<PAGE>
Filed under Rule 497(h) of Regulation C
Securities Act File No. 333-30248
Investment Company Act File #811-05484
PROSPECTUS
$60,000,000
Zenix Income Fund Inc.
Auction Rate Cumulative Preferred Shares
("Preferred Shares")
2,400 Shares
Liquidation Preference $25,000 per share
-----------
Zenix Income Fund Inc., or the Fund, is selling 2,400 Auction Rate
Cumulative Preferred Shares. The Fund is a diversified, closed-end management
investment company. The Fund's investment objective is to seek high current
income by investing in a diversified portfolio of high yield, lower rated
fixed-income securities. The Fund invests at least 65% of its total assets in
such high yield fixed-income securities. These securities are commonly known
as "junk bonds" because they are rated in the lower rating categories by
nationally recognized rating agencies. There is no assurance that the Fund
will achieve its investment objective. An investment in the Fund is not
appropriate for all investors.
Investors in Preferred Shares will be entitled to receive cash dividends at
an annual rate that may vary for the successive dividend periods for such
Preferred Shares. The dividend rate on the Preferred Shares for the period
from and including the date of issue to but excluding April 26, 2000 will be
6.00% per year. For each subsequent period, the Auction Agent will determine
the dividend rate for a particular period by an auction conducted on the
business day prior to that period. The auction is usually held weekly.
Investors in Preferred Shares may participate in auctions through their
broker-dealers in accordance with the procedures specified in this Prospectus
and in the Statement of Additional Information. The Fund may redeem Preferred
Shares as described under "Description of Preferred Shares--Redemption."
Preferred Shares are not listed on an exchange. You may only buy or sell
Preferred Shares through an order placed at an auction with or through a
broker-dealer that has entered into an agreement with the Auction Agent and
the Fund, or in a secondary market maintained by certain broker-dealers. These
broker-dealers are not required to maintain this market, and it may not
provide you with liquidity.
The Preferred Shares will be senior to shares of the Fund's outstanding
Common Stock, par value $.01 per share. The Fund's Common Stock is traded on
the New York Stock Exchange under the symbol "ZIF." It is a condition of the
closing of this offering that the Preferred Shares be offered with a rating of
AAA from Standard & Poor's Rating Group and aaa from Moody's Investors
Services, Inc.
This Prospectus sets forth concisely the information you should know before
investing, including information about risks. You should read this Prospectus
before you invest and keep it for future reference. The Fund's Statement of
Additional Information, dated April 12, 2000, contains additional information
about the Fund and is incorporated by reference into (which means it is
considered to be a part of) this Prospectus. You may obtain a free copy of the
Statement of Additional Information by calling the Fund at 1-800-451-2010, or
by writing to the Fund at 388 Greenwich Street, New York, New York 10013. A
table of contents to the Statement of Additional Information is located at
page 31 of this Prospectus. The Statement of Additional Information is also
available, along with other Fund-related materials, on the Securities and
Exchange Commission's internet web site (http://www.sec.gov).
Investing in the Preferred Shares involves risks. See the "Risk Factors and
Special Considerations" section beginning on page 15 of this Prospectus.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this Prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
<TABLE>
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- -------------------------------------------------------------------------------
<CAPTION>
Per Share Total
- -------------------------------------------------------------------------------
<S> <C> <C>
Public Price............... $25,000 $60,000,000
- -------------------------------------------------------------------------------
Sales Load................. $250.00 $ 600,000
- -------------------------------------------------------------------------------
Proceeds to Fund (before
expenses)................. $24,750 $59,400,000
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
The public offering price per share will be increased by the amount of
dividends, if any, that have accumulated from the date the Preferred Shares
are first issued.
-----------
The underwriter is offering the Preferred Shares subject to various
conditions. The underwriter expects to deliver the shares to purchasers, in
book-entry form through the Depository Trust and Clearing Corporation, on or
about April 14, 2000.
-----------
Salomon Smith Barney
April 12, 2000
<PAGE>
You should rely only on the information contained in or incorporated by
reference into this Prospectus. Neither the Fund nor the Underwriter has
authorized anyone to provide you with different information. If anyone
provides you with different information, you should not rely on it. Neither
the Fund nor the Underwriter is making an offer to sell these securities in
any jurisdiction where the offer or sale is not permitted. You should not
assume that the information provided by this Prospectus is accurate as of any
date other than the date on the front of this Prospectus. The Fund's business,
financial conditions, results of operations and prospects may have changed
since that date.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary......................................................... 1
Financial Highlights....................................................... 6
The Fund................................................................... 10
Use of Proceeds............................................................ 10
Capitalization............................................................. 11
Portfolio Composition...................................................... 11
Investment Objective and Policies.......................................... 12
Risk Factors and Special Considerations.................................... 15
Management of the Fund..................................................... 18
Description of Preferred Shares............................................ 19
The Auction................................................................ 23
Taxes...................................................................... 26
Description of Common Stock................................................ 27
Determination of Net Asset Value........................................... 28
Conversion to Open-End Fund................................................ 28
Repurchase of Common Shares................................................ 28
Custodian, Transfer Agent, Dividend Paying Agent and Registrar............. 28
Underwriting............................................................... 29
Legal Opinions............................................................. 29
Reports to Shareholders.................................................... 29
Independent Auditors....................................................... 30
Further Information........................................................ 30
Financial Statements....................................................... 30
Table of Contents of the Statement of Additional Information............... 31
</TABLE>
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to the more
detailed information included elsewhere in this Prospectus and the Statement of
Additional Information. Cross references in this summary are to headings in the
body of this Prospectus or the Statement of Additional Information.
The Fund.................... Zenix Income Fund Inc. is a diversified,
closed-end management investment company. The
Fund was incorporated under the laws of the
State of Maryland on February 11, 1988. The
Fund's outstanding Common Stock is listed on
the New York Stock Exchange under the symbol
"ZIF." See "The Fund" and "Description of
Common Stock." The Fund's principal office is
located at 388 Greenwich Street, New York,
New York 10013 and its telephone number is
(212) 783-7857.
Investment Adviser.......... SSB Citi Fund Management LLC, or SSBC, a
subsidiary of Salomon Smith Barney Holdings
Inc., is the Fund's investment adviser. SSBC
is responsible for the selection and on-going
monitoring of the Fund's investment
portfolio. The Fund pays SSBC for the
services it provides to the Fund a monthly
fee at the annual rate of .50 of 1% of the
Fund's average daily net assets. See
"Management of the Fund."
The Offering................ The Fund is offering a total of 2,400 shares
of Auction Rate Cumulative Preferred Shares
at a purchase price of $25,000 per share plus
dividends, if any, that have accumulated from
the date the Fund first issues the shares.
The Preferred Shares are being offered by
Salomon Smith Barney Inc. as underwriter. See
"Underwriting."
Investment Objective and The Fund's investment objective is to seek
Policies.................... high current income. This income, if any,
will be distributed to holders of Common
Stock after the satisfaction of the
obligations to pay dividends on the Preferred
Shares. See "Investment Objective and
Policies" and "Description of Preferred
Shares--Dividends." An investment in the Fund
may not be appropriate for all investors and
the Fund cannot guarantee you that it will
achieve its investment objective.
Investment Strategy......... The Fund seeks to achieve its objective by
investing in a portfolio of high yield, lower
rated fixed-income securities. Under normal
market conditions, the Fund invests at least
65% of its total assets in high yield fixed-
income securities. These securities are
commonly known as "junk bonds" because they
are rated in the lower categories by
nationally recognized rating agencies
(consisting of fixed-income securities rated
BB to as low as C by Standard & Poor's Rating
Group, or S&P, or Ba to as low as C by
Moody's Investors Services, Inc., or
Moody's).
The Fund may invest up to 35% of its total
assets in investment grade fixed-income
securities during normal market conditions
and in excess of that amount during temporary
defensive periods.
The Fund may also invest up to 20% of its
total assets in non-rated securities that
SSBC believes to be of a quality comparable
to rated
1
<PAGE>
securities in which the Fund may invest. See
"Investment Objective and Policies--
Investment Strategies."
Lower rated fixed-income securities are
subject to a greater degree of risk than
higher rated securities, which generally bear
a lower interest rate; accordingly, to the
extent the Fund's assets are invested in
higher rated securities, the Fund's
investment objective of high current income
may not be attained. Consequently, the Fund
cannot guarantee you that it will achieve its
investment objective. See "Risk Factors and
Special Considerations--Lower Rated and
Unrated Securities Risk."
The Fund's investments are subject to
diversification, liquidity and related
guidelines established in connection with the
Fund's receipt from S&P and Moody's of
ratings of AAA and aaa, respectively, for the
Preferred Shares. See "Investment Objective
and Policies."
Ratings issued by nationally recognized
rating agencies, including S&P and Moody's,
do not eliminate or mitigate the risks of
investing in the Fund's securities. See "Risk
Factors and Special Considerations" below and
in the Statement of Additional Information
and "Description of Preferred Shares--Asset
Maintenance" in the Statement of Additional
Information.
Risk Factors and Special Risk is inherent in all investing. Therefore,
Considerations.............. before investing in Preferred Shares you
should consider certain risks carefully. The
primary risks of investing in Preferred
Shares are:
. if an auction fails you may not be able
to sell some or all of your shares
(auction risk);
. because of the nature of the market for
Preferred Shares, you may receive less
than the price you paid for your shares
if you sell them outside of the auction,
especially when market interest rates are
rising (secondary market risk);
. a rating agency could downgrade the
rating assigned to the Preferred Shares,
which could affect liquidity (ratings and
asset coverage risk);
. the Fund may be forced to redeem your
shares to meet regulatory or rating
agency requirements or may voluntarily
redeem your shares under certain
circumstances (ratings and asset coverage
risk);
. in extraordinary circumstances the Fund
may not earn sufficient income from its
investments to pay dividends (interest
rate risk);
. if the Fund redeems your Preferred
Shares, you may not be able to find as
good a yield on an investment with
similar terms and quality (reinvestment
risk);
. if long-term rates rise, the value of the
Fund's investment portfolio will decline,
reducing the asset coverage for the
Preferred Shares (interest rate risk);
and
2
<PAGE>
. if an issuer of a fixed-income security
in which the Fund invests defaults, there
may be a negative impact on the income
and net asset value of the Fund's
portfolio (interest rate risk and credit
risk).
In addition, although the offering described
in this Prospectus is conditioned upon the
receipt of ratings of AAA from S&P and aaa
from Moody's for the Preferred Shares, the
Fund invests in lower rated securities,
commonly known as "junk bonds" because of
their lower rating by nationally recognized
rating agencies, and unrated securities of
comparable quality. These lower rated and
comparable unrated securities involve greater
risk than higher rated securities.
These securities generally offer a higher
return potential than higher rated securities
but also involve greater volatility of price
and risk of loss of income and principal,
including the possibility of default or
bankruptcy of the issuers of the securities.
See "Risk Factors and Special
Considerations--Credit Risk" and--"Investment
Strategy Risk." For additional risks of
investing in the Fund and the Preferred
Shares, see "Risk Factors and Special
Considerations."
Trading Market.............. Preferred Shares are not listed on an
exchange. Instead, you may buy or sell
Preferred Shares at an auction that normally
is held weekly, by submitting orders to a
broker-dealer that has entered into an
agreement with the Auction Agent and the Fund
(a "Broker-Dealer"), or to a broker-dealer
that has entered into a separate agreement
with a Broker-Dealer.
In addition to the auctions, Broker-Dealers
and other broker-dealers may maintain a
secondary trading market in Preferred Shares
outside of auctions, but may discontinue this
market at any time. A secondary market may
not provide you with liquidity. You may
transfer shares outside of auctions only to
or through a Broker-Dealer, a broker-dealer
that has entered into a separate agreement
with a Broker-Dealer, or other persons as the
Fund permits. See "The Auction--Secondary
Market" in the Statement of Additional
Information.
The first auction date for Preferred Shares
will be Tuesday, April 25, 2000, the business
day before the dividend payment date for the
initial rate period for Preferred Shares. The
auction date for Preferred Shares normally
will be a Tuesday, and the start date for
subsequent rate periods normally will be the
following business day, typically a
Wednesday, unless the then-current rate
period is a special rate period, or the day
that normally would be the auction date or
the first day of the subsequent rate period
is not a business day.
Dividends and Rate Periods.. Dividends on the Preferred Shares will be
cumulative from the date the shares are first
issued. The Fund will pay dividends on the
Preferred Shares, on each dividend payment
date, out of legally available funds,
commencing on April 26, 2000. See
"Description of Preferred Shares--Dividends--
General."
3
<PAGE>
Dividends on Preferred Shares will accumulate
beginning on Friday, April 14, 2000 at the
initial rate of 6.00%. For subsequent rate
periods, Preferred Shares will pay dividends
based on a rate set at the auctions, normally
held weekly. For each subsequent period, the
Auction Agent will determine the dividend
rate for a particular period by an auction
conducted on the business day prior to that
period. The rate set at auction will not
exceed the Maximum Applicable Rate. Dividends
will be paid on shares of Preferred Shares on
Wednesday, April 26 and normally thereafter
on each Wednesday. If the Wednesday on which
dividends otherwise would be paid is not a
business day, then dividends will be paid on
the first business day that falls before that
Wednesday. See "Description of Preferred
Shares--Dividends--General and--Dividend Rate
Set At Auction."
The number of days in the initial rate period
will be 12 days. Subsequent rate periods
generally will be seven days. The dividend
payment date for a special rate period of
more than seven days will be set out in the
notice designating a special rate period. See
"Description of Preferred Shares--Dividends--
General."
Administrator...............
In addition to serving as the Fund's
Investment Adviser, SSBC currently serves as
the Fund's administrator. The Fund pays SSBC
for the services it provides as administrator
to the Fund a monthly fee at the annual rate
of .20 of 1% of the Fund's average daily net
assets. See "Management of the Fund."
Use of Proceeds............. The net proceeds from the sale of the
Preferred Shares offered by this Prospectus
will be used to redeem 30,000 shares of the
outstanding Preferred Stock (the "Outstanding
Preferred Stock") that are subject to
mandatory redemption on April 15, 2000 and to
retire the Fund's debt under its existing
line of credit with PNC Bank, N.A. See "Use
of Proceeds."
Underwriting................ Salomon Smith Barney Inc. will serve as
underwriter of the Preferred Shares offered
by this Prospectus. See "Underwriting."
Asset Maintenance........... Under the Fund's Articles Supplementary,
which establishes and fixes the rights and
preferences of the Preferred Shares, the Fund
is required to maintain, as of the last
business day of each calendar month
. asset coverage of at least 200% with
respect to senior securities that are
stock, including the Preferred Shares,
and
. asset coverage of at least 300% with
respect to any senior securities
representing indebtedness.
See "Description of Preferred Shares--Asset
Maintenance" in the Statement of Additional
Information. If the Fund fails to maintain
these asset coverages, the Preferred Shares
must be redeemed in certain circumstances.
See "Description of Preferred Shares--
Redemption."
Minimum Liquidity Level..... For as long as Preferred Shares are still
outstanding, the Fund will be required to
maintain on a semi-annual basis certain
assets having
4
<PAGE>
a discounted value not less than the Dividend
Coverage Amount. See "Description of
Preferred Shares--Minimum Liquidity Level" in
the Statement of Additional Information.
Ratings..................... It is a condition of closing of the offering
described in this Prospectus that the
Preferred Shares be issued with a rating of
AAA from S&P and aaa from Moody's. See
"Investment Objective and Policies."
Redemption.................. The Fund will not ordinarily redeem Preferred
Shares. However, it may be required to redeem
shares if, for example, the Fund does not
meet an asset coverage ratio required by law
or correct a failure to meet a rating agency
guideline in a timely manner. The Fund
voluntarily may redeem Preferred Shares under
certain conditions. Any redemption of
Preferred Shares will be made at a price
equal to $25,000 per share plus accumulated
but unpaid dividends to the redemption date
plus (in the case of a dividend period of one
year or more only) a redemption premium. See
"Description of Preferred Shares--
Redemption."
Liquidation Preference...... The liquidation preference of each Preferred
Share is $25,000, plus any accumulated but
unpaid dividends to the date of distribution.
See "Description of Preferred Shares--
Liquidation Rights" in the Statement of
Additional Information.
Voting Rights............... Normally, holders of Preferred Shares will
elect two Directors, holders of Common Stock
will elect two Directors and holders of
Preferred Shares and Common Stock, voting as
a single class, will elect the remaining
Directors. If the Fund fails to pay dividends
on the Preferred Shares in an amount equal to
two full years' dividends, however, holders
of Preferred Shares, voting as a single
class, will have the right to elect the
smallest number of Directors that would
constitute a majority of the Directors until
cumulative dividends have been paid or
provided for. The holders of Preferred Shares
vote separately as a class on certain other
matters, as required under the Fund's
Articles of Incorporation, the Investment
Company Act of 1940, as amended (the
"Investment Company Act") and Maryland law.
See "Description of Preferred Shares--Voting
Rights."
Federal Income Taxes........ So long as the Fund continues to meet the
requirements for being a tax-qualified
regulated investment company, it pays no
federal income tax on the earnings it
distributes to shareholders. Because the
Fund's portfolio income consists principally
of interest income, corporate investors in
Preferred Shares generally will not be
entitled to the Federal dividends received
deduction. See "Taxes."
Custodian, Transfer Agent,
Dividend Paying Agent and PNC Bank, N.A., or PNC, serves as the Fund's
Registrar................... custodian. PFPC Global Fund Services or PFPC,
a subsidiary of PNC Corporation, serves as
transfer agent, dividend paying agent and
registrar for the Common Stock and Preferred
Shares and, for the Preferred Shares, as
agent to provide notice of redemption and
certain voting rights. See "Custodian,
Transfer Agent, Dividend Paying Agent and
Registrar."
5
<PAGE>
FINANCIAL HIGHLIGHTS
The tables below set forth selected financial information for an outstanding
share of Common Stock, a share of Outstanding Preferred Stock and a share of
the Fund's 9.67% Cumulative Preferred Stock (which was redeemed on April 15,
1993) throughout each period presented. All of the Fund's Outstanding
Preferred Stock will be redeemed on or about April 15, 2000. See "Use of
Proceeds." The financial highlights for fiscal years ended March 31, 1996
through and including March 31, 1999 have been audited by KPMG LLP, the Fund's
independent accountants, as stated in their report dated May 12, 1999,
included in the Fund's March 31, 1999 Annual Report and incorporated by
reference into the Fund's Statement of Additional Information. The financial
highlights for the fiscal years ended March 31, 1990-1995 have been audited by
other independent auditors. The Fund's unaudited financial statements in its
September 30, 1999 Semi-Annual Report are also incorporated by reference in
the Statement of Additional Information. The financial highlights should be
read in conjunction with the financial statements and notes thereto included
in the Fund's March 31, 1999 Annual Report and the September 30, 1999 Semi-
Annual Report, which are available without charge by calling the Fund at 1-
800-451-2010.
PER SHARE OPERATING PERFORMANCE THROUGHOUT EACH PERIOD(1)
<TABLE>
<CAPTION>
Six Months
Ended Year Ended March 31,
Sept. 30, -----------------------------------
1999 1999 1998 1997 1996
----------- ------- ------ ------ -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Asset Value, Beginning
of Period................ $ 5.96 $ 6.96 $ 6.45 $ 6.31 $ 5.88
Net Investment Income..... 0.38 0.82 0.87 0.92 0.86
Net Realized and
Unrealized Gain (Loss)... (0.54) (0.97) 0.56 0.08 0.45
Total from Investment
Operations............... (0.16) (0.15) 1.43 1.00 1.31
Less Distributions
Dividends (from net
investment income)
(i)To Outstanding
Preferred Stockholders. (0.06) (0.14) (0.14) (0.14) (0.15)
(ii)To Common
Shareholders........... (0.33) (0.69) (0.78) (0.72) (0.73)
Distributions (from
capital gains)
(i)To Common
Shareholders........... -- (0.02) -- -- --
Returns of Capital
(i)To Common
Shareholders........... -- -- -- -- --
Total Distributions....... (0.39) (0.85) (0.92) (0.86) (0.88)
Net Asset Value, End of
Period................... $ 5.41 $ 5.96 $ 6.96 $ 6.45 $ 6.31
Per Share Market Value,
End of Period............ $ 5.31 $ 5.88 $ 7.50 $ 7.25 $ 7.00
Total Investment Return,
Based on Market Value(2). (4.14)%(3) (12.53)% 14.81 % 15.55 % 18.35 %
Total Investment Return,
Based on Net Asset
Value(2)................. (3.78)%(3) (4.38)% 19.75 % 14.04 % 20.01 %
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------
1995 1994 1993 1992 1991 1990
------ ------ ------ ------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Net Asset Value,
Beginning of Period.... $ 6.76 $ 6.86 $ 6.39 $ 5.58 $ 6.30 $ 8.71
Net Investment Income... 0.93 1.02 1.07 1.08 1.17 1.42
Net Realized and
Unrealized Gain (Loss). (0.78) (0.13) 0.51 0.82 (0.74) (2.37)
Total from Investment
Operations............. 0.15 0.89 1.58 1.90 0.43 (0.95)
Underwriting Commissions
and offering cost on
7.00% Cumulative
Preferred Stock........ -- -- (0.05) -- -- --
Less Distributions
Dividends (from net
investment income)
(i)To Outstanding
Preferred
Stockholders......... (0.16) (0.11) -- -- -- --
(ii)To 9.67% Preferred
Stockholders......... -- (0.12) (0.23) (0.24) (0.25) (0.26)
(iii)To Common
Shareholders......... (0.87) (0.82) (0.82) (0.85) (0.90) (1.20)
Change in Accumulated
Undeclared Dividends on
Preferred Stock........ -- 0.06 (0.01) -- -- --
Total Distributions..... (1.03) (0.99) (1.06) (1.09) (1.15) (1.46)
Net Asset Value, End of
Period................. $ 5.88 $ 6.76 $ 6.86 $ 6.39 $ 5.58 $ 6.30
Per Share Market Value,
End of Period.......... $ 6.63 $ 7.13 $ 7.25 $ 6.63 $ 5.50 $ 5.88
Total Investment
Return(2).............. 6.41 % 10.02 % 24.02 % 39.12 % 10.58 % (27.68)%
</TABLE>
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(1) Until October 2, 1989, the Fund employed Bernstein-Macaulay, Inc., a
subsidiary of Shearson Lehman Brothers, as investment adviser. On October
2, 1989, Bernstein-Macaulay, Inc. was merged into Shearson Lehman
Brothers, becoming a division of Shearson Lehman Brothers and changing its
name to Bernstein-Macaulay. In September 1990, Bernstein Macaulay changed
its name to Shearson Lehman Advisors. Shearson Lehman Advisors was
acquired by Mutual Management Corp., or MMC, a wholly-owned subsidiary of
The Travelers Inc., in 1993. On February 23, 1999 the Board of Directors
of MMC voted to change its name to SSBC Fund Management Inc. ("SSBC"). On
September 21, 1999 SSBC converted to a limited liability company and
changed its name to SSB Citi Fund Management LLC.
(2) The total return calculation assumes that dividends are reinvested in
accordance with the Fund's dividend reinvestment plan.
(3) Total return is not annualized, as it may not be representative of the
total return for the year.
7
<PAGE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
Year Ended March 31,
-----------------------------------
Six Months
Ended
Sept. 30,
1999 1999 1998 1997 1996
----------- ------- -------- ------- -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net Assets(1), End of Period
(000)...................... $86,224 $93,561 $105,861 $95,034 $90,318
Ratio of Expenses to Average
Net Assets(2)
Interest Expense............ 1.85%(3) 1.81% 1.81% 1.92% 1.98%
Other Expense............... 1.60%(3) 1.53% 1.51% 1.59% 1.65%
Ratio of Net Income to
Average Net Assets(2)...... 13.30%(3) 12.99% 12.60% 14.35% 14.21%
Portfolio Turnover Rate..... 49% 91% 79% 101% 87%
</TABLE>
RATIOS/SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------
1995 1994 1993 1992 1991 1990
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net Assets(1), End of
Period (000)............ $80,309 $87,726 $85,225 $75,818 $62,518 $69,213
Ratio of Expenses to
Average Net Assets(2)
Interest Expense......... 1.58% 0.92% 1.14% 2.10% 4.18% 5.16%
Other Expense............ 1.65% 1.60% 1.99% 2.15% 2.47% 2.32%
Ratio of Net Income to
Average Net Assets(2)... 15.35% 14.38% 12.89% 14.16% 16.12% 15.11%
Portfolio Turnover Rate.. 79% 102% 93% 86% 68% 81%
</TABLE>
- --------
(1) Exclusive of preferred shares outstanding.
(2) Calculated on the basis of the average net assets of common shareholders.
Ratios do not reflect the effect of dividend payments to preferred
shareholders.
(3) Annualized.
8
<PAGE>
SUPPLEMENTAL SENIOR SECURITY INFORMATION (UNAUDITED)
The table below sets forth information with respect to the Outstanding
Preferred Stock, the Fund's 9.67% Cumulative Preferred Stock (which was
redeemed April 15, 1993) and the Fund's Senior Money Market Notes (which were
paid in full in 1995) for the relevant periods, as included in the Fund's
Annual Reports for each of the years then ended from March 31, 1993 to March
31, 1999, and in the Fund's September 30, 1999 Semi-Annual Report.
<TABLE>
<CAPTION>
Six Months
Ended Year Ended March 31,
Sept. 30, ---------------------------------------
1999 1999 1998 1997 1996 1995
---------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
7.00% Cumulative Preferred
Stock(1)
Total Amount Outstanding
(000s)................... $30,000 $30,000 $30,000 $30,000 $30,000 $30,000
Asset Coverage (000s) .... 2,440 2,560 2,760 2,580 2,490 2,439
Involuntary Liquidating
Preference Per Share(3).. 1,000 1,000 1,000 1,000 1,000 1,000
Average Market Value Per
Share(3)................. 1,000 1,000 1,000 1,000 1,000 1,000
Senior Money Market Notes
Total Amount Outstanding
(000s)................... -- -- -- -- -- 25,800
Asset Coverage (000s)..... -- -- -- -- -- 135,966
</TABLE>
<TABLE>
<CAPTION>
Year Ended
March 31,
-------------
1994 1993
------ ------
<S> <C> <C>
7.00% Cumulative Preferred Stock(1)
Total Amount Outstanding (000s)................................. 30,000 30,000
Asset Coverage (000s)........................................... 2,583 2,529
Involuntary Liquidating Preference Per Share(3)................. 1,000 1,000
Average Market Value Per Share (Excludes Bank Loans)(3)......... 1,000 1,000
</TABLE>
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
9.67% Cumulative Preferred Stock(2)
Total Amount Outstanding (000s)...... 0 28,750 28,750 28,750 28,750
Asset Coverage (000s)................ 2,583 2,529 2,413 2,169 2,097
Involuntary Liquidating Preference
Per Share(3)........................ 1,000 1,000 1,000 1,000 1,000
Average Market Value Per Share
(Excludes Bank Loans)(3)............ 1,000 1,000 1,000 1,000 1,000
Senior Money Market Notes(4)
Total Amount Outstanding (000s)...... 25,800 25,800 25,800 25,800 35,500
Asset Coverage Per Share (000s)...... 558,675 546,948 510,240 458,692 379,585
</TABLE>
- --------
(1) Redeemable April 15, 2000.
(2) Redeemed April 15, 1993.
(3) Excludes accrued interest or accumulated undeclared dividends.
(4) Paid in full in 1995.
9
<PAGE>
THE FUND
The Fund, which commenced operations under the name "Zenith Income Fund
Inc.," was organized as a Maryland corporation on February 11, 1988 and is a
diversified, closed-end management investment company registered with the
Securities and Exchange Commission under the Investment Company Act. On
October 19, 1989 the Fund changed its name from Zenith Income Fund Inc. to its
current name. The Fund's Common Stock is traded on the New York Stock Exchange
under the symbol "ZIF."
The Fund's principal office is located at 388 Greenwich Street, New York,
New York 10013. The Fund's investment adviser and administrator is SSB Citi
Fund Management LLC, or SSBC, a subsidiary of Salomon Smith Barney Holdings
Inc. SSBC is located at 388 Greenwich Street, New York, NY 10013. See
"Management of the Fund."
The following table provides information about the Fund's outstanding shares
as of April 5, 2000.
<TABLE>
<CAPTION>
Amount Held by
Amount the Fund or Amount
Title of Class Authorized for its Account Outstanding
- -------------- ----------- --------------- -----------
<S> <C> <C> <C>
Common Stock, par value $.01 per share. 250,000,000 0 15,971,284
Preferred Stock, par value $.01 per
share, liquidation preference $1,000
per share............................. 250,000 0 30,000
</TABLE>
USE OF PROCEEDS
The net proceeds of the sale of the Preferred Shares offered by this
Prospectus, assuming all of the Preferred Shares are sold, will be
approximately $59,135,000, after the payment of offering expenses (not
expected to exceed $265,000) and a deduction for the underwriting discount.
The Fund will use approximately $30,000,000 of the net proceeds of the
offering to redeem all of the shares of the Outstanding Preferred Stock that
are subject to mandatory redemption on April 15, 2000 and the balance of the
net proceeds of the offering and other assets of the Fund to retire the Fund's
$30,000,000 outstanding amount borrowed under its line of credit with PNC
Bank, N.A.
Interest on amounts borrowed under the line of credit is typically
calculated at the federal funds rate plus 40 basis points.
10
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Fund as
of March 31, 2000, and as adjusted to give effect to the issuance of the
Preferred Shares offered by this Prospectus and the redemption of the
Outstanding Preferred Stock.
<TABLE>
<CAPTION>
Actual As Adjusted
------------ ------------
<S> <C> <C>
Shareholders' equity:
7.0% Cumulative Preferred Stock, par value $.01
per share,* 30,000 issued and outstanding at
$1,000 per share liquidation preference, no
shares issued and outstanding as adjusted*...... $ 30,000,000 $ 0
============ ============
Auction Rate Cumulative Preferred Stock, par value
$.01 per share,* no shares issued, 2,400 shares
issued and outstanding at $25,000 per share
liquidation preference as adjusted................ $ 0 $ 60,000,000
------------ ------------
Common Stock, $.01 par value, authorized
250,000,000 shares, 15,971,284 shares issued and
outstanding, 15,971,284 shares issued and
outstanding as adjusted**......................... $ 159,713 $ 159,713
Capital in excess of par value..................... $117,130,507 $117,130,507
------------ ------------
Balance of undistributed net investment income..... (35,481) (35,481)
Accumulated net realized gain (loss) from
investment transactions........................... (27,996,121) (27,996,121)
Net assets less liquidation value of all Preferred
Shares............................................ $ 80,234,063 $ 80,234,063
============ ============
Net assets attributable to Common Stock
outstanding....................................... $ 79,606,947 $ 79,606,947
</TABLE>
- --------
* Under the Fund's Articles of Incorporation, a total of 250,000 shares of
Cumulative Preferred Stock are authorized.
** As of March 31, 2000 no shares of Outstanding Preferred Stock or Common
Stock were held by the Fund or for its account.
PORTFOLIO COMPOSITION
As of March 31, 2000 the Fund's portfolio included 214 holdings issued by
162 different issuers having an average yield to maturity of 10.45%. The
weighted average maturity of the portfolio at this date was approximately 6.92
years.
The table below shows the allocation, on a weighted average basis, of the
Fund's assets invested in bonds, convertible preferred stock, warrants,
commercial paper and cash and options for the twelve months ended March 31,
2000. This information reflects the average composition of the Fund's assets
during the year ended March 31, 2000 and is not necessarily representative of
the Fund as of the current fiscal year or at any other time in the future.
<TABLE>
<CAPTION>
Bonds--S&P's Ratings
--------------------
<S> <C>
BB..................................................................... 14%
B...................................................................... 77%
CCC.................................................................... 8%
Nonrated............................................................... 1%
---
Total.................................................................. 100%
</TABLE>
11
<PAGE>
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The investment objective of the Fund is to seek high current income, which
income, if any, will be distributed to holders of Common Stock only after
satisfaction of the obligation to pay dividends on the Preferred Shares. The
Fund seeks to achieve its investment objective through investment in a
diversified portfolio of high yield, lower rated fixed-income securities. No
assurance can be given that the Fund's investment objective will be achieved.
The investment objective is a fundamental policy of the Fund. Fundamental
policies of the Fund may not be changed without the affirmative vote of the
holders of a majority (as defined in the Investment Company Act) of the
outstanding shares of Common Stock and a majority of the then outstanding
Preferred Shares, voting as separate classes. "Majority" as defined in the
Investment Company Act means, for each class, the lesser of (1) more than 50%
of the class or (2) 67% or more of the class present at a meeting at which
more than 50% of the outstanding shares of the class are present or
represented by proxy. In view of this requirement, no change in the Fund's
investment objective could occur without the affirmative vote of both classes
of stock.
Under normal market conditions, the Fund invests at least 65% of its total
assets in high yield fixed-income securities. These securities are commonly
known as "junk bonds" because they are rated in the lower categories by
nationally recognized rating agencies. "High yield" fixed-income securities,
the generic name for corporate bonds rated between BB and C by S&P and between
Ba and C by Moody's, are frequently issued by corporations in the growth
stages of their development, as a result of corporate reorganizations or as
part of corporate takeovers. Risks and special considerations associated with
investing in high yield fixed-income securities are described under "Risk
Factors and Special Considerations" below.
Investment Strategies
SSBC may employ the investment strategies described below, among others. The
Fund is under no obligation to use any of these strategies at any given time
or under any particular economic condition and no assurance can be given that
the use of any strategy will have its intended result or that the use of any
practice is, or will be, available to the Fund. These instruments and certain
related risks are described more specifically under "Additional Information
About Certain Securities and Investment Strategies of the Fund" in the
Statement of Additional Information. The Fund's ability to use some of these
strategies, such as investing in foreign securities and the use of covered
call options, may be limited as a condition to S&P's and/or Moody's rating of
the Preferred Shares.
Securities Loans. To the extent permitted by S&P and Moody's, the Fund may
make secured loans of its portfolio securities amounting to not more than one-
third of the value of its total assets, thereby realizing additional income.
The risks in lending portfolio securities, as with other extensions of credit,
consist of possible delays in recovery of the securities or possible loss of
rights in the collateral should the borrower fail financially. Although voting
rights, or rights to consent, with respect to the loaned securities, pass to
the borrower, the Fund retains the right to call the loans at any time on
reasonable notice, and it will do so in order that the securities may be voted
by the Fund if the holders of such securities are asked to vote upon or
consent to matters materially affecting the investment. The Fund may also call
such loans in order to sell the securities involved.
When-Issued and Delayed Delivery Securities. The Fund may purchase
securities on a when-issued or delayed delivery basis, which means that
delivery and payment can take place a month or more after the date of the
commitment to purchase the securities. The purchase price and the interest
rate payable on the securities are fixed at the time the buyer enters into the
commitment. The securities so purchased are subject to market fluctuation, and
no interest accrues to the Fund until delivery and payment take place.
The Fund will make commitments to purchase such when-issued securities only
with the intention of actually acquiring the securities. When the Fund buys on
a when-issued or delayed delivery basis, it establishes
12
<PAGE>
a separate account that consists of cash, cash equivalents or other liquid
securities from its portfolio having a value at least equal to the amount of
the securities the Fund has committed to buy. The purchase of securities on a
when-issued or delayed delivery basis is not limited by the S&P or Moody's
guidelines.
Repurchase Agreements. To the extent permitted by S&P and Moody's, the Fund
may enter into repurchase agreements on up to 25% of the value of its total
assets. A repurchase agreement is a contract under which the Fund acquires a
security for a relatively short period (usually not more than one week)
subject to the obligation of the seller to repurchase and the Fund to resell
such security at a fixed time and price representing the Fund's cost plus
interest.
If the seller defaults on a repurchase agreement, the Fund could realize a
loss on the sale of the underlying security to the extent that the proceeds of
the sale, including accrued interest, are less than the resale price provided
in the agreement, including interest. In addition, if the seller should be
involved in bankruptcy or insolvency proceedings, the Fund may incur delay and
costs in selling the underlying security or may suffer a loss of principal and
interest if the Fund is treated as an unsecured creditor and is required to
return the underlying collateral to the seller's estate.
