<PAGE>
PROSPECTUS
8,500,000 SHARES
TRAVELERS CORPORATE LOAN FUND INC.
COMMON STOCK
($.001 PAR VALUE)
-----------
Travelers Corporate Loan Fund Inc. (the "Fund") is a new, closed-end, non-
diversified investment company. The Fund's investment objective is to maximize
current income consistent with prudent efforts to preserve capital. The Fund
seeks to achieve its objective by investing primarily in interests in floating
or variable rate collateralized senior loans to corporations, partnerships and
other business entities operating in various industries (other than the
business of primarily investing, reinvesting or trading in securities or other
financial instruments) and geographical regions ("Collateralized Senior
Loans"). The Fund offers investors the opportunity to receive current income
by investing in a professionally managed portfolio of Collateralized Senior
Loans--a type of investment typically unavailable to individual investors.
Under normal market conditions, the Fund will invest at least 80% of its total
assets in Collateralized Senior Loans (as an original lender or as a purchaser
of an assignment or participation). These Collateralized Senior Loans will
generally be rated, when purchased, below investment grade by Moody's
Investors Service, Inc. (below Baa) or Standard & Poor's Ratings Group (below
BBB) or will be of comparable quality if unrated. Collateralized Senior Loans
generally involve greater volatility of price and risks to principal and
income than higher rated securities. The Fund may also invest up to 20% of its
total assets in uncollateralized senior loans, investment and non-investment
grade corporate debt securities and U.S. government debt securities both with
maturities no longer than five years from the date they are acquired by the
Fund, money market instruments, derivatives designed to hedge risks inherent
in the Fund's portfolio and certain other securities received in connection
with investments in Collateralized Senior Loans.
The Fund's net asset value per share will vary. The Fund is designed for
investors willing to assume certain risks in return for seeking to maximize
current income. The Fund expects that investing in Collateralized Senior
Loans, uncollateralized senior loans, debt securities with maturities no
longer than five years and money market instruments will minimize interest
rate related fluctuations in net asset value. The credit quality of borrowers
under Collateralized Senior Loans should be the most important factor
affecting the Fund's net asset value per share. There is no assurance that the
Fund will realize its investment objective. Investments in Collateralized
Senior Loans involve substantial risk since the borrowers may be highly
leveraged and may not have access to other traditional methods of financing.
During economic downturns or sustained periods of rising interest rates,
borrowers under Collateralized Senior Loans are more likely to experience
financial stress (especially if they are highly leveraged)
(Continued on next page)
-----------
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
COMMON
STOCK: PRICE TO PUBLIC(1)(3) SALES LOAD(1)(2) PROCEEDS TO FUND(3)(4)
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share $15.00 none $15.00
- ------------------------------------------------------------------------
Total(4) $127,500,000 none $127,500,000
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(Footnotes on the following page)
-----------
The Common Stock is offered by the underwriters named in this Prospectus,
subject to prior sale, when, as and if accepted by them and subject to certain
conditions. Delivery of the Common Stock will be made in book-entry form
through The Depository Trust Company on or about November 24, 1998.
-----------
SALOMON SMITH BARNEY BT ALEX. BROWN
CIBC OPPENHEIMER THE NIKKO SECURITIES CO.
INTERNATIONAL, INC.
ADVEST, INC. EVEREN SECURITIES, INC. THE ROBINSON-HUMPHREY COMPANY
SUTRO & CO. INCORPORATED TUCKER ANTHONY
INCORPORATED
November 19, 1998
<PAGE>
(Continued from previous page)
and may be unable to meet payment obligations. Also, specific borrower
developments may adversely affect a borrower's ability to service its debt
obligations. See "Risk Factors and Special Considerations--Special
Considerations Relating to Collateralized Senior Loans." The Fund's shares are
not deposits of, nor guaranteed or endorsed by, any bank or depositary
institution. The Fund's shares are not insured by the Federal Deposit
Insurance Corporation, the Federal Reserve Board, or any other governmental
agency.
Mutual Management Corp. ("MMC" or the "Adviser") is the Fund's investment
adviser and administrator, and Travelers Asset Management International
Corporation ("TAMIC" or the "Sub-Adviser") is the Fund's sub-investment
adviser. Travelers Casualty and Surety Company ("Travelers Casualty"), an
affiliate of the Adviser and Sub-Adviser, will purchase shares in an amount
equal to $20 million in this offering. Travelers Casualty will maintain its
investment in the Fund for a period of at least one year.
The Fund may seek to enhance its return by leveraging its capital structure
by borrowing money or issuing preferred stock or debt securities in an amount
up to 33 1/3% of its total assets including the amount obtained from leverage.
The Fund intends to use leverage in an initial amount equal to approximately
25% of its total assets including the amount obtained from leverage. Leverage
is a speculative technique and involves special risks and costs. Leverage may
magnify fluctuations in the Fund's net asset value per share. The Fund intends
to borrow on a floating or variable rate basis to mitigate the risk that the
costs of borrowing will exceed the total return on an investment. There is no
assurance that the Fund's leverage strategy will succeed. See "Risk Factors
and Special Considerations--Leverage" and "Investment Objective, Policies and
Portfolio Risks"--"Additional Investment Activities--Leverage."
Closed-end fund shares frequently trade at a discount from their net asset
value. This risk may be greater for initial investors expecting to sell their
shares in a relatively short period after the public offering. The Fund is
intended primarily for long-term investors and is not a vehicle for trading
purposes. See "Risk Factors and Special Considerations." The Common Stock has
been approved for listing on the New York Stock Exchange under the symbol
"TLI" subject to official notice of issuance.
Before this offering, there had been no public market for the Fund's shares
of Common Stock.
The Fund's address is 388 Greenwich Street, New York, New York 10013, and
the Fund's telephone number is 1-(800)-331-1710. Please read this Prospectus
before investing and keep it for future reference. It contains important
information, including how the Fund invests and the services available to
investors. The Securities and Exchange Commission (the "Commission") maintains
a web site (http://www.sec.gov) that contains material incorporated by
reference and other information of registrants that file electronically with
the Commission.
------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR AFFECT THE MARKET PRICE OF THE FUND'S COMMON
STOCK. THESE TRANSACTIONS INCLUDE STABILIZING BIDS, COVERING TRANSACTIONS OR
PENALTY BIDS AND MAY TAKE PLACE ON THE NEW YORK STOCK EXCHANGE OR OTHER
TRADING MARKETS. SEE "UNDERWRITING" FOR A DESCRIPTION OF THESE ACTIVITIES.
------------
(Footnotes from cover page)
(1) The Adviser, Sub-Adviser, or an affiliate will pay the underwriters a
commission in the amount of 4.00% of the Price to Public per share in
connection with the sale of shares of Common Stock offered hereby.
However, the underwriters will not receive any commission with respect
to shares purchased by Travelers Casualty. See "Underwriting."
(2) The Fund, the Adviser and the Sub-Adviser will indemnify the
underwriters against certain liabilities, including liabilities under
the Securities Act of 1933, as amended.
(3) Before deducting organizational and offering expenses payable by the
Fund (including approximately $150,000 to be paid to the underwriters
as reimbursement of certain of their expenses in connection with the
offering), estimated at $746,150.
(4) The Fund has granted the underwriters an option exercisable for 45 days
after the date hereof to purchase up to an additional 1,275,000 shares
to cover over-allotments. If all such shares are purchased, the total
Price to Public and Proceeds to Fund will be $146,625,000. See
"Underwriting."
2
<PAGE>
PROSPECTUS SUMMARY
Because this is a summary, it does not contain all the information that may
be important to you. You should read the entire Prospectus before you decide to
invest.
The Fund................ The Fund is a newly organized, closed-end, non-
diversified management investment company which
seeks to hold principally a portfolio of loans and
also debt securities designed to earn current income
while preserving capital. See "The Fund."
Investment in the Common Stock of the Fund offers
several benefits to investors. The Fund allows
individual investors to invest in a professionally
managed portfolio of Collateralized Senior Loans
that is typically only available to financial
institutions and larger corporate or institutional
investors. In managing such portfolio, the Sub-
Adviser provides the Fund with professional credit
analysis. The Fund relieves the investor of the
burdensome administrative details involved in
managing a portfolio of such investments.
Investment Objective
and Policies...........
The Fund's investment objective is to maximize
current income consistent with prudent efforts to
preserve capital.
The Fund seeks to achieve its objective by investing
primarily in a professionally managed portfolio of
interests in Collateralized Senior Loans. The
Collateralized Senior Loans in which the Fund will
invest will be generally rated, at the time of
acquisition, below investment grade by Moody's
Investors Services, Inc. (below Baa) ("Moody's") or
Standard & Poor's Rating Service (below BBB) ("S&P")
or another Nationally Recognized Statistical Rating
Organization ("NRSRO") or, if unrated, be of
comparable quality as determined by the Sub-Adviser.
Collateralized Senior Loans generally are arranged
through private negotiations between a borrower and
several financial institutions ("Lenders")
represented in each case by one or more such Lenders
acting as agent ("Agent") of the Lenders. On behalf
of the Lenders, the Agent will be primarily
responsible for negotiating the loan agreement
("Loan Agreement") that establishes the relative
terms and conditions of the Collateralized Senior
Loan and rights of the borrower and the Lenders.
Also, an Agent typically administers the terms of
the Loan Agreement and is responsible for the
monitoring of collateral and collection of principal
and interest and fee payments from the borrower and
the apportionment of these payments to the credit of
all investors which are parties to the Loan
Agreement (the "Administrative Agent").
3
<PAGE>
The Fund may act as one of the group of Lenders in a
Collateralized Senior Loan (an "Original Lender"),
and purchase assignments ("Assignments") and
participations ("Participations") in Collateralized
Senior Loans from third parties. The Fund will act
as Original Lender in a Collateralized Senior Loan,
or purchase an Assignment or Participation in a
Collateralized Senior Loan only where the
Administrative Agent with respect to the
Collateralized Senior Loan at the time of investment
by the Fund has outstanding debt or deposit
obligations rated investment grade (BBB or A-3 or
higher by S&P or Baa or P-3 or higher by Moody's or
a comparable rating from another NRSRO), or, if
unrated, determined by the Sub-Adviser to be of
comparable quality.
Under normal market conditions, the Fund will invest
at least 80% of its total assets in Collateralized
Senior Loans. The Fund may also invest up to 20% of
its total assets in uncollateralized senior loans,
investment and non-investment grade corporate debt
securities and U.S. government debt securities both
with maturities no longer than five years from the
date of acquisition, money market instruments,
derivatives designed to hedge risks inherent in the
Fund's portfolio and certain other securities
received in connection with investments in
Collateralized Senior Loans.
The Fund is designed for investors willing to assume
additional risk in an effort to maximize current
income. The Fund is not intended to be a complete
investment program and there is no assurance that
the Fund will achieve its objectives. It is
anticipated that the proceeds of the Collateralized
Senior Loans will be used by borrowers primarily to
finance leveraged buyouts, recapitalizations,
mergers, acquisitions, stock repurchases, finance
internal growth and for other corporate purposes of
borrowers. Collateralized Senior Loans generally
will not be registered with the Commission or listed
on any national securities exchange. See "Investment
Objective, Policies and Portfolio Risks."
Collateralized Senior Loans in which the Fund will
invest generally hold the most senior position in
the capital structure of the borrower and will be
secured with specific collateral. As a result,
Collateralized Senior Loans are generally repaid
before general trade creditors, unsecured loans,
corporate bonds, subordinated debt and preferred or
common stockholders if the borrower becomes
insolvent. The terms and conditions of
Collateralized Senior Loans typically will include
various restrictive covenants which are designed to
limit certain activities of borrowers and allow
Lenders to accelerate repayment of principal if a
4
<PAGE>
borrower does not meet certain financial tests
included in such covenants.
The Fund is not subject to any restrictions with
respect to the maturity of Collateralized Senior
Loans held in its portfolio. However, it is
currently anticipated that, under normal market
conditions, the Fund will invest in Collateralized
Senior Loans with stated maturities of between five
and 10 years. Because of prepayment provisions, the
actual remaining maturity of Collateralized Senior
Loans may vary substantially from the stated
maturity of such loans. The Fund estimates that the
actual maturity of Collateralized Senior Loans in
the portfolio generally will be approximately 18 to
36 months.
Collateralized Senior Loans in which the Fund will
purchase interests generally pay interest at rates
which are periodically redetermined by reference to
a benchmark lending rate plus a premium. The
benchmark lending rates generally offered to
borrowers by Lenders are the London Inter-Bank
Offered Rate ("LIBOR"), the prime rate offered by
one or more major United States banks ("Prime
Rate"), the Certificate of Deposit ("CD") rate or
other base lending rates used by commercial lenders.
LIBOR is the benchmark rate most often selected by
borrowers and is expected to be the benchmark in the
majority of Collateralized Senior Loans invested in
by the Fund.
It is currently anticipated that the Fund will invest
in Collateralized Senior Loans that will pay
interest at rates which are typically redetermined
daily or approximately every 1, 2, 3 or 6 months.
The Fund may invest in Collateralized Senior Loans
which permit the borrower at its option to select an
interest rate redetermination period of up to one
year. Investment in Collateralized Senior Loans with
longer interest rate redetermination periods may
increase interest-rate related fluctuations in the
Fund's net asset value per share. Under current
market conditions, it is anticipated that the
Collateralized Senior Loans in the Fund's portfolio
will ordinarily have a dollar-weighted average time
until the next interest rate redetermination of 120
days or less.
The Fund's net asset value per share will be affected
primarily by changes in the credit quality of
borrowers with respect to Collateralized Senior Loan
interests in which the Fund invests. Because the
Collateralized Senior Loans that the Fund will
purchase will generally be rated, at the time of
purchase, below investment grade or, if unrated, be
of comparable quality, the Fund will have
substantial exposure to the risks of investing in
lower rated debt instruments. A default on a
5
<PAGE>
Collateralized Senior Loan in which the Fund has
invested may cause a decline in the Fund's net asset
value. See "Risk Factors and Special
Considerations--Special Considerations Relating to
Collateralized Senior Loans" and "--Special
Considerations Related to Other Securities and
Investment Strategies--High Yield/Lower Rated
Securities", "Investment Objective, Policies and
Portfolio Risks" and "Additional Investment
Activities--High Yield/Lower Rated Securities."
Although the Fund's net asset value will vary as a
result of changes in interest rates, the Fund's
policy of acquiring interests in floating or
variable rate Collateralized Senior Loans and the
anticipated dollar-weighted average time until the
next interest rate redetermination of 120 days or
less are expected to significantly decrease these
interest rate related fluctuations.
The floating or variable rate feature of
Collateralized Senior Loans is an important
difference from typical fixed income investments
that carry significant interest rate risk. The Fund
can normally be expected to have less significant
interest rate related fluctuations in its net asset
value per share than investment companies investing
primarily in fixed rate income-oriented securities
(other than money market funds and some short-term
bond funds) because the floating or variable rate
Collateralized Senior Loans in which the Fund
invests float in response to changes in prevailing
market interest rates. However, because floating or
variable interest rates on Collateralized Senior
Loans only reset periodically, the Fund's net asset
value may experience interest rate related
fluctuations from time to time in the event of an
imperfect correlation between the interest rates on
the Fund's Collateralized Senior Loans and
prevailing interest rates in the market. Similarly,
a sudden and extreme increase in prevailing interest
rates may cause a decline in the Fund's net asset
value. In addition, because Collateralized Senior
Loans carry floating or variable rates of interest,
changes in prevailing market interest rates can be
expected to affect dividends paid by the Fund. As a
result, the yield on an investment in the Fund's
shares will likely fluctuate in response to changes
in prevailing interest rates.
At times, the Fund may utilize leverage through
borrowing or by issuing shares of preferred stock or
debt securities in an amount up to 33 1/3% of the
Fund's total assets including the amount obtained
from leverage. The Fund intends to utilize leverage
in an initial amount equal approximately to 25% of
its total assets including the amount obtained from
leverage. Through these leveraging techniques, the
Fund will seek
6
<PAGE>
to obtain a higher return for holders of Common
Stock than if the Fund did not use leverage.
Leverage is a speculative technique and there are
special risks and costs associated with leveraging.
Leverage may magnify fluctuations in the Fund's net
asset value per share. The Fund will seek to
minimize interest rate related fluctuations by
utilizing leverage and investing in Collateralized
Senior Loans which both carry floating or variable
rates of interest (or dividends in the case of
preferred stock issued by the Fund, if any). There
can be no assurance that the Fund's leveraging
strategy will be successful if employed. See "Risk
Factors and Special Considerations--Leverage" and
"Investment Objective, Policies and Portfolio
Risks"--"Additional Investment Activities--
Leverage."
The Fund may also invest up to 20% of its total
assets in uncollateralized senior loans, investment
and non-investment grade corporate debt securities
and U.S. government debt securities both with
maturities no longer than five years from the date
of acquisition, money market instruments,
derivatives designed to hedge risks inherent in the
Fund's portfolio assets and certain other
securities. The high yield/lower rated securities
that the Fund may purchase, if any, are generally
rated, at the time of acquisition, below investment
grade (Ba or lower by Moody's or BB or lower by S&P
or the equivalent by another NRSRO), or if unrated,
are determined by the Sub-Adviser to be of
comparable quality. The Fund will not purchase lower
rated securities that are not, at the time of
acquisition, current in the payment of interest and
principal.
In limited circumstances, the Fund may also receive
warrants, other equity securities and junior debt
securities as part of its investments in
Collateralized Senior Loans. Such equity securities
and junior debt securities will not be treated by
the Fund as Collateralized Senior Loans. Investments
in loans which are not secured by specific
collateral and in warrants, equity securities and
junior debt securities entail certain risks in
addition to those associated with an investment in
Collateralized Senior Loans.
