Preferred Stock by the Fund. Any redemption
or purchase of shares of preferred stock by the Fund will reduce the leverage
applicable to shares of Common Stock, while any resale of such shares of
preferred stock by the Fund will increase such leverage. See "Additional
Investment Activities--Leverage."
The discussion above describes the present intention of the Board of
Directors with respect to an offering of preferred stock if the Board elects
to utilize preferred stock in order to leverage the Fund's Common Stock. If
the Board of Directors determines to proceed with such an offering, the terms
of the preferred stock may be the same as, or different from, the terms
described above, subject to applicable law and the Fund's Articles of
Incorporation. The Board of Directors, without the approval of the holders of
Common Stock, may authorize an offering of preferred stock or may determine
not to authorize such an offering, and may fix the terms of the preferred
stock to be offered.
SPECIAL VOTING PROVISIONS
The Fund has provisions in its Articles of Incorporation and By-Laws that
could have the effect of limiting the ability of other entities or persons to
acquire control of the Fund, to cause it to engage in certain transactions or
to modify its structure. Commencing with the first annual meeting of
shareholders, the Board of Directors will be divided into three classes,
having initial terms of one, two and three years, respectively. At the annual
meeting of shareholders in each year thereafter, the term of one class will
expire and directors will be elected to serve in that class for terms of three
years. This provision could delay for up to two years the replacement of a
majority of the Board of Directors. A director may be removed from office only
for cause and only by a vote of the holders of at least 75% of the outstanding
shares of the Fund entitled to be cast on the matter.
The affirmative vote of at least 75% of the entire Board of Directors is
required to authorize the conversion of the Fund from a closed-end to an open-
end investment company. Such conversion also requires the affirmative vote of
the holders of at least 75% of the votes entitled to be cast thereon by the
shareholders of the Fund unless it is approved by a vote of at least 75% of
the Continuing Directors (as defined below), in which event such conversion
requires the approval of the holders of a majority of the votes entitled to be
cast thereon by the shareholders of the Fund. A "Continuing Director" is any
member of the Board of Directors of the Fund who (i) is not a person or
affiliate of a person who enters or proposes to enter into a Business
Combination (as defined below) with the Fund (an "Interested Party") and (ii)
who has been a member of the Board of Directors of the Fund for a period of at
least 12 months, or has been a member of the Board of Directors since April
24, 1998, or is a successor of a Continuing Director who is unaffiliated with
an Interested Party and is recommended to succeed a Continuing Director by a
majority of the Continuing Directors then on the Board of Directors of the
53
<PAGE>
Fund. The affirmative vote of at least 75% of the votes entitled to be cast
thereon by shareholders of the Fund will be required to amend the Articles of
Incorporation to change any of the provisions in this paragraph and the
preceding paragraph.
The affirmative votes of at least 75% of the entire Board of Directors and
the holders of at least (i) 80% of the votes entitled to be cast thereon by
the shareholders of the Fund and (ii) in the case of a Business Combination
(as defined below), 66 2/3% of the votes entitled to be cast thereon by the
shareholders of the Fund other than votes held by an Interested Party who is
(or whose affiliate is) a party to a Business Combination (as defined below)
or an affiliate or associate of the Interested Party, are required to
authorize any of the following transactions:
(i) merger, consolidation or statutory share exchange of the Fund with or
into any other person;
(ii) issuance or transfer by the Fund (in one or a series of transactions in
any 12-month period) of any securities of the Fund to any person or entity for
cash, securities or other property (or combination thereof) having an
aggregate fair market value of $1,000,000 or more, excluding issuances or
transfers of debt securities of the Fund, sales of securities of the Fund in
connection with a public offering, issuances of securities of the Fund
pursuant to a dividend reinvestment plan adopted by the Fund, issuances of
securities of the Fund upon the exercise of any stock subscription rights
distributed by the Fund and portfolio transactions effected by the Fund in the
ordinary course of business;
(iii) sale, lease, exchange, mortgage, pledge, transfer or other disposition
by the Fund (in one or a series of transactions in any 12 month period) to or
with any person or entity of any assets of the Fund having an aggregate fair
market value of $1,000,000 or more except for portfolio transactions
(including pledges of portfolio securities in connection with borrowings)
effected by the Fund in the ordinary course of its business (transactions
within clauses (i), (ii) and (iii) above being known individually as a
"Business Combination");
(iv) any voluntary liquidation or dissolution of the Fund or an amendment to
the Fund's Articles of Incorporation to terminate the Fund's existence; or
(v) unless the 1940 Act or federal law requires a lesser vote, any
shareholder proposal as to specific investment decisions made or to be made
with respect to the Fund's assets as to which shareholder approval is required
under federal or Maryland law.
However, the shareholder vote described above will not be required with
respect to the foregoing transactions (other than those set forth in (v)
above) if they are approved by a vote of at least 75% of the Continuing
Directors. In that case, if Maryland law requires shareholder approval, the
affirmative vote of a majority of votes entitled to be cast thereon shall be
required. The Fund's By-Laws contain provisions the effect of which is to
prevent matters, including nominations of directors, from being considered at
a shareholders' meeting where the Fund has not received notice of the matters
generally at least 60 but no more than 90 days prior to the first anniversary
of the preceding year's annual meeting.
54
<PAGE>
The Board of Directors has determined that the foregoing voting
requirements, which are generally greater than the minimum requirements under
Maryland law and the 1940 Act, are in the best interest of the Fund's
shareholders generally.