Reverse Repurchase Agreements. To the extent permitted by S&P and Moody's,
the Fund may enter into reverse repurchase agreements with respect to debt
obligations that could otherwise be sold by the Fund. A reverse repurchase
agreement is an instrument under which the Fund sells an underlying debt
instrument and simultaneously obtains the commitment of the purchaser
(generally a commercial bank or a broker or dealer) to sell the security back
to the Fund at an agreed upon price on an agreed upon date.
Reverse repurchase agreements could involve certain risks in the event of
default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities.
An additional risk is that the market value of securities sold by the Fund
under a reverse repurchase agreement could decline below the price at which
the Fund is obligated to repurchase them.
Reverse repurchase agreements will be considered borrowings by the Fund and
as such will be subject to the restrictions on borrowing described under
"Investment Restrictions" in the Statement of Additional Information. The Fund
will not hold more than 5% of the value of its total assets in reverse
repurchase agreements. The Fund will not provide prior notice to its security
holders of its intention to expand the use of this practice.
Foreign Investments. The Fund may invest up to 10% of the value of its total
assets in securities principally traded in foreign markets. Securities issued
by companies organized outside the United States but registered with the U.S.
Securities and Exchange Commission and traded on a recognized U.S. securities
market are not subject to this limitation. In addition, subject to the Fund's
basic investment strategy, the Fund may also purchase Eurodollar certificates
of deposit issued by branches of U.S. and foreign banks. The Fund may buy or
sell foreign currencies or deal in forward foreign currency contracts in
connection with the purchase and sale of foreign investments.
There are certain risks involved in investing in securities of companies and
governments of foreign nations that are in addition to the usual risks
inherent in domestic investments. The risks of investing in foreign securities
include those resulting from devaluation of currencies, future adverse
political and economic developments and the possible imposition of currency
exchange restrictions or other foreign governmental laws or restrictions,
reduced availability of public information concerning issuers and the lack of
uniform accounting, auditing and financial reporting standards or of other
regulatory practices and requirements comparable to those applicable to
domestic companies. The Fund may be adversely affected, when holding foreign
securities, by fluctuations in value of one or more foreign currencies
relative to the U.S. dollar. Moreover, securities of many foreign issuers and
their markets may be less liquid and their prices more volatile than those of
securities of comparable domestic issues. In addition, with respect to certain
foreign countries, there is the possibility of expropriation, nationalization,
confiscatory taxation, limitations on the use or removal of funds or other
assets of the Fund,
13
<PAGE>
including the withholding of dividends, potential difficulties enforcing
contractual obligations and extended clearance and settlement periods. Foreign
securities may be subject to foreign government taxes that could reduce the
yield on such securities. Investments in foreign securities also may result in
higher expenses due to the cost of converting foreign currency to U.S.
dollars, the payment of fixed brokerage commissions on foreign exchanges, the
expense of maintaining securities with foreign custodians and the imposition
of transfer taxes or transaction charges associated with foreign exchanges.
Options. The Fund may write (sell) call options that are traded on national
securities exchanges with respect to securities in its portfolio. The Fund may
only write "covered" call options. A call option written by a Fund will be
deemed covered if (1) the Fund owns the securities underlying the call or has
an absolute and immediate right to acquire those securities without additional
cash consideration upon conversion or exchange of other securities held in its
portfolio, (2) the Fund holds a call at the same exercise price for the same
exercise period and on the same securities as the call written or (3) at the
time the call is written, an amount of cash, government securities or other
liquid securities equal to the fluctuating market value of the optioned
securities, is segregated with the Fund's custodian. The writing of call
options could result in increases in the Fund's portfolio turnover rate,
especially during periods when market prices of the underlying securities
appreciate.
Additional Leverage. The Fund has reserved the right to borrow money to the
extent the borrowing would not result in a violation of Section 18 of the
Investment Company Act. Pursuant to Section 18 of the Investment Company Act,
not more than 33 1/3% of the Fund's capital structure may consist of
borrowings representing indebtedness and not more than 50% of the Fund's
capital structure may consist of borrowings represented by indebtedness and a
senior class of stock, such as the Preferred Shares. The Fund may borrow to
the extent permitted by the Investment Company Act through the public or
private issuance of debt securities or from lenders of all types, such as
banks, savings and loan associations, insurance companies and similar
financial institutions.
It is anticipated that borrowings will be effected by the Fund primarily to
provide additional liquidity. However, the Fund reserves the right to use the
proceeds of borrowings for any other purpose, including additional investment
leverage.
The Preferred Shares are subject to mandatory redemption in certain
circumstances and may be voluntarily redeemed by the Fund under certain
circumstances. See "Description of Preferred Shares--Redemption." Should the
Preferred Shares be redeemed in whole or in part it is the Fund's intention to
leverage its structure through the further issuance of senior securities,
subject to the Fund's Board of Directors' determination that such issuance is
appropriate in light of relative interest rates, general economic conditions
and other relevant factors and subject to compliance with the Investment
Company Act.
S&P and Moody's Guidelines
The composition of the Fund's portfolio reflects guidelines (referred to
herein as the "Rating Agency Guidelines") established by S&P and Moody's in
connection with the Fund's receipt of a rating of AAA and aaa from S&P and
Moody's, respectively, for the Preferred Shares. These Rating Agency
Guidelines relate, among other things, to industry and credit quality
characteristics of issuers and specify various discount factors for debt
securities (with the level of discount greater as the rating of a security
becomes lower). Under the Rating Agency Guidelines, certain types of
securities in which the Fund may otherwise invest consistent with its
investment strategy are not eligible for inclusion in the calculation of the
Discounted Value of the Fund's portfolio. Such instruments include, for
example, private placements (other than Rule 144A Securities), non-U.S.
securities, and other securities not within the investment guidelines.
Accordingly, although the Fund reserves the right to invest in such securities
to the extent set forth herein, they have not and it is anticipated that they
will not constitute a significant portion of the Fund's portfolio.
The Rating Agency Guidelines require that the Fund maintain assets having an
aggregate Discounted Value, determined on the basis of the Guidelines, greater
than the aggregate liquidation preference of the Preferred
14
<PAGE>
Shares plus specified liabilities, payment obligations and other amounts, as
of periodic valuation dates. The Rating Agency Guidelines also require the
Fund to maintain asset coverage for the Preferred Shares on a non-discounted
basis of at least 200% as of the end of each month, and the Investment Company
Act requires such asset coverage as a condition to paying dividends or other
distributions on Common Stock. See "Description of Preferred Shares--Asset
Maintenance" in the Statement of Additional Information. The effect of
compliance with the Rating Agency Guidelines may be to cause the Fund to
invest in higher quality assets and/or to maintain relatively substantial
balances of highly liquid assets or to restrict the Fund's ability to make
certain investments that would otherwise be deemed potentially desirable by,
the Investment Adviser, including private placements of other than Rule 144A
Securities (as defined in the Glossary to the Statement of Additional
Information), and to limit or delay the Fund's ability to reinvest cash in a
rising "high-yield" market. The Rating Agency Guidelines are subject to change
from time to time with the consent of the relevant rating agency and would not
apply if the Fund in the future elected not to use investment leverage
consisting of senior securities rated by one or more rating agencies, although
other similar arrangements might apply with respect to other senior securities
that the Fund may issue. See "S&P and Moody's Guidelines" in the Statement of
Additional Information.
RISK FACTORS AND SPECIAL CONSIDERATIONS
Risk is inherent in all investing. Investing in any investment company
security involves risk factors and special considerations, including the risk
that you may receive little or no return on your investment or that you may
lose part or all of your investment. Therefore, before investing you should
consider carefully the following risk factors and special considerations that
you assume when you invest in Preferred Shares.
Auction Risk
The dividend rate for the Preferred Shares normally is set through an
auction process. In the auction, holders of Preferred Shares may indicate the
dividend rate at which they would be willing to hold or sell their Preferred
Shares or purchase additional Preferred Shares. The auction also provides
liquidity for the sale of Preferred Shares. An auction fails if there are more
Preferred Shares offered for sale than there are buyers. You may not be able
to sell your Preferred Shares at an auction if the auction fails. Also, if you
place hold orders (orders to retain Preferred Shares) at an auction only at a
specified dividend rate, and that rate exceeds the rate set at the auction,
you will not retain your Preferred Shares. Finally, if you buy shares or elect
to retain shares without specifying a dividend rate below which you would not
wish to buy or continue to hold those shares, you could receive a lower rate
of return on your shares than the market rate. See "Description of Preferred
Shares" and "The Auction--Summary of Auction Procedures."
Secondary Market Risk
If you try to sell your Preferred Shares between auctions, you may not be
able to sell any or all of your shares, or you may not be able to sell them
for $25,000 per share or $25,000 per share plus accumulated dividends. If the
Fund has designated a special rate period (a rate period of more than seven
days), changes in interest rates could affect the price you would receive if
you sold your shares in the secondary market. Broker-dealers that maintain a
secondary trading market for Preferred Shares are not required to maintain
this market, and the Fund is not required to redeem shares either if an
auction or an attempted secondary market sale fails because of a lack of
buyers. Preferred Shares are not listed on a stock exchange or the NASDAQ
stock market. If you sell your Preferred Shares to a broker-dealer between
auctions, you may receive less than the price you paid for them, especially if
market interest rates have risen since the last auction.
15
<PAGE>
Ratings and Asset Coverage Risk
Preferred Shares. While it is a condition to the closing of this offering
that S&P assigns a rating of AAA and Moody's assigns a rating of aaa to the
Preferred Shares, the rating does not eliminate or necessarily mitigate the
risks of investing in Preferred Shares. S&P or Moody's could downgrade
Preferred Shares, which may make your shares less liquid at an auction or in
the secondary market. If S&P or Moody's downgrades Preferred Shares, the Fund
may alter its portfolio or redeem Preferred Shares in an effort to improve the
rating, although there is no assurance that it will be able to do so to the
extent necessary to restore the prior rating. The Fund may voluntarily redeem
Preferred Shares under certain circumstances. See "Description of Preferred
Shares--S&P and Moody's Guidelines" in the Statement of Additional Information
for a description of the asset maintenance tests the Fund must meet.
Portfolio Securities. Subsequent to its purchase by the Fund, an issue of
securities may cease to be rated or its rating may be reduced below the
minimum required for purchase by the Fund. In addition, it is possible that a
national statistical rating agency might not change its rating of a particular
issue to reflect subsequent events. Unless otherwise provided in the S&P or
Moody's guidelines applicable to the Preferred Shares, none of these events
will require sale of such securities by the Fund, but SSBC will consider such
events in its determination whether the Fund should continue to hold the
securities. In addition, to the extent that the ratings change as a result of
changes in such organizations or their rating systems, or due to a corporate
reorganization, unless otherwise provided in the S&P or Moody's guidelines
applicable to the Preferred Shares, the Fund will attempt to use comparable
ratings as standards for its investments in accordance with its investment
objective and policies.
Interest Rate Risk
The Preferred Shares will generally pay dividends based on a rate set at
auction, usually held weekly. The Fund purchases fixed-income securities,
which pay interest based on long-term rates. Both long-term and short-term
interest rates may fluctuate. If short-term interest rates rise, the Preferred
Shares dividend rates may rise. Thus, it is possible that the amount of
dividends paid to holders of Preferred Shares would exceed the income from the
Fund's portfolio securities. However, Preferred Share dividend rates would
need to greatly exceed the yield on the Fund's portfolio before the Fund's
ability to pay Preferred Share dividends would be impaired. Generally, fixed-
income securities will decrease in value when interest rates rise and increase
in value when interest rates decline. If long-term rates rise, the value of
the Fund's investment portfolio will decline, reducing the amount of assets
serving as asset coverage for the Preferred Shares.
Credit Risk
Credit risk is the risk that an issuer of a security will become unable to
meet its obligation to make interest and principal payments. The Fund invests
in lower rated securities and unrated securities of comparable quality. In
general, lower rated fixed-income securities offer a higher return potential
but carry a greater degree of risk that the issuer will lose its ability to
make interest and principal payments, which could have a negative impact on
the Fund's net asset value or dividends. Fixed-income securities rated Ba/BB
or B are regarded as having predominately speculative characteristics with
respect to the issuer's capacity to pay interest and repay principal, and
these bonds are commonly referred to as "junk bonds." These securities are
subject to a greater risk of default. The prices of these lower grade
securities are more sensitive to negative developments, such as a decline in
the issuer's revenues or a general economic downturn, than are the prices of
higher grade securities. Lower grade securities tend to be less liquid than
investment grade securities. The market values of lower grade securities tend
to be more volatile than is the case for investment grade securities. These
types of factors could, in certain instances, reduce the value of securities
held by the Fund. Also, the Fund may have additional expenses if it must seek
recovery if one of its portfolio holdings defaults in the payment of principal
or interest.
Investment Strategy Risk
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 S&P or Moody's or, if unrated, will be
16
<PAGE>
of comparable quality. These lower rated and comparable unrated securities
involve greater risk than higher 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.
The markets in which these securities are traded generally are more limited
than those in which higher rated securities are traded. Limited markets may
restrict the availability of securities for the Fund to purchase and also may
make the security less liquid and/or more difficult to 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.
Changes in economic conditions or other circumstances are also likely to
weaken the capacity of issuers of these securities to make principal and
interest payments.
While the market values of these securities tend to react less to
fluctuations in interest rate levels than do those of higher rated securities,
the marker values of the former also tend to be more sensitive to company-
specific developments and changes in economic conditions than higher rated
securities.
Fixed-income securities, including lower rated and comparable unrated
securities, frequently have call or buy-back features that permit their
issuers to call or repurchase the securities from their holders, such as the
Fund. If an issuer exercises these rights during periods of declining interest
rates, the Fund may have to replace the security with a lower yielding
security, resulting in a decreased return to the Fund.
Securities that are rated BB by S&P or Ba by Moody's have speculative
characteristics with respect to capacity to pay interest and repay principal.
Securities that are rated B by S&P or Moody's generally lack characteristics
of a desirable investment and assurance of interest and principal payments
over any long period of time may be small. Securities that are rated CCC by
S&P or Caa by Moody's or below are of poor standing. Those issues may be in
default or present elements of danger with respect to principal or interest.
See Appendix A for a description of corporate bond ratings by S&P and Moody's.
In light of the risks of lower rated securities, SSBC, in evaluating the
creditworthiness of an issue, whether rated or unrated, will take various
factors into consideration, which may include, as applicable, the issuer's
financial resources, its sensitivity to economic conditions and trends, the
operating history of and the community support for the facility financed by
the issue, the ability of the issuer's management and regulatory matters.
Reinvestment Risk
Reinvestment risk is the risk that income from the Fund's portfolio will
decline if and when the Fund invests the proceeds from matured, traded,
prepaid or called fixed-income securities at lower interest rates. A decline
in income could affect the Fund's ability to pay dividends on the Preferred
Shares. Investment risk also exists for holder of Preferred Shares because the
Shares are subject to involuntary redemption under circumstances where the
investor may not be able to achieve a comparable yield or an investment with
similar terms and quality.
Inflation Risk
Inflation is the reduction in the purchasing power of money resulting from
the increase in the prices of goods and services. Inflation risk is the risk
that the inflation adjusted (or "real") value of the Preferred Shares
investment or the income from that investment will be worth less in the
future. As inflation occurs, the real value of the Preferred Shares and
distributions declines. In an inflationary period, however, it is expected
that, through the auction process, dividend rates on the Preferred Shares
would increase, tending to offset this risk.
17
<PAGE>
"Year 2000" Risk
As the year 2000 began, there were few problems caused by the inability of
certain computer systems to tell the difference between the year 2000 and the
year 1900 (commonly known as the "Year 2000" issue). It is still possible that
some computer systems could malfunction in the future because of the Year 2000
issue or as a result of actions taken to address the Year 2000 issue. Fund
management does not anticipate that its services or those of the Fund's other
service providers will be adversely affected, but Fund management will
continue to monitor the situation. If malfunctions related to the Year 2000
issue do arise, the Fund and its investments could be negatively affected.
Futures and Options Transactions Risks
The use of options, financial futures and options on financial futures may
involve risks not associated with other types of investments that the Fund
purchases. It is possible that a fund that utilizes hedging strategies may not
perform as well as a fund that does not make use of such devices. The Fund's
positions in options and financial futures may be closed out only on an
exchange that provides a liquid secondary market for them, and there can be no
assurance that a liquid secondary market will exist for any particular option
or futures contract. If the Fund cannot close out its options and futures
positions, it could have an adverse effect on the Fund's ability to hedge its
securities effectively and might, in some cases, require the Fund to deposit
cash to meet applicable margin requirements.
The Fund's ability to hedge effectively through transactions in financial
futures or options depends on SSBC's ability to predict the direction of
interest rates and prices of securities and the degree to which price
movements in the Fund's holdings correlate with price movements of the hedging
instruments. Since the Fund's options and futures will not duplicate such
underlying securities, the correlation will probably not be perfect.
Therefore, the prices of the securities being hedged may not move in the same
amount as the hedging instrument. There could be a negative correlation
between the hedging instrument and the hedged securities, which would result
in an ineffective hedge and a loss to the Fund.
MANAGEMENT OF THE FUND
Overall responsibility for management and supervision of the Fund rests with
the Fund's Board of Directors. The Directors approve all significant
agreements between the Fund and the persons or companies that furnish services
to the Fund, including agreements with its investment adviser, administrator,
custodian and transfer agent. The day-to-day operations of the Fund are
delegated to SSBC. SSBC acts as the investment adviser for, and manages the
investment and reinvestment of the assets of, the Fund. SSBC was incorporated
in 1968 and manages investment companies that had total assets in excess of
$124 billion as of December 31, 1999. SSBC is an affiliated subsidiary of
Salomon Smith Barney Inc., the Underwriter and an indirect wholly owned
subsidiary of Citigroup Inc. Citigroup businesses provide a broad range of
financial services--asset management, banking and consumer finance, credit and
charge cards, insurance, investments, investment banking and trading. SSBC is
located at 388 Greenwich Street, New York, New York 10013. One of the Fund's
Directors and all of its officers are affiliated with SSBC or its affiliates.
The Investment Advisory Agreement between SSBC and the Fund became effective
on July 30, 1993. The Investment Advisory Agreement remains in effect from
year to year if it is approved annually by (i) the Board of Directors or (ii)
a vote of the "majority" (as defined in the Investment Company Act) of the
Fund's shareholders, provided that in either event the continuance is also
approved by a majority of the non-interested members of the Board, unless
earlier terminated. It was last approved to be continued by the Fund's Board
of Directors on August 25, 1999. The Investment Advisory Agreement provides
that, subject to the direction of the Board of Directors of the Fund and the
applicable provisions of the Investment Company Act, SSBC is responsible for
the actual management of the Fund's portfolio, including decisions to buy,
sell or hold a particular investment.
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<PAGE>
Under the Investment Advisory Agreement, SSBC receives for its advisory
services a monthly investment advisory fee calculated at an annual rate of
0.50% of the average daily net assets (defined as the average daily value of
the total assets of the Fund less total liabilities other than the outstanding
principal amount under the line of credit with PNC Bank, N.A.) of the Fund.
The liquidation value of the Preferred Shares is included in determining the
Fund's average daily net assets. This fee is calculated daily and paid
monthly.
SSBC also acts as the Fund's administrator, for which the Fund pays a fee
calculated at an annual rate of 0.20% of the average daily net assets, as
defined above. This fee is calculated daily and paid monthly.
Portfolio Management
John C. Bianchi, who is Vice President and Investment Officer of the Fund,
is primarily responsible for management of the Fund's assets. Mr. Bianchi has
served the Fund in these capacities since the commencement of the Fund's
operations.
DESCRIPTION OF PREFERRED SHARES
The following is a brief description of the terms of the Preferred Shares.
This description does not purport to be complete and is qualified by reference
to the Articles Supplementary and other charter documents, which have been
filed as exhibits to the Registration Statement of which this Prospectus is a
part.
General
Under the Articles of Incorporation, the Fund is authorized to issue up to
250,000 Preferred Shares. No fractional Preferred Shares may be issued. As of
the date of this Prospectus, there were 30,000 shares of Outstanding Preferred
Stock, all of which will be redeemed on or about April 15, 2000. The Board of
Directors is authorized to cause the Fund to issue additional Preferred Shares
from time to time, subject to the restrictions in the Articles of
Incorporation. Any such additional shares are to be deemed "Preferred Shares."
The Preferred Shares will not trade on the New York Stock Exchange or on any
other stock exchange. The Preferred Shares offered by this Prospectus, when
issued and paid for pursuant to the terms of this Prospectus, will be fully
paid and nonassessable and will have no preemptive, exchange or conversion
rights. Any Preferred Shares repurchased or redeemed by the Fund will be
classified as authorized but unissued Preferred Shares. The Board of Directors
may by resolution classify or reclassify any authorized but unissued Preferred
Shares from time to time by setting or changing the preferences, rights,
voting powers, restrictions, limitations as to dividends or terms or
conditions of redemption. The Fund will not issue any class of stock senior to
or on a parity with Preferred Shares.
Dividends
The following is a general description of dividends and rate periods. The
calculation of dividends and rate periods is complex and subject to special
rules. See the Statement of Additional Information and the Glossary to the
Statement of Additional Information for a description of the terms used in
this section and a more detailed discussion of this topic.
General. The initial rate period will be 12 days. Subsequent rate periods
will generally be seven days. The holders of Preferred Shares are entitled to
receive cash dividends at an annual rate that may vary for the successive
periods for such shares. The dividend payment date for the initial rate period
for Preferred Shares will be Wednesday, April 26, 2000. Dividends will
thereafter be paid, generally, on each business day immediately following the
last day of each successive seven day period. Subject to certain conditions
and with notice to the holders of Preferred Shares, rate periods may be longer
or shorter than seven days and will have such duration as the Board of
Directors specifies.
The dividend rate for the initial rate period on the Preferred Shares will
be 6.00%. For subsequent rate periods, Preferred Shares will pay dividends
based on a rate set at the auctions, normally held weekly. The rate
19
<PAGE>
set at auction will not exceed the Maximum Applicable Rate, as defined in the
Glossary appended as Exhibit C to the Statement of Additional Information. The
interest rate on the Preferred Shares will change weekly as the result of an
auction, as described in this Prospectus and the Statement of Additional
Information. Dividends on the Preferred Shares will be cumulative from the
date the shares are first issued. Dividends paid on the Preferred Shares are
not expected to qualify for the Federal dividends received deduction available
to corporations.
No dividends will be declared or paid or set apart for payment on shares of
any class of stock ranking as to dividends on a parity with or junior to the
Preferred Shares for any period or part thereof unless full accumulated but
unpaid dividends have been paid or contemporaneously are declared and paid on
the Preferred Shares.
Dividends on Preferred Shares will be paid on the dividend payment date to
holders of record as their names appear on the Fund's stock books, on the
business day next preceding the dividend payment date. If dividends are in
arrears, they may be declared and paid at any time, to holders of record as
their names appear on the Fund's stock books, on that date, not more than 15
days before the payment date, as the Fund's Board of Directors may fix.
Depository Trust and Clearing Corporation (the "Securities Depository"), in
accordance with its current procedures, is expected to credit on each dividend
payment date dividends received from the Fund to the accounts of its agent
members, in same-day funds. "Agent members" are Broker-Dealers or broker-
dealers that are members of or participants in the Securities Depository who
act on behalf of Preferred Shares shareholders. Agent members, in turn, are
expected to distribute these dividend payments to the person for whom they are
acting as agents. If a Broker-Dealer or a broker-dealer that is an agent
member of the Securities Depository does not make dividends available to
Preferred Share shareholders in same-day funds, these shareholders will not
have funds available until the following business day.
Dividend Rate Set at Auction. Preferred Shares pay dividends based on a rate
set at auction. The auction usually is held weekly, but may be held less
frequently. The auction sets the dividend rate, and Preferred Shares may be
bought and sold at the auction. Bankers Trust Company, the Auction Agent,
reviews orders from Broker-Dealers on behalf of existing shareholders that
wish to sell, hold at the auction rate, or hold only at a specified rate, and
on behalf of potential shareholders that wish to buy Preferred Shares, and
determines the lowest dividend rate that will result in all of the outstanding
Preferred Shares continuing to be held. The shares in this offering will trade
at auction starting in the week following this offering. See "The Auction" in
this Prospectus and in the Statement of Additional Information.
Determination of Dividend Rate. The Fund computes the dividends per share by
multiplying the dividend rate determined at the auction by the following
fraction: the numerator normally is seven and the denominator is 360. If the
Fund has designated a special rate period, then the numerator is the number of
days in the rate period, and the denominator is 360. In either case, this rate
is then multiplied against $25,000 to arrive at the dividend per share. The
numerator may be different if the rate period includes a holiday. If an
auction for any subsequent rate period of Preferred Shares is not held for any
reason other than as described below, the dividend rate on those shares will
be the Maximum Applicable Rate on the auction date for that subsequent rate
period.
Effect of Failure to Pay Dividends in Timely Manner. If the Fund fails to
pay, in a timely manner, the Auction Agent the full amount of any dividend on
any Preferred Shares during any rate period, but the Fund cures the failure
and pays any late charge before 12:00 noon Eastern time on the third business
day following the date the failure occurred, no auction will be held for
Preferred Shares for the first subsequent rate period thereafter, and the
dividend rate for Preferred Shares for that subsequent rate period will be the
Default Rate, as such term is defined in the Glossary to the Statement of
Additional Information.
If the Fund fails to pay, in a timely manner, the Auction Agent the full
amount of any dividend on, or the redemption price of, any Preferred Shares
during any rate period thereof, and the Fund does not cure the failure and pay
any late charge before 12:00 noon Eastern time on the third business day next
succeeding the date on which the failure occurred, no auction will be held for
Preferred Shares for the first subsequent rate period
20
<PAGE>
thereafter (or for any rate period thereafter, to and including the rate
period during which the failure is cured and the late charge is paid), and the
dividend rate for Preferred Shares for each subsequent rate period will be the
Default Rate.
If the Fund fails to pay, in a timely manner, the Auction Agent the full
amount of any dividend on, or the redemption price of, any Preferred Shares
during a special rate period of more than 364 rate period days, or during any
rate period succeeding any special rate period of more than 364 rate period
days during which a failure occurred that has not been cured, and the Fund
does not cure the failure and pay a late charge, no auction will be held for
Preferred Shares for that subsequent rate period (or for any rate period
thereafter, to and including the rate period during which the failure is cured
and the late charge paid), and the dividend rate for Preferred Shares for each
subsequent rate period will be the Default Rate.
The Fund cures a failure to pay dividends on Preferred Shares for any rate
period by paying the Auction Agent all accumulated and unpaid dividends on the
Preferred Shares.
Maximum Applicable Rate. The dividend rate that results from an auction for
Preferred Shares will not be greater than the Maximum Applicable Rate as
defined in the Glossary to the Statement of Additional Information. The
Maximum Applicable Rate is subject to upward adjustment by the Board of
Directors in consultation with the Broker-Dealers.
Restrictions on Dividends and Other Distributions. When the Fund has any
Preferred Shares outstanding, the Fund may not pay any dividend or
distribution (other than a stock dividend) to shareholders of its common stock
unless (1) it has paid all cumulative dividends on Preferred Shares; (2) it
has redeemed any Preferred Shares that it has called for mandatory redemption;
and (3) after paying the dividend, the Fund meets S&P's and Moody's asset
coverage requirements for AAA and aaa ratings, respectively, and Investment
Company Act asset coverage requirements. Holders of Preferred Shares will
acquire certain additional voting rights if the Fund fails to pay them
dividends for two years or more. See "Voting Rights" below.
Except as set forth in the next sentence, no dividends will be declared or
paid or set apart for payment on any class or series of shares of stock of the
Fund ranking, as to the payment of dividends, on a parity with Preferred
Shares for any period unless full cumulative dividends have been or
contemporaneously are declared and paid on the Preferred Shares through their
most recent dividend payment date. When dividends are not paid in full upon
the Preferred Shares through their most recent dividend payment date or upon
any other class or series of shares ranking on a parity as to the payment of
dividends with Preferred Shares through their most recent respective dividend
payment dates, all dividends declared upon Preferred Shares and any other such
class or series of shares ranking on a parity as to the payment of dividends
with Preferred Shares will be declared pro rata so that the amount of
dividends declared per share of Preferred Shares and such other class or
series of shares will in all cases bear to each other the same ratio that
accumulated dividends per share of Preferred Shares and such other class or
series of shares bear to each other.
Voting Rights
Except as noted below, the Common Stock and the Preferred Shares have equal
voting rights of one vote per share and vote together as a single class. In
elections of Directors, the holders of Preferred Shares, as a separate class,
vote to elect two Directors, the holders of the Common Stock, as a separate
class, vote to elect two Directors and the holders of the Preferred Shares and
the Common Stock, voting together as a single class, elect the remaining
Directors. In addition, during any period ("Voting Period") in which the Fund
has not paid dividends on the Preferred Shares in an amount equal to two full
years dividends, the holders of Preferred Shares, voting as a single class,
are entitled to elect (in addition to the two Directors set forth above) the
smallest number of additional Directors as is necessary to assure that a
majority of the Directors has been elected by the holders of Preferred Shares.
In an instance when the Fund has not paid dividends as set forth in the
immediately preceding paragraph, the terms of office of all persons who are
Directors of the Fund at the time of the commencement of a Voting Period will
continue, notwithstanding the election by the holders of the Preferred Shares
of the number
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<PAGE>
of Directors that such holders are entitled to elect. The persons elected by
the holders of the Preferred Shares, together with the incumbent Directors
elected by the holders of the Common Stock, will constitute the duly elected
Directors of the Fund. When all dividends in arrears on the Preferred Shares
have been paid or provided for, the terms of office of the additional
Directors elected by the holders of the Preferred Shares will terminate.
The Common Stock and Preferred Shares vote as separate classes on amendments
to the Articles of Incorporation that would adversely affect their respective
interests.
In addition, so long as any Preferred Shares are outstanding
. the Fund may not be voluntarily liquidated, dissolved, wound up, merged
or consolidated and may not sell all or substantially all of its assets,
without the approval of at least a majority of the Preferred Shares and
the shares of Common Stock, each voting as a separate class;
. the adoption of any plan of reorganization adversely affecting either
the Preferred Shares or the Common Stock requires the approval of a
majority of the outstanding shares of such class;
. the Fund may not, without the affirmative vote of at least a majority of
the Preferred Shares outstanding, voting as a separate class, file a
voluntary application for relief under Federal bankruptcy law or any
similar application under state law for so long as the Fund is solvent
and does not foresee becoming insolvent;
. the approval of a majority of the outstanding Preferred Shares and
Common Stock, each acting as a separate class, is required to approve
any action requiring a vote of security holders under Section 13(a) of
the Investment Company Act including, among other things, changes in the
Fund's investment objective, changes in certain investment restrictions
described under "Investment Restrictions" in the Statement of Additional
Information and changes in the Fund's subclassification as a closed-end
investment company; and
. the approval of a majority of the outstanding Preferred Shares, voting
separately as a class, is required to amend, alter or repeal any of the
preferences, rights or powers of the holders of Preferred Shares or to
increase or decrease the number of Preferred Shares authorized to be
issued.
The Common Stock and Preferred Shares will also vote separately to the
extent otherwise required under Maryland law or the Investment Company Act as
in effect from time to time, and, to the extent required under the Investment
Company Act, action by the Fund's shareholders requires a vote of a majority
of the Fund's outstanding voting securities as defined under "Investment
Objective and Policies."
For purposes of any right of the holders of Preferred Shares to vote on any
matter, whether the right is created by the Articles of Incorporation, by
statute or otherwise, a holder of a Preferred Share is not entitled to vote
and the Preferred Share will not be deemed to be outstanding for the purpose
of voting or determining the number of Preferred Shares required to constitute
a quorum, if prior to or concurrently with a determination of the Preferred
Shares entitled to vote or of Preferred Shares deemed outstanding for quorum
purposes, as the case may be, a notice of redemption was given in respect of
those Preferred Shares and sufficient Deposit Securities (as defined in the
Statement of Additional Information) for the redemption of those Preferred
Shares were deposited.
Redemption
You do not have the right to redeem your Preferred Shares. The Fund will be
required to redeem your shares in certain circumstances, and has the right to
redeem your Preferred Shares under certain conditions.
The Fund is required under the Investment Company Act to maintain a ratio of
total assets to Preferred Shares of at least two to one (200% asset coverage).
Essentially, for every two dollars of Fund assets, the Fund can issue one
dollar of Preferred Shares (measured by liquidation preference). The Fund's
Articles Supplementary for the Preferred Shares require it to redeem Preferred
Shares if it does not maintain this two-to-one ratio. The Fund also must
redeem Preferred Shares if it fails to maintain the rating agencies' Preferred
Shares Basic Maintenance Amount. See "Description of Preferred Shares--S&P and
Moody's Guidelines" in the Statement of Additional Information. The redemption
price will be $25,000 per share plus the amount of accumulated but unpaid
dividends, up to the redemption date. The Fund will redeem only the amount of
Preferred Shares necessary to comply with the Investment Company Act
restrictions, the rating agencies' requirements, or both.
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<PAGE>
The Fund may, but is not required to, redeem Preferred Shares under certain
conditions. The redemption price will be $25,000 per share plus the amount of
accumulated but unpaid dividends, up to the redemption date. The Fund may
redeem Preferred Shares in whole or in part, on the second business day before
any dividend payment date, out of funds legally available, at the redemption
price.
Notice of redemption will be made by mailing a notice to each holder of
Preferred Shares to be redeemed, at least 15 but not more than 25 days before
the redemption date, at the address as it appears in the Fund's stock books.
The notice will state (1) the redemption date; (2) the number of Preferred
Shares to be redeemed; (3) the redemption price; (4) that the dividends on
shares to be redeemed will cease to accumulate on the redemption date; and (5)
the provisions of the Articles Supplementary under which the redemption is
made.
THE AUCTION
Summary of Auction Procedures
The following is a brief summary of the auction procedures. They are
described in more detail in the Statement of Additional Information. The
auction procedures are complicated, and there are exceptions to these
procedures. Many of the terms in this section have a special meaning. Any
terms in this section not defined have the meaning assigned to them in the
Statement of Additional Information and the Glossary appended as Exhibit C
thereto.
The auction determines the Applicable Rate (the dividend rate) for Preferred
Shares, but the Applicable Rate will not be higher than the Maximum Applicable
Rate. See "Description of Preferred Shares--Dividends and Rate Periods--
Maximum Applicable Rate" in the Statement of Additional Information. You also
may buy or sell Preferred Shares in the auction. If you own Preferred Shares,
you may instruct, orally or in writing, a Broker-Dealer, or a broker-dealer
that has entered into an agreement with a Broker-Dealer, to enter an order in
the auction. If your broker-dealer is not an agent member of the Securities
Depository, or an affiliate of an agent member, it may submit orders for
Preferred Shares to the Auction Agent. Existing Holders can enter three kinds
of orders regarding their Preferred Shares: sell, hold/sell, and hold.
Potential and Existing Holders can also enter buy orders to purchase
additional Preferred Shares.
If you enter a sell order, you indicate that you want to sell Preferred
Shares at $25,000 per share, no matter what the next rate period's Applicable
Rate will be.
If you enter a hold/sell (or "hold at a rate") order, you indicate that you
want to sell Preferred Shares only if the next rate period's Applicable Rate
is less than the rate you specify.
If you enter a hold order, you indicate that you want to continue to own
Preferred Shares, no matter what the next rate period's Applicable Rate will
be.
If a Potential or Existing Holder enters a buy order, he or she indicates
that he or she wants to buy Preferred Shares at a bid rate at or below the
Applicable Rate.
You may enter different types of orders for your Preferred Shares, as well
as orders for additional Preferred Shares. All orders must be for whole
shares. All orders you submit are irrevocable. There are a fixed number of
Preferred Shares, and the Applicable Rate likely will vary from auction to
auction depending on the number of bidders, the number of shares the bidders
seek to buy, and general economic conditions including current interest rates.
If you own Preferred Shares and submit a bid higher than the Maximum
Applicable Rate, your bid will be treated as a sell order. If you do not enter
an order, the Broker-Dealer will assume that you want to continue to hold
Preferred Shares, but if you fail to submit an order and the rate period is
longer than seven days, the Broker-Dealer will treat your failure to submit a
bid as a sell order. If you do not currently own Preferred Shares, or want to
buy more shares, you may instruct a Broker-Dealer, or a broker-dealer that has
entered into an agreement with a Broker-Dealer, to enter a bid order to buy
shares in an auction at $25,000 per share, at a specified dividend rate. If
your bid specifies a rate higher than the Maximum Applicable Rate, your order
will not be accepted.