The Offering............ 8,500,000 shares of Common Stock, par value $.001 per
share (the "Common Stock"), of the Fund are being
offered for sale through the several underwriters
(collectively, the "Underwriters") for whom Salomon
Smith Barney Inc. ("Salomon Smith Barney") is acting
as representative. The initial public offering price
of the Common Stock is $15.00 per share. The minimum
purchase is 100 shares ($1,500.00). In addition, the
Fund has granted the Underwriters an option to
purchase up to 1,275,000 additional shares to cover
over-allotments. See
7
<PAGE>
"Underwriting." Travelers Casualty, an affiliate of
the Adviser and Sub-Adviser, will purchase shares in
an amount equal to $20 million in this offering.
Travelers Casualty will maintain its investment in
the Fund for a period of at least one year.
Listing................. Prior to this offering, there has been no public
market for the shares of Common Stock of the Fund.
The Common Stock has been approved for listing on
the New York Stock Exchange (the "NYSE") under the
symbol "TLI" subject to official notice of issuance.
Stock Symbol............ "TLI"
Investment Adviser and
Administrator..........
MMC serves as the investment adviser for the Fund.
MMC (through predecessor entities) has been in the
investment counseling business since 1934. It
renders investment advisory services to investment
companies that had aggregate assets under management
as of August 31, 1998 of approximately $106 billion.
MMC also provides administration services to the
Fund.
Sub-Investment TAMIC has been selected by MMC to serve as sub-
Adviser................ investment adviser with responsibility for
investment of the Fund's assets in Collateralized
Senior Loans and other securities in which the Fund
will invest. TAMIC officers, including those who
will be primarily responsible for management of the
Fund's assets, are also involved in the management
of the general accounts of TAMIC's insurance company
affiliates. As of August 31, 1998, those persons
managed $760 million of assets invested in
Collateralized Senior Loans by those affiliates.
Management Fees......... The Fund will pay MMC for its investment advisory and
administration services a monthly fee at an annual
rate of 1.05% of the value of the Fund's average
weekly assets. See "Management of the Fund--
Investment Adviser and Administrator." This fee is
higher than fees paid by most other investment
companies, although it is comparable to the fees
paid by several publicly offered closed-end
investment companies with investment objectives and
policies similar to those of the Fund. MMC, not the
Fund, will compensate TAMIC for its services. During
periods in which the Fund is utilizing leverage, the
fees which are payable to MMC as a percentage of the
Fund's net assets will be higher than if the Fund
did not utilize leverage because the fees are
calculated as a percentage of the Fund's total
assets, including those purchased with leverage. See
"Risk Factors and Special Considerations--Leverage"
and "Investment Objective, Policies and Portfolio
Risks--Additional Investment Activities--Leverage."
8
<PAGE>
Dividends and It is the Fund's present policy to distribute the net
Distributions.......... investment income of the Fund to holders of Common
Stock on a monthly basis, beginning with its initial
distribution approximately 60 days after the
completion of this offering and to distribute any
net capital gain at least annually. The Fund's
policy with respect to dividends and distributions
may be changed by the Board of Directors. If the
Common Stock is leveraged, 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.
For tax purposes, the Fund is currently required to
allocate net capital gain and other taxable income
between shares of Common Stock and shares of
preferred stock, if any.
Dividend Reinvestment Under the Fund's Dividend Reinvestment Plan (the
Plan................... "Plan"), shareholders will have all dividends and
distributions automatically reinvested in additional
shares of Common Stock of the Fund unless the
shareholder elects to receive cash or the Board of
Directors of the Fund declares a dividend or
distribution payable only in cash. Shareholders
whose shares are held in the name of a broker or
nominee should contact such broker or nominee to
confirm that they may participate in the Plan. See
"Dividends and Distributions; Dividend Reinvestment
Plan."
Taxation................ The Fund intends to elect and qualify to be treated
as a regulated investment company for U.S. federal
income tax purposes. As such, it will generally not
be subject to U.S. federal income tax on income and
gains that are distributed to shareholders. See
"Taxation."
Custodian, Transfer
Agent, Dividend Paying
Agent and Registrar....
PNC Bank, N.A. will act as custodian for the Fund's
assets. First Data Investor Services Group, Inc.
will act as transfer agent, dividend paying agent
and registrar for the Fund's Common Stock.
Closed-End Fund Shares of closed-end funds differ from those of open-
Structure.............. end management investment companies (commonly
referred to as mutual funds) in that shares of
closed-end funds are not redeemable at the option of
the shareholders and may trade at a price below
their net asset value per share, at which time a
shareholder wishing to liquidate his or her
investment in the Fund would sell at a price
reflecting a discount to net asset value. See
"Description of Capital Stock."
9
<PAGE>
RISK FACTORS AND SPECIAL CONSIDERATIONS
Special Considerations
Relating to
Collateralized Senior
Loans.................. Collateralized Senior Loans in which the Fund will
invest will generally be rated, at the time of
acquisition, below investment grade by Moody's
(below Baa) or S&P (below BBB) or the equivalent by
another NRSRO, or if unrated, will be of comparable
quality as determined by the Sub-Adviser.
Investments in Collateralized Senior Loans involve
substantial risk since the borrowers may be highly
leveraged and may not have available to them more
traditional methods of financing. During an economic
downturn or a sustained period of rising interest
rates, issuers of Collateralized Senior Loans may be
more likely to experience financial stress,
especially if such borrowers are highly leveraged.
During these periods, such borrowers may not have
sufficient cash flow to meet their interest payment
obligations. The borrower's ability to service its
debt obligations also may be affected adversely by
developments specific to the borrower or the
borrower's industry, including the borrower's
inability to meet specific projected business
forecasts, or the unavailability of additional
financing.
As noted above, Collateralized Senior Loans will
generally be rated, at the time of purchase, below
investment grade or be of comparable quality. The
borrowers of Collateralized Senior Loans may also
have outstanding debt securities that are similarly
rated below investment grade. The risks attendant to
investing in such instruments are described
generally under "Risk Factors and Special
Considerations" and "Investment Objective, Policies
and Portfolio Risks" and "Additional Investment
Activities--High Yield/Lower Rated Securities."
The Fund typically will invest in Collateralized
Senior Loans made in connection with highly
leveraged transactions. Collateralized Senior Loans
made in connection with highly leveraged
transactions are subject to greater credit risks
than other transactions in which the Fund may
invest. These credit risks include a greater
possibility of default or bankruptcy of the borrower
and the assertion that the pledging of collateral to
secure the loan constituted a fraudulent conveyance
or preferential transfer which can be nullified or
subordinated to the rights of other creditors of the
borrower under applicable law.
In situations where the borrower under a
Collateralized Senior Loan does not have any
publicly issued, registered debt securities, the
Fund will have access to financial and other
information made available to the Lenders in
connection with Collateralized Senior Loans.
However, the
10
<PAGE>
amount of information available with respect to such
Collateralized Senior Loans will typically be less
extensive than that available for publicly issued,
registered debt securities. As a result, the
performance of the Fund and its ability to meet its
investment objective is more dependent on the
analytical abilities of the Adviser and particularly
the Sub-Adviser than would be the case for an
investment company that invests primarily in
registered or exchange-listed securities. See
"Investment Objective, Policies and Portfolio Risks"
and "Risk Factors and Special Considerations."
Collateralized Senior Loans--Illiquidity. Although it
is growing, the secondary market for Collateralized
Senior Loans is currently limited. Certain
Collateralized Senior Loans may be purchased and
sold through dealers who make a market in such
loans. However, Collateralized Senior Loans are not
listed on any national securities exchange or
automated quotation system and no active trading
market may exist for many of the Collateralized
Senior Loans in which the Fund will invest.
Accordingly, some or many of the Collateralized
Senior Loans in the Fund's portfolio will be
relatively illiquid. Liquidity relates to the
ability of the Fund to sell an investment in a
timely manner and at a price which, in the Sub-
Adviser's judgment, is fair. The market for
relatively illiquid investments tends to be more
volatile than the market for liquid investments. The
potential illiquidity of certain of the Fund's
Collateralized Senior Loans may negatively affect
the Fund's ability to dispose of these investments
to raise cash to repay debt, pay dividends, pay
expenses, tender for its Common Stock or take
advantage of new investment opportunities. The risks
associated with liquidity may be particularly acute
if the Adviser and the Sub-Adviser consider a
defensive investment strategy more appropriate due
to adverse market conditions, and desire to
liquidate Collateralized Senior Loan investments to
increase the percentage of the Fund's portfolio
invested in high quality, short-term securities.
Notwithstanding the risks associated with liquidity,
many of the Collateralized Senior Loans in which the
Fund expects to invest are of a relatively large
principal amount and are held by a number of owners
which should, in the Sub-Adviser's opinion, enhance
the relative liquidity of such interests. See
"Investment Objective, Policies and Portfolio
Risks."
In addition, because the secondary market for
Collateralized Senior Loans may be limited, it may
be more difficult to value Collateralized Senior
Loans. Specific market quotations may not be
available and valuation may require more research
than for liquid securities. As a result, elements of
judgment on the part of the Sub-Adviser may play a
greater
11
<PAGE>
role in the valuation, because there is less
reliable, objective data available. See
"Determination of Net Asset Value."
Credit Risks Associated with Collateralized Senior
Loans. Collateralized Senior Loans, like other
corporate debt obligations, are subject to the risk
of non-payment of scheduled interest or principal.
Such non-payment would result in a reduction of
income to the Fund, a reduction in the value of the
Collateralized Senior Loan portfolio of the Fund and
a potential decrease in the net asset value per
share of the Fund. This risk is increased when
investing in Collateralized Senior Loans which are
rated below investment grade. Although
Collateralized Senior Loans in which the Fund
invests will be secured by specific collateral,
there can be no assurance that liquidation of such
collateral would satisfy the borrower's obligation
in the event of nonpayment of scheduled interest or
principal or that such collateral could be readily
liquidated. In the event of bankruptcy of a
borrower, the Fund could experience delays or
limitations with respect to its ability to realize
the benefits of any collateral securing a
Collateralized Senior Loan. See "Investment
Objective, Policies and Portfolio Risks" and "Risk
Factors and Special Considerations."
Credit Risks Associated with the Administrative
Agent. The success of the Fund depends to some
degree on the skill with which the Administrative
Agent administers the terms of the Collateralized
Senior Loan Agreements, monitors borrower compliance
with covenants, collects principal, interest and fee
payments from borrowers, monitors collateral and,
where necessary, enforces the Lender's remedies
against borrowers. Typically, the Administrative
Agent will have some discretion in enforcing a
Collateralized Senior Loan Agreement. The financial
status of the Administrative Agent may affect the
ability of the Fund to receive payments of interest
and principal in a timely manner.
Credit Risks Associated with Investments in
Participations. The Fund will from time to time
purchase Participations in Collateralized Senior
Loans. With respect to any given Collateralized
Senior Loan, the terms of Participations may result
in the Fund having rights which differ from, and are
more limited than, the rights of Lenders or of
persons who acquire interests in Collateralized
Senior Loans by Assignment or by acting as an
Original Lender. Participations typically will
result in the Fund having a contractual relationship
with the seller of the Participation, but not with
the borrower. The Fund will generally have no right
to enforce compliance by the borrower with the terms
of the Loan Agreement, nor any rights with respect
to any funds acquired by
12
<PAGE>
other Lenders through set-off against the borrower,
with the result that the Fund may be subject to
delays, expenses and risks that are greater than
those that exist where the Fund is an Original
Lender or an Assignee. In the event of the
insolvency of the seller of the Participation, the
Fund may be treated as a general creditor of such
person (or of any other person interpositioned
between the Fund and the borrower), and may not have
any exclusive or senior claim with respect to such
person's interest in, or the collateral with respect
to, the Collateralized Senior Loan. As such, the
Fund may incur the credit risk of the seller of the
Participation (or of any other person
interpositioned between the Fund and the borrower),
in addition to the credit risk of the borrower with
respect to the Collateralized Senior Loan when
purchasing Participations, and may not benefit
directly from the security provided by any
collateral supporting the Collateralized Senior Loan
with respect to which such Participation was sold.
In addition, in the event of bankruptcy or
insolvency of the borrower, the obligation of the
borrower to repay the Collateralized Senior Loan may
be subject to certain defenses that can be asserted
by such borrower against the Lender of record. The
Fund has implemented measures designed to reduce
such risk but no assurances can be given as to their
effectiveness. For example, the Fund will only
acquire Participations if (i) the seller of the
Participation, and any other person interpositioned
between the Fund and the borrower, at the time of
investment has outstanding debt or deposit
obligations rated investment grade (BBB or A-3 or
higher by S&P or Baa or P-3 or higher by Moody's, or
the equivalent rating from another NRSRO) or
determined by the Sub-Adviser to be of comparable
quality and (ii) the seller of the Participation (or
of any other person interpositioned between the Fund
and the borrower), has entered into an agreement
which provides for the holding of assets in
safekeeping for, or the prompt disbursement of
assets to, the Fund. The Fund may pay a fee or forgo
a portion of interest payments when acquiring
Participations. See "Investment Objective, Policies
and Portfolio Risks."
Percentage of Assets in Participations. The Fund may,
but currently does not intend to, invest a
substantial portion of its assets in Participations.
The seller of a Participation and any other persons
interpositioned between the borrower and the Fund
with respect to Participations will likely conduct
their principal business activities in the banking
and financial services industries. To the extent
that the Fund invests a relatively high percentage
of its assets in such Participations, the Fund may
be more susceptible than an investment company that
13
<PAGE>
does not invest in such Participations to any single
economic, political or regulatory occurrence
affecting such industries. The Fund has taken
measures which it believes reduce its exposure to
such risk but no assurances can be given as to their
effectiveness. See "Investment Objective, Policies
and Portfolio Risks" and "Risk Factors and Special
Considerations" and "Investment Restrictions."
Leverage................ At times, the Fund may utilize leverage by borrowing
or by issuing shares of preferred stock or debt
securities in an amount up to 33 1/3% of the Fund's
total assets including the amount obtained from
leverage. The Fund intends to utilize leverage in an
initial amount equal to approximately 25% of its
total assets including the amount obtained from
leverage. The use of leverage will pose certain
risks for holders of Common Stock including the
possibility of higher volatility of both the net
asset value and market value of the Common Stock.
There can be no assurance that the Fund will be able
to realize a higher return on the portion of its
investment portfolio attributable to leverage than
the then-current interest or dividend rate on any
leverage. In the event the Fund realizes a return on
the portion of its investment portfolio attributable
to leverage which is less than the then-current
interest or dividend rate on any leverage, the
Fund's leveraged capital structure would result in a
lower yield to the holders of Common Stock than if
the Fund were not leveraged. Moreover, any decline
in the value of the Fund's assets attributable to
leverage will be borne entirely by holders of Common
Stock in the form of reductions in the Fund's net
asset value. Any requirement that the Fund sell
assets at a loss in order to redeem or repay any
leverage or for other reasons would make it more
difficult for the net asset value of the Fund to
recover. Accordingly, the effect of leverage in a
declining market is likely to be a greater decline
in the net asset value per share of the Common Stock
than if the Fund were not leveraged, which may be
reflected in a greater decline in the market price
of the Common Stock. See "Investment Objective,
Policies and Portfolio Risks--Certain
Characteristics of Collateralized Senior Loan
Interests" and --"Additional Investment Activities--
Leverage."
The Fund's use of leverage will be subject to the
provisions of the Investment Company Act of 1940, as
amended (the "1940 Act"), including asset coverage
requirements and restrictions on the declaration of
dividends and distributions to holders of Common
Stock or purchasers of Common Stock in the event
such asset coverage requirements are not met. In
addition, the Fund may seek to have Moody's, S&P
and/or another NRSRO rate any preferred stock or
debt
14
<PAGE>
it issues. As a condition to obtaining such ratings,
the terms of any preferred stock or debt securities
issued will include asset coverage maintenance
provisions which will require the redemption of
shares of preferred stock or the repayment of debt
in the event of non-compliance by the Fund and may
also prohibit dividends and other distributions on
the Common Stock in such circumstances. Also, the
class voting requirements for preferred stock could
make it more difficult for the Fund to take certain
actions that may be proposed in the future, such as
a merger, exchange of securities, liquidation or
alteration of the rights of a class of the Fund's
securities, changing the Fund to an open-end company
or ceasing to be an investment company. In order to
meet repayment requirements in the event of
noncompliance, the Fund may have to liquidate
portfolio securities. Collateralized Senior Loans,
the Fund's principal portfolio investment, may be
illiquid and not susceptible to sale by the Fund at
any particular time. Such liquidations would cause
the Fund to incur related transaction costs and
could result in capital losses to the Fund.
Prohibitions on dividends and other distributions on
the Common Stock could impair the Fund's ability to
qualify as a regulated investment company under the
Internal Revenue Code of 1986, as amended (the
"Code"). The 1940 Act also requires that holders of
preferred stock have certain voting rights. See
"Investment Objective, Policies and Portfolio
Risks--Additional Investment Activities--Leverage,"
"Taxation" and "Description of Capital Stock."
During periods in which the Fund is utilizing
financial leverage, the fees which are payable to
MMC as a percentage of the Fund's net assets will be
higher than if the Fund did not utilize leverage
because the fees are calculated as a percentage of
the Fund's total assets, including those purchased
with leverage. See "Management of the Fund."
