<PAGE>
As filed with the Securities and Exchange Commission on August 19, 1999
Securities Act File No. 333-48351
Investment Company Act File No. 811-08709
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM N-2
[X] Registration Statement under the Securities Act of 1933
[_] Pre-Effective Amendment No.
[X] Post-Effective Amendment No. 2
and/or
[X] Registration Statement under the Investment Company Act of 1940
[X] Amendment No. 4
(Check Appropriate Box or Boxes)
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SALOMON BROTHERS HIGH INCOME FUND II INC
(Exact Name of Registrant as Specified in Charter)
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Seven World Trade Center
New York, New York 10048
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code:
(888) 777-0102
Robert A. Vegliante, Esq.
Salomon Brothers High Income Fund II Inc
Seven World Trade Center
New York, New York 10048
(212) 783-7000
(Name and Address of Agent for Service)
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Copies to:
Gary S. Schpero, Esq.
Simpson Thacher & Bartlett
425 Lexington Avenue
New York, New York 10017
(212) 455-2000
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that the Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section
8(a), may determine.
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<PAGE>
CROSS-REFERENCE SHEET
Pursuant to Rule 481(a)
<TABLE>
<CAPTION>
N-2 Item Number Location in Prospectus (Caption)
--------------- --------------------------------
<C> <S> <C>
PART A
1. Outside Front Cover......... Outside Front Cover Page
2. Cover Pages; Other Offering Outside Front Cover Page; Inside Front
Information................ Cover Page; Outside Back Cover Page
3. Fee Table and Synopsis...... Prospectus Summary; Fee Table
4. Financial Highlights........ Financial Highlights
5. Plan of Distribution........ Not Applicable
6. Selling Shareholders........ Not Applicable
7. Use of Proceeds............. Use of Proceeds; Investment Objectives and
Policies
8. General Description of the Outside Front Cover Page; Prospectus
Registrant................. Summary; Risk Factors & Special
Considerations; The Fund; Investment
Objectives and Policies; Additional
Investment Activities; Description of
Capital Stock
9. Management.................. Outside Front Cover; Prospectus Summary;
Management of the Fund; Custodian,
Transfer Agent, Dividend Paying Agent and
Registrar
10. Capital Stock, Long-Term
Debt, and Other Outside Front Cover Page; Prospectus
Securities................. Summary; Investment Objectives and
Policies; Description of Capital Stock;
Taxation
11. Defaults and Arrears on
Senior Securities.......... Not Applicable
12. Legal Proceedings........... Not Applicable
13. Table of Contents of the
Statement of Additional
Information................ Not Applicable
PART B
14. Cover Page.................. Outside Front Cover Page
15. Table of Contents........... Inside Front Cover Page
16. General Information and
History.................... The Fund
17. Investment Objectives and Investment Objectives and Policies;
Policies................... Investment Restrictions
18. Management.................. Management of the Fund
19. Control Persons and
Principal Holders of
Securities................. Not Applicable
20. Investment Advisory and
Other Services............. Management of the Fund
21. Brokerage Allocation and
Other Practices............ Portfolio Transactions
22. Tax Status.................. Taxation
23. Financial Statements........ Financial Statements
</TABLE>
PART C
Information required to be included in Part C is set forth under the
appropriate Item, so numbered, in Part C to this Registration Statement.
<PAGE>
Prospectus August , 1999
Salomon Brothers High Income Fund II Inc
Common Stock
Listed on the New York Stock Exchange
Trading symbol--HIX
Salomon Brothers High Income Fund II Inc is a diversified, closed-end
management investment company. The fund's investment objective is to maximize
current income, with a secondary objective of capital appreciation to the
extent consistent with maximization of current income. The fund invests
primarily in high yield debt securities (commonly known as "junk bonds") rated
at the time of investment in medium or lower rating categories. These include
securities rated "Baa" or lower by Moody's Investors Servce, Inc. ("Moody's")
or "BBB" or lower by Standard & Poor's Rating Group ("S&P"), or unrated
securities of comparable quality. The fund also invests in securities of
foreign issuers, including issuers located in emerging market countries.
Medium and lower rated securities involve greater volatility and credit risk
than higher-rated securities. The fund is designed for investors willing to
assume a high degree of risk. The fund should not be considered a complete
investment program. Shares of closed-end funds frequently have market prices
that are less than the net asset value per share. For more information about
this or other risks of investing in the fund, see "Risk Factors" on page 4.
The prospectus contains important information about the fund. For your benefit
and protection, please read it before you invest, and keep it for future
reference.
Shareholder reports can be obtained without charge from your Salomon Smith
Barney Financial Consultant or from the fund by calling 1-888-772-0102 or
writing to the fund at Seven World Trade Center, New York, New York 10048. You
can review the fund's shareholder reports at the Securities and Exchange
Commission's Public Reference Room in Washington, D.C. The Commission charges a
fee for this service. Information about the Public Reference Room may be
obtained by calling 1-800-SEC-0330. You can get the same information free from
the Commission's Internet web site at www.sec.gov.