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<PAGE>
Broker-Dealers will submit orders from Existing Holders and Potential
Holders to the Auction Agent. The submission deadline for the Broker-Dealers
to submit the orders is 1:00 p.m. Eastern time on each auction date (or
another time the Auction Agent specifies). Neither the Fund nor the Auction
Agent will be responsible for a Broker-Dealer's failure to submit orders from
existing shareholders and potential shareholders. A Broker-Dealer's failure to
submit orders for Preferred Shares held by it or its customers will be treated
in the same manner as a shareholder's failure to submit an order to the
Broker-Dealer. A Broker-Dealer may submit orders to the Auction Agent for its
own account.
If the number of Preferred Shares subject to hold/sell orders with a
dividend rate equal to or lower than the Maximum Applicable Rate is at least
equal to the number of Preferred Shares subject to sell orders, then the
Applicable Rate for the next rate period will be the lowest rate submitted
which, taking into account that rate and all lower rates submitted in order
from Existing Holders and Potential Holders, would result in Existing Holders
and Potential Holders owning all the Preferred Shares available for purchase
in the auction. If the number of Preferred Shares subject to hold/sell orders
with a dividend rate equal to or lower than the Maximum Applicable Rate is
less than the number of Preferred Shares subject to sell orders, then the
auction is considered to be a failed auction, and the dividend rate will be
the Maximum Applicable Rate. In that event, Existing Holders that have
submitted sell orders (or are treated as having submitted sell orders) may not
be able to sell any or all the shares for which they submitted sell orders.
The Auction Agent will not accept a bid above the Maximum Applicable Rate
from a Potential Holder, and will treat such a bid from an Existing Holders as
a sell order. The purpose of the Maximum Applicable Rate is to place an upper
limit on Preferred Shares dividends and in so doing to help protect the
earnings available to pay common share dividends, and to serve as the
Applicable Rate in the event of a failed auction (that is, an auction where
there are more Preferred Shares offered for sale than there are buyers for
those shares).
If Broker-Dealers submit or are deemed to submit hold orders for all
Outstanding Preferred Shares, the Applicable Rate for the next rate period
will be the Maximum Applicable Rate. See "Additional Information Concerning
the Auction for Preferred Shares--Dividend Rates and Auction Dates" in the
Statement of Additional Information and the Glossary appended as Exhibit C
thereto for a description of this rate.
The auction procedures include a pro rata allocation of shares for purchase
and sale. This may result in an Existing Holder continuing to hold or selling,
or a Potential Holder buying, fewer shares than the number of shares in its
order. If this happens, Broker-Dealers will be required to make appropriate
pro rata allocations among their customers.
Settlement of purchases and sales will be made on the next business day
(which also is a dividend payment date) after the auction date, through the
Securities Depository. Purchasers will pay for their shares through Broker-
Dealers in same-day funds to the Securities Depository against delivery to the
Broker-Dealers. The Securities Depository will make payment to the sellers'
Broker-Dealers in accordance with its normal procedures, which require Broker-
Dealers to make payment against delivery in same-day funds.
The following is a simplified example of how a typical auction works. Assume
that a Fund has 1,000 outstanding shares of preferred shares, and three
current shareholders. The three current shareholders and three potential
shareholders submit orders through Broker-Dealers at the auction:
<TABLE>
<S> <C> <C> <C>
Current Shareholder..... A Owns 500 shares, wants to Hold/sell order of 3.5% rate
sell all 500 shares if for all 500 shares
auction rate is less than
3.5%
Current Shareholder..... B Owns 300 shares, wants to Hold order--will take the
hold auction rate
Current Shareholder..... C Owns 200 shares, wants to Hold/sell order of 3.3% rate
sell all 200 shares if for all 200 shares
auction rate is less than
3.3%
Potential Shareholder... D Wants to buy 200 shares Places order to buy at or above
3.4%
Potential Shareholder... E Wants to buy 300 shares Places order to buy at or above
3.3%
Potential Shareholder... F Wants to buy 200 shares Places order to buy at or above
3.5%
</TABLE>
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<PAGE>
The lowest dividend rate that will result in all 1000 preferred shares
continuing to be held is 3.4% (the offer by D). Therefore, the Applicable Rate
will be 3.4%. Current shareholders B and C will continue to own their shares,
and current shareholder A will sell its shares, because A's dividend rate bid
was higher than the Applicable Rate. Potential shareholder D will buy 200
shares, and Potential shareholder E will buy 300 shares, because their bid
rates were at or below the Applicable Rate. Potential shareholder F will not
buy any shares because its bid rate was above the Applicable Rate.
Notification of Results; Settlement
The Auction Agent will notify each Broker-Dealer that submitted an order
whether the order was accepted and of the Applicable Rate for the next
dividend period, by telephone by approximately 3:00 p.m. Eastern time on the
auction date. Each Broker-Dealer that submitted an order on behalf of an
Existing Holder or Potential Holder will as soon as practicable notify that
person whether its order was accepted and of the Applicable Rate for the next
rate period and, if the order was a hold/sell or sell order, whether the order
was accepted or rejected in whole or in part and will confirm purchases and
sales with each Existing Holder or Potential Holder purchasing or selling
shares as a result of the auction. The Auction Agent will record each transfer
of Preferred Shares on the registry of Existing Holders it maintains.
In accordance with the Securities Depository's normal procedures, on the
business day after the auction date, purchases and sales of Preferred Shares
will be executed through the Securities Depository and the accounts of the
agent members will be debited and credited and shares delivered as necessary
to effect the purchases and sales of Preferred Shares as determined in the
auction.
Purchasers will make payment through their agent members in same-day funds
to the Securities Depository against delivery through their agent members; the
Securities Depository will make payment in accordance with its normal
procedures, which now provide for payment against delivery by its agent
members in same-day funds.
If any Existing Holder selling Preferred Shares in an auction fails to
deliver its shares, the Broker-Dealer of any buyer of shares in an auction may
deliver to that person a number of whole Preferred Shares that is less than
the number of shares that the person otherwise was to buy. In that event, the
Broker-Dealer will determine the number of Preferred Shares to be delivered,
and delivery of the lesser number of shares will constitute good delivery.
Auction Agent
The Auction Agent acts solely as an agent of the Fund and is not a trustee
for holders of Preferred Shares. Unless the Auction Agent acts in bad faith or
is negligent, it will not be liable for any action taken, suffered, or omitted
or for any error of judgment it makes in the performance of its duties under
the Auction Agency Agreement, and it will not be liable for any error of
judgment it makes in good faith unless it is negligent in ascertaining the
pertinent facts. The Auction Agent may terminate the Auction Agency Agreement
as to the Fund upon 90 days' notice to the Fund. If the Auction Agent should
resign, the Fund will use its best efforts to enter into an agreement with a
successor Auction Agent that contains substantially the same terms and
conditions as the Auction Agent Agreement. The Fund may remove the Auction
Agent, but before this removal, the Fund must have entered into an agreement
with a successor Auction Agent. The Fund may also replace the Auction Agent.
Broker-Dealers; Participation Fee
A Broker-Dealer may acquire shares for its own account. If a Broker-Dealer
submits an order for its own account in an auction, it may have an advantage
over others because it would have knowledge of other orders placed through it
in that auction.
After each auction, the Auction Agent will pay to each Broker-Dealer, from
monies the Fund provides, a participation fee at the annual rate of .25 of 1%
of the purchase price of Preferred Shares the Broker-Dealer
25
<PAGE>
places at that auction for any auction immediately preceding a rate period of
less than one year. For a rate period of one year or longer, the amount will
be a percentage of the purchase price of Preferred Shares the broker-dealer
places at that auction, as the Fund and Broker-Dealers may agree. "Places at
auction" means that the shares were
. the subject of hold orders deemed to be sell orders made by Existing
Holders who acquired their shares from that Broker-Dealer, or
. the subject of an order the Broker-Dealer submitted that is
. a hold/sell order from an Existing Holder that results in the
shareholder continuing to hold those shares as a result of the
auction;
. a buy order from a Potential Holder or Existing Holder that results
in the shareholder buying those shares as a result of the auction; or
. a valid hold order.
The broker-dealer agreements allow a Broker-Dealer to submit orders in
auctions for its own account, unless a Fund notifies all Broker-Dealers that
they may no longer do so. In that case, Broker-Dealers may continue to submit
hold, sell, hold/sell and buy orders for their own accounts. The Fund may
request that the Auction Agent terminate one or more broker-dealer agreements
at any time, provided that at least one broker-dealer agreement is in effect
after the termination(s).
Secondary Market
Broker-Dealers and other broker-dealers may maintain a secondary trading
market for Preferred Shares, although they are not required to do so. The
secondary trading market in Preferred Shares may not provide you with
liquidity. Preferred Shares are not registered on a stock exchange or on the
NASDAQ Stock Market.
You may sell or transfer Preferred Shares only in whole shares and only:
. pursuant to a buy or sell order placed with the Auction Agent in
accordance with the auction procedures;
. to a Broker-Dealer or other broker-dealer; or
. to other persons as a Fund may permit; provided, however, that
. a sale or transfer of your shares (if you hold your shares in the
name of a Broker-Dealer) to that Broker-Dealer, or to another
customer of that Broker-Dealer, will not be considered a sale or
transfer for purposes of the foregoing if that Broker-Dealer remains
the existing holder of the shares immediately after the transaction;
and
. in the case of all transfers, other than through an auction, the
Broker- Dealer (or other person, if the Fund permits) receiving the
transfer will advise the Auction Agent of the transfer.
Further description of the auction procedures can be found in the Statement
of Additional Information.
TAXES
Taxes on Distributions
As long as the Fund continues to meet the requirements for being a tax-
qualified regulated investment company, it pays no federal income tax on the
earnings it distributes to shareholders.
Distributions you receive from the Fund are generally considered taxable.
Distributions from the Fund's net long-term capital gains will be taxed as
long-term capital gains, regardless of how long you have held Fund shares;
distributions from other sources will generally be taxed as ordinary income.
Because the Fund's portfolio income consists principally of interest income,
corporate investors in Preferred Shares generally will not be entitled to the
federal dividends received deduction.
26
<PAGE>
If you fail to provide your correct taxpayer identification number or you
have been notified by the IRS that you are subject to backup withholding, the
Fund may withhold 31% of all distributions to you for federal taxes.
Taxes on Transactions
A sale or exchange of Fund shares will be a taxable transaction on which you
will recognize gain or loss.
DESCRIPTION OF COMMON STOCK
The Articles of Incorporation authorize the issuance of up to 250,000,000
shares of Common Stock, $.01 par value. All shares of Common Stock have equal
rights as to voting, dividends and liquidation. All shares of Common Stock
issued and outstanding are fully paid and nonassessable. Shares of Common
Stock have no preemptive, conversion or redemption rights and are freely
transferable. The number of shares of Common Stock outstanding as of April 5,
2000 was 15,971,307. The voting rights of the Common Stock are noncumulative,
which means that the holders of more than 50% of the shares of Common Stock
voting for the election of Directors can elect 100% of those Directors that
are subject to election by the holders of the Common Stock if they choose to
do so, and, in that event, the holders of the remaining shares of Common Stock
voting for the election of Directors will not be able to elect any Directors.
The holders of the Common Stock vote as a single class with the holders of the
Preferred Shares on all matters except as described under "Description of
Preferred Shares--Voting Rights." The rights of the holders of the Common
Stock may not be amended by a vote of less than a majority of the shares of
Common Stock outstanding.
Under the Investment Company Act, the Fund may not pay dividends on or make
other distributions with respect to its Common Stock or purchase any shares of
Common Stock if, at the time of the dividend declaration, distribution or
purchase, as applicable (and after giving effect thereto), asset coverage with
respect to senior securities representing indebtedness would be less than 300%
(or a higher percentage as may in the future be required by law) or asset
coverage with respect to Preferred Shares would be less than 200% (or a higher
percentage as may in the future be required by law). Dividends or other
distributions by the Fund on the Common Stock also will be prohibited at any
time dividends on Preferred Shares are in arrears or the Preferred Shares
Basic Maintenance Amount is not maintained pursuant to the Articles
Supplementary. Subject to the foregoing, to the extent that the Fund's net
investment income for any year exceeds any current or accumulated dividends on
Preferred Shares, the income will be distributed to the holders of the Common
Stock. "Net investment income" includes interest, dividends, short-term
capital gains and other income received or accrued less interest payments with
respect to any then-existing line of credit, the advisory and administration
fees, bank custodian charges, taxes (except capital gains taxes) and other
expenses properly chargeable against income (including transfer taxes,
brokerage or other capital charges), but does not include net capital gains or
distributions designated as a return of capital. Any net capital gains of the
Fund are distributed annually to the holders of the Common Stock, subject to
the prior rights of the holders of Preferred Shares.
Pursuant to the Fund's Dividend Reinvestment Plan (the "Plan"), holders of
Common Stock may elect to receive all dividends and capital gains
distributions in cash paid by check mailed directly to the Common Stock
holders by or under the direction of PFPC, as dividend paying agent. Pursuant
to the Plan, holders of Common Stock not making this election will have all
dividends and distributions automatically reinvested by PFPC, as the Plan
agent, in whole or fractional shares of Common Stock.
Restrictive Covenants
Under the Investment Company Act, the Fund may not pay dividends on or make
other distributions with respect to the Common Stock or purchase any shares of
Common Stock if, at the time of the dividend declaration, distribution or
purchase, as applicable (and after giving effect thereto), asset coverage with
respect to senior securities representing indebtedness would be less than 300%
(or a higher percentage as may in the future be required by law) or asset
coverage with respect to Preferred Shares would be less than 200% (or a higher
percentage as may in the future be required by law). In addition, under the
Investment Company Act, so long as
27
<PAGE>
any senior securities representing indebtedness are outstanding, the Fund may
not (1) pay dividends on the Preferred Shares if, at the time of the dividend
declaration (and after giving effect thereto), asset coverage with respect to
such senior securities representing indebtedness would be less than 200% (or a
higher percentage as may in the future be required by law) or (2) make any
other distributions with respect to the Preferred Shares or purchase the
Preferred Shares if, at the time of the distribution or purchase, as
applicable (and after giving effect thereto), asset coverage with respect to
such senior securities representing indebtedness would be less than 300% (or a
higher percentage as may in the future be required by law). The terms of the
Preferred Shares also prohibit the payment of dividends or other distributions
on or purchases of the Common Stock under certain circumstances. Under the
Code, the Fund must, among other things, distribute at least 90% of its
investment company taxable income each year in order to maintain its
qualification for conduit tax treatment.
The foregoing limitations on dividends, distributions and purchases may
under certain circumstances impair the Fund's ability to maintain such
qualification. See "Taxes."
DETERMINATION OF NET ASSET VALUE
Net asset value of the Common Shares is determined by SSBC no less
frequently than as of the close of business (generally 4:00 p.m. New York
time) on the last Business Day of each week (generally a Friday), by dividing
the value of the net assets of the Fund by the total number of shares of
Common Stock outstanding. See "Determination of Net Asset Value" in the
Statement of Additional Information for further description.
CONVERSION TO OPEN-END FUND
The Fund may be converted to an open-end investment company at any time by
an amendment to the Articles of Incorporation. The Articles of Incorporation
provide that such an amendment must be approved by the affirmative vote of the
holders of a majority of the Fund's outstanding shares of Common Stock, voting
as a separate class, and by the affirmative vote of a majority of the
preferred shares, including the Preferred Shares, voting as a separate class.
Such a vote would also satisfy a separate requirement in the Investment
Company Act that the change be approved by the shareholders. Conversion of the
Fund to an open-end investment company would require the redemption of any
outstanding preferred shares, including the Preferred Shares. The Board of
Directors believes, however, that the closed-end structure is desirable in
light of the Fund's investment objective and policies. Therefore, you should
assume that it is not likely that the Board of Directors would vote to convert
the Fund to an open-end fund.
REPURCHASE OF COMMON SHARES
Shares of closed-end investment companies often trade at a discount to their
net asset values, and the Fund's Common Shares may also trade at a discount to
their net asset value. The market price of the Common Shares will be
determined by such factors as relative demand for and supply of such common
shares in the market, the Fund's net asset value, general market and economic
conditions and other factors beyond the control of the Fund. Although the
holders of the Fund's Common Shares do not have the right to redeem their
Common Shares, the Fund may take action to repurchase Common Shares in the
open market or make tender offers for its Common Shares at their net asset
value. This may have the effect of reducing any market discount from net asset
value.
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
The Fund's securities and cash are held under a custodian agreement by PNC.
The principal business address of PNC is 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103. The Fund's assets are held under bank
custodianship in compliance with the Investment Company Act.
28
<PAGE>
PFPC is located at P.O. Box 9699, Providence, Rhode Island 02940, and
serves, with respect to the Preferred Shares and the Common Stock, as transfer
agent, dividend paying agent and registrar, and, with respect to the Preferred
Shares, as agent to provide notice of redemption and certain voting rights.
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement between
Salomon Smith Barney Inc. (the "Underwriter") and the Fund (the "Underwriting
Agreement") dated the date hereof, the Underwriter has agreed to purchase, and
the Fund has agreed to sell, 2,400 shares of Preferred Shares offered hereby.
The Underwriting Agreement provides that the obligations of the Underwriter
to purchase the shares included in this offering are subject to the approval
of certain legal matters by counsel and to certain other conditions. The
Underwriter is obligated to purchase all of the Preferred Shares offered
hereby if it purchases any of the Preferred Shares. In the Underwriting
Agreement, the Fund has agreed to indemnify the Underwriter against certain
liabilities, including liabilities arising under the Securities Act of 1933,
as amended, or to contribute payments the Underwriter may be required to make
for any of those liabilities, and the Adviser has agreed to provide
indemnification to the Underwriter only to the extent that the Fund does not.
The Fund has been advised by the Underwriter that it proposes initially to
offer some of the Preferred Shares directly to the public at the public
offering price set forth on the cover page of this Prospectus and some of the
shares to selected dealers at the public offering price less a concession not
in excess of $21.875 per share. The underwriting commission the Fund will pay
of $250.00 per share is equal to 1.0% of the initial offering price. After the
initial public offering, the Underwriter may change the public offering price
and the concession. Investors must pay for any Preferred Shares purchased in
the initial public offering on or before April 14, 2000.
The Fund anticipates that the Underwriter may from time to time act as a
broker or dealer in connection with the execution of its portfolio
transactions after it has ceased to be an underwriter. The Fund anticipates
that the Underwriter or one of its affiliates may from time to time act in
auctions as a Broker-Dealer and will receive fees as described under "The
Auction" in this Prospectus and in the Statement of Additional Information.
The underwriter is an active underwriter of, and dealer in, securities and
acts as a market maker in a number of such securities, and therefore can be
expected to engage in portfolio transactions with the Fund.
SSBC and Salomon Smith Barney (the Underwriter) are each wholly owned
indirect subsidiaries of Citigroup Inc.
The principal business address of Salomon Smith Barney Inc. is 388 Greenwich
Street, New York, New York 10013.
LEGAL OPINIONS
The legality of the Preferred Shares offered by this Prospectus will be
passed on by Willkie Farr & Gallagher, New York, New York, which serves as
counsel to the Fund. Certain legal matters will be passed on for the
Underwriter by Simpson Thacher & Bartlett, New York, New York. Willkie Farr &
Gallagher and Simpson Thacher & Bartlett will rely, as to certain matters of
Maryland law, on the opinion of Venable, Baetjer and Howard, LLP, Baltimore,
Maryland.
REPORTS TO SHAREHOLDERS
The Fund sends unaudited semi-annual and audited annual reports to its
shareholders, including a list of investments held.
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<PAGE>
INDEPENDENT AUDITORS
The financial statements of the Fund for the year ended March 31, 1999 and
the selected per share data and ratios set forth under "Financial Highlights"
for each of the fiscal years ended March 31, 1996-1999 have been audited by
KPMG LLP, which is located at 757 Third Avenue, New York, NY 10017, as set
forth in their report incorporated by reference into the Statement of
Additional Information, and are included in reliance upon their authority as
experts in accounting and auditing. KPMG LLP audits and reports on the Fund's
annual financial statements, reviews certain regulatory reports and the Fund's
federal income tax returns, and performs other professional accounting,
auditing, tax and advisory services when engaged to do so by the Fund.
FURTHER INFORMATION
This Prospectus does not contain all of the information included in the
Registration Statement filed with the Securities and Exchange Commission under
the Securities Act of 1933, as amended, and the Investment Company Act with
respect to the Preferred Shares offered by this Prospectus. Further
information concerning the Preferred Shares may be found in the Registration
Statement, which is on file with the Commission. Statements contained in this
Prospectus as to the contents of any contract or other document referred to
are not necessarily complete and, in each instance, reference is made to the
copy of the contract or other document filed as an exhibit to the Registration
Statement, of which this Prospectus forms a part, each such statement being
qualified in all respects by such reference.
The Fund is subject to the information requirements of the Securities
Exchange Act of 1934, and the Investment Company Act, and in accordance
therewith files reports and other information with the Commission. Such
reports, proxy and public statements and other information can be inspected
and copied at the public reference facilities maintained by the Commission at
450 Fifth Street, N.W., Washington, DC 20549. Call 1-800-SEC-0330 for
information about the public reference facilities. Copies of such material can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, DC 20549 at prescribed rates. Such reports and other
information concerning the Fund may also be inspected at the offices of the
New York Stock Exchange. The Commission maintains a Web site
(http:\\www.sec.gov) that contains the Statement of Additional Information,
material incorporated by reference into this Prospectus and the Statement of
Additional Information, and reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. In addition, reports, proxy and information statements and other
information concerning the Fund can be inspected at the offices of the New
York Stock Exchange, 20 Broad Street, New York, New York 10005.
The registration statement may be inspected without a charge at the
Commission's office in Washington, D.C. and copies of all or any part thereof
may be obtained from such office after payment of the fees prescribed by the
Commission.
FINANCIAL STATEMENTS
The Fund's Financial Statements for the fiscal year ended March 31, 1999 and
the Fund's Semi-Annual Report for the fiscal period ended September 30, 1999
(unaudited) is incorporated by reference into this Prospectus with respect to
all information other than the information set forth in the Letter to
Shareholders included therein.
30
<PAGE>
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
Page
----
<S> <C>
General Information........................................................ 1
Investment Objective And Policies.......................................... 1
S&P and Moody's Guidelines................................................. 4
Investment Restrictions.................................................... 16
Certain Trading Strategies of the Fund..................................... 18
Description of Preferred Shares............................................ 25
Management of the Fund..................................................... 45
Principal Stockholders..................................................... 48
Investment Adviser......................................................... 49
Determination of Net Asset Value........................................... 51
Share Repurchases.......................................................... 52
Taxes...................................................................... 53
Additional Information Concerning the Auction for Preferred Shares......... 57
Custodian, Transfer Agent, Dividend Paying Agent and Registrar............. 62
Experts.................................................................... 62
Additional Information..................................................... 63
Appendix A--Portfolio of Investments....................................... A-1
Appendix B--Ratings of Investments......................................... B-1
Appendix C--Glossary....................................................... C-1
</TABLE>
31
<PAGE>
No dealer, salesman or other person has been authorized to give any
information or to make any representation not contained in this Prospectus in
connection with the offer contained in this Prospectus, and, if given or made,
any information or representation must not be relied upon as having been
authorized by the Fund, the Fund's investment adviser or by the underwriter of
the offering described in this Prospectus. This Prospectus does not constitute
an offer to sell, or a solicitation of an offer to buy, any securities in any
jurisdiction to any person to whom it is unlawful to make an offer or
solicitation in such jurisdiction. Neither the delivery of this Prospectus nor
any sale made pursuant to this Prospectus, under any circumstances, is
intended to create an implication that there has been no change in the affairs
of the Fund since the date of this Prospectus or that the information in this
Prospectus is correct as of any time subsequent to its date. However, if any
material change occurs while this Prospectus is required by law to be
delivered, this Prospectus will be supplemented or amended accordingly.
Until May 6, 2000, (25 days after the effective date of this Prospectus), all
dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
32
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
$60,000,000
Zenix Income Fund Inc.
2,400 Auction Rate Cumulative Preferred Shares
------------
PROSPECTUS
April 12, 2000
------------
Salomon Smith Barney
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
2,400 Shares
ZENIX INCOME FUND INC.
Auction Rate Cumulative Preferred Shares
Salomon Smith Barney
STATEMENT OF ADDITIONAL INFORMATION DATED APRIL 12, 2000
ZENIX INCOME FUND INC.
This Statement of Additional Information relating to this offering
does not constitute a prospectus, but should be read in conjunction with the
Prospectus relating thereto dated, 2000 (the "Prospectus"). This Statement of
Additional Information does not include all information that a prospective
investor should consider before purchasing Preferred Shares in this offering,
and investors should obtain and read the Prospectus prior to purchasing such
shares. A copy of the Prospectus may be obtained without charge by calling 1-
800-451-2010. Capitalized terms used but not defined in this Statement of
Additional Information have the meanings assigned to them in the Prospectus or
the Glossary appended as Exhibit C hereto.
<PAGE>
TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION
Page
----
GENERAL INFORMATION ....................................................... 1
INVESTMENT OBJECTIVE AND POLICIES ......................................... 1
S&P AND MOODY'S GUIDELINES ................................................ 4
INVESTMENT RESTRICTIONS ................................................... 16
CERTAIN TRADING STRATEGIES OF THE FUND .................................... 18
DESCRIPTION OF PREFERRED SHARES .......................................... 25
MANAGEMENT OF THE FUND .................................................... 45
PRINCIPAL STOCKHOLDERS .................................................... 48
INVESTMENT ADVISER ........................................................ 49
DETERMINATION OF NET ASSET VALUE .......................................... 51
SHARE REPURCHASES ......................................................... 52
TAXES ..................................................................... 53
ADDITIONAL INFORMATION CONCERNING THE AUCTION FOR PREFERRED SHARES......... 57
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR............. 62
EXPERTS ................................................................... 62
ADDITIONAL INFORMATION .................................................... 63
Appendix A -- Portfolio of Investments .................................... A-1
Appendix B -- Ratings of Investments ...................................... B-1
Appendix C -- Glossary .................................................... C-1
(i)
<PAGE>
GENERAL INFORMATION
The Fund is a diversified, closed-end management investment company.
The Fund changed its name from "Zenith Income Fund Inc." to "Zenix Income Fund
Inc." on October 19, 1989.
INVESTMENT OBJECTIVE AND POLICIES
Investment Objective
The investment objective of the Fund is to seek high current income by
investing in a portfolio of fixed-income securities. The Fund's current income,
if any, will be distributed to holders of Common Stock only after satisfaction
of the obligation to pay dividends on the Preferred Shares. No assurance can be
given that the Fund's investment objective will be achieved.
Fundamental policies of the Fund may not be changed without the
affirmative vote of the holders of a majority (as defined in the Investment
Company Act) of the outstanding shares of Common Stock and a majority of the
outstanding Preferred Shares, voting as separate classes. In view of this
requirement, no change in the Fund's investment objective could occur without
the affirmative vote of both classes of stock. The Portfolio of Investments of
the Fund as of March 31, 2000 is set forth in Appendix A to this Statement of
Additional Information.
Portfolio Investments
Under normal market conditions, the Fund invests at least 65% of its
total assets in high yield fixed-income securities. These securities are
commonly known as "junk bonds" because they are rated in the lower categories by
nationally recognized rating agencies. "High yield" fixed-income securities, the
generic name for corporate bonds rated between BB and C by S&P and between Ba
and C by Moody's, are frequently issued by corporations in the growth stages of
their development, as a result of corporate reorganizations or as part of
corporate takeovers. Risks and special considerations associated with investing
in high yield fixed-income securities are described under "Risk Factors and
Special Considerations" in the Prospectus.
Under current S&P and Moody's guidelines relating to the receipt of
ratings on the Preferred Shares, certain types of securities in which the Fund
may otherwise invest, and certain strategies in which the Fund may otherwise
engage, pursuant to the investment policies and strategies stated below, are not
eligible for inclusion in the calculation of the Discounted Value of the Fund's
portfolio. Such instruments consist of, among others: securities that are not
readily marketable; private placements (other than Rule 144A Securities);
1
<PAGE>
and securities not within S&P's diversification guidelines. Accordingly,
although the Fund reserves the right to invest in such securities and to engage
in such strategies to the extent described in the Prospectus and this Statement
of Additional Information, it is anticipated that they will not ordinarily
constitute in total more than 20% of the Fund's total assets. See "S&P and
Moody's Guidelines" and "Description of Preferred Shares -- Asset Maintenance."
The composition of the Fund's portfolio as of March 31, 2000 by rating category
is set out in the Prospectus under "Portfolio Composition." Further information
concerning the rating categories of S&P and Moody's is provided in Appendix B to
this Statement of Additional Information.
Fixed-income securities acquired by the Fund consist of preferred
stocks (limited to 20% of the Fund's total assets) and all types of debt
obligations having varying terms with respect to security or credit support,
subordination, purchase price, interest payments and maturity. These obligations
consist of bonds, debentures, notes, mortgage or other asset-backed instruments
(that is, instruments secured by receivables and other forms of collateral),
equipment lease certificates, equipment trust certificates, conditional sales
contracts, commercial paper and obligations issued or guaranteed by the United
States Government or any of its political subdivisions, agencies or
instrumentalities ("Government Securities") (including obligations, such as
repurchase agreements, secured by such instruments).
Most debt securities in which the Fund invests bear interest at fixed
rates, although the Fund reserves the right to invest without limitation in
fixed-income securities that have variable rates of interest or involve equity
features, such as contingent interests or participations based on revenues,
sales or profits (that is, interest or other payments, often in addition to a
fixed rate of return, that are based on the borrower's attainment of specified
levels of revenues, sales or profits and thus enable the holder of the security
to share in the potential success of the venture). The Fund also has the right
to acquire common stock as part of a unit in connection with the purchase of
debt securities consistent with the Fund's investment policies.
The Fund may invest up to 20% of its total assets in illiquid
securities, including securities that are not readily marketable, securities
restricted as to resales, repurchase agreements maturing in more than seven
days, interest-only and principal-only mortgage backed securities and certain
options traded in the over-the-counter market and the securities to which those
options relate. No security that is not readily marketable will be acquired by
the Fund unless (1) SSBC believes the security to be of quality comparable to
publicly traded securities and (2) the security carries rights to be registered
2
<PAGE>
under the Federal securities laws (which rights typically enable the holder of
the related security to cause the issuer to register the security for public
sale under the Federal securities laws or to include the security in a
registration initiated by the issuer or another security holder, thereby
providing additional liquidity). Securities that are not readily marketable may
offer higher yields than comparable publicly traded securities; the Fund may not
be able to sell these securities, however, when SSBC considers it desirable to
do so or, to the extent they are sold privately, may have to sell them at less
than the price of otherwise comparable securities.
The Fund may invest up to 20% of its total assets in non-rated
securities deemed by SSBC to be of quality comparable to rated securities,
whether rated investment grade or below, that the Fund may acquire.
The Fund is also permitted to invest up to 20% of its total assets in
zero coupon securities, which are securities that pay no cash income to their
holders until they mature and are issued at substantial discounts from their
value at maturity. When held to maturity, their entire return, which consists of
the amortization of discount, comes from the difference between their purchase
price and their maturity value. Because interest on zero coupon securities is
not paid on a current basis, the values of securities of this type are subject
to greater fluctuations than are the values of securities that distribute income
regularly and may be more speculative than such securities. Accordingly, the
values of these securities may be highly volatile as interest rates rise or
fall. The Fund's investments in zero coupon securities will result in special
tax consequences; although zero coupon securities do not make interest payments,
a portion of the difference between a zero coupon security's maturity value and
its purchase price is taxable income to the Fund each year. See "Taxes" below
and in the Prospectus.
Notwithstanding the investment policies stated above, when SSBC
determines that market conditions warrant a temporary "defensive" investment
strategy, the Fund may invest without limitation in money market instruments,
including commercial paper of domestic and foreign corporations, certificates of
deposit of foreign or domestic banks, bankers' acceptances and other obligations
of banks, repurchase agreements and short-term Government Securities. The yield
on these securities, which may be purchased consistent with S&P and Moody's
guidelines, will tend to be lower than the yield on other securities to be
purchased by the Fund.
The Fund may also invest in securities rated higher than BB by S&P, Ba
by Moody's, or non-rated securities of comparable quality, when SSBC determines
that the difference in yields between quality classifications is relatively
narrow in light of then current market conditions or for temporary
3
<PAGE>
defensive purposes when SSBC anticipates adverse market conditions. Investments
in higher quality issues may serve to lessen a decline in net asset value but
may also affect the amount of current income produced by the Fund, since the
yields from such issues are usually less than those from lower rated issues. To
the extent the Fund invests in money market investments, it may not be pursuing
its investment objective.
The achievement of the Fund's objective depends upon SSBC's analytical
and portfolio management skills. No assurance can be given that this objective
will be achieved. All nonfundamental investment policies of the Fund, including
those described below under "S&P and Moody's Guidelines," may be changed by the
Board of Directors of the Fund without shareholder approval.
S&P AND MOODY'S GUIDELINES
The composition of the Fund's portfolio reflects guidelines (referred
to herein as the "Rating Agency Guidelines") established by S&P and Moody's in
connection with the Fund's receipt of a rating of AAA and aaa from S&P and
Moody's, respectively, for the Preferred Shares. These Rating Agency Guidelines
relate, among other things, to industry and credit quality characteristics of
issuers and specify various discount factors for debt securities (with the level
of discount greater as the rating of a security becomes lower). Under the Rating
Agency Guidelines, certain types of securities in which the Fund may otherwise
invest consistent with its investment strategy are not eligible for inclusion in
the calculation of the Discounted Value of the Fund's portfolio. Such
instruments include, for example, private placements (other than Rule 144A
Securities), non-U.S. securities and other securities not within the investment
guidelines. Accordingly, although the Fund reserves the right to invest in such
securities to the extent set forth herein, they have not and it is anticipated
that they will not constitute a significant portion of the Fund's
portfolio.
The Rating Agency Guidelines require that the Fund maintain assets
having an aggregate Discounted Value, determined on the basis of the Guidelines,
greater than the aggregate liquidation preference of the Preferred Shares plus
specified liabilities, payment obligations and other amounts, as of periodic
valuation dates. The Rating Agency Guidelines also require the Fund to maintain
asset coverage for the Preferred Shares on a non-discounted basis of at least
200% as of the end of each month, and the Investment Company Act requires such
asset coverage as a condition to paying dividends or other distributions on
Common Stock. See "Description of Preferred Shares -- Asset Maintenance." The
effect of compliance with the
4
<PAGE>
Rating Agency Guidelines may be to cause the Fund to invest in higher quality
assets and/or to maintain relatively substantial balances of highly liquid
assets or to restrict the Fund's ability to make certain investments that would
otherwise be deemed potentially desirable by the Investment Adviser, including
private placements of other than Rule 144A securities (as defined herein), and
to limit or delay the Fund's ability to reinvest cash in a rising "high-yield"
market. The Rating Agency Guidelines are subject to change from time to time
with the consent of the relevant rating agency and would not apply if the Fund
in the future elected not to use investment leverage consisting of senior
securities rated by one or more rating agencies, although other similar
arrangements might apply with respect to other senior securities that the Fund
may issue.
"High-yield" bonds, the generic name for corporate bonds rated between
BB/Ba and C/C by S&P and Moody's, respectively, are frequently issued by
corporations in the growth stage of their development. Bonds rated BB/Ba, B/B,
CCC/Caa, CC/Ca and C/C are regarded by the rating agencies, on balance, as
predominantly speculative with respect to capacity to pay interest and repay
principal in accordance with the terms of the obligations. Such securities are
also generally considered to be subject to greater risk than securities with
higher ratings with regard to a deterioration of general economic conditions.
"High-yield" securities held by the Fund may include securities received as a
result of a corporate reorganization or issued as part of a corporate takeover.
Securities issued to finance corporate restructurings may have special credit
risks due to the highly leveraged conditions of the issuers, and such securities
are usually subordinate to other securities issued by the issuer. In addition,
such issuers may lose experienced management as a result of the restructurings.
Finally, the market price of such securities may be more volatile to the extent
that expected benefits from restructuring do not materialize.