Trading Discount........ As a newly organized investment company, the Fund has
no operating history. Shares of closed-end
investment companies frequently trade at a discount
from net asset value. This is a risk separate and
distinct from the risk that the Fund's net asset
value will decrease as a result of its investment
activities and may be greater for investors
expecting to sell their shares in a relatively short
period of time following completion of this
offering. It should be noted, however, that shares
of some closed-end funds have traded at premiums to
net asset value. The Fund cannot predict whether its
shares will trade at, above or below net asset
value. The Fund is intended primarily for long-term
investors and should not be considered as a vehicle
for trading purposes.
15
<PAGE>
Special Considerations
Related to Other
Securities and
Investment
Strategies.............
High Yield/Lower Rated Securities. The high
yield/lower rated securities that the Fund may
purchase (commonly known as "junk bonds") will
generally be rated, at the time of investment, below
investment grade by Moody's (below Baa) or by S&P
(below BBB) or another NRSRO or, if unrated, will be
of comparable quality. These lower rated and
comparable unrated securities involve greater risk
than higher rated securities. Under rating agency
guidelines, lower rated securities and comparable
unrated securities will likely have some quality and
protective characteristics that are outweighed by
large uncertainties or major risk exposures to
adverse conditions. See "Appendix A--Ratings of
Corporate Bonds." The ratings of Moody's, S&P and
the other rating agencies represent their opinions
as to the quality of the obligations which they
undertake to rate. Ratings are relative and
subjective and, although ratings may be useful in
evaluating the safety of interest and principal
payments, they do not evaluate the market value risk
of such obligations. Although these ratings may be
an initial criterion for selection of portfolio
investments, the Sub-Adviser also will evaluate
these securities and the ability of the issuers of
such securities to pay interest and principal. To
the extent that the Fund invests in lower grade
securities that have not been rated by a rating
agency, the Fund's ability to achieve its investment
objectives will be more dependent on the Sub-
Adviser's credit analysis than would be the case
when the Fund invests in rated securities.
Lower rated securities may have poor prospects of
ever attaining any real investment standing, may
have a current identifiable vulnerability to
default, may be unlikely to have the capacity to pay
interest and repay principal when due in the event
of adverse business, financial or economic
conditions and/or may be in default or not current
in the payment of interest or principal. Such
securities are considered speculative with respect
to the issuer's capacity to pay interest and repay
principal in accordance with the terms of the
obligations. See "Appendix A--Ratings of Corporate
Bonds." Accordingly, it is possible that these types
of factors could reduce the value and liquidity of
lower rated securities held by the Fund, with a
commensurate effect on the value of the Fund's
shares.
The secondary markets for high yield/lower rated
securities are not as liquid as the secondary
markets for higher rated securities, thus having an
adverse effect on the Fund's ability to dispose of
particular portfolio
16
<PAGE>
investments and possibly limiting the ability of the
Fund to obtain accurate market quotations for
purposes of valuing securities and calculating net
asset value.
Lower rated securities may be particularly
susceptible to economic downturns. An economic
recession could disrupt severely the market for such
securities and may have an adverse impact on the
value of such securities. In addition, any such
economic downturn could adversely affect the ability
of the issuers of such securities to repay principal
and pay interest thereon and increase the incidence
of default for such securities.
While the market values of corporate debt securities
rated below investment grade and comparable unrated
securities tend to react less to fluctuations in
interest rate levels than do those of higher rated
securities, the market values of the former also
tend to be more sensitive to company-specific
developments and changes in economic conditions than
higher rated securities. The risk of loss due to
default by the issuers of these securities is
significantly greater because such securities may be
unsecured and may be subordinate to other creditors
of the issuer.
Some corporate debt securities contain call or buy-
back features which permit the issuer of the
security to call or repurchase it. Such securities
may present risk based on payment expectations. If
an issuer exercises such a "call option" and redeems
the security, the Fund may have to replace the
called security with a lower yielding security
resulting in a decreased rate of return for the
Fund.
Prices for high yield/lower rated securities may be
affected by legislative and regulatory developments
which could adversely affect the Fund's net asset
value and investment practices, the secondary market
for high yield securities, the financial condition
of issuers of these securities and the value of
outstanding high yield securities.
Certain Investment The Fund may use various investment practices that
Practices.............. involve special considerations including lending its
portfolio assets, entering into when-issued and
delayed delivery transactions and entering into
repurchase and reverse repurchase agreements. In
addition, the Fund has the authority to engage in
interest rate and other hedging and risk management
transactions. For further discussion of these
practices and associated special considerations, see
"Investment Objective, Policies and Portfolio
Risks"--"Additional Investment Activities."
17
<PAGE>
Investment in Non-U.S. The Fund may invest in Collateralized Senior Loans
Issuers................ and debt securities of borrowers that are organized
or located in countries other than the United
States, provided that such Collateralized Senior
Loans and debt securities are denominated in U.S.
dollars and provide for the payment of interest and
repayment of principal in U.S. dollars. Investment
in non-U.S. issuers involves special risks,
including that non-U.S. issuers may be subject to
less rigorous accounting and reporting requirements
than U.S. issuers, less rigorous regulatory
requirements, differing legal systems and laws
relating to creditors' rights, the potential
inability to enforce legal judgments and the
potential for political, social and economic
adversity.
Non-Diversification..... The Fund has elected to operate as a "non-
diversified" company in order to enhance its
flexibility to invest more than 5% of the value of
its assets in the obligations of any single issuer.
While it does not currently intend to invest more
than 5% of the value of its assets in Collateralized
Senior Loans of a single borrower, there is no
restriction preventing the Fund from doing so. In
addition, the Fund may invest more than 5% of its
assets in Participations purchased from a single
person. To the extent the Fund invests a relatively
high percentage of its assets in obligations of a
limited number of issuers, the Fund may be more
susceptible than a more widely-diversified company
to any single corporate, economic, political or
regulatory occurrence. See "Investment Objective,
Policies and Portfolio Risks" and "The Fund."
Year 2000............... The investment management services provided to the
Fund by MMC and TAMIC and the administration
services provided by MMC depend in large part 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 or calculated. Any failure by these systems
to recognize the year 2000 could have a negative
impact on MMC's and TAMIC's provision of services,
including investment analysis, the handling of
securities trades, and pricing and accounting
services. MMC and TAMIC 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, given the extensive testing which they
are undertaking, their systems will be year 2000
compliant before such date. In addition, MMC has
been advised by certain of the Fund's service
providers that they are also in the process of
modifying their systems with the same goal. There
can be no assurance, however, that MMC, TAMIC, or
any other service provider
18
<PAGE>
will be successful in achieving year 2000
compliance, or that interaction with other non-
complying computer systems will not impair services
to the Fund at that time.
In addition, it is possible that the markets for
Collateralized Senior Loans and other securities in
which the Fund invests may be detrimentally affected
by computer failures throughout the financial
services industry beginning January 1, 2000.
Improperly functioning trading systems may result in
settlement problems and liquidity issues. In
addition, corporate and governmental data processing
errors may result in production problems for
individual companies and overall economic
uncertainties. Earnings of individual issuers may be
affected by remediation costs, which may be
substantial and may be reported inconsistently in
U.S. and foreign financial statements. Accordingly,
the Fund's investments could be adversely affected.
Anti-Takeover The Fund's Articles of Incorporation (the "Articles
Provisions............. of Incorporation") and By-Laws (the "By-Laws")
contain certain anti-takeover provisions that may
have the effect of inhibiting the Fund's possible
conversion to open-end status and limiting the
ability of other persons to acquire control of the
Fund. In certain circumstances, these provisions
might also inhibit the ability of shareholders to
sell their shares at a premium over prevailing
market prices. The Fund's Board of Directors has
determined that these provisions are in the best
interests of shareholders generally. See
"Description of Capital Stock--Preferred Stock--
Special Voting and Anti-Takeover Provisions."
* * * *
You should carefully consider your ability to assume
the above risks before investing in the Fund.
Investing in the Fund may not be appropriate for all
investors.
19
<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 Fees(a)(b)................................................. 1.40%
Interest Payments on Borrowed Funds(b)................................ 1.93%
Other Expenses(b)..................................................... 0.20%
----
Total Annual Expenses(b)............................................ 3.53%
====
</TABLE>
EXAMPLE:
<TABLE>
<CAPTION>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
An investor would pay the following expenses
on a $1,000 investment, assuming (1) total
annual expenses of 1.25% (assuming no
leverage) and 3.53% (assuming leverage of 25%
of the Fund's total assets) and (2) a 5%
annual return throughout the periods:
Assuming No Leverage........................ $13 $ 40 $ 69 $151
Assuming 25% Leverage....................... $36 $108 $183 $380
</TABLE>
- ------------
(a) See "Management of the Fund."
(b) Based on the assumption that the Fund utilizes leverage by borrowing in an
amount equal to approximately 25% of the Fund's total assets (including
the amount obtained from leverage, assuming an interest rate of
approximately 5.80%, which interest rate is subject to change based on
prevailing market conditions). If the Fund does not utilize leverage, the
Management Fees would be 1.05%, Interest Payment on Borrowed Funds would
be 0.00%, Other Expenses would be 0.20% and Total Annual Expenses would be
1.25%. The Fund may utilize leverage up to 33 1/3% of the Fund's total
assets (including the amount obtained from leverage), depending on
economic conditions. See "Risk Factors and Special Considerations--
Leverage" and "Additional Investment Activities--Leverage."
The foregoing Fee Table is intended to assist investors in understanding the
costs and expenses that a shareholder in the Fund will bear directly or
indirectly. The expenses set forth under "Other Expenses" are based on
estimated amounts through the end of the Fund's first fiscal year on an
annualized basis. The Example set forth above assumes reinvestment of all
dividends and distributions and utilizes a 5% annual rate of return as
mandated by Commission regulations. THE EXAMPLE SHOULD NOT BE CONSIDERED A
REPRESENTATION OF FUTURE EXPENSES OR ANNUAL RATE OF RETURN, AND ACTUAL
EXPENSES, LEVERAGE AMOUNT OR ANNUAL RATE OF RETURN MAY BE MORE OR LESS THAN
THOSE ASSUMED FOR PURPOSES OF THE EXAMPLE.
In addition, the proceeds to the Fund will reflect a deduction of
organizational and offering expenses payable by the Fund (including
approximately $150,000 to be paid to the Underwriters as reimbursement of
certain of their expenses in connection with the offering), estimated at
$746,150.
20
<PAGE>
THE FUND
The Fund, incorporated in Maryland on August 25, 1998, is a closed-end, non-
diversified management investment company registered under the 1940 Act. The
Fund's principal office is located at 388 Greenwich Street, New York, New York
10013, and its telephone number is (800) 331-1710. The Fund's investment
objective is to maximize current income consistent with prudent efforts to
preserve capital. The Fund's Adviser and Sub-Adviser believe that a portfolio
of Collateralized Senior Loans combined with financial leverage allows the
Fund to offer an attractive dividend yield and to generate superior risk
adjusted returns over time. The floating or variable rate feature of
Collateralized Senior Loans should allow the Fund to capture higher yields in
a rising interest rate environment.
USE OF PROCEEDS
The net proceeds of this offering, estimated to be $126,753,850 (or
approximately $145,878,850 assuming the Underwriters exercise the over-
allotment option in full) after deducting offering and organizational
expenses, will be invested in accordance with the policies set forth under
"Investment Objective, Policies and Portfolio Risks" as soon as practicable,
but in any event within three months from the date of the completion of the
offering given normal market conditions and the availability of appropriate
Collateralized Senior Loans. Initially, the proceeds will be invested in high
quality short-term money market instruments and U.S. Government securities as
described under "Additional Investment Activities--Money Market Instruments
and Government Securities." There will be no sales load or underwriting
discount imposed on sales of shares of Common Stock in this offering. MMC,
TAMIC or an affiliate of either (not the Fund) will pay a commission to the
Underwriters from its own assets in connection with sales of shares of Common
Stock in this offering. However, the Underwriters will not receive any
commission with respect to shares purchased by Travelers Casualty. See
"Underwriting."
21
<PAGE>
INVESTMENT OBJECTIVE, POLICIES AND PORTFOLIO RISKS
The Fund's investment objective is to maximize current income consistent
with prudent efforts to preserve capital. The Fund seeks to achieve its
objective by investing primarily in a professionally managed portfolio of
interests in Collateralized Senior Loans. The Collateralized Senior Loans in
which the Fund will invest will be generally rated at the time of acquisition
below investment grade by Moody's (below Baa) or S&P (below BBB), or be of
comparable quality as determined by another NRSRO or the Sub-Adviser.
Collateralized Senior Loans may be also extended to borrowers which have
outstanding debt securities that are similarly rated below investment grade.
The risks attendant to investing in such securities are described below.
Under normal market conditions, the Fund will invest at least 80% of its
total assets in Collateralized Senior Loans (either as an Original Lender or
as a purchaser of an Assignment or Participation). The Fund may also invest up
to an aggregate of 20% of its total assets in uncollateralized senior loans,
investment and non-investment grade corporate debt securities and U.S.
government debt securities both with maturities no longer than five years from
the date of acquisition, money market instruments and derivatives designed to
hedge risks inherent in the Fund's portfolio. In limited circumstances, as
noted above, the Fund may also receive warrants, other equity securities and
junior debt securities as part of its investments in Collateralized Senior
Loans. The value of these securities, if any, will be included in the up to
20% portion of the Fund's assets not invested in Collateralized Senior Loans.
CERTAIN CHARACTERISTICS OF COLLATERALIZED SENIOR LOAN INTERESTS
The market for Collateralized Senior Loans has developed dramatically in the
last several years as new and more institutions have sought to participate,
and the sophistication of the Collateralized Senior Loan market has increased
to meet the needs of these market participants.
Collateralized Senior Loans generally are arranged through private
negotiations between a borrower and several financial institutions ("Lenders")
represented in each case by one or more such Lenders acting as agent ("Agent")
of the Lenders. On behalf of the Lenders, the Agent, which frequently
originates the Collateralized Senior Loan and invites other parties to join
the lending syndicate, will be primarily responsible for negotiating the loan
agreement or agreements ("Loan Agreement") that establish the relative terms,
conditions and rights of the borrower and the several Lenders. In larger
transactions it is common to have several Agents. Agents responsible for
rendering these services are typically paid a fee or fees by the borrower for
their services. Also, an Agent typically administers the terms of the Loan
Agreement and is responsible for the monitoring of collateral and collection
of principal and interest and fee payments from the borrower and the
apportionment of these payments to the credit of all investors which are
parties to the Loan Agreement (the "Administrative Agent"). The Fund will not
invest in any Collateralized Senior Loan for which MMC, TAMIC or any of their
affiliates perform these services unless the Fund is advised by counsel that
investment under the circumstances is permitted or it receives an exemption
from the Commission or advice from the Commission's staff to similar effect.
The Fund may act as one of the group of Lenders in a Collateralized Senior
Loan (an "Original Lender"), or purchase assignments ("Assignments") or
participations ("Participations") in Collateralized Senior Loans from third
parties. The Fund will act as an Original Lender in a Collateralized Senior
Loan, or purchase an Assignment or Participation in a Collateralized Senior
Loan only where the Administrative Agent with respect to such Collateralized
Senior Loan at the time of investment by the Fund has outstanding debt or
deposit
22
<PAGE>
obligations rated investment grade (BBB or A-3 or higher by S&P, Baa or P-3 or
higher by Moody's or a comparable rating from another NRSRO) or, if unrated,
determined by the Sub-Adviser to be of comparable quality. Further, in the
case of Participations, the Fund will not purchase interests in Collateralized
Senior Loans unless the seller of the Participation (and any other person
interpositioned between the Fund and the borrower) has entered into an
agreement which provides for the holding of assets in safekeeping for, or the
prompt disbursement of assets to, the Fund.
It is anticipated that the proceeds of the Collateralized Senior Loans in
which the Fund will acquire interests primarily will be used by borrowers to
finance leveraged buyouts, recapitalizations, mergers, acquisitions, stock
repurchases, internal growth and for other corporate purposes of borrowers.
The Fund currently does not intend to acquire interests in Collateralized
Senior Loans the proceeds of which would be used primarily to finance
construction or real estate development projects, provided that the Fund may
invest in Collateralized Senior Loans secured by real estate or issued by
companies that invest in real estate or interests therein, including real
estate investment trusts. The Fund currently does not intend to invest in
loans to business entities primarily engaged in the business of investing,
reinvesting or trading in securities or other financial instruments.
Collateralized Senior Loans in which the Fund will invest generally hold the
most senior position in the capital structure of the borrower and will be
secured with specific collateral. As a result, Collateralized Senior Loans are
generally repaid before general trade creditors, unsecured loans, corporate
bonds, subordinated debt and preferred or common stockholders if the borrower
becomes insolvent. The terms and conditions of Collateralized Senior Loans
typically will include various restrictive covenants which are designed to
limit certain activities of borrowers and allow lenders to accelerate
repayment of principal if a borrower does not meet certain financial tests
included in such covenants. Restrictive covenants may include mandatory
prepayment provisions arising from excess cash flows and typically include
restrictions on dividend payments, specific mandatory minimum or maximum
financial ratios, limits on total debt and other financial tests. Breach of
such covenants, if not waived by the Lenders, is generally an event of default
under the applicable Loan Agreement and may give the Lenders the right to
accelerate principal and interest payments. The Sub-Adviser will consider the
terms of such restrictive covenants in deciding whether to invest in
Collateralized Senior Loans for the Fund's portfolio.
Before investing in a Collateralized Senior Loan, the Sub-Adviser will
consider the following factors among others: capital structure; cash flow
coverage of debt service; working capital availability; leverage; quality and
experience of management; business plan; quality of collateral; pricing in
relation to risk; liquidity of the Collateralized Senior Loan in the secondary
market; operating history and competitive position. The Sub-Adviser will
perform its own independent credit analysis of each borrower. In so doing, the
Sub-Adviser may utilize information and credit analyses obtained from the
Agent, other Lenders investing in a Collateralized Senior Loan and other
sources. These analyses will continue on a periodic basis for any
Collateralized Senior Loan owned by the Fund.