The Securities and Exchange Commission has not approved the fund's shares as an
investment or determined whether this prospectus is accurate or complete. Any
statement to the contrary is a crime.
SALOMON BROTHERS ASSET MANAGEMENT INC
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary....................................................... 1
Risk Factors and Special Considerations.................................. 4
Fee Table................................................................ 10
Financial Highlights..................................................... 11
The Fund................................................................. 12
Use of Proceeds.......................................................... 12
Investment Objectives and Policies....................................... 12
Additional Investment Activities......................................... 17
Investment Restrictions.................................................. 25
Management of the Fund................................................... 26
Portfolio Transactions................................................... 32
Dividends and Distributions; Dividend Reinvestment Plan.................. 33
Taxation................................................................. 35
Net Asset Value.......................................................... 41
Description of Capital Stock............................................. 41
Custodian, Transfer Agent, Dividend Paying Agent and Registrar........... 45
Experts.................................................................. 45
Further Information...................................................... 45
Financial Statements..................................................... 45
Appendix A: Description of Ratings....................................... A-1
Appendix B: General Characteristics and Risks of Hedging and Other
Strategic Transactions.................................................. B-1
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
The following is a summary of more complete information appearing later in
the prospectus. You should read the entire prospectus because it contains
details that are not in the summary. Cross references in the summary to
headings in the prospectus will help you locate information.
The Fund The fund is a diversified closed-end management
investment company. See "The Fund."
Investment The fund's investment objective is to maximize current
Objectives, income. The fund's secondary objective is capital
Policies and appreciation to the extent consistent with its primary
Risks objective of maximizing current income. The fund invests
primarily in high yield debt securities (commonly known
as "junk bonds") rated at the time of investment in
medium or lower rating categories. These include
securities rated "Baa" or lower by Moody's, "BBB" or
lower by S&P, or unrated securities of comparable
quality. Medium and lower rated securities involve
greater volatility and credit risk than higher-rated
securities.
The fund normally invests at least 65% of its assets in
high yield debt securities. The fund may invest up to 35%
of its assets in foreign debt securities, including the
debt securities of issuers located in emerging market
countries. The fund also may invest up to 30% of its
assets in zero coupon securities, pay-in-kind bonds and
deferred payment securities, up to 20% of its assets in
equity securities. See "Investment Objectives and
Policies."
The fund may attempt to increase total return by engaging
in "leverage" through borrowing or by issuing shares of
preferred stock or debt securities in an amount up to 33%
of the fund's assets (including the amount obtained from
leverage). The currently fund intends to engage in
leverage of approximately 25% of its total assets.
Leverage is a speculative techniqueinvolving special
risks and costs. Although the fund attempts to limit some
of these risks by certain hedging techniques, 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 fund is not intended to be a complete investment
program and there is no assurance that the fund will
achieve its objectives. The value of the securities in
the fund's portfolio will fluctuate in price, causing the
value of your investment in the fund to fluctuate. This
means that you could lose money on your investment in the
fund or the fund could perform less well than other
possible investments. In addition, the price of the
shares is determined by market prices on the NYSE and
elsewhere, so you may receive a price that is less than
net asset value when you sell your shares. Specific risks
associated with an investment in the fund are described
below in "Risk Factors and Special Considerations."
1
<PAGE>
The Offering The fund's shares of common stock trade on the New York
Stock Exchange ("NYSE"). In addition, Salomon Smith
Barney intends to buy and sell the fund's shares and will
make a market in the common stock. Salomon Smith Barney
is not obligated to conduct market-making activities and
may stop doing so at any time without notice to the fund
or its shareholders. See "The Offering" and "Use of
Proceeds."
Listing NYSE.
Stock Symbol HIX.
Investment The fund's investment manager is Salomon Brothers Asset
Manager Management Inc. ("SBAM"). SBAM is a subsidiary of
Citigroup Inc.
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. See "Management
of the fund."
Management and The fund pays SBAM for its investment management services
Administration a monthly fee at an annual rate of 1.00% of the value of
Fees 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--Investment Manager." This
fee is higher than fees paid by other comparable
investment companies. The fund will also pay SSBC Fund
Management Inc. (formerly 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 payable to SBAM and the Administrator
as a percentage of the fund's assets will be higher than
if the fund did not utilize leverage, 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 The fund makes regular monthly cash distributions to
Distributions 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. The fund distributes net
realized capital gains, if any, at least annually. From
and
2
<PAGE>
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. These policies may be changed by the
fund's board of directors at any time.
Dividend Your dividends or distributions are reinvested in
Reinvestment additional shares of common stock through participation
Plan in the Dividend Reinvestment Plan, unless you elect to
receive cash (or unless the fund declares a cash-only
dividend). If your shares are held in the name of a
broker or nominee, you should confirm that the broker or
nomeinee is able to participate in the plan.