The Fund intends to maintain, at specified times, a Discounted Value
for its portfolio at least equal to the amount specified by each rating agency
(the "Preferred Shares Basic Maintenance Amount"), the determination of which is
as set forth under "Description of Preferred Shares -- Asset Maintenance." S&P
and Moody's have each established separate guidelines for determining Discounted
Value. To the extent any particular portfolio holding does not satisfy the
applicable rating agency's guidelines, all or a portion of such holding's value
will not be included in the calculation of Discounted Value (as defined by such
rating agency).
The Rating Agency Guidelines do not impose any limitations on the
percentage of Fund assets that may be invested in holdings not eligible for
inclusion in the calculation of the Discounted Value of the Fund's portfolio.
The amount of such assets included in the portfolio at any time may vary
depending upon the rating, diversification and other characteristics of the
5
<PAGE>
assets included in the portfolio which are eligible for inclusion in the
Discounted Value of the portfolio under the Rating Agency Guidelines.
As described by Moody's, an issue of preferred stock which is rated
aaa is considered to be top-quality preferred stock with good asset protection
and the least risk of dividend impairment within the universe of preferred
stocks. As described by S&P, a preferred stock rating of AAA indicates strong
asset protection, conservative balance sheet ratios and positive indications of
continued protection of preferred dividend requirements. An S&P or Moody's
credit rating of preferred stock does not address the likelihood that a resale
mechanism (e.g., the Auction) will be successful.
Ratings are not recommendations to purchase, hold or sell Preferred
Shares, inasmuch as the rating does not comment as to market price or
suitability for a particular investor. The rating is based on current
information furnished to S&P and Moody's by the Fund and obtained by S&P and
Moody's from other sources. The rating may be changed, suspended or withdrawn as
a result of changes in, or unavailability of, such information. The Preferred
Shares will be subject to mandatory redemption in the event that the AAA/aaa
Credit Rating is not available for the Preferred Shares and the Fund is unable
to obtain the AAA/aaa Credit Rating for the Preferred Shares from a substitute
rating agency or agencies within the time specified herein.
In connection with the S&P and Moody's guidelines, the Fund is also
required to meet specified minimum liquidity levels. See "Description of
Preferred Shares -- Minimum Liquidity Level.'
S&P Guidelines
S&P issues ratings for various securities reflecting the perceived
creditworthiness of such securities. The guidelines described below have been
developed by S&P in connection with issuances of asset-backed and similar
securities, including debt obligations and money market preferred stocks,
generally on a case-by-case basis through discussions with the issuers of these
securities. The guidelines are designed to ensure that assets underlying
outstanding debt or preferred stock will be sufficiently varied and will be of
sufficient quality and amount to justify investment grade ratings. The
guidelines do not have the force of law, but have been implemented by the Fund
in order to receive the above-described rating for the Preferred Shares, which
ratings are generally relied upon by institutional investors in purchasing such
securities. In the context of a closed-end investment company such as the Fund,
therefore, the guidelines provide a set of tests for portfolio composition and
asset coverage that supplement the applicable requirements under the Investment
Company Act (and may be more or less restrictive), but are the sole determinants
in the rating of a security. Consequently, in order to maintain (1) the ratings
described
6
<PAGE>
above from S&P with respect to the Preferred Shares and (2) compliance with the
Investment Company Act, the Fund, with respect to each of its investments,
adheres to the requirements of the S&P guidelines or the Investment Company Act,
whichever is more restrictive. Ratings issued by S&P do not eliminate or
mitigate the risks of investing in the Fund's securities.
Under the S&P guidelines, the Fund is required to maintain specified
discounted asset values for its portfolio representing the Preferred Shares
Basic Maintenance Amount (as defined below). To the extent any particular
portfolio holding does not meet the applicable guidelines, it is not included
for purposes of calculating the discounted value of the Fund's portfolio, and,
among the requirements, the amount of such assets included in the portfolio at
any time, if any, may vary depending upon the credit quality (and related
discounted value) of the Fund's eligible assets at such time.
The Preferred Shares Basic Maintenance Amount includes the sum of (1)
$25,000 times the number of Preferred Shares then outstanding and (2) certain
accrued and projected payment obligations of the Fund. Upon any failure to
maintain the required discounted value, the Fund would seek to alter the
composition of its portfolio to reestablish required asset coverage within the
specified eight Business Day cure period, thereby incurring additional
transaction costs and possible losses and/or gains on dispositions of portfolio
securities. To the extent any such failure is not cured in a timely manner, the
holders of the Preferred Shares will acquire certain rights. See "Description of
Preferred Shares -- Asset Maintenance." "Business Day," as used in the
Prospectus and this Statement of Additional Information, means each Monday,
Tuesday, Wednesday, Thursday and Friday that is a day on which the New York
Stock Exchange is open for trading and that is not a day on which banks in New
York City are authorized or required by law or executive order to close.
Under S&P guidelines, corporate debt obligations are not included in
the calculation of the discounted value of the Fund's portfolio unless they,
among other requirements (1) are not subject to extended settlement (2) are
rated CCC-(senior) or higher by S&P, (3) provide for the periodic payment of
interest thereon in cash, (4) except for commercial paper, have registered under
the Securities Act of 1933, as amended (the "Securities Act") or are eligible
for resale pursuant to Rule 144A and (5) have not had notice given in respect
thereof that any such corporate debt obligation is the subject of an offer by
the issuer thereof of exchange or tender for cash, securities or any other type
of consideration (except that corporate debt obligations in an amount not
exceeding 10% of the value of the Fund's portfolio at any time will be subject
to the provisions of this clause (5)). In
7
<PAGE>
addition, portfolio holdings must be within the following requirements in order
to be included in such calculation:
<TABLE>
<CAPTION>
Maximum Single Minimum Issue Size
Rating Issuer(R) (%) (1,2) Maximum Single Industry (%)(2,3) ($ in millions)
------ ------------------- -------------------------------- ---------------
Corporate Bonds Convertible Bonds (5)
--------------- --------------------
<S> <C> <C> <C> <C>
AAA 10% 50% 50% $ 100
AA 10 33 33.3 100
A 10 33 33.3 100
BBB 5 20 25 100
BB 4 12 25 50 (4)
B 3 8 25 50 (4)
B- 3 8 25 50 (4)
CCC+ 3 8 25 50 (4)
CCC 3 8 25 50 (4)
CCC- 3 8 N.A. 50 (4)
</TABLE>
See accompanying notes.
_______________
(1) Companies subject to common ownership of 25% or more are considered as one
name.
(2) Percentages represent a portion of the aggregate Market Value of corporate
securities.
(3) Industries are determined according to S&P Industry Classifications, as
defined herein.
(4) Corporate Collateral bonds rated below BBB- by S&P and from issues ranging
from $50 million to $100 million are limited to 20% of the collateral pool.
Convertible bonds rated below BBB by S&P must have an issue size of at
least $100 million.
(5) For convertible bonds which are rated less than BBB by S&P, the minimum
capitalization is $100 million.
See the Articles Supplementary for further information on and description of the
S&P Guidelines and S&P Eligible Assets.
Moody's Guidelines
8
<PAGE>
For purposes of calculating the Discounted Value of the Fund's
portfolio under current Moody's guidelines, the fair market value of portfolio
securities eligible for consideration under such guidelines ("Moody's Eligible
Assets") must be discounted by certain discount factors set forth below
("Moody's Discount Factors"). The Discounted Value of a portfolio security under
Moody's guidelines is the Market Value thereof, determined as specified by
Moody's, divided by the Moody's Discount Factor. The Moody's Discount Factor
with respect to securities other than those described below will be the
percentage provided in writing by Moody's.
Corporate Debt Securities. Under current Moody's guidelines, portfolio
securities that are corporate debt securities not be included in the calculation
of the Discounted Value of the Fund's portfolio if (a) such securities are rated
Caa or higher by Moody's; (b) such securities provide for the periodic payment
of interest in cash in U.S. dollars; (c) for securities which provide for
conversion or exchange into equity capital at some time over their lives, the
issuer must be rated at least B3 by Moody's and the discount factor will be
250%; (d) for debt securities rated Ba1 and below, no more than 10% of the
original amount of such issue may constitute Moody's Eligible Assets; (e)
such securities have been registered under the Securities Act of 1933, as
amended, or are restricted as to resale under federal securities laws but are
eligible for resale pursuant to Rule 144A under the Securities Act as determined
by the Fund's adviser acting subject to the Supervision of the Fund's Board of
Directors and (f) such securities are not subject to extended settlement.
The Discounted Value of any Moody's Eligible Asset that is a corporate
debt security is the percentage determined by reference to the rating on such
asset (which percentage is based upon the Exposure Period) with reference to the
remaining term to maturity of such assets, in accordance with the table set
forth below:
9
<PAGE>
Moody's Discount Factors
Corporate Debt Securities+
<TABLE>
<CAPTION>
Maturity of Collateral Rating Category
Aaa Aa A Baa Ba B* Caa Unrated*
- ------------------ ----- ----- ----- ----- ----- ----- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year-15 Years 150% 155% 160% 165% 170% 180% 205% 260%
Above 15 Years-20 Years 161 169 177 184 200 215 260 260%
Above 20 Years 162 170 178 185 201 216 260 260%
</TABLE>
- -------------
* If a security is unrated by Moody's but is rated by S&P, a rating two numeric
ratings below the S&P rating will be used e.g., where the S&P rating is AAA,
a Moody's rating of Aa2 will be used; where the S&P rating is AA+, a Moody's
rating of Aa3 will be used. If a security is unrated by either S&P or
Moody's, the Fund will use the percentage set forth under "Unrated" in this
table.
10
<PAGE>
The Moody's guidelines impose minimum issue size, issuer and industry
diversification and other requirements for purposes of determining Moody's
Eligible Assets. Specifically, portfolio holdings as described below must be
within the following diversification and issue size requirements in order to
constitute Moody's Eligible Assets includable within the calculation of
Discounted Value:
<TABLE>
<CAPTION>
Asset Single Issuer Single Industry Minimum Issue Size ($ in
Ratings(1) (%)(2,3) (%)(3,4) millions)(6)
----------------- ------------- --------------- ------------------------
<S> <C> <C> <C>
aaa, Aaa 100 100 100
aa, Aa 20 60 100
a, A, 10 40 100
baa, Baa 6 20 100
Ba 4 12 50(5)
B1-B2 3 8 50(5)
B3 3 8 50(5)
Caa 2 7 50(5)
</TABLE>
See accompanying notes.
- ------------------------
(1) Refers to the preferred stock and senior debt rating of collateral.
(2) Companies subject to common ownership of 25% or more are considered as one
name.
(3) Percentages represent a portion of the aggregate Market Value of corporate
securities.
(4) Industries are determined according to industry classifications specified
by Moody's ("Moody's Industry Classification"). See the Articles
Supplementary.
(5) Collateral bonds from issues ranging from $50 million to $100 million are
limited to 20% of the collateral pool.
(6) Except for preferred stock, which has a minimum issue size of $50 million.
11
<PAGE>
The effect of the foregoing discount factors may be to cause the Fund
to invest in higher rated securities than it would if it were not required to
maintain specified asset coverage on a discounted basis. This may have the
effect of reducing the yield on the portfolio. See "Risk Factors and Special
Considerations" in the Prospectus.
Preferred Stock. Under current Moody's guidelines, portfolio
securities that are preferred stocks will be included in the calculation of
Discounted Value of the Fund's portfolio if (a) dividends on such preferred
stock are cumulative, (b) such securities provide for the periodic payment of
dividends thereon in cash in U.S. dollars and do not provide for conversion or
exchange into, or have warrants attached entitling the holder to receive, equity
capital at any time over the respective lives of such securities, (c) the issuer
of such a preferred stock has common stock listed on either the New York Stock
Exchange or the American Stock Exchange, (d) the issuer of such a preferred
stock has a senior debt rating from Moody's of Baa1 or higher or a preferred
stock rating from Moody's of "baa3" or higher and (e) such preferred stock has
paid consistent cash dividends in U.S. dollars over the last three years or has
a minimum rating of al (if the issuer of such preferred stock has other
preferred issues outstanding that have been paying dividends consistently for
the last three years, then a preferred stock without such a dividend history
would also be eligible). In addition, the preferred stocks must have the
following diversification requirements: (x) the preferred stock issue must be
greater than $50 million and (y) the minimum holding by the Fund of each issue
of preferred stock is $500,000 and the maximum holding of preferred stock of
each issue is $5 million. In addition, preferred stocks issued by transportation
companies will not be considered as Moody's Eligible Assets.
The Moody's Discount Factors for Moody's Eligible Assets that are
preferred stock are (a) 152% for utility preferred stocks, (b) 197% for
industrial/financial preferred stocks and (c) 350% for auction rate preferred
stocks.
Other Moody's Eligible Assets. In addition to corporate debt
securities and preferred stocks which satisfy the above requirements, Moody's
Eligible Assets also include the following:
(i) cash (including, for this purpose, interest and dividends due on
assets rated (A) Baa3 or higher by Moody's if the payment date is within
five Business Days of the date on which the value of the portfolio is being
determined for purposes of determining compliance with Moody's or S&P's
12
<PAGE>
investment guidelines (a "Valuation Date"), (B) A2 or higher if the payment
date is within thirty days of the Valuation Date, and (C) A1 or higher if
the payment date is within the Exposure Period and receivables for Moody's
Eligible Assets sold if the receivable is due within five Business Days of
the Valuation Date, and if the trades which generated such receivables are
(A) settled through clearing house firms with respect to which the Fund has
received prior written authorization from Moody's or (B)(1) with
counterparties having a Moody's long-term debt rating of at least Baa3 or
(2) with counterparties having a Moody's short-term money market instrument
rating of at least P-1;
(ii) short-term money market instruments (as defined by Moody's), so
long as (A) such securities are rated at least P-1, (B) in the case of
demand deposits, time deposits and overnight funds, the supporting entity
is rated at least A2, or (C) in all other cases, the supporting entity (1)
is rated A2 and the security matures within one month, (2) is rated A1 and
the security matures within three months, or (3) is rated at least Aa3 and
the security matures within six months; provided, however, that for
purposes of this definition, such instruments (other than commercial paper
rated by S&P and not rated by Moody's) need not meet any otherwise
applicable S&P rating criteria; and
(iii) U.S. Treasury Securities and Treasury Strips (as defined by
Moody's).
A Moody's Discount Factor of 100% will be applied to cash. The Moody's
Discount Factor applied to Moody's Eligible Assets that are short term money
instruments (as defined by Moody's) will be (a) 100%, so long as portfolio
securities mature or have a demand feature at par exercisable within 49 days of
the relevant valuation date (the "Exposure Period"), (b) 115%, so long as such
portfolio securities mature or have a demand feature at par not exercisable
within the Exposure Period, and (c) 125%, if such securities are not rated by
Moody's, so long as such portfolio securities are rated at least A-1+/AA or SP-
1+/AA by S&P and mature or have a demand feature at par exercisable within the
Exposure Period.
13
<PAGE>
The Moody's Discount Factors for Moody's Eligible Assets that are U.S.
Treasury Securities and U.S. Treasury Strips are as follows:
U.S. Treasury Securities:
<TABLE>
<CAPTION>
Discount
Remaining Term to Maturity Factor
- -------------------------- ------
<S> <C>
1 year or less................................................................................. 107%
2 years or less (but longer than 1 year)....................................................... 113
3 years or less (but longer than 2 years)...................................................... 118
4 years or less (but longer than 3 years)...................................................... 123
5 years or less (but longer than 4 years)...................................................... 128
7 years or less (but longer than 5 years)...................................................... 135
10 years or less (but longer than 7 years)..................................................... 141
15 years or less (but longer than 10 years).................................................... 146
20 years or less (but longer than 15 years).................................................... 154
30 years or less (but longer than 20 years).................................................... 154
</TABLE>
U.S. Treasury Strips:
<TABLE>
<CAPTION>
Discount
Remaining Term to Maturity Factor
- -------------------------- ------
<S> <C>
1 year or less................................................................................. 107%
2 years or less (but longer than 1 year)....................................................... 114
3 years or less (but longer than 2 years)...................................................... 120
4 years or less (but longer than 3 years)...................................................... 127
5 years or less (but longer than 4 years)...................................................... 133
7 years or less (but longer than 5 years)...................................................... 145
10 years or less (but longer than 7 years)..................................................... 159
15 years or less (but longer than 10 years).................................................... 184
20 years or less (but longer than 15 years).................................................... 211
30 years or less (but longer than 20 years).................................................... 236
</TABLE>
See the Articles Supplementary of the Fund for further detail on the
above Moody's Rating Agency Guidelines and for a description of Moody's Eligible
Assets.
The foregoing Rating Agency Guidelines are subject to change from time
to time. The Fund may, but it is not required to, adopt any such change.
Nationally recognized rating agencies other than S&P and Moody's may also from
time to time rate the Preferred Shares; any nationally recognized rating agency
providing a rating for the Preferred Shares may, at any time, change or withdraw
any such rating.
For so long as any of the Preferred Shares are Outstanding and either
S&P, Moody's or any Other Rating Agency is rating the Preferred Shares, the Fund
will not, unless it has received written confirmation from S&P, Moody's or any
Other Rating Agency as applicable, that any such action would not impair the
respective rating then assigned by S&P, Moody's or
14
<PAGE>
such Other Rating Agency to the Preferred Shares, engage in any one or more of
the following transactions: (i) purchase or sell futures contracts or options
thereon with respect to portfolio securities or write unsecured put or uncovered
call options on portfolio securities, engage in options transactions involving
cross-hedging, or enter into any swap transaction; or (ii) borrow money, except
that the Fund may, without the written confirmation described above, borrow
money for the purpose of clearing securities transactions, provided that such
borrowings shall under any circumstances be limited to the lesser of $10 million
and an amount equal to 10% of the Market Value of the Fund's assets at the time
of such borrowings and the Preferred Shares Basic Maintenance Amount would
continue to be satisfied after giving effect to such borrowing and if the
borrowing matures in not more than 60 days and shall not be extended or renewed;
or (iii) except in connection with a refinancing of the Preferred Shares, issue
any class or series of stock ranking prior to or on a parity with the Preferred
Shares with respect to the payment of dividends or the distribution of assets
upon dissolution, liquidation or winding up of the Fund, or reissue any
Preferred Shares previously purchased or redeemed by the Fund; or (iv) engage in
any short sales of securities; or (v) lend portfolio securities; or (vi) engage
in any reverse repurchase agreements; or (vii) merge or consolidate into or with
any other fund. For so long as any shares of the Preferred Shares are
outstanding and S&P is then rating such shares, the Fund will not, unless it has
received written confirmation from S&P that such action would not impair the
rating then assigned to the Preferred Shares by S&P, change the pricing service
to a service other than Muller's Data Corporation or any other S&P approved
pricing service. For purposes of valuation of Moody's Eligible Assets: (A) if
the Fund writes a call option, the underlying asset will be valued as follows:
(1) if the option is exchange-traded and may be offset readily or if the option
expires before the earliest possible redemption of the Preferred Shares, at the
lower of the Discounted Value of the underlying security of the option and the
exercise price of the option or (2) otherwise, it has no value; (B) if the Fund
writes a put option, the underlying asset will be valued as follows: the lesser
of (1) exercise price and (2) the Discounted Value of the underlying security;
and (C) call or put option contracts which the Fund buys have no value. For so
long as Preferred Shares are rated by Moody's: (A) the Fund will not engage in
options transactions for leveraging or speculative purposes; (B) the Fund will
not write or sell any anticipatory contracts pursuant to which the Fund hedges
the anticipated purchase of an asset prior to completion of such purchase; (C)
the Fund will not enter into an option transaction with respect to portfolio
securities unless, after giving effect thereto, the Fund would continue to have
Eligible Assets with an aggregate Discounted Value equal to or greater than the
Preferred Shares Basic Maintenance Amount; (D) the Fund will not enter into an
option transaction with respect to portfolio securities unless after giving
effect to such transaction the Fund would continue to be in compliance with the
provisions relating to the Preferred Shares Basic Maintenance Amount; (E) for
purposes of the Preferred Shares Basic Maintenance Amount assets in margin
accounts are not Eligible Assets; (F) the Fund shall write only exchange-traded
options on exchanges approved by Moody's (if Moody's is then rating the
Preferred Shares); (G) where delivery may be made to the Fund with any of a
class of securities, the Fund shall assume for purposes of the Preferred Shares
Basic Maintenance Amount that it takes delivery of that security which yields it
the least value; (H) the Fund will not engage in forward contracts; and (I)
there shall be a
15
<PAGE>
quarterly audit made of the Fund's options transactions by the Fund's
independent accountants to confirm that the Fund is in compliance with these
standards.
For so long as any Preferred Shares are rated by S&P, the Fund will not
purchase or sell futures contracts, write, purchase or sell options on futures
contracts or write put options (except covered put options) or call options
(except covered call options) on portfolio securities unless it receives written
confirmation from S&P that engaging in such transactions will not impair the
ratings then assigned to the Preferred Shares by S&P, except that the Fund may
purchase or sell futures contracts based on the Bond Buyer Municipal Bond Index
(the "Municipal Index") or United States Treasury Bonds or Notes ("Treasury
Bonds") and write, purchase or sell put and call options on such contracts
(collectively, "S&P Hedging Transactions"), subject to the following
limitations: 1) the Fund will not engage in any S&P Hedging Transaction based on
the Municipal Index (other than transactions which terminate a futures contract
or option held by the Fund by the Fund's taking an opposite position thereto
("Closing Transactions")), which would cause the Fund at the time of such
transaction to own or have sold the least of (A) more than 1,000 outstanding
futures contracts based on the Municipal Index, (B) outstanding futures
contracts based on the Municipal Index exceeding in number 25% of the quotient
of the Market Value of the Fund's total assets divided by $1,000 or (C)
outstanding futures contracts based on the Municipal Index exceeding in number
10% of the average number of daily traded futures contracts based on the
Municipal Index in the 30 days preceding the time of effecting such transaction
as reported by The Wall Street Journal; (2) the Fund will not engage in any S&P
Hedging Transaction based on Treasury Bonds (other than Closing Transactions)
which would cause the Fund at the time of such transaction to own or have sold
the lesser of (A) outstanding futures contracts based on Treasury Bonds and on
the Municipal Index exceeding in number 25% of the quotient of the Market Value
of the Fund's total assets divided by $100,000 ($200,000 in the case of the two-
year United States Treasury Note) or (B) outstanding futures contracts based on
Treasury Bonds exceeding in number 10% of the average number of daily traded
futures contracts based on Treasury Bonds in the 30 days preceding the time of
effecting such transaction as reported by The Wall Street Journal; (3) the Fund
will engage in Closing Transactions to close out any outstanding futures
contract which the Fund owns or has sold or any outstanding option thereon owned
by the Fund in the event (A) the Fund does not have S&P Eligible Assets with an
aggregate Discounted Value equal to or greater than the Preferred Shares Basic
Maintenance Amount on two consecutive Valuation Dates and (B) the Fund is
required to pay [Variation Margin] on the second such Valuation Date; (4) the
Fund will engage in a Closing Transaction to close out any outstanding futures
contract or option thereon in the month prior to the delivery month under the
terms of such futures contract or option thereon unless the Fund holds the
securities deliverable under such terms; and (5) when the Fund writes a futures
contract or option thereon, it will either maintain an amount of cash, cash
equivalents or high grade (rated BBB or better by S&P), fixed-income securities
in a segregated account with the Fund's custodian, so that the amount so
segregated plus the amount of Initial Margin and Variation Margin held in the
account of or on behalf of the Fund's broker with respect to such futures
contract or option equals the Market Value of the futures contract or option, or
, in the event the Fund writes a futures contract or option thereon which
requires delivery of an underlying security, it shall hold such underlying
security in its portfolio. For purposes of this Section 12(h), "Initial Margin"
means the amount of cash or securities deposited with a broker as a margin
payment at the time of purchase or sale of a futures contract, and "Variation
Margin" means, in connection with an outstanding futures contract owned or sold
by the Fund, the amount of cash or securities paid to or received from a broker
(subsequent to the Initial Margin payment) from time to time as the price of
such futures contract fluctuates.
INVESTMENT RESTRICTIONS
The following restrictions are fundamental policies of the Fund. All
percentage limitations on investments will apply at the time of the making of an
investment and will not be considered violated unless an excess or deficiency
occurs or exists immediately after and as a result of such investment. The Fund
may not:
1. Borrow money (through reverse repurchase agreements or otherwise)
to the extent such borrowing would result in a violation of Section 18 of the
Investment Company Act, or issue any senior securities (as defined in the
Investment Company Act) other than the Preferred Shares, certain money market
instruments or debt instruments related to borrowings described under
"Investment Objective and Policies -- Certain Investment Strategies --
Additional Leverage" in the Prospectus and this Statement of Additional
Information to the extent such instruments are deemed to constitute senior
securities; provided that for this purpose temporary borrowings in an amount not
exceeding 5% of the Fund's total assets (not including the amount borrowed) will
not be deemed a senior security.
Pursuant to Section 18 of the Investment Company Act, not more than 33
1/3% of the Fund's capital structure may consist of borrowings representing
indebtedness, such as money market instruments, and not more than 50% of the
Fund's capital structure may consist of borrowings represented by indebtedness,
such as money market instruments, and a senior class of stock, such as the
Preferred Shares.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except to secure borrowings permitted by restriction No. 1 above. Collateral
arrangements with respect to margin for futures contracts and options are not
deemed to be pledges or other encumbrances for purposes of this restriction.
3. Purchase securities on margin, except such short-term credits as
may be necessary for the clearance of purchases and sales of securities and
except that the Fund may make margin payments in connection with transactions in
futures contracts and options.
4. Make short sales of securities or maintain a short position for the
account of the Fund unless at all times when a short position is open the Fund
owns an equal amount of such securities or owns securities that, without payment
of any further consideration, are convertible into or exchangeable for
securities of the same issue as, and in equal amount to, the securities sold
short.
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<PAGE>
5. Underwrite securities issued by other persons except to the extent
that, in connection with the disposition of its portfolio investments, the Fund
may be deemed to be an underwriter under the Federal securities laws.
6. Purchase or sell real estate, although the Fund may purchase
securities of issuers that deal in real estate, securities that are secured by
interests in real estate and securities representing interests in real estate.
7. Purchase or sell commodities or commodity contracts, except that
the Fund may purchase or sell financial futures contracts and related options as
provided herein.
8. Make loans, except by purchase of debt obligations in which the
Fund may invest consistent with its investment policies, by entering into
repurchase agreements with respect to not more than 25% of the value of its
total assets, or through the lending of its portfolio securities with respect to
not more than one-third of the value of its total assets.
9. With respect to 75% of the value of the Fund's assets, invest in
securities of any issuer if, immediately after such investment, more than 5% of
the value of the Fund's total assets would be invested in the securities of such
issuer or the Fund would own more than 10% of the outstanding voting securities
of such issuer, provided that this limitation does not apply to Government
Securities.
10. Invest more than 25% of the value of its total assets in any one
industry, provided that this limitation does not apply to Government Securities.
11. Invest more than 20% of the market or other fair value of its
total assets in illiquid securities, including securities that are not readily
marketable, securities that are restricted as to disposition under the Federal
securities laws or otherwise, repurchase agreements maturing in more than seven
days, interest-only and principal-only mortgaged backed securities, certain
options traded in the over-the-counter market and the securities to which such
options relate.
This restriction will not apply to securities received as a result of
a corporate reorganization or similar transaction affecting readily marketable
securities already held in the portfolio of the Fund; however, the Fund will
attempt to dispose in an orderly fashion of any securities received under these
circumstances to the extent that such securities, together with other illiquid
securities, exceed 20% of the market or other fair value of the Fund's total
assets.
12. Invest in the securities of other registered investment companies,
except as they may be acquired as part of a
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<PAGE>
merger or consolidation or acquisition of assets or by purchases in the open
market involving only customary brokers' commissions.
-----------------------
Although the provisions of restrictions No. 2 (with respect to futures
contracts), No. 3 and No. 7 permit the Fund to engage in certain practices to a
limited extent, the Fund does not have any current intention of engaging in such
practices. See "Certain Investment Strategies -- Futures Contracts and Related
Options" in the Prospectus and this Statement of Additional Information. The
Fund will not make any investment permitted by the exceptions to the Fund's
investment restrictions if the investment would adversely affect the ratings
assigned by S&P and/or Moody's to the Preferred Shares. In addition, as noted,
certain practices are subject to the prior written approval of S&P and/or
Moody's.
CERTAIN TRADING STRATEGIES OF THE FUND
The following provides a detailed description of certain trading strategies
of the Fund, some of which are more briefly described in the Prospectus.
Portfolio Trading and Turnover Rate
Portfolio trading may be undertaken to accomplish the investment
objective of the Fund in relation to actual and anticipated movements in
interest rates. The Fund's holdings include issues of various maturities.
Ordinarily, the Fund emphasizes investments in intermediate- and longer-term
instruments, that is, those with remaining maturities in excess of three years,
but the weighted average maturity of portfolio holdings may be shortened or
lengthened depending primarily upon SSBC's outlook for interest rates. To the
extent the weighted average maturity of the Fund's portfolio securities is
lengthened, the value of such holdings will be more susceptible to fluctuation
in response to changes in interest rates, creditworthiness and general economic
conditions.
SSBC actively makes portfolio adjustments that reflect the Fund's
investment strategy, but does not trade securities for the Fund for the purpose
of seeking short-term profits. SSBC does, however, trade the Fund's securities,
regardless of how long they have been held, when it believes doing so will
further the Fund's investment objective. Portfolio turnover is calculated by
dividing the lesser of sales or purchases of portfolio securities for any given
year by the average monthly value of the Fund's portfolio securities for such
year. For purposes of this calculation, portfolio securities exclude purchase
and sales of debt securities having a maturity at the date of purchase of one
year or less. In periods when there are rapid changes in economic conditions or
security price levels or when investment strategy is changed significantly,
portfolio
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<PAGE>
turnover may be significantly higher than during times of economic and market
price stability, when investment strategy remains relatively constant. A high
rate of portfolio turnover will result in increased transaction costs for the
Fund. For the fiscal years ended March 31, 1998 and 1999, the Fund's portfolio
turnover rates were 91% and 79%, respectively.
Securities Loans
To the extent permitted by S&P and Moody's, the Fund may make secured
loans of its portfolio securities amounting to not more than one-third of the
value of its total assets, thereby realizing additional income. The risks in
lending portfolio securities, as with other extensions of credit, consist of
possible delays in recovery of the securities or possible loss of rights in the
collateral should the borrower fail financially. As a matter of policy,
securities loans are made to unaffiliated broker-dealers pursuant to agreements
requiring that loans be continuously secured by collateral in cash or short-term
debt obligations at least equal at all times to the value of the securities
subject to the loan. The borrower pays to the Fund an amount equal to any
interest or dividends received on securities subject to the loan. The Fund
retains all or a portion of the interest received on investment of the cash
collateral or receives a fee from the borrower. Although voting rights, or
rights to consent, with respect to the loaned securities, pass to the borrower,
the Fund retains the right to call the loans at any time on reasonable notice,
and it will do so in order that the securities may be voted by the Fund if the
holders of such securities are asked to vote upon or consent to matters
materially affecting the investment. The Fund may also call such loans in order
to sell the securities involved.
When-Issued and Delayed-Delivery Securities
The Fund may purchase securities on a when-issued or delayed delivery
basis. When-issued and delayed-delivery transactions arise when securities are
purchased or sold with payment and delivery beyond the regular settlement date
(that is, delivery and payment can take place a month or more after the date of
the transaction). On such transactions the payment obligation and the interest
rate are fixed at the time the buyer enters into the commitment. The securities
so purchased are subject to market fluctuation, and no interest accrues to the
Fund until delivery and payment take place.
At the time the Fund makes the commitment to purchase securities on a
when-issued or delayed delivery basis, it will record the transaction and
thereafter reflect the value of such securities in determining its net asset
value. The Fund will make commitments for such when-issued transactions only
with the intention of actually acquiring the securities. Beginning on the date
the Fund enters into a commitment to purchase securities on a when-issued or
delayed delivery basis, it is required under
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<PAGE>
rules promulgated by the Securities and Exchange Commission to maintain in a
segregated account cash or liquid assets, equal in value to the purchase price
due on the settlement date. The Fund's custodian bank will maintain, in a
separate account of the Fund, cash, cash equivalents or other liquid securities
from its portfolio, marked to market daily and having value equal to or greater
than such commitments. On delivery dates for such transactions, the Fund will
meet its obligations from maturities or sales of the securities held in the
separate account and/or from then available cash flow.
Placing securities rather than cash in the segregated account may have
a leveraging effect on the Fund's net asset value per share; that is, to the
extent that the Fund remains substantially fully invested in securities at the
same time that it has committed to purchase securities on a when-issued or
delayed delivery basis, greater fluctuations in its net asset value per share
may occur than if it had set aside cash to satisfy its purchase commitments.
If the Fund chooses to dispose of the right to acquire a when-issued
security prior to its acquisition, it could, as with the disposition of other
portfolio obligations, incur a gain or loss due to market fluctuation. The
commitment to purchase securities on a when-issued or delayed delivery basis may
involve an element of risk because the value of the securities is subject to
market fluctuation. No interest accrues to the purchaser prior to settlement of
the transaction, and at the time of delivery the market value may be less than
cost. The purchase of securities on a when-issued or delayed delivery basis is
not limited by the S&P or Moody's guidelines.
Options
The Fund may write (sell) call options that are traded on national
securities exchanges with respect to securities in its portfolio. The Fund may
only write "covered" call options. A call option written by the Fund will be
deemed covered (1) if the Fund owns the securities underlying the call or has an
absolute and immediate right to acquire those securities without additional cash
consideration upon conversion or exchange of other securities held in its
portfolio, (2) if the Fund holds a call at the same exercise price for the same
exercise period and on the same securities as the call written or (3) if, at the
time the call is written, an amount of cash, Government Securities or other
liquid securities equal to the fluctuating market value of the optioned
securities, is segregated with the Fund's custodian.
The Fund may write call options on its portfolio securities in an
attempt to realize a greater current return than would be realized on the
securities alone. The Fund may also write call options as a partial hedge
against a possible market decline. In view of its investment objective, the Fund
generally would write call options only in circumstances in which SSBC does
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<PAGE>
not anticipate significant appreciation of the underlying security in the near
future or has otherwise determined to dispose of the security. As the writer of
a call option, the Fund receives a premium for undertaking the obligation to
sell the underlying security at a fixed price during the option period, if the
option is exercised. So long as the Fund remains obligated as a writer of a call
option, it will forego the opportunity to profit from increases in the market
price of the underlying security above the exercise price of the option, except
insofar as the premium represents such a profit (and retains the risk of loss
should the value of the underlying security decline). The Fund may also enter
into "closing purchase transactions" in order to terminate its obligation as a
writer of a call option prior to the expiration of the option. Although the
writing of call options only on national securities exchanges increases the
likelihood that the Fund will be able to make closing purchase transactions,
there is no assurance that the Fund will be able to effect such transactions at
any particular time or at an acceptable price. The writing of call options could
result in increases in the Fund's portfolio turnover rate, especially during
periods when market prices of the underlying securities appreciate. Income (or
loss) from the exercise, expiration or closing out of written or purchased
options will generally be short- or long-term capital gain (or loss).
Futures Contracts and Related Options
The Fund has reserved the right, subject to the approval of its Board
of Directors and to the extent permitted by S&P and Moody's, to enter into
transactions involving financial futures contracts and options on such futures
contracts. The Fund may, for example, undertake these transactions for the
purpose of hedging its portfolio securities (or portfolio securities that it
expects to acquire) against anticipated changes in prevailing interest rates.
This technique could be employed if SSBC anticipates that interest rates may
rise, in which event the Fund could sell a futures contract to protect against
the potential decline in the value of its portfolio securities. Conversely, if
declining interest rates were anticipated, the Fund could purchase a futures
contract to protect against a potential increase in the price of securities the
Fund intends to purchase.
Commodity Futures Trading Commission regulations permit the Fund to
enter into futures contracts and related options for bona fide hedging purposes
and, in addition, for other purposes, so long as aggregate initial margin and
premiums required to establish such non-hedge positions do not exceed 5% of the
liquidation value of the Fund's portfolio, after taking into account unrealized
profits and unrealized losses on any such contracts.