Collateralized Senior Loans in which the Fund will invest generally pay
interest at rates which are periodically redetermined by reference to a
benchmark lending rate plus a premium. The benchmark lending rates generally
offered to borrowers by Lenders are the London Inter-Bank Offered Rate
("LIBOR"), the prime rate offered by one or more major United States banks
(the "Prime Rate"), the certificate of deposit ("CD") rate or other base
lending rates used by commercial lenders. LIBOR is the benchmark rate most
often selected by borrowers and is expected to be the benchmark in the
majority of Collateralized Senior Loans invested in by the
23
<PAGE>
Fund. LIBOR is an average of the interest rates quoted by several designated
banks as the rates at which such banks would offer to pay interest to major
financial institutional depositors in the London interbank market on U.S.
dollar-denominated deposits for a specified period of time. The Prime Rate
quoted by a major U.S. bank is generally the interest rate at which such bank
is willing to lend U.S. dollars to its most creditworthy borrowers although it
may not be the bank's lowest available rate. The CD rate is the average rate
paid on large certificates of deposit traded in the secondary market.
The Fund is not subject to any restrictions with respect to the maturity of
Collateralized Senior Loans held in its portfolio. It is currently
anticipated, however, that the Fund's assets invested in Collateralized Senior
Loans will consist of Collateralized Senior Loans with stated maturities of
between five and 10 years, inclusive, and with rates of interest which are
redetermined either daily, or approximately every 1, 2, 3 or 6 months;
provided, however, that the Fund may invest in Collateralized Senior Loans
which permit the borrower, at its option, to select an interest rate
redetermination period of up to one year. Investment in Collateralized Senior
Loans with longer interest rate redetermination periods may increase interest
rate related fluctuations in the Fund's net asset value. It is the Sub-
Adviser's expectation that the Collateralized Senior Loans in the Fund's
portfolio will ordinarily have a dollar-weighted average time until the next
interest rate redetermination of 120 days or less. As a result, as short term
interest rates increase, interest payable to the Fund from its investments in
Collateralized Senior Loans should increase, and as short term interest rates
decrease, interest payable to the Fund from its investments in Collateralized
Senior Loans should decrease. The amount of time required to pass before the
Fund will realize the effects of changing short term market interest rates on
its portfolio will vary with the dollar-weighted average time until the next
interest rate redetermination on the Collateralized Senior Loans in the Fund's
portfolio. The Fund may utilize certain investment practices to, among other
things, shorten the effective interest rate redetermination period of
Collateralized Senior Loans in its portfolio. In such event, the Fund will
consider such shortened period to be the interest rate redetermination period
of the Collateralized Senior Loan. Because most Collateralized Senior Loans in
the Fund's portfolio will be subject to mandatory and/or optional prepayment
and at times there may be significant economic incentives for a borrower to
prepay its loans, prepayments of Collateralized Senior Loans in the Fund's
portfolio may occur. Accordingly, the actual maturity of the Collateralized
Senior Loans in the Fund's portfolio may vary substantially from the stated
maturity. As a result of expected prepayments of Collateralized Senior Loans
in the Fund's portfolio, the Fund estimates that the actual maturity of the
Collateralized Senior Loans held in its portfolio generally will be
approximately 18 to 36 months.
The floating or variable rate feature of Collateralized Senior Loans is a
significant difference from typical fixed income investments that carry
significant interest rate risk. The Fund can normally be expected to have less
significant interest rate related fluctuations in its net asset value per
share than investment companies investing primarily in fixed income securities
(other than money market funds and some short-term bond funds). Generally, the
net asset value of the shares of an investment company that invests primarily
in fixed rate income-oriented securities changes as interest rates fluctuate.
When interest rates decline, the value of a fixed income portfolio normally
can be expected to increase and conversely, when interest rates increase, the
value of a fixed income portfolio can be expected to decrease. The Sub-Adviser
expects that these interest rate related fluctuations in the Fund's net asset
value will be reduced during normal market conditions because the interest
rate of the floating or variable rate Collateralized Senior Loans in which the
Fund invests floats in response to changes in prevailing interest rates.
However, because the floating or variable interest rates on Collateralized
Senior Loans only reset periodically, the Fund's net asset value may
experience interest rate related fluctuations from time to time in the
24
<PAGE>
event of an imperfect correlation between the interest rates on the Fund's
Collateralized Senior Loans and prevailing interest rates in the market.
Similarly, a sudden and extreme increase in prevailing interest rates may
cause a decline in the Fund's net asset value. In addition, because
Collateralized Senior Loans carry floating or variable rates of interest,
changes in prevailing market interest rates can be expected to affect
dividends paid by the Fund. As a result, the yield on an investment in the
Fund's shares will likely fluctuate in response to changes in prevailing
interest rates.
The Fund's net asset value per share will be affected primarily by changes
in the credit quality of borrowers with respect to Collateralized Senior Loan
interests in which the Fund invests. Because the Collateralized Senior Loans
that the Fund will purchase will generally be rated, at the time of purchase,
below investment grade or be of comparable quality, the Fund will have
substantial exposure to the risks of investing in lower rated debt
instruments. A default on a Collateralized Senior Loan in which the Fund has
invested may cause a decline in the Fund's net asset value. See "Additional
Investment Activities--High Yield/Lower Rated Securities."
In a typical Collateralized Senior Loan, the Administrative Agent
administers the terms of the Loan Agreement and is responsible for the
collection of principal and interest and fee payments from the borrower and
the apportionment of these payments to the credit of all investors which are
parties to the Loan Agreement. The Fund generally will rely on the
Administrative Agent to collect its portion of the payments on the
Collateralized Senior Loan. Further, the Fund will rely on the Administrative
Agent to monitor collateral and to enforce appropriate creditor remedies
against the borrower. Typically, under Loan Agreements, the Administrative
Agent is given some discretion in enforcing the Loan Agreement, and it is
obliged to use only the same care it would use in the management of its own
property. For these services, the borrower compensates the Administrative
Agent. Such compensation may include special fees paid on structuring and
funding the Collateralized Senior Loan and other fees paid on a continuing
basis. The success of the Fund depends to some degree, on the skill with which
the Administrative Agent administers the terms of the Loan Agreements,
monitors borrower compliance with covenants, collects principal, interest and
fee payments from borrowers and, where necessary, enforces creditor remedies
against borrowers. The financial status of the Administrative Agent may affect
the ability of the Fund to receive payments of interest and principal.
Loan Agreements typically provide for the termination of the Administrative
Agent's agency status in the event that it fails to act as required under the
relevant loan agreement, becomes insolvent, enters FDIC receivership, or if
not FDIC insured, enters into bankruptcy. Should such an Administrative Agent,
Lender or assignor with respect to an Assignment or seller of a Participation
interpositioned between the Fund and the borrower become insolvent or enter
FDIC receivership or bankruptcy, any interest in the Collateralized Senior
Loan of such person and any loan payment held by such person for the benefit
of the Fund should not be included in such person's estate. If, however, any
such amount were included in such person's estate, the Fund would incur
certain costs and delays in realizing payment or could suffer a loss of
principal or interest. In such event, the Fund could experience a decrease in
net asset value.
When the Fund is an Original Lender in a Collateralized Senior Loan it may
share in a fee paid to the Original Lenders. The Fund will never act as the
Agent or principal negotiator or administrator of a Collateralized Senior
Loan. When the Fund is a Lender, it will have a direct contractual
relationship with the borrower, may enforce compliance by the borrower with
the terms of the Collateralized Senior Loan and may have rights with respect
to any funds acquired by other Lenders through set-off. Lenders also have full
voting and consent rights under the applicable Collateralized Senior Loan.
Action subject to Lender vote or consent
25
<PAGE>
generally requires the vote or consent of the holders of some specified
percentage of the outstanding principal amount of the Collateralized Senior
Loan. Certain decisions, such as reducing the amount, increasing the time for
payment or changing the rate of interest on or repayment of principal of a
Collateralized Senior Loan, or releasing collateral therefor, frequently
require the unanimous vote or consent of all Lenders affected.
The Fund may also purchase Assignments from Lenders. The purchaser of an
Assignment typically succeeds to all the rights and obligations under the
Collateralized Senior Loan of the assigning Lender and becomes a Lender under
the Collateralized Senior Loan with the same rights and obligations as the
assigning Lender.
Participations by the Fund in a portion of a Collateralized Senior Loan
typically will result in the Fund having a contractual relationship only with
the seller of such Participation, not with the borrower. As a result, the Fund
may have the right to receive payments of principal, interest and any fees to
which it is entitled only from the seller of the Participation and only upon
receipt by such seller of such payments from the borrower. When the Fund holds
a Participation in a Collateralized Senior Loan it may not have the right to
vote to waive enforcement of any restrictive covenant breached by a borrower.
Lenders voting in connection with a potential waiver of a restrictive covenant
may have interests different from those of the Fund and such Lenders may not
consider the interests of the Fund in connection with their votes. 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, nor any rights with respect to any funds acquired by other Lenders
through set-off against the borrower and the Fund may not directly benefit
from the collateral supporting the Collateralized Senior Loan in which it has
purchased the Participation. As a result, the Fund may assume the credit risk
of both the borrower and the seller of the Participation (and any other person
interpositioned between the Fund and the borrower). In the event of the
insolvency of the seller of a Participation, the Fund may be treated as a
general creditor of such seller. The Fund has taken the following measures in
an effort to minimize such risks. The Fund will only acquire Participations if
(i) the seller of the Participation, and any other persons interpositioned
between the Fund and the borrower, at the time of investment has outstanding
debt or deposit obligations rated investment grade (BBB or A-3 or higher by
S&P or Baa or P-3 or higher by Moody's or the equivalent rating from another
NRSRO) or, if unrated, determined by the Sub-Adviser to be of comparable
quality and (ii) the seller of the Participation (and any other person
interpositioned between the Fund and the borrower) has entered into an
agreement which provides for the holding of assets in safekeeping for, or the
prompt disbursement of assets to, the Fund. Long-term debt rated BBB by S&P is
regarded by S&P as having adequate capacity to pay interest and repay
principal and debt rated Baa by Moody's is regarded by Moody's as a medium
grade obligation, i.e., it is neither highly protected nor poorly secured.
Commercial paper rated A-3 by S&P indicates that S&P believes such obligations
exhibit adequate protection parameters but that 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 and issues of
commercial paper rated P-3 by Moody's are considered by Moody's to have an
acceptable ability for repayment of short-term debt obligations but the effect
of industry characteristics and market compositions may be more pronounced.
See "Appendix A--Ratings of Corporate Bonds." The Fund ordinarily will
purchase a Participation only if, at the time of such purchase, the Fund
believes that the party from whom it is purchasing such Participation is
retaining an interest in the underlying Collateralized Senior Loan. In the
event that the Fund does not so believe, it will only purchase such a
Participation if, in addition to the requirements set forth above, the party
from whom the Fund is purchasing such Participation is a bank, a member of a
national securities exchange or other entity designated in the 1940 Act as
qualified to serve as a custodian for a registered investment company.
26
<PAGE>
The seller of a Participation and other persons interpositioned between the
borrower and the Fund with respect to Participations will likely conduct their
principal business activities in the banking, finance and financial services
industries. Although, as discussed above, the Fund has taken measures which it
believes reduce its exposure to any risks incident to purchasing
Participations, the Fund may be more susceptible than an investment company
that does not purchase Participations to any single economic, political or
regulatory occurrence affecting such industries. Persons engaged in such
industries may be more susceptible than are persons engaged in some other
industry to, among other things, fluctuations in interest rates, changes in
the Federal Open Market Committee's monetary policy, governmental regulations
concerning such industries and concerning capital raising activities generally
and fluctuations in the financial markets generally.
In order to borrow money pursuant to Collateralized Senior Loans, a borrower
will frequently, for the term of the Collateralized Senior Loan, pledge its
assets as collateral, including but not limited to, trademarks, accounts
receivable, inventory, buildings, real estate, franchises and common and
preferred stock in its subsidiaries. In addition, in the case of some
Collateralized Senior Loans, there may be additional collateral pledged in the
form of guarantees or other credit support by and/or securities of affiliates
of the borrower. In certain instances, a Collateralized Senior Loan may be
secured by stock in the borrower or its subsidiaries. Collateral may consist
of assets that may not be readily liquidated, and there is no assurance that
the liquidation of such assets would satisfy fully a borrower's obligations
under a Collateralized Senior Loan.
The Fund may invest in the U.S. dollar-denominated Collateralized Senior
Loans of non-U.S. issuers. Investment in the Collateralized Senior Loans of
non-U.S. issuers involves special risks, including that non-U.S. issuers may
be subject to less rigorous accounting and reporting requirements than U.S.
issuers, less rigorous regulatory requirements, differing legal systems and
laws relating to creditors' rights, the potential inability to enforce legal
judgments and the potential for political, social and economic adversity.
Although the Fund does not currently intend to do so, it may purchase and
retain in its portfolio a Collateralized Senior Loan interest in a borrower
which has filed for protection under the federal bankruptcy laws or has had an
involuntary bankruptcy petition filed against it by its creditors. Investment
in these Collateralized Senior Loans is speculative and involves significant
risk. Such Collateralized Senior Loans frequently do not produce income while
they are outstanding and may require the Fund to bear certain extraordinary
expenses in order to protect and recover its investment. The Fund also will be
subject to significant uncertainty as to when and in what manner and for what
value the obligations evidenced by these types of Collateralized Senior Loans
will eventually be satisfied; i.e. through a liquidation of the borrower's
assets, an exchange offer or plan of reorganization involving the
Collateralized Senior Loan or a payment of some amount in satisfaction of the
obligation. The values of such Collateralized Senior Loan interests, if any,
will reflect, among other things, the Sub-Adviser's assessment of the
likelihood that the Fund ultimately will receive full repayment of the
principal amount invested in such Collateralized Senior Loan interests, the
likely duration, if any, of a lapse in the scheduled repayment of principal
and prevailing interest rates. At times, in connection with the restructuring
of a Collateralized Senior Loan either outside of bankruptcy court or in the
context of bankruptcy court proceedings, the Fund may determine or be required
to accept equity securities or junior debt securities in exchange for all or a
portion of a Collateralized Senior Loan interest. Depending upon, among other
things, the Sub-Adviser's evaluation of the potential value of such securities
in relation to the price that could be obtained by the Fund at any given time
upon sale thereof, the Fund may determine to hold such securities in its
portfolio.
27
<PAGE>
The Fund may invest up to 20% of its total assets in investments which are
not Collateralized Senior Loans, including loans which are not secured by any
collateral. Loans that are not secured by specific collateral constitute a
general obligation of the borrower, and therefore pose a greater risk of
nonpayment of interest or loss of principal than do otherwise comparable
Collateralized Senior Loans.
In limited circumstances, the Fund may also receive warrants, equity
securities and junior debt securities issued by a borrower or its affiliates
as part of its investments in Collateralized Senior Loans. Warrants, equity
securities and junior debt securities will not be treated as Collateralized
Senior Loans and thus assets invested in such securities will not count toward
the percentage of the Fund's total assets that normally will be invested in
Collateralized Senior Loans. The Fund will acquire such interests in warrants,
equity securities and junior debt securities only as an incident to the
ownership of interests in Collateralized Senior Loans.
A Lender may have certain obligations pursuant to a revolving loan
agreement, which may include the obligation to make additional loans in
certain circumstances. The Fund currently intends to reserve against such
contingent obligations by segregating a sufficient amount of borrowing
capacity under its credit facility, cash, liquid securities or liquid
Collateralized Senior Loans as a reserve against such commitments. The Fund
will not purchase interests in Collateralized Senior Loans that would require
the Fund to make any such additional loans if such additional loan commitments
in the aggregate would exceed 20% of the Fund's total assets.
The Fund may be required to pay and may receive various fees and commissions
in connection with purchasing, selling and holding interests in Collateralized
Senior Loans. The fees normally paid by borrowers may include three types:
upfront fees, commitment fees and prepayment penalties. Upfront fees are paid
to Lenders upon origination of a Collateralized Senior Loan. Commitment fees
are paid to Lenders on an ongoing basis based upon the undrawn portion
committed by the Lenders of the underlying Collateralized Senior Loan. Lenders
may receive prepayment penalties when a borrower prepays all or part of a
Collateralized Senior Loan. The Fund will receive these fees directly from the
borrower if the Fund is an Original Lender, or, in the case of commitment fees
and prepayment penalties, if the Fund acquires an interest in a Collateralized
Senior Loan by way of Assignment. Whether or not the Fund receives an upfront
fee from the Lender in the case of an Assignment, or any fees in the case of a
Participation, depends upon negotiations between the Fund and the seller of
such interests. When the Fund is an assignee, it may be required to pay a fee,
or forgo a portion of interest and any fees payable to it, to the Lender
selling the Assignment. The assignor may pay a fee to the assignee based on
the principal amount of the Collateralized Senior Loan which is being
assigned. A seller of a Participation to the Fund may deduct a portion of the
interest and any fees payable to the Fund as an administrative fee prior to
payment thereof to the Fund. The Fund may be required to pay over or pass
along to a purchaser of an interest in a Collateralized Senior Loan from the
Fund a portion of any fees that the Fund would otherwise be entitled to.