Reference is made to the Articles of Incorporation and By-Laws of the Fund,
on file with the Commission, for the full text of these provisions. See
"Further Information." These provisions could have the effect of depriving
shareholders of an opportunity to sell their shares at a premium over
prevailing market prices by discouraging a third party from seeking to obtain
control of the Fund in a tender offer or similar transaction. In the opinion
of SBAM, however, these provisions offer several possible advantages. They may
require persons seeking control of the Fund to negotiate with its management
regarding the price to be paid for the shares required to obtain such control,
they promote continuity and stability and they enhance the Fund's ability to
pursue long-term strategies that are consistent with its investment
objectives.
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
PNC Bank, N.A., Airport Business Center, International Court 2, 200 Stevens
Drive, Lester, Pennsylvania 19113, will act as custodian for the Fund's
assets. First Data Investor Services Group, Inc., P.O. Box 5127, Westborough,
Massachusetts 01581-5127, will act as the transfer agent, dividend paying
agent and registrar for the Fund's Common Stock.
55
<PAGE>
UNDERWRITING
The Underwriters named herein, for whom Smith Barney Inc., 388 Greenwich
Street, New York, New York 10013 is acting as Representative (the
"Representative"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement among the Fund, SBAM and the several
Underwriters (the "Underwriting Agreement"), to purchase from the Fund the
number of shares of Common Stock set forth below opposite their respective
names.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Smith Barney Inc.......................................... 3,464,174
A.G. Edwards & Sons, Inc.................................. 3,464,166
Advest, Inc............................................... 3,464,166
EVEREN Securities, Inc.................................... 3,464,166
Fahnestock & Co. Inc...................................... 3,464,166
Janney Montgomery Scott Inc............................... 3,464,166
Legg Mason Wood Walker, Incorporated...................... 3,464,166
McDonald & Company Securities, Inc........................ 3,464,166
Morgan Keegan & Company, Inc.............................. 3,464,166
The Robinson-Humphrey Company, LLC........................ 3,464,166
Tucker Anthony Incorporated............................... 3,464,166
Wedbush Morgan Securities................................. 3,464,166
ABN AMRO Incorporated..................................... 800,000
Bear, Stearns & Co. Inc. ................................. 800,000
BT Alex Brown Incorporated................................ 800,000
CIBC Oppenheimer Corp. ................................... 800,000
PaineWebber Incorporated.................................. 800,000
Prudential Securities Incorporated........................ 800,000
Robert W. Baird & Co. Incorporated........................ 400,000
William Blair & Company, L.L.C. .......................... 400,000
J.C. Bradford & Co. ...................................... 400,000
Crowell, Weedon & Co. .................................... 400,000
Dain Rauscher Wessels..................................... 400,000
First Albany Corporation.................................. 400,000
First of Michigan Corporation............................. 400,000
Interstate/Johnson Lane Corporation....................... 400,000
Ladenburg Thalmann & Co. Inc. ............................ 400,000
The Ohio Company.......................................... 400,000
Pennsylvania Merchant Group............................... 400,000
Piper Jaffray Inc. ....................................... 400,000
Ragen Mackenzie Incorporated.............................. 400,000
Roney Capital Markets..................................... 400,000
Scott & Stringfellow, Inc. ............................... 400,000
Stifel, Nicolaus & Company, Incorporated.................. 400,000
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
Sutro & Co. Incorporated.................................. 400,000
C.E. Unterberg, Towbin.................................... 400,000
Allen & Company of Florida Inc. .......................... 200,000
George K. Baum & Company.................................. 200,000
Branch, Cabell & Company.................................. 200,000
The Chapman Co. .......................................... 200,000
Allen C. Ewing & Co. ..................................... 200,000
Hanifen, Imhoff Inc. ..................................... 200,000
Huntleigh Securities Corporation.......................... 200,000
Johnston, Lemon & Co. Incorporated........................ 200,000
C.L. King & Associates, Inc. ............................. 200,000
John G. Kinnard & Company, Incorporated................... 200,000
Moors & Cabot, Inc. ...................................... 200,000
Parker/Hunter Incorporated................................ 200,000
Pauli & Company, Incorporated............................. 200,000
Sands Brothers & Co., Ltd. ............................... 200,000
Southwest Securities, Inc. ............................... 200,000
Sterne, Agee & Leach, Inc. ............................... 200,000
TD Securities Inc. ....................................... 200,000
Van Kasper & Company...................................... 200,000
----------
Total................................................... 57,170,000
==========
</TABLE>
The Representative has informed the Fund that the Underwriters do not intend
to confirm shares of Common Stock to any accounts over which they exercise
discretionary authority.
The Underwriters, through their Representative, have advised the Fund that
they propose to offer the shares of Common Stock initially at the public
offering price set forth on the cover page of this Prospectus. There is no
sale charge or underwriting discount charged to investors on purchases of
shares of Common Stock in the offering. SBAM or an affiliate has agreed to pay
the Underwriters from its own assets a commission in connection with the sale
of shares of Common Stock in the offering in the amount of $0.75 per share.
Such payment is equal to 5.00% of the initial public offering price per share.
From this amount, the Underwriters may allow to selected dealers a payment in
the amount of $0.45 per share sold by such dealers and such dealers may
reallow a payment of $.10 per share to certain other dealers. The Underwriters
reserve the right to reject orders in whole or in part. After the initial
offering of the Common Stock to the public, the offering price and other
selling terms may be changed by the Representative. The Fund is obligated to
sell, and the Underwriters are obligated to purchase, all of the shares of
Common Stock offered hereby (other than shares covered by the over-allotment
option described below) if any are sold. Investors must pay for any shares of
Common Stock purchased on or before May 28, 1998.