The number of shares issued to you by the plan depends on
the price of the shares. The price of the shares is
determined by the market price at the time the shares are
purchased.
<TABLE>
<CAPTION>
Market Price of Fund Shares Price of Fund Shares Issued by Plan
<S> <C>
Greater than or equal to net Shares issued at net asset value or
asset value 95% of market price, whichever is
greater
Less than net asset value Market price
</TABLE>
See "Dividends and Distributions; Dividend Reinvestment
Plan."
Taxation The fund intends has elected and intends to qualify as a
regulated investment company for U.S. federal income tax
purposes. As such, it generally will not be subject to
U.S. federal income tax on income and gains that are
distributed to shareholders. See "Taxation."
Custodian PNC Bank, National Association (PNC Bank) is the fund's
custodian. See "Custodian, Transfer Agent, Dividend-
Paying Agent, Registrar and Plan Agent."
Transfer Agent, First Data Investor Services Group, Inc. (First Data) is
Dividend Paying the fund's transfer agent, dividend-paying agent and
Agent and registrar. See "Custodian, Transfer Agent, Dividend-
Registrar Paying Agent, Registrar and Plan Agent."
3
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
As described above, the value of the securities in the fund's portfolio will
fluctuate in price, causing the value of your investment in the fund to
fluctuate. This means that you could lose money on your investment in the fund
or the fund could perform less well than other possible investments due to any
of the following:
Default Risk Investments in fixed income securities are subject to the
risk that the issuer of the security could default on its
obligations, causing a fund to sustain losses on those
investments. A default could impact both interest and
principal payments. High yield fixed income securities
(commonly known as "junk bonds") are considered
speculative with respect to the issuer's capacity to pay
interest and repay principal in accordance with the terms
of the obligations. This means that, compared to issuers
of higher rated securities, issuers of medium and lower
rated securities are less likely 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.
The market values of medium and lower-rated securities
tend to be more sensitive to company-specific
developments and changes in economic conditions than
higher-rated securities. The companies that issue these
securities often are highly leveraged, and their ability
to service their debt obligations during an economic
downturn or periods of rising interest rates may be
impaired. In addition, these companies may not have
access to more traditional methods of financing, 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 these issuers is significantly greater than
with higher rated securities because medium and lower
rated securities generally are unsecured and subordinated
to senior debt.
Default, or the market's perception that an issuer is
likely to default, could reduce the value and liquidity
of securities held by the fund, thereby reducing the
value of your investment in fund shares. In addition,
default may cause the fund to incur expenses in seeking
recovery of principal or interest on its portfolio
holdings.
Interest Rate When interest rates decline, the market value of fixed
Risk income securities tends to increase. Conversely, when
interest rates increase, the market value of fixed income
securities tends to decline. These fluctuations can be
expected to be greater for investments in fixed-income
securities with longer maturities than investments in
securities with shorter maturities. Although there is no
limitation on the average maturity of the fund's
portfolio, SBAM currently expects that the fund's high
yield debt portfolio will 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.
4
<PAGE>
Economic Risk High yield bonds have historically been found to be more
sensitive to adverse economic changes or individual
corporate developments than higher-rated investments.
Thus, an economic downturn could disrupt the market for
high yield bonds and adversely affect the value of
outstanding bonds and the ability of issuers to repay
principal and interest.
Call or As interest rates decline, issuers of high yield bonds
Redemption Risk may exercise redemption or call provisions. This may
force the fund to redeem higher yielding securities and
replace them with lower yielding securities with a
similar risk profile. This could result in a decreased
return.
Risk of Investments in securities of foreign issuers involve
Investing in certain risks not ordinarily associated with investments
Foreign Issuers in securities of domestic issuers. These risks include
(Including fluctuations in foreign exchange rates, future political
those in and economic developments, and the possible imposition of
Emerging exchange controls or other foreign governmental laws or
Markets) restrictions. In addition, in certain countries, there is
the possibility of expropriation of assets, confiscatory
taxation, political or social instability or diplomatic
developments which could adversely affect investments in
those countries.
Foreign securities markets, while growing in volume,
have, for the most part, substantially less volume than
U.S. markets, and securities of many foreign companies
are less liquid and their price more volatile than
securities of comparable U.S. companies. Transaction
costs on foreign securities markets are generally higher
than in the U.S. There is generally less government
supervision and regulation of exchanges, brokers and
issuers than there is in the U.S. A fund might have
greater difficulty taking appropriate legal action in
foreign courts. 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. Moreover,
interest income from foreign securities will generally be
subject to withholding taxes by the country in which the
issuer is located and may not be recoverable by the fund
or the investors. Capital gains also are subject to
taxation in some foreign countries. These risks generally
are heightened for issuers in emerging market countries.
Sovereign/Emerging Market Debt. 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 issuers or the governmental authorities that
control repayment of their external debt to pay principal
and interest on such debt when due may depend on general
economic and political conditions within the relevant
5
<PAGE>
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.