21
<PAGE>
In addition, the Fund's positions in futures contracts, as well as
options on futures written by the Fund, will be collateralized with cash or
certain liquid assets held in a segregated account or covered in order to
eliminate any potential leveraging. The extent to which the Fund may enter into
transactions involving futures contracts may be limited by the requirements of
the Internal Revenue Code of 1986, as amended (the "Code") for qualification by
the Fund as a regulated investment company.
Description of Financial Futures and Options. A futures contract is a
contract between a seller and a buyer for the sale and purchase of specified
property at a specified future date for a specified price. An option is a
contract that gives the holder of the option the right, but not the obligation,
to buy (in the case of a call option) specified property from, or to sell (in
the case of a put option) specified property to, the writer of the option for a
specified price during a specified period prior to the option's expiration.
Financial futures contracts and options cover specified debt securities (such as
U.S. Treasury securities) or indexes designed to correlate with price movements
in certain categories of debt securities. Financial futures contracts and
options on financial futures contracts are traded on exchanges regulated by the
Commodity Futures Trading Commission. Options on certain financial instruments
and financial indexes are traded on securities markets regulated by the
Securities and Exchange Commission. Although futures contracts and options on
specified financial instruments call for settlement by delivery of the financial
instruments covered by the contracts, in most cases positions in these contracts
are closed out in cash by entering into offsetting liquidating or closing
transactions. Index futures and options are designed for cash settlement only.
Repurchase Agreements
To the extent permitted by S&P and Moody's, the Fund may enter into
repurchase agreements on up to 25% of the value of its total assets. A
repurchase agreement is a contract under which the Fund acquires a security for
a relatively short period (usually not more than one week) subject to the
obligation of the seller to repurchase and the Fund to resell the same security
on a future date at a specified price representing the Fund's cost plus
interest. Repurchase agreements are considered to be loans whose collateral is
the underlying security that is the subject of the repurchase agreement. It is
the Fund's present intention to enter into repurchase agreements only with
commercial banks and registered broker-dealers and only with respect to
Government Securities.
The risk to the Fund under this type of agreement is limited to the
ability of the other party to pay the agreed-upon repurchase price on the
delivery date; however, although the value of the underlying collateral at the
time of the transaction
22
<PAGE>
always equals or exceeds the repurchase price, if the value of the collateral
declines there is a risk of loss of principal and interest. If the other party
defaults, the collateral may be sold, but the Fund may lose money if the value
of the collateral declines and may have to pay the costs of the sale or
experience delays in selling the collateral. In addition, if the seller should
be involved in bankruptcy or insolvency proceedings, the Fund may incur delay
and costs in selling the underlying security or may suffer a loss of principal
and interest if the Fund is treated as an unsecured creditor and is required to
return the underlying collateral to the seller's estate. SSBC will monitor the
value of the collateral at the time the Fund enters into a repurchase agreement
and during the term of the repurchase agreement to determine that at all times
the value of the collateral equals or exceeds the repurchase price. If the value
of the collateral is less than the repurchase price, SSBC will demand additional
collateral from the other party to increase the value of the collateral to at
least the redemption price plus interest. SSBC will also monitor, on an ongoing
basis to evaluate potential risks, the creditworthiness of those parties with
which the Fund enters into repurchase agreements.
Reverse Repurchase Agreements
To the extent permitted by S&P and Moody's, the Fund may enter into
reverse repurchase agreements with respect to debt obligations that could
otherwise be sold by the Fund. A reverse repurchase agreement is an instrument
under which the Fund sells an underlying debt instrument and simultaneously
obtains the commitment of the purchaser (a commercial bank or a broker or
dealer) to sell the security back to the Fund at an agreed upon price on an
agreed upon date. The value of underlying securities will be required to be
maintained at a level at least equal at all times to the total amount of the
resale obligation, including interest. The Fund receives payment for these
securities only upon physical delivery or evidence of book entry transfer by its
custodian. Securities sold by the Fund under a reverse repurchase agreement will
be segregated pending repurchase or the proceeds will be segregated on the
Fund's books and records pending repurchase.
Reverse repurchase agreements could involve certain risks in the event
of default or insolvency of the other party, including possible delays or
restrictions upon the Fund's ability to dispose of the underlying securities. An
additional risk is that the market value of securities sold by the Fund under a
reverse repurchase agreement could decline below the price at which the Fund is
obligated to repurchase them.
Reverse repurchase agreements will be considered borrowings by the
Fund and as such will be subject to the restrictions on borrowing described in
this Statement of Additional Information under "Investment Restrictions." The
Fund
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<PAGE>
will not hold more than 5% of the value of its total assets in reverse
repurchase agreements.
Foreign Investments
The Fund may invest up to 10% of the value of its total assets in
securities principally traded in foreign markets. In addition, subject to the
Fund's basic investment strategy, the Fund may also purchase Eurodollar
certificates of deposit issued by branches of U.S. and foreign banks. The Fund
may buy or sell foreign currencies or deal in forward foreign currency contracts
in connection with the purchase and sale of foreign investments. There are
certain risks involved in investing in securities of companies and governments
of foreign nations that are in addition to the usual risks inherent in domestic
investments.
The risks of investing in foreign securities include those resulting
from devaluation of currencies, future adverse political and economic
developments and the possible imposition of currency exchange restrictions or
other foreign governmental laws or restrictions, reduced availability of public
information concerning issuers and the lack of uniform accounting, auditing and
financial reporting standards or of other regulatory practices and requirements
comparable to those applicable to domestic companies. The Fund may be adversely
affected, when holding foreign securities, by fluctuations in value of one or
more foreign currencies relative to the U.S. dollar. Moreover, securities of
many foreign issuers and their markets may be less liquid and their prices more
volatile than those of securities of comparable domestic issues. In addition,
with respect to certain foreign countries, there is the possibility of
expropriation, nationalization, confiscatory taxation, limitations on the use or
removal of funds or other assets of the Fund, including the withholding of
dividends, potential difficulties enforcing contractual obligations and extended
clearance and settlement periods. Foreign securities may be subject to foreign
government taxes that could reduce the yield on such securities.
Investments in foreign securities also may result in higher expenses
due to the cost of converting foreign currency to U.S. dollars, the payment of
fixed brokerage commissions on foreign exchanges, the expense of maintaining
securities with foreign custodians and the imposition of transfer taxes or
transaction charges associated with foreign exchanges.
Additional Leverage
The Fund has reserved the right to borrow money to the extent the
borrowing would not result in a violation of Section 18 of the Investment
Company Act. Pursuant to Section 18 of the Investment Company Act, not more than
33 1/3% of the Fund's capital
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<PAGE>
structure may consist of borrowings representing indebtedness and not more than
50% of the Fund's capital structure may consist of borrowings represented by
indebtedness and a senior class of stock, such as the Preferred Shares.
The Fund may borrow to the extent permitted by the Investment Company
Act through the public or private issuance of debt securities or from lenders of
all types, such as banks, savings and loan associations, insurance companies and
similar financial institutions. It is anticipated that borrowings will be
effected by the Fund primarily to provide additional liquidity. However, the
Fund reserves the right to use the proceeds of borrowings for any other purpose,
including additional investment leverage. The Preferred Shares are subject to
mandatory redemption in certain circumstances.
Should the Preferred Shares be redeemed in whole or in part it is the
Fund's intention to leverage through the further issuance of senior securities,
subject to the Fund's Board of Directors' determination that such issuance is
appropriate in light of relative interest rates, general economic conditions and
other relevant factors and subject to compliance with the Investment Company
Act.
DESCRIPTION OF PREFERRED SHARES
The following provides, with respect to the Preferred Shares, a further
description of certain matters which are included under "Description of
Preferred Shares" in the Prospectus along with a description of certain matters
which are not included therein.
General
The Preferred Shares have a liquidation preference equal to their
Liquidation Value per share, plus all accumulated but unpaid dividends thereon
(whether or not earned or declared) to the date of final distribution. The
Preferred Shares, when issued and sold through this offering, will (i) be fully
paid and non-assessable, (ii) not be convertible into Common Stock or other
capital stock of the Fund, (iii) have no preemptive rights and (iv) not be
subject to any sinking fund. The Preferred Shares will be subject to optional
and mandatory redemption as described below under "Redemption."
Holders of the Preferred Shares will not receive certificates
representing their ownership interest in such shares. The Depository Trust
Clearing Corporation will act as securities depository for the Agent Members
with respect to the Preferred Shares.
In addition to serving as the Auction Agent in connection with the
Auction Procedures described below, the Auction Agent will act as the transfer
agent, registrar, and paying agent for the Preferred Shares. Furthermore, the
Auction Agent will send notices to holders of the Preferred Shares of any
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<PAGE>
meeting at which holders of Preferred Shares have the right to vote. See
"Description of Preferred Shares -- Voting Rights" below and in the Prospectus.
However, the Auction Agent generally will serve merely as the agent of the Fund,
acting in accordance with the Fund's instructions.
Except in an Auction, the Fund will have the right (to the extent
permitted by applicable law) to purchase or otherwise acquire any Preferred
Shares, so long as the Fund is current in the payment of dividends on the
Preferred Shares and on any other capital shares of the Fund ranking on a parity
with the Preferred Shares with respect to the payment of dividends or upon
liquidation.
Dividends and Dividend Periods
The holders of Preferred Shares will be entitled to receive out of
funds legally available therefor, cumulative cash dividends on their shares, at
the Applicable Rate determined as set forth below under "Determination of
Dividend Rate," payable on the respective dates set forth below. Dividends so
declared and payable shall be paid to the extent permitted under the Code and to
the extent available and in preference to and with priority over any dividend
declared and payable on the Common Stock.
On the Business Day next preceding each Dividend Payment Date, the
Fund is required to deposit with the Paying Agent sufficient funds for the
payment of declared dividends. The Fund does not intend to establish any
reserves for the payment of dividends.
Each dividend will be paid to the record holder, which holder is
expected to be the nominee of the Securities Depository. The Securities
Depository will credit the accounts of the Agent Members of the beneficial
owners in accordance with the Securities Depository's normal procedures. The
Securities Depository's current procedures provide for it to distribute
dividends in same-day funds to Agent Members who are in turn expected to
distribute such dividends to the persons for whom they are acting as agents. The
Agent Member of a beneficial owner will be responsible for holding or disbursing
such payments on the applicable Dividend Payment Date to such beneficial owner
in accordance with the instructions of such beneficial owner. Dividends in
arrears for any past Dividend Period may be declared and paid at any time,
without reference to any regular Dividend Payment Date, to the nominee of the
Securities Depository. Any dividend payment shall first be credited against the
earliest declared but unpaid dividends.
Holders will not be entitled to any dividends, whether payable in
cash, property or shares, in excess of full cumulative dividends except as
described under "Determination of Dividend Rate" below. No interest will be
payable in respect of any
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<PAGE>
dividend payment or payments which may be in arrears. See "Default Period"
below.
The amount of dividends per Outstanding share payable (if declared) on
each Dividend Payment Date of each Dividend Period of less than one year (or in
respect of dividends on another date in connection with a redemption during such
Dividend Period) shall be computed by multiplying the Applicable Rate (or the
Default Rate) for such Dividend Period (or a portion thereof) by a fraction, the
numerator of which will be the number of days in such Dividend Period (or
portion thereof) such share was Outstanding and for which the Applicable Rate or
the Default Rate was applicable and the denominator of which will be 360,
multiplying the amount so obtained by the Liquidation Value, and rounding the
amount so obtained to the nearest cent. During any Dividend Period of one year
or more, the amount of dividends per share payable on any Dividend Payment Date
shall be computed as described in the preceding sentence, except that it will be
determined on the basis of a year consisting of twelve 30-day months.
Determination of Dividend Rate. The dividend rate during the period
from and including the Date of Original Issue to and including the initial
Auction Date will be the rate per annum set forth on the cover page of the
Prospectus. The first Auction Date will be as set forth on page 3 of the
Prospectus. For each subsequent Dividend Period, subject to certain exceptions,
the dividend rate will be the Applicable Rate that the Auction Agent advises the
Fund has resulted from an Auction.
Notification of Dividend Period. The Fund will designate the duration
of Dividend Periods; provided, however, that no such designation is necessary
for a Standard Term Period and that any designation of an Alternate Term Period
shall be effective only if (i) notice thereof shall have been given as provided
herein, (ii) any failure to pay in a timely manner to the Auction Agent the full
amount of any dividend on, or the redemption price of, the Preferred Shares
shall have been cured as set forth under "Default Period," (iii) Sufficient
Clearing Orders shall have existed in an Auction held on the Auction Date
immediately preceding the first day of such proposed Alternate Term Period, (iv)
if the Fund shall have mailed a notice of redemption with respect to any shares,
as described under "Redemption" below, the Redemption Price with respect to such
shares shall have been deposited with the Paying Agent, and (v) the Fund has
confirmed that, as of the Auction Date next preceding the first day of such
Alternate Term Period, it has Eligible Assets with an aggregate Discounted Value
at least equal to the Preferred Shares Basic Maintenance Amount and has
consulted with the Broker-Dealers and has provided notice and a Preferred Shares
Basic Maintenance Certificate (as defined below) to S&P (if S&P is then rating
the Preferred Shares), to Moody's (if Moody's is then rating the Preferred
Shares) and any Other
27
<PAGE>
Rating Agency which is then rating the Preferred Shares and so requires.
If the Fund proposes to designate any Alternate Term Period, not fewer
than 15 (or two Business Days in the event the duration of the Dividend Period
prior to such Alternate Term Period is fewer than 15 days) nor more than 30 days
prior to the first day of such Alternate Term Period, notice shall be (i) made
by press release and (ii) communicated by the Fund by telephonic or other means
to the Auction Agent and confirmed in writing promptly thereafter. Each such
notice shall state (A) that the Fund proposes to exercise its option to
designate a succeeding Alternate Term Period, specifying the first and last days
thereof and (B) that the Fund will by 3:00 p.m., New York City time, on the
second Business Day next preceding the first day of such Alternate Term Period,
notify the Auction Agent, who will promptly notify the Broker-Dealers, of either
(x) its determination, subject to certain conditions, to proceed with such
Alternate Term Period, in which case the Fund may specify the terms of any
Specific Redemption Provisions, or (y) its determination not to proceed with
such Alternate Term Period in which latter event the succeeding Dividend Period
shall be a Standard Term Period.
No later than 3:00 p.m., New York City time, on the second Business
Day next preceding the first day of any proposed Alternate Term Period, the Fund
shall deliver to the Auction Agent, who will promptly deliver to the Broker-
Dealers and Existing Holders, either:
(i) a notice stating (A) that the Fund has determined to designate the
next succeeding Dividend Period as an Alternate Term Period, specifying the
first and last days thereof and (B) the terms of the Specific Redemption
Provisions, if any; or
(ii) a notice stating that the Fund has determined not to exercise its
option to designate an Alternate Term Period.
If the Fund fails to deliver either such notice with respect to any designation
of any proposed Alternate Term Period to the Auction Agent or is unable to make
the confirmation described above by 3:00 p.m., New York City time, on the second
Business Day next preceding the first day of such proposed Alternate Term
Period, the Fund shall be deemed to have delivered a notice to the Auction Agent
with respect to such Dividend Period to the effect set forth in clause (ii)
above, thereby resulting in a Standard Term Period.
Default Period. A "Default Period" will commence on the applicable
date set forth below if the Fund fails to
(i) declare prior to the close of business on the second Business Day
preceding any Dividend Payment Date, for payment on, or (to the extent permitted
as described below)
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<PAGE>
within two Business Days after, such Dividend Payment Date
to the persons who held Preferred Shares as of 12:00 noon, New York City time,
on the Business Day preceding such Dividend Payment Date, the full amount of any
dividend payable on such Dividend Payment Date,
(ii) to deposit, irrevocably in trust, in same-day funds, with a
designated paying agent by 12:00 noon, New York City time, (A) on or (to the
extent permitted as described below) within two Business Days after any Dividend
Payment Date the full amount of any declared dividend on the Preferred Shares
payable on such Dividend Payment Date (together with the failure to timely
declare dividends described in (i) above, hereinafter referred to as a "Dividend
Default") or (B) on or (to the extent permitted as described below) within two
Business Days after any date fixed for redemption of Preferred Shares called for
redemption, the applicable redemption price (a "Redemption Default"), or
(iii) to maintain the AAA/aaa Credit Rating unless the AAA/aaa Credit
Rating is restored by the Dividend Payment Date next following the date on which
the Fund fails to maintain the AAA/aaa Credit Rating (a "Rating Default").
A Default Period with respect to a Dividend Default or a Redemption
Default will consist of the period commencing on and including the
aforementioned Dividend Payment Date or redemption date, as the case may be, and
ending on and including the Business Day on which, by 12:00 noon, New York City
time, all unpaid dividends and unpaid redemption price shall have been so
deposited or shall have otherwise been made available to the applicable holders
in same day funds. A Default Period with respect to a Rating Default shall
commence as of the date on which the Fund fails to maintain the AAA/aaa Credit
Rating (provided that such Rating Default shall be deemed not to have occurred
and such Default Period shall not commence if such Rating Default is cured by
the next succeeding Dividend Payment Date) and shall end on the earlier of the
date on which such default is cured as provided herein or the date on which the
Preferred Shares mandatorily redeemed as provided herein. Holders of two-thirds
of the Preferred Shares then Outstanding may waive any Dividend Default,
Redemption Default or Rating Default.
The Applicable Rate for each Default Period, including each Dividend
Period commencing during a Default Period, will be equal to the Default Rate;
and each subsequent Dividend Period commencing after the beginning of a Default
Period shall be a Standard Term Period; provided, however, that the commencement
of a Default Period will not by itself cause the commencement of a new Dividend
Period. Any dividend due on any Dividend Payment Date (if, prior to 12:00 noon,
New York City time, on such Dividend Payment Date, the Fund has declared such
dividend payable on or within two Business Days after such Dividend
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<PAGE>
Payment Date to the persons who held such shares as of 12:00 noon, New York City
time, on the Business Day preceding such Dividend Payment Date) or redemption
price with respect to such shares not paid to such persons when due may (if such
default is not solely due to the willful failure of the Fund) be paid to such
Persons in the same form of funds by 12:00 noon, New York City time, on any of
the first two Business Days after such Dividend Payment Date or due date, as the
case may be, provided that such amount is accompanied by an additional amount
for such period of non-payment at the Default Rate applied to the amount of such
default based on the actual number of days comprising such period divided by
360. For the purposes of the foregoing, payment to a person in same-day funds
made on or before 12:00 noon New York City time on any Business Day at any time
will be considered equivalent to payment to that person in New York Clearing
House (next-day) funds at the same time on the preceding Business Day, and any
payment made after 12:00 noon, New York City time, on any Business Day shall be
considered to have been made instead in the same form of funds and to the same
person before 12:00 noon, New York City time, on the next Business Day.
Subject to the foregoing, and any requirements of Maryland law, to the
extent that the Fund's net investment income for any year exceeds any current or
accumulated dividends on the Preferred Shares, it will be distributed to the
holders of the Common Stock. The term "net investment income" includes interest,
dividends, short-term capital gains and other income received or accrued less
the advisory fee, bank custodian charges, taxes (except capital gain taxes) and
other expenses properly chargeable against income, but does not include net
capital gains, stock dividends, transfer taxes, brokerage or other capital
charges or distributions designated as a return of capital. Any realized net
capital gains (defined as the excess of net long-term capital gains over net
short-term capital losses) of the Fund will be distributed annually to the
holders of the Common Stock (subject to the prior rights of the holders of the
Preferred Shares) subject to the foregoing and any requirements of Maryland law.
Restrictions on Dividends and Other Payments. Under the Investment
Company Act, the Fund may not declare dividends or make other distributions on
the Common Stock or purchase any Common Stock if, at the time of the
declaration, distribution or purchase, as applicable (and after giving effect
thereto), asset coverage (as defined in the Investment Company Act) with respect
to the outstanding Preferred Shares would be less than 200%. Under the Code, the
Fund must, among other things, distribute at least 90% of its investment company
taxable income each year in order to maintain its qualification for tax
treatment as a regulated investment company. The foregoing limitation on
dividends, distributions and purchases may in certain circumstances impair the
Fund's ability to maintain such qualification. The Fund intends, however, to
redeem Preferred
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<PAGE>
Shares to the extent necessary to maintain such qualification. See "Taxes" below
and in the Prospectus.
Upon failure to pay dividends for two years or more, the holders of
Preferred Shares will acquire certain additional voting rights. See "Description
of Preferred Shares -- Voting Rights" below and in the Prospectus. Such rights
shall be the exclusive remedy of the holders of Preferred Shares upon any
failure to pay dividends on the Preferred Shares.
For so long as any Preferred Shares are outstanding, the Fund will not
declare, pay or set apart for payment any dividend or other distribution (other
than a dividend or distribution paid in shares of, or options, warrants or
rights to subscribe for or purchase, Common Stock or other stock, if any,
ranking junior to the Preferred Shares as to dividends or upon liquidation) in
respect of the Common Stock or any other stock of the Fund ranking junior to the
Preferred Shares as to dividends or upon liquidation, or call for redemption,
redeem, purchase or otherwise acquire for consideration any shares of Common
Stock or any other junior stock (except by conversion into or exchange for stock
of the Fund ranking junior to the Preferred Shares as to dividends and upon
liquidation), unless
(1) immediately after such transaction, the Preferred Shares Basic
Maintenance Amount and the Investment Company Act Preferred Shares Asset
Coverage (see "Description of Preferred Shares -- Asset Maintenance" and --
Redemption" below) would be achieved,
(2) full cumulative dividends on Preferred Shares due on or prior to
the date of the transaction have been declared and paid (or sufficient Deposit
Securities (see "Deposit Securities Requirement") maturing on or prior to the
date fixed for their payment have been set apart for their payment) and
(3) the Fund has redeemed the full number of Preferred Shares required
to be redeemed by any provision for mandatory redemption contained in the
Articles of Incorporation.
Redemption
Optional Redemption. To the extent permitted under the Investment
Company Act and Maryland law, the Fund at its option may redeem Preferred Shares
having a Dividend Period of less than one year, in whole or in part, on the
Business Day after the last day of such Dividend Period upon not less than 15
days and not more than 25 days prior notice. The optional redemption price per
share shall be the Liquidation Value per share, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared) to
the date fixed for redemption.
Preferred Shares having a Dividend Period of more than one year may be
redeemable at the option of the Fund prior to the
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<PAGE>
end of the relevant Dividend Period, subject to any Specific Redemption
Provisions, which may include the payment of redemption premiums to the extent
required under any applicable Specific Redemption Provisions.
The Fund shall not effect any optional redemption unless after giving
effect thereto (i) the Fund has available certain Deposit Securities with
maturity or tender dates not later than the day preceding the applicable
redemption date and having a value not less than the amount (including any
applicable premium) due to holders of Preferred Shares by reason of the
redemption of Preferred Shares on such date fixed for the redemption and (ii)
the Fund would have Eligible Assets with an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount.
The Fund also reserves the right to repurchase Preferred Shares in
market or other transactions from time to time in accordance with applicable law
and at a price that may be more or less than the liquidation preference of the
Preferred Shares, but is under no obligation to do so.
Mandatory Redemption. If the Fund fails to maintain, as of any
Valuation Date, Eligible Assets with an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount or, as of the last
Business Day of any month, the Investment Company Act Preferred Shares Asset
Coverage, and such failure is not cured within two Business Days following the
relevant Valuation Date in the case of a failure to maintain the Preferred
Shares Basic Maintenance Amount or the last Business Day of the following month
in the case of a failure to maintain Investment Company Act Preferred Shares
Asset Coverage as of such last Business Day (each an "Asset Coverage Cure
Date"), the Preferred Shares will be subject to mandatory redemption out of
funds legally available therefor. See "Description of Preferred Shares -- Asset
Maintenance."
The number of Preferred Shares to be redeemed in such circumstances
will be equal to the lesser of (i) the minimum number of Preferred Shares the
redemption of which, if deemed to have occurred immediately prior to the opening
of business on the relevant Asset Coverage Cure Date, would result in the Fund
having Eligible Assets with an aggregate Discounted Value at least equal to the
Preferred Shares Basic Maintenance Amount, or sufficient to satisfy Investment
Company Act Preferred Shares Asset Coverage, as the case may be, in either case
as of the relevant Asset Coverage Cure Date (provided that, if there is no such
minimum number of shares the redemption of which would have such result, all
Preferred Shares then Outstanding will be redeemed), and (ii) the maximum number
of Preferred Shares that can be redeemed out of funds expected to be available
therefor on the Mandatory Redemption Date (as defined below) at the Mandatory
Redemption Price (as defined below).
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<PAGE>
The Fund shall allocate the number of shares required to be redeemed
to satisfy the Preferred Shares Basic Maintenance Amount or the Investment
Company Act Preferred Shares Asset Coverage, as the case may be, pro rata among
the holders of Preferred Shares in proportion to the number of shares they hold.
If the Fund at any time fails to maintain the AAA/aaa Credit Rating
for the Preferred Shares, and such failure is not cured within 90 calendar days
thereafter (the "Rating Default Cure Date"), all Preferred Shares will be
subject to mandatory redemption out of funds legally available therefor, on the
Mandatory Redemption Date, and dividends thereon will be payable at the Default
Rate until such redemption is effected as provided above under "Dividends and
Dividend Periods-Default Period." To maintain the AAA/aaa Credit Rating, the
Fund must maintain a rating for the Preferred Shares in the highest rating
category from any two nationally recognized statistical rating organizations, as
used in the rules and regulations under the Securities Exchange Act of 1934, as
amended, one of which shall be S&P or Moody's.
The Fund is required to effect such a mandatory redemption not later
than 30 days after the Asset Coverage Cure Date or the Rating Default Cure Date,
as the case may be (the "Mandatory Redemption Date"), except that if the Fund
does not have funds legally available for the redemption of, or is not otherwise
legally permitted to redeem, all of the required number of Preferred Shares
which are subject to mandatory redemption, or the Fund otherwise is unable to
effect such redemption on or prior to such Mandatory Redemption Date, the Fund
will redeem those Preferred Shares on the earliest practicable date on which the
Fund will have such funds available, upon notice to record owners of Preferred
Shares and the Paying Agent. The Fund's ability to make a mandatory redemption
may be limited by the provisions of the Investment Company Act or Maryland law.
The redemption price per share in the event of any mandatory
redemption will be the Liquidation Value per share, plus an amount equal to
accumulated but unpaid dividends thereon (whether or not earned or declared) to
the date fixed for redemption plus (in the case of a Dividend Period of not less
than one year) any redemption premium, if any, determined by the Board of
Directors after consultation with the Broker-Dealer and set forth in any
applicable Specific Redemption Provisions (the "Mandatory Redemption Price").
Redemption Procedure. Pursuant to Rule 23c-2 under the Investment
Company Act, the Fund will file a notice of its intention to redeem with the
Commission so as to provide at least the minimum notice required by such Rule or
any successor provision (notice currently must be filed with the Commission at
least 30 days prior to the redemption date). The Auction Agent will use its
reasonable efforts to provide telephonic notice to each Holder of Preferred
Shares called for redemption not later
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<PAGE>
than the close of business on the Business Day immediately following the
Business Day on which the Auction Agent determines the shares to be redeemed
(or, during a Default Period with respect to such shares, not later than the
close of business on the Business Day immediately following the day on which the
Auction Agent receives notice of redemption from the Fund). Such telephonic
notice will be confirmed promptly in writing not later than the close of
business on the third Business Day preceding the redemption date by providing
the notice sent by the Paying Agent to each Holder of record of Preferred Shares
called for redemption, the Paying Agent (if different from the Auction Agent)
and the Securities Depository ("Notice of Redemption").
Notice of Redemption will be addressed to the registered owners of the
Preferred Shares at their addresses appearing on the share records of the Fund.
Such notice will set forth (i) the redemption date, (ii) the number and identity
of Preferred Shares to be redeemed, (iii) the redemption price (specifying the
amount of accumulated dividends to be included therein), (iv) that dividends on
the shares to be redeemed will cease to accumulate on such redemption date, and
(v) the provision under which redemption shall be made.
If fewer than all of the Preferred Shares are redeemed on any date,
the shares to be redeemed on such date will be selected by the Fund on a pro
rata basis in proportion to the number of shares held by such holders, by lot or
by such other method as is determined by the Fund to be fair and equitable,
subject to the terms of any Specific Redemption Provisions. Preferred Shares may
be subject to mandatory redemption as described herein notwithstanding the terms
of any Specific Redemption Provisions. The Auction Agent will give notice to the
Securities Depository, whose nominee will be the record holder of all of the
Preferred Shares, and the Securities Depository will determine the number of
shares to be redeemed from the account of the Agent Member of each beneficial
owner. Each Agent Member will determine the number of shares to be redeemed from
the account of each beneficial owner for which it acts as agent. An Agent Member
may select for redemption shares from the accounts of some beneficial owners
without selecting for redemption any shares from the accounts of other
beneficial owners. Notwithstanding the foregoing, if neither the Securities
Depository nor its nominee is the record holder of all of the shares, the
particular shares to be redeemed shall be selected by the Fund by lot, on a pro
rata basis or by such other method as the Fund shall deem fair and equitable, as
contemplated above.
In connection with any redemption, whether optional or mandatory, the
Fund shall pay, together with the redemption price, an amount equal to all
accumulated dividends, whether or not such dividends have been earned or
declared through the redemption date.
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<PAGE>
If Notice of Redemption has been given, then upon the deposit of funds
sufficient to effect such redemption, all rights of the owners of the shares so
called for redemption will cease, except the right of the owners of such shares
to receive the redemption price, but without interest, and such shares will no
longer be deemed to be Outstanding for any purpose. The Fund shall be entitled
to receive from the Paying Agent, promptly after the date fixed for redemption,
any cash deposited with the Paying Agent in excess of (i) the aggregate
redemption price of the Preferred Shares called for redemption on such date and
(ii) such other amounts, if any, to which holders of Preferred Shares called for
redemption may be entitled. The Fund will be entitled to receive, from time to
time, from the Paying Agent the interest, if any, earned on such funds deposited
with the Paying Agent and the owners of shares so redeemed will have no claim to
any such interest. Any funds so deposited which are unclaimed two years after
such redemption date will be paid by the Paying Agent to the Fund upon its
request. Thereupon the Paying Agent will be relieved of all responsibility to
the owners of such shares and such owners may look only to the Fund for payment.
So long as any Preferred Shares are held of record by the nominee of
the Securities Depository, the redemption price for such shares will be paid on
the redemption date to the nominee of the Securities Depository. The Securities
Depository's normal procedures now provide for it to distribute the amount of
the redemption price to Agent Members who, in turn, are expected to distribute
such funds to the persons for whom they are acting as agent.
Notwithstanding the provisions for redemption described above, no
Preferred Shares may be redeemed unless all dividends in arrears on the
Outstanding Preferred Shares, and all capital stock of the Fund ranking on a
parity with the Preferred Shares with respect to the payment of dividends or
upon liquidation, have been or are being contemporaneously paid or set aside for
payment, except in connection with the liquidation of the Fund in which case all
Preferred Shares and all shares ranking in a parity with the Preferred Shares
must receive proportionate amounts.
Except for the provisions described above, nothing contained in the
Articles Supplementary limits any legal right of the Fund to purchase or
otherwise acquire any Preferred Shares outside of an Auction at any price,
whether higher or lower than the price that would be paid in connection with an
optional or mandatory redemption, so long as, at the time of any such purchase,
there is no arrearage in the payment of dividends on or the mandatory or
optional redemption price with respect to, any Preferred Shares for which Notice
of Redemption has been given and the Fund is in compliance with the Investment
Company Act Preferred Shares Asset Coverage and has Eligible Assets with an
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount after giving effect to such purchase or
35
<PAGE>
acquisition on the date thereof. Any shares which are purchased, redeemed or
otherwise acquired by the Fund shall have no voting rights. If fewer than all
the outstanding Preferred Shares are redeemed or otherwise acquired by the Fund,
the Fund shall give notice of such transaction to the Auction Agent, in
accordance with the procedures agreed upon by the Board of Directors.
Restrictions on Transfer
Preferred Shares may be transferred only
(a) pursuant to an Order placed in an Auction,
(b) to or through a Broker-Dealer,
(c) to a person that has delivered a signed Master Purchaser's Letter
to the Auction Agent or
(d) to the Fund or any Affiliate.
Notwithstanding the foregoing, a transfer other than pursuant to an
Auction will not be effective unless the selling Existing Holder or the Agent
Member of such Existing Holder, in the case of an Existing Holder whose shares
are listed in its own name on the books of the Auction Agent, or the Broker-
Dealer or Agent Member of such Broker-Dealer, in the case of a transfer between
persons holding Preferred Shares through different Broker-Dealers, advises the
Auction Agent of such transfer. The certificates representing the Preferred
Shares issued to the Securities Depository will bear legends with respect to the
restrictions described above and stop-transfer instructions will be issued to
the Transfer Agent and/or Registrar.
Asset Maintenance
The Fund is required to satisfy two separate asset coverage
requirements under the terms of the Articles Supplementary. These requirements
are summarized below.
Preferred Shares Basic Maintenance Amount. The Fund is required to
maintain as of each Valuation Date Eligible Assets having in the aggregate a
Discounted Value at least equal to the Preferred Shares Basic Maintenance
Amount, calculated separately for S&P (if S&P is then rating the Preferred
Shares) and Moody's (if Moody's is then rating the Preferred Shares). For this
purpose, the Market Value of the Fund's portfolio securities is (i) computed
based upon one or more pricing services agreements approved by the Board of
Directors or (ii) the lower bid price from two independent dealers in
securities, one of which bids shall be in writing. The Fund has a pricing
services agreement with Muller Data Corporation. The Fund may substitute another
pricing service, provided that it has received notice from S&P (if S&P is then
rating the Preferred Shares and only in the case that the Fund wishes to
substitute a pricing service not approved by S&P) and Moody's (if Moody's is
then rating the Preferred Shares) that such
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<PAGE>
substitution will not impair the AAA/aaa Credit Rating. If the Fund fails to
maintain Eligible Assets having in the aggregate a Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount as of any Valuation Date
and such failure is not cured on or before the related Asset Coverage Cure Date,
the Fund will be required in certain circumstances to redeem certain of the
Preferred Shares. See "Description of Preferred Shares -- Redemption."
The "Preferred Shares Basic Maintenance Amount" as of any Valuation
Date is defined as the dollar amount equal to the sum of
(1) (A) the products resulting from multiplying the number of
outstanding Preferred Shares on such date by the Liquidation Value per
share; (B) the aggregate amount of dividends that will have accumulated at
the Applicable Rate (whether or not earned or declared) to and including
the first following Dividend Payment Date for each Preferred Share
outstanding that follows such Valuation Date (or to the 49th day after such
Valuation Date, if such 49th day occurs before the first following Dividend
Payment Date); (C) the aggregate amount of dividends that would accumulate
at the then current Maximum Applicable Rate for the Exposure Period
multiplied by the Volatility Factor on any Preferred Shares outstanding
from the first day following the Dividend Payment Date referred to in (B)
above through the 49th day after such Valuation Date, but only if such 49th
day occurs after the first day following the Dividend Payment Date, except
that if such Valuation Date occurs during a Default Period, the dividend
for purposes of the calculation would accumulate at the Default Rate; (D)
the amount of anticipated Fund expenses for the 90 days subsequent to such
Valuation Date; (E) any current liabilities, including, without limitation,
indebtedness due within one year and any redemption premium due with
respect to Preferred Shares for which a Notice of Redemption has been
given, as of such Valuation Date to the extent not reflected in any of
(1)(A) through (1)(D); less
(2) the sum of any cash or the value of any Fund assets irrevocably
deposited by the Fund for the payment of any of (1)(B) through (1)(D)
("value," for purposes of this clause (2), shall mean the Discounted Value
of the security, except that if the security matures prior to the relevant
redemption payment date and is either fully guaranteed by the U.S.
Government or is rated A1+ by S&P and P-1 by Moody's, it will be valued at
its face value).
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<PAGE>
Solely for purposes of calculating the Preferred Shares Basic
Maintenance Amount, interest on borrowed funds outstanding as of any date will
be treated as dividend payments, at a deemed dividend rate equal to the interest
rate payable on such funds on the relevant date, but shall be subject to
multiplication by the larger of the factors that the Fund has been informed by
S&P (if S&P is then rating the Preferred Shares) or Moody's (if Moody's is then
rating the Preferred Shares) are applicable (as described in 1(C) above) only in
the event that interest on such borrowed funds is payable on the basis of a
variable rate of interest, and the interest rate is subject to change within the
relevant 49-day period.