The Fund has granted to the Underwriters an option, exercisable within 45
days of this Prospectus, to purchase up to 8,575,500 additional shares of
Common Stock at the same price to public as set forth on the cover page of
this Prospectus. The Underwriters may exercise such option solely for the
purpose of covering
57
<PAGE>
over-allotments, if any, incurred in the sale of the shares of Common Stock
offered hereby. To the extent the Underwriters exercise such option, each of
the Underwriters will be obligated, subject to certain conditions, to purchase
the same proportion of such additional shares as the number of shares set
forth opposite such Underwriter's name in the preceding table bears to the
total number of shares set forth in such table.
The Fund and SBAM have each agreed to indemnify the several Underwriters or
contribute to losses arising out of certain liabilities, including liabilities
under the Securities Act.
The Fund has agreed to pay the Underwriters $250,000 as partial
reimbursement of expenses incurred in connection with the offering.
In connection with the requirements for listing the Fund's shares of Common
Stock on the NYSE, the Underwriters have undertaken to sell lots of 100 or
more shares of Common Stock to a minimum of 2,000 beneficial owners in the
United States. The minimum investment requirement is 100 shares of Common
Stock.
Prior to the offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price has been determined by
negotiation between the Fund, SBAM and the Representative. The Common Stock
has been approved for listing on the NYSE subject to official notice of
issuance. Smith Barney Inc. intends to make a market in the Common Stock after
trading in the Common Stock has commenced on the NYSE. Smith Barney Inc.,
however, is not obligated to conduct market-making activities and any such
activities may be discontinued at any time without notice, at the sole
discretion of Smith Barney Inc. No assurance can be given as to the liquidity
of, or the trading market for, the Common Stock as a result of any market-
making activities undertaken by Smith Barney Inc. This Prospectus is to be
used by Smith Barney Inc. in connection with this offering and with offers and
sales of the Common Stock in market-making transactions in the over-the-
counter market at negotiated prices related to prevailing market prices at the
time of the sale.
The Underwriters have advised the Fund that, pursuant to Regulation M under
the Securities Exchange Act of 1934, as amended, certain persons participating
in the offering may engage in transactions, including stabilizing bids,
covering transactions or the imposition of penalty bids, which may have the
effect of stabilizing or maintaining the market price of the Common Stock at a
level above that which might otherwise prevail in the open market. A
"stabilizing bid" is a bid for or the purchase of the Common Stock on behalf
of an Underwriter for the purpose of fixing or maintaining the price of the
Common Stock. A "covering transaction" is a bid for or purchase of the Common
Stock on behalf of an Underwriter to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an
arrangement permitting an Underwriter to reclaim the selling concession
otherwise accruing to the Underwriters in connection with the offering if any
of the Common Stock originally sold by the Underwriters is purchased in a
covering transaction and has therefore not been effectively placed by the
Underwriters. The Underwriters have advised the Fund that such transactions
may be effected on the NYSE or otherwise and, if commenced, may be
discontinued at any time.
The Underwriting Agreement provides that it may be terminated in the
absolute discretion of the Representative without liability on the part of any
Underwriter to the Fund or SBAM if, prior to delivery of and payment for the
shares of Common Stock, (i) trading in the Fund's Common Stock shall have been
suspended by the Commission or the NYSE or trading in securities generally on
the NYSE shall have been suspended or limited or minimum prices shall have
been established on the NYSE, (ii) a banking moratorium shall have been
declared either by Federal or New York State authorities or (iii) there shall
have occurred any outbreak or
58
<PAGE>
escalation of hostilities, declaration by the United States of a national
emergency or war or other calamity or crisis the effect of which on financial
markets is such as to make it, in the judgment of the Representative,
impracticable or inadvisable to proceed with the offering or delivery of the
securities as contemplated by this Prospectus (exclusive of any supplement
thereto).
The Underwriters have taken certain actions to discourage short-term trading
of shares of Common Stock during a period of time following the initial
offering date. Included in these actions is the withholding of payments to
Underwriters and concessions to dealers in connection with shares of Common
Stock which were sold by such Underwriters or dealers and which are
repurchased for the account of the Underwriters during such period.
The Fund anticipates that from time to time the Representative of the
Underwriters and certain other Underwriters may act as brokers or dealers in
connection with the execution of the Fund's portfolio transactions after they
have ceased to be Underwriters and, subject to certain restrictions, may act
as brokers while they are Underwriters.
The Fund has agreed not to offer or sell any additional shares of Common
Stock for a period of 180 days after the date of this Prospectus, without the
prior written consent of the Smith Barney Inc.
SBAM and Smith Barney Inc. are each wholly-owned subsidiaries of Salomon
Smith Barney Holdings Inc., which is in turn wholly-owned by Travelers Group
Inc.
EXPERTS
The financial statement of the Fund included in this Prospectus has been so
included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
LEGAL MATTERS
The validity of the shares offered hereby will be passed on for the Fund by
Simpson Thacher & Bartlett, New York, New York, and certain legal matters in
connection with the offering of the shares will be passed on for the
Underwriters by Skadden, Arps, Slate, Meagher & Flom LLP, New York, New York.
Counsel for the Fund and the Underwriters will rely, as to matters of Maryland
law, on Piper & Marbury L.L.P., Baltimore, Maryland.