Pursuant to the relevant Loan Agreement, a borrower may be required in
certain circumstances, and may have the option at any time, to prepay the
principal amount of a Collateralized Senior Loan, often without incurring a
prepayment penalty. Because the interest rates on Collateralized Senior Loans
are periodically redetermined at relatively short intervals, the Fund and the
Sub-Adviser believe that the prepayment of, and subsequent reinvestment by the
Fund in, Collateralized Senior Loans will not have a materially adverse impact
on the yield on the Fund's portfolio and may have a beneficial impact on
income due to receipt of prepayment penalties, if any, and any upfront fees
earned in connection with reinvestment.
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<PAGE>
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. The Adviser and Sub-
Adviser anticipate that the interest payments on any borrowing or debt
securities or the dividends on any preferred stock will reflect short-term
rates, and that the net return on the Fund's portfolio attributable to
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 the Adviser and Sub-Adviser.
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 MMC as a percentage of the Fund's net 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 total 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 of the Fund. So long
as the Fund is able to realize a higher net return on the portion of its
investment portfolio attributable to leverage 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 portion of Fund's investment portfolio attributable to leverage,
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 portion of the Fund's portfolio attributable to leverage, 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 on its entire portfolio were not
sufficient to meet interest or dividend requirements on any leverage, it could
be necessary for the Fund to liquidate certain of its investments, thereby
reducing the net asset value attributable to the Common Stock. The Fund's
Adviser and Sub-Adviser will seek to mitigate the interest-rate related risk
associated with leverage by utilizing leverage and investing in Collateralized
Senior Loans which both carry floating or variable rates of interest (or
dividends in the case of preferred stock issued by the Fund, if any).
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
29
<PAGE>
purchases of additional investments in the event such asset coverage
requirements are not met. The 1940 Act also requires that holders of preferred
stock 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 NRSRO 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 may enhance the marketability of the preferred stock or debt and thereby
reduce the dividend rate on such preferred stock or interest requirements on
such debt from that which the Fund would be required to pay if the preferred
stock or debt were not so rated. The rating agencies for any preferred stock
or debt 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 investments. The Fund
expects that the terms of any preferred stock or debt will provide for
mandatory redemption of the preferred stock or the 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 investments 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 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 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
30
<PAGE>
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 the Adviser or the Sub-Adviser to be creditworthy.
Under a reverse repurchase agreement, the Fund would sell Collateralized
Senior Loans, uncollateralized senior loans or 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 typically establish and
maintain a segregated account, with its custodian or a designated sub-
custodian, containing liquid assets in an amount not less than the repurchase
price marked to market daily (including accrued interest), and will
subsequently review the account to ensure that such equivalent value is
maintained, in accordance with procedures established by the Board of
Directors. Reverse repurchase agreements involve the risk that the market
value of the Collateralized Senior Loans, uncollateralized senior loans or
securities purchased with the proceeds of the sale of Collateralized Senior
Loans, uncollateralized senior loans or securities received by the Fund may
decline below the price of the Collateralized Senior Loans, uncollateralized
senior loans or securities the Fund is obligated to repurchase. In the event
the buyer of Collateralized Senior Loans, uncollateralized senior loans or
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 Collateralized Senior Loans, uncollateralized senior loans or
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 5.80% 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 1.93%. 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 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.................. (15.27)% (8.60)% (1.93)% 4.73% 11.40%
</TABLE>
Until the Fund borrows (including issuing debt securities) or issues shares
of preferred stock, the Fund's Common Stock will not be leveraged, and the
risks and special considerations related to leverage described in this
Prospectus will not apply. Such leveraging of the Common Stock cannot be fully
achieved until the proceeds resulting from the use of leverage have been
invested in debt instruments in accordance with the Fund's investment
objective and policies.
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<PAGE>
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).
HIGH YIELD/LOWER RATED SECURITIES
As stated above, under normal market conditions, the Fund may invest up to
20% of its total assets in high yield/lower rated securities with remaining
maturities not exceeding five years at the time of acquisition by the Fund.
These securities are rated below investment grade (lower than Baa by Moody's
or BBB by S&P or comparable ratings by other NRSROs) or, if unrated, have
characteristics similar to such securities as determined by the Fund's Sub-
Adviser. These lower grade securities are often referred to as "junk bonds."
Securities rated Ba by Moody's or BB by S&P and lower are considered to have
speculative elements, with higher vulnerability to default than corporate
securities with higher ratings. See "Appendix A--Ratings of Corporate Bonds"
for additional information concerning rating categories of Moody's and S&P.
The Fund will not purchase lower rated securities that are not, at the time of
purchase, current in the payment of interest and principal.
Lower rated securities, though high yielding, are characterized by high
risk. They may be subject to certain risks with respect to the issuer and to
greater market fluctuations than certain lower yielding, higher rated
securities. In addition, high yield securities are often unsecured and
subordinated obligations of the issuer. Accordingly, following an event of
default or liquidation or bankruptcy of the issuer, the Fund might not receive
payments to which it is entitled as a result of its position as an unsecured
or subordinated creditor, or may receive distributions of non-income producing
securities, including common stock. Therefore, the Fund may experience a
decline in the value of its investment and possibly its net asset value. The
retail secondary market for lower rated securities may be less liquid than
that of higher rated securities; adverse conditions could make it difficult,
at times, for the Fund to sell certain securities or could result in lower
prices than those used in calculating the Fund's net asset value.
Bond prices generally are inversely related to interest rate changes;
however, bond price volatility also is inversely related to coupon.
Accordingly, lower rated securities may be relatively less sensitive to
interest rate changes than higher quality securities of comparable maturity,
because of their higher coupon. This higher coupon is what the investor
receives in return for bearing greater credit risk. The higher credit risk
associated with lower rated securities potentially will have a greater effect
on the value of such securities than may be the case with higher quality
issues of comparable maturity.
In selecting high yield/lower rated securities for the Fund, the Sub-Adviser
evaluates the creditworthiness of an issuer and seeks to identify those with
stable or improving financial conditions. The Fund's Sub-Adviser also
considers general industry trends, the issuer's managerial strength, market
position, debt maturity schedules and liquidity.
DERIVATIVE INSTRUMENTS
Although the Fund does not currently intend to do so, it may from time to
time engage in hedging or similar strategies in order to manage risk or in
furtherance of the Fund's investment objectives and policies. The Fund may use
these strategies to attempt to protect against possible changes in the market
value of the Fund's portfolio resulting from fluctuations in the securities
markets and changes in interest rates, to protect the Fund's unrealized gains
in the value of its portfolio investments to facilitate the sale of such
investments for investment purposes,
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to establish a position in the market as a temporary substitute for purchasing
a particular investment, 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 the Sub-Adviser's discretion, and may not necessarily be
engaging in such activities when movements occur in interest rates or in the
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.
Although the Fund does not currently intend to do so, 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
financial instruments, financial indices and futures contracts, enter into the
interest rate transactions discussed below and enter into other similar
transactions which may be developed in the future to the extent the Fund's
Sub-Adviser 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.
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.
Successful use of Derivative Transactions by the Fund is subject to the
ability of the Fund's Sub-Adviser to predict correctly movements in the
direction of interest rates and other factors affecting markets for financial
investments. These skills are different from those needed to select portfolio
investments. The Fund believes that the Sub-Adviser possesses the skills
necessary for the successful utilization of hedging and risk management
transactions. If the Sub-Adviser'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 investments in its portfolio
and the price of such investments increased instead, the Fund would lose part
or all of the benefit of the increased value of its investments 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 debt instruments
the Fund anticipates purchasing at a later date.
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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 the Fund's Sub-Adviser
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. Although the Fund does
not currently intend to do so, the Fund may also enter into (a) contracts for
the purchase or sale for future delivery ("futures contracts") of debt
instruments (including Collateralized Senior Loans), aggregates of financial
instruments, 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 investments 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 investments
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. 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.
Put and Call Options on Financial Instruments and Indices of Financial
Instruments. Although the Fund does not currently intend to do so, in order to
reduce interest-rate related 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 financial instruments
(including Collateralized Senior Loans) and indices based upon the prices,
yields or spreads of financial instruments. 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 instrument or
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 financial instrument at a price higher than the
current market price of the instrument. In buying put or call options, the
Fund is exposed to the risk that such options may expire worthless.
Segregation and Cover Requirements. Futures contracts, interest rate swaps,
caps, floors and collars, and options on financial instruments, 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 financial instrument or futures contract underlying the
instrument, the Fund will be required to segregate on an ongoing basis with
its custodian liquid assets in an amount at least equal to the current amount
of the Fund's obligations with respect to such instruments in accordance with
procedures established by the Board of Directors. Such amounts fluctuate as
the obligations increase or decrease. The segregation requirement can result
in the Fund maintaining investment positions it would otherwise liquidate or
segregating assets at a time when it might be disadvantageous to do so.
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WHEN-ISSUED AND DELAYED DELIVERY FINANCIAL INSTRUMENTS
The Fund may purchase financial instruments (including Collateralized Senior
Loans) on a when-issued or delayed delivery basis. Financial instruments
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 financial instrument on a when-issued or
delayed delivery basis prior to delivery. Such financial instruments are
recorded as an asset and are subject to changes in value based upon changes in
the general level of interest rates. Purchasing a financial instrument 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 financial instruments on a when-issued
or delayed delivery basis with the intention of actually acquiring the
instruments 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 financial instruments 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
instruments as senior securities representing indebtedness, which are subject
to asset coverage requirements under the 1940 Act.
LOANS OF PORTFOLIO ASSETS
The Fund may lend portfolio assets (including Collateralized Senior Loans).
By doing so, the Fund will attempt to increase its income through the receipt
of interest payments on the loan. In the event of the bankruptcy of the other
party to either a financial instrument loan or a repurchase agreement, the
Fund could experience delays in recovering either the instrument it lent or
its cash. To the extent that, in the meantime, the value of the assets the
Fund lent has increased or the value of the assets it purchased with cash
collateral has decreased, the Fund could experience a loss.
The Fund may lend financial instruments from its portfolio if liquid assets
in an amount at least equal to the current market value of the instruments
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 assets 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 or take
possession of such collateral. During the time assets are on loan, the
borrower will make payments in respect of any accrued income on those assets,
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 financial
instruments in which the Fund is permitted to invest. The value of assets
loaned and collateral received will be marked to market daily. Portfolio
investments purchased with cash collateral are subject to possible
depreciation. Loans of assets 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 assets, 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 assets with a value in excess
of 33 1/3% of the value of its total assets (including the value of assets
purchased with collateral received in respect of the loans).
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ILLIQUID OR RESTRICTED FINANCIAL INSTRUMENTS
The Fund may invest without limitation in illiquid financial instruments
(including Collateralized Senior Loans) for which there is a limited trading
market and for which a low trading volume of a particular instrument may
result in abrupt and erratic price movements. The Fund may be unable to
dispose of its holdings in illiquid investments at then current market prices
and may have to dispose of such investments over extended periods of time.
Certain instruments 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 Restricted 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 Restricted Securities for at least two
years and is unaffiliated with the issuer. Companies whose Restricted
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 Restricted 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.
MONEY MARKET INSTRUMENTS AND GOVERNMENT SECURITIES
During normal market conditions, the Fund may invest up to 20% of its total
assets (including assets maintained by the Fund as a reserve against any
additional loan commitments) in the following types of money market
instruments.
U.S. Government Securities. The Fund may invest in debt obligations of
varying maturities issued or guaranteed by the U.S. government, its agencies
or instrumentalities ("U.S. Government Securities"). Direct obligations of the
U.S. Treasury include a variety of securities that differ in their interest
rates, maturities and dates of issuance. U.S. Government Securities also
include securities issued or guaranteed by the Federal Housing Administration,
Farmers Home Loan Administration, Export-Import Bank of the U.S., Small
Business Administration, Government National Mortgage Association, General
Services Administration, Central Bank for Cooperatives, Federal Farm Credit
Banks, Federal Home Loan Banks, Federal Home Loan Mortgage Corporation,
Federal Intermediate Credit Banks, Federal Land Banks, Federal National
Mortgage Association, Maritime Administration, Tennessee Valley Authority,
District of Columbia Armory Board and Student Loan Marketing Association. The
Fund may also invest in instruments that are supported by the right of the
issuer to borrow from the U.S. Treasury and instruments that are supported by
the credit of the instrumentality. The U.S. government is not obligated by law
to provide support to an instrumentality it sponsors.
Repurchase Agreements. In a repurchase agreement, the Fund buys, and the
seller agrees to repurchase, a financial instrument at a mutually agreed upon
time and price (usually within seven days). The repurchase agreement thereby
determines the yield to the Fund (buyer) during the purchaser's holding
period, while the
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seller's obligation to repurchase is secured by the value of the underlying
financial instruments. The Adviser will monitor the value of the financial
instrument underlying the repurchase agreement at the time the transaction is
entered into and during the term of the repurchase agreement to ensure that
the value of the financial instruments always exceeds the repurchase price.
Repurchase agreements could involve risks in the event of a default or
insolvency of the other party to the agreement, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying instruments.
The Fund may enter into repurchase agreements with certain banks or non-bank
dealers deemed creditworthy by the Adviser.
Bank Obligations. The Fund may purchase certificates of deposit, time
deposits, bankers' acceptances and other short-term obligations issued by
domestic banks, foreign subsidiaries or foreign branches of domestic banks,
domestic and foreign branches of foreign banks, domestic savings and loan
associations and other banking institutions. With respect to such securities
issued by foreign subsidiaries or foreign branches of domestic banks, and
domestic and foreign branches of foreign banks, the Fund may be subject to
additional investment risks.
Certificates of deposit are negotiable certificates evidencing the
obligation of a bank to repay funds deposited with it for a specified period
of time.
Time deposits are non-negotiable deposits maintained in a banking
institution for a specified period of time (in no event longer than seven
days) at a stated interest rate.
Bankers' acceptances are credit instruments evidencing the obligation of a
bank to pay a draft drawn on it by a customer. These instruments reflect the
obligation both of the bank and the drawer to pay the face amount of the
instrument upon maturity. The other short-term obligations may include
uninsured, direct obligations bearing fixed, floating or variable interest
rates.
Commercial Paper. Commercial paper consists of short-term, unsecured
promissory notes issued to finance short-term credit needs of corporations.
The commercial paper purchased by the Fund will consist only of direct
obligations which, at the time of their purchase, are (a) rated not lower than
Prime-1 by Moody's or A-1 by S&P, (b) issued by companies having an
outstanding unsecured debt issue currently rated at least A3 by Moody's or A-
by S&P, or (c) if unrated, determined by the Adviser to be of comparable
quality to those rated obligations which may be purchased by the Fund.
Other Short-Term Corporate Obligations. These instruments include variable
amount master demand notes, which are obligations that permit the Fund to
invest fluctuating amounts at varying rates of interest pursuant to direct
arrangements between the Fund, as lender, and the borrower. These notes permit
daily changes in the amounts borrowed. Because these obligations are direct
lending arrangements between the lender and borrower, it is not contemplated
that such instruments generally will be traded, and there generally is no
established secondary market for these obligations, although they are
redeemable at face value, plus accrued interest, at any time. Accordingly,
where these obligations are not secured by letters of credit or other credit
support arrangements, the Fund's right to redeem is dependent on the ability
of the borrower to pay principal and interest on demand. Such obligations
frequently are not rated by credit rating agencies, and the Fund may invest in
them only if at the time of an investment the Adviser determines that such
investment is of comparable quality to those rated obligations which may be
purchased by the Fund.
If the Adviser determines that market conditions temporarily warrant a
defensive investment policy, the Fund may invest, subject to its ability to
liquidate its relatively illiquid portfolio of Collateralized Senior Loans,
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up to 100% of its assets in money market instruments. The yield on such
securities may be lower than the yield on Collateralized Senior Loans,
uncollateralized senior loans and high risk/lower rated, and other fixed-
income securities.
INVESTMENT RESTRICTIONS
The following restrictions, along with the Fund's investment objective, 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. As used here, "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. See "Description of Capital Stock--Preferred Stock" and
"Description of Capital Stock--Special Voting and Anti-Takeover Provisions"
for additional information with respect to the voting rights of holders of
preferred stock, if any. The other policies, practices 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 investments or take other action to
satisfy the percentage restriction. Under its fundamental restrictions, the
Fund may not:
(1) purchase any investment which would cause more than 25% of the value of
its total assets at the time of such purchase to be invested in financial
instruments 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 investment obligations issued or guaranteed by the
U.S. Government, its agencies or instrumentalities or repurchase agreements
collateralized by any of such obligations;
(2) issue senior securities (including borrowing money or entering into
reverse repurchase agreements) in excess of 33 1/3% of its total assets
(including the amount of senior securities issued but excluding any
liabilities and indebtedness not constituting senior securities) except that
the Fund may borrow up to an additional 5% of its total assets for temporary
purposes, or pledge its assets other than to secure such issuance or in
connection with hedging transactions, when-issued and delayed delivery
transactions and similar investment strategies;
(3) purchase or sell commodities or commodity contracts, except that the
Fund may engage in Derivative Transactions;
(4) 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 objective and policies; (b) invest in or purchase Collateralized
Senior Loans in accordance with its Investment Objective and Policies; (c)
enter into repurchase agreements with respect to portfolio investments; (d)
make loans of portfolio assets, 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 transactions
shall not be considered loans;
(5) underwrite the securities of other issuers, except to the extent that,
in connection with the disposition of portfolio investments, it may be deemed
to be an underwriter;
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(6) purchase real estate (other than Collateralized Senior Loans or other
financial instruments secured by real estate or interests therein or financial
instruments issued by companies that invest in real estate or interests
therein, including real estate investment trusts); or
(7) invest for the purpose of exercising control over the 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 except to the extent
permitted by order of the Commission; or
(2) make short sales of financial instruments or purchase financial
instruments 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 financial instruments
and indices based on the prices, yields or spreads of financial instruments).