The discount factors, the criteria used to determine whether the
assets held in the Fund's portfolio are Eligible Assets and guidelines for
determining the market value of the Fund's portfolio holdings have been based on
criteria established in connection with rating the Preferred Shares. These
factors include, but are not limited to, the sensitivity of the market value of
the relevant asset to changes in interest rates, the liquidity and depth of the
market for the relevant asset, the credit quality of the relevant asset (for
example, the lower the rating of a debt obligation, the higher the related
discount factor) and the frequency with which the relevant asset is marked to
market. In no event shall the Discounted Value of any asset of the Fund exceed
its unpaid principal balance or face amount as of the date of calculation.
The Discount Factor relating to any asset of the Fund, the Preferred
Shares Basic Maintenance Amount, the assets eligible for inclusion in the
calculation of the Discounted Value of the Fund's portfolio and certain
definitions and methods of calculation relating thereto may be changed from time
to time by the Fund, without stockholder approval, but only in the event that
the Fund receives written confirmation from S&P (if S&P is then rating the
Preferred Shares), Moody's (if Moody's is then rating the Preferred Shares) and
any Other Rating Agency which is then rating the Preferred Shares and which so
requires that any such changes would not impair the AAA/aaa Credit Rating. If
the Fund fails to maintain the AAA/aaa Credit Rating and is unable to restore
the AAA/aaa Credit Rating by the Rating Default Cure Date, the Fund will be
required to redeem the Preferred Shares. See "Description of Preferred Shares -
- - Redemption" and "S&P and Moody's Guidelines" above.
Investment Company Act Preferred Shares Asset Coverage. The Fund is
required under the Articles Supplementary to maintain Investment Company Act
Preferred Shares Asset Coverage on each Friday, or, if such day is not a
Business Day, the next preceding Business Day, in which any Preferred Shares are
outstanding. If the Fund fails to maintain Investment Company Act Preferred
Shares Asset Coverage and such failure is not cured as of the related Asset
Coverage Cure Date, the Fund will be required to
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<PAGE>
redeem certain Preferred Shares. See "Description of Preferred Shares --
Redemption."
The Fund estimates that on the Date of Original Issue of the Preferred
Shares, based on the composition of its portfolio as of March 31, 2000, the
Investment Company Act Preferred Shares Asset Coverage, after giving effect to
the issuance of the Preferred Shares ($60 million) and the deduction of
estimated offering expenses for such shares ($ ), will be computed as
follows:
Value of Fund assets less
liabilities not constituting
senior securities
- ------------------------------- $140,234,063 234%
Senior securities $ 60,000,000
representing indebtedness ($0)
plus Liquidation Value
of the Preferred Shares
Notices. The Fund is required to deliver a certificate with respect
to the calculation of the Preferred Shares Basic Maintenance Amount and the
value of the portfolio holdings of the Fund (a "Preferred Shares Basic
Maintenance Certificate")
(i) to the Auction Agent, S&P (if S&P is then rating the Preferred
Shares), Moody's (if Moody's is then rating the Preferred Shares) and any Other
Rating Agency which is then rating the Preferred Shares and which so requires as
of (a) the Business Day preceding the Date of Original Issue and (b) any
Valuation Date on which the Fund fails to have Eligible Assets with an aggregate
Discounted Value at least equal to 125% of the Preferred Shares Basic
Maintenance Amount,
(ii) to the Auction Agent, S&P (if S&P is then rating the Preferred
Shares) and any Other Rating Agency which is then rating the Preferred Shares
and which so requires (a) if the Fund fails to have Eligible Assets with an
aggregate Discounted Value at least equal to the Preferred Shares Basic
Maintenance Amount, and (b) on request by S&P or such Other Rating Agency, as
applicable,
(iii) to the Auction Agent, S&P (if S&P is then rating the Preferred
Shares), Moody's (if Moody's is then rating the Preferred Shares) and any Other
Rating Agency which is then rating the Preferred Shares and which so requires as
of (a) the Valuation Date next following the date of redemption by the Fund of
shares of Common Stock which, together with all other shares of Common Stock
purchased during the six months preceding such date, equal in excess of
1,000,000 shares of Common Stock, and (b) the last Valuation Date of each fiscal
quarter and a
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<PAGE>
Valuation Date during such fiscal quarter randomly selected by the Fund's
independent accountants as provided below, and
(iv) to the Auction Agent, S&P (if S&P is then rating the Preferred
Shares), Moody's (if Moody's is then rating the Preferred Shares) and any Other
Rating Agency which is then rating the Preferred Shares and which so requires as
of a Business Day on or before any Asset Coverage Cure Date relating to the
Fund's cure of a failure to have Eligible Assets with an aggregate Discounted
Value at least equal to the Preferred Shares Basic Maintenance Amount.
Such Preferred Shares Basic Maintenance Certificate shall be delivered
in the case of clause (i)(a) as of the Valuation Date preceding the Date of
Original Issue and in the case of clauses (i)(b), (ii), (iii) and (iv) above on
or before the seventh Business Day after the relevant Valuation Date or Asset
Coverage Cure Date.
The Fund is required to deliver to the Auction Agent, S&P (if S&P is
then rating the Preferred Shares), Moody's (if Moody's is then rating the
Preferred Shares) and any Other Rating Agency which is then rating the Preferred
Shares and which so requires, a certificate with respect to the calculation of
the Investment Company Act Preferred Shares Asset Coverage and the value of the
portfolio holdings of the Fund (an "Investment Company Act Preferred Shares
Asset Coverage Certificate")
(i) as of the Valuation Date preceding the Date of Original Issue, and
(ii) as of (a) the last Valuation Date of each quarter thereafter, and
(b) as of the Business Day on or before the Asset Coverage Cure Date relating to
the failure to satisfy the Investment Company Act Asset Coverage.
Such Investment Company Act Preferred Shares Asset Coverage
Certificate shall be delivered in the case of clause (i) on the Date of Original
Issue and in the case of clause (ii) on or before the seventh Business Day after
the relevant Valuation Date or the Asset Coverage Cure Date. Such certificate
must be accompanied by a certificate from the Fund's accountants certifying as
to the accuracy of the Fund's calculations.
Within ten Business Days of the Date of Original Issue, the Fund shall
deliver to the Auction Agent, S&P (if S&P is then rating the Preferred Shares,
Moody's (if Moody's is then rating the Preferred Shares) and any Other Rating
Agency which is then rating the Preferred Shares and which so requires, a letter
prepared by the Fund's independent accountants (an "Accountant's Certificate")
regarding the accuracy of the calculations made by the Fund in the Preferred
Shares Basic Maintenance Certificate and the Investment Company Act Preferred
Shares Asset Coverage Certificate required to be delivered by the Fund.
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<PAGE>
Within 10 Business Days after the delivery of the Preferred Shares
Basic Maintenance Certificate relating to the last Valuation Date of each fiscal
quarter of the Fund on which a Preferred Shares Basic Maintenance Certificate is
required to be delivered, the Fund (x) will deliver to the Auction Agent, S&P
(if S&P is then rating the Preferred Shares), Moody's (if Moody's is then rating
the Preferred Shares) and any Other Rating Agency which is then rating the
Preferred Shares and which so requires an Accountant's Certificate regarding the
accuracy of the calculations made by the Fund in such Preferred Shares Basic
Maintenance Certificate and in one other Preferred Shares Basic Maintenance
Certificate randomly selected by the Fund's independent accountants during such
fiscal quarter. Within 10 Business Days after delivery of the Investment Company
Act Preferred Shares Asset Coverage Certificate relating to the last Valuation
Date of each fiscal quarter of the Fund on which an Investment Company Act
Preferred Shares Asset Coverage Certificate is required to be delivered, the
Fund will deliver to the Auction Agent, S&P (if S&P is then rating the Preferred
Shares), Moody's (if Moody's is then rating the Preferred Shares) and any Other
Rating Agency which is then rating the Preferred Shares and which so requires an
Accountant's Certificate regarding the accuracy of the calculations made by the
Fund in such Investment Company Act Preferred Shares Asset Coverage Certificate.
In addition, the Fund will deliver to the relevant persons specified in the
preceding sentence an Accountant's Certificate regarding the accuracy of the
calculations made by the Fund on each Preferred Shares Basic Maintenance
Certificate and Investment Company Act Preferred Shares Asset Coverage
Certificate delivered pursuant to this section, as the case may be, within 10
days after the relevant Asset Coverage Cure Date. If an Accountant's Certificate
delivered with respect to an Asset Coverage Cure Date shows an error was made in
the Fund's report with respect to such Asset Coverage Cure Date, the calculation
or determination made by the Fund's independent accountants will be conclusive
and binding on the Fund with respect to such reports. If any other Accountant's
Certificate shows that an error was made in any such report, the calculation or
determination made by the Fund's independent accountants will be conclusive and
binding on the Fund; provided, however, any errors shown in the Accountant's
Certificate filed on a quarterly basis shall not be deemed to be a failure to
maintain the Preferred Shares Basic Maintenance Amount on any prior Valuation
Dates.
The Accountant's Certificates referred to above will confirm, based upon
the independent accountant's review, (i) the mathematical accuracy of the
calculations reflected in the related Preferred Shares Basic Maintenance Amount
and Investment Company Act Preferred Shares Asset Coverage Certificates, as the
case may be, and (ii) that the Fund determined whether the Fund had, at such
Valuation Date, Eligible Assets with an aggregate Discounted Value at least
equal to the Preferred Shares Basic Maintenance Amount in accordance with the
Articles Supplementary.
In the event that a Preferred Shares Basic Maintenance Certificate or
Investment Company Act Preferred Shares Asset Coverage Certificate or the
applicable Accountant's Certificates with respect to an applicable Valuation
Date are not delivered within the time periods specified in the Articles
Supplementary, the Fund shall be deemed to have failed to have maintained the
Preferred Shares Basic Maintenance Amount or the Investment Company Act
Preferred Shares Asset Coverage, as the case may be, on such Valuation Date.
41
<PAGE>
Liquidation
In the event of a liquidation, dissolution or winding up of the Fund,
whether voluntary or involuntary, the holders of Preferred Shares and any other
shares ranking in parity with the Preferred Shares, in preference to the holders
of Common Stock, will be entitled to payment, out of the assets of the Fund or
the proceeds thereof available for distribution to stockholders after
satisfaction of claims of creditors of the Fund, of a liquidation distribution
in the amount equal to the Liquidation Value per share of the Preferred Shares,
plus an amount equal to accumulated dividends (whether or not earned or declared
but without interest) to the date payment of such distribution is made in full
or a sum sufficient for the payment thereof is set apart with the Paying Agent.
However, holders of Preferred Shares will not be entitled to any premium to
which such Holder would be entitled to receive upon redemption of such Preferred
Shares. After payment of the full amount of such liquidation distribution, the
owners of the Preferred Shares will not be entitled to any further participation
in any distribution of assets of the Fund.
If, upon the liquidation, dissolution or winding up of the Fund,
whether voluntary or involuntary, the assets of the Fund or proceeds thereof
available for distribution to stockholders after satisfaction of claims of
creditors of the Fund shall be insufficient to pay in full the liquidation
distribution to which owners of any Preferred Shares are entitled, such assets
or the proceeds thereof will be distributed among the owners of the Preferred
Shares and any other shares ranking on a parity therewith, ratably.
In the event of any such liquidation, dissolution or winding up of the
Fund, whether voluntary or involuntary, until payment in full is made to the
owners of the Preferred Shares of the liquidation distribution to which they are
entitled, no dividend or other distribution shall be made to the holders of
Common Stock and no purchase, redemption or other acquisition for any
consideration by the Fund shall be made in respect of the Common Stock.
A consolidation or merger of the Fund with or into any other company
or companies, or a sale, lease or exchange of all or substantially all of the
assets of the Fund in consideration for the issuance of equity securities of
another company, shall not be deemed to be a liquidation, dissolution or winding
up of the Fund; provided, however, that the consolidation, merger, sale, lease
or exchange does not materially adversely affect any
42
<PAGE>
designation, right, preference or limitation of the Preferred Shares or any
shares issuable in exchange for Preferred Shares in any such consolidation or
merger.
To the extent other Preferred Shares are issued by the Fund, such
shares will share equally and on a pro rata basis with the Preferred Shares then
outstanding in connection with any liquidation, dissolution or winding up of the
Fund.
Voting Rights
See "Description of Preferred Shares -- Voting Rights" in Part A of this
prospectus for a summary of the voting rights of the holders of Preferred
shares. A full description of such rights is provided in the Fund's Articles
Supplementary relating to the Preferred Shares.
43
<PAGE>
Minimum Liquidity Level
Under the Articles Supplementary, as long as Preferred Shares are
still outstanding, the Fund will be required to have, as of the Valuation Date
next preceding each Dividend Payment Date, cash and/or Deposit Securities with
maturity dates not later than the day preceding the Dividend Payment Date and
having a value not less than the Dividend Coverage Amount. The "Dividend
Coverage Amount" as of any date means (1) the product of (a) $25,000 times the
number of Preferred Shares outstanding on such date, (b) the Dividend Rate and
(c) seven divided by 360, less (2) the combined value of Deposit Securities
irrevocably deposited for the payment of dividends on the Preferred Shares (but
not including any liabilities due prior to the next Dividend Payment Date).
Deposit Securities Requirements
The Fund is obligated to deposit in a segregated custodial account a
specified amount of cash, United States Government obligations or short-term
money market instruments (collectively, "Deposit Securities") not later than
days prior to each dividend payment date and each redemption date relating
44
<PAGE>
to the Preferred Shares. These Deposit Securities, in all cases, will have an
initial combined value greater than or equal to the cash amounts payable on the
applicable dividend payment or redemption date, and will mature prior to such
date.
MANAGEMENT OF THE FUND
Directors and Officers
The Board of Directors is responsible for the management of the Fund,
including general supervision of the duties SSBC performs under the Investment
Management Agreement. There are six directors of the Fund, one of whom is an
"interested person" (as defined in the Investment Company Act) and five of whom
are "disinterested persons." The names and business addresses of the directors
and officers of the Fund and their principal occupations and other affiliations
during the past five years are set forth below.
<TABLE>
<CAPTION>
Positions Held Principal Occupation
Name and Address (1) With the Fund During Past 5 Years
- ------------------------------------------ --------------------------------- -----------------------------------------
<S> <C> <C>
Heath B. McLendon* Chief Executive Officer, President and Director of SSBC and
SSB Citi Fund Management LLC President and Chairman of the Travelers Investment Advisor, Inc.;
Seven World Trade Center Board Managing Director of Salomon Smith
New York, New York 10048 Barney; Chairman of Salomon Smith
Barney Strategy Advisers Inc.;
Director of 64 investment companies
affiliated with Citigroup Inc.
Allan J. Bloostein Director Consultant; formerly Vice Chairman of
27 West 67th Street the Board of May Department Stores
Apt. 5FW Company, Director of Crystal Brands,
New York, New York 10023 Inc., Melville Corp., R.G. Barry
Corp. and Hechinger Co.
Martin Brody Director Consultant, HMK Associates, a
30 Columbia Turnpike financial consulting firm; retired;
Florham Park, New Jersey 07932 Vice Chairman of the Board of
Directors
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation
Name and Address (1) With the Fund During Past 5 Years
- ------------------------------------------ --------------------------------- -----------------------------------------
<S> <C> <C>
of Restaurant Associates
Corp.; Director of Taubman Realty,
CVS Drug Stores.
Dwight B. Crane Director Professor, Graduate School of
Harvard Business School Business Administration, Harvard
Soldiers Field Road University; Director of Peer Review
Boston, Massachusetts 02163 Analysis, Inc.
Robert A. Frankel Director Managing Partner of Robert A. Frankel
Robert A. Frankel Management Consultants Management Consultants; formerly
102 Grand Street Corporate Vice President of The
Croton-on-Hudson, New York Readers Digest Assoc. Inc.
10520
William R. Hutchinson Director Group Vice President, Mergers &
BP Amoco Acquisitions, BP Amoco p.l.c.;
200 E. Randolph Drive formerly Vice President Financial
Mail Code 1605 Operations AMOCO Corporation;
Chicago, Illinois Director of Associated Bank; Director
60601 of Associated Banc-Corp.
Lewis E. Daidone Senior Vice President and Managing Director of Salomon Smith
Two World Trade Center Treasurer Barney; Chief Financial Officer,
New York, New York 10048 Director and Senior Vice President of
SSBC and Travelers Investment
Advisers.
John C. Bianchi Vice President and Investment Managing Director of Salomon Smith
Two World Trade Center Officer Barney.
New York, New York 10048
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
Positions Held Principal Occupation
Name and Address (1) With the Fund During Past 5 Years
- ------------------------------------------ --------------------------------- -----------------------------------------
<S> <C> <C>
Christina Sydor Secretary Managing Director of Salomon Smith
Two World Trade Center Barney; General Counsel and Secretary
New York, New York 10048 of SSBC and Travelers Investment
Advisers.
</TABLE>
---------------------
(1) Messrs. Frankel and Hutchinson are subject to election by the holders of
the Preferred Shares, Messrs. Brody and Crane are subject to election by
the holders of the Common Stock and Messrs. Bloostein and McLendon are
subject to election by the holders of Preferred Shares and Common Stock
acting as a single class.
* Designates a Director who is an "interested person" of the Fund, as defined
in the Investment Company Act.
Under the Articles of Incorporation and the Investment Company Act, the
holders of Preferred Shares are entitled to elect two Directors, the holders of
Common Stock are entitled to elect two Directors and holders of Preferred Shares
and Common Stock, voting as a single class, are entitled to elect the remaining
directors, except in certain circumstances. See "Description of Preferred Shares
- -- Voting Rights" in the Prospectus and this Statement of Additional
Information. Election of Directors is non-cumulative; accordingly, holders of a
majority of the outstanding shares of Common Stock or a majority of the
outstanding Preferred Shares may elect all of the Directors who are subject to
election by such class.
The Fund pays each Director not affiliated with SSBC or any of its
affiliates a fee of $5,000 per year plus $500 per each in-person or committee
meeting attended and $100 per each telephonic Board meeting, together with
reimbursements for travel and out-of-pocket expenses related to attendance at
Board or committee meetings.
The table below shows, for each director who is not affiliated with SSBC,
the aggregate compensation the Fund paid for its fiscal year ended March 31,
1999 and the total compensation that SSBC affiliated funds paid to each director
during the calendar year 1999. The Fund has no retirement or pension plans. The
officers and directors affiliated with SSBC serve without compensation from the
Fund.
47
<PAGE>
<TABLE>
<CAPTION>
TOTAL NUMBER OF FUNDS
TOTAL COMPENSATION FOR WHICH DIRECTOR
AGGREGATE COMPENSATION FROM THE FUND AND FUND SERVES WITHIN FUND
NAME FROM THE FUND COMPLEX COMPLEX(1)
<S> <C> <C> <C>
Allan J. Bloostein $6,250 $ 90,500 9
Martin Brody $5,850 $132,500 20
Dwight B. Crane $6,850 $139,975 23
Robert A. Frankel $6,850 $ 72,250 9
William R. $6,750 $ 42,450 7
Hutchinson
Heath B. McLendon* 0 0 64
</TABLE>
- -----------
* Designates a director who is an "interested person" of the Fund, as defined
in the Investment Company Act.
(1) Investment companies affiliated with SSBC.
The Fund, SSBC and the Underwriter have adopted codes of ethics
pursuant to Rule 17j-1 of the Investment Company Act. These codes of ethics
permit personnel subject to the codes to invest in securities, including
securities that may be purchased or held by the Fund. These codes of ethics can
be reviewed and copied at the Public Reference Room of the Securities and
Exchange Commission in Washington, D.C. Information on the operation of the
Public Reference Room may be obtained by calling the Commission at 1-202-942-
8090. These codes of ethics are available on the EDGAR Database on the
Commission's Internet site at http://www.sec.gov and copies of these codes of
ethics may be obtained, after paying a duplication fee, by electronic request at
the following e-mail address: [email protected], or by writing the Commission's
Public Reference Section, Washington, D.C. 20549-0102.
PRINCIPAL STOCKHOLDERS
There are no persons known to the Fund to be control persons of the
Fund, as such term is defined in Section 2(a)(9) of the Investment Company Act.
There is no person known to the
48
<PAGE>
Fund to hold beneficially more than 5% of the outstanding shares of the Common
Stock. The following person is the only person holding of record more than 5% of
the outstanding shares of Common Stock as of March 31, 2000.
Name and Address Amount of Record Percent
of Record Owner Ownership of Class
- --------------- --------- --------
Cede & Co., as Nominee for
Depository Trust and Clearing
Corporation 88.18%
P.O. Box 20 Bowling Green Station
New York, New York 10004
As of March 31, 2000, the Fund's officers and directors as a group
beneficially owned less than 1% of the outstanding shares of Common Stock and no
shares of Outstanding Preferred Shares.
INVESTMENT ADVISER
SSB Citi Fund Management LLC, or SSBC, located at 388 Greenwich
Street, New York, New York 10013, acts as the investment adviser for, and
manages the investment and reinvestment of the assets of, the Fund.
Pursuant to the Investment Management Agreement and subject to the
supervision and direction of the Fund's Board of Directors, SSBC manages the
Fund's portfolio in accordance with the Fund's investment objective and
policies, makes investment decisions for the Fund, places orders to purchase and
sell securities and employs professional portfolio managers and securities
analysts who provide research services to the Fund. The Fund pays SSBC a monthly
investment advisory fee calculated at an annual rate of 0.50% of the average
daily net assets (defined as the average daily value of the total assets of the
Fund less total liabilities other than the outstanding principal amount under
the line of credit with PNC Bank, N.A.) of the Fund. This fee is calculated
daily and paid monthly. For the six months ended September 30, 1999 and for the
fiscal years ended March 31, 1999, 1998 and 1997, the Fund paid SSBC $377,331,
$789,196, $818,642 and $770,618, respectively, in administrative fees. For the
six months ended September 30, 1999 and for the fiscal years ended March 31,
1999, 1998 and 1997, the Fund paid SSBC $150,932, $315,678, $327,385 and
$305,651, respectively, in maintenance fees.
49
<PAGE>
Portfolio Trading
SSBC is responsible for decisions to buy and sell securities and other
portfolio holdings for the Fund, the selection of brokers and dealers to effect
transactions and the negotiation of brokerage commissions, if any. Fixed-income
securities are generally traded on a "net" basis with dealers acting as
principal for their own accounts without a stated commission, although the price
of the security will likely include a profit to the dealer. In underwritten
offerings, securities are usually purchased at a fixed price that includes an
amount of compensation to the underwriter, generally referred to as the
underwriter's concession or discount. On occasion, certain money market
instruments may be purchased directly from an issuer, in which case no
commissions or discounts are paid.
In placing orders for portfolio securities on behalf of the Fund, SSBC
is required to give primary consideration to obtaining the most favorable price
and efficient execution. This means that SSBC seeks to execute each transaction
at a price and commission, if any, that provides the most favorable total cost
or proceeds reasonably attainable in the circumstances. While SSBC generally
seeks reasonably competitive spreads or commissions, the Fund will not
necessarily be paying the lowest spread or commission available in all
instances. Within the framework of the policy of obtaining the most favorable
price and efficient execution, SSBC considers research and investment services
provided by brokers and dealers who effect or are parties to portfolio
transactions of the Fund, SSBC or SSBC's other clients.
Research and investment services are those which brokerage houses
customarily provide to institutional investors and include statistical and
economic data and research reports on particular issues and industries. These
services are used by SSBC in connection with all of its investment activities,
and some of the services obtained in connection with the execution of
transactions for the Fund may be used in managing other investment accounts.
Conversely, brokers furnishing these services may be selected for the execution
of transactions for these other accounts, whose aggregate assets may exceed
those of the Fund, and the services furnished by the brokers may be used by SSBC
in providing investment management for the Fund. During the Fund's last fiscal
year, neither the Fund nor SSBC, pursuant to any agreement or understanding with
a broker or otherwise through an internal allocation procedure, directed the
Fund's brokerage transactions to a broker or brokers because of research
services provided.
Commission rates are established pursuant to negotiations based on the
quality and quantity of execution services provided by the broker or dealer in
light of generally prevailing rates. The allocation of orders and the commission
rates paid by the Fund will be reviewed periodically by the
50
<PAGE>
Fund's Board of Directors. SSBC reserves the right to, and does, manage other
investment accounts and investment companies for other clients which may have
investment objectives similar or identical to those of the Fund.
Subject to applicable laws and regulations, SSBC will attempt to
allocate equitably portfolio transactions among the Fund and the portfolios of
its other clients purchasing or selling securities whenever SSBC decides to
purchase or sell securities for the Fund and one or more other clients
simultaneously. In making these allocations, the main factors to be considered
will be the respective investment objectives of the Fund and such other clients,
the relative size of the portfolio holdings of the same or comparable
securities, the availability of cash for investment by the Fund and such other
clients, the size of investment commitments the Fund and other clients generally
hold, and opinions of the persons responsible for recommending investments to
the Fund and such other clients. While this procedure could have a detrimental
effect on the price or amount of the securities available to the Fund from time
to time, it is the opinion of the Board that the benefits available from SSBC's
organization will outweigh any disadvantage that may arise from exposure to
simultaneous transactions.
Notwithstanding the similarity of the investment objective of the Fund
with that of other funds SSBC manages, the Fund will be separately managed and
the composition of its investment portfolio is likely to differ. Accordingly,
the investment performance of the Fund will likely not be the same as other
funds.
The Fund anticipates that, in connection with the execution of
portfolio transactions on its behalf, the Underwriter may from time to time act
as a broker or dealer. In addition, affiliated persons (as such term is defined
in the Investment Company 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
Investment Company Act from dealing with the Fund as principal in the purchase
or sale of securities. In order for such an affiliated person to be permitted to
effect any portfolio transactions for the Fund, the commissions, fees or other
remuneration received by such affiliated person must be reasonable and fair
compared to the commissions, fees or other remuneration received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable period of
time. This standard would allow such an affiliated person to receive no more
than the remuneration which would be expected to be received by an unaffiliated
broker in a commensurate arm's-length transaction. The Fund is prohibited by the
Investment Company Act from purchasing securities in primary offerings in which
an affiliate acts as an underwriter unless certain conditions established under
the Investment Company Act are satisfied.
The Fund paid no commissions to affiliated brokers for the fiscal
years ended March 31, 2000, 1999 and 1998.
DETERMINATION OF NET ASSET VALUE
Net asset value of the Common Stock is determined by SSBC no less
frequently than the close of business (generally 4:00 P.M. New York time) on the
last Business Day of each week (generally Friday), by dividing the value of the
net assets of the Fund by the total number shares of Common Stock outstanding.
For the purpose of determining the net asset value per share of the Common
Stock, the value of the Fund's net assets is deemed to equal the value of the
Fund's assets less (1) the Fund's liabilities (2) accumulated and unpaid
dividends on the outstanding Preferred Shares and (3) the aggregate liquidation
value of the Preferred Shares.
51
<PAGE>
In valuing the Fund's assets for all purposes other than the
determination of the discounted value of such assets pursuant to S&P and Moody's
guidelines, portfolio securities that are actively traded in the over-the-
counter market, including listed securities for which the primary market is
believed to be over-the-counter, are valued at the mean between the most
recently quoted bid and asked prices provided by the principal market makers.
Any security for which the primary market is on an exchange is valued
at the last sale price on the exchange on the day of valuation or, if there was
no sale on that day, the last bid price quoted on that day. Options are valued
at market value or fair value if no market exists.
Securities and assets for which market quotations are not readily
available are valued at fair value as determined in good faith by or under the
direction of the Board of Directors of the Fund, including reference to
valuations of other securities that are considered comparable in quality,
interest rate and maturity. Short-term investments that mature in 60 days or
less are valued on the basis of amortized cost (which involves valuing an
investment at cost and, thereafter, assuming a constant amortization to maturity
of any discount or premium, regardless of the effect of fluctuating interest
rates on the market value of the investment), when the Board of Directors has
determined that amortized cost represents fair value. Repurchase agreements are
valued at cost plus accrued interest.
SHARE REPURCHASES
Shares of common stock of closed-end investment companies frequently
trade at a discount from net asset value. To address this possibility, the Board
of Directors contemplates that the Fund may from time to time consider either
the repurchase of shares of the Common Stock on the open market or the making of
tender offers for the Common Stock. Repurchases of shares of Common Stock will
reduce the net assets of the Fund and, therefore, the net assets available for
purposes of the asset coverage calculations for the Preferred Shares. The Fund
may borrow money to finance the repurchase of shares, subject to compliance with
Section 18 of the Investment Company Act and the other limitations described
under "Investment Objective and Policies -- Certain Investment Strategies --
Additional Leverage."
Shares of Common Stock may not be repurchased, however
(1) if applicable asset coverage requirements under the Investment
Company Act (that is, 300% with respect to any securities representing
indebtedness and 200% with respect to the Preferred Shares) are not met or would
not be met following the repurchase or
52
<PAGE>
(2) when dividends on the Preferred Shares are in arrears or the
Preferred Shares Basic Maintenance Amount is not maintained.
See "Description of Preferred Shares --Asset Maintenance."
No assurance can be given that repurchases or tenders will result in
the Common Stock's trading at a price that is equal to its net asset value.
Although the Board of Directors believes that Common Stock repurchases and
tenders generally would have a favorable effect on the market price of the
Common Stock, it should be recognized that the acquisition of Common Stock will
decrease the total assets of the Fund and therefore have the effect of
increasing the Fund's expense ratios, as well as reducing the net assets
available for the asset coverage calculations for the Preferred Shares.
Furthermore, any interest on borrowings to finance Common Stock repurchase
transactions will reduce the Fund's net income.
TAXES
The following offers only a brief outline of the Federal income tax
consequences of investing in the Preferred Shares. Investors should consult
their own tax advisors for more detailed information and for information
regarding the effect of state and local taxes upon such an investment.
Tax Treatment of the Fund
The Fund has qualified, and intends to qualify each year, as a
"regulated investment company" under Subchapter M of the Code. If the Fund
qualifies as a regulated investment company, the Fund will pay no Federal income
taxes on its taxable net investment income (that is, taxable income other than
net realized capital gains) and its net realized capital gains that are
distributed to shareholders.
To qualify under Subchapter M of the Code, the Fund must, among other
things:
(1) distribute to its shareholders at least 90% of its taxable net
investment income (for this purpose consisting of taxable net investment income
and net realized short-term capital gains);
(2) derive at least 90% of its gross income from dividends, interest,
payments with respect to loans of securities, gains from the sale or other
disposition of securities, or other income (including, but not limited to, gains
from options, futures, and forward contracts) derived with respect to the Fund's
business of investing in securities, and
53
<PAGE>
(3) diversify its holdings so that, at the end of each fiscal quarter
of the Fund (a) at least 50% of the market value of the Fund's assets is
represented by cash, Government Securities and other securities, with those
other securities limited, with respect to any one issuer, to an amount no
greater than 5% of the value of the Fund's assets and not greater than 10% of
the outstanding voting securities of the issuer and (b) not more than 25% of the
market value of the Fund's assets is invested in the securities of any one
issuer (other than Government Securities or securities of other regulated
investment companies) or of two or more issuers that the Fund controls and that
are determined to be in the same or similar trades or businesses or related
trades or businesses.
If the Fund does not meet the asset coverage requirements of the
Investment Company Act, the Fund will be required to suspend distributions to
the holders of the Common Stock and/or the Preferred Shares until the asset
coverage is restored. Such a suspension of distributions might prevent the Fund
from distributing 90% of its investment company taxable income, as is required
in order to avoid Fund-level taxation on the Fund's distributions.
In addition, if the Fund fails to distribute in each calendar year an
amount equal to at least the sum of (1) 98% of its ordinary income for such
calendar year, (2) 98% of its capital gain net income (both long-term and short-
term) for the 12 months ended October 31 of such calendar year (or November 30
or December 31, if the Fund so elects) and (3) any portion of the respective 2%
balances not later than the end of the succeeding calendar year, the Fund will
be subject to a 4% excise tax on the undistributed income unless it is otherwise
required to pay an income tax on those amounts. The Fund's income would include
income attributable to the Fund from its investment in zero coupon securities
and other instruments issued with an original issue discount, although no cash
payments would be received for income accruing on such securities until their
respective maturities.
Upon any failure to meet the asset coverage requirements of the
Investment Company Act, the Fund will be required under certain circumstances to
partially redeem the Preferred Shares in order to maintain or restore the
requisite asset coverage. Depending on the size of the Fund's assets relative to
its outstanding senior securities, redemption under certain circumstances of the
Preferred Shares might restore asset coverage. If asset coverage were restored,
the Fund would again be able to pay dividends and might be able to avoid
Fund-level taxation of the Fund's distributions.
If the Fund fails to qualify as a regulated investment company in any
year or fails to meet the distribution requirement, it would be taxed in the
same manner as an ordinary corporation and distributions to its shareholders
would not be
54
<PAGE>
deductible by the Fund in determining its income. The Fund's dividends, to the
extent derived from its current or accumulated earnings and profits, would
constitute dividends (eligible for the corporate dividends received deduction)
which are taxable to shareholders as ordinary income, even though those
distributions might otherwise (at least in part) have been treated in the
shareholders' hands as long-term capital gain. In order to requalify as a
regulated investment company, a fund must pay out its earning and profits
accumulated in the year it fails to qualify. In addition, if the Fund fails to
qualify as a regulated investment company for a period greater than one taxable
year, it may be required to recognize any net built-in gains (the excess of the
aggregate gains, including items of income, over aggregate losses that would
have been realized if it had been liquidated) in order to qualify as a regulated
investment company in a subsequent year.
If the Fund is the holder of record of any stock on the record date
for any dividends payable with respect to such stock, such dividend will be
included in the Fund's gross income as of the later of (1) the date such stock
became ex-dividend with respect to such dividends (that is, the date on which a
buyer of the stock would not be entitled to receive the declared, but unpaid
dividends) or (2) the date the Fund acquired such stock. Accordingly, in order
to satisfy its income distribution requirements, the Fund may be required to pay
dividends based on anticipated earnings, and shareholders may receive dividends
in an earlier year than would otherwise be the case.
The Fund's transactions, if any, in foreign currencies, forward
contracts, options and futures contracts (including options and forward
contracts on foreign currencies) will be subject to special provisions of the
Code that, among other things, may affect the character of gains and losses
recognized by the Fund (that is, may affect whether gains or losses are ordinary
or capital), accelerate recognition of income to the Fund, defer Fund losses and
cause the Fund to be subject to hyperinflationary currency rules. These rules
could therefore affect the character, amount and timing of distributions to
shareholders.
These provisions also (1) will require the Fund to mark to market
certain types of its positions (that is, treat them as if they were closed out)
and (2) may cause the Fund to recognize income without receiving cash with which
to pay dividends or make distributions in amounts necessary to satisfy the
distribution requirements for avoiding income and excise taxes.
The Fund will monitor its transactions, will make the appropriate tax
elections and will make the appropriate entries in its books and records when it
acquires any foreign currency, forward contract, option, futures contract or
hedged investment so that (1) neither the Fund nor its shareholders will be
treated as receiving a materially greater amount of capital gains or
55
<PAGE>
distributions than actually realized or received, (2) the Fund will be able to
use substantially all of its losses for the fiscal years in which the losses
actually occur and (3) the Fund will continue to qualify as a regulated
investment company.
Tax Treatment of Holders of Preferred Shares
Distributions paid in cash to holders of Preferred Shares will be
taxable as ordinary income for Federal income tax purposes. Generally, dividends
received by corporate shareholders will not be eligible for the dividends
received deduction if the Fund qualifies as a regulated investment company.
Generally, gain or loss realized by a shareholder on the sale of shares held for
more than one year will be treated as long-term capital gain or loss. If a
shareholder holds shares primarily for sale to customers in the ordinary course
of business rather than for investment, any gain recognized on the sale of those
shares would be taxable as ordinary income. Any loss realized on a sale or
exchange of Preferred Shares will be treated as long-term capital loss to the
extent of any capital gain dividends received by the shareholder with respect to
such Preferred Shares. In addition, any loss realized on a sale or exchange will
be disallowed to the extent the shares disposed of are replaced within a period
of 61 days beginning 30 days before and ending 30 days after the disposition. In
such a case, the basis of the shares acquired will be adjusted to reflect the
disallowed loss.