FURTHER INFORMATION
Prior to the registration statement becoming effective, the Underwriters or
other appropriate party may have distributed advertising or other solicitation
material which discusses (i) economic and market conditions and trends
generally; (ii) historical and current conditions and trends in the high yield
debt securities market and risk and reward potential in such market; (iii)
comparative information, including statistical analysis and performance-
related information, related to high yield securities generally and investing
in high yield securities; (iv) the special considerations and potential
benefits of investing in closed-end management investment companies and (v)
information about SBAM and the Fund's portfolio managers, including honors or
awards received and information and commentary on investment strategy or other
matters of general interest to investors.
Further information concerning these securities and their issuer may be
found in the Registration Statement, of which this Prospectus constitutes a
part, on file with the Commission.
59
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholder and Board of Directors of
Salomon Brothers High Income Fund II Inc
In our opinion, the accompanying statement of assets and liabilities presents
fairly, in all material respects, the financial position of Salomon Brothers
High Income Fund II Inc (the "Fund") at May 20, 1998, in conformity with
generally accepted accounting principles. This financial statement is the
responsibility of the Fund's management; our responsibility is to express an
opinion on this financial statement based on our audit. We conducted our audit
of this financial statement in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statement, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for the opinion expressed above.
Price Waterhouse LLP
New York, New York
May 21, 1998
60
<PAGE>
SALOMON BROTHERS HIGH INCOME FUND II INC (NOTE 1)
STATEMENT OF ASSETS AND LIABILITIES
MAY 20, 1998
<TABLE>
<S> <C>
Assets:
Cash................................................................. $100,005
Deferred organization expenses (Note 2).............................. 125,000
--------
Total assets........................................................ 225,005
Liabilities:
Accrued organization expenses (Note 2)............................... 125,000
Commitments (Note 2)................................................. --
--------
Net Assets (6,667 shares of $.001 par value shares of common stock
issued and outstanding; 100,000,000 shares authorized)............... $100,005
========
Net asset value per share............................................. $ 15.00
========
</TABLE>
NOTES TO FINANCIAL STATEMENT
NOTE 1
The Salomon Brothers High Income Fund II Inc (the "Fund") was incorporated
as a Maryland corporation on March 19, 1998, and has had no operations to date
other than matters relating to its organization and registration as a
diversified, closed-end management investment company under the Investment
Company Act of 1940, as amended, and the sale and issuance to Salomon Brothers
Asset Management Inc ("SBAM") of 6,667 shares of its common stock for an
aggregate purchase price of $100,005. The books and records of the Fund will
be maintained in U.S. dollars.
NOTE 2
Organization expenses relating to the Fund incurred and to be incurred by
SBAM will be reimbursed by the Fund. Such expenses, estimated at $125,000,
will be deferred and amortized on a straight-line basis for a five-year period
beginning at the commencement of operations of the Fund. However, in
accordance with the AICPA Statement of Position No. 98-5, "Reporting on the
Costs of Start-up Activities", the Fund will be required to expense the
unamortized amount of this asset on the first day of its second fiscal year
which is expected to be May 1, 1999. Offering costs, estimated at $1,545,000,
will be paid from the proceeds of the offering and will be charged to capital
at the time of the issuance of such shares.
NOTE 3
The Fund retains SBAM, a wholly-owned subsidiary of Salomon Brothers Holding
Company Inc, which is in turn wholly-owned by Salomon Smith Barney Holdings
Inc, which is in turn wholly-owned by Travelers Group Inc., as its investment
manager under an investment management agreement (the "Advisory Agreement").
Under the terms of the Advisory Agreement, SBAM will manage the investment and
reinvestment of the assets of the Fund, subject to the supervision of the
Fund's Board of Directors. SBAM will make the investment decisions for the
Fund and place purchase and sale orders for the Fund's portfolio securities
pursuant
61
<PAGE>
to the Advisory Agreement. For its services, SBAM will receive from the Fund a
monthly fee at an annual rate of 1.00% of the value of the Fund's average
weekly net assets plus the proceeds of any outstanding borrowings used for
leverage. ("Average weekly net assets" means the average weekly value of the
total assets of the Fund, including any proceeds from the issuance of
preferred stock, minus the sum of (i) accrued liabilities of the Fund, (ii)
any accrued and unpaid interest on outstanding borrowings and (iii) accrued
accumulated dividends on shares of preferred stock.)
Mutual Management Corp. (the "Administrator"), a wholly-owned subsidiary of
Salomon Smith Barney Holdings Inc., will act as administrator for the Fund.
Under the Administration Agreement with the Fund (the "Administration
Agreement"), the Administrator administers the Fund's corporate affairs
subject to the supervision of the Fund's Board of Directors and in connection
therewith furnishes the Fund with office facilities together with such
ordinary clerical and bookkeeping services (e.g., preparation of annual and
other reports to shareholders and the Securities and Exchange Commission and
filing of federal, state and local income tax returns) as are not being
furnished by SBAM or the Fund's custodian. The Administration Agreement
provides that the Fund shall pay to the Administrator a monthly fee for its
services and the facilities furnished by the Administrator at an annual rate
of .10% of the value of the Fund's average weekly net assets (as defined and
determined with respect to the Advisory Agreement) plus the proceeds of any
outstanding borrowings used for leverage.
Certain officers and/or directors of the Fund are officers and/or directors
of SBAM or the Administrator.
62
<PAGE>
APPENDIX A
DESCRIPTION OF RATINGS
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S AND S&P WITH RESPECT TO
BONDS APPEARS BELOW.