MANAGEMENT OF THE FUND
INVESTMENT ADVISER AND ADMINISTRATOR
The Fund has retained MMC, an indirect, wholly-owned subsidiary of Citigroup
Inc. ("Citigroup") as its investment adviser and administrator. MMC is located
at 388 Greenwich Street, New York, New York, 10013. MMC, in turn, has retained
TAMIC, also a wholly-owned indirect subsidiary of Citigroup as the sub-
investment adviser. MMC is registered as an investment adviser under the
Investment Advisers Act of 1940, as amended (the "Advisers Act"), and provides
investment advisory, investment management and/or administrative services to
investment companies that had aggregate assets under management of
approximately $106 billion as of August 31, 1998. MMC is responsible for the
overall management of the Fund's affairs, including developing a program for
the investment and reinvestment of the Fund's assets, recommending to the
Board of Directors of the Fund the appropriate leverage ratio, consulting with
TAMIC concerning hedging strategies that may be employed and supplying certain
officers for the Fund.
For its services, pursuant to an investment management and administrative
agreement with the Fund (the "Advisory Agreement"), MMC receives from the Fund
a monthly fee at an annual rate of 1.05% of the value of the Fund's average
weekly assets out of which MMC pays TAMIC for its sub-advisory services to the
Fund. The Fund's average weekly assets include the Fund's net assets plus the
proceeds of any outstanding borrowings used for leverage and any proceeds from
the issuance of preferred stock, minus the sum of: (i) accrued liabilities of
the Fund (other than outstanding leverage), (ii) any accrued and unpaid
interest on outstanding borrowings and (iii) accumulated dividends on shares
of preferred stock. The net 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. This fee is higher than
fees paid by other investment companies although it is comparable to the fees
paid by several publicly offered, closed-end investment companies with
investment objectives and policies similar to those of the Fund. During
periods in which the Fund is utilizing financial leverage, the fee which is
payable to MMC as a percentage of the Fund's net 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 total assets, including those
purchased with leverage.
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As administrator, MMC provides the following services: determination and
publication of the Fund's net asset value, maintenance of the books and
records of the Fund as required under the 1940 Act, assistance in the payment
and filing of the Fund's tax returns, review of and arrangement for the
payment of the Fund's expenses, preparation of certain materials for the
Fund's proxy statements and shareholder reports, preparation of reports to the
Commission, monitoring the performance of all service providers to the Fund,
responding to shareholder inquiries, and assistance with such other services
as generally may be required to properly carry on the business and operations
of the Fund.
Citigroup businesses produce a broad range of financial services -- asset
management, banking and consumer finance, credit and charge cards, insurance,
investments, investment banking and trading--and use diverse channels to make
them available to consumer and corporate customers around the world. Among
these businesses are Citibank, Commercial Credit, Primerica Financial
Services, Salomon Smith Barney, SSBC Asset Management, Travelers Life &
Annuity and Travelers Property Casualty.
SUB-INVESTMENT ADVISER
TAMIC, located at 388 Greenwich Street, New York, New York, 10013, is
registered under the Advisers Act and currently manages assets with a value of
$5.9 billion as of August 31, 1998. For its services, TAMIC receives from MMC
a monthly fee at an annual rate of 0.50% of the value of the Fund's average
weekly assets. TAMIC officers, including those who will be primarily
responsible for management of the Fund, are also involved in management of the
general accounts of TAMIC's insurance company affiliates. As of August 31,
1998, those persons managed $760 million of assets invested in Collateralized
Senior Loans by those affiliates; as a result of investing for these accounts
in Collateralized Senior Loans, TAMIC has developed the systems, accounting,
credit analysis and performance analysis experience deemed appropriate for the
management of the Fund's portfolio. TAMIC provides advisory services with
respect to assets typically available only to a limited number of
institutional investors.
Glenn N. Marchak, a certified public accountant, joined the Sub-Adviser in
1998 as a Senior Vice President and is primarily responsible for the day-to-
day management of the Fund's portfolio, as well as the management of assets of
the Sub-Adviser's insurance company affiliates invested in Collateralized
Senior Loans. From 1997 to 1998, Mr. Marchak was a Managing Director of Smith
Barney Inc. charged with developing and heading that firm's leveraged lending
and loan syndication efforts and previously was a Senior Vice President and
Head of Loan Syndications at National Westminster Bank plc. from 1993 to 1997.
Mr. Marchak was a Vice President at Citibank, N.A. in the Loan Syndications
Department and prior to that the Leveraged Finance Department from 1986 to
1993. He began his business career in 1980 at Arthur Young & Co. where he was
a Manager in the Audit Department and a founder of that firm's Reorganization
and Insolvency practice.
IMPORTANT TERMS OF ADVISORY AND SUB-ADVISORY AGREEMENTS
Unless earlier terminated as described below, the Advisory and Sub-Advisory
Agreements will remain in effect for two years from the date of this
Prospectus and from year to year thereafter if they are 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 as defined in the 1940 Act. The Advisory and Sub-Advisory
Agreements 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 or Sub-Advisory
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Agreements, the Fund's Board of Directors will select a successor investment
adviser. If the Sub-Advisory Agreement should be terminated or not renewed,
MMC could manage the assets alone or it could recommend a new sub-investment
adviser to the Fund's Board of Directors and shareholders.
Except as indicated above, the Advisory, Sub-Advisory and Administration
Agreements provide that the Fund will pay all of its expenses, including,
without limitation, organizational and offering expenses (but not overhead or
employee costs of MMC and TAMIC); 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, registrars, transfer agents, dividend
disbursing agents and dividend reinvestment plan agents; payment for portfolio
pricing services to a pricing agent; fees of the Commission; expense of
registering or qualifying securities of the Fund for sale; freight and other
charges in connection with the shipment of the Fund's portfolio investments;
fees and expenses of non-interested directors; costs of shareholders meetings;
insurance; interest; brokerage costs; litigation and other extraordinary or
non-recurring expenses.
DIRECTORS AND OFFICERS OF THE FUND
The Fund has a Board of Directors composed of six Directors which supervises
the Fund's investment activities and reviews contractual arrangements with
companies that provide the Fund with services. Mr. McLendon is the sole
Director who is an "interested person" of the Fund (as defined in the 1940
Act). Each Director who is not an "interested person" serves on the Audit
Committee of the Board.
The address of each officer of the Fund is 388 Greenwich Street, New York,
New York 10013.
The Directors and officers of the Fund as a group owned beneficially less
than 1% of the total shares of the Fund outstanding as of the date of this
Prospectus.
The following lists the Directors and officers and their positions with the
Fund and their present and principal occupations during the past five years.
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
DURING
POSITIONS HELD WITH PAST FIVE YEARS, OTHER
NAME AND ADDRESS REGISTRANT DIRECTORSHIPS AND AGE
---------------- ----------------------- ------------------------
<C> <C> <S>
Allan J. Bloostein............ Director President of Allan J.
Allan J. Bloostein Associates Bloostein Associates, a
425 Park Avenue, 27th Floor consulting firm; retired
New York, NY 10022-8101 Vice Chairman and
Director of May
Department Stores;
Director of CVS
Corporation and Taubman
Centers Inc.; 68.
Martin Brody.................. Director Consultant, HMK
HMK Associates Associates; retired Vice
30 Columbia Turnpike Chairman of the Board of
Florham Park, NJ 07932 Directors of Restaurant
Associates Corp.;
Director of Jaclyn,
Inc.; 77.
</TABLE>
41
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
DURING
POSITIONS HELD WITH PAST FIVE YEARS, OTHER
NAME AND ADDRESS REGISTRANT DIRECTORSHIPS AND AGE
---------------- ------------------------- -------------------------
<C> <C> <S>
Dwight Crane.............. Director Professor, Harvard
Harvard Business School Business School; 60.
Soldiers Field
Morgan Hall #371
Boston, MA 02163
Robert A. Frankel......... Director Managing Partner of
Management Consultants Robert A. Frankel
102 Grand Street Management Consultants;
Croton-on-Hudson, NY 10520 formerly Corporate Vice
President of the Reader's
Digest Association
Inc.; 71.
William R. Hutchinson..... Director Vice President-Financial
Amoco Corp. Operations AMOCO
200 East Randolph Drive Corporation; Director of
Mail Code 3205 Associated Bank and
Chicago, IL 60601 Director of Associated
Banc-Corp.; 55.
Heath B. McLendon......... Director, Chief Executive Managing Director of
Officer, Chairman of the Salomon Smith Barney;
Board and President Director of fifty-eight
investment companies
associated with Salomon
Smith Barney; President
of MMC; Chairman of Smith
Barney Strategy Advisers
Inc. and President of
Travelers Investment
Advisers, Inc. ("TIA").
Lewis E. Daidone.......... Senior Vice President, Managing Director of
Treasurer and Chief Salomon Smith Barney;
Financial Officer Senior Vice President and
Treasurer or Executive
Vice President and
Treasurer of fifty-eight
investment companies
associated with Salomon
Smith Barney; Director
and Senior Vice President
of MMC and TIA; 41.
Glenn N. Marchak.......... Vice President and Senior Vice President of
Investment Officer Traveler's Asset
Management International
Corporation; Managing
Director of Smith Barney
from 1997 to 1998; Senior
Vice President and Head
of Loan Syndications at
National Westminister
Bank plc. from 1993 to
1997; and Vice President
at Citibank N.A. from
1986 to 1993; 42.
Christina T. Sydor........ Secretary Managing Director of
Salomon Smith Barney;
Secretary or Executive
Vice President and
General Counsel of forty-
three investment
companies associated with
Salomon Smith Barney;
Secretary and General
Counsel of MMC and TIA;
47.
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING
POSITIONS HELD WITH PAST FIVE YEARS, OTHER
NAME AND ADDRESS REGISTRANT DIRECTORSHIPS AND AGE
---------------- ----------------------- ------------------------------------
<C> <C> <S>
Irving P. David.. Controller Director of Salomon Smith Barney and
MMC; Controller of several
investment companies associated with
Salomon Smith Barney; Prior to March
1994, Assistant Treasurer of First
Investment Management Company; 37.
</TABLE>
No officer or employee of the Fund receives any compensation from the Fund
for serving as an officer, employee or Director of the Fund. The Fund pays
each Director who is not a director, officer, or employee of MMC or TAMIC
$5,000 per annum and $500 per Board meeting attended in person, $100 for each
telephonic Board meeting and reimburses each Director for travel and out-of-
pocket expenses.
<TABLE>
<CAPTION>
PENSION OR TOTAL
RETIREMENT ESTIMATED COMPENSATION
NAME AND AGGREGATE BENEFITS ACCRUED ANNUAL FROM THE FUND
ADDRESS OF COMPENSATION AS PART OF FUND BENEFITS UPON COMPLEX PAID TO
BOARD MEMBER FROM FUND(1) EXPENSES RETIREMENT BOARD MEMBER(2)
------------ ------------ ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Allan J. Bloostein...... $7,000 None None $ 85,850 (9)
Martin Brody............ $7,000 None None $119,814 (20)
Dwight Crane............ $7,000 None None $133,850 (22)
Robert A. Frankel....... $7,000 None None $ 65,900 (9)
William R. Hutchinson... $7,000 None None $ 35,750 (7)
Heath B. McLendon....... None None None None (59)
</TABLE>
(1) Amounts shown are estimates of payments to be made for the remaining
period of the fiscal year ending on September 30, 1999 pursuant to
existing arrangements.
(2) These payments are for the 1997 calendar year. A Fund Complex means two or
more investment companies that hold themselves out to investors as related
companies for purposes of investment and investor services, or have a
common investment adviser or have an investment adviser that is an
affiliated person of the investment adviser of any other investment
company. The numbers in parentheses indicate the applicable number of
investment company directorships within the Fund complex held by that
director.
Commencing with the first annual meeting of shareholders, the Board of
Directors will be divided into three classes, having terms of one, two and
three years, respectively. At the annual meeting of shareholders in each year
thereafter, the term of one class will expire and Directors will be elected to
serve in that class for terms of three years. See "Description of Capital
Stock."
The Articles of Incorporation and By-Laws of the Fund provide that the Fund
will indemnify, to the fullest extent permitted by law, its Directors and
officers and may indemnify employees or agents of the Fund (including MMC and
TAMIC) against liabilities and expenses incurred in connection with litigation
in which they may be involved because of their offices or relationship with
the Fund. In addition, the Fund's Articles of Incorporation provide that the
Fund's Directors and officers will not be liable to the Fund or its
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.
43
<PAGE>
PORTFOLIO TRANSACTIONS
The Fund has no obligation to deal with any brokers or dealers in the
execution of transactions in portfolio investments. Subject to a policy
established by the Fund's Board of Directors, the Sub-Adviser is primarily
responsible for the Fund's portfolio decisions and the placing of the Fund's
portfolio transactions.
With respect to interests in Collateralized Senior Loans, the Fund generally
will engage in privately negotiated transactions for purchase or sale in which
the Sub-Adviser will act on behalf of the Fund. The Fund may receive upfront
fees as an Original Lender in a Collateralized Senior Loan transaction. The
Fund may receive fees from or pay fees to, or forgo a portion of interest and
any fees payable to the Fund to, the party selling Participations or
Assignments to the Fund. The Sub-Adviser will determine the Agents from whom
the Fund will purchase Collateralized Senior Loans as an Original Lender and
the Lender and other parties from whom the Fund will purchase Assignments or
Participations, by considering their professional ability, level of service,
relationship with the borrower, financial condition, credit standards and
quality of management. See "Investment Objective, Policies and Portfolio
Risks" and "Risk Factors and Special Considerations."
Debt securities (other than Collateralized Senior Loans) 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, if any, held by the Fund will
normally be sold 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 dealer in positioning the securities involved. While the Sub-Adviser
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 the Sub-Adviser 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 the Sub-Adviser under the Sub-Advisory Agreement
and the Sub-Adviser's expenses 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, 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 or
acting as Agent in connection with the negotiation, arranging or on-going
administration of Collateralized Senior Loans. In order for such an affiliated
person to be permitted to effect any portfolio transactions for the Fund, the
commissions, fees or other remuneration received by such affiliated person
must be reasonable and fair compared to the commissions, fees or other
remuneration received by other brokers in connection with comparable
transactions involving similar securities being purchased or sold on a
securities exchange during a comparable period of time. This standard would
allow such an affiliated person to receive no more than the remuneration which
would be expected to be received by an unaffiliated broker in a commensurate
arm's-length transaction. The Fund is prohibited by the 1940 Act from
purchasing securities in primary offerings in which an affiliate acts as an
underwriter unless certain conditions established under the 1940 Act are
satisfied.
Investment decisions for the Fund are made independently from those for
other funds and accounts advised or managed by the Adviser or Sub-Adviser or
companies affiliated with the Adviser or Sub-Adviser, including
44
<PAGE>
proprietary accounts of such companies. Such other funds and accounts may or
may not also invest in the same financial instruments (including
Collateralized Senior Loans) as the Fund. If those funds or accounts are
prepared to invest in, or desire to dispose of, the same financial instrument
at the same time as the Fund, however, transactions in such financial
instruments will be made, insofar as feasible, for the respective funds and
accounts in a manner deemed by the Sub-Adviser 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 financial
instrument may be purchased for one or more funds or accounts when one or more
funds or accounts are selling the same financial instrument.
Although the Advisory and Sub-Advisory Agreements contain 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 investments by the average monthly value of the Fund's
portfolio investments. For purposes of this calculation, portfolio investments
exclude all financial instruments having a stated maturity when purchased of
one year or less.
DIVIDENDS AND DISTRIBUTIONS; DIVIDEND REINVESTMENT PLAN
Beginning with its initial distribution approximately 60 days after
completion of this offering, it is the Fund's present policy, which may be
changed by the Board of Directors, to make regular monthly cash distributions
to holders of Common Stock of substantially 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) for that period and to
distribute any net gain at least annually. Distributions to holders of Common
Stock cannot be assured and the amount of each monthly distribution is likely
to vary.
Pursuant to the Plan, shareholders whose Common Stock is registered in their
own names will be deemed to have elected to have all distributions reinvested
automatically in additional Common Stock of the Fund by First Data Investor
Services Group, Inc. (the "Plan Agent") as agent under the Plan, unless such
shareholders elect to receive distributions in cash. Shareholders who elect to
receive distributions in cash will receive all distributions in cash paid by
check in U.S. dollars mailed directly to the shareholder by First Data
Investor Services Group, Inc., as dividend paying agent. In the case of
shareholders such as banks, brokers or nominees, which hold Common Stock for
others who are the beneficial owners, the Plan Agent will administer the Plan
on the basis of the number of shares of Common Stock 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 of Common Stock 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 Common Stock
of the Fund, to be issued by the Fund or purchased by the Plan Agent in the
open market as outlined below. Whenever the market price per share of Common
Stock is equal to or exceeds the 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),
45
<PAGE>
participants will be issued new shares of Common Stock 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. If net asset value exceeds the market price of the Fund's shares
of Common Stock 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 terminating
no later than the earlier of (a) 30 days after the dividend or distribution
payment date or (b) the record date for the next succeeding dividend or
distribution to be made to the holders of the Common Stock, except when
necessary to comply with applicable provisions of the federal securities laws.
If, before the Plan Agent has completed its purchases, the market price
exceeds the net asset value of a share of Common Stock, 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 had been paid in shares of Common Stock
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 of Common Stock (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 of Common Stock credited to his
or her account under the Plan will be issued and a cash payment will be made
for any fractional shares credited to such account. An election to withdraw
from the Plan will, until such election is changed, be deemed to be an
election by a shareholder to take all subsequent dividends and distributions
in cash. Elections will be effective immediately if notice is received by the
Plan Agent not less than ten days prior to any dividend or distribution record
date; otherwise such termination will be effective after the investment of the
then current dividend or distribution. If a withdrawing shareholder requests
the Plan Agent to sell the shareholder's shares upon withdrawal from
participation in the Plan, the withdrawing shareholder will be required to pay
a $5.00 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 of Common Stock 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 of Common Stock 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.