The ability of a foreign sovereign issuer, especially in
an emerging market country, to make timely and ultimate
payments on its debt obligations will also be strongly
influenced by the sovereign issuer'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
sovereign issuer 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 multinational
organizations.
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 International Bank
for Reconstruction and Development 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 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.
Heightened risks of investing in emerging market
sovereign debt include:
. Risk of default by a governmental issuer or
guarantor. In the event of a default, the fund may
have limited legal recourse against the issuer
and/or guarantor.
. Risk of restructuring certain debt obligations
(such as Brady Bonds). This may include reducing
and rescheduling interest and principal payments or
requiring lenders to extend additional credit,
which may adversely affect the value of these
investments.
6
<PAGE>
Foreign corporate securities. There may be less publicly
available information about a foreign company than about
a U.S. company, and foreign companies may not be subject
to accounting, auditing, and financial reporting
standards and requirements comparable to or as uniform as
those of U.S. companies.
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. Moreover, brokerage commissions and
other transaction costs on foreign securities exchanges
are generally higher than in the United States.
Exchange rate risks. Because the fund may invest in
securities denominated or quoted in currencies other than
the U.S. dollar, changes in foreign currency exchange
rates will, to the extent the fund does not adequately
hedge against these changes, affect the U.S. dollar value
of securities in its portfolio and the unrealized U.S.
dollar appreciation or depreciation of investments.
Currencies of certain countries may be volatile and
subject to risk of revaluation, which may reduce the
value of securities denominated in those currencies.
Illiquidity The secondary markets for high yield securities are not
Risk 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, and the trading volume for high yield debt
securities is generally lower than that for higher-rated
securities. Accordingly, these secondary markets
(generally or for a particular security) could contract
under real or perceived adverse market or economic
conditions. 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. 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.
7
<PAGE>
Legislative and Prices for high yield securities may be affected by
Regulatory Risk 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. These risks generally are higher than issuers
in emerging market countries.
Leverage The fund may engage in "leverage" by borrowing from
banks, on a secured or unsecured basis, up to 33 1/3% of
the value of its assets, and using the proceeds of the
borrowings to make additional investments. Leverage,
which involves costs to the fund including interest or
dividend expenses, creates an opportunity for increased
returns, but also creates risk of significant losses. If
the fund uses leverage to make additional investments for
its portfolio, the amount of income and appreciation from
these additional investments will improve the fund's
performance only if it exceeds the fund's leverage-
related costs. These investments will reduce the fund's
performance if the amount of their income and
appreciation is less than the fund's leverage-related
costs. Further, if the investments lose value, the
resulting losses to the fund will be greater than if the
fund did not use leverage because the fund will be
obligated to repay principal and interest on the borrowed
money in addition to having investment losses. The fund
might have to liquidate securities to cover its leverage-
related costs or repay principal. Depending on market or
other conditions, these liquidations could be
disadvantageous to the fund. Therefore, leverage may
exaggerate changes in the fund's net asset value or
yield, and the fund's market value. During periods in
which the fund is utilizing financial leverage, the fees
which are payable to the manager as a percentage of the
fund's assets will be higher than if the fund did not use
leverage, because the fees are calculated as a percentage
of the fund's assets, including those purchased with
leverage.
Additional
Investment
Strategies The fund may employ various additional investment
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.
8
<PAGE>
Trading Shares of closed-end investment companies (such as the
Discount fund) often trade at a discount from net asset value.
This risk is 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 after
acquiring them. 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 the manager and the services provided to shareholders
by Salomon Smith Barney depend on the smooth functioning
of their 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 and calculated. That failure could
have a negative impact on the fund's operations,
including the handling of securities trades, pricing and
account services. The cost of addressing the year 2000
issue, if substantial, could also adversely affect
companies and governmental entities, especially those
located outside the U.S., that issue securities held by
the fund. The manager and Salomon Smith Barney have
advised the fund that they have been reviewing all of
their computer systems and actively working on necessary
changes to their systems to prepare for the year 2000 and
expect that their systems will be compliant before that
date. In addition, the manager has been advised by the
fund's custodian, transfer agent and accounting service
agent that they are also in the process of modifying
their systems with the same goal. There can, however, be
no assurance that the manager, Salomon Smith Barney or
any other service provider will be successful, or that
interaction with other non-complying computer systems
will not impair fund services at that time.
Anti-Takeover Certain provisions of the fund's articles of
Provisions incorporation and by-laws may have the effect of
inhibiting a future attempt to convert the fund to open-
end status and limiting the ability of other persons to
acquire control of the fund. In some circumstances, these
provisions might also inhibit the ability to sell fund
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."
9
<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)................................. %
Interest Payments on Borrowed Funds................................... None
Other Expenses........................................................ %
----
Total Annual Expenses............................................... %
====
</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 $10,000 investment, assuming (1) total
annual expenses of % and % and (2) a 5%
annual return throughout the periods:
$ $ $ $
</TABLE>
(a) See "Management of the Fund."