MOODY'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A--Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa--Bonds which are rated "Baa" are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba--Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
CAA--Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca--Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" in each generic rating
classification from Aa to Caa. The modifier "1" indicates that the security
ranks in the higher end of its generic rating category; the
A-1
<PAGE>
modifier "2" indicates a mid-range ranking; and the modifier "3" indicates
that the issue ranks in the lower end of its generic rating category.
S&P'S CORPORATE BOND RATINGS
AAA--This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to repay principal and pay interest.
AA--Bonds rated "AA" also qualify as high quality debt obligations. Capacity
to pay principal and interest is very strong, and differs from "AAA" issues
only in small degree.
A--Bonds rated "A" have a strong capacity to repay principal and pay
interest, although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than debt in higher-rated
categories.
BBB--Bonds rated "BBB" are regarded as having an adequate capacity to repay
principal and pay interest. Whereas they normally exhibit adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to repay principal and pay interest for
bonds in this category than for higher-rated categories.
BB-B-CCC-CC-C--Bonds rated "BB", "B", "CCC", "CC" and "C" are regarded, on
balance, as predominantly speculative with respect to the issuer's capacity to
pay interest and repay principal in accordance with the terms of the
obligations. BB indicates the lowest degree of speculation and C the highest
degree of speculation. While such bonds will likely have some quality and
protective characteristics, these are outweighed by large uncertainties or
major risk exposures to adverse conditions.
CI--Bonds rated "CI" are income bonds on which no interest is being paid.
D--Bonds rated "D" are in default. The "D" category is used when interest
payments or principal payments are not made on the date due even if the
applicable grace period has not expired unless S&P believes that such payments
will be made during such grace period. The "D" rating is also used upon the
filing of a bankruptcy petition if debt service payments are jeopardized.
The ratings set forth above may be modified by the addition of a plus or
minus to show relative standing within the major rating categories.
MOODY'S INVESTORS SERVICE'S COMMERCIAL PAPER RATINGS
Prime-1--Issuers (or related supporting institutions) rated Prime-1 have a
superior ability for repayment of short-term debt obligations. Prime-1
repayment ability will often be evidenced by leading market positions in well-
established industries, high rates or return on funds employed, conservative
capitalization structures with moderate reliance on debt and ample asset
protection, broad margins in earnings coverage of fixed financial charges and
high internal cash generation, and well-established access to a range of
financial markets and assured sources of alternate liquidity.
Prime-2--Issuers (or related supporting institutions) rated Prime-2 have a
strong ability for repayment of short-term debt obligations. This will
normally be evidenced by many of the characteristics cited above but to a
A-2
<PAGE>
lesser degree. Earning trends and coverage ratio, while sound, will be more
subject to variation. Capitalization characteristics, while still appropriate,
may be more affected by external conditions. Ample alternative liquidity is
maintained.
Prime-3--Issuers (or related supporting institutions) rated Prime-3 have an
acceptable ability for repayment of short-term debt obligations. The effect of
industry characteristics and market compositions may be more pronounced.
Variability in earnings and profitability may result in changes in the level
of debt protection measurements and may require relatively high financial
leverage. Adequate alternate liquidity is maintained.
Not Prime--Issuers rated Not Prime do not fall within any of the Prime
rating categories.
STANDARD & POOR'S COMMERCIAL PAPER RATINGS
An S&P commercial paper rating is a current assessment of the likelihood of
timely payment of debt having an original maturity of no more than 365 days.
Ratings are graded into four categories, ranging from "A-1" for the highest
quality obligations to "D" for the lowest. The categories are as follows:
"A-1'--A short-term obligation rated "A-1' is rated in the highest category
by Standard & Poor's. The obligor's capacity to meet its financial commitment
on the obligation is strong. Within this category, certain obligations are
designated with a plus sign (+). This indicates that the obligor's capacity to
meet its financial commitment on these obligations is extremely strong.
"A-2'--A short-term obligation rated "A-2' is somewhat more susceptible to
the adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor's capacity to
meet its financial commitment on the obligation is satisfactory.
"A-3'--A short-term obligation rated "A-3' exhibits adequate protection
parameters. However, adverse economic conditions or changing circumstances are
more likely to lead to a weakened capacity of the obligor to meet its
financial commitment on the obligation.
"B'--A short-term obligation rated "B' is regarded as having significant
speculative characteristics. The obligor currently has the capacity to meet
its financial commitment on the obligation; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet
its financial commitment on the obligation.
"C'--A short-term obligation rated "C' is currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation.
"D'--A short-term obligation rated "D' is in payment default. The "D' rating
category is used when payments on an obligation are not made on the date due
even if the applicable grace period has not expired, unless Standard & Poor's
believes that such payments will be made during such grace period. The "D'
rating also will be used upon the filing of a bankruptcy petition or the
taking of a similar action if payments on an obligation are jeopardized.
A-3
<PAGE>
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<PAGE>
APPENDIX B
GENERAL CHARACTERISTICS AND RISKS OF HEDGING
AND OTHER STRATEGIC TRANSACTIONS
The Fund may engage in certain hedging and other strategic transactions. The
Fund will engage in such activities from time to time in SBAM's discretion and
may not necessarily be engaging in such activities when movements occur in
interest rates that could affect the value of the assets of the Fund. The
Fund's ability to pursue certain of these strategies may be limited by the
Commodity Exchange Act, as amended, applicable regulations of the CFTC and the
federal income tax requirements applicable to regulated investment companies
which are not operated as commodity pools.