46
<PAGE>
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.
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 Board of Directors' 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 federal income tax discussion is based on provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), existing Treasury
regulations, rulings published by the Internal Revenue Service (the "IRS"),
and other applicable authority, as of the date of this Prospectus. These
authorities are subject to change by legislative or administrative action. The
following discussion is only a summary of some of the important tax
considerations generally applicable to investments in the Fund. There may be
other tax considerations applicable to particular investors. In addition,
income earned through an investment in the Fund may be subject to state and
local taxes. Prospective shareholders are therefore urged to consult their tax
advisers with respect to the tax consequences of an investment in the Fund.
TAXATION OF THE FUND
The Fund intends to elect and to qualify each year to be treated as a
regulated investment company under Subchapter M of the Code. In order to so
qualify, the Fund must, among other things, (a) derive at least 90% of its
gross income from dividends, interest, payments with respect to certain
securities loans, and gains from the sale of stock, securities and foreign
currencies, or other income (including but not limited to gains from options,
futures or forward contracts) derived with respect to its business of
investing in such stock, securities or currencies; and (b) diversify its
holdings so that, at the end of each fiscal quarter (i) at least 50% of the
market value of the Fund's assets is represented by cash, cash items, U.S.
Government securities, securities of other regulated investment companies, and
other securities, limited in respect of any one issuer to a value not greater
than 5% of the value of the Fund's total assets and 10% of the outstanding
voting securities of such issuer, and (ii) not more than 25% of the value of
its assets is invested in the securities (other than those of the U.S.
Government or other regulated investment companies) of any one issuer or of
two or more issuers which the Fund controls and which are engaged in the same,
similar or related trades or businesses. If the Fund so qualifies as a
regulated investment company and distributes each year to its shareholders at
least 90% of its net investment income (i.e., the Fund's investment company
taxable income, as that term is defined in the Code, without regard to the
deduction for dividends paid), the Fund will not be required to pay federal
income taxes on any net investment income and net capital gain (i.e., the
excess of the Fund's net long-term capital gain over net short-term capital
loss) distributed to shareholders. The Fund would be subject to corporate
income tax (currently at a maximum rate of 35%) on any undistributed net
investment income and net capital gain. If the Fund failed to qualify as a
regulated investment company or failed to satisfy the 90% distribution
requirement in any taxable year, the Fund would be taxed as an ordinary
corporation on its taxable income and all distributions out of earnings and
profits would be taxed to shareholders as ordinary income.
47
<PAGE>
In addition, the Fund will be subject to a nondeductible 4% excise tax on
the amount by which the aggregate income it distributes in any calendar year
is less than the sum of (a) 98% of the Fund's ordinary income for such
calendar year; (b) 98% of the Funds capital gain net income for the one-year
period generally ending on October 31; 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 and subject to corporate
income tax will be considered to have been distributed by year-end.
Any dividend declared by the Fund in October, November or December of any
calendar year and payable to shareholders of record on a specified date in
such a month shall be deemed to have been received by each such shareholder on
December 31 of such calendar year and to have been paid by the Fund not later
than such December 31, provided that such dividend is actually paid by the
Fund to such shareholders during January of the following calendar year.
Although it does not currently intend to do so, the Fund may engage in
certain transactions, including derivative transactions, that 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 corporate income and excise tax. 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.
TAXATION OF SHAREHOLDERS
Distributions of the Fund's net investment income are taxable to
shareholders as ordinary income, whether paid in cash or reinvested in
additional shares. Distributions of the Fund's net capital gain that are
designated by the Fund as "capital gain dividends", if any, are taxable to
shareholders at the rates applicable to long-term capital gains regardless of
the length of time shares of the Fund have been held by such shareholders. It
is not expected that a significant portion of the Fund's dividends and
distributions will be eligible for the dividends received deduction for
corporations. The Fund will inform shareholders of the source and tax status
of all distributions promptly after the close of each calendar year.
Any dividend or distribution declared by the Fund in October, November or
December of any calendar year and payable to shareholders of record on a
specified date in such a month shall be deemed to have been received by each
shareholder on December 31 of such calendar year, provided that such dividend
is actually paid by the Fund during January of the following calendar year.
Shareholders receiving dividends or distributions in the form of additional
shares pursuant to the Plan (either from the Fund or as a result of purchases
by the Plan Agent) should be treated for United States federal income tax
purposes as receiving a dividend or distribution in an amount equal to the
amount of money that a shareholder receiving cash dividends or distributions
will receive, and should have a cost basis in the shares received equal to
such amount.
48
<PAGE>
Except as discussed below, selling shareholders will generally recognize
gain or loss in an amount equal to the difference between their adjusted tax
basis in the shares and the amount received. If such shares are held as a
capital asset, the gain or loss will be a capital gain or loss, and will be a
long-term capital gain or loss if the shares have been held for more than one
year. Any loss realized on the sale or exchange will be disallowed to the
extent the shares disposed of are replaced by substantially identical shares
(including shares acquired through the Plan) within a period of 61 days
beginning 30 days before and ending 30 days after the disposition of the
shares. In such case, the basis of the shares acquired will be increased to
reflect the disallowed loss. Any loss realized by a shareholder on the sale of
a share or shares held for six months or less will be treated for federal
income tax purposes as a long-term capital loss to the extent of any actual or
deemed capital gain dividends received by the shareholder with respect to such
share.
BACKUP WITHHOLDING
The Fund may be required to withhold federal income tax at a rate of 31%
("backup withholding") from dividends and redemption proceeds paid to non-
corporate shareholders. This tax may be withheld from dividends if (i) the
shareholder fails to furnish the Fund with its correct taxpayer identification
number, (ii) the IRS notifies the Fund that the shareholder has failed to
properly report certain interest and dividend income to the IRS and to respond
to notices to that effect or (iii) when required to do so, the shareholder
fails to certify that he or she is not subject to backup withholding.
Redemption proceeds may be subject to withholding under the circumstances
described in (i) above.
The Fund must report annually to the IRS and to each 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.
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.
DETERMINATION OF NET ASSET VALUE
The net asset value per share of the Fund's Common Stock is determined no
less frequently than weekly, generally on the last business day of the week,
and at such other times as the Board of Directors may determine, by
calculating the total value of the Fund's assets, deducting its total
liabilities and the liquidation value of the Fund's outstanding preferred
shares (without giving effect to any potential redemption premium with respect
to such preferred shares), and dividing the result by the number of shares of
Common Stock outstanding.
Where possible, Collateralized Senior Loans will be valued at market value
by the Administrator, with assistance from an independent pricing service
retained at the Fund's expense. The Administrator may rely on actual
transactions, quotations from market makers and other facts and circumstances
relevant to the determination of market value. However, as an active secondary
market for Collateralized Senior Loans generally does not exist to a reliable
degree in the opinion of the Sub-Adviser, interests in Collateralized Senior
Loans frequently will be valued at fair value in accordance with guidelines
established by the Board of Directors. Fair value is intended to approximate
market value. In valuing a Collateralized Senior Loan at fair value, the
Administrator, with assistance from the Sub-Adviser may consider, among other
factors, some or all of the
49
<PAGE>
following: (i) the nature and pricing history (if any) of the portfolio
instrument, (ii) whether any dealer quotations for the portfolio instrument
are available, (iii) possible valuation methodologies that could be used to
determine the fair value of the portfolio instrument, (iv) the recommendation
of the Portfolio Manager of the Fund with respect to the valuation of the
portfolio instrument, (v) whether the same or similar portfolio instruments
are held by other portfolios managed by TAMIC and the method used to price the
portfolio instruments in those portfolios, (vi) the extent to which the fair
value to be determined for the portfolio instrument will result from the use
of data or formulae produced by third parties independent of MMC and TAMIC,
(vii) the liquidity or illiquidity of the market for the particular portfolio
instrument, (viii) the creditworthiness of the borrower and any party
interpositioned between the Fund and the borrower, (ix) the current interest
rate, the period until next interest rate reset and maturity of the
Collateralized Senior Loan, (x) recent market prices for publicly traded debt
and/or equity issues, if any, of the borrower, (xi) recent market prices for
instruments of similar quality, rate, period until next interest rate reset
and maturity, and (xii) the expected recovery value of a Collateralized Senior
Loan if the borrower is in default of a material covenant or not paying
interest and/or principal on a timely basis. In addition, in valuing
Collateralized Senior Loans, the Administrator and Sub-Adviser may consider to
the extent they consider such information to be reliable, prices or quotations
provided by banks, dealers or pricing services which may represent the prices
at which secondary market transactions in the Collateralized Senior Loans held
by the Fund have or could have occurred. However, because the secondary market
for such Collateralized Senior Loans has not yet fully developed, the
Administrator and Sub-Adviser will not currently rely solely on such prices or
quotations when determining the fair value of a Collateralized Senior Loan.
Uncollateralized senior loans will be valued in accordance with the
guidelines for Collateralized Senior Loans described above.
Fund assets, other than Collateralized Senior Loans and uncollateralized
senior loans, for which market quotations are readily available are valued (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.
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 150,000,000 shares of Common
Stock ($.001 par value per share). The Common Stock of the Fund, when issued,
will be fully paid and nonassessable. All shares of Common Stock are equal as
to dividends, distributions and voting privileges. There are no conversion,
preemptive or other subscription rights. In the event of liquidation, each
share of Common Stock is entitled to its proportion of the Fund's assets after
debts and expenses subject to the rights of any preferred stock. There are no
cumulative voting rights for the election of directors. Prior to the offering,
the Adviser or an affiliated company
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will own 100% of the outstanding shares of Common Stock of the Fund and,
consequently, will be a controlling person of the Fund until the shares
offered hereby are issued and sold. The Fund will hold annual meetings of
shareholders.
The Fund has no present intention of offering additional shares of its
Common Stock, except as provided in the Plan as discussed above. 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
voting shares of Common Stock as defined in the 1940 Act.
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.
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, as defined in the 1940 Act, 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 and Anti-Takeover 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
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<PAGE>
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. Under the 1940 Act, if at
any time dividends on the Fund's preferred stock are unpaid in an amount equal
to two full years' dividends, the holders of all outstanding preferred stock,
voting as a class, will be entitled to elect a majority of the Fund's
directors until all dividends in default have been paid or declared and set
apart for payment.
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. 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 or
Directors 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 AND ANTI-TAKEOVER PROVISIONS
The Fund has provisions in its Articles of Incorporation and By-Laws that
could limit the ability of other entities or persons to acquire control of the
Fund, cause the Fund to engage in certain transactions or induce the Fund to
modify its structure or status under the 1940 Act as a closed-end investment
company. 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
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<PAGE>
director may be removed from office by the stockholders, but only for cause
and only by a vote of the holders of at least 75% of the votes entitled to be
cast in an election to fill that directorship.
The class voting requirements for preferred stock could make it more
difficult for the Fund to take certain actions that may be proposed in the
future, such as a merger, exchange of securities, liquidation or alteration of
the rights of a class of the Fund's securities, changing the Fund to an open-
end company or ceasing to be an investment company. The Board of Directors
would be able to include redemption features in any series of preferred stock
that might be issued in the future that would enable the Fund to redeem the
preferred stock if it appeared to stand in the way of actions that the Board
of Directors concluded, at the time of issuing the preferred stock, might
therefore be of significance to the holders of Common Stock.
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 (excluding investment companies advised by the Fund's
initial investment adviser or any of its affiliates) 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 September, 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 and the
affirmative vote of at least 75% of the Continuing Directors, as defined
above, will be required to amend the Articles of Incorporation to change any
of the provisions in this paragraph and certain other provisions described in
this section.
The affirmative vote 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 in the case of (iv) and (v) below 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, including at
least 66 2/3% of the votes entitled to be cast thereon 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 sales of debt
securities of the Fund in a public or private offering, sales of other
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
53
<PAGE>
fair market value of $1,000,000 or more except for portfolio transactions
(including pledges of portfolio assets in connection with borrowings and debt
securities) 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, including a change in investment objective.
However, the voting requirements described above will not be required with
respect to a Business Combination if it is approved by a vote of at least 75%
of the Continuing Directors, or certain pricing and other conditions specified
in the Articles of Incorporation are met. In such cases, depending upon
whether a shareholder vote would be required under Maryland law without regard
to the provisions of the Articles of Incorporation, either (i) a majority of
the votes entitled to be cast by the shareholders will be sufficient to
authorize the transaction, or (ii) no shareholder vote will be required.
Further, with respect to a transaction described in (iv) above, if it is
approved by a vote of least 75% of the Continuing Directors, a majority of the
votes entitled to be cast by the shareholders will be sufficient to authorize
the transaction.
The Fund's By-Laws contain provisions the effect of which is to prevent
matters initiated by shareholders, 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 date of the meeting. Further, in order for the shareholders of the Fund to
call a special meeting, the By-Laws require that shareholders holding at least
40% of the votes required to be cast at the meeting make a request in writing
to the Secretary of the Fund. Shareholders would also be responsible for
certain costs (i.e. mailing of notice) associated with any such 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 MMC, however, these provisions offer several possible advantages. They may
require persons seeking control of the Fund to negotiate with its management
regarding the price to be paid for the shares required to obtain such control,
they promote continuity and stability and they enhance the Fund's ability to
pursue long-term strategies that are consistent with its investment
objectives.
MARKET DISCOUNT
Shares of common stock of closed-end investment companies frequently trade
at a discount from net asset value, or in some cases trade at a premium.
Shares of closed-end investment companies investing primarily in fixed-income
securities tend to trade on the basis of income yield on the market price of
the shares and the market
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<PAGE>
price may also be affected by trading volume, general market conditions and
economic conditions and other factors beyond the control of the Fund. As a
result, the market price of the Fund's shares may be greater or less than the
net asset value.
Some closed-end investment companies have taken certain actions, including
the repurchase of common stock in the market at market prices and the making
of one or more tender offers for common stock at net asset value, in an effort
to reduce or mitigate the discount, and others have converted to an open-end
investment company, the shares of which are redeemable at net asset value. The
experience of many closed-end funds suggests that the effect of any of these
steps (other than open-ending) on the discount may be temporary or
insignificant. Accordingly, although the Board of Directors will monitor any
discount and consider such action as it may deem to be appropriate, there can
be no assurance that any of the specific actions described above will be taken
or, if undertaken, will cause the Fund's shares to trade at a price equal to
their net asset value. MMC may voluntarily waive its fees from time to time in
order to increase the Fund's dividend yield in an effort to reduce the
discount. Any such waiver may be terminated at any time, and there can be no
assurance that such actions would be successful at reducing the discount.
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
PNC Bank, N.A. located at 17th and Chestnut, Philadelphia, Pennsylvania
19103, 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.
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<PAGE>
UNDERWRITING
The Underwriters named herein, for whom Salomon Smith Barney Inc., 388
Greenwich Street, New York, New York 10013 is acting as Representative (the
"Representative"), have severally agreed, subject to the terms and conditions
contained in the Underwriting Agreement among the Fund, the Adviser, the Sub-
Adviser and the several Underwriters (the "Underwriting Agreement"), to
purchase from the Fund the number of shares of Common Stock set forth below
opposite their respective names.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ---- ----------------
<S> <C>
Salomon Smith Barney Inc....................................... 743,112
BT Alex. Brown Incorporated.................................... 743,111
CIBC Oppenheimer Corp. ........................................ 743,111
The Nikko Securities Co. International, Inc. .................. 743,111
Advest, Inc. .................................................. 743,111
EVEREN Securities, Inc. ....................................... 743,111
The Robinson-Humphrey Company, LLC............................. 743,111
Sutro & Co. Incorporated....................................... 743,111
Tucker Anthony Incorporated.................................... 743,111
ABN AMRO Incorporated.......................................... 85,000
Bear, Stearns & Co. Inc. ...................................... 85,000
Donaldson, Lufkin & Jenrette Securities Corporation............ 85,000
A.G. Edwards & Sons, Inc....................................... 85,000
Prudential Securities Incorporated............................. 85,000
Wedbush Morgan Securities Inc. ................................ 85,000
Robert W. Baird & Co. Incorporated............................. 42,000
William Blair & Company, LLC. ................................. 42,000
Crowell, Weedon & Co. ........................................ 42,000
Dain Rauscher Wessels.......................................... 42,000
Fahnestock & Co. Inc. ......................................... 42,000
Fifth Third/The Ohio Company................................... 42,000
First Albany Corporation....................................... 42,000
First of Michigan Corporation.................................. 42,000
Hilliard Lyons Inc. ........................................... 42,000
Interstate/Johnson Lane Corporation............................ 42,000
Janney Montgomery Scott Inc. .................................. 42,000
Josephthal & Co., Inc. ........................................ 42,000
John G. Kinnard & Company, Incorporated........................ 42,000
Legg Mason Wood Walker, Incorporated........................... 42,000
Parker/Hunter Incorporated..................................... 42,000
Pennsylvania Merchant Group.................................... 42,000
Piper Jaffray Inc. ............................................ 42,000
Ragen Mackenzie Incorporated................................... 42,000
Roney Capital Markets.......................................... 42,000
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ---- ----------------
<S> <C>
Scott & Stringfellow, Inc. .................................... 42,000
Suntrust Equitable Securities Corporation...................... 42,000
C.E. Unterberg, Towbin......................................... 42,000
Wheat First Union.............................................. 42,000
Allen & Company of Florida Inc. ............................... 21,000
George K. Baum & Company....................................... 21,000
Branch, Cabell & Company....................................... 21,000
The Chapman Co. ............................................... 21,000
D.A. Davidson & Co., Inc. ..................................... 21,000
Allen C. Ewing & Co. .......................................... 21,000
Gibraltar Securities Co. ...................................... 21,000
Huntleigh Securities Corporation............................... 21,000
Johnston, Lemon & Co. Incorporated............................. 21,000
C.L. King & Associates, Inc. .................................. 21,000
Moors & Cabot, Inc. ........................................... 21,000
Pauli & Company, Incorporated.................................. 21,000
Sands Brothers & Co., Ltd. ................................... 21,000
Southwest Securities, Inc. .................................... 21,000
TD Securities (USA) Inc. ...................................... 21,000
Van Kasper & Company........................................... 21,000
---------
Total........................................................ 8,500,000
=========
</TABLE>
The Representative has informed the Fund that the Underwriters do not intend
to confirm shares of Common Stock to any accounts over which they exercise
discretionary authority.