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 regulations promulgated by the Securities and Exchange Commission (the
"Commission"). 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.
10
<PAGE>
FINANCIAL HIGHLIGHTS
The following information has been audited by PriceWaterhouseCoopers LLP,
independent auditors, whose report thereon appears in the fund's annual report
dated April 30, 1999. This information should be read in conjunction with the
financial statements and related notes that also appear in the fund's 1999
annual report to shareholders, which is incorporated by reference into this
prospectus.
<TABLE>
<CAPTION>
Smith Barney Municipal Fund, Inc. 1999 1998(a)(b)
-----------------------------------------------------------
<S> <C> <C>
Net Asset Value Beginning of Year $ $
-----------------------------------------------------------
Income (Loss) From Operations:
Net investment income
Net realized and unrealized gain (loss)
-----------------------------------------------------------
Total Income (Loss) from Operations
-----------------------------------------------------------
Less Distributions From:
Net investment income
In excess of net investment income -- --
Net realized gains -- --
-----------------------------------------------------------
Total Distributions
-----------------------------------------------------------
Net Asset Value, End of Year
-----------------------------------------------------------
Total Return, Based on
Market Value** % %++
-----------------------------------------------------------
Total Return, Based on
Net Asset Value** % %++
-----------------------------------------------------------
Net Assets, End of Year (millions)
-----------------------------------------------------------
Ratios to Average Net Assets:
Expenses % %+
Net investment income
-----------------------------------------------------------
Fund Turnover Rate % %
-----------------------------------------------------------
Market Value, End of Year $ $
-----------------------------------------------------------
</TABLE>
(a) Based on the weighted average shares outstanding for period.
(b) For the period from , 1998 (commencement of operations) to
April 30, 1998.
++Total return is not annualized as it may not be representative of the
total return for the year.
+ Annualized.
** The total return calculation assumes that dividends are reinvested in
accordance with the fund's dividend reinvestment plan.
11
<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 fund will not receive any proceeds from the sale of common stock offered
pursuant to this prospectus. Proceeds received by Salomon Smith Barney as a
result of its market-making in common stock will be utilized by Salomon Smith
Barney in connection with its secondary market operations and for general
corporate purposes.
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. 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
12
<PAGE>
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 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 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."
13
<PAGE>
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."
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 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.
14
<PAGE>
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 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.
15
<PAGE>
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
even though cash payments have not yet been received 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 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 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
16
<PAGE>
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 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
17
<PAGE>
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 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
18
<PAGE>
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.
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
19
<PAGE>
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,
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 shareholders when portfolio return is
positive and greater than the cost of leverage and decreases the
20
<PAGE>
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>
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 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.
21
<PAGE>
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 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
22
<PAGE>
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 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 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.
23
<PAGE>
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 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.
24
<PAGE>
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 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;
25
<PAGE>
(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, an affiliate of Salomon Smith Barney and a wholly-
owned subsidiary of Citigroup Inc., 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
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 June
30, 1999, SBAM and its worldwide investment advisory affiliates managed
approximately $30 billion of assets. SBAM's business offices are located at 7
World Trade Center, New York, New York 10048.
26
<PAGE>
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
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.
27
<PAGE>
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.
Administrator
SSBC Fund Management Inc. ("SSBC") (formerly Mutual Management Corp.), an
affiliate of Salomon Smith Barney and a wholly-owned subsidiary of Citigroup
Inc., will act as administrator for the fund. Under the administration
agreement with the fund, SSBC 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 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
28
<PAGE>
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 Managing Director,
Salomon Smith Barney board of directors and President Salomon Smith Barney;
388 Greenwich Street, 22nd Director of 42
Fl. investment companies
New York, NY 10013 associated with Salomon
Age: 65 Smith Barney; Director
and President of SSBC
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.
Charles F. Barber............ Director Consultant, formerly
66 Glenwood Drive Chairman of the Board,
Greenwich, CT 06830 ASARCO Incorporated.
Age: 82
Daniel P. Cronin............. Director Vice President and
Pfizer Inc. General Counsel, Pfizer
235 East 42nd Street International Inc.;
New York, NY 10017 Senior Assistant General
Age: 53 Counsel, Pfizer, Inc.
Dr. Riordan Roett............ Director Professor and Director,
Johns Hopkins University Latin American Studies
1740 Massachusetts Program, Paul H. Nitze
Avenue, NW School of Advanced
Washington D.C. 20036 International Studies,
Age: 60 Johns Hopkins
University.
Jeswald W. Salacuse.......... Director Henry J. Braker
220 Stone Route Lane Professor of Commercial
Concord, MA 01742 Law and formerly Dean,
Age: 61 The Fletcher School of
Law and Diplomacy, Tufts
University.
</TABLE>
- ------------
* Director who is an "interested person" within the meaning of the 1940 Act.