INTEREST RATE TRANSACTIONS
The Fund may enter into interest rate swaps and may purchase interest rate
caps, floors and collars and may sell interest rate caps, floors and collars
that it has purchased. The Fund would enter into these transactions primarily
to preserve a return or spread on a particular investment or portion of its
portfolio, to manage the duration of its portfolio, to protect against any
increase in the price of securities the Fund anticipates purchasing at a later
date or to further the Fund's investment objectives and policies. Interest
rate swaps involve the exchange by the Fund with another party of their
respective commitments to pay or receive interest, e.g., an exchange of
floating rate payments for fixed rate payments with respect to a notional
amount of principal. The purchase of an interest rate cap entitles the
purchaser, to the extent that a specified index exceeds a predetermined
interest rate, to receive payments of interest on a notional principal amount
from the party selling such interest rate cap. The purchase of an interest
rate floor entitles the purchaser, to the extent that a specified index falls
below a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate floor. A
collar is a combination of a cap and a floor that preserves a certain return
within a predetermined range of interest rates or values.
The Fund may enter into interest rate swaps, caps, floors and collars on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or liabilities, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments on the payment date. To the extent these Derivative Transactions are
entered into for good faith hedging purposes, SBAM believes such obligations
do not constitute senior securities and, accordingly, will not treat them as
being subject to its borrowing restrictions. The Fund will accrue the net
amount of the excess, if any, of the Fund's obligations over its entitlements
with respect to each interest rate swap on a daily basis and will segregate
with a custodian an amount of cash or liquid securities having an aggregate
net asset value at least equal to the accrued excess. The Fund will not enter
into any interest rate swap, cap, floor or collar transaction unless the other
party thereto has been determined by SBAM to be creditworthy at the time of
entering into such transaction. If there is a default by the other party to
such a transaction, the Fund will have contractual remedies pursuant to the
agreements related to the transaction. The swap market has grown substantially
in recent years with a large number of banks and investment banking firms
acting both as principals and as agents utilizing standardized swap
documentation. Caps, floors and collars are less liquid than swaps.
B-1
<PAGE>
PUT AND CALL OPTIONS ON SECURITIES AND INDICES
The Fund may purchase and sell put and call options on securities and
indices based upon the prices of securities. A put option on a security gives
the purchaser of the option the right to sell and the writer the obligation to
buy the underlying security at the exercise price during the option period.
The Fund may also purchase and sell options on indices based upon the prices
of securities ("index options"). Index options are similar to options on
securities except that, rather than taking or making delivery of securities
underlying the option at a specified price upon exercise, an index option
gives the holder the right to receive cash upon exercise of the option if the
level of the index upon which the option is based is greater, in the case of a
call, or less in the case of a put, than the exercise price of the option. The
purchase of a put option on a security would be designed to protect against a
decline in the market value of a security held by the Fund. A call option on a
security gives the purchaser of the option the right to buy and the writer the
obligation to sell the underlying security at the exercise price during the
option period. The purchase of a call option on a security would be intended
to protect the Fund against an increase in the price of a security that it
intended to purchase in the future. In the case of either put or call options
that it has purchased, if the option expires without being sold or exercised,
the Fund will experience a loss in the amount of the option premium plus any
related commissions. When the Fund sells put and call options, it receives a
premium as the seller of the option. The premium that the Fund receives for
writing the option will serve as a partial hedge, in the amount of the option
premium, against changes in the value of the securities in its portfolio.
During the term of the option, however, a covered call seller has, in return
for the premium on the option, given up the opportunity for capital
appreciation above the exercise price of the option if the value of the
underlying security increases, but has retained the risk of loss should the
price of the underlying security decline. Conversely, a secured put seller
retains the risk of loss should the market value of the underlying security
decline below the exercise price of the option, less the premium received on
the sale of the option. The Fund is authorized to purchase and sell exchange
listed options and over-the-counter options ("OTC Options") which are
privately negotiated with the counterparty to such contract. Listed options
are issued by the Options Clearing Corporation ("OCC"), which guarantees the
performance of the obligations of the parties to such options.
All such call options sold (written) by the Fund will be "covered" as long
as the call is outstanding (i.e., the Fund will own the instrument subject to
the call or other securities or assets acceptable under applicable segregation
and coverage rules). All such put options sold (written) by the Fund will be
secured by segregated assets consisting of cash or liquid assets having a
value not less than the exercise price.
The Fund's ability to close out its position as a purchaser or seller of an
exchange listed put or call option is dependent upon the existence of a liquid
secondary market. Among the possible reasons for the absence of a liquid
secondary market on an exchange are: (i) insufficient trading interest in
certain options; (ii) restrictions on transactions imposed by an exchange;
(iii) trading halts, suspensions or other restrictions imposed with respect to
particular classes or series of options or underlying securities; (iv)
interruption of the normal operations on an exchange; (v) inadequacy of the
facilities of an exchange or OCC to handle current trading volume; or (vi) a
decision by one or more exchanges to discontinue the trading of options (or a
particular class or series of options), in which event the secondary market on
that exchange (or in that class or series of options) would cease to exist,
although outstanding options on that exchange that had been listed by the OCC
as a result of trades on that exchange would generally continue to be
exercisable in accordance with their terms. OTC Options are purchased from or
sold to dealers, financial institutions or other counterparties which have
entered into direct
B-2
<PAGE>
agreements with the Fund. With OTC Options, such variables as expiration date,
exercise price and premium will be agreed upon between the Fund and the
counterparty, without the intermediation of a third party such as the OCC. If
the counterparty fails to make or take delivery of the securities underlying
an option it has written, or otherwise fails to settle the transaction in
accordance with the terms of that option as written, the Fund would lose the
premium paid for the option as well as any anticipated benefit of the
transaction. As the Fund must rely on the credit quality of the counterparty
rather than the guarantee of the OCC, it will only enter into OTC options with
counterparties with the highest long-term credit ratings, and with primary
United States government securities dealers recognized by the Federal Reserve
Bank of New York.