The Underwriters, through their Representative, have advised the Fund that
they propose to offer the shares of Common Stock initially at the public
offering price set forth on the cover page of this Prospectus. There is no
sales charge or underwriting discount charged to investors on purchases of
shares of Common Stock in the offering. MMC, TAMIC or an affiliate of either
has agreed to pay the Underwriters from its/their own assets a commission in
connection with the sale of shares of Common Stock in the offering in the
amount of $0.60 per share. Such payment is equal to 4.00% of the initial
public offering price per share. From this amount, the Underwriters may allow
to selected dealers a payment in the amount of $0.40 per share sold by such
dealer and such dealer may reallow a payment of $0.10 per share to certain
other dealers. The Underwriters will not receive any commission with respect
to shares purchased by Travelers Casualty. The Underwriters reserve the right
to reject orders in whole or in part. After the initial offering of the Common
Stock to the public, the offering price and other selling terms may be changed
by the Representative. The Fund is obligated to sell, and the Underwriters are
obligated to purchase, all of the shares of Common Stock offered hereby (other
than shares covered by the over-allotment option described below) if any are
sold. Investors must pay for any shares of Common Stock purchased on or before
November 24, 1998.
The Fund has granted to the Underwriters an option, exercisable within 45
days of this Prospectus, to purchase up to 1,275,000 additional shares of
Common Stock at the same price to public as set forth on the
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<PAGE>
cover page of this Prospectus. The Underwriters may exercise such option
solely for the purpose of covering over-allotments, if any, incurred in the
sale of the shares of Common Stock offered hereby. To the extent the
Underwriters exercise such option, each of the Underwriters will be obligated,
subject to certain conditions, to purchase the same proportion of such
additional shares as the number of shares set forth opposite such
Underwriter's name in the preceding table bears to the total number of shares
set forth in such table.
The Fund, the Adviser and the Sub-Adviser have each agreed to indemnify the
several Underwriters or contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
The Fund has agreed to pay the Underwriters $150,000 as partial
reimbursement of expenses incurred in connection with the offering.
In connection with the requirements for listing the Fund's shares of Common
Stock on the New York Stock Exchange ("NYSE"), the Underwriters have
undertaken to sell lots of 100 or more shares of Common Stock to a minimum of
2,000 beneficial owners in the United States. The minimum investment
requirement is 100 shares of Common Stock ($1,500.00).
Prior to the offering, there has been no public market for the Common Stock.
Consequently, the initial public offering price has been determined by
negotiation between the Fund, the Adviser and the Representative. The Common
Stock has been approved for listing on the NYSE subject to official notice of
issuance. This Prospectus, as amended from time-to-time in accordance with
rules adopted by the Commission, is to be used by Salomon Smith Barney Inc. in
connection with this offering.
The Underwriters have advised the Fund that, pursuant to Regulation M under
the Securities Exchange Act of 1934, certain persons participating in the
offering may engage in transactions, including stabilizing bids, covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level
above that which might otherwise prevail in the open market. A "stabilizing
bid" is a bid for or the purchase of the Common Stock on behalf of an
Underwriter for the purpose of fixing or maintaining the price of the Common
Stock. A "covering transaction" is a bid for or purchase of the Common Stock
on behalf of an Underwriter to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an
arrangement permitting an Underwriter to reclaim the selling concession
otherwise accruing to the Underwriters in connection with the offering if any
of the Common Stock originally sold by the Underwriters is purchased in a
covering transaction and has therefore not been effectively placed by the
Underwriters. The Underwriters have advised the Fund that such transactions
may be effected on the NYSE or otherwise and, if commenced, may be
discontinued at any time.
The Underwriting Agreement provides that it may be terminated in the
absolute discretion of the Representative without liability on the part of any
Underwriter to the Fund, MMC or TAMIC if, prior to delivery of and payment for
the shares of Common Stock: (i) trading in the Fund's Common Stock shall have
been suspended by the Commission or the NYSE or trading in securities
generally on the NYSE shall have been suspended or limited or minimum prices
shall have been established on the NYSE, (ii) a banking moratorium shall have
been declared either by Federal or New York State authorities, or (iii) there
shall have occurred any outbreak or escalation of hostilities, declaration by
the United States of a national emergency or war or other calamity or crisis
the effect of which on financial markets is such as to make it, in the
judgment of the Representative, impracticable or inadvisable to proceed with
the offering or delivery of the securities as contemplated by this Prospectus
(exclusive of any supplement thereto).
The Underwriters may take certain actions to discourage short-term trading
of Common Stock during a period of time following the initial offering date.
Included in these actions is the withholding of the concession
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<PAGE>
and payments to Underwriters and dealers in connection with Common Stock which
were sold by such Underwriters and dealers and which are repurchased for the
account of the Underwriters during such period.
The Fund anticipates that, from time to time, the Representative of the
Underwriters and certain other Underwriters may act as brokers or dealers in
connection with the execution of the Fund's portfolio transactions after they
have ceased to be Underwriters and, subject to certain restrictions, may act
as brokers while they are Underwriters.
Except as provided in the Plan as discussed above, the Fund has agreed not
to offer or sell any additional shares of Common Stock for a period of 180
days after the date of this Prospectus, without the prior written consent of
Salomon Smith Barney Inc.
MMC, TAMIC and Salomon Smith Barney are each wholly-owned, indirect
subsidiaries of Citigroup.
INDEPENDENT AUDITORS
The statement of assets and liabilities of the Fund included in this
Prospectus have been so included in reliance upon the report of KPMG Peat
Marwick LLP, independent auditors, and upon the authority of said firm as
experts in accounting and auditing.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed on
for the Fund by Willkie Farr & Gallagher, New York, New York and certain legal
matters in connection with the offering of the shares of Common Stock will be
passed on for the Underwriters by Simpson Thacher & Bartlett, New York, New
York. Counsel for the Fund and the Underwriters will rely, as to matters of
Maryland law, on Venable, Baetjer and Howard, LLP, Baltimore, Maryland.
FURTHER INFORMATION
Prior to the registration statement becoming effective, the Underwriters or
other appropriate parties 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
Collateralized Senior Loan market and risk and reward potential in such
market; (iii) comparative information, including statistical analysis and
performance-related information, related to Collateralized Senior Loans
generally and investing in Collateralized Senior Loans; (iv) the special
considerations and potential benefits of investing in closed-end management
investment companies; and (v) information about MMC, TAMIC and the Fund's
portfolio manager, 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.
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<PAGE>
INDEPENDENT AUDITORS' REPORT
The Shareholder and Board of Directors of
Travelers Corporate Loan Fund Inc.
We have audited the accompanying statement of assets and liabilities of
Travelers Corporate Loan Fund Inc. as of October 19, 1998. This statement of
assets and liabilities is the responsibility of the Fund's Management. Our
responsibility is to express an opinion on this statement of assets and
liabilities based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the statement of assets and
liabilities is free of material misstatement. An audit of a statement of
assets and liabilities includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of assets and
liabilities. Our procedures included confirmation of cash by correspondence
with the custodian. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the statement of assets and liabilities referred to above
presents fairly, in all material respects, the financial position of Travelers
Corporate Loan Fund Inc. as of October 19, 1998, in conformity with generally
accepted accounting principles.
/s/ KPMG Peat Marwick LLP
New York, New York
October 19, 1998
60
<PAGE>
TRAVELERS CORPORATE LOAN FUND INC.
STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 19, 1998
<TABLE>
<CAPTION>
ASSETS:
Cash.................................................................. $100,000
<S> <C>
Deferred organization expenses (Note 4)............................... 121,650
--------
Total Assets........................................................ 221,650
--------
<CAPTION>
LIABILITIES:
Accrued organization expenses (Note 4)................................ $121,650
<S> <C>
--------
Commitments (Note 4).................................................. --
Net Assets (6,667 shares of $.001 par value shares of common stock
issued and outstanding; 150,000,000 shares authorized)................. $100,000
========
Net Asset Value per share............................................... $ 15.00
========
</TABLE>
The accompanying notes are an integral part of this financial statement.
61
<PAGE>
TRAVELERS CORPORATE LOAN FUND INC.
NOTES TO STATEMENT OF ASSETS AND LIABILITIES
OCTOBER 19, 1998
NOTE 1
The Travelers Corporate Loan Fund Inc. (the "Fund") was incorporated in
Maryland on August 25, 1998 and is registered under the Investment Company Act
of 1940, as amended, as a closed-end non-diversified management investment
company.
The only transactions of the Fund have been the initial sale on October 19,
1998 of 6,667 shares of the Fund to Salomon Smith Barney Inc.
NOTE 2
The Fund intends to comply with the requirements of the Internal Revenue
Code applicable to regulated investment companies and to distribute each year
substantially all of the investment company taxable income to the shareholders
of the Fund. Accordingly, no federal tax provisions are required.
NOTE 3
The Fund has entered into an investment management and administrative
agreement (the "Advisory Agreement") with Mutual Management Corporation
("MMC") (the "Advisor"), a subsidiary of Salomon Smith Barney Holdings Inc.
Pursuant to the terms of the Advisory Agreement, the Advisor will manage the
investments, make investment decisions for the Fund, and provide
administrative services to the Fund. For these services, the Advisor is
entitled to a monthly fee at the annual rate of 1.05% of the Fund's average
weekly net assets.
NOTE 4
Organization expenses relating to the Fund, which have been incurred by MMC,
will be reimbursed by the Fund. Such expenses, estimated at $121,650, will be
deferred and amortized on a straight-line basis for a five-year period
beginning at the commencement of operations of the Fund. However, in
accordance with the AICPA Statement of Position No. 98-5, "Reporting on the
Costs of Start-up Activities," the Fund will be required to expense the
unamortized amount of this asset on the first day of its second fiscal year
which is expected to be October 1, 1999. Offering costs, estimated at
$724,500, will be paid from the proceeds of the offering and will be charged
to capital at the time of issuance of such shares.
62
<PAGE>
APPENDIX A--DESCRIPTION OF RATINGS
A DESCRIPTION OF THE RATING POLICIES OF MOODY'S AND S&P WITH RESPECT TO BONDS
APPEARS BELOW.
MOODY'S CORPORATE BOND RATINGS
Aaa--Bonds which are rated "Aaa" are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
"gilt edged." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized
are most unlikely to impair the fundamentally strong position of such issues.
Aa--Bonds which are rated "Aa" are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known
as high grade bonds. They are rated lower than the best bonds because margins
of protection may not be as large as in Aaa securities or fluctuation of
protective elements may be of greater amplitude or there may be other elements
present which make the long-term risk appear somewhat larger than the Aaa
securities.
A--Bonds which are rated "A" possess many favorable investment attributes
and are to be considered as upper-medium-grade obligations. Factors giving
security to principal and interest are considered adequate, but elements may
be present which suggest a susceptibility to impairment some time in the
future.
Baa--Bonds which are rated "Baa" are considered as medium-grade obligations,
(i.e., they are neither highly protected nor poorly secured). Interest
payments and principal security appear adequate for the present but certain
protective elements may be lacking or may be characteristically unreliable
over any great length of time. Such bonds lack outstanding investment
characteristics and in fact have speculative characteristics as well.
Ba--Bonds which are rated "Ba" are judged to have speculative elements;
their future cannot be considered as well-assured. Often the protection of
interest and principal payments may be very moderate, and thereby not well
safeguarded during both good and bad times over the future. Uncertainty of
position characterizes bonds in this class.
B--Bonds which are rated "B" generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
Caa--Bonds which are rated "Caa" are of poor standing. Such issues may be in
default or there may be present elements of danger with respect to principal
or interest.
Ca--Bonds which are rated "Ca" represent obligations which are speculative
in a high degree. Such issues are often in default or have other marked
shortcomings.
C--Bonds which are rated "C" are the lowest rated class of bonds, and issues
so rated can be regarded as having extremely poor prospects of ever attaining
any real investment standing.
Moody's applies numerical modifiers "1", "2" and "3" in each generic rating
classification from Aa to Caa. The modifier "1" indicates that the security
ranks in the higher end of its generic rating category; the 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.
A-1
<PAGE>
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 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
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.
A-2
<PAGE>
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.
S&P'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>
[This page is intentionally left blank]
<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 the Sub-Adviser's
discretion and may not necessarily be engaging in such activities when
movements occur in interest rates that could affect the value of the assets of
the Fund. The Fund's ability to pursue certain of these strategies may be
limited by the Commodity Exchange Act, as amended, applicable regulations of
the CFTC and the federal income tax requirements applicable to regulated
investment companies which are not operated as commodity pools.
INTEREST RATE TRANSACTIONS
The Fund may enter into interest rate swaps and may purchase interest rate
caps, floors and collars and may sell interest rate caps, floors and collars
that it has purchased. The Fund would enter into these transactions primarily
to preserve a return or spread on a particular investment or portion of its
portfolio, to manage the duration of its portfolio, to protect against any
increase in the price of securities (including Collateralized Senior Loans)
the Fund anticipates purchasing at a later date or to further the Fund's
investment objectives and policies. Interest rate swaps involve the exchange
by the Fund with another party of their respective commitments to pay or
receive interest, e.g., an exchange of floating rate payments for fixed rate
payments with respect to a notional amount of principal. The purchase of an
interest rate cap entitles the purchaser, to the extent that a specified index
exceeds a predetermined interest rate, to receive payments of interest on a
notional principal amount from the party selling such interest rate cap. The
purchase of an interest rate floor entitles the purchaser, to the extent that
a specified index falls below a predetermined interest rate, to receive
payments of interest on a notional principal amount from the party selling
such interest rate floor. A collar is a combination of a cap and a floor that
preserves a certain return within a predetermined range of interest rates or
values.
The Fund may enter into interest rate swaps, caps, floors and collars on
either an asset-based or liability-based basis, depending on whether it is
hedging its assets or liabilities, and will usually enter into interest rate
swaps on a net basis, i.e., the two payment streams are netted out, with the
Fund receiving or paying, as the case may be, only the net amount of the two
payments on the payment date. To the extent these Derivative Transactions are
entered into for good faith hedging purposes, the Sub-Adviser 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 the Sub-Adviser 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 agreements with the Fund. With OTC Options, such variables
as expiration date, exercise price and premium
B-2
<PAGE>
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 assets 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
as a hedge against changes resulting from market conditions in the values of
securities (including Collateralized Senior Loans) in its portfolio. 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.
The Sub-Adviser 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.
B-3
<PAGE>
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 the Sub-Adviser'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 Code, as amended. See "Taxation" in this Prospectus.
B-4
<PAGE>
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESEN-
TATIONS IN CONNECTION WITH THIS OFFERING, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS, IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF GIVEN OR
MADE, SUCH OTHER INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAV-
ING BEEN AUTHORIZED BY THE FUND, ITS INVESTMENT ADVISER OR THE UNDERWRITERS.
NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UN-
DER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE FUND SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECU-
RITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURI-
TIES IN ANY CIRCUMSTANCE IN WHICH SUCH AN OFFER OR SOLICITATION IS UNLAWFUL.
-----------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors and Special Considerations.................................. 10
Fee Table................................................................ 20
The Fund................................................................. 21
Use of Proceeds.......................................................... 21
Investment Objective, Policies and Portfolio Risks....................... 22
Additional Investment Activities......................................... 29
Investment Restrictions.................................................. 38
Management of the Fund................................................... 39
Dividends and Distributions; Dividend Reinvestment Plan.................. 45
Taxation................................................................. 47
Determination of Net Asset Value......................................... 49
Description of Capital Stock............................................. 50
Custodian, Transfer Agent, Dividend Paying Agent and Registrar........... 55
Underwriting............................................................. 56
Independent Auditors..................................................... 59
Legal Matters............................................................ 59
Further Information...................................................... 59
Report of Independent Accountants........................................ 60
Statement of Assets and Liabilities...................................... 61
Appendix A: Description of Ratings....................................... A-1
Appendix B: General Characteristics and Risks of Hedging and Other
Strategic Transactions.................................................. B-1
</TABLE>
-----------
UNTIL DECEMBER 14, 1998, ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON
STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN ADDITION TO THE OBLIGA-
TION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH
RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
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8,500,000 SHARES
TRAVELERS CORPORATE
LOAN FUND INC.
COMMON STOCK
($.001 PAR VALUE)
-------
PROSPECTUS
NOVEMBER 19, 1998
-------
SALOMON SMITH BARNEY
BT ALEX. BROWN
CIBC OPPENHEIMER
THE NIKKO SECURITIES CO.
INTERNATIONAL, INC.
ADVEST, INC.
EVEREN SECURITIES, INC.
THE ROBINSON-HUMPHREY COMPANY
SUTRO & CO. INCORPORATED
TUCKER ANTHONY
INCORPORATED
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