29
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Age Position With the Fund Principal Occupation and Other Affiliations
--------------------- ------------------------ -------------------------------------------
<C> <C> <S>
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: 39
Christina T. Sydor, Esq...... Secretary Managing Director of Salomon Smith
Salomon Smith Barney Barney; General Counsel and
388 Greenwich Street Secretary of SSBC; Secretary of 42
New York, NY 10013 investment companies associated
Age: 47 with Salomon Smith Barney.
Beth A. Semmel............... Executive Vice President Managing Director of SBAM since
Salomon Brothers Asset December 1998. From January 1996 to
Management Inc December 1998, Director of SBAM.
7 World Trade Center From May 1993 to December 1995,
New York, NY 10048 Vice President of SBAM.
Age: 37
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: 35
James E. Craige.............. Executive Vice President Managing Director of SBAM since
Salomon Brothers Asset December 1998. From December 1997
Management Inc to December 1998, Director of SBAM.
7 World Trade Center Vice President of SBAM from 1992 to
New York, NY 10048 December 1997.
Age: 31
Thomas K. Flanagan........... Executive Vice President Managing Director of SBAM since
Salomon Brothers Asset December 1998. From 1991 to
Management Inc December 1998, Director of SBAM.
7 World Trade Center
New York, NY 10048
Age: 45
</TABLE>
30
<PAGE>
<TABLE>
<CAPTION>
Name, Address and Age Position With the Fund Principal Occupation and Other Affiliations
--------------------- ------------------------ -------------------------------------------
<C> <C> <S>
Lewis E. Daidone............ Executive Vice President Managing Director of Salomon Smith
Salomon Smith Barney and Treasurer Barney; Director and Senior Vice
388 Greenwich Street President of SSBC; Senior Vice
New York, NY 10013 President and Treasurer of 42
Age: 41 investment companies associated with
Salomon Smith Barney.
Anthony Pace................ Controller Controller of investment companies
Salomon Brothers Asset associated with Salomon Smith
Management Inc Barney, including SBAM.
7 World Trade Center
New York, NY 10048
Age: 34
</TABLE>
Compensation Table
The following table provides information concerning the compensation paid
during the fiscal year ended April 30, 1999 to each director of the fund and,
for the calendar year ended December 31, 1998, 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 was 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>
Total Compensation
Aggregate from Other Funds
Compensation Advised by SBAM
Name of Person, Position from the Fund and Affiliates(A)
- ------------------------ ------------- ------------------
<S> <C> <C>
Daniel P. Cronin
Director..................................... $8,500 $ ( )
Dr. Riordan Roett
Director..................................... $8,500 $ ( )
Jeswald W. Salacuse
Director..................................... $8,500 $ ( )
</TABLE>
(A) The numbers in parentheses indicate the applicable number of investment
company directorships held by that director.
* Includes compensation from investment companies advised by affiliates of
Salomon Smith Barney which are affiliates of SBAM.
Directors who are not officers, directors or employees of SBAM or of any
"interested person" thereof (as defined in the 1940 Act) will be paid a fee of
$5,000 per year, plus $700 for every meeting of the board of directors or
committee thereof.
The officers of the fund conduct and supervise the daily business operations
of the fund, while the directors, in addition to performing their functions set
forth under "Management of the Fund," review such actions and determine general
policy.
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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.
The board of directors is 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 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
32
<PAGE>
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
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 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 federal income tax law, would be
available to supplement future distributions which might otherwise have been
reduced by a decrease in the fund's monthly net income due to fluctuation in
investment income or expenses. 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
33
<PAGE>
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.
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
34
<PAGE>
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 the difference between such fair market value and the
amount of cash the shareholder would otherwise have received may be treated as
a return of capital, and the shareholder should have a cost basis in such
shares equal to such fair market value, adjusted by any amount treated as a
return of capital to the shareholder. 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 equal
to the amount of the cash 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.
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.
35
<PAGE>
The Fund
The fund has elected or intends to elect and intends to qualify for each
taxable year 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 total 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 total 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 total 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, which includes any excess of net short-term capital gain over net long-
term capital loss and is determined 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 its 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 and gain it distributes or is deemed
to distribute 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 ending on October 31 of each year; and (c) 100%
of the undistributed ordinary income and capital gain net income from 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
36
<PAGE>
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 (if any), income not qualifying for the
dividends-received deduction and net capital gain 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 or for 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 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 or revised issue price 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
37
<PAGE>
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 or if the basis
would be reduced below zero.
Shareholders
Distributions. Distributions to shareholders of net investment income
(including distributions from net short-term capital gain) 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.
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 20%. The
current maximum federal income tax rate imposed on individuals with respect to
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.
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 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
38
<PAGE>
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 earnings and profits 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.
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),
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 other than to the fund will be taxed as
capital gain or loss if the shares are capital assets in the shareholder's
hands. If shares are sold to the fund (e.g., in connection with a tender
offer), the same tax treatment will result for any sale that satisfies the
applicable requirements of the Code for avoiding dividend treatment. 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.