The hours of trading for options on securities may not conform to the hours
during which the underlying securities are traded. To the extent that the
option markets close before the markets for the underlying securities,
significant price and rate movements can take place in the underlying markets
that cannot be reflected in the option markets.
FUTURES CONTRACTS AND OPTIONS ON FUTURES CONTRACTS
Characteristics. The Fund may purchase and sell futures contracts on
interest rates and securities indices and purchase and sell (write) put and
call options on such futures contracts traded on recognized domestic exchanges
as a hedge against anticipated interest rate changes or other market
movements. The sale of a futures contract creates an obligation by the Fund,
as seller, to deliver the specific type of financial instrument called for in
the contract at a specified future time for a specified price. Options on
futures contracts are similar to options on securities except that an option
on a futures contract gives the purchaser the right in return for the premium
paid to assume a position in a futures contract (a long position if the option
is a call and a short position if the option is a put).
Margin Requirements. At the time a futures contract is purchased or sold,
the Fund must allocate cash or securities as a deposit payment ("initial
margin"). It is expected that the initial margin that the Fund will pay may
range from approximately 1% to approximately 5% of the value of the
instruments underlying the contract. In certain circumstances, however, such
as during periods of high volatility, the Fund may be required by an exchange
to increase the level of its initial margin payment. Additionally, initial
margin requirements may be increased in the future pursuant to regulatory
action. An outstanding futures contract is valued daily and the payment in
cash of "variation margin" may be required, a process known as "marking to the
market." Transactions in listed options and futures are usually settled by
entering into an offsetting transaction, and are subject to the risk that the
position may not be able to be closed if no offsetting transaction can be
arranged.
Limitations on Use of Futures Contracts and Options on Futures
Contracts. The Fund's use of futures contracts and options on futures
contracts will in all cases be consistent with applicable regulatory
requirements and in particular, the rules and regulations of the CFTC. In
addition, the Fund may not sell futures contracts if the value of such futures
contracts exceeds the total market value of the Fund's portfolio securities.
The Fund may engage in transactions in futures contracts or options thereon
for speculative purposes or as a hedge against changes resulting from market
conditions in the values of securities in its portfolio. The Fund may enter
into futures contracts or options thereon for purposes other than bona fide
hedging if, immediately thereafter, the sum of the amount of its initial
margin and premiums on open contracts and options would not exceed 5% of the
liquidation value of the Fund's portfolio; provided further that in the case
of an option that is
B-3
<PAGE>
in-the-money at the time of the purchase, the in-the-money amount may be
excluded in calculating the 5% limitation. Also, when required, a segregated
account of cash or cash equivalents will be maintained and marked to market in
an amount equal to the market value of the contract. SBAM reserves the right
to comply with such different standards as may be established from time to
time by CFTC rules and regulations with respect to the purchase and sale of
futures contracts and options thereon.
Segregation and Cover Requirements. Futures contracts, interest rate swaps,
caps, floors and collars, and options on securities, indices and futures
contracts sold by the Fund are generally subject to segregation and coverage
requirements established by either the CFTC or the Commission, with the result
that, if the Fund does not hold the instrument underlying the futures contract
or option, the Fund will be required to segregate on an ongoing basis with its
custodian, cash, U.S. government securities, or other liquid assets in an
amount at least equal to the Fund's obligations with respect to such
instruments. Such amounts will fluctuate as the market value of the
obligations increases or decreases. The segregation requirement can result in
the Fund maintaining positions it would otherwise liquidate and consequently
segregating assets with respect thereto at a time when it might be
disadvantageous to do so. In addition, with respect to futures contracts
purchased by the Fund, the Fund will also be subject to the segregation
requirements with respect to the value of the instruments underlying the
futures contract.
Derivative Transactions present certain risks. In particular, the variable
degree of correlation between price movements of hedging instruments and price
movements in the position being hedged creates the possibility that losses on
the hedge may be greater than gains in the value of the Fund's positions. In
addition, certain hedging instruments and markets may not be liquid in all
circumstances. As a result, in volatile markets, the Fund may not be able to
close out a transaction in certain of these instruments without incurring
losses substantially greater than the initial deposit. Although the
contemplated use of these instruments should tend to minimize the risk of loss
due to a decline in the value of the hedged position, at the same time they
tend to limit any potential gain which might result from an increase in the
value of such position. The ability of the Fund to hedge successfully will
depend on SBAM's ability to predict pertinent market movements, which cannot
be assured. Finally, the daily variation margin deposit requirements in
futures contracts that the Fund has sold create an ongoing greater potential
financial risk than do transactions in which the Fund has purchased options
where the exposure is limited to the cost of the initial premium and
transaction costs paid by the Fund. While the Fund may enter into Derivative
Transactions to hedge all or a portion of its portfolio, changes in the
directions of markets that are the subject of a hedge and fluctuations in
interest rates may result in a poorer overall performance for the Fund than if
it had not engaged in any such transactions. Losses due to Derivative
Transactions will reduce the Fund's net asset value.