Backup Withholding
If a shareholder fails to furnish a correct taxpayer identification
number, fails to report fully dividend or interest income, or fails to certify
that he has provided a correct taxpayer identification number and that he is not
subject to "backup withholding," the shareholder may be subject to a 31% "backup
withholding" tax with respect to (1) taxable dividends and distributions and (2)
the proceeds of any sales or repurchases of Preferred Shares. An individual's
taxpayer identification number is his social security number. Corporate
shareholders and other shareholders specified in the Code are or may be exempt
from backup withholding. The backup withholding tax is not an additional tax and
may be credited against a taxpayer's Federal income tax liability. Additional
Federal withholding taxes at a 30% rate (or a lesser rate established by treaty)
may apply to distributions to shareholders that are nonresident aliens or
foreign partnerships, trusts or corporations.
Other Taxation
Dividends and distributions from the Fund received by a shareholder of
the Fund may be subject to state and local taxes depending on the shareholder's
particular situation.
56
<PAGE>
ADDITIONAL INFORMATION CONCERNING THE AUCTION FOR PREFERRED SHARES
Note: Capitalized terms used in the following section have the meaning
assigned to them in the Glossary, which is included as Appendix C to this
Statement of Additional Information.
The following section supplements and, with respect to certain
information, describes in greater detail the information concerning the auction
and auction procedures contained in the Prospectus.
General
The Fund will not submit an Order in any Auction.
Dividend Rates and Auction Dates
The Dividend Rate for each Dividend Period will be determined on the
Auction Date in respect of such Dividend Period. If Sufficient Clearing Orders
exist for an Auction, the Dividend Rate for the ensuing Dividend Period will be
the Winning Rate, or, if all shares in an Auction are the subject of Submitted
Hold Orders in respect of a Dividend Period of fewer than 93 days, the Minimum
Applicable Rate. If Sufficient Clearing Orders do not exist for any Auction, the
ensuing Dividend Period will be a Standard Term Period and the Dividend Rate for
that Dividend Period will be the Maximum Applicable Rate. Except in the case of
a Default or where all Preferred Shares are subject to Submitted Hold Orders, if
there is no Auction on any Auction Date, the next Dividend Period will be a
Standard Term Period, and the Dividend Rate will be the Maximum Applicable Rate
that could have resulted from an Auction in respect of a Standard Term Period on
such Auction Date. The Fund is obligated to exercise its best efforts to
maintain an Auction Agent.
Orders by Existing Holders and Potential Holders
On or prior to each Auction Date and prior to the Submission Deadline
(initially 1:00 P.M., New York City time), each Existing Holder, with respect to
shares it then holds, may submit to a Broker-Dealer by telephone or otherwise a
Hold Order, a Hold/Sell Order or a Sell Order and each Broker-Dealer will
contact Potential Holders to determine the Buy Orders, if any, to be made by
such Potential Holders.
Submission of Orders to Auction Agent
Each Order must be submitted in writing by a Broker-Dealer to the
Auction Agent prior to the Submission Deadline on each Auction Date for the
Auction to be conducted on such Auction Date and must specify (A) the name of
the Existing Holder or
57
<PAGE>
Potential Holder placing such Order, (B) the aggregate number of shares that are
the subject of such Order, (C) to the extent that such Orders are placed by an
Existing Holder, the number of shares, if any, subject to any Hold Order,
Hold/Sell Order or Sell Order and (D) the rate, if any, specified in each Order.
If any rate specified in any Order contains more than three figures to
the right of the decimal point, the Auction Agent will round such rate up to the
next higher one thousandth of 1%.
Only in the case of an Auction preceding a Dividend Period of 93 days
or fewer and following a Dividend Period of 93 days or fewer, if an Order or
Orders covering all shares held by any Existing Holder are not submitted to the
Auction Agent by the Submission Deadline, the Auction Agent will deem a Hold
Order to have been submitted on behalf of such Existing Holder covering the
number of shares held by such Existing Holder and not subject to Orders
submitted to the Auction Agent. In the case of all other Auctions, if a
Hold/Sell or Sell Order or Orders covering all shares held by any Existing
Holder are not submitted to the Auction Agent by the Submission Deadline, the
Auction Agent will deem a Sell Order to have been submitted on behalf of such
Existing Holder covering the number of shares held by such Existing Holder and
not subject to Orders submitted to the Auction Agent.
If one or more Orders covering in the aggregate more than the number
of Preferred Shares held by an Existing Holder are submitted to the Auction
Agent, such Orders will be valid in accordance with the Validity Procedures.
If more than one Order is submitted on behalf of any Existing Holder
or Potential Holder, each Order submitted will be a separate Order.
In the case of any Dividend Period of 93 days or fewer, if any rate
specified in any Order is lower than the Minimum Applicable Rate for the
Dividend Period with respect to which such Order is made, such Order will be
deemed to be an Order specifying a rate equal to such Minimum Applicable Rate.
In the case of any Dividend Period of more than 93 days, only Buy
Orders, Hold/Sell Orders or Sell Orders may be submitted and Hold Orders may not
be submitted.
Determination of Sufficient Clearing Orders and Applicable Rate
Not earlier than the Submission Deadline, on each Auction Date, the
Auction Agent will assemble all Submitted Orders and will determine whether
Sufficient Clearing Orders exist and the Applicable Rate.
Acceptance of Orders and Allocation of Shares
58
<PAGE>
Based upon the results of the Auction, the Auction Agent will
determine the aggregate number of shares to be held and sold by Existing Holders
and to be purchased by Potential Holders, and, with respect to each Broker-
Dealer, determine the extent to which such Broker-Dealer will deliver, and from
which other Broker-Dealers such Broker-Dealer will receive, shares.
If Sufficient Clearing Orders exist, subject to the Rounding
Procedures:
(i) all Submitted Hold Orders will be accepted;
(ii) all Submitted Sell Orders will be accepted and all Submitted
Hold/Sell Orders specifying any rate higher than the Winning Rate
will be accepted as Sell Orders;
(iii) all Submitted Hold/Sell Orders specifying a rate lower than the
Winning Rate will be accepted as Hold Orders; (iv) all Submitted
Buy Orders specifying a rate lower than the Winning Rate will be
accepted;
(v) all Submitted Hold/Sell Orders specifying a rate equal to the
Winning Rate will be accepted as Hold Orders unless the number of
shares subject to all such Submitted Hold/Sell Orders is greater
than the number of shares remaining unaccounted for after the
acceptances described in clauses (i), (iii), and (iv) above, in
which event each such Submitted Hold/Sell Order will be accepted as
a Hold Order and a Sell Order as to the respective number of shares
determined in accordance with the Proration Procedures; and
(vi) all Submitted Buy Orders specifying a rate equal to the Winning
Rate will be accepted, unless the number of shares subject to all
such Submitted Buy Orders is greater than the number of shares
remaining unaccounted for after the acceptances described in
clauses (i), (iii), (iv) and (v) above, in which event each such
Submitted Buy Order will be accepted only as to the number of
shares determined in accordance with the Proration Procedures.
If Sufficient Clearing Orders do not exist, subject to the Rounding Procedures:
(i) all Submitted Hold Orders will be accepted;
(ii) all Submitted Hold/Sell Orders specifying a rate equal to or lower
than the Maximum Applicable Rate will be accepted as Hold Orders;
(iii) all Submitted Buy Orders specifying a rate equal to or lower than
the Maximum Applicable Rate will be accepted; and
59
<PAGE>
(iv) all Submitted Hold/Sell Orders specifying a rate higher than the
Maximum Applicable Rate and all Submitted Sell Orders will be
accepted as Hold Orders and as Sell Orders as to the respective
number of Preferred Shares determined in accordance with the
Proration Procedures.
Notification of Results; Settlement
The Auction Agent will notify each Broker-Dealer that submitted an
Order whether such Order was accepted and of the Applicable Rate for the next
Dividend Period by telephone by approximately 3:00 p.m., Eastern time, on each
Auction Date. Each Broker-Dealer that submitted an Order will as soon as
practicable advise each Existing Holder and Potential Holder whether its Order
was accepted and will confirm in writing purchases and sales with each Existing
Holder and Potential Holder purchasing or selling shares as a result of an
Auction as soon as practicable on the Business Day next succeeding the Auction
Date. Each Broker-Dealer that submitted a Hold Order will advise each Existing
Holder on whose behalf such Hold Order was submitted of the Applicable Rate for
the Preferred Shares for the next Dividend Period.
In accordance with the Securities Depository's normal procedures, on
the Business Day after the Auction Date, the transactions described above will
be executed through the Securities Depository and the accounts of the respective
Agent Members at the Securities Depository will be debited and credited and
shares delivered as necessary to effect the purchases and sales as determined in
the Auction. Purchasers will make payment through their Agent Members in same-
day funds to the Securities Depository against delivery through their Agent
Members; the Securities Depository will make payment in accordance with its
normal procedures, which now provide for payment against delivery to their Agent
Members in same-day funds.
If any Existing Holder selling shares in an Auction fails to deliver
such shares, the Broker-Dealer of any person that was to have purchased shares
in such Auction may deliver to such person a number of whole shares that is less
than the number of shares that otherwise was to be purchased by such person. In
such event, the number of shares to be so delivered shall be determined by such
Broker-Dealer. Delivery of such lesser number of shares shall constitute good
delivery.
Broker-Dealers; Commissions
The Fund may request the Auction Agent to terminate one or more
Broker-Dealer Agreements at any time, provided that at least one Broker-Dealer
Agreement is in effect after any such termination.
Broker-Dealers which submit Orders for the account of others must be
authorized by law to perform such function. A
60
<PAGE>
Broker-Dealer may acquire shares for its own account. If a Broker-Dealer submits
an Order for its own account in an Auction, it may have an advantage over others
because it would have knowledge of other Orders placed through it in that
Auction.
Salomon Smith Barney Inc. ("Salomon Smith Barney" or the
"Underwriter"), the underwriter in the offering of Preferred Shares, intends to
serve as the initial Broker-Dealer for the Preferred Shares. Other firms may
serve as Broker-Dealers in connection with Auctions, although there is no
assurance that they will do so.
The Auction Agent after each Auction will initially pay to each
Broker-Dealer from funds provided by the Fund a participation fee based on the
purchase price of shares placed by the Broker-Dealer at such Auction. Initially,
the annual rate of such participation fee with respect to Dividend Periods of
less than one year shall be an annual rate of .25%, depending on the results of
the Auction and, in the case of Dividend Periods of one year or more, a
percentage agreed upon between the Fund and the Broker-Dealer. For purposes of
this paragraph, shares will be placed by a Broker-Dealer if such shares were (i)
the subject of Hold Orders deemed to have been made by Existing Holders and were
acquired by such Existing Holders through the Broker-Dealer or (ii) the subject
of an Order submitted by the Broker-Dealer that is (A) an Order of an Existing
Holder that resulted in such Existing Holder continuing to hold such shares as a
result of the Auction or (B) an Order of a Potential Holder that resulted in
such Potential Holder purchasing such shares as a result of the Auction or (C) a
valid Hold Order. In the event an Auction scheduled to occur on an Auction Date
fails to occur for any reason, a Broker-Dealer will be entitled to service
charges as if the Auction had occurred and all holders of shares placed by them
had submitted valid Hold Orders.
The Auction Agent
Bankers Trust Company will serve as Auction Agent for so long as
Preferred Shares are Outstanding. The Auction Agent is acting solely as agent of
the Fund and is not a trustee for holders of Preferred Shares. In the absence of
bad faith or gross negligence on its part, the Auction Agent will not be liable
to the Fund for any action taken, suffered or omitted or for any error of
judgment made by it in the performance of its duties as Auction Agent.
The Auction Agent may resign upon notice to the Fund, such resignation
to be effective on the earlier of the 90th day after the delivery of such notice
and the date on which a successor Auction Agent is appointed by the Fund. The
Fund may also replace the Auction Agent.
Master Purchaser's Letter
61
<PAGE>
Each prospective purchaser of Preferred Shares or its Broker-Dealer
will be required to sign and deliver to the Auction Agent, as a condition to
such purchaser's purchasing Preferred Shares in any Auction or otherwise, a
Master Purchaser's Letter, the form of which is an exhibit to the Registration
Statement, in which such prospective purchaser or its Broker-Dealer will agree,
among other things:
(a) to participate in Auctions for Preferred Shares in accordance with
the Auction Procedures described in the Prospectus and this Statement of
Additional Information;
(b) to sell, transfer or otherwise dispose of Preferred Shares only
pursuant to a Bid or a Sell Order in an Auction, or to or through a Broker-
Dealer or to a person that has delivered a signed Master Purchaser's Letter to
the Auction Agent, provided that in the case of all transfers other than those
pursuant to Auctions, the Existing Holder of the shares so transferred, its
Agent Member or its Broker-Dealer advises the Auction Agent of such transfer;
and
(c) to have the ownership of the Preferred Shares as to which such
purchaser or its Broker-Dealer is the Existing Holder maintained in book entry
form by the Securities Depository for the account of its Agent Member, which in
turn will maintain records of such purchaser's beneficial ownership, and to
authorize such Agent Member to disclose to the Auction Agent such information
with respect to such purchaser's beneficial ownership as the Auction Agent may
request.
Each prospective purchaser should ask its Broker-Dealer whether such
prospective purchaser should sign a Master Purchaser's Letter. If the Broker-
Dealer submits Orders for such prospective purchaser listing the Broker-Dealer
as the Existing Holder or the Potential Holder, a Master Purchaser's Letter
signed by such prospective purchaser may not be required.
An execution copy of the Master Purchaser's Letter is an exhibit to
the Registration Statement. Execution by a prospective purchaser or its Broker-
Dealer of a Master Purchaser's Letter is not a commitment to purchase Preferred
Shares in the offering being made by the Prospectus or in any Auction or
otherwise, but is a condition precedent to such purchaser's purchasing Preferred
Shares.
CUSTODIAN, TRANSFER AGENT, DIVIDEND PAYING AGENT AND REGISTRAR
The Fund's securities and cash are held under a custodian agreement by
PNC. The principal business address of PNC is 17th and Chestnut Streets,
Philadelphia, Pennsylvania 19103. The Fund's assets are held under bank
custodianship in compliance with the Investment Company Act.
PFPC is located at P.O. Box 9699, Providence, Rhode Island 02940, and
serves, with respect to the Preferred Shares and the Common Stock, as transfer
agent, dividend paying agent and registrar, and, with respect to the Preferred
Shares, as agent to provide notice of redemption and certain voting rights.
EXPERTS
The audited statement of assets and liabilities, as of March 31,
1999, the related statement of operations and statement of cash flows for the
year then ended, the statement of changes in net assets for each of the years in
the two-year period then ended, the financial highlights for each of the years
in the four-year period ended March 31, 1999 have been incorporated by reference
into this Statement of Addition Information in reliance on the report
62
<PAGE>
of KPMG LLP, independent certified public accountants, and upon the authority of
said firm as experts in accounting and auditing. KPMG LLP is located at 757
Third Avenue, New York, NY 10017.
ADDITIONAL INFORMATION
This Statement of Additional Information does not contain all of the
information included in the Registration Statement filed with the Securities and
Exchange Commission under the Securities Act of 1933, as amended, and the
Investment Company Act with respect to the Preferred Shares offered by the
Prospectus. Further information concerning the Preferred Shares may be found in
the Registration Statement, which is on file with the Commission. Statements
contained in the Prospectus and in this Statement of Additional Information as
to the contents of any contract or other document referred to are not
necessarily complete and in each instance reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each such statement being qualified in all respects by such reference.
The Registration Statement may be inspected without a change at the
Commission's principal office in Washington, D.C. and copies of all or any part
thereof may be obtained from such office after payment of the fees prescribed by
the Commission.
The Fund is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and the Investment Company Act, and in
accordance therewith files and reports and other information with the
Commission. Such reports, proxy and public statements and other information can
be inspected and copied at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, DC 20549. Call 1-800-SEC-0330
for information about the public reference facilities. Copies of such material
can be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, DC 20549 at prescribed rates. Such reports and other
information concerning the Fund may also be inspected at the offices of the New
York Stock Exchange. The Commission maintains a Web site (http:\\www.sec.gov)
that contains the Prospectus, material incorporated by reference into this
Statement of Additional Information and the Prospectus, and reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission.
63
<PAGE>
APPENDIX A
STATEMENT OF PORTFOLIO COMPOSITION
<TABLE>
<CAPTION>
ZENIX INCOME FUND
PORTFOLIO HOLDINGS BY S&P RATINGS AS OF MARCH 31, 2000
CUSIP NAME RTG_SP PAR MARKET VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
131347AD8 CALPINE CORP BB+ 1,350,000.00 1,419,187.50
482584AG4 K MART CORP BB+ 490,000.00 553,700.00
87970CAA4 TEMBEC FINANCE CORP BB+ 350,000.00 350,000.00
00130HAQ8 AES CORP BB 690,000.00 662,400.00
009451AH8 AIRPLANES PASS-THRU TRST BB 1,725,805.00 1,480,688.92
37931KAH4 GLOBAL CROSSING HLDG LTD BB 815,000.00 790,550.00
40423QAG2 HMH PROPERTIES, INC. BB 1,275,000.00 1,112,437.50
448924AD2 ICN PHARMACEUTICALS INC BB 2,070,000.00 2,013,075.00
741932AC1 PRIDE INTERNATIONAL INC BB 655,000.00 645,175.00
01958XAM9 ALLIED WASTE NORTH AMER BB- 230,000.00 184,000.00
053790AC5 AVIS GROUP HOLDINGS INC BB- 535,000.00 533,662.50
126304AF1 CSC HOLDINGS INC BB- 1,000,000.00 1,103,750.00
172909AF0 MANDALAY RESORT GROUP BB- 105,000.00 81,900.00
45811EAB9 INTEGRATED ELEC SERVICES BB- 255,000.00 217,387.50
52736TAC2 LEVIATHAN GAS PL/FIN CRP BB- 365,000.00 374,125.00
731095AF2 POLAROID CORPORATION BB- 430,000.00 435,375.00
74925LAF7 RBF FINANCE CO BB- 555,000.00 600,093.75
811371AA1 SEA CONTAINERS BB- 1,030,000.00 957,900.00
911363AG4 UNITED RENTALS INC BB- 180,000.00 162,900.00
911363AH2 UNITED RENTALS INC BB- 175,000.00 155,750.00
969455AB0 WILLIAMS COMM GROUP INC BB- 525,000.00 518,437.50
156503AD6 ADELPHIA COMMUNICATIONS BB- 130,000.00 130,650.00
156503AK0 ADELPHIA COMMUNICATIONS BB- 340,000.00 272,000.00
156503AN4 ADELPHIA COMMUNICATIONS BB- 255,000.00 105,825.00
775100AG5 ROGERS CABLESYSTEMS LTD BB- 775,000.00 868,000.00 BB 15,728,970.17
00130HAD7 AES CORPORATION B+ 915,000.00 901,275.00
01958XAQ0 ALLIED WASTE NORTH AMER B+ 3,000,000.00 2,227,500.00
030789AM3 AMES DEPARTMENT STORES B+ 610,000.00 565,775.00
151018AC2 CELESTICA INTL B+ 515,000.00 540,750.00
16117PAG5 CHRTR COMM HLDS/CHRT CAP B+ 235,000.00 227,362.50
16117PAJ9 CHRTR COMM HLDGS LLC B+ 1,460,000.00 799,350.00
35802W204 FRESENIUS MED CAP TR I B+ 10,900.00 1,035,500.00
365438AF7 GARDEN STATE NEWSPAPERS B+ 145,000.00 128,143.75
447012AB1 HUNTSMAN ICI CHEMICALS B+ 645,000.00 622,425.00
44701DAB7 HUNTSMAN ICI CHEMICALS B+ 3,700,000.00 1,091,500.00
460915AB7 INTRAWEST CORP B+ 510,000.00 484,500.00
460915AG6 INTRAWEST CORP B+ 685,000.00 671,300.00
465266AC8 IT GROUP INC B+ 315,000.00 300,431.25
599908AC4 MILLAR WESTERN FOREST B+ 565,000.00 532,512.50
656559AT8 NORTEK INC B+ 480,000.00 446,400.00
656559AW1 NORTEK INC B+ 135,000.00 124,200.00
670509AG3 NUEVO ENERGY CO B+ 855,000.00 829,350.00
675746AA9 OCWEN FINANCIAL CORP B+ 2,600,000.00 2,366,000.00
700677AH0 PARK-OHIO INDUSTRIES INC B+ 700,000.00 616,000.00
701081AG6 PARKER DRILLING CO B+ 980,000.00 948,150.00
74912EAP6 R&B FALCON CORP B+ 515,000.00 552,981.25
782295AA7 RUSSEL METALS INC B+ 430,000.00 424,625.00
857555AH9 STATER BROTHERS HLDGS B+ 450,000.00 446,625.00
87956PAD7 TELEWEST COMMUNICATN PLC B+ 1,250,000.00 1,293,750.00
880349AA3 TENNECO AUTOMOTIVE INC B+ 1,030,000.00 1,006,825.00
880915AE3 TERRA INDUSTRIES B+ 445,000.00 338,200.00
903236AD9 URS CORP. B+ 740,000.00 747,400.00
92923JAF6 WCI STEEL INC B+ 1,320,000.00 1,293,600.00
010375614 ESAT TELECOM GROUP PLC B+ 325,000.00 394,960.96
006848AP0 ADELPHIA COMMUNICATIONS B+ 1,010,000.00 979,700.00
130910AG7 CALL-NET ENTERPRISES INC B+ 300,000.00 231,000.00
866768AC8 SUN INTERNATIONAL HOTELS B+ 370,000.00 333,000.00
866768AD6 SUN INTL HOTELS/INTL-NA B+ 560,000.00 511,000.00
008914AB9 AINSWORTH LUMBER B 660,000.00 716,925.00
009270701 POLESTAR CORP PLC B 975,000.00 1,477,649.80
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CUSIP NAME RTG_SP PAR MARKET VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
010043620 BSN FINANCING CO. SA B 800,000.00 799,969.38
010470676 GLOBAL TELESYSTEMS EUROP B 650,000.00 597,106.33
02311PAG9 AMATEK INDUSTRIES PTY B 295,000.00 279,143.75
04962VAE9 ATRIUM COMPANIES INC B 385,000.00 364,787.50
05354RAA9 AVECIA GROUP PLC B 685,000.00 688,425.00
055381AF4 BE AEROSPACE B 875,000.00 702,187.50
055381AH0 BE AEROSPACE B 150,000.00 129,750.00
056039AC4 BWAY CORP B 225,000.00 202,781.25
077410AC2 BELCO OIL & GAS CORP B 600,000.00 559,500.00
120075AA4 BUHRMANN US INC B 335,000.00 340,862.50
135713AC9 CANADIAN FOREST OIL LTD B 500,000.00 461,250.00
14066PAC0 AMFM INC B 130,000.00 116,837.50
165167AQ0 CHESAPEAKE ENERGY CORP B 370,000.00 346,875.00
181581AD1 CLARK USA INC B 1,195,000.00 645,300.00
191886AC4 BELCO OIL & GAS CORP B 250,000.00 254,062.50
194832AA9 COLLINS & AIKMAN PRODCTS B 1,030,000.00 1,010,687.50
228227AD6 CROWN CASTLE INTL CORP B 1,515,000.00 863,550.00
257039AB3 DOMAN INDUSTRIES LIMITED B 1,315,000.00 1,084,875.00
257039AE7 DOMAN INDUSTRIES LIMITED B 205,000.00 157,850.00
26632QAB9 DURA OPERATING CORP B 250,000.00 223,750.00
27876GAG3 ECHOSTAR DBS CORP B 40,000.00 38,700.00
303727AC5 FAIRCHILD SEMICONDUCTOR B 1,240,000.00 1,209,000.00
306075AC6 FALCON PRODUCTS INC B 405,000.00 378,168.75
344155AC0 FOCAL COMMUNICATIONS CP B 340,000.00 224,400.00
344155AD8 FOCAL COMMUNICATIONS CP B 275,000.00 277,750.00
346091AL5 FOREST OIL CORPORATION B 715,000.00 725,725.00
420781AB2 HAYES LEMMERZ INTL INC B 225,000.00 195,750.00
420804AB2 HAYES LEMMERZ INTL INC B 220,000.00 223,850.00
427516AB5 HERMES EUROPE RAILTEL BV B 1,000,000.00 945,000.00
427516AE9 HERMES EUROPE RAILTEL BV B 135,000.00 121,500.00
436132AF1 HOLLYWOOD CASINO CORP B 495,000.00 498,712.50
43613PAA1 HOLLYWD CASINO SHREVEPRT B 160,000.00 171,200.00
483008AK4 KAISER ALUMINUM & CHEM B 160,000.00 155,200.00
483008AL2 KAISER ALUMINUM & CHEM B 140,000.00 135,800.00
495582AB4 KING PHARMACEUTICAL INC B 1,045,000.00 1,039,775.00
52729NAP5 LEVEL 3 COMMUNICATIONS B 170,000.00 85,000.00
52729NAV2 LEVEL 3 COMMUNICATIONS B 1,800,000.00 1,705,197.89
590175AD7 MERRILL CORPORATION B 335,000.00 326,625.00
65332VAJ2 NEXTEL COMMUNICATIONS B 930,000.00 678,900.00
65332VAM5 NEXTEL COMMUNICATIONS B 2,210,000.00 1,524,900.00
65332VAV5 NEXTEL COMMUNICATIONS B 175,000.00 161,437.50
65333AAC2 NEXTLINK COMMUNICATIONS B 440,000.00 468,600.00
65333HAK9 NEXTLINK COMMUNICATIONS B 975,000.00 943,312.50
65333HAL7 NEXTLINK COMMUNICATIONS B 1,240,000.00 700,600.00
65333HAN3 NEXTLINK COMMUNICATIONS B 865,000.00 458,450.00
784005AD2 SC INTL SERVICES INC B 440,000.00 422,400.00
861598AA8 STONE CONTAINER FIN-CAN B 1,075,000.00 1,138,156.25
861642AC0 STONE ENERGY CORP B 700,000.00 651,000.00
883060AC9 TEXON INTERNATIONAL PLC B 799,999.99 365,949.11
911300AF8 UNITED PAN-EUROPE COMM B 4,615,000.00 2,457,487.50
199333AC9 COLUMBUS MCKINNON CORP B 275,000.00 241,656.25
417826AA2 HARVEY CASINOS RESORTS B 180,000.00 184,500.00
447013AC7 HUNTSMAN PACKAGING CORP B 575,000.00 543,375.00
92343W300 VERITAS CAPITAL TRUST B 650,000.00 396,500.00
00751KAB2 ADVANCE STORES CO INC B- 1,000,000.00 800,000.00
008540AB2 AGRILINK FOODS INC B- 385,000.00 363,825.00
010014328 PSINET INC B- 250,000.00 234,440.79
029050AB7 AMER PLUMBING & MECHANIC B- 165,000.00 150,150.00
055088AC2 B&G FOODS INC B- 850,000.00 684,250.00
095173AE0 BLOUNT INC B- 390,000.00 401,700.00
145744AD0 CARROLS CORP B- 1,000,000.00 857,500.00
15134QAB5 CENTENNIAL COMMUNICATNS B- 700,000.00 693,000.00
222746AC3 COURTYARD BY MARRIOTT II B- 2,375,000.00 2,300,781.25
265736AB4 DUNLOP STAND AERO HLDGS B- 380,000.00 387,600.00
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CUSIP NAME RTG_SP PAR MARKET VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
29665WAA2 GLOBAL TELE-SYSTEMS LTD B- 700,000.00 644,000.00
29665WAB0 GLOBAL TELE-SYSTEMS LTD B- 600,000.00 278,864.97
29665WAF1 GLOBAL TELE-SYSTEMS LTD B- 400,000.00 361,000.00
302088AH2 EXODUS COMMUNICATIONS B- 800,000.00 784,000.00
41043FAB5 HANGER ORTHOPEDIC GROUP B- 855,000.00 684,000.00
449247AA3 ICG HOLDINGS INC B- 335,000.00 317,412.50
449247AB1 ICG HOLDINGS INC B- 510,000.00 422,025.00
452835AD3 IMPERIAL SUGAR CO B- 980,000.00 254,800.00
459655AC0 INTL HOME FOODS B- 245,000.00 242,550.00
461127AC6 INTERTEK FINANCE PLC B- 1,000,000.00 850,000.00
482562AA3 KMC TELECOM HOLDINGS INC B- 805,000.00 432,687.50
482562AH8 KMC TELECOM HOLDINGS INC B- 590,000.00 578,200.00
559079AD0 MAGELLAN HEALTH SERVICES B- 2,085,000.00 1,542,900.00
59501TAL0 MICROCELL TELECOMMUNICAT B- 835,000.00 532,312.50
600814AC1 MILLICOM INTL CELLULAR B- 1,155,000.00 1,014,956.25
62874LAA4 ORIUS CAPITAL CORP B- 430,000.00 432,150.00
677007BU9 OGLEBAY NORTON CO B- 320,000.00 298,400.00
690132AC9 OUTSOURCING SOLUTIONS B- 500,000.00 451,875.00
69363VAB3 PSINET INC B- 880,000.00 853,600.00
701081AD3 PARKER DRILLING CO B- 110,000.00 83,187.50
740518AD7 PREMIER INTL FOODS PLC B- 575,000.00 540,500.00
740540AE9 PREMIER PARKS INC B- 710,000.00 454,400.00
74437CAD3 PSINET INC B- 355,000.00 351,450.00
74437CAE1 PSINET INC B- 505,000.00 486,062.50
769507AM6 RIVERWOOD INTL CORP B- 345,000.00 339,825.00
84760TAE0 SPECTRASITE HOLDINGS INC B- 680,000.00 353,600.00
870426AA1 SWEETHEART CUP CO INC B- 435,000.00 412,162.50
87910PAB6 TEKNI-PLEX INC B- 1,000,000.00 1,027,500.00
87910PAD2 TEKNI-PLEX INC B- 75,000.00 71,625.00
87944KAC5 TELE1 EUROPE B.V. B- 615,000.00 645,750.00
89589TAC2 TRIARC CONSUMER/BEVERAGE B- 535,000.00 505,575.00
89708PAC6 TROPICAL SPORTSWEAR INTL B- 525,000.00 488,250.00
910734AE2 UNITEDGLOBALCOM INC B- 4,520,000.00 3,118,800.00
92264NAC1 VENETIAN CASINO/LV SANDS B- 465,000.00 439,425.00
923433AG1 VERIO INC B- 360,000.00 349,200.00
923433AL0 VERIO INC B- 380,000.00 377,150.00
923433AM8 VERIO INC B- 675,000.00 658,125.00
925301AB9 VERSATEL TELECOM BV B- 265,000.00 270,962.50
925529AG4 VIATEL INC B- 675,000.00 614,250.00
925529BJ7 VIATEL INC B- 400,000.00 368,000.00
92861LAA6 VSTR WIRE CO/VSTR WR HLD B- 545,000.00 542,275.00
92861LAC2 VSTR WIRE CO/VSTR WR HLD B- 415,000.00 249,000.00
975515AW7 WINSTAR COMM B- 175,000.00 168,437.50
975515AY3 WINSTAR COMM B- 190,000.00 89,300.00
008754578 DIAMOND HOLDINGS PLC B- 495,000.00 770,297.05
62940NAA0 NTL COMMUNICATIONS CORP B- 1,345,000.00 1,388,712.50
784178AC9 SFX ENTERTAINMENT INC B- 780,000.00 774,150.00 B 89,617,748.78
010551986 JAZZTEL PLC CCC+ 500,000.00 489,215.72
011593AA8 ALAMOSA PCS HOLDINGS INC CCC+ 995,000.00 482,575.00
126934AB4 CABLE SATISFACTION INTL CCC+ 180,000.00 177,300.00
256886AE2 DOLPHIN TELECOM PLC CCC+ 675,000.00 293,625.00
362359AA9 GT GROUP TELECOM CCC+ 495,000.00 277,200.00
483008AD0 KAISER ALUMINUM & CHEM CCC+ 1,170,000.00 1,117,350.00
591097AB6 METAL MANAGEMENT INC CCC+ 1,020,000.00 773,925.00
67574RAA3 OCWEN CAPITAL TRUST I CCC+ 1,000,000.00 590,000.00
68212DAF9 VOICESTREAM WIRELESS CRP CCC+ 330,000.00 352,687.50
68212DAH5 VOICESTREAM WIRELESS CRP CCC+ 180,000.00 195,750.00
76026QAC6 REPAP NEW BRUNSWICK CCC+ 315,000.00 282,712.50
762430AF3 RHYTHMS NETCONNECTIONS CCC+ 450,000.00 391,500.00
769507AJ3 RIVERWOOD INTERNATIONAL CCC+ 1,460,000.00 1,365,100.00
879946AE1 TELESYSTEM INTL WIRELESS CCC+ 415,000.00 229,287.50
896778AB3 TRITON PCS INC CCC+ 1,000,000.00 682,500.00
933590AB7 WAM!NET INC CCC+ 460,000.00 262,200.00
009367AA1 AIRGATE PCS INC CCC 875,000.00 476,875.00
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
CUSIP NAME RTG_SP PAR MARKET VALUE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
00102PAA9 AEI RESOURCES INC/HLDG CCC- 960,000.00 211,200.00
031909AD6 AMRESCO INC CCC- 600,000.00 435,000.00
031909AE4 AMRESCO INC CCC- 135,000.00 97,875.00 CCC 9,183,878.22
009367111 AIRGATE PCS INC WRNT NA 665.00 119,700.00
05258A113 AUSTRALIS HOLDINGS WRNT NA 1,725.00 -
130214208 CALIFORNIA PREF FED NA 20,100.00 439,687.50
184902AD6 CLEARNET COMMUNICATIONS NA 750,000.00 320,292.05
195204AC6 COLO.COM NA 185,000.00 186,850.00
232503110 NABERNET INTERNET SERV-WRNT 325.00 34,125.00
232503AE2 CYBERNET INTERNET SERV NA 325,000.00 260,000.00
25607PAB4 DOBSON/SYGNET COMMUNICAT NA 405,000.00 425,250.00
37957FAB7 GLOBIX CORP NA 620,000.00 567,300.00
46268L111 IRIDIUM WRNT NA 1,000.00 10.00
472143AA4 JAZZ CASINO CO LLC NA 380,000.00 119,700.00
695534115 PAGEMART WIRELESS WRNT NA 7,130.00 110,515.00
781076112 RSL COMM WRNT NA 1,300.00 52,000.00
848636114 NALITROCK SERVICES INC-WRNT 1,625.00 390,000.00
87944K135 TELE1 EUROPE B.V.-WRNT NA 325.00 111,758.01
87944T201 TELE1 EUROPE B.V. NA 5,636.05 107,789.46
902745116 UIH AUSTRALIA WRNT NA 2,450.00 73,500.00
925301111 NARSATEL TELECOM BV-WRNT 265.00 160,325.00
933590119 WAM!NET INC-WRNT NA 2,550.00 29,643.75
98141A101 WORLD ACCESS INC NA 3,770.50 72,110.87
98141AAD3 WORLD ACCESS INC NA 1,200,000.00 1,026,000.00 NA 4,606,556.64
59501TAG1 MICROCELL TELECOMMUNICAT NR 305,000.00 271,450.00
848636AC0 SPLITROCK SERVICES INC NR 1,075,000.00 1,139,500.00 NR 1,410,950.00
120,548,103.81
-----------------
Summary
BB 15,728,970.17 13.0%
B 89,617,748.78 74.3%
CCC 9,183,878.22 7.6%
NR 1,410,950.00 1.2%
NA 4,606,556.64 3.8%
--------------------------------------------
Total 120,548,103.81 100.0%
</TABLE>
<PAGE>
APPENDIX B
RATINGS OF INVESTMENTS
STANDARD & POOR'S RATINGS GROUP
A brief description of the applicable Standard & Poor's Ratings Group
("S&P") rating symbols and their meanings (as published by S&P) follows:
LONG TERM DEBT
An S&P corporate debt rating is a current assessment of the
creditworthiness of an obligor with respect to a specific obligation. This
assessment may take into consideration obligors such as guarantors, insurers, or
lessees. The debt rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished by
the issuer or obtained by S&P from other sources it considers reliable. S&P does
not perform an audit in connection with any rating and may, on occasion, rely on
unaudited financial information. The ratings may be changed, suspended, or
withdrawn as a result of changes in, or unavailability of, such information, or
based on other circumstances. The ratings are based, in varying degrees, on the
following considerations:
1. Likelihood of default -- capacity and willingness of the obligor
as to the timely payment of interest and repayment of principal in accordance
with the terms of the obligation;
2. Nature of and provisions of the obligation;
3. Protection afforded by, and relative position of, the obligation in
the event of bankruptcy, reorganization, or other arrangement under the laws of
bankruptcy and other laws affecting creditors' rights.