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) 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
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<PAGE>
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, 2000 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, 2000. 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 (including capital gain
dividends) and the proceeds of sales of fund shares paid to non-corporate
shareholders or certain corporate shareholders who fail to provide required
information or certifications. This tax may be withheld from dividends if (i)
the shareholder fails to furnish the fund with the shareholder's correct and
properly certified taxpayer identification number, (ii) the IRS or a broker
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. Sales 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.
40
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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). 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. 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.
Preferred Stock
The fund's articles of incorporation provide 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.
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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 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
42
<PAGE>
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
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
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<PAGE>
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.
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
44
<PAGE>
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.
EXPERTS
The financial statement of the fund included in this prospectus has been so
included in reliance on the report of PriceWaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
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.
FINANCIAL STATEMENTS
The fund's audited financial statements for the fiscal year ended April 30,
1999 and the report of independent accountants are incorporated by reference
into this prospectus from the fund's annual report dated April 30, 1999 and
filed with the commission on July 19, 1999, accession number (91155-99-000458).
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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
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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>
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.
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>
SALOMON BROTHERS ASSET MANAGEMENT INC
- --------------------------------------
A member of citigroup [LOGO]
Salomon Brothers High Income Fund II Inc
Seven World Trade Center
New York, New York 10048
Common Stock
All dealers effecting transactions in the fund's securities, whether or not
participating in this distribution, may be required to give investors a
prospectus.
If someone makes a statement about the fund that is not in this prospectus, you
should not rely upon that information. This prospectus does not offer any
security other than the fund's shares of common stock. Neither the fund nor
Salomon Brothers Asset Management is offering to sell shares of the fund to any
person to whom the fund may not lawfully sell its shares.
There may be changes in the fund's affairs that occur after the date of the
prospectus. The fund will publish a supplement to the prospectus if there are
any material changes in its business.
<PAGE>
PART C
OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(1) The fund's audited Financial Statements for the fiscal year ended April 30,
1999 included in Part B of the Registration Statement are incorporated herein
by reference to the fund's Annual Report dated April 30, 1999 and filed with
the Commission on July 19, 1999, accession number 91155-99-000458
Exhibits
<TABLE>
<C> <S>
(2)(a) --Amended and Restated Articles of Incorporation are incorporated
herein by reference to Exhibit 2(a) of Registrant's Registration
Statement on Form N-2 filed on May 21, 1998
(b) --Amended and Restated By-Laws are incorporated herein by reference to
Exhibit 2(b) of Registrant's Registration Statement on Form N-2 filed
on May 21, 1998
(c) --Not Applicable
(d)(1) --Specimen Stock Certificate is incorporated herein by reference to
Exhibit 2(d)(1) of Registrant's Registration Statement on Form N-2
filed on April 29, 1998.
(2) --Articles V and VIII of Registrant's Articles of Incorporation and
Article II of Registrant's By-Laws are incorporated herein by
reference to Exhibits 2(a) and 2(b) hereof, respectively.
(e) --Form of Dividend Reinvestment Plan is incorporated herein by
reference to Exhibit 2(e) of Registrant's Registration Statement on
Form N-2 filed on April 29, 1998.
(f) --Not Applicable
(g) --Form of Investment Management Agreement is incorporated herein by
reference to Exhibit 2(g) of Registrant's Registration Statement on
Form N-2 filed on April 29, 1998.
(h)(1) --Form of Underwriting Agreement is incorporated herein by reference
to Exhibit 2(h)(1) of Registrant's Registration Statement on Form N-2
filed on May 21, 1998
(2) --Form of Master Agreement Among Underwriters is incorporated herein
by reference to Exhibit 2(h)(2) of Registrant's Registration
Statement on Form N-2 filed on April 29, 1998.
(3) --Form of Selling Agreement is incorporated herein by reference to
Exhibit 2(h)(3) of Registrant's Registration Statement on Form N-2
filed on April 29, 1998.
(i) --Not Applicable
(j) --Form of Custodian Agreement is incorporated herein by reference to
Exhibit 2(j) of Registrant's Registration Statement on Form N-2 filed
on May 21, 1998
(k)(1) --Form of Administration Agreement is incorporated herein by reference
to Exhibit 2(k)(1) of Registrant's Registration Statement on Form N-2
filed on April 29, 1998.
(2) --Form of Transfer Agency and Services Agreement is incorporated
herein by reference to Exhibit 2(k)(2) of Registrant's Registration
Statement on Form N-2 filed on April 29, 1998.
(l) --Opinion and Consent of Counsel is incorporated herein by reference
to Exhibit 2(l) of Registrant's Registration Statement on Form N-2
filed on May 21, 1998
(m) --Not Applicable
(n) --Consent of Independent Accountants*
(o) --Not Applicable
(p) --Form of Stock Purchase Agreement is incorporated herein by reference
to Exhibit 2(p) of Registrant's Registration Statement on Form N-2
filed on April 29, 1998.