The Fund's investments in Derivative Transactions may be limited by certain
provisions of the Internal Revenue Code of 1986, as amended. See "Taxation" in
this Prospectus.
CURRENCY TRANSACTIONS
As discussed in the Prospectus, the Fund may engage in currency transactions
with counterparties to hedge the value of portfolio securities denominated in
particular currencies against fluctuations in relative value or to generate
income or gain. The types of currency transactions the Fund may engage in are
described in the Prospectus. Transaction hedging is entering into a currency
transaction with respect to specific assets or liabilities of the Fund, which
will generally arise in connection with the purchase or sale of the Fund's
portfolio securities
B-4
<PAGE>
or the receipt of income from them. Position hedging is entering into a
currency transaction with respect to portfolio securities positions
denominated or generally quoted in that currency. The Fund will not enter into
a transaction to hedge currency exposure to an extent greater, after netting
all transactions intended wholly or partially to offset other transactions,
than the aggregate market value (at the time of entering into the transaction)
of the securities held by the Fund that are denominated or generally quoted in
or currently convertible into the currency, other than with respect to proxy
hedging as described below.
The Fund may cross-hedge currencies by entering into transactions to
purchase or sell one or more currencies that are expected to increase or
decline in value relative to other currencies to which the Fund has or in
which the Fund expects to have exposure. To reduce the effect of currency
fluctuations on the value of existing or anticipated holdings of its
securities, the Fund may also engage in proxy hedging. Proxy hedging is often
used when the currency to which the Fund's holdings is exposed is difficult to
hedge generally or difficult to hedge against the U.S. dollar. Proxy hedging
entails entering into a forward contract to sell a currency, the changes in
the value of which are generally considered to be linked to a currency or
currencies in which some or all of the Fund's securities are or are expected
to be denominated, and buying U.S. dollars. The amount of the contract would
not exceed the market value of the Fund's securities denominated in linked
currencies.
Currency transactions are subject to risks different from those of other
portfolio transactions. Currency hedging involves some of the same risks and
considerations as other transactions with similar instruments. Currency
transactions can result in losses to the Fund if the currency being hedged
fluctuates in value to a degree or in a direction that is not anticipated.
Further, the risk exists that the perceived linkage between various currencies
may not be present or may not be present during the particular time that the
Fund is engaging in proxy hedging. Currency transactions are also subject to
risks different from those of other portfolio transactions. Because currency
control is of great importance to the issuing governments and influences
economic planning and policy, purchases and sales of currency and related
instruments can be adversely affected by government exchange controls,
limitations or restrictions on repatriation of currency, and manipulations or
exchange restrictions imposed by governments. These forms of governmental
actions can result in losses to the Fund if it is unable to deliver or receive
currency or monies in settlement of obligations and could also cause hedges it
has entered into to be rendered useless, resulting in full currency exposure
as well as the incurrence of transaction costs. Buyers and sellers of currency
futures contracts are subject to the same risks that apply to the use of
futures contracts generally. Further, settlement of a currency futures
contract for the purchase of most currencies must occur at a bank based in the
issuing nation. Trading options on currency futures contracts is relatively
new, and the ability to establish and close out positions on these options is
subject to the maintenance of a liquid market that may not always be
available. Currency exchange rates may fluctuate based on factors extrinsic to
a country's economy.
B-5
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRE-
SENTATIONS IN CONNECTION WITH THIS OFFERING, OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN
OR MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE FUND, ITS INVESTMENT ADVISER OR THE UNDERWRIT-
ERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF OR THAT THE INFORMA-
TION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER
TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCE IN WHICH SUCH AN OFFER OR SOLICITA-
TION IS UNLAWFUL.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors and Special Considerations.................................. 8
Fee Table................................................................ 18
The Fund................................................................. 19
Use of Proceeds.......................................................... 19
Investment Objectives and Policies....................................... 20
Additional Investment Activities......................................... 26
Investment Restrictions.................................................. 34
Management of the Fund................................................... 35
Portfolio Transactions................................................... 42
Dividends and Distributions; Dividend Reinvestment Plan.................. 43
Taxation................................................................. 46
Net Asset Value.......................................................... 51
Description of Capital Stock............................................. 51
Custodian, Transfer Agent, Dividend Paying Agent and Registrar........... 55
Underwriting............................................................. 56
Experts.................................................................. 59
Legal Matters............................................................ 59
Further Information...................................................... 59
Report of Independent Accountants........................................ 60
Statement of Assets and Liabilities...................................... 61
Appendix A: Description of Ratings....................................... A-1
Appendix B: General Characteristics and Risks of Hedging and Other
Strategic Transactions.................................................. B-1
</TABLE>
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UNTIL JUNE 15, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK,
WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER
A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF
DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT
TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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57,170,000 SHARES
SALOMON BROTHERS
HIGH INCOME
FUND II INC
COMMON STOCK
($.001 PAR VALUE)
-------
PROSPECTUS
MAY 21, 1998
-------
SALOMON SMITH BARNEY
A.G. EDWARDS & SONS, INC.
ADVEST, INC.
EVEREN SECURITIES, INC.
FAHNESTOCK & CO. INC.
JANNEY MONTGOMERY SCOTT INC.
LEGG MASON WOOD WALKER
INCORPORATED
MCDONALD & COMPANY
SECURITIES, INC.
MORGAN KEEGAN & COMPANY, INC.
THE ROBINSON-HUMPHREY COMPANY
TUCKER ANTHONY
INCORPORATED
WEDBUSH MORGAN SECURITIES
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