INVESTMENT GRADE
AAA Debt rated "AAA" has the highest rating assigned by S&P. Capacity
to pay interest and repay principal is extremely strong.
AA Debt rated "AA" has a very strong capacity to pay interest and
repay principal and differs from the highest rated issues only in small degree.
A Debt rated "A" has a strong capacity to pay interest and repay
principal although it is somewhat more susceptible to the adverse effects of
changes in circumstances and economic conditions than debt in higher rated
categories.
B-1
<PAGE>
BBB Debt rated "BBB" is regarded as having an adequate capacity to pay
interest and repay principal. Whereas it normally exhibits adequate protection
parameters, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity to pay interest and repay principal for
debt in this category than in higher rated categories.
SPECULATIVE GRADE RATING
Debt rated "BB", "B", "CCC", "CLARK CURBO" and "C" is regarded as
having predominantly speculative characteristics with respect to capacity to pay
interest and repay principal. "BB" indicates the least degree of speculation and
"C" the highest. While such debt will likely have some quality and protective
characteristics these are outweighed by major uncertainties or major exposures
to adverse conditions.
BB Debt rated "BB" has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which could lead
to inadequate capacity to meet timely interest and principal payments. The "BB"
rating category is also used for debt subordinated to senior debt that is
assigned an actual or implied "BBB-" rating.
B Debt rated "B" has a greater vulnerability to default but currently
has the capacity to meet interest payments and principal repayments. Adverse
business, financial, or economic conditions will likely impair capacity or
willingness to pay interest and repay principal. The "B" rating category is also
used for debt subordinated to senior debt that is assigned an actual or implied
"BB" or "BB-" rating.
CCC Debt rated "CCC" has a currently identifiable vulnerability to
default, and is dependent upon favorable business, financial, and economic
conditions to meet timely payment of interest and repayment of principal. In the
event of adverse business, financial, or economic conditions, it is not likely
to have the capacity to pay interest and repay principal. The "CCC" rating
category is also used for debt subordinated to senior debt that is assigned an
actual or implied "B" or "B-" rating.
CLARK CURBO The rating "CLARK CURBO" typically is applied to debt
subordinated to senior debt that is assigned an actual or implied "CCC" debt
rating.
C The rating "C" typically is applied to debt subordinated to senior
debt which is assigned an actual or implied "CCC-" debt rating. The "C" rating
may be used to cover a situation where a bankruptcy petition has been filed, but
debt service payments are continued.
B-2
<PAGE>
CI The rating "CI" is reserved for income bonds on which no interest
is being paid.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the date due
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period. The "D" rating also will be
used upon the filing of a bankruptcy petition if debt service payments are
jeopardized.
PLUS (+) OR MINUS (-) The ratings from "AA" to "CCC" may be modified
by the addition of a plus or minus sign to show relative standing within the
major rating categories.
PROVISIONAL RATINGS The letter "p" indicates that the rating is
provisional. A provisional rating assumes the successful completion of the
project financed by the debt being rated and indicates that payment of debt
service requirements is largely or entirely dependent upon the successful and
timely completion of the project. This rating, however, while addressing credit
quality subsequent to completion of the project, makes no comment on the
likelihood of, or the risk of default upon failure of, such completion. The
investor should exercise judgment with respect to such likelihood and risk.
L The letter "L" indicates that the rating pertains to the principal
amount of those bonds to the extent that the underlying deposit collateral is
federally insured and interest is adequately collateralized.
In the case of certificates of deposit the letter "L" indicates that
the deposit, combined with other deposits being held in the same right and
capacity, will be honored for principal and accrued pre-default interest up to
the federal insurance limits within 30 days after closing of the insured
institution or, in the event that the deposit is assumed by a successor insured
institution, upon maturity. Continuance of the rating is contingent upon S&P's
receipt of an executed copy of the escrow agreement or closing documentation
confirming investments and cash flow.
NR Indicates no rating has been requested, that there is insufficient
information on which to base a rating, or that S&P does not rate a particular
type of obligation as a matter of policy.
NOTES
An S&P note rating reflects the liquidity concerns and market access
risks unique to notes. Notes due in 3 years or less will likely receive a note
rating. Notes maturing beyond 3 years will most likely receive a long-term debt
rating. The following criteria will be used in making that assessment:
B-3
<PAGE>
-- Amortization schedule (the larger the final maturity relative to
other maturities, the more likely it will be treated as a note).
-- Source of payment (the more dependent the issue is on the market
for its refinancing, the more likely it will be treated as a note).
NOTE RATING SYMBOLS ARE AS FOLLOWS:
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics will be
given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
A note rating is not a recommendation to purchase, sell, or hold a
security, inasmuch as it does not comment as to market price or suitability for
a particular investor. The ratings are based on current information furnished to
S&P by the issuer or obtained by S&P from other sources it considers reliable.
S&P does not perform an audit in connection with any rating and may, on
occasion, rely on unaudited financial information. The ratings may be changed,
suspended, or withdrawn as a result of changes in or unavailability of such
information or based on other circumstances.
COMMERCIAL PAPER
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 several categories, ranging from "A-1" for the
highest quality obligations to "D" for the lowest. These categories are as
follows:
A-1 This highest category indicates that the degree of safety
regarding timely payment is strong. Those issues determined to possess extremely
strong safety characteristics are denoted with a plus sign (+) designation.
A-2 Capacity for timely payment on issues with this designation is
satisfactory. However, the relative degree of safety is not as high as for
issues designated "A-1."
A-3 Issues carrying this designation have adequate capacity for timely
payment. They are, however, more vulnerable to the adverse effects of changes in
circumstances than obligations carrying the higher designation.
B-4
<PAGE>
B Issues rated "B" are regarded as having only speculative capacity
for timely payment.
C This rating is assigned to short-term debt obligations with a
doubtful capacity for payment.
D Debt rated "D" is in payment default. The "D" rating category is
used when interest payments or principal payments are not made on the date due,
even if the applicable grace period has not expired, unless S&P believes that
such payments will be made during such grace period.
A commercial paper rating is not a recommendation to purchase, sell,
or hold a security, inasmuch as it does not comment as to market price or
suitability for a particular investor. The ratings are based on current
information furnished to S&P by the issuer or obtained by S&P from other sources
it considers reliable. S&P does not perform an audit in connection with any
rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in or
unavailability of such information or based on other circumstances.
B-5
<PAGE>
MOODY'S INVESTORS SERVICE, INC.
A brief description of the applicable Moody's Investors Service, Inc.
("Moody's") rating symbols and their meanings (as published by Moody's) follows:
LONG-TERM RATINGS
Aaa Bonds that 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 edge." Interest payments are protected by a large or by an
exceptionally stable margin and principal is secure. While the various
protective elements are likely to change, such changes as can be visualized are
most unlikely to impair the fundamentally strong position of such issues.
Aa Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long-term risks appear somewhat larger than in Aaa securities.
A Bonds that 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 sometime in the future.
Baa Bonds that 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 that 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 that are rated B generally lack characteristics of the
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.
B-6
<PAGE>
Caa Bonds that 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 that 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 that 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.
CON(-) Bonds for which the security depends upon the completion of
some act or the fulfillment of some condition are rated conditionally. These are
bonds secured by (a) earnings of projects under construction, (b) earnings of
projects unseasoned in operation experience, (c) rentals which begin when
facilities are completed, or (d) payments to which some other limiting condition
attaches. Parenthetical rating denotes probable credit stature upon completion
of construction or elimination of basis of condition.
NOTE: Those bonds in the Aa, A, Baa, Ba, and B groups which Moody's
believes possess the strongest investment attributes are designated by the
symbols Aa1, A1, Baa1, Ba1 and B1.
SHORT-TERM RATINGS
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity not
exceeding one year.
Among the obligations covered are commercial paper, Eurocommercial
paper, bank deposits, bankers' acceptances and obligations to deliver foreign
exchange. Obligations relying upon support mechanisms such as letters-of-credit
and bonds of indemnity are excluded unless explicitly rated.
Issuers rated Prime-1 (or supporting institutions) have a superior
ability for repayment of senior short-term debt obligations. Prime-1 repayment
ability will often be evidenced by many of the following characteristics:
Leading market positions in well-established industries
High rates of return on funds employed
Conservative capitalization structure with moderate reliance on debt
and ample asset protection
Broad margins in earnings coverage of fixed financial charges and high
internal cash generation
B-7
<PAGE>
Well-established access to a range of financial markets and assured
sources of alternate liquidity
Issuers rated Prime-2 (or supporting institutions) have a strong
ability for repayment of senior short-term debt obligations. This will normally
be evidenced by many of the characteristics cited above but to a lesser degree.
Earnings trends and coverage ratios, while sound, may be more subject to
variation. Capitalization characteristics, while still appropriate, may be more
affected by external conditions. Ample alternate liquidity is maintained.
Issuers rated Prime-3 (or supporting institutions) have an acceptable
ability for repayment of senior short-term 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.
Issuers rated Not Prime do not fall within any of the Prime rating
categories.
PREFERRED STOCK RATINGS
Preferred stock rating symbols and their definitions are as follows:
aaa An issue which is rated "aaa" is considered to be a top-quality
preferred stock. This rating indicates good asset protection and the least risk
of dividend impairment within the universe of preferred stocks.
aa An issue which is rated "aa" is considered a high-grade preferred
stock. This rating indicates that there is reasonable assurance that earnings
and asset protection will remain relatively well maintained in the foreseeable
future.
a An issue which is rated "a" is considered to be an upper-medium
grade preferred stock. While risks are judged to be somewhat greater than in the
"aaa" and "aa" classifications, earnings and asset protections are,
nevertheless, expected to be maintained at adequate levels.
baa An issue which is rated "baa" is considered to be medium grade
preferred stock, neither highly protected nor poorly secured. Earnings and asset
protection appear adequate at present but may be questionable over any great
length of time.
ba An issue which is rated "ba" is considered to have speculative
elements and its future cannot be considered well assured. Earnings and asset
protection may be very moderate and not well safeguarded during adverse periods.
Uncertainty of position characterizes preferred stocks in this class.
B-8
<PAGE>
b An issue which is rated "b" generally lacks the characteristics of a
desirable investment. Assurance of dividend payments and maintenance of other
terms of the issue over any long period of time may be small.
caa An issue which is rated "caa" is likely to be in arrears on
dividend payments. This rating designation does not purport to indicate the
future status of payments.
ca An issue which is rated "ca" is speculative in a high degree and is
likely to be in arrears on dividends with little likelihood of eventual payment.
c This is the lowest rated class of preferred or preference stock.
Issues so rated can be regarded as having extremely poor prospects of ever
attaining any real investment standing.
Note: Moody's applies numerical modifiers 1, 2 and 3 in each rating
classification. 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.
B-9
<PAGE>
APPENDIX C
GLOSSARY
"AAA/aaa Credit Rating" means a credit rating in the highest category of
any two nationally recognized statistical rating organizations (as used in the
rules and regulations under the Securities Exchange Act of 1934), one of which
shall be S&P or Moody's.
"AA Financial Composite Commercial Paper Rate" on any date means (a) the
interest equivalent of the higher of the 7-day or the 30-day rate, in the case
of a Dividend Period which is a Standard Term Period or shorter, or the 180-day
rate, in the case of all other Dividend Periods, on commercial paper on behalf
of issuers whose corporate bonds are rated AA by S&P, or the equivalent of such
rating by another nationally recognized rating agency, as announced by the
Federal Reserve Bank of New York for the close of business on the Business Day
immediately preceding such date; or (b) if the Federal Reserve Bank of New York
does not make available such a rate, then the arithmetic average of the interest
equivalent of such rates on commercial paper placed on behalf of such issuers,
as quoted on a discount basis or otherwise by the Commercial Paper Dealers to
the Auction Agent for the close of business on the Business Day immediately
preceding such date (rounded to the next highest .001 of 1%). If any Commercial
Paper Dealer does not quote a rate required to determine the AA Financial
Composite Commercial Paper Rate, such rate shall be determined on the basis of
the quotations (or quotation) furnished by the remaining Commercial Paper
Dealers (or Dealer), if any, or, if there are no such Commercial Paper Dealers,
by the Auction Agent. For purposes of this definition, (i) "Commercial Paper
Dealers" shall mean (A) Salomon Smith Barney Inc., Lehman Brothers Inc., Merrill
Lynch, Pierce, Fenner & Smith Incorporated and Goldman Sachs & Co.; (B) in lieu
of any thereof, its respective Affiliate or successor, and (C) in the event that
any of the foregoing shall cease to quote rates for commercial paper of issuers
of the sort described above, in substitution therefor, a nationally recognized
dealer in commercial paper of such issuers then making such quotations selected
by the Fund, and (ii) "interest equivalent" of a rate stated on a discount basis
for commercial paper of a given number of days' maturity shall mean a number
equal to the quotient (rounded upward to the next higher one-thousandth of 1%)
of (A) such rate expressed as a decimal, divided by (B) the difference between
(x) 1.00 and (y) a fraction, the numerator of which shall be the product of such
rate expressed as a decimal, multiplied by the number of days in which such
commercial paper shall mature and the denominator of which shall be 360.
"Advisory Agreement" means the Investment Advisory Agreement dated July 30,
1993 under which SSBC serves as investment adviser for the Fund.
C-1
<PAGE>
"Affiliate" means any person known to the Auction Agent to be controlled
by, in control of or under common control with the Fund; provided that no
Broker-Dealer controlled by, in control of or under common control with the Fund
shall be deemed to be an Affiliate nor shall any corporation or any person
controlled by, in control of or under common control with such corporation one
of the directors or executive officers of which is also a director of the Fund
be deemed to be an Affiliate solely because such director or executive officer
is also a director of the Fund.
"Agent Member" means a member of or participant in the Securities
Depository that will act on behalf of a person placing an Order.
"Alternate Term Period" means any Dividend Period that is not a Standard
Term Period.
"Applicable Rate" means for each Dividend Period (A) if Sufficient Clearing
Orders exist for the Auction in respect thereof, the Winning Rate, (B) if
Sufficient Clearing Orders do not exist for the Auction in respect thereof, the
Maximum Applicable Rate and (C) in the case of any Dividend Period of 93 days or
fewer if all the Preferred Shares are the subject of Submitted Hold Orders for
the Auction in respect thereof, the Minimum Applicable Rate.
"Articles" means the Articles of Amendment and Restatement, as amended, and
the Articles Supplementary with respect to the Preferred Shares of the
Fund.
"Asset Coverage Cure Date" has the meaning set forth under "Description of
Preferred Shares--Redemption" in the Statement of Additional Information.
"Auction" means each periodic operation of the procedures set forth under
"Auction Procedures."
"Auction Agent" means Bankers Trust Company unless and until another
commercial bank, trust company, or other financial institution appointed by a
resolution of the Board of Directors enters into an agreement with the Fund to
follow the Auction Procedures for the purpose of determining the Applicable
Rate.
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"Auction Date" means the first Business Day next preceding the first day of a
Dividend Period.
"Auction Procedures" means the procedures for conducting Auctions set forth
under "Auction Procedures."
"Average Net Assets" has the meaning set forth under "The Investment
Adviser" in the Prospectus.
"Board of Directors" or "Board" means the Board of Directors of the Fund or
any duly authorized committee thereof as permitted by applicable law.
"Broker-Dealer" or "Broker-Dealers" means any broker-dealer or broker-
dealers, or other entity permitted by law to perform the functions required of a
Broker-Dealer by the Auction Procedures, that has been selected by the Fund and
has entered into a Broker-Dealer Agreement with the Auction Agent that remains
effective.
"Broker-Dealer Agreement" means an agreement entered into by the Auction
Agent and a Broker-Dealer, pursuant to which such Broker-Dealer agrees to follow
the Auction Procedures.
"Buy Order" means the communication by a Potential Holder to a Broker-
Dealer of the number of Preferred Shares which such Potential Holder offers to
purchase on an Auction Date if the Applicable Rate for the next succeeding
Dividend Period therefor is not less than the rate per annum then specified by
such Potential Holder.
"Business Day" means a day on which the New York Stock Exchange is open for
trading and which is not a Saturday, Sunday or other day on which banks in the
City of New York, New York are authorized or obligated by law to close.
"Code" means the Internal Revenue Code of 1986, as amended.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the common stock, par value $.01 per share, of the
Fund.
"Date of Original Issue" means the date on which the Preferred Shares are
originally issued by the Fund.
"Default Period" has the meaning set forth under "Description of Preferred
Shares--Dividends and Dividend Periods" in the Statement of Additional
Information.
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"Default Rate" means the Reference Rate multiplied by three (3).
"Deposit Securities" means cash and any obligations or securities,
including Short Term Money Market Instruments that are Eligible Assets, rated at
least AAA, A-1+ or SP-1+ by S&P, except that, for purposes of optional
redemption, such obligations or securities shall be considered "Deposit
Securities" only if they are also rated at least P-1 by Moody's.
"Discount Factor" means the S&P Discount Factor (if S&P is then rating the
Preferred Shares), the Moody's Discount Factor (if Moody's is then rating the
Preferred Shares) or the discount factor established by any Other Rating Agency
which is then rating the Preferred Shares and which so requires, whichever is
applicable.
"Discounted Value" means the quotient of the Market Value of an Eligible
Asset divided by the applicable Discount Factor provided that with respect to an
Eligible Asset that is currently callable, Discounted Value shall be equal to
the quotient as calculated above or the call price, whichever is lower, and that
with respect to an Eligible Asset that is prepayable, Discounted Value shall be
equal to the quotient as calculated above or the par value, whichever is lower.
"Dividend Payment Date" means (i) with respect to any Dividend Period of
one year or less, the Business Day next succeeding the last day thereof and, if
any, the 91st, 181st and 271st days thereof, and (ii) with respect to any
Dividend Period of more than one year, on a quarterly basis on each January 1,
April 1, July 1 and October 1 and on the Business Day following the last day of
such Dividend Period.
"Dividend Period" means the period commencing on the Date of Original Issue
and ending on the date specified on the Date of Original Issue and thereafter
the period commencing on the day following each Dividend Period and ending on
the day established by the Fund.
"Eligible Assets" means S&P Eligible Assets (if S&P is then rating the
Preferred Shares), Moody's Eligible Assets (if Moody's is then rating the
Preferred Shares) and/or Other Rating Agency Eligible Assets if any Other Rating
Agency is then rating the Preferred Shares, whichever is applicable.
"Existing Holder" means (a) a person who has signed a Master Purchaser's
Letter and beneficially owns those Preferred Shares listed in that person's name
in the records of the Auction Agent or (b) the beneficial owner of those
Preferred Shares which are listed under such person's Broker-Dealer's name in
the records of the Auction Agent, which Broker-Dealer shall have signed a Master
Purchaser's Letter.
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<PAGE>
"Exposure Period" means the period commencing on (and including) a given
Valuation Date and ending 49 calendar days/33 Business Days thereafter.
"Fund" means Zenix Income Fund Inc., a Maryland corporation that is the
issuer of the Preferred Shares.
"Holder" means, with respect to the Common Stock and the Preferred Shares
of the Fund, the registered holder of shares of such Stock as the same appears
on the stock ledger or stock records books of the Fund.
"Hold Order" means the communication by an Existing Holder to a Broker-
Dealer of the number of Outstanding Preferred Shares which such Existing Holder
desires to continue to hold without regard to the Applicable Rate for the next
succeeding Dividend Period therefor.
"Hold/Sell Order" means the communication by an Existing Holder to a
Broker-Dealer of the number of Outstanding Preferred Shares which such Existing
Holder desires to continue to hold if the Applicable Rate for the next Dividend
Period therefor is not less than the rate per annum then specified by such
Existing Holder.
"Investment Adviser" means SSB Citi Fund Management LLC, the current
investment adviser to the Fund, or such other future investment adviser to the
Fund.
"Investment Company Act" means the Investment Company Act of 1940, as
amended from time to time.
"Investment Company Act Preferred Shares Asset Coverage" means asset
coverage, as defined in Section 18(h) of the Investment Company Act, of at least
200% with respect to all outstanding senior securities of the Fund which are
stock, including all Outstanding Preferred Shares (or such other asset coverage
as may in the future be specified in or under the Investment Company Act as the
minimum asset coverage for senior securities which are stock of a closed-end
investment company as a condition of declaring dividends on its common stock),
determined on the basis of values calculated as of a time within 48 hours next
preceding the time of such determination.
"Liquidation Value" means $25,000 per share.
"Mandatory Redemption Date" has the meaning set forth under "Description of
Preferred Shares--Redemption" in the Statement of Additional Information.
"Mandatory Redemption Price" has the meaning set forth under "Description
of Preferred Shares--Redemption" in the Statement of Additional Information.
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<PAGE>
"Market Value" shall mean the fair market value of an asset of the Fund as
computed based upon (i) pricing services to be provided by such pricing service
determined from time to time by the Board of Directors, provided that S&P (if
S&P is then rating Preferred Shares, Moody's (if Moody's is then rating
Preferred Shares) and any Other Rating Agency which is then rating Preferred
Shares and so requires have informed the Fund in writing that use of such
pricing service will not adversely affect such rating agency's then current
rating of the Preferred Shares or (ii) the lower of the value set forth in bids
from two independent dealers that in securities, one of which bids shall be in
writing, in each case with interest accrued added to such computation for those
assets of the Fund where such computation does not include interest accrued.
"Master Purchaser's Letter" means a letter substantially in the form of, or
containing provisions similar to those in the form, attached as an Exhibit
hereto which is required to be executed by each prospective purchaser of
Preferred Shares or the Broker-Dealer through whom the shares will be held.
"Maximum Applicable Rate" means, on any date on which the Applicable Rate
is determined, 150% of the 30-day AA Financial Composite Commercial Paper Rate
on the date of such Auction.
"Minimum Applicable Rate" means, on any Auction Date with respect to a
Dividend Period of 93 days or fewer, 80% of the AA Financial Composite
Commercial Paper Rate at the close of business on the Business Day next
preceding such Auction Date. There shall be no Minimum Applicable Rate on any
Auction Date with respect to a Dividend Period of more than 93 days.
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<PAGE>
"Moody's" means Moody's Investors Service, Inc. and its successors at law.
"Notice of Redemption" has the meaning provided under "Description of
Preferred Shares--Redemption" in the Statement of Additional Information.
"Offering" means the offering of 2,400 Auction Rate Cumulative Preferred
Shares issued by the Fund under its Registration Statement of which this
Statement of Additional Information is a part.
"Order" means a Hold Order, a Hold/Sell Order, a Sell Order or a Buy Order.
"Other Rating Agency" means any rating agency other than S&P or Moody's
then providing a rating for the Preferred Shares pursuant to the request of the
Fund.
"Other Rating Agency Eligible Assets" means assets of the Fund designated
by any Other Rating Agency as eligible for inclusion in calculating the
discounted value of the Fund's assets in connection with such Other Rating
Agency's rating of the Preferred Shares.
"Outstanding" means, as of any date, any Preferred Shares theretofore
issued by the Fund except, without duplication, (i) any Preferred Shares
theretofore canceled or redeemed by the Fund, or delivered to the Auction Agent
for cancellation or with respect to which the Fund has given notice of
redemption and irrevocably deposited with the Paying Agent sufficient funds to
redeem such Preferred Shares, and (ii) any Preferred Shares represented by any
certificate in lieu of which a new certificate has been executed and delivered
by the Fund. Notwithstanding the foregoing (A) for purposes of voting rights
(including the determination of the number of shares required to constitute a
quorum), any Preferred Shares to which the Fund or any Affiliate of the Fund
shall be the Existing Holder shall be disregarded and not deemed Outstanding;
(B) in connection with any Auction, any Preferred Shares as to which the Fund or
any person known to the Auction Agent to be an Affiliate of the Fund shall be
the Existing Holder thereof shall be disregarded and deemed not to be
Outstanding; and (C) for purposes of determining the Preferred Shares Basic
Maintenance Amount, any Preferred Shares held by the Fund shall be disregarded
and not deemed Outstanding but shares held by any Affiliate of the Fund shall be
deemed Outstanding.
"Paying Agent" means Bankers Trust Company unless and until another entity
appointed by a resolution of the Board of Directors enters into an agreement
with the Fund to serve as paying agent, which Paying Agent may be the same as
the Auction Agent.
C-7
<PAGE>
"Potential Holder" when used with respect to Preferred Shares, means any
person, including any Existing Holder of Preferred Shares, (i) who shall have
executed a Master Purchaser's Letter or whose shares will be listed under such
person's Broker-Dealer's name in the records of the Auction Agent, which Broker-
Dealer shall have executed a Master Purchaser's Letter and (ii) who may be
interested in acquiring shares of Preferred Shares (or, in the case of an
Existing Holder or such person of Preferred Shares, additional Preferred
Shares).
"Preferred Shares" means the Auction Rate Cumulative Preferred Shares, $.01
par value per share and liquidation preference $25,000 per share, of the
Fund.
"Preferred Shares Basic Maintenance Amount" has the meaning set forth under
"Rating Agency Guidelines" in the Statement of Additional Information.
"Preferred Shares Basic Maintenance Certificate" has the meaning set forth
under "Description of Preferred Shares--Asset Maintenance" in the Statement of
Additional Information.
"Proration Procedures" means:
(A) if Sufficient Clearing Orders exist, in the case of a Submitted
Hold/Sell Order specifying a rate equal to the Winning Rate
(x) the number of Preferred Shares to be the subject of an accepted
Hold Order will be (i) the number of Preferred Shares subject to such Submitted
Hold/Sell Order multiplied by (ii) the total number of Preferred Shares that are
neither the subject of a Submitted Buy Order or a Submitted Hold/Sell Order
specifying a rate lower than the Winning Rate nor the subject of a Submitted
Hold Order and divided by (iii) the total number of Preferred Shares of
Submitted Hold/Sell Orders that specified a rate equal to the Winning Rate, and
(y) the number of Preferred Shares to be the subject of an accepted
Sell Order will be the remaining number of Preferred Shares subject to such
Submitted Hold/Sell Order,
(B) if Sufficient Clearing Orders exist, in the case of a Submitted Buy
Order specifying a rate equal to the Winning Rate
(x) the number of Preferred Shares to be the subject of an accepted
Buy Order will be (i) the number of Preferred Shares subject to such Submitted
Buy Order multiplied by (ii) the difference between (1) the number of Preferred
Shares that are the subject of a Submitted Sell Order or a Submitted Hold/Sell
Order that specified a rate higher than the Winning Rate and (2) the number of
Preferred Shares that are the subject of a Submitted Buy Order that specified a
rate lower than the Winning Rate and divided by (iii) the total number of
Preferred Shares
C-8
<PAGE>
subject to Submitted Buy Orders that specified a rate equal to the Winning Rate,
and
(y) such Submitted Buy Order will not be accepted as to the remaining
number of Preferred Shares subject to such Submitted Buy Order, and
(C) if Sufficient Clearing Orders do not exist, in the case of a Submitted
Hold/Sell Order specifying a rate higher than the Maximum Applicable Rate and in
the case of a Submitted Sell Order
(x) the number of Preferred Shares to be the subject of an accepted
Sell Order will be (i) the number of Preferred Shares subject to such Submitted
Hold/Sell Order or Submitted Sell Order multiplied by (ii) the total number of
Preferred Shares that are the subject of a Submitted Buy Order specifying a rate
equal to or lower than the Maximum Applicable Rate and divided by (iii) the
total number of Preferred Shares subject to all Submitted Hold/Sell Orders that
specified a rate higher than the Maximum Applicable Rate and Submitted Sell
Orders, and
(y) the number of Preferred Shares to be the subject of an accepted
Hold Order will be the remaining number of Preferred Shares subject to such
Submitted Hold/Sell Order or Submitted Sell Order.
"Rating Agency Guidelines" means the guidelines established by S&P (if S&P
is then rating the Preferred Shares) and Moody's (if Moody's is then rating the
Preferred Shares) as set forth under "Rating Agency Guidelines," in the
Statement of Additional Information, as amended from time to time, or by any
Other Rating Agency that is then rating the Preferred Shares.
"Reference Rate" means, with respect to the determination of the Maximum
Applicable Rate, the applicable AA Financial Composite Commercial Paper Rate
(for a Dividend Period of fewer than 184 days) or the applicable Treasury Index
Rate for a Dividend Period of 184 days or more).
"Rounding Procedures" means, if as a result of an Auction (including the
Proration Procedures) any Existing Holder would be entitled to hold or required
to sell, or any Potential Holder would be required to purchase, a number of
Preferred Shares not evenly divisible by 1, on any Auction Date, the Auction
Agent will, in such manner as it determines, round up or down the number of
Preferred Shares to be held, purchased or sold by any Existing Holder or
Potential Holder on such Auction Date so that the number of shares held,
purchased or sold by each Existing Holder or Potential Holder on such Auction
Date will be a number of Preferred Shares evenly divisible by 1.
"Rule 144A Securities" means securities that are restricted as to resale
under federal securities laws but are eligible for resale pursuant to Rule 144A
under the Securities Act of 1933, as
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<PAGE>
amended, as determined by the Fund's Investment Adviser acting subject to the
supervision of the Fund's Board of Directors.
"S&P" means Standard & Poor's, a division of The McGraw-Hill Companies,
Inc., and its successors at law.
"Securities Depository" means the Depository Trust and Clearing Corporation
and its successors and assigns or any successor securities depository selected
by the Fund that agrees to follow the procedures required to be followed by such
securities depository in connection with the Preferred Shares.
"Sell Order" means the communication by an Existing Holder to a Broker-
Dealer of the number of Outstanding Preferred Shares which such Existing Holder
offers to sell without regard to the Dividend Rate for the next succeeding
Dividend Period therefor.
"Service" means the United States Internal Revenue Service.
"Specific Redemption Provisions" means with respect to any Alternate Term
Period of more than one year, either, or any combination of, a period (a "Non-
Call Period") determined by the Board of Directors after consultation with the
Broker-Dealers, during which the shares subject to such Alternate Term Period
are not subject to redemption at the option of the Fund pursuant to Section
3(a)(i) of the Articles Supplementary and/or Section 3(a)(ii) and/or 3(a)(iii)
of the Articles Supplementary and (ii) a period (a "Premium Call Period"),
consisting of a number of whole years as determined by the Board of Directors
after consultation with the Broker-Dealers, during each year of which the shares
subject to such Alternate Term Period shall be redeemable at the Fund's option
pursuant to Section 3(a)(i) of the Articles Supplementary and/or in connection
with any mandatory redemption pursuant to Section 3(a)(ii) and/or 3(a)(iii) of
the Articles Supplementary at a price per share equal to Liquidation Value plus
accumulated but unpaid dividends plus a premium expressed as a percentage or
percentages of Liquidation Value or expressed in a formula using specified
variables as determined by the Board of Directors after consultation with the
Broker-Dealers.
"Standard Term Period" means a Dividend Period of seven days, unless such
7th day is not a Business Day, then the number of days ending on the Business
Day next preceding such 7th day.
"Submission Deadline" means 1:00 p.m., New York City time, on each Auction
Date, or such other time on such Auction Date as may be specified from time to
time by the Auction Agent as the time by which each Broker-Dealer must submit to
the Auction Agent all Orders obtained by it for the Auction to be conducted on
such Auction Date.
"Submitted Buy Order" means each Buy Order submitted to the Auction Agent
by a Broker-Dealer.
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<PAGE>
"Submitted Hold Order" means each Hold Order submitted to the Auction Agent
by a Broker-Dealer.
"Submitted Hold/Sell Order" means each Hold/Sell Order submitted to the
Auction Agent by a Broker-Dealer.
"Submitted Order" means each Order submitted to the Auction Agent by a
Broker-Dealer.
"Submitted Sell Order" means each Sell Order submitted to the Auction Agent
by a Broker-Dealer.
"Sufficient Clearing Orders" means that all Preferred Shares are the
subject of Submitted Hold Orders or that the number of Preferred Shares that are
the subject of Submitted Buy Orders by Potential Holders specifying one or more
rates equal to or less than the Maximum Applicable Rate exceeds or equals the
sum of (A) the number of Preferred Shares that are the subject of Submitted
Hold/Sell Orders by Existing Holders specifying one or more rates higher than
the Maximum Applicable Rate and (B) the number of Preferred Shares that are
subject to Submitted Sell Orders.
"Treasury Index Rate" means the average yield to maturity for actively
traded marketable U.S. Treasury fixed interest rate securities having the same
number of 30-day periods to maturity as the length of the applicable Dividend
Period, determined, to the extent necessary, by linear interpolation based upon
the yield for such securities having the next shorter and next longer number of
30-day periods to maturity treating all Dividend Periods with a length greater
than the longest maturity for such securities as having a length equal to such
longest maturity, in all cases based upon data set forth in the most recent
weekly statistical release published by the Board of Governors of the Federal
Reserve System (currently in H.15(519)); provided, however, if the most recent
such statistical release shall not have been published during the 15 days
preceding the date of computation, the foregoing computations shall be based
upon the average of comparable data as quoted to the Fund by at least three
recognized dealers in U.S. Government securities selected by the Fund.
"Underwriter" means Salomon Smith Barney Inc.
"Underwriting Agreement" means the Underwriting Agreement among the
Underwriter, the Fund and the Investment Adviser, a form of which is filed as an
exhibit to the Fund's Registration Statement of which this Statement of
Additional Information is a part.
"Validity Procedures" means the following procedures and priorities:
(A) If one or more Hold Orders shall be submitted on behalf of an Existing
Holder as to a number of Preferred Shares greater than the number of Preferred
Shares held by such Existing Holder, such Hold Order or Hold Orders shall be
considered valid only as to the number of Preferred Shares held by such Existing
Holder. In the case of multiple Hold Orders, each such Hold Order shall be
considered valid pro rata.
(B) If one or more Hold/Sell Orders shall be submitted on behalf of an
Existing Holder as to a number of Preferred Shares greater
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<PAGE>
than the excess of the number of Preferred Shares held by such Existing Holder
over the number of Preferred Shares subject to Hold Orders submitted on behalf
of such Existing Holder, such Hold/Sell Order or Hold/Sell Orders shall be
considered valid only as to the number of Preferred Shares equal to such excess.
In the case of multiple Hold/Sell Orders specifying different rates, such
Hold/Sell Orders shall be considered valid in increasing order of such rates. In
the case of multiple Hold/Sell Orders specifying the same rate, each such
Hold/Sell Order shall be considered valid pro rata.
(C) If one or more Sell Orders shall be submitted on behalf of an Existing
Holder as to a number of Preferred Shares greater than the excess of the number
of Preferred Shares held by such Existing Holder over the number of Preferred
Shares subject to Hold Orders and Hold/Sell Orders submitted on behalf of such
Existing Holder, such Sell Order or Sell Orders shall be considered valid only
as to the number of Preferred Shares equal to such excess. In the case of
multiple Sell Orders, each such Sell Order shall be considered valid pro rata.
"Valuation Date" means every Friday, or, if such day is not a Business Day,
the next preceding Business Day; provided, however, that the first Valuation
Date may occur on any other date established by the Fund; provided, further,
however, that such date shall be not more than one week from the date on which
the Preferred Shares initially are issued.
"Winning Rate" means the lowest rate specified in the Submitted Orders
which, if (A) each Submitted Hold/Sell Order from Existing Holders specifying
such lowest rate and all other Submitted Hold/Sell Orders from Existing Holders
specifying lower rates were accepted and (B) each Submitted Buy Order from
Potential Holders specifying such lowest rate and all other Submitted Buy Orders
from Potential Holders specifying lower rates were accepted, would result in the
Existing Holders described in clause (A) above continuing to hold an aggregate
number of Preferred Shares which, when added to the number of Preferred Shares
to be purchased by the Potential Holders described in Clause (B)above and the
number of Preferred Shares subject to Submitted Hold Orders, would be equal to
the number of Preferred Shares.
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