(q) --Not Applicable
(r) --Intentionally Omitted
(s) --Power of Attorney of Heath B. McClendon, Charles F. Barber, Daniel
P. Cronin, Riordan Roett and Jeswald W. Salacuse is incorporated by
reference to Page C-4 of Registrant's Registration Statement on Form
N-2 filed on April 29, 1998.
</TABLE>
- --------
* To be filed by amendment.
C-1
<PAGE>
Item 25. Marketing Arrangements
See Exhibits 2(h)(1), 2(h)(2) and 2(h)(3) to this Registration Statement.
Item 26. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses to be incurred in
connection with the offering described in this Registration Statement:
<TABLE>
<S> <C>
SEC Registration fees............................................ $ 295,000
New York Stock Exchange listing fee.............................. 300,433
Printing and engraving expenses.................................. 341,300
Legal fees and expenses.......................................... 138,000
NASD Fees........................................................ 38,500
Miscellaneous.................................................... 431,767
----------
Total.......................................................... $1,545,000
==========
</TABLE>
Item 27. Persons Controlled by or Under Common Control with Registrant
Not Applicable.
Item 28. Number of Holders of Securities (August 16, 1999)
<TABLE>
<CAPTION>
Title of Class Number of Record Holders
-------------- ------------------------
<S> <C>
Common Stock, par value $.001 per share............. 507
</TABLE>
Item 29. Indemnification
Under the Registrant's Amended and Restated Articles of Incorporation and
Amended and Restated By-Laws, the directors and officers of the Registrant
will be (and employees and agents of the Registrant may be) indemnified to the
fullest extent allowed and in the manner provided by Maryland law and
applicable provisions of the Investment Company Act of 1940, as amended,
including advancing of expenses incurred in connection therewith.
Indemnification shall not be provided, however, to any person against any
liability to the Registrant or its security-holders to which he or she would
otherwise be subject by reasons of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of his
or her office.
Insofar as indemnification for liabilities under the Securities Act of 1933
may be permitted to the directors and officers, the Registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in such Act and is
therefore unenforceable. If a claim for indemnification against such
liabilities under the Securities Act of 1933 (other than for expenses incurred
in a successful defense) is asserted against the Registrant by the directors
or officers in connection with the Common Stock, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of
whether such indemnification by it is against public policy as expressed in
such Act and will be governed by the final adjudication of such issue.
Reference is made to Section Eight of the Underwriting Agreement, a form of
which is filed as Exhibit 2(h)(1) hereto, for provisions relating to the
indemnification of the Underwriters.
Item 30. Business and Other Connections of Adviser
For information as to the business, profession, vocation or employment of a
substantial nature of each of the officers and directors of Salomon Brothers
Asset Management Inc ("SBAM"), reference is made to SBAM's current Form ADV
filed under the Investment Advisers Act of 1940, incorporated herein by
reference.
Item 31. Location of Accounts and Records
The accounts and records of the Registrant are maintained at the office of
(i) SBAM at Seven World Trade Center, New York, New York 10048, (ii) at PNC
Bank, N.A., the Registrant's custodian, at Airport Business Center,
International Court 2, 200 Stevens Drive, Lester, Pennsylvania 19113, (iii)
First Data Investor Services
C-2
<PAGE>
Group, Inc., the Registrant's transfer agent, at P.O. Box 5127, Westborough,
Massachusetts 01581-5127; and (iv) Mutual Management Corp., the Registrant's
administrator, at 388 Greenwich Street, New York, New York 10013.
Item 32. Management Services
Not Applicable
Item 33. Undertakings
(1) Registrant undertakes to suspend the offering of Common Stock until the
prospectus is amended, if subsequent to the effective date of this
registration statement, its net asset value declines more than ten percent
from its net asset value as of the effective date of the registration
statement or its net asset value increases to an amount greater than its net
proceeds as stated in the prospectus.
(2) Not Applicable
(3) Not Applicable
(4) Not Applicable
(5) Not Applicable
(6) Not Applicable
C-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Registrant has duly caused this Registration Statement
to be signed on its behalf by the undersigned, hereunto duly authorized, in the
City of New York, State of New York on the 19th day of August, 1999.
Salomon Brothers High Income Fund II
Inc
/s/ Heath B. McLendon
By: _________________________________
Heath B. McLendon
President
/s/ Lewis E. Daidone
By: _________________________________
Lewis E. Daidone
Treasurer & Chief Financial
Officer
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ Heath B. McLendon Chairman of the
- ------------------------------------- Board and President August 19, 1999
Heath B. McLendon
* Charles F. Barber Director
- ------------------------------------- August 19, 1999
Charles F. Barber
* Daniel P. Cronin Director
- ------------------------------------- August 19, 1999
Daniel P. Cronin
* Riordan Roett Director
- ------------------------------------- August 19, 1999
Riordan Roett
* Jeswald W. Salacuse Director
- ------------------------------------- August 19, 1999
Jeswald W. Salacuse
/s/ Heath B. McLendon
* By: _______________________________
Heath B. McLendon, Attorney-in-fact
C